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EX-10.4 - THIRD AMENDMENT TO LEASE - NEWPORT CORPdex104.htm
EX-32.2 - CERTIFICATION OF CFO - SECTION 906 - NEWPORT CORPdex322.htm
EX-31.2 - CERTIFICATION OF CFO - SECTION 302 - NEWPORT CORPdex312.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - NEWPORT CORPdex211.htm
EX-32.1 - CERTIFICATION OF CEO - SECTION 906 - NEWPORT CORPdex321.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - NEWPORT CORPdex231.htm
EX-23.2 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - NEWPORT CORPdex232.htm
EX-31.1 - CERTIFICATION OF CEO - SECTION 302 - NEWPORT CORPdex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 1, 2011

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: 000-01649

 

 

NEWPORT CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada   94-0849175

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1791 Deere Avenue, Irvine, California 92606

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (949) 863-3144

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.1167 per share   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of July 3, 2010, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $305.7 million, calculated based upon the closing price of the registrant’s common stock as reported by the NASDAQ Global Select Market on such date.

As of February 28, 2011, 36,968,251 shares of the registrant’s sole class of common stock were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2011 Annual Meeting of Stockholders, which is expected to be held on May 17, 2011, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I   

ITEM 1.

   BUSINESS      1   

ITEM 1A.

   RISK FACTORS      16   

ITEM 1B.

   UNRESOLVED STAFF COMMENTS      28   

ITEM 2.

   PROPERTIES      28   

ITEM 3.

   LEGAL PROCEEDINGS      29   

ITEM 4.

   RESERVED      29   
PART II   

ITEM 5.

  

MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     29   

ITEM 6.

  

SELECTED FINANCIAL DATA

     32   

ITEM 7.

  

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     35   

ITEM 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     51   

ITEM 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     52   

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     52   

ITEM 9A.

  

CONTROLS AND PROCEDURES

     52   

ITEM 9B.

  

OTHER INFORMATION

     54   
PART III   
ITEM 10.   

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     54   
ITEM 11.   

EXECUTIVE COMPENSATION

     54   
ITEM 12.   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     54   
ITEM 13.   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS , AND DIRECTOR INDEPENDENCE

     54   
ITEM 14.   

PRINCIPAL ACCOUNTING FEES AND SERVICES

     54   
PART IV   

ITEM 15.

  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     55   

SIGNATURES

     58   

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

     F-1   

 

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This Annual Report on Form 10-K 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 Annual Report on Form 10-K except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, 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, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail 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 this Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. 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.

PART I

 

ITEM 1. BUSINESS

General Description of Business

We are a global supplier of advanced technology products and systems to a wide range of industries, including scientific research, microelectronics, aerospace and defense/security, life and health sciences, and industrial manufacturing. We provide a broad portfolio of products to customers in these end markets, allowing us to offer them an end-to-end resource for photonics solutions.

The demands of scientific and commercial applications for higher precision and miniaturization have caused photonics, the science and technology of generating and harnessing light in productive ways, to become an increasingly important enabling technology, permitting researchers and commercial users to perform tasks that cannot be accomplished by existing electrical, mechanical or chemical processes. In addition, in markets such as microelectronics and life and health sciences, photonics technology is replacing these current processes in a number of applications that it can accomplish faster, better or more economically.

We provide a wide range of photonics technology and products designed to enhance the capabilities and productivity of our customers’ precision applications, including:

 

   

lasers and laser technology, including solid-state, gas and dye lasers, tunable lasers and ultrafast laser systems;

 

   

optical components and subassemblies, including precision optics and opto-mechanical subassemblies, thin-film optical filters, and ruled and holographic diffraction gratings;

 

   

photonics instruments and components, including optical meters, light sources, high-speed detectors and modulators, monochromators and spectroscopy instrumentation;

 

   

high-precision positioning and vibration isolation products and systems; and


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advanced automated manufacturing systems used in the manufacture of solar panels and communications and electronics devices.

