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NEWPORT CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our unaudited consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K/A for
the year ended December 31, 2011 previously filed with the SEC. This discussion
contains descriptions of our expectations regarding future trends affecting our
business. Words such as "anticipate," "believe," "can," "continue," "could,"
"estimate," "expect," "intend," "may," "plan," "potential," "predict," "should,"
"will," "would," or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to projections of our future financial performance or
condition, trends in our business, or other characterizations of future events
or circumstances are forward-looking statements. These forward-looking
statements and other forward-looking statements made elsewhere in this report
are made in reliance upon safe harbor provisions in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of several factors, including, but not
limited to those factors set forth and discussed elsewhere in this Quarterly
Report on Form 10-Q and in Item 1 (Business) and Item 1A (Risk Factors) of
Part I, and Item 7 (Management's Discussion and Analysis of Financial Condition
and Results of Operations) of Part II, of our Annual Report on Form 10-K/A for
the year ended December 31, 2011. In light of the significant uncertainties
inherent in the forward-looking information included in this report, the
inclusion of this information should not be regarded as a representation by us
or any other person that our objectives or plans will be achieved and readers
are cautioned not to place undue reliance on such forward-looking information.
Except as required by law, we undertake no obligation to update or revise these
forward-looking statements, whether as a result of new information, future
events or otherwise.
Overview
We are a global supplier of advanced-technology products and systems, including
lasers, photonics instrumentation, precision positioning and vibration isolation
products and systems, optical components, subassemblies and subsystems,
three-dimensional non-contact measurement equipment and advanced automated
manufacturing systems. Our products are used worldwide in industries including
scientific research, defense/security, microelectronics, life and health
sciences and industrial markets. We operate within three distinct business
segments, our Photonics and Precision Technologies (PPT) Division, our Lasers
Division and our Ophir Division. All of our divisions offer a broad array of
advanced technology products and services to original equipment manufacturer
(OEM) and end-user customers across a wide range of applications in all of our
targeted end markets.
The following is a discussion and analysis of certain factors that have affected
our results of operations and financial condition during the periods included in
the accompanying consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We evaluate these estimates and assumptions on an
ongoing basis. We base our estimates on our historical experience and on
various other factors which we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the amounts of certain expenses that are
not readily apparent from other sources. The accounting policies that involve
the most significant judgments, assumptions and estimates used in the
preparation of our financial statements are those related to revenue
recognition, allowances for doubtful accounts, pension liabilities, inventory
reserves, warranty obligations, asset impairment, income taxes and stock-based
compensation. The judgments, assumptions and estimates used in these areas by
their nature involve risks and uncertainties, and in the event that any of them
prove to be inaccurate in any material respect, it could have a material effect
on our reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. A summary of these critical accounting policies is included
in Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) of Part II, of our Annual Report on Form 10-K/A for the
fiscal year ended
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December 31, 2011. There have been no material changes to the critical
accounting policies disclosed in our Annual Report on Form 10-K/A.
Acquisition
On January 13, 2012, we acquired all of the outstanding capital stock of ILX
Lightwave Corporation (ILX) by means of a merger of our wholly owned subsidiary
with and into ILX. The total purchase price for the acquisition was $9.0
million. An initial purchase price of $9.3 million was paid in cash at closing,
of which $1.2 million was deposited at closing into escrow until July 12, 2013,
to secure certain indemnification and other obligations of the ILX
securityholders. The purchase price was subsequently reduced by $0.3 million,
based on a calculation of ILX's net assets at closing. We incurred $0.1 million
in transaction costs, which have been expensed as incurred and are included in
selling, general and administrative expenses in the accompanying consolidated
statements of income and comprehensive income. This acquisition expanded our
optical power meter and fiber optic source product offerings, and added laser
diode instrumentation and laser diode and light emitting diode (LED) burn-in,
test and characterization systems to our product portfolio. ILX is now a part
of our PPT Division.
