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, 1998
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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
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 863-3144
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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
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The number of shares outstanding of each of the issuer's classes of common
stock as of September 30, 1998, was 9,091,482
Page 1 of 13
Exhibit Index on Sequentially Numbered Page 13
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 Nine Months ended September 30, 1998 and 1997. 3
Consolidated Balance Sheet at September 30, 1998 and
December 31, 1997. 4
Consolidated Statement of Cash Flows for the
Three and Nine Months ended September 30, 1998 and 1997. 5
Notes to Condensed Consolidated Financial Statements. 6-8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-13
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K. 13
SIGNATURE 13
Page 2
NEWPORT CORPORATION
CONSOLIDATED INCOME STATEMENT AND
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except Three Months Ended Nine Months Ended
per share amounts) September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
Net sales $33,456 $32,699 $100,952 $95,611
Cost of sales 18,939 18,734 56,792 54,186
------- ------- -------- -------
Gross profit 14,517 13,965 44,160 41,425
Selling, general and administrative expense 7,931 8,612 24,662 26,204
Research and development expense 3,061 2,492 9,013 6,958
------- ------- -------- -------
Income from operations 3,525 2,861 10,485 8,263
Interest expense (446) (480) (1,439) (1,484)
Other income (expense), net 46 99 248 (170)
------- ------- -------- -------
Income before income taxes 3,125 2,480 9,294 6,609
Income tax provision 907 711 2,881 2,115
------- ------- -------- -------
Net income $ 2,218 $ 1,769 $ 6,413 $ 4,494
------- ------- -------- -------
------- ------- -------- -------
Net income per share:
Basic $ 0.25 $ 0.20 $ 0.71 $ 0.51
Diluted $ 0.24 $ 0.19 $ 0.68 $ 0.49
Number of shares used to calculate
net income per share:
Basic 9,003 8,906 8,986 8,850
Diluted 9,337 9,245 9,408 9,137
Stockholders' equity, beginning of period $65,493 $58,162 $ 60,658 $57,429
Net income 2,218 1,769 6,413 4,494
Dividends - - (183) (179)
Unrealized translation gain (loss) 1,313 293 1,186 (1,872)
Unamortized deferred compensation 60 51 (88) (22)
Repurchase of common stock (1,489) (355) (2,876) (1,698)
Issuance of common stock 704 690 3,189 2,458
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Stockholders' equity, end of period $68,299 $60,610 $ 68,299 $60,610
------- ------- -------- -------
------- ------- -------- -------
See accompanying notes
Page 3
NEWPORT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
September 30, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,238 $ 7,456
Customer receivables, net 23,672 23,372
Other receivables 812 979
Inventories 30,544 28,326
Deferred tax assets 3,317 3,256
Other current assets 2,139 2,065
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Total current assets 71,722 65,454
Investments and other assets 4,791 5,830
Property, plant and equipment, at cost, net 21,881 22,994
Goodwill, net 9,876 10,133
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$108,270 $104,411
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,861 $ 6,082
Accrued payroll and related expenses 5,343 5,855
Taxes based on income 1,528 2,056
Current portion of long-term debt 3,368 2,380
Other current liabilities 3,169 4,766
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Total current liabilities 19,269 21,139
Long-term debt 19,118 21,027
Other liabilities 1,584 1,587
Commitments and contingencies
Stockholders' equity:
Common stock, $.35 stated value,
20,000,000 shares authorized;
9,091,000 shares issued and outstanding
at September 30, 1998; 8,951,000 shares
at December 31, 1997 3,182 3,132
Capital in excess of stated value 8,289 8,026
Unamortized deferred compensation (607) (519)
Unrealized translation loss (3,850) (5,036)
Retained earnings 61,285 55,055
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Total stockholders' equity 68,299 60,658
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$108,270 $104,411
-------- --------
-------- --------
See accompanying notes
Page 4
NEWPORT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
September 30
------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income $ 6,413 $4,494
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,646 4,430
Increase in provision for losses
on receivables and inventories 790 1,001
Other non-cash items, net (354) (160)
Changes in operating assets and liabilities:
Receivables 349 1,547
Inventories (2,685) (1,951)
Other current assets (562) (1,472)
Other assets 318 391
Accounts payable and other accrued expenses (2,443) (626)
Taxes based on income (534) 341
Other, net (1) 535
------- -------
Net cash provided by operating activities 5,937 8,530
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INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (3,906) (4,056)
Disposition of property, plant and equipment, net 2,443 273
Acquisition of businesses, net of cash acquired - (879)
Proceeds from sale of investment 720 -
Other, net 49 (193)
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Net cash used in investing activities (694) (4,855)
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FINANCING ACTIVITIES:
Decrease in long-term borrowings (990) (893)
Cash dividends paid (362) (357)
Repurchase of common stock (2,876) (1,698)
Issuance of common stock under employee
agreements, including associated tax benefit 2,927 2,283
------- -------
Net cash used in financing activities (1,301) (665)
------- -------
Effect of foreign exchange rate changes on cash (160) 191
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,782 3,201
Cash and cash equivalents at beginning of period 7,456 3,375
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,238 $ 6,576
------- -------
------- -------
CASH PAID IN THE PERIOD FOR:
Interest $ 1,092 $ 1,108
Taxes 2,712 1,784
See accompanying notes
Page 5
NEWPORT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 accounts of the Company's subsidiaries in Europe
have been consolidated using a one-month lag.