In addition to our individual product offerings, we have significant expertise in integrating our products into systems and subsystems that are engineered to meet our customers’ specific application requirements. We believe that our ability to develop and manufacture integrated solutions, together with our broad portfolio of products and technologies, gives us a significant competitive advantage.

For over four decades, we have serviced the needs of research laboratories for precision equipment. We have acquired a number of companies, which has led to the expansion of our product offerings, technology base and geographic presence and has allowed us to evolve from a provider of discrete components and instruments primarily for research applications to a company that manufactures both components and integrated solutions for both research and commercial applications. Through our acquisitions and our own product development, we have built a family of industry-leading product brands including our Corion®, New Focus™, Newport™, Oriel® Instruments, Richardson Gratings™ and Spectra-Physics® brands.

Acquisitions

In February 2002, we acquired Micro Robotics Systems, Inc. (MRSI), a manufacturer of high-precision, fully-automated assembly and dispensing systems for back-end packaging applications in the semiconductor, microwave communications and fiber optic communications industries. MRSI became part of what is now our Photonics and Precision Technologies (PPT) Division, and contributed significant expertise to us in the design and manufacture of automated high-precision manufacturing systems. During the past four years, we have focused this expertise on developing automated laser-based manufacturing systems, particularly for solar panel manufacturing applications.

In July 2004, we acquired Spectra-Physics, Inc. and certain related photonics entities (collectively, Spectra-Physics). This acquisition significantly increased the scope of our expertise and product offerings in our target customer end markets, adding to our product portfolio solid-state, gas and dye lasers, high-power diode lasers, and ultrafast laser systems, as well as photonics instruments and components, including light sources, monochromators, spectroscopy instrumentation, optical filters, ruled and holographic diffraction gratings and crystals. This acquisition approximately doubled our size with respect to revenue, number of employees and facilities. At the time of the acquisition, we established Spectra-Physics’ laser and laser-related technology business as our Lasers Division, and we combined Spectra-Physics’ Corion filters, Hilger Crystals, Oriel Instruments and Richardson Gratings businesses with the existing businesses that comprised our former Industrial and Scientific Technologies Division to create our PPT Division.

In July 2009, we acquired the New Focus™ business of Oclaro, Inc. (Oclaro). The New Focus business expanded our product offerings to include a number of new high-performance products, including opto-electronics, high-resolution actuators, high-speed detectors and modulators, opto-mechanics, tunable lasers, and custom-engineered solutions designed for original equipment manufacturer (OEM) customers.

Divestitures

In 2009, in evaluating the performance and needs of our Lasers Division, we concluded that our high-power diode laser manufacturing operations in Tucson, Arizona were not well aligned with the focus and business model of our Lasers Division. Therefore, in July 2009, we sold these diode laser operations to Oclaro in conjunction with our acquisition of the New Focus business from Oclaro. In connection with the sale, we secured a supply arrangement with Oclaro to ensure the continued availability of diode lasers needed in the manufacture of certain of our laser products at competitive price levels.

In 2010, we concluded that our Hilger Crystals Limited subsidiary, which manufactured infrared, x-ray and gamma ray synthetic crystals, primarily for security applications, was not a strategic fit with our overall business. As a consequence, we sold all of the outstanding capital stock of Hilger Crystals Limited in July 2010.

We will continue to pursue acquisitions of companies, technologies and complementary product lines that we believe will further our strategic objectives. Conversely, from time to time, we review our different businesses to

 

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ensure that they are key to our strategic plans, and close or divest businesses that we determine are no longer of strategic importance. See Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview) beginning on page 35, and Note 2 of the Notes to Consolidated Financial Statements beginning on page F-14, of this Annual Report on Form 10-K for additional information.

Our Markets

We sell our products, subsystems and systems to OEM and end-user customers in markets and for applications that are enabled or enhanced by the use of photonics technology, including primarily:

 

   

Scientific Research. We are one of the world’s leading suppliers of lasers and other photonics products to scientific researchers. For fifty years, we have worked closely with the research community to pioneer new applications and technologies. Today, we continue to help researchers extend the frontiers of science in a variety of research areas, including spectroscopy, ultrafast phenomena, terahertz imaging, laser-induced fluorescence, chemical analysis, materials science, light detection and ranging (LIDAR) and nonlinear optics.