The consideration paid for the acquisition of ILX is allocated to the assets
acquired, net of the liabilities assumed, based upon their estimated fair values
as of the date of the acquisition. The excess of the purchase price over the
estimated fair value of the assets acquired, net of the estimated fair value of
the liabilities assumed, is recorded as goodwill. Below is a summary of the
purchase price, assets acquired and liabilities assumed:
(In thousands)
Assets acquired and liabilities assumed:
Cash $ 44
Accounts receivable 1,224
Inventories 861
Other assets 587
Goodwill 3,762
Developed technology 2,800
Customer relationships 1,100
Other intangible assets 1,090
Deferred income taxes (1,841 )
Other liabilities (644 )
$ 8,983
The goodwill related to this acquisition has been allocated to our PPT Division
and will not be deductible for tax purposes, as this was a merger.
Goodwill
During 2011, we acquired multiple businesses, which resulted in us recording
goodwill in our Lasers Division and Ophir Division of $6.1 million and $67.8
million, respectively. Political deadlock in Congress due to ideological
differences and the current presidential election year in the U.S., as well as
the prospect of automatic spending cuts scheduled to take effect in January 2013
absent Congressional action, have created enormous uncertainty in the levels of
Federal spending on research and defense programs for 2013. As a result, many
research customers have reduced their spending for any new research projects in
2012 that would extend into 2013 until they have better visibility as to their
2013 funding levels. Similarly, many U.S. defense contractors have reduced
their spending levels in 2012 until they have better visibility as to defense
procurement levels in 2013. Further, the uncertainty caused by the massive
overhaul of the U.S. healthcare system under recent legislation, as well as the
possibility for repeal of that legislation in the future, have caused many
customers in the life and health sciences market to halt, delay or reduce their
spending until they have better visibility as to the future regulatory
environment. As a result, our actual 2012 sales, and in particular the sales of
our Ophir Division, are below the levels that we had originally forecasted.
These sales levels and other factors could negatively impact our evaluation of
the goodwill associated with our business. We believe that the assumptions we
use in evaluating the goodwill associated with our business
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are reasonable, however we may be required to recognize a goodwill impairment
charge in the future as a result of subsequent changes to the factors underlying
such assumptions.
Stock-Based Compensation
During the nine months ended September 29, 2012, we granted 0.5 million
restricted stock units and 0.4 million stock-settled stock appreciation rights
with weighted average grant date fair values of $17.11 and $7.92, respectively.
The total stock-based compensation expense included in our consolidated
statements of income and comprehensive income was as follows:
Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
(In thousands) 2012 2011 2012 2011
Cost of sales $ 189 $ 133 $ 490 $ 354
Selling, general and
administrative expenses 1,767 1,210 5,075 3,807
Research and development expense 217 166 700 518
$ 2,173 $ 1,509 $ 6,265 $ 4,679
Results of Operations for the Three and Nine Months Ended September 29, 2012 and
October 1, 2011
The following table presents our results of operations for the periods indicated
as a percentage of net sales:
Percentage of Net Sales
Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
2012 2011 2012 2011
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 56.0 55.6 56.4 54.9
Gross profit 44.0 44.4 43.6 45.1
Selling, general and
administrative expenses 26.1 24.2 27.2 24.4
Research and development expense 9.0 8.9 8.9 8.3
Operating income 8.9 11.3 7.5 12.4
Foreign currency translation
gain from dissolution of
subsidiary - - - 1.9
Gain on sale of investments 0.6 - 1.4 -
Interest and other expense, net (1.5) (1.9) (1.6) (1.6)
Income before income taxes 8.0 9.4 7.3 12.7
Income tax provision 2.8 1.1 2.2 0.9
Net income 5.2 8.3 5.1 11.8
Net loss attributable to
non-controlling interests (0.1) - (0.0) -
Net income attributable to
Newport Corporation 5.3 % 8.3 % 5.1 % 11.8 %
In the following discussion regarding our net sales, certain prior period
amounts have been reclassified between end markets to conform to the current
period presentation.
