-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MNGyepbyKZnwv+7RaXEq6vchm4Ga5K6m07+/mgAwnwtt7X1mY+D/wsLEZjuYdydc Jqz1665v+QvZmjhL/GpqKQ== 0001017062-99-001461.txt : 19990817 0001017062-99-001461.hdr.sgml : 19990817 ACCESSION NUMBER: 0001017062-99-001461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWPORT CORP CENTRAL INDEX KEY: 0000225263 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 940849175 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01649 FILM NUMBER: 99690216 BUSINESS ADDRESS: STREET 1: 1791 DEERE AVE CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 7148633144 FORMER COMPANY: FORMER CONFORMED NAME: DOLE JAMES CORP DATE OF NAME CHANGE: 19910905 10-Q 1 QUARTERLY REPORT DATED JUNE 30, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 *** FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 ------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ------------------ Commission File Number 0-1649 ------ NEWPORT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 94-0849175 ------ -------------- (State or other Jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1791 Deere Avenue, Irvine, CA 92606 ----------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (949) 863-3144 -------------- N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of each of the issuer's classes of common stock as of June 30, 1999, was 9,151,479. Page 1 of 16 Exhibit Index Sequentially Numbered Page 15 NEWPORT CORPORATION INDEX PART I. FINANCIAL INFORMATION Page Number Item 1: Financial Statements: Consolidated Income Statement and Condensed Consolidated Statement of Stockholders' Equity for the Three and Six Months ended June 30, 1999 and 1998. 3 Consolidated Balance Sheet at June 30, 1999 and December 31, 1998. 4 Consolidated Statement of Cash Flows for the Three and Six Months ended June 30, 1999 and 1998. 5 Notes to Condensed Consolidated Financial Statements. 6-9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. 10-14 Item 3: Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders. 15 Item 6: Exhibits and Reports on Form 8-K. 15 SIGNATURE 15 Page 2 NEWPORT CORPORATION Consolidated Income Statement and Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1999 1998 1999 1998 --------- -------- -------- --------- Net sales $35,576 $33,833 $65,024 $67,496 Cost of sales 19,716 18,670 36,355 37,853 ------- ------- ------- ------- Gross profit 15,860 15,163 28,669 29,643 Selling, general and administrative expense 9,390 8,419 17,285 16,731 Research and development expense 3,220 3,180 6,226 5,952 ------- ------- ------- ------- Income from operations 3,250 3,564 5,158 6,960 Interest expense (457) (485) (905) (993) Other income (expense), net 60 139 (130) 202 ------- ------- ------- ------- Income before income taxes 2,853 3,218 4,123 6,169 Income tax provision 798 1,029 1,154 1,974 ------- ------- ------- ------- Net income $ 2,055 $ 2,189 $ 2,969 $ 4,195 ======= ======= ======= ======= Net income per share Basic $ 0.23 $ 0.24 $ 0.33 $ 0.47 Diluted $ 0.22 $ 0.23 $ 0.32 $ 0.44 Number of shares used to calculate net income per share Basic 9,080 9,032 9,077 8,978 Diluted 9,336 9,497 9,374 9,441 Stockholders' equity, beginning of period $71,422 $63,736 $70,970 $60,658 Net income 2,055 2,189 2,969 4,195 Dividends (183) (183) (183) (183) Unrealized translation gain (loss) (710) 328 (2,166) (127) Unamortized deferred compensation 54 59 108 (148) Repurchase of common stock (855) (1,387) (998) (1,387) Issuance of common stock 76 751 1,159 2,485 ------- ------- ------- ------- Stockholders' equity, end of period $71,859 $65,493 $71,859 $65,493 ======= ======= ======= =======
See accompanying notes Page 3 NEWPORT CORPORATION Consolidated Balance Sheet
(In thousands, except share data) June 30, December 31, 1999 1998 ----------- ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 2,686 $ 5,335 Customer receivables, net 26,338 25,798 Other receivables 2,289 2,367 Inventories 33,648 31,260 Deferred tax assets 2,646 2,703 Other current assets 2,817 1,643 -------- -------- Total current assets 70,424 69,106 Investments and other assets 7,633 6,451 Property, plant and equipment, at cost, net 21,470 22,696 Goodwill, net 11,220 12,220 -------- -------- $110,747 $110,473 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,666 $ 6,180 Accrued payroll and related expenses 4,160 5,566 Line of credit 3,500 - Current portion of long-term debt 3,684 3,699 Other current liabilities 3,972 5,163 -------- -------- Total current liabilities 21,982 20,608 Long-term debt 15,499 17,536 Other liabilities 1,407 1,359 Commitments and contingencies Stockholders' equity: Common stock, $.35 stated value, 20,000,000 shares authorized; 9,151,000 shares issued and outstanding at June 30, 1999; 9,119,000 shares at December 31, 1998 3,203 3,192 Capital in excess of stated value 8,723 8,573 Unamortized deferred compensation (440) (548) Unrealized translation loss (6,082) (3,916) Retained earnings 66,455 63,669 -------- -------- Total stockholders' equity 71,859 70,970 -------- -------- $110,747 $110,473 ======== ========