 

   

Microelectronics. Photonics technology addresses a number of vital applications in the microelectronics market. It is a key enabler of the semiconductor industry roadmap driving smaller chip feature sizes with the increased functionalities needed for next-generation consumer technology products, including cellular phones, personal digital assistants and digital cameras. It is also a key technology enabling the manufacture of solar panels with higher efficiency and at a lower cost per watt as that industry strives to make solar power more cost competitive. Our products are used in several key applications in the microelectronics market, including semiconductor lithography, wafer inspection and metrology, reticle inspection, memory yield enhancement, wafer dicing and scribing, wafer and component marking, resistor trimming, thin-film solar panel scribing and edge deletion, solar cell testing and characterization, solar cell efficiency enhancement and LED scribing, as well as in printed circuit board and flat panel display manufacturing applications.

 

   

Life and Health Sciences. Photonics is increasingly becoming an enabling technology in the life and health sciences market. We provide products for diagnostic and analytical instrumentation and bioimaging. Our products are used in applications such as optical coherence tomography, multiphoton and confocal microscopy, flow cytometry, matrix-assisted laser desorption/ionization time-of-flight mass spectrometry, laser microdissection, DNA microarrays and blood analysis to enable advancements in the fields of molecular biology, proteomics and drug discovery.

 

   

Aerospace and Defense/Security. The drive for more technologically advanced weapons and sensors is producing increased investment in photonics-based technologies that can remotely, rapidly and non-invasively detect threats, improve intelligence gathering, provide secure communications systems and improve the performance of weapons and countermeasures. In addition, innovative optical sensors are augmenting human vision on the battlefield, providing remote sensing, ranging and observation capabilities that offer high-resolution imaging and night vision. Our high-precision products are used by aerospace and defense engineers to develop, assemble, test and calibrate equipment and are incorporated into weapon or sensor systems for applications including target recognition and acquisition, LIDAR, range finding, missile guidance and advanced weapons development.

 

   

Industrial Manufacturing. Our lasers and other photonics products are used in a wide range of precision industrial manufacturing applications, including rapid prototyping, micromachining, heat-treating, welding and soldering, cutting, illumination, drilling and high-precision marking and engraving. We also offer laser solutions for image recording applications.

 

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Our Operating Divisions

We operate our business in two divisions, our PPT Division and our Lasers Division, which are organized to support our primary product categories.

Photonics and Precision Technologies Division

Our PPT Division’s products and systems are sold to end users in all of our target end markets. We also sell products and subassemblies to OEM customers that integrate them into their systems, particularly for microelectronics and life and health sciences applications. The products sold by this division include photonics instruments and systems, precision positioning systems and subsystems, vibration isolation systems and subsystems, optics, optical hardware, and opto-mechanical subassemblies. The PPT Division also offers automated systems for advanced applications in the manufacturing of solar panels and communications and electronic devices, including microwave, optical, radio frequency (RF) and multi-chip modules.

Our PPT Division also designs, develops and manufactures systems and subsystems that integrate our broad portfolio of products and technologies into solutions that meet the specific application requirements of our OEM and select end-user customers. With our expertise in the design, development and manufacture of these integrated solutions, we help our customers accelerate the time to market and enhance the performance of their equipment or products. We have established a business team comprised of technical and operations specialists, which collaborates across our divisions to develop and provide these integrated solutions to our customers. We have used our capabilities in this area for customers in a number of industries and applications, most notably in microelectronics applications such as semiconductor manufacturing and solar cell manufacturing, and in life and health sciences applications such as flow cytometry, DNA sequencing and optical coherence tomography.