Net Sales
Net sales for the three months ended September 29, 2012 increased by $17.3
million, or 13.8%, compared with the corresponding period in 2011. Net sales
for the nine months ended September 29, 2012 increased by $69.6 million, or
18.1%, compared with the corresponding period in 2011. For the three months
ended September 29, 2012, net sales by our PPT Division decreased $2.8 million,
or 3.5%, compared with the corresponding prior year period, and net sales by our
Lasers Division decreased $4.1 million, or 8.8%, compared with the corresponding
prior year period. For the nine months ended September 29, 2012, net sales by
our PPT Division decreased $8.4 million, or
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3.4%, and net sales by our Lasers Division decreased $1.1 million, or 0.8%,
compared with the corresponding prior year period. Our Ophir Division, which we
established in connection with our acquisition of Ophir Optronics Ltd. (Ophir)
in October 2011, contributed net sales of $24.2 million and $79.1 million for
the three and nine months ended September 29, 2012, respectively. Our net sales
for the three and nine months ended September 29, 2012 also included $5.3
million and $20.9 million, respectively, of net sales from High Q Laser GmbH
(High Q), which we acquired in July 2011 and which is included in our Lasers
Division, and $1.9 million and $5.5 million, respectively, of net sales from
ILX, which we acquired in January 2012 and which is included in our PPT
Division. Net sales from High Q for the three and nine months ended October 1,
2011 were $4.9 million. We did not have any comparable sales for Ophir or ILX
in the prior year periods.
For the three months ended September 29, 2012 compared with the corresponding
period in 2011, we experienced increases in net sales to our industrial
manufacturing and other end markets and to our scientific research and
defense/security end markets, and decreases in sales to our life and health
sciences and microelectronics end markets. For the nine months ended
September 29, 2012 compared with the corresponding period in 2011, we
experienced increases in net sales to all of our end markets, except for the
microelectronics market. Sales by Ophir were primarily to customers in our
scientific research and defense/security end markets and industrial
manufacturing and other end markets, sales by High Q were primarily to customers
in our life and health sciences end market, and sales by ILX were primarily to
customers in our industrial and other end markets.
Net sales to the scientific research and defense/security markets for the three
months ended September 29, 2012 increased $8.0 million, or 19.1%, compared with
the same period in 2011. Net sales to these markets for the nine months ended
September 29, 2012 increased $28.3 million, or 23.0%, compared with the same
period in 2011. The increases in both periods were due to the addition of sales
from our acquisition of Ophir, which contributed sales to these markets of $11.6
million and $38.6 million during the three and nine months ended September 29,
2012, respectively, offset in part by lower sales to these markets by our Lasers
Division and PPT Division due to adverse macroeconomic conditions in these
markets as a result of budget constraints and uncertainty in future global
research and defense spending levels. Generally, our net sales to these markets
by each of our divisions may fluctuate from period to period due to changes in
overall research and defense spending levels and the timing of large sales
relating to major research and aerospace/defense programs and, in some cases,
these fluctuations may be offsetting between our divisions or between such
periods.
Net sales to the microelectronics market for the three months ended
September 29, 2012 decreased $1.3 million, or 3.8%, compared with the same
period in 2011. Net sales to this market for the nine months ended
September 29, 2012 decreased $11.8 million, or 9.7%, compared with the same
period in 2011. The decreases in sales to this market in both periods were due
primarily to cyclical downturns in the semiconductor equipment industry. Sales
to the microelectronics market were not impacted significantly by any of our
acquisitions.
Net sales to the life and health sciences market for the three months ended
September 29, 2012 decreased $1.5 million, or 5.0%, compared with the same
period in 2011. Net sales to this market for the nine months ended
September 29, 2012 increased $17.7 million, or 21.7%, compared with the same
period in 2011. The decrease in sales to this market for the three month period
was due primarily to lower sales of products for bioinstrumentation
applications, offset in part by the addition of $1.8 million of sales from our
acquisition of Ophir. The increase in sales to this market for the nine month
period was due primarily to our acquisitions of High Q and Ophir, which
contributed total sales of $26.9 million to this market during this period,
offset in part by decreased sales of products for bioinstrumentation
applications. High Q contributed $4.2 million of sales to this market in both
prior year periods.