See accompanying notes Page 4 NEWPORT CORPORATION Consolidated Statement of Cash Flows (Unaudited)
(In thousands) Six Months Ended June 30 ------------------ 1999 1998 ------- ------- Operating activities: Net income $ 2,969 $ 4,195 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,274 3,083 Increase in provision for losses on receivables and inventories 274 894 Other non-cash items, net 62 (222) Changes in operating assets and liabilities: Receivables (1,350) 1,873 Inventories (3,287) (3,229) Other current assets (1,506) (705) Other assets (35) 320 Accounts payable and other accrued expenses (1,424) (2,925) Taxes based on income (106) 41 Other, net - (1) ------- ------- Net cash provided by (used in) operating activities (1,129) 3,324 ------- ------- Investing activities: Purchases of property, plant and equipment, net (2,205) (2,946) Disposition of property, plant and equipment, net 108 2,395 Proceeds from sale of investment - 720 Payments for in-process technology (1,099) - Other, net - 31 ------- ------- Net cash provided by (used in) investing activities (3,196) 200 ------- ------- Financing activities: Increase in credit line 3,500 - Decrease in long-term borrowings (1,841) (839) Cash dividends paid (182) (180) Repurchase of common stock (998) (1,387) Issuance of common stock under employee agreements, including associated tax benefit 1,159 2,217 ------- ------- Net cash provided by (used in) financing activities 1,638 (189) ------- ------- Effect of foreign exchange rate changes on cash 38 4 ------- ------- Net increase (decrease) in cash and cash equivalents (2,649) 3,339 Cash and cash equivalents at beginning of period 5,335 7,456 ------- ------- Cash and cash equivalents at end of period $ 2,686 $10,795 ======= ======= Cash paid in the period for: Interest $ 909 $ 1,004 Taxes 1,205 1,293
See accompanying notes Page 5 NEWPORT CORPORATION Notes to Condensed Consolidated Financial Statements June 30, 1999 (Unaudited) 1. Interim Reporting General The accompanying unaudited financial statements consolidate the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information. Both the three- and six-month periods in 1999 include net sales of $2.5 million representing one extra month of sales from Newport's European operations. The additional net sales stem from a reporting change in the second quarter that eliminated a one-month lag in the reporting of European results. Without the change, net sales would have been $33.1 million and $62.5 million, respectively, for the 1999 second quarter and first half. Earnings per share were not impacted by the change. In the opinion of management, all adjustments necessary for a fair presentation of the information in the unaudited condensed consolidated financial statements have been made and consist of only normal recurring accruals. Operating results for the six-month period ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission, and consequently, these statements should be read in conjunction with the Company's consolidated financial statements and notes thereto, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Net Income per Share Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period, excluding restricted stock, while diluted net income per share is based on the weighted average number of shares of common stock outstanding during the period and the dilutive effects of common stock equivalents (mainly stock options), determined using the treasury stock method, outstanding during the period. Foreign Currency Balance sheet accounts denominated in foreign currencies are translated at exchange rates as of the date of the balance sheet and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are accumulated as a separate component of stockholders' equity. The Company has adopted local currencies as the functional currencies for its subsidiaries because their principal economic activities are most closely tied to the respective local currencies. The Company may enter into foreign exchange contracts as a hedge against foreign currency denominated receivables. It does not engage in currency speculation. Market value gains and losses on contracts are recognized currently, offsetting gains or losses on the associated receivables. Foreign currency transaction gains and losses are included in current earnings. Foreign exchange contracts totaled $6.6 million and $4.2 million at June 30, 1999, and December 31, 1998, respectively. Page 6 NEWPORT CORPORATION Notes to Condensed Consolidated Financial Statements June 30, 1999 (Unaudited) 2. Customer Receivables The Company maintains reserves for potential credit losses. Such losses have been minimal and within management's estimates. Receivables from customers are generally unsecured. Customer receivables consist of the following: June 30, December 31, (In thousands) 1999 1998 -------- ------------ Customer receivables $26,643 $26,077 Less allowance for doubtful accounts 305 279 ------- ------- $26,338 $25,798 ======= ======= 3. Inventories Inventories are stated at cost, determined on either a first-in, first-out (FIFO) or average cost basis and do not exceed net realizable