Products

The following table summarizes our PPT Division’s primary product offerings by product category, and includes representative applications for each category:

 

Category

  

Products

  

Representative Applications

Photonics Instruments and Systems   

•    Electro-optic modulators

 

•    Laser diode controllers

 

•    Light sources

 

•    Monochromators and spectrographs

 

•    Optical power/energy detectors

 

•    Optical power/energy meters

 

•    Photonics test systems

 

•    Solar simulators

 

•    Solar cell test instruments

 

•    Spectrometers

 

•    Tunable external cavity diode lasers

 

•    Ultrafast laser pulse measurement systems

  

•    Atom trapping and cooling, including Bose-Einstein Condensates

 

•    Characterization of cosmetic and pharmaceutical products

 

•    Characterization of light emitted by lasers, light emitting diodes and broadband light sources

 

•    Chemical composition analysis

 

•    Colorimetry

 

•    Optical power and energy measurement for free space and fiber-directed laser light

 

•    Solar cell characterization and measurements

 

•    Spectroscopy

 

•    Testing and characterization of optical fibers and passive fiber optical components

 

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Category

  

Products

  

Representative Applications

Precision Positioning Devices, Systems and Subsystems   

•  Custom multi-axis positioning systems

 

•  Fast steering mirrors

 

•  Fiber alignment stages and accessories

 

•  Manual linear and rotation stages

 

•  Micromanipulators

 

•  Micrometers and adjustment screws

 

•  Motion controllers and drivers

 

•  Motorized linear and rotation stages

 

•  Motorized actuators and optical mounts

 

•  Nano-positioning and nano-focusing stages

 

•  Piezo motor actuators and stages

 

•  Precision air-bearing motion systems

  

•   High-precision positioning for manufacturing and in-process inspection, metrology and final test applications

 

•   High-precision positioning for thin-film solar cell manufacturing

 

•   High-precision positioning of semiconductor wafers for metrology and fabrication

 

•   Laser beam stabilization and pointing

 

•   Laser system alignment and beam steering for inspection, laser processing and communications

 

•   Precision alignment in fiber optic, telecommunication and laser device assembly

 

•   Sample or sensor manipulation for imaging and microscopy

 

•   Sample sorting and sequencing for DNA research

 

•   Solar cell test and characterization

 

•   Tracking and targeting test systems for aerospace and defense/security applications

Vibration Isolation Systems and Subsystems   

•  Active and passive isolation systems

 

•  Active vibration damping systems

 

•  Elastomeric mounts

 

•  Honeycomb and granite structures

 

•  Optical tables, support systems and accessories

 

•  Workstations

  

•   Foundation platforms for laser systems

 

•   Isolated platforms for semiconductor lithography equipment

 

•   Reduction of impact of external vibration sources on high-precision research, manufacturing test and assembly systems

 

•   Scanning electron microscope, atomic force microscope, and optical microscope base isolation

 

•   Workstation platforms for fiber optic device fabrication

 

•   Workstation platforms for microscopy and other advanced imaging applications

 

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Category

  

Products

  

Representative Applications

Optics and Optical Hardware   

•  Beam routing and enclosing systems

 

•  Beamsplitters and polarization optics

 

•  Collimators

 

•  Filters and attenuators

 

•  Laser-to-fiber couplers

 

•  Lenses

 

•  Mirrors

 

•   Optical hardware including bases, brackets, posts and rod systems

 

•  Optical mounts

 

•  Prisms and windows

 

•  Ruled and holographic diffraction gratings

 

•  Thin-film filters and coatings

 

•  Ultrafast laser optics

  

•   Analytical instrumentation for life and health sciences applications

 

•   Development and manufacturing of laser systems

 

•   Electro-optic sensors and imaging systems for defense/security applications

 

•   High-precision alignment of optical instruments

 

•   Optical measurement and communications systems

 

•   Research in physical and biological sciences

 

•   Semiconductor lithography, wafer and reticle inspection and wafer processing

 

•   Spectroscopy

 

•   Ultrafast laser, terahertz imaging and laser fusion research

Opto-Mechanical Subassemblies and Subsystems   

•  Integrated electro-optic-mechanical subsystems

 