Net sales to our industrial manufacturing and other end markets for the three
months ended September 29, 2012 increased $12.1 million, or 64.4%, compared with
the same period in 2011. Net sales to these markets for the nine months ended
September 29, 2012 increased $35.4 million, or 61.6%, compared with the same
period in 2011. The increases in sales to these markets in both periods were
due primarily to our acquisitions of Ophir and ILX, which contributed total
sales to these markets of $10.6 million and $32.5 million during the three and
nine months ended September 29, 2012, respectively.
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The table below reflects our net sales by geographic region. Sales are
attributed to each location based on the customer address to which the product
is shipped.
Three Months Ended
September 29, October 1, Percentage
(In thousands) 2012 2011 Increase Increase
United States $ 61,741 $ 57,729 $ 4,012 6.9 %
Germany 16,225 16,058 167 1.0
Other European countries 18,913 15,941 2,972 18.6
Japan 15,913 10,323 5,590 54.2
Other Pacific Rim countries 20,157 19,223 934 4.9
Rest of world 9,932 6,324 3,608 57.1
$ 142,881 $ 125,598 $ 17,283 13.8 %
Nine Months Ended
September 29, October 1, Percentage
(In thousands) 2012 2011 Increase Increase
United States $ 188,997 $ 173,624 $ 15,373 8.9 %
Germany 56,228 38,029 18,199 47.9
Other European countries 56,388 51,483 4,905 9.5
Japan 47,028 37,081 9,947 26.8
Other Pacific Rim countries 73,346 59,233 14,113 23.8
Rest of world 31,716 24,691 7,025 28.5
$ 453,703 $ 384,141 $ 69,562 18.1 %
The increases in sales to customers in the United States and Germany for the
three months ended September 29, 2012 compared with the corresponding period in
2011 were attributable to higher sales to our industrial manufacturing and other
end markets and our scientific research and defense/security end markets, offset
in part by lower sales to our microelectronics and life and health sciences end
markets. The increases in sales into these countries for the nine months ended
September 29, 2012 compared with the corresponding period in 2011 were
attributable to higher sales to all of our end markets other than the
microelectronics market. In particular, in the United States, sales to our
industrial manufacturing and other end markets, and our scientific research and
defense/security end markets, were positively impacted by our acquisition of
Ophir. In Germany, sales to our life and health sciences market were positively
impacted by our acquisition of High Q.
The increases in sales to customers in other parts of Europe for the three and
nine months ended September 29, 2012 compared with the corresponding prior year
periods were attributable to higher sales to all of our end markets other than
the microelectronics market.
The increases in sales to customers in Japan for the three and nine months ended
September 29, 2012 compared with the corresponding prior year periods were due
to higher sales to all of our end markets other than the life and health
sciences market.
The increases in sales to customers in other parts of the Pacific Rim for the
three and nine months ended September 29, 2012 compared with the corresponding
prior year periods were due to higher sales to all of our end markets, with the
exception of lower sales to our scientific research and defense/security markets
for the three month period and lower sales to our life and health sciences
market for the nine month period.
The increase in sales to customers in the rest of the world for the three and
nine months ended September 29, 2012 compared with the corresponding prior year
periods were due to higher sales to all of our end markets other than the
microelectronics market.
