<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.txt
<DESCRIPTION>FORM 10-Q FOR PERIOD ENDED JUNE 30, 2001
<TEXT>
<PAGE>
================================================================================
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 June 30, 2001
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 0-1649
------
NEWPORT CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-0849175
--------------------------------------------------------------------------------
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1791 Deere Avenue, Irvine, CA 92606
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 863-3144
--------------
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of each of the issuer's classes of common stock
as of June 30, 2001, was 36,530,273.
================================================================================
Page 1 of 18
Exhibit Index on Sequentially Numbered Page 18
<PAGE>
NEWPORT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1: Financial Statements:
Consolidated Income Statement and Condensed
Consolidated Statement of Stockholders' Equity for the
Three and Six Months ended June 30, 2001 and 2000. 3
Consolidated Balance Sheet at June 30, 2001 and
December 31, 2000. 4
Consolidated Statement of Cash Flows for the Six
Months ended June 30, 2001 and 2000. 5
Notes to Condensed Consolidated Financial Statements. 6-10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11-16
Item 3: Quantitative and Qualitative Disclosures About Market Risk. 16-17
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders. 17-18
Item 6: Exhibits and Reports on Form 8-K. 18
SIGNATURE 18
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEWPORT CORPORATION
Consolidated Income Statement and
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 98,899 $ 61,109 $205,640 $113,546
Cost of sales, including asset writedown of $1,788
related to acquisition integration in the three
months ended March 31, 2001 57,862 32,209 119,026 60,332
-------- -------- -------- --------
Gross profit 41,037 28,900 86,614 53,214
Selling, general and administrative expense 18,227 12,107 38,464 23,291
Research and development expense 8,233 5,680 16,444 10,778
Acquisition and other non-recurring charges - - 10,683 -
-------- -------- -------- --------
Income from operations 14,577 11,113 21,023 19,145
Interest and other income (expense), net 3,546 (614) 7,461 (1,242)
-------- -------- -------- --------
Income before income taxes 18,123 10,499 28,484 17,903
Income tax provision 5,981 1,632 9,400 2,804
-------- -------- -------- --------
Net income $ 12,142 $ 8,867 $ 19,084 $ 15,099
======== ======== ======== ========
Net income per share:
Basic $0.33 $0.28 $0.53 $0.48
Diluted $0.32 $0.26 $0.50 $0.44
Number of shares used to calculate net
income per share:
Basic 36,354 31,899 36,260 31,675
Diluted 37,849 34,211 37,918 34,029
Pro forma information reflecting the tax effect
of the conversion of Kensington Laboratories, Inc.
from an S-Corporation to a C-Corporation
Income before income taxes $ 18,123 $ 10,499 $ 28,484 $ 17,903
Income tax provision 5,981 3,547 9,400 5,909
-------- -------- -------- --------
Net income $ 12,142 $ 6,952 $ 19,084 $ 11,994
======== ======== ======== ========
Earnings per share:
Basic $0.33 $0.22 $0.53 $0.38
Diluted $0.32 $0.20 $0.50 $0.35
Stockholders' equity, beginning of period $493,370 $ 91,181 $485,965 $ 83,246
Net income 12,142 8,867 19,084 15,099
Dividends (358) (284) (358) (284)
Other distributions to shareholders (7) (1,266) (3,821) (1,697)
Other comprehensive income (loss) (1,172) 75 (1,961) (972)
Deferred compensation 181 480 261 (1,537)
Issuance of common stock 3,052 4,078 8,038 9,276
-------- -------- -------- --------
Stockholders' equity, end of period $507,208 $103,131 $507,208 $103,131
======== ======== ======== ========
</TABLE>
See accompanying notes
Page 3
<PAGE>
NEWPORT CORPORATION
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(In thousands, except share data)
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,004 $ 16,861
Marketable securities 244,758 289,781
Customer receivables, net 72,698 70,241
Income tax receivable - 4,110
Inventories 118,959 80,585
Deferred tax assets 17,648 17,720
Other current assets 8,175 7,836
-------- --------
Total current assets 481,242 487,134
Property, plant and equipment, at cost, net 49,341 41,308
Goodwill, net 29,193 18,805
Investments and other assets 8,388 9,773
-------- --------
$568,164 $557,020
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,382 $ 24,797