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,
1998, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. 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, 1997.
NET INCOME PER SHARE
Net income per share for all periods have been presented and, where
necessary, restated to conform with the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. Basic net income per share
is based on the weighted average number of shares of common stock outstanding
during the periods, excluding restricted stock, while diluted net income per
share is based on the weighted average number of shares of common stock
outstanding during the periods and the dilutive effects of common stock
equivalents (mainly stock options), determined using the treasury stock
method, outstanding during the periods.
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 $4.0 million and $5.6 million at September
30, 1998, and December 31, 1997, respectively.
Page 6
NEWPORT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No. 130). SFAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholders' equity. SFAS No. 130
requires unrealized gains or losses on foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
The components of comprehensive income, net of related tax, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
Net income $2,218 $1,769 $6,413 $4,494
Unrealized translation gain (loss) 1,313 293 1,186 (1,872)
------ ------ ------ ------
Comprehensive income $3,531 $2,062 $7,599 $2,622
------ ------ ------ ------
------ ------ ------ ------
PENDING ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS No. 131), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131 is effective for financial statements for fiscal years beginning after
December 15, 1997, and therefore the Company will adopt the new requirements
effective with the filing of its Annual Report on Form 10-K for the year
ended December 31, 1998. Management has not completed its review of SFAS No.
131, but does expect that, while adoption of SFAS No. 131 may result in more
reported segments than are currently reported, it will not have an impact on
the Company's results of operations, financial position or cash flow.
2. CUSTOMER RECEIVABLES
The Company maintains adequate 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:
September 30, December 31,
(In thousands) 1998 1997
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Customer receivables $24,057 $23,857
Less allowance for doubtful accounts 385 485
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$23,672 $23,372
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Page 7
NEWPORT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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:
September 30, December 31,
(In thousands) 1998 1997
---- ----
Raw materials and purchased parts $11,933 $10,161
Work in process 5,671 5,236
Finished goods 12,940 12,929
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$30,544 $28,326
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------- -------
4. PROPERTY, PLANT AND EQUIPMENT
Property plant and equipment consist of the following:
September 30, December 31,
(In thousands) 1998 1997
---- ----
Land $1,287 $1,954
Buildings 7,218 12,069
Leasehold improvements 8,606 8,381
Machinery and equipment 22,364 20,620
Office equipment 11,565 10,074
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51,040 53,098
Less accumulated depreciation 29,159 30,104
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$21,881 $22,994
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------- -------
5. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
Interest and dividend income $141 $ 45 $353 $ 114
Exchange gains (losses), net 36 (63) (95) (419)
Gains (losses) on sales of investments, net (3) - 134 14
Other (128) 117 (144) 121
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$ 46 $(99) $248 $(170)
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Page 8
NEWPORT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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, 1997. 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. Newport 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,
1998, with the three- and nine-month periods ended September 30, 1997. This
discussion should be read in conjunction with the financial statements and
associated notes.
ACQUISITIONS
On September 29, 1998, the Company entered into, subject to certain terms and
conditions, a definitive agreement to acquire all the outstanding stock of
Environmental Optical Sensors, Inc. (EOSI) in exchange for cash. The
transaction was completed on October 13, 1998 and EOSI, a manufacturer of
tunable external cavity diode laser systems and other components, became a
wholly owned subsidiary of Newport.