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Gross Margin
Gross margin was 44.0% and 44.4% for the three months ended September 29, 2012
and October 1, 2011, respectively, and 43.6% and 45.1% for the nine months ended
September 29, 2012 and October 1, 2011, respectively. The addition of Ophir in
October 2011 has resulted in decreases in overall gross margins for the 2012
periods compared with the 2011 periods, as the gross margins of our Ophir
Division are generally lower than our overall gross margins. In addition, gross
margins of our PPT Division decreased in the current year periods compared with
the prior year periods due to a higher proportion of sales of lower margin
products. Gross margins of our Lasers Division increased during the three
months ended September 29, 2012 compared with the corresponding prior year
period, due to lower charges for excess and obsolete inventory and lower
manufacturing costs related to certain products. Gross margins of our Lasers
Division increased during the nine months ended September 29, 2012 due to lower
charges for excess and obsolete inventory and warranty reserves, offset in part
by higher manufacturing costs for certain products.
In general, we expect that our gross margin will vary in any given period
depending upon factors such as our mix of sales, product pricing variations,
manufacturing absorption levels, and changes in levels of inventory and warranty
reserves.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses totaled $37.3 million, or 26.1% of net sales, and $30.4 million,
or 24.2% of net sales, for the three months ended September 29, 2012 and
October 1, 2011, respectively. SG&A expenses totaled $123.3 million, or 27.2%
of net sales, and $93.6 million, or 24.4% of net sales, for the nine months
ended September 29, 2012 and October 1, 2011, respectively. The increases in
SG&A expenses in the 2012 periods compared with the prior year periods were due
to increased personnel costs and amortization expenses related to acquired
intangible assets as a result of our acquisitions of Ophir, High Q and ILX.
SG&A expenses related to Ophir, High Q and ILX totaled $9.4 million and $31.2
million for the three and nine months ended September 29, 2012, respectively. In
the prior year periods, SG&A expenses related to High Q, which we acquired in
July 2011, totaled $0.8 million, and there were no comparable SG&A expenses for
Ophir or ILX.
In general, we expect that SG&A expense will vary as a percentage of net sales
in the future based on our sales level in any given period. Because the
majority of our SG&A expense is fixed in the short term, changes in SG&A expense
will likely not be in proportion to changes in net sales.
Research and Development (R&D) Expense
R&D expense totaled $12.9 million, or 9.0% of net sales, and $11.2 million, or
8.9% of net sales, for the three months ended September 29, 2012 and October 1,
2011, respectively. R&D expense totaled $40.3 million, or 8.9% of net sales,
and $31.8 million, or 8.3% of net sales, for the nine months ended September 29,
2012 and October 1, 2011, respectively. The increases in R&D expense in the
current year periods compared with the prior year periods were due to the
addition of R&D expense of Ophir, High Q and ILX. R&D expense for Ophir, High Q
and ILX totaled $3.5 million and $11.1 million for the three and nine months
ended September 29, 2012, respectively. In the prior year periods, R&D expense
related to High Q totaled $0.5 million, and there was no comparable R&D expense
for Ophir or ILX. The increases in R&D expense in the current year periods were
offset in part by decreased spending in our PPT Division and in other parts of
our Lasers Division due to reductions in headcount, suspension of work on
certain projects and the completion of other projects.
We believe that the continued development and advancement of our products and
technologies is critical to our success, and we intend to continue to invest in
R&D initiatives, while working to ensure that our efforts are focused and the
resources are deployed efficiently. In general, we expect that R&D expense as a
percentage of net sales will vary in the future based on our sales level in any
given period. Because of our commitment to continued product development, and
because the majority of our R&D expense is fixed in the short term, changes in
R&D expense will likely not be in proportion to changes in net sales.
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Gain on Sale of Investments
We hold equity interests in privately-held corporations, which were accounted
for using the cost method. During previous years, we had reduced the carrying
values of these interests to zero due to the corporations' poor financial
condition at that time. In the second quarter of 2012, one of these
corporations was acquired in a merger transaction, and we received $5.3 million
for our interest as a result of the acquisition. In the third quarter of 2012,
another of these corporations redeemed its shares from us for $1.0 million,
which amount was received in the fourth quarter of 2012.