Accrued payroll and related expenses 12,632 13,313
Taxes based on income 3,199 1,139
Deferred revenue 1,623 2,696
Other current liabilities 10,058 11,305
Current portion of long-term debt 8,276 7,590
-------- --------
Total current liabilities 55,170 60,840
Long-term debt 4,496 9,540
Other liabilities 1,290 675
Commitments and contingencies
Stockholders' equity:
Common stock, $.1167 par value,
200,000,000 shares authorized;
36,530,000 shares issued and outstanding
at June 30, 2001; 36,168,000 shares at
December 31, 2000 4,263 3,813
Capital in excess of par value 382,973 375,385
Unamortized deferred compensation (735) (996)
Accumulated other comprehensive loss (9,196) (7,235)
Retained earnings 129,903 114,998
-------- --------
Total stockholders' equity 507,208 485,965
-------- --------
$568,164 $557,020
======== ========
</TABLE>
See accompanying notes
Page 4
<PAGE>
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Six Months Ended
June 30,
---------------------
2001 2000
--------- --------
<S> <C> <C>
Operating activities:
Net income $ 19,084 $ 15,099
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 7,454 5,812
Increase in provision for losses
on receivables and inventories 1,520 1,490
Other non-cash items, net 1,227 (89)
Changes in operating assets and liabilities:
Customer receivables (3,260) (9,595)
Income tax receivable, net 6,220 (4,819)
Inventories (39,143) (11,585)
Other current assets (527) (995)
Other assets 992 (370)
Accounts payable and other accrued expenses (7,269) 8,248
Deferred revenue (2,812) 895
Other, net 612 (11)
--------- --------
Net cash provided by (used in) operating activities (15,902) 4,080
--------- --------
Investing activities:
Purchases of property, plant and equipment, net (13,259) (4,812)
Acquisition of businesses, net of cash acquired (12,357) (50)
Purchases of marketable securities (375,911) -
Sales of marketable securities 422,289 -
Proceeds from sale of investment - 1,430
Payments for equity investment - (1,510)
Payments for in-process technology - (488)
--------- --------
Net cash provided by (used in) investing activities 20,762 (5,430)
--------- --------
Financing activities:
Increase (decrease) in line of credit 157 (16)
Payments on long-term borrowings (4,717) (1,723)
Cash dividends paid (325) (184)
Other distributions to shareholders (3,821) (1,722)
Issuance of common stock under employee
agreements, including associated tax benefit 6,299 7,093
--------- --------
Net cash provided by (used in) financing activities (2,407) 3,448
--------- --------
Effect of foreign exchange rate changes on cash (310) 11
--------- --------
Net increase in cash and cash equivalents 2,143 2,109
Cash and cash equivalents at beginning of period 16,861 9,241
--------- --------
Cash and cash equivalents at end of period $ 19,004 $ 11,350
========= ========
Cash paid in the period for:
Interest $ 543 $ 1,117
Taxes 950 2,427
</TABLE>
See accompanying notes
Page 5
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 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 six-month period ended June 30, 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 Standards
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.
In June 2001 the FASB issued Statement No. 141, Business Combinations
("Statement 141"), and No. 142, Goodwill and Other Intangible Assets ("Statement
142"), effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but, instead, will be subject to annual impairment tests
in accordance with Statements 141 and 142. Other intangible assets will continue
to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of Statement 142 is expected to result in an
increase in net income of approximately $1.8 million per year (or $0.05 per
diluted share based on the weighted average share outstanding at June 30, 2001).
During 2002, the Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 and has
not yet determined what effect, if any, applying those test will have on the
Company's financial position and results of operations.
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.
Page 6
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)
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 $3.8 million and $4.3 million at June 30, 2001, and December 31, 2000,
respectively.
2. Mergers and Acquisitions
Kensington Laboratories, Inc.
-----------------------------
In February 2001, the Company merged with 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 of its common stock to the KLI shareholders in the transaction.