value. Inventories consist of the following: June 30, December 31, (In thousands) 1999 1998 -------- ------------ Raw materials and purchased parts $11,395 $12,412 Work in process 7,243 5,301 Finished goods 15,010 13,547 ------- ------- $33,648 $31,260 ======= ======= 4. Property, Plant and Equipment Property plant and equipment consist of the following: June 30, December 31, (In thousands) 1999 1998 -------- ------------- Land $ 1,136 $ 1,287 Buildings 6,370 7,218 Leasehold improvements 8,488 8,715 Machinery and equipment 24,098 24,063 Office equipment 12,371 11,715 ------- ------- 52,463 52,998 Less accumulated depreciation 30,993 30,302 ------- ------- $21,470 $22,696 ======= ======= Page 7 NEWPORT CORPORATION Notes to Condensed Consolidated Financial Statements June 30, 1999 (Unaudited) 5. Other Income (Expense), Net Other income (expense), net, consists of the following:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ (In thousands) 1999 1998 1999 1998 -------- --------- -------- ------- Interest and dividend income $ 22 $ 126 $ 71 $ 212 Exchange gains (losses), net 15 (87) (197) (131) Gains on sales of investments, net - 134 - 134 Other 23 (34) (4) (13) ------ ------ ------- ------ $ 60 $ 139 $ (130) $ 202 ====== ====== ======= ======
6. Comprehensive Income The components of comprehensive income, net of related tax, are as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- (In thousands) 1999 1998 1999 1998 ------ ------ ------- ------ Net income $2,055 $2,189 $ 2,969 $4,195 Unrealized translation gain (loss) (710) 328 (2,166) (127) ------ ------ ------- ------ $1,345 $2,517 $ 803 $4,068 ====== ====== ======= ======
Page 8 NEWPORT CORPORATION Notes to Condensed Consolidated Financial Statements June 30, 1999 (Unaudited) 7. Segment Reporting Selected financial information for the Company's reportable segments for the three- and six-months ended June 30, 1999 and 1998 follows:
(In thousands) Components Instruments and and Subassemblies Systems Europe Total ------------- ----------- ------- ------- Three Months Ended June 30, 1999: - --------------------------------- Sales to external customers $ 9,982 $13,618 $10,018 $33,618 Intersegment sales 2,012 2,682 2,097 6,791 Segment income (loss) 2,999 (5) 344 3,338 Three Months Ended June 30, 1998: - --------------------------------- Sales to external customers $10,328 $16,002 $ 6,698 $33,028 Intersegment sales 1,482 1,036 2,256 4,774 Segment income (loss) 2,899 677 37 3,613 Six Months Ended June 30, 1999: - ------------------------------- Sales to external customers $19,522 $25,984 $16,150 $61,656 Intersegment sales 3,342 4,610 3,813 11,765 Segment income (loss) 5,542 (661) 295 5,176 Six Months Ended June 30, 1998: - ------------------------------- Sales to external customers $21,537 $30,906 $13,634 $66,077 Intersegment sales 3,041 2,474 3,937 9,452 Segment income (loss) 6,181 1,152 (190) 7,143 The following reconciles segment income to consolidated income before income taxes. Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (In thousands) 1999 1998 1999 1998 ------- -------- ------- ------- Segment income $ 3,338 $ 3,613 $ 5,176 $ 7,143 Income from non reportable segments 63 27 215 43 Unallocated corporate and other operating expense (151) (76) (233) (226) Interest expense (457) (485) (905) (993) Other income (expense) 60 139 (130) 202 ------- ------- ------- ------- Income before income taxes $ 2,853 $ 3,218 $ 4,123 $ 6,169 ======= ======= ======= =======
Page 9 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations Three and Six Months Ended June 30, 1999 and 1998 INTRODUCTORY NOTE This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These forward-looking statements include (i) the existence and development of the Company's technical and manufacturing capabilities and product offerings, (ii) anticipated competition, (iii) potential future growth in revenues and income, (iv) potential future decreases in costs, and (v) the need for, and availability of, additional financing. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that the Company will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that the Company's markets will continue to grow, that the Company's products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within the Company's markets will not change materially or adversely, that the Company will retain key technical and management personnel, that the Company's forecasts will accurately anticipate market demand, that there will be no material adverse change in the Company's operations or business, that fluctuations in foreign currency exchange rates do not have a material adverse impact on the Company's competitive position in international markets and that the Company will not experience significant supply shortages with respect to purchased components, sub-systems or raw materials. Additional factors that may affect future operating results are discussed in more detail in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, including those in Europe and Asia and those related to its strategic markets, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although, the Company believes that the assumptions underlying the forward-looking statements will be realized. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward- looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company undertakes no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following is management's discussion and analysis of certain significant factors that have affected the earnings and financial position of the Company during the period included in the accompanying financial statements. This discussion compares the three- and six-month periods ended June 30, 1999, with the three- and six-month periods ended June 30, 1998. This discussion should be read in conjunction with the financial statements and associated notes. Page 10 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three and Six Months Ended June 30, 1999 and 1998 RESULTS OF OPERATIONS
FINANCIAL ANALYSIS Period-to-Period Increase (Decrease) ------------------- Percentage of Net Sales Three Six ------------------------- Months Months Three Months Ended Six Months Ended Ended Ended June 30, June 30, June 30, June 30, June 30, June 30. 1999 1998 1999 1998 1999 1998 ----- ----- ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% 5.2% (3.7%) Cost of sales 55.4 55.2 55.9 56.1 5.6 (4.0) ----- ----- ----- ----- Gross margin 44.6 44.8 44.1 43.9 4.6 (3.3) Selling, general and administrative expense 26.4 24.9 26.6 24.8 11.5 3.3 Research and development expense 9.1 9.4 9.6 8.8 1.3 4.6 ----- ----- ----- ----- Income from operations 9.1 10.5 7.9 10.3 (8.8) (25.9) Interest expense (1.3) (1.4) (1.4) (1.5) (5.8) (8.9) Other income (expense), net 0.2 0.4 (0.2) 0.3 (56.8) NM Income taxes 2.2 3.0 1.8 2.9 (22.4) (41.5) ----- ----- ----- ----- Net income 5.8 6.5 4.6 6.2 (6.1) (29.2) ===== ===== ===== =====
NM = not meaningful NET SALES Net sales for the three- and six-month periods ended June 30, 1999, were $35.6 million and $65.0 million, respectively, compared with $33.8 million and $67.5 million for the three- and six-month periods ended June 30, 1998. Both the three- and six-month periods in 1999 include net sales of $2.5 million representing one extra month of sales from Newport's European operations. The additional net sales stem from a reporting change in the second quarter that eliminated a one-month lag in the reporting of European results. Without the change, net sales would have been $33.1 million and $62.5 million, respectively, for the 1999 second quarter and first half. The increase over the second quarter of 1998 is primarily attributable to the fiber optic communications and general metrology markets, with sales growth of 49.1% and 16.5%, respectively, over the prior year quarter. Partially offsetting this increase were declines in sales to the computer peripherals, research and semiconductor markets of 24.9%, 12.7% and 6.9%, respectively, over the corresponding 1998 period. For the six-month period, sales to the semiconductor, computer peripherals and research markets decreased 25.6%, 21.8% and 15.1%, respectively. Partially offsetting this decline was growth in sales to the fiber optic communications market of 44.5% over the prior year period. The Company's domestic sales totaled $20.6 million and $38.5 million for the three- and six-month periods ended June 30, 1999, compared with $23.8 million and $45.7 million for the three- and six-month periods ended June 30, 1998, decreases of 13.8% and 15.9% versus the respective prior year periods. The decrease in domestic sales for both the three- and six-month periods principally was attributable to a decline in sales to the aerospace and defense portion of the research market as well as lower sales to the semiconductor and computer peripherals markets. Increases in sales to the fiber optic communications market for both periods partially offset the previously mentioned declines. The Company's international sales totaled $15.0 million and $26.5 million for the three- and six-month periods ended June 30, 1999, compared with $10.0 million and $21.8 million for the corresponding prior year periods, increases of 50.4% and 22.0% respectively. European sales reflect a $2.5 million favorable impact from the reporting change discussed previously. Excluding that impact, European sales grew 15.7% to $7.5 million versus the prior year quarter, but declined 1.4% to $13.9 million for the six-month period. The growth for the quarter is primarily attributable to a significant increase in sales to European-based OEM customers, primarily in the transportation and analytical instrument industries. Canadian sales for the three- and six-month periods, reflecting the strength of the fiber optic communications market, totaled $1.9 million and 3.4 million, respectively, representing increases of 208.4% and 191.5% over the comparable prior year periods. Sales to Pacific Rim markets Page 11 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three and Six Months Ended June 30, 1999 and 1998 increased 16.9% and 9.3% to for the quarter and year to-date periods compared to the corresponding prior year periods. The increase for