Page 9
NEWPORT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
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,
1998 1997 1998 1997 1998 1998
---- ---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0% 2.3% 5.6%
Cost of sales 56.6 57.3 56.3 56.7 1.1 4.8
---- ---- ---- ----
Gross margin 43.4 42.7 43.7 43.3 4.0 6.6
Selling, general and
administrative expense 23.7 26.4 24.4 27.4 (7.9) (5.9)
Research and development expense 9.2 7.6 8.9 7.3 22.8 29.5
---- ---- ---- ----
Income from operations 10.5 8.7 10.4 8.6 23.2 26.9
Interest expense (1.3) (1.4) (1.4) (1.5) (7.1) (3.0)
Other income (expense), net 0.1 0.3 0.3 (0.2) (53.5) NM
Income taxes (2.7) (2.2) (2.9) (2.2) 27.6 36.2
---- ---- ---- ----
Net income 6.6% 5.4% 6.4% 4.7% 25.4 42.7
---- ---- ---- ----
---- ---- ---- ----
NM = not meaningful
NET SALES
Net sales for the three- and nine-month periods ended September 30, 1998 were
$33.5 million and $101.0 million, respectively, compared with $32.7 million
and $95.6 million for the three- and nine-month periods ended September 30,
1997, increasing 2.3% and 5.6% over the respective prior year periods. The
increase for the three-month period was primarily attributable to sales
advances in the fiber optic communications and computer peripherals markets,
which grew 77.8% and 39.3% respectively, versus the prior year quarter.
Largely offsetting this growth were sales declines to the semiconductor and
general metrology markets of 39.3% and 15.7% compared to 1997's third
quarter. Third quarter 1998 sales to the research market increased 3.4% over
the corresponding prior year period. The sales increase for the nine-month
period versus the prior year period resulted principally from 63.5% and 2.2%
growth in the fiber optic communications and research markets, respectively,
partially offset by a year-to-date decline of 9.2% in sales to the
semiconductor market.
The Company's domestic sales totaled $22.1 million and $67.9 million for the
three- and nine-month periods ended September 30, 1998, compared with $22.9
million and $62.8 million for the corresponding periods in 1997, a decrease
of 2.8% for the quarter and an increase of 7.9% for the nine-month period
versus the respective prior year periods. The decrease in domestic sales for
the quarter versus prior year is largely the result of lower sales to the
semiconductor and general metrology markets which more than offset growth in
sales to the fiber optic communications and computer peripherals markets. As
previously mentioned, growth for the nine months ended September 30, 1998
results primarily from increased sales to the fiber optic communications
market.
The Company's international sales totaled $11.4 million and $33.1 million for
the three- and nine-month periods ended September 30, 1998, compared with
$9.8 million and $32.8 million for the corresponding prior year periods,
increases of 1.2% and 14.0% respectively. European sales were up $1.6
million and $1.5 million for the quarter and year to date respectively,
representing increases of 28.5% and 7.6% over the respective prior year
periods. France, Germany and Sweden accounted for most of the quarterly
increase while Germany, the United Kingdom, the Netherlands and Sweden
provided most of the year-to-date growth. Foreign exchange rate effects on
European sales were negligible for the quarter and an unfavorable $0.9
million for the nine-month period ended September 30, 1998. Combined
Canadian and Latin American sales for the three- and nine-month periods
totaled $2.0 million and $4.0 million respectively, increases of 148.4% and
70.0% for the respective periods. Sales to the Asian markets declined 47.0%
and 28.4% for the quarter and nine-months, respectively, with Korea
accounting for 82% of the year-to-date decline. Through nine months, sales
into Asia comprised 7% of total sales versus 10% of total sales in
Page 10
NEWPORT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
the comparable 1997 period. Management anticipates that sales to the Asian
markets will continue to be down for the remainder of 1998 when compared with
1997 due to continued economic uncertainty and oversupply in the
semiconductor and disk drive markets.
Order rates for the third quarter were 2.6% below the prior year period as
increases of 39.7% in the fiber optic communications market and 24.1% in the
computer peripherals market were offset by declines of 48.5% and 10.1% in the
semiconductor and research markets, respectively.
Overall, management anticipates that net sales in 1998 will increase over
1997; however, such growth may be affected by many factors, including
economic uncertainty in Asia which may partially offset anticipated sales
growth in other geographic markets, and cannot be assured.