The transaction was accounted for as a pooling of interests, and, accordingly,
the accompanying 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
transaction 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
-------------------- --------------------
(In thousands) 2001 2000 2001 2000
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Newport $83,043 $52,769 $176,651 $ 99,536
KLI 17,491 10,135 33,150 17,151
Less: intercompany sales (1,635) (1,795) (4,161) (3,141)
Combined $98,899 $61,109 $205,640 $113,546
======= ======= ======== ========
Net income:
Newport $ 7,579 $ 4,080 $ 13,923 $ 7,338
KLI 4,563 4,787 5,161 7,761
------- ------- -------- --------
Combined $12,142 $ 8,867 $ 19,084 $ 15,099
======= ======= ======== ========
Earnings per share:
Basic
Newport $ 0.21 $ 0.14 $ 0.39 $ 0.26
KLI 0.12 0.14 0.14 0.22
------- ------- -------- --------
Combined $ 0.33 $ 0.28 $ 0.53 $ 0.48
======= ======= ======== ========
Diluted
Newport $ 0.20 $ 0.13 $ 0.37 $ 0.24
KLI 0.12 0.13 0.13 0.20
------- ------- -------- --------
Combined $ 0.32 $ 0.26 $ 0.50 $ 0.44
======= ======= ======== ========
</TABLE>
Page 7
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)
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.
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:
June 30, December 31,
(In thousands) 2001 2000
------- -------
Customer receivables $73,546 $70,918
Less allowance for doubtful accounts 848 677
------- -------
$72,698 $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:
June 30, December 31,
(In thousands) 2001 2000
-------- -------
Raw materials and purchased parts $ 37,116 $24,949
Work in process 21,918 17,124
Finished goods 59,925 38,512
-------- -------
$118,959 $80,585
======== =======
Page 8
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 2001 2000
-------- ------------
<S> <C> <C>
Land $ 829 $ 920
Buildings 4,779 5,304
Leasehold improvements 19,453 14,725
Machinery and equipment 55,493 49,652
Office equipment 23,237 20,786
-------- ------------
103,791 91,387
Less accumulated depreciation 54,450 50,079
-------- ------------
$ 49,341 $41,308
======== ============
</TABLE>
7. Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
------------------- ------------------
(In thousands) 2001 2000 2001 2000
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest and dividend income $ 3,335 $ 108 $ 7,425 $ 213
Interest expense (249) (695) (619) (1,348)
Exchange gains (losses), net 35 (34) (19) (45)
Gains on sale of investments, net 585 - 930 -
Other income (expense), net (160) 7 (256) (62)
-------- ------- ------- -------
$ 3,546 $ (614) $ 7,461 $(1,242)
======= ======= ======= =======
</TABLE>
8. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
(In thousands) 2001 2000 2001 2000
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income $12,142 $ 8,867 $19,084 $15,099
Foreign currency translation gain (loss) (1,019) 75 (3,316) (972)
Unrealized gain (loss) on marketable securities (153) - 1,355 -
------- -------- ------- -------
$10,970 $ 8,942 $17,123 $14,127
======= ======== ======= =======
</TABLE>
Page 9
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)
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- and six-months ended June 30, 2001 and 2000 follows:
<TABLE>
<CAPTION>
(In thousands) Industrial Industrial
& Scientific Fiber Optics Metrology
Technologies & Photonics Systems Total
------------ ------------- ----------- ---------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 2001:
---------------------------------
Sales to external customers $ 58,051 $35,628 $ 5,220 $ 98,899
Segment income (loss) 15,569 2,206 (3,198) 14,577
Three Months Ended June 30, 2000:
---------------------------------
Sales to external customers $ 41,342 $17,931 $ 1,836 $ 61,109
Segment income (loss) 10,696 2,095 (1,678) 11,113
Six Months Ended June 30, 2001:
-------------------------------
Sales to external customers $121,832 $70,916 $ 12,892 $205,640
Segment income (loss) 34,261 4,020 (4,787) 33,494
Six Months Ended June 30, 2000:
-------------------------------
Sales to external customers $ 77,074 $32,936 $ 3,536 $113,546
Segment income (loss) 18,095 4,322 (3,272) 19,145
</TABLE>
The following reconciles segment income to consolidated income before income
taxes.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
(In thousands) 2001 2000 2001 2000
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Segment income $ 14,577 $11,113 $ 33,494 $ 19,145
Unallocated acquisition and other
non-recurring charges - - (12,471) -
Interest and other income (expense), net 3,546 (614) 7,461 (1,242)
-------- ------- -------- --------
Income before income taxes $ 18,123 $10,499 $ 28,484 $ 17,903
======== ======= ======== ========
</TABLE>
10. Subsequent Events
Subsequent to June 30, 2001, the Company announced staff reductions and other
cost containment programs designed to bring the Company's expense structure in
line with its current business outlook. The staff reductions, which constitute
approximately 10% of the Company's workforce, primarily impact manufacturing and
support capacities within the Fiber Optics and Photonics reportable segment.