Interest and Other Expense, Net
Interest and other expense, net totaled $2.1 million and $2.3 million for the
three months ended September 29, 2012 and October 1, 2011, respectively, and
$7.1 million and $6.4 million for the nine months ended September 29, 2012 and
October 1, 2011, respectively. The decrease in interest and other expense, net
for the three months ended September 29, 2012 compared with the same period in
2011 was due primarily to lower interest expense as a result of the repayment of
our convertible notes in February 2012 and to foreign currency transaction
gains, offset in part by derivative instrument losses and by interest expense
related to the term loan under our secured credit facility. The increase in
interest and other expense, net for the nine months ended September 29, 2012
compared with the same period in 2011 was due primarily to a $0.6 million gain
that occurred in the second quarter of 2011 associated with the recovery of
amounts relating to previously discontinued operations, which did not recur in
the 2012 period, and derivative instrument losses that occurred in the 2012
period, offset in part by lower interest expense as a result of the repayment of
our convertible notes.
Income Taxes
Our effective tax rate was 34.4% and 11.5% for the three months ended
September 29, 2012 and October 1, 2011, respectively, and 30.4% and 7.3% for the
nine months ended September 29, 2012 and October 1, 2011, respectively. We had
previously established a valuation allowance against substantially all domestic
and certain foreign deferred tax assets due to the uncertainty as to the timing
and ultimate realization of those assets. During the fourth quarter of 2011, we
achieved a cumulative three-year income position in the United States.
Management considered this position along with other available evidence, both
positive and negative, and determined, as of December 31, 2011, that it was more
likely than not that the net deferred tax assets (exclusive of deferred tax
liabilities related to indefinite-lived intangibles) would be realized, with the
exception of domestic capital losses, domestic unrealized losses, certain
foreign net operating loss carryforwards and other miscellaneous foreign
deferred tax assets, and we therefore released substantially all of the
valuation allowance against our U.S. deferred tax assets. During the first
quarter of 2012, we released $1.4 million of our remaining valuation allowance
related to certain deferred tax assets due to the expected recovery of certain
investments and capital loss carryovers. During the second quarter of 2012, we
substantially completed a corporate reorganization related to the U.S.
subsidiaries of Ophir, which necessitated updates to the estimated state tax
rates used to value our domestic deferred tax assets and liabilities, and as a
result, we recognized a $1.0 million tax benefit. During the third quarter of
2012, we released $0.4 million of our valuation allowance related to certain
deferred tax assets due to the recovery of certain other investments. Our
effective tax rates for the three and nine months ended September 29, 2012
reflected a return to statutory tax rates in the United States, offset in part
by the items outlined above. Our effective tax rates for the three and nine
months ended October 1, 2011 were favorably impacted by a greater percentage of
our earnings being reported in the U.S., which was offset by a reduction in the
valuation allowance maintained against our U.S. deferred tax assets at that
time. In addition, in the first quarter of 2011, we recognized as a discrete
item a non-taxable currency translation gain of $7.2 million associated with the
dissolution of our French financing subsidiary, which was a disregarded entity
for U.S. tax purposes.
Under Accounting Standards Codification (ASC) 740-270, Income Taxes - Interim
Reporting, we are required to evaluate and make any necessary adjustments to our
effective tax rate each quarter as new information is obtained that may affect
the assumptions used to estimate our annual effective tax rate. Our assumptions
relate to factors such as the projected level and projected mix of pre-tax
earnings in the various tax jurisdictions in which we operate, valuation
allowances against deferred tax assets, the recognition or derecognition of tax
benefits related to uncertain tax positions, expected utilization of tax credits
and changes in or the interpretation of tax laws in jurisdictions in which we
conduct business. In addition, jurisdictions for which we have projected losses
for the year, or a year-to-
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date loss, where no tax benefit can be recognized, are excluded from the
calculation of the estimated annual effective tax rate. Changes in our
assumptions and the inclusion or exclusion of certain jurisdictions could result
in a higher or lower effective tax rate during a particular quarter.