the three-month period is due primarily to significant sales increases in Korea and the ASEAN countries, while the increase for the six-month period is attributable primarily to sales increases in Korea and Australia of 220.3% and 117.1%, respectively. Order rates for the second quarter increased 19.0% versus the prior year period as increases of 85.9%, 35.3% and 17.0% in orders from the fiber optic communications, semiconductor and general metrology markets, respectively were partially offset by a 38.6% decline in orders from the computer peripherals market. Second quarter orders from the research market were flat versus the prior year quarter. These order rates include an additional $2.7 million, representing one extra month of orders from Newport's European operations. Excluding that impact, order rates for the second quarter increased 10.4% versus the prior year quarter. Management expects that net sales to the fiber optic communications and semiconductor markets will increase in the second half of the year but that sales to the computer peripherals market and sales of its video metrology products will continue to be weak for the remainder of the year. Overall, management anticipates that net sales in 1999 will increase over 1998; however, such growth may be affected by many factors, and cannot be assured. GROSS PROFIT Gross profit increased 4.6% on sales growth of 5.2% for the three-month period ended June 30, 1999, compared with the three-month period ended June 30, 1998. For the six-month ended June 30, 1999, gross profit decreased 3.3% on a sales decrease of 3.7%, compared with the six-month period ended June 30, 1998. Gross margins (gross profit as a percentage of sales) of 44.6% and 44.1% for the three and six months ended June 30, 1999, did not vary significantly from the 44.8% and 43.9% gross margins realized in the comparable 1998 periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses for the three- and six-month periods ended June 30, 1999, increased 11.5% and 3.3% compared with the three- and six-month periods ended June 30, 1998. SG&A expenses when stated as a percentage of sales were 26.4% and 26.6%, compared with 24.9% and 24.8% for the prior year periods. The increase in SG&A is primarily due to the inclusion of an additional month of expenses from the aforementioned reporting change. Absent this change, SG&A expenses would have increased $0.1 million for the three-month period while decreasing $0.3 million for the six-month period versus the comparable prior year periods. RESEARCH AND DEVELOPMENT EXPENSES Research and development (R&D) expenses for the three- and six-month periods ended June 30, 1999, increased 1.3% and 4.6% compared with the three- and six- month periods ended June 30, 1998. As a percentage of sales, R&D expenses were 9.1% and 9.6% for the three- and six-month periods ended June 30, 1999, versus 9.4% and 8.8% for the prior year periods. Similar to SG&A expenses, the increase in R&D expenses is due to the inclusion of an additional month of expenses from the change in European reporting. Absent this change, R&D expenses would have decreased $0.1 million for the three-month period while increasing $0.1 million for the six-month period versus the comparable prior year periods. Expenses for both the three- and six-month periods ended June 30, 1999, are in line with management's commitment to continued product development and enhancement of existing products. INTEREST EXPENSE AND OTHER INCOME (EXPENSE), NET Interest expense totaled $0.5 million and $0.9 million for the three- and six- month periods ended June 30, 1999, versus $0.5 million and $1.0 million for the three- and six-month periods ended June 30, 1998. Other income (expense), net was a $0.1 million for both the 1999 and 1998 second quarters. Year-to-date, Other income (expense), net was a $0.1 million loss for 1999 versus a $0.2 million gain in 1998. The year-to-date decline versus prior year is primarily attributable to higher foreign exchange losses related to the strengthening of the U.S. dollar against the euro that occurred in the first quarter of 1999. Page 12 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three and Six Months Ended June 30, 1999 and 1998 PROVISION FOR TAXES The effective annual tax rate for the three- and six-month periods ended June 30, 1999, was 28.0% versus 32.0% for the corresponding prior year periods. The lower rate in 1999 is primarily the result of increased utilization of foreign tax loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities of $1.1 million for the six-month period ended June 30, 1999, was principally attributable to payments on accounts payable and other accrued expenses ($1.4 million), increases in certain other operating assets, principally inventories ($3.3 million), receivables ($1.4 million) and other current assets ($1.5 million). Partially offsetting these amounts were the Company's net income ($3.0 million) and depreciation and amortization ($3.3 million). Current assets totaled $70.4 million at June 30, 1999, and exceeded current liabilities ($22.0 million) at that date. Net