The Company expects to record a charge in the third quarter of 2001 of
approximately $1.0 to $1.5 million for employee severance. The Company is also
evaluating certain assets, including goodwill, inventory and fixed assets for
potential impairment. This charge, which would primarily be non-cash in nature,
is expected to be in the range of $6.0 million to $10.0 million.
Page 10
<PAGE>
NEWPORT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation for the Three Month and Six Month Periods Ended
June 30, 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) information regarding
the expected third-quarter 2001 charge referenced under the heading "Mergers,
Acquisitions and Other 2001 Events - Cost Containment Programs" below and in
Note 10 to the Financial Statements included herein, and (ii) 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 cancellation 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- and six-month periods ended June 30, 2001, with the three-
and six-month periods ended June 30, 2000. This discussion should be read in
conjunction with the financial statements and associated notes.
MERGERS, ACQUISITIONS AND OTHER 2001 EVENTS
During the three-month period ended March 31, 2001, the Company recorded non-
recurring charges of $12.5 million related primarily to mergers and
acquisitions. Of this amount, $9.2 million was related to the merger with
Kensington Laboratories, Inc. ("KLI") and consisted of investment 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 11
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 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 KLI
from an S-Corporation to a C-Corporation on the three- and six-month periods
ended June 30, 2000 is presented below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
(In thousands) 2001 2000 2001 2000
------- ------- ------- -------
Income before income taxes $18,123 $10,499 $41,003 $17,903
Income tax provision 5,981 3,547 13,531 5,909
------- ------- ------- -------
Net income $12,142 $ 6,952 $27,472 $11,994
Earnings per share:
Basic $ 0.33 $ 0.22 $ 0.76 $ 0.38
Diluted $ 0.32 $ 0.20 $ 0.72 $ 0.35
Kensington Laboratories, Inc.
-----------------------------
In February 2001, the Company merged with 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 of its common
stock to the KLI shareholders in the transaction. The transaction was accounted
for as a pooling of interests, and accordingly, the accompanying 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.
Cost Containment Programs
-------------------------
Subsequent to June 30, 2001, the Company announced staff reductions and other
cost containment programs designed to bring the Company's expense structure in
line with its current business outlook. The staff reductions, which constitute
approximately 10% of the Company's workforce, primarily impact manufacturing and
support capacities within the Fiber Optics and Photonics reportable segment.
The Company expects to record a charge in the third quarter of 2001 of
approximately $1.0 to $1.5 million for employee severance. The Company is also
evaluating certain assets, including goodwill, inventory and fixed assets for
potential impairment. This charge, which would primarily be non-cash in nature,
is expected to be in the range of $6.0 million to $10.0 million.