We utilize ASC 740-10-25, Income Taxes - Recognition, which requires income tax
positions to meet a more-likely-than-not recognition threshold to be recognized
in the financial statements. Under ASC 740-10-25, tax positions that previously
failed to meet the more-likely-than-not threshold should be recognized in the
first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
threshold should be derecognized in the first subsequent financial reporting
period in which that threshold is no longer met. As a multi-national
corporation, we are subject to taxation in many jurisdictions, and the
calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax laws and regulations in various taxing
jurisdictions. If we ultimately determine that the payment of these liabilities
will be unnecessary, we reverse the liability and recognize a tax benefit during
the period in which we determine the liability no longer applies. Conversely,
we record additional tax charges in a period in which we determine that a
recorded tax liability is less than we expect the ultimate assessment to be. As
a result of these adjustments, our effective tax rate in a given financial
statement period could be materially affected.
The income tax returns of one of our wholly owned Japanese subsidiaries for the
taxable years of 2009 through 2011 are currently under audit by the Japanese tax
authorities. We do not expect the results of this examination to have a
material effect on our financial condition or results of operations.
Liquidity and Capital Resources
Our cash and cash equivalents, restricted cash and marketable securities
balances increased to a total of $76.9 million as of September 29, 2012 from
$72.9 million as of December 31, 2011. This increase was attributable primarily
to cash provided by operating activities, offset in part by cash used for net
repayments of debt, payment of the purchase price for our acquisition of ILX,
annual incentive compensation payouts and the purchases of property and
equipment.
Net cash provided by our operating activities of $54.3 million for the nine
months ended September 29, 2012 was attributable primarily to cash provided by
our results of operations, a decrease in accounts receivable of $4.0 million due
to the timing of collections and an increase in accrued expenses and other
liabilities of $2.7 million due to the timing of payments, offset in part by a
decrease in accrued payroll and related expenses of $9.4 million due primarily
to annual incentive compensation payouts, an increase in gross inventory of $3.8
million and a decrease in accounts payable of $1.1 million due to timing of
payments.
Net cash used in investing activities of $3.9 million for the nine months ended
September 29, 2012 was attributable to net cash paid for our acquisition of ILX
of $8.9 million, purchases of property and equipment of $8.3 million and net
purchases of marketable securities of $1.4 million, offset in part by the net
change in restricted cash of $9.4 million, which was primarily a result of the
lapse of restrictions on cash, which had been held, and was subsequently used,
for repayment of our convertible notes, and $5.4 million in cash received on the
sale of assets.
Net cash used in financing activities of $37.9 million for the nine months ended
September 29, 2012 was attributable to net repayments of borrowings of $37.3
million (which consisted primarily of principal payments on the term loan under
our secured credit facility of $13.9 million, the repayment of the remaining
$12.4 million of our convertible notes, the repayment of $6.5 million of loans
in Israel, and the repayment of all of our loans and lines of credit in Austria
totaling $4.2 million) and payments of $3.1 million in connection with the
cancellation of restricted stock units for taxes owed by employees upon the
vesting of restricted stock units issued under our stock incentive plans, offset
in part by proceeds of $2.4 million from the sale of stock under employee stock
plans.
In October 2011, we entered into a credit agreement with certain lenders (Credit
Agreement). The Credit Agreement and the related security agreement provide for
a senior secured credit facility consisting of a $185 million term loan and a
$65 million revolving line of credit, each with a term of five years, which is
secured by substantially all of our domestic assets as well as a pledge of
certain shares of our subsidiaries. The initial interest rates per annum
applicable to amounts outstanding under the term loan and the revolving line of
credit are, at our option, either (a) the base rate as defined in the Credit
Agreement (Base Rate) plus 1.75%, or (b) the Eurodollar Rate
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as defined in the Credit Agreement (Eurodollar Rate) plus 2.75%. The margins
over the Base Rate and Eurodollar Rate applicable to the term loan and loans
outstanding under the revolving line of credit are subject to adjustment in
future periods based on our consolidated leverage ratio, as defined in and
calculated under the Credit Agreement, provided that the maximum applicable
margins are 2.00% for Base Rate loans and 3.00% for Eurodollar Rate loans, and
the minimum applicable margins are 1.25% for Base Rate loans and 2.25% for
Eurodollar Rate loans. Principal amortization and interest payments on the term
loan are due quarterly. At September 29, 2012, we had a remaining balance of
$171.1 million outstanding on the term loan with an effective interest rate of
2.97%. At September 29, 2012, there was no balance outstanding under the
revolving line of credit, with $63.6 million available after considering
outstanding letters of credit totaling $1.4 million. Our ability to borrow
funds under the revolving line of credit is subject to certain conditions,
including compliance with certain covenants and making certain representations
and warranties.