cash used in investing activities of $3.2 million for the six-month period ended June 30, 1999, was principally attributable to the Company's purchases of property, plant and equipment and the payments for in-house technology. Net cash provided by financing activities of $1.6 million for the six-month period ended June 30, 1999, was primarily due to the utilization of $3.5 million of the Company's line of credit and the issuance of common stock under employee agreements. Partially offsetting these amounts were a $1.5 million principal repayment on the Company's long-term debt and the repurchase of common stock under the Company's share repurchase program. At June 30, 1999, there was $3.5 million outstanding under the Company's line of credit with $21.3 million available after considering outstanding letters of credit. Although the Company has no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies, the Company continues to evaluate acquisitions of products, technologies or companies that complement the Company's business and may make such acquisitions in the future, and there can be no assurance that the Company will not need to obtain additional sources of capital to finance any such acquisitions. The Company believes its current working capital position together with estimated cash flows from operations and its existing credit availability are adequate to fund operations in the ordinary course of business, anticipated capital expenditures and debt repayment requirements over at least the next year. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Impact of Year 2000 Certain business operations software programs were written using two digits rather than four to define the applicable year. As a result, those software programs are time-sensitive and recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including but not limited to, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company initiated a review of its business operations software requirements in early 1996 as part of the normal course of upgrading its systems to support current and anticipated growth. Among the criteria for acquiring new or upgraded software was that it be Year 2000 compliant. In 1997 the Company acquired new operating software that is Year 2000 compliant. Testing and implementation occurred throughout 1998 with final conversion at year-end. Following this conversion, the Company believes that its operations software and hardware are substantially Year 2000 compliant. The cost of acquiring the upgraded computer hardware and software was approximately $1.2 million and has been capitalized. Page 13 NEWPORT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd) Three and Six Months Ended June 30, 1999 and 1998 Newport sells certain products that include various software applications. The Company believes that, since January 1, 1996, its product software has been Year 2000 compliant. The Company has also requested assurance from its goods and services providers that they are, or have programs in place to be, Year 2000 compliant. The Company has established an Information Technology Steering Committee, which reports directly to the President and Chief Executive Officer. The committee members include executive management and employees with expertise from various disciplines including, but not limited to, information technology, engineering, finance, customer service, communications, facilities, procurement and human resources. The committee is responsible for addressing Year 2000 issues associated with the Company's (1) business application systems including, but not limited to, the Company's customer service, operations and financial systems and end-user applications; (2) embedded systems, including equipment that operates such items as the Company's telecommunications and facilities; (3) software applications embedded in certain of the Company's products; (4) vendor and supplier relationships; and (5) contingency planning. While the Company anticipates no major interruption of its business activities due to Year 2000 issues, this will depend in part upon Year 2000 compliance of third parties. The Company's most likely potential risk is the inability of some customers to order and/or pay on a timely basis and/or the inability of some suppliers to receive orders and/or deliver on a timely basis. Although the Company has implemented the actions described above to address third party issues, it has no direct ability to influence the compliance actions by such parties. Accordingly, while the Company believes its actions in this regard should reduce Year 2000 risks, it is unable to eliminate them or to estimate the ultimate effect Year 2000 risks may have. While the Company currently believes that neither the software developed by it as part of its products nor the software licensed by it for its internal use will be materially affected by Year 2000 problems, there can be no assurance that the Company's product software, its internal computer systems and networks or those of its key vendors, developers, distributors and customers will not be affected by