Page 12
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 2001 and 2000
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FINANCIAL ANALYSIS
Period-to-Period
Increase (Decrease)
-------------------
Percentage of Net Sales Three Six
----------------------------------------- Months Months
Three Months Ended Six Months Ended Ended Ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
2001 2000 2001 2000 2001 2001
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 61.8% 81.1%
Cost of sales, including asset
writedown of $1,788,000 related to
acquisition integration in the three
months ended March 31, 2001 58.5 52.7 57.9 53.1 79.6 97.3
----- ----- ----- -----
Gross profit 41.5 47.3 42.1 46.9 42.0 62.8
Selling, general and
administrative expense 18.5 19.8 18.7 20.5 50.5 65.1
Research and
development expense 8.3 9.3 8.0 9.5 44.9 52.6
Acquisition and other
non-recurring charges - - 5.2 - - 100.0
----- ----- ----- -----
Income from operations 14.7 18.2 10.2 16.9 31.2 9.8
Interest and other income
(expense), net 3.6 (1.0) 3.7 (1.1) NM NM
----- ----- ----- -----
Income before income taxes 18.3 17.2 13.9 15.8 72.6 59.1
Income taxes 6.0 2.7 4.6 2.5 266.5 235.2
----- ----- ----- -----
Net income 12.3 14.5 9.3 13.3 36.9 26.4
===== ===== ===== =====
</TABLE>
NM = not meaningful
Net Sales Net sales for the three- and six-month periods ended June 30, 2001
were $98.9 million and $205.6 million, respectively, compared with $61.1 million
and $113.5 million, respectively, for the three- and six-month periods ended
June 30, 2000. The results reflect increases of 61.8% and 81.1%, respectively,
when compared with the corresponding periods of the previous year. The sales
increases for the three-and six-month periods were due primarily to sales
increases in the fiber optic communications, semiconductor equipment and general
metrology markets, as well as the inclusion of sales from acquired businesses
accounted for using the purchase method for which there were no comparable sales
in the 2000 periods.
Three- and six-month sales to the fiber optic communications market were $36.2
million and $80.8 million, respectively, reflecting increases of $14.4 million,
or 66.2%, and $42.2 million, or 109.3%, compared with the corresponding prior
year periods. Sales to the semiconductor equipment market totaled $28.2 million
and $55.3 million for the three- and six-month periods ended June 30, 2001,
reflecting increases of $12.0 million, or 73.8%, and $27.3 million, or 97.3%,
respectively, compared with the corresponding periods in 2000. Three- and six-
month sales to the general metrology market were $20.7 million and $41.3
million, respectively, reflecting increases of $9.4 million, or 82.5%, and $19.4
million, or 88.9%, compared with the corresponding prior year periods. The
increases in sales to the general metrology market were also due to the
inclusion of sales from acquired businesses accounted for using the purchase
method for which there were no comparable sales in the 2000 periods. Three- and
six-month sales to the other market segments, including aerospace and research
and computer peripherals, were $13.8 million and $28.2 million, respectively,
reflecting increases of $2.0 million, or 14.9%, and $3.2 million, or 11.4%,
compared with the corresponding prior year periods.
Page 13
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 2001
Domestic sales totaled $67.8 million and $137.8 million for the three- and six-
month periods ended June 30, 2001, respectively, reflecting increases of $23.8
million, or 54.1%, and $52.2 million, or 60.9%, compared with the corresponding
periods in 2000. The increase for the quarter was due primarily to sales
increases in the fiber optic communications, semiconductor equipment, and
general metrology markets of $7.9 million, or 55.5%, $10.8 million, or 69.3%,
and $3.7 million, or 52.7%, respectively. Domestic sales to the other market
segments increased $1.4 million, or 20.0%, over the second quarter of 2000. The
increase for the six-month period ended June 30, 2001 was primarily due to sales
increases in the fiber optic communications, semiconductor equipment and general
metrology markets of $22.1 million, or 80.4%, $25.5 million, or 94.7%, and $5.1
million, or 35.1%, respectively, compared with the corresponding prior year
period, offset in part by a decrease in sales to the other market segments of
$0.5 million, or 2.8%, compared with the period year period. The increase in
domestic sales to the general metrology market was partly due to the inclusion
of sales from acquired businesses accounted for using the purchase method for
which there were no comparable sales in the 2000 periods.