GROSS PROFIT
Gross profit increased 4.0% and 6.6% on sales increases of 2.3% and 5.6% for
the three- and nine-month periods ended September 30, 1998, compared with the
three- and nine-month periods ended September 30, 1997. Gross margin (gross
profit as a percentage of sales) increased to 43.4% and 43.7% of sales for
the three- and nine-month periods ended September 30, 1998, compared with
42.7% and 43.3% in the comparable 1997 periods. This increase in gross
margin percentage reflects a greater proportion of higher margin photonics
product sales during both the quarter and year to date. Management
anticipates that the Company's overall gross margin will improve in 1998 as a
result of this product mix effect, the overall increase in sales volume and
continued productivity improvements Company-wide.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the three- and
nine-month periods ended September 30, 1998, decreased 7.9% and 5.9% compared
with the three- and nine-month periods ended September 30, 1997. SG&A
expenses when stated as a percentage of sales were 23.7% and 24.4%, compared
with 26.4% and 27.4% for the prior year periods. The decrease in SG&A
expenses is primarily a result of successful cost containment measures
throughout the Company and a favorable exchange rate effect on expenses.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) expenses for the three- and nine-month periods
ended September 30, 1998, increased 22.8% and 29.5% compared with the
three-and nine-month periods ended September 30, 1997. As a percentage of
sales, R&D expenses were 9.2% and 8.9% versus 7.6% and 7.3% for the prior
year periods. The increase in expenses is 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 $0.4 million and $1.4 million for the three- and
nine-month periods ended September 30, 1998 versus $0.5 million and $1.5
million for three- and nine-month periods ended September 30, 1997. Other
income, net was $0.05 million versus $0.1 million for the 1998 and 1997 third
quarters. Year to date, other income (expense), net was a $0.2 million gain
for 1998 versus a $0.2 million loss in 1997. The increase in other income
for the nine-month period was primarily attributable to a gain on the sale of
an equity investment and lower foreign exchange losses in the current year.
PROVISION FOR TAXES
The effective annual tax rates for the three- and nine-month periods ended
September 30, 1998 were 29.0% and 31.0%, respectively, compared with 28.7%
and 32.0% for the three- and nine-month periods ended September 30, 1997.
The lower 1998 third quarter tax rate, compared with the 1998 year to date
tax rate, reflects the utilization of foreign valuation allowances, while the
1997 third quarter tax rate, compared with the tax rate for the 1997
nine-month period, reflected the tax benefit associated with higher sales
through the Company's Foreign Sales Corporation.
Page 11
NEWPORT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $5.9 million for the nine-month
period ended September 30, 1998 was principally attributable to the Company's
net income ($6.4 million), non-cash items, principally depreciation and
amortization ($4.6 million). Partially offsetting these amounts were
increases in certain other operating assets, principally inventories ($2.7
million) and accounts payable ($2.4 million). Customer receivables, net
totaled $23.7 million at September 30, 1998 and exceeded current liabilities
($19.3 million) at that date.
Net cash used in investing activities of $0.7 million for the nine-month
period ended September 30, 1998, was principally attributable to the
Company's sale of an equity investment and other property for net proceeds of
$3.2 million offset in part by the Company's purchases of property, plant and
equipment.
Net cash used in financing activities of $1.3 million for the nine-month
period ended September 30, 1998, was primarily due to the repurchase of
common stock under the Company's share repurchase program and payments on
borrowings, partially offset by issuance of common stock under employee
agreements.
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 and for the foreseeable future.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
IMPACT OF YEAR 2000
Certain of the Company's 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
and is currently in the test and conversion phase, with implementation
expected to be substantially complete by December 31, 1998. Based upon the
results of the work done to date, the Company believes that the remaining
work will be completed in a timely manner and that the overall cost of such
work will not be material. The cost of acquiring the upgraded computer
hardware and software was approximately $1.2 million and has been
capitalized. In the event that unanticipated difficulty is encountered in
converting to the new operating software, the Company's software supplier
has, as a contingency, provided a "patch" which would render the current
operating software Year 2000 compliant.
Newport sells certain products that include various software applications.
The Company has determined 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 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
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NEWPORT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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 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 and distributors 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 are scheduled to establish fixed conversion rates
between their existing national currencies and one common currency - the
euro. The euro will then trade 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. The Company anticipates that intercompany transactions
for the operating subsidiaries affected by the euro conversion will be
denominated in euro currency effective January 1, 1999. While the Company
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's 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 the currency market volatility will
not increase, which could have an adverse effect on the Company's hedging
strategies.
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 6, 1998
By: /S/ ROBERT C. HEWITT
-------------------------------------------
Robert C. Hewitt, Principal Financial
Officer, duly authorized to sign on behalf
of the Registrant
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