such Year 2000 issues, which could have a material adverse effect on the Company's business, operating results and financial condition. European Economic and Monetary Union (EMU) - New European Currency On January 1, 1999, eleven of the fifteen member countries of the European Economic and Monetary Union established fixed conversion rates between their existing national currencies and one common currency - the euro. The euro trades on currency exchanges and, during a three-year dual-currency transition period, either the euro or the national currencies may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins will be issued, and the national currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the systems and business issues raised by the euro currency conversion. These issues include, among others, (1) the need to adapt computer and other business systems and equipment to accommodate euro- denominated transactions; and (2) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis, particularly once the euro currency is issued in 2002. While, the Company currently anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations, there can be no assurance that the Company or its key vendors, customers and distributors will not be affected by such euro currency issues, which could have an adverse effect on the Company's business, operating results and financial condition. Further, there can be no assurance that currency market volatility will not increase, which could have an adverse effect on the Company's euro exposures. PENDING ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording derivatives in interim and annual financial reports requiring that all derivative instruments be recorded as assets or liabilities, measured at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, and therefore the Company will adopt the new requirements effective with the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. Management does not anticipate that the adoption of SFAS No. 133 will have a significant impact on the Company's results of operations, financial position or cash flow. Page 14 NEWPORT CORPORATION Quantitative and Qualitative Disclosures About Market Risk Three and Six Months Ended June 30, 1999 and 1998 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rates which may generate translation and transaction gains and losses. Foreign Currency Risk Operating in international markets sometimes involves exposure to volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on the Company is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause the Company to adjust its financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors. International operations constituted approximately 12.5% of the Company's consolidated operating profit for the three-months ended June 30, 1999. As currency exchange rates change, translation of the income statements of international operations into U.S. dollars affects year-over-year comparability of operating results. The Company does not generally hedge translation risks because cash flows from international operations are generally reinvested locally. The Company does not currently enter into hedges to minimize volatility of reported earnings because it does not believe it is justified by the exposure or the cost. NEWPORT CORPORATION PART II. OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders was held on May 20, 1999. (b) Set forth below is the name of each Class I director elected at the meeting and the number of votes cast for their election, the number of votes against their election, the number of votes abstained and the number of broker non-votes:
Number of Number of Number of Number of Broker Name Votes "For" Votes "Against" Votes "Abstain" "Non-Votes" ---- ----------- --------------- --------------- ----------- C. Kumar N. Patel 8,582,510 0 24,219 568,044 Kenneth F. Potashner 8,582,714 0 24,015 568,044
(c) Proposal Two to appoint Ernst & Young LLP as the Company's independent auditors resulted in the following number of votes for, against, abstain, withheld and non-vote:
Number of Number of Number of Number of Number of Broker Votes "For" Votes "Against" Votes "Abstain" Votes "Withheld" "Non-Votes" ----------- --------------- --------------- ---------------- ----------- 8,590,173 10,989 5,565 0 568,046
Item 6. Exhibits and reports on Form 8-K. (a) Exhibits Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWPORT CORPORATION (Registrant) Dated: August 12, 1999 By: /s/ROBERT C. HEWITT ------------------------------------- Robert C. Hewitt, Principal Financial Officer, duly authorized to sign on behalf of the Registrant Page 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows and is qualified in its entirety by reference to such financial statements contained within the Company's Form 10-Q for the period ended June 30, 1999. 1,000 3-MOS DEC-31-1999 JUN-30-1999 2,686 0 26,643 305 33,648 70,424 52,463 30,993 110,747 21,982 15,499 0 0 3,203 68,656 110,747 35,576 35,576 19,716 19,716 12,524 26 457 2,853 798 2,055 0 0 0 2,055 0.23 0.22
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