International sales totaled $31.1 million and $67.8 million for the three- and
six-month periods ended June 30, 2001, respectively, reflecting increases of
$14.0 million, or 81.8%, and $39.9 million, or 143.0%, compared with the
corresponding periods in 2000. The increase for the quarter was due primarily
to sales increases in the fiber optic communications, semiconductor equipment,
and general metrology markets of $6.5 million, or 86.1%, $1.2 million, or
202.7%, and $5.7 million, or 130.0%, respectively. International sales to the
other market segments also increased $0.6 million, or 12.6%, over second quarter
of 2000. The increase for the six-month period ended June 30, 2001 was due
primarily to sales increases in the fiber optic communications, semiconductor
equipment and general metrology markets of $20.1 million, or 180.6%, $1.8
million, or 165.9%, and $14.3 million, or 193.8%, respectively, compared with
the corresponding prior year period. International sales to the other market
segments also increased $3.7 million, or 44.1%, compared with the prior year
period. Geographically, second quarter 2001 sales to customers in Europe and
the Pacific Rim increased $12.8 million, or 154.8%, and $1.7 million, or 39.1%,
respectively. Second quarter 2001 sales to customers in Canada decreased $1.1
million, or 37.9% from the prior year period. For the six-month period ended
June 30, 2001, sales to customers in Europe, the Pacific Rim and Canada
increased $25.4 million, or 153.1%, $7.8 million, or 100.9%, and $2.5 million,
or 40.8%, respectively. Increased European sales to the general metrology
market were due primarily to the inclusion of sales from acquired businesses
accounted for using the purchase method for which there were no comparable sales
in 2000. European sales for the three- and six-month periods were reduced by
$0.8 million and $1.3 million, respectively, compared with the same periods 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 periods.
GROSS MARGIN Gross margins for the three- and six-month periods ended June 30,
2001 were 41.5% and 42.1%, respectively, compared with margins of 47.3% and
46.9% in the corresponding periods in 2000. Margin for the six-month period in
2001 included an asset writedown of $1.8 million related to acquisition
integration. Excluding this charge, gross margin for the six-month period in
2001 would have been 43.0%. The decrease in gross margins for both the three-
and six-month periods were due primarily to higher manufacturing costs within
the Fiber Optics and Photonics division. In addition, in the second quarter of
2001, the Company's margins were negatively impacted by a few unusually low-
margin sales of semiconductor products. Further, gross margins for the three-
and six-month periods in 2000 reflect significantly higher than usual margins in
KLI's operations, whereas gross margins for the 2001 periods reflect the
additional costs incurred to expand the infrastructure of the KLI operations.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE SG&A expenses totaled $18.2
million, or 18.5% of net sales, and $38.5 million, or 18.7% of net sales, for
the three- and six-month periods ended June 30, 2001. The increase in SG&A
expenses of $6.1 million, or 50.5% versus the second quarter of 2000, was less
than the sales increase of 61.8%, reflecting the Company's efforts to leverage
expenses. The increase in total SG&A dollars resulted primarily from increases
in expenses from recently acquired businesses as well as from additional costs
required to support the year over year sales growth.
RESEARCH AND DEVELOPMENT (R&D) EXPENSE R&D expenses totaled $8.2 million, or
8.3% of net sales, and $16.4 million, or 8.0% of net sales, for the three- and
six-month periods ended June 30, 2001. R&D expenses increased $2.6 million, or
44.9% compared with the prior year quarter. The increase was attributable
primarily to increased 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,
Page 14
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 2001
technology enhancements to the LaserWeld and AutoAlign packaging workstation,
development of laser diode burn-in and characterization products, and the
development of 3D multi-sensor measurement capabilities for our video metrology
software.
ACQUISITION AND OTHER NON-RECURRING CHARGES Acquisition and other non-recurring
charges of $10.7 million were recorded in the three-month period ended March 31,
2001 and consisted primarily of investment banking, legal and accounting fees
associated with transactions.
INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income (expense),
net, totaled $3.5 million and $7.5 million for the three- and six-month periods
ended June 30, 2001, compared with expenses of $0.6 million and $1.2 million for
the corresponding prior year periods. The increase is a result of interest
income attributable to the proceeds from the secondary offering completed in
July 2000.
INCOME TAXES The effective tax rate for the three- and six-month periods ended
June 30, 2001, was 33.0% versus 15.5% and 15.7%, for the corresponding prior
year periods. 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 $15.9 million for the six-month
period June 30, 2001 was primarily attributable to an increase 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. Our customer receivables increased by $2.5 million, or 3.5%, from
the end of 2000. Despite the increase in total accounts receivables, the days
sales outstanding ratio improved to 57 days in the second quarter 2001 from 68
days in the fourth quarter of 2000. Our inventories increased $38.4 million, or
47.6%, in the second 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. Inventory turns were consistent with prior year-end levels.