During 2011, we issued 200 million yen ($2.6 million at September 29, 2012) in
private placement bonds through a Japanese bank. These bonds bear interest at a
rate of 0.62% per year, payable in cash semiannually in arrears on June 30 and
December 31 of each year, and mature on June 30, 2014. The bonds are included
in long-term debt in the accompanying consolidated balance sheets as of
September 29, 2012.
At September 29, 2012, we had (i) four revolving lines of credit with Japanese
banks; (ii) two agreements with Japanese banks under which we sell trade notes
receivable with recourse; (iii) seven loans with Japanese banks; and (iv) six
loans with Israeli banks, as follows:
Principal Amount
Amount Available for
Outstanding Borrowing
Description (in millions) (in millions) Interest Rate(s) Expiration Date(s)
Japanese lines of credit $ 5.8 $ 7.4 1.18% to 2.475% Various dates
through July 2013
Japanese agreements for $ 1.1 $ 6.0 1.48% No expiration
sale of receivables dates
Japanese loans $ 1.3 $ - 1.25% to 1.45% Various dates
through
November 2016
Israeli loans $ 4.1 $ - 2.97% to 4.50% Various dates
through
October 2015
In May 2008, our Board of Directors approved a share repurchase program,
authorizing the purchase of up to 4.0 million shares of our common stock. No
purchases were made under this program during the nine months ended
September 29, 2012. As of September 29, 2012, 3.9 million shares remained
available for purchase under the program. However, the terms of the senior
secured credit facility that we entered into in October 2011 restrict our
ability to purchase additional shares under this program during the term of such
facility.
During the remainder of 2012, we expect to use $2 million to $4 million of cash
for capital expenditures.
We believe that our current working capital position, together with our expected
future cash flows from operations and the borrowing availability under our lines
of credit, will be adequate to fund our operations in the ordinary course of
business, our anticipated capital expenditures, our debt payment requirements
and other contractual obligations for at least the next twelve months. However,
this belief is based upon many assumptions and is subject to numerous risks
including those discussed in Item 1A (Risk Factors) of Part I of our Annual
Report on Form 10-K/A for the year ended December 31, 2011.
Except for the aforementioned capital expenditures, we have no present
agreements or commitments with respect to any material acquisitions of
businesses, products, product rights or technologies or any other material
capital expenditures. However, we will continue to evaluate acquisitions of
and/or investments in products, technologies, capital equipment or improvements
or companies that complement our business and may make such acquisitions and/or
investments in the future.
27
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Table of Contents
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board issued Accounting
Standards Update (ASU) No. 2012-02, Testing Indefinite-Lived Intangible Assets
for Impairment, which amends the guidance in ASC 350, Intangibles-Goodwill and
Other. ASU No. 2012-02 allows, but does not require, companies first to assess
qualitative factors to determine whether it is more likely than not that an
indefinite-lived intangible asset is impaired as a basis for determining whether
it is necessary to perform the quantitative impairment test. ASU No. 2012-02
will be effective for fiscal years beginning after September 15, 2012 and early
adoption is permitted but has not been elected. The adoption of ASU No. 2012-02
will not have a material impact on our financial position or results of
operations.
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