Net cash provided by investing activities of $20.8 million for the six-month
period ended June 30, 2001, was principally attributable to the net sales of
marketable securities, offset in part by net purchases of property, plant and
equipment, as well as of recently acquired businesses.
Net cash used in financing activities of $2.4 million for the six-month period
ended June 30, 2001, was principally attributable to the payment of cash
dividends and payments on long-term borrowings, offset in part by the issuance
of common stock in connection with employee stock option and purchase plans.
At June 30, 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 June 30, 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 will be adequate to fund
our operations in the ordinary course of business, our anticipated capital
expenditures and our 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.
Page 15
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 2001
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 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 29% and 42% of our
consolidated operating profit for the three- and six-month periods ended June
30, 2001. Excluding non-recurring charges, international operations would have
constituted approximately 26% of our consolidated operating profit for the six-
months ended June 30, 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 and $0.6 million for the three- and six-month periods
ended June 30, 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.
Page 16
<PAGE>
NEWPORT CORPORATION
Quantitative and Qualitative Disclosures About Market Risk (Cont'd)
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 $244.8 million at June
30, 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 $0.2
million and $0.5 million for both the three- and six-month periods ended June
30, 2001.
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 4: Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on
May 30, 2001 for the purpose of acting on the following proposals:
(1) Proposal One to elect Robert G. Deuster and William R.
Rauth III as Class I directors of the Company:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Name Votes "For" Votes "Against" Votes "Withheld" Broker "Non Votes"
-------------------- ----------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Robert G. Deuster 29,495,637 0 3,164,640 0
William R. Rauth III 28,983,294 0 3,676,982 0
</TABLE>
(2) Proposal Two to amend the Company's Articles of
Incorporation to increase the number of authorized common
shares from seventy-five million (75,000,000) to two
hundred million (200,000,000):
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Withheld" Broker "Non Votes"
----------- --------------- ---------------- ------------------
<S> <C> <C> <C>
25,861,899 6,765,196 33,182 0
</TABLE>
(3) Proposal Three to amend the Company's Articles of
Incorporation to authorize a class of preferred stock, to
consist of ten million (10,000,000) shares:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Withheld" Broker "Non-Votes"
----------- --------------- ---------------- ------------------
<S> <C> <C> <C>
6,251,285 18,175,210 89,403 8,144,379
</TABLE>
(4) Proposal Four to approve the Company's 2001 Stock Incentive
Plan:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Withheld" Broker "Non-Votes"
----------- --------------- ---------------- ------------------
<S> <C> <C> <C>
12,895,193 11,424,194 196,511 8,144,379
</TABLE>
Page 17
<PAGE>
NEWPORT CORPORATION
PART II OTHER INFORMATION
(5) Proposal Five to approve an amendment to the Company's
Employee Stock Purchase Plan to accelerate the eligibility
date for employee participation under the Plan
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Withheld" Broker "Non-Votes"
----------- --------------- ---------------- ------------------
<S> <C> <C> <C>
32,364,295 234,893 61,089 0
</TABLE>
(6) Proposal Six to ratify the appointment of Ernst & Young, LLP
as the Company's independent auditors for the fiscal year
ending December 31, 2001:
<TABLE>
<CAPTION>
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Withheld" Broker "Non-Votes"
----------- --------------- ---------------- ------------------
<S> <C> <C> <C>
32,325,403 263,254 71,621 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit 3.1 Certificate of Amendment to Articles of
Incorporation, as filed June 26, 2001
(b) Reports on Form 8-K
-------------------
On April 18, 2001, the Company filed an Amended Current Report on
Form 8-K/A to file the financial statements and pro forma
financial information required by Item 7 of Form 8-K with respect
to the Company's merger with Kensington Laboratories, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWPORT CORPORATION
(Registrant)
Dated: August 14, 2001
By: /s/ CHARLES F. CARGILE
--------------------------------------
Charles F. Cargile, Principal Financial
Officer, duly authorized to sign on
behalf of the Registrant
Page 18
</TEXT>
</DOCUMENT>