•  Laser beam attenuators

 

•  Laser beam delivery and imaging assemblies

 

•  Objective lens systems

 

•  Refractive beam shaper assemblies

  

•   Analytical instrumentation for life and health sciences applications

 

•   High-speed cell sorting for genomic research

 

•   Laser beam delivery systems for solar panel manufacturing

 

•   Laser beam stabilization for industrial metrology

 

•   Light detection and ranging

 

•   Optical coherence tomography for non-invasive diagnostics

 

•   Optical data storage

 

•   Semiconductor mask patterning

 

•   Semiconductor lithography, wafer and reticle inspection and wafer processing

 

•   Thin-film measurement of semiconductor wafers

 

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Category

  

Products

  

Representative Applications

Advanced Manufacturing Systems   

•    Automated electronic device packaging systems

 

•    Automated die bonding and dispensing systems

 

•    Automated, laser-based crystalline silicon solar cell efficiency enhancement systems

 

•    Automated, laser-based solar panel scribing and edge deletion systems

  

•    Automated manufacturing and assembly of microelectronic and optoelectronic devices

 

•    Crystalline silicon solar cell module manufacturing

 

•    High-speed, high-accuracy automated dispensing applications for microwave modules, optical modules, hybrid circuits, multi-chip modules and semiconductor packaging

 

•    Thin-film solar panel manufacturing

Lasers Division

Our Lasers Division, which was formed in July 2004 in connection with our acquisition of Spectra-Physics, offers a broad portfolio of laser technology products and services to OEM and end-user customers across a wide range of markets and applications. Our lasers and laser-based systems include ultrafast lasers and amplifiers, diode-pumped solid-state lasers, high-energy pulsed lasers, tunable lasers and gas lasers. In addition to providing a wide range of standard and configured laser products and accessories to our end-user customers, we also work closely with our OEM customers to develop laser and laser system designs optimized for their product and technology roadmaps.

Products

The following table summarizes our primary laser and laser-based system product offerings by product category, and includes representative applications for each category:

 

Category

  

Products

  

Representative Applications

Ultrafast Lasers and Systems   

•    Mai Tai® femtosecond lasers

 

•    Tsunami® ultrafast lasers

 

•    Spitfire® Pro XP ultrafast amplifiers

 

•    Solstice® one-box ultrafast amplifiers

 

•    Inspire™ femtosecond optical parametric oscillators (OPOs)

 

•    TOPAS™ automated ultrafast optical parametric amplifiers (OPAs)

  

•    Femtosecond spectroscopy

 

•    Micro-machining and other high-precision materials processing applications

 

•    Multiphoton microscopy

 

•    Supercontinuum and high harmonic generation

 

•    Terahertz imaging

 

•    Time-resolved photoluminescence

 

•    Two-photon polymerization

 

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Category

  

Products

  

Representative Applications

Diode-Pumped Solid State Q-Switched Lasers   

•  Tristar™ high repetition rate UV lasers

 

•  Navigator™ lasers

 

•  HIPPO™ mid-power lasers

 

•  Pulseo® high power lasers

 

•  Explorer® compact lasers

 

•  Empower® high pulse energy lasers

  

•   Diamond processing

 

•   Disk texturing

 

•   Electronics and semiconductor packaging manufacturing

 

•   Flat panel display manufacturing

 

•   Laser microdissection

 

•   LED wafer scribing

 

•   Matrix-assisted laser desorption/ionization

 

•   Memory yield enhancement systems

 

•   Printed circuit board (PCB) manufacturing

 

•   Pump source for ultrafast lasers

 

•   Rapid prototyping

 

•   Resistor trimming

 

•   Semiconductor wafer and flat panel display marking

 

•   Silicon micromachining

 

•   Solar cell manufacturing

 

•   Stereolithography

Diode-Pumped Solid State Continuous Wave (CW) and Quasi-CW Lasers   

•  Millennia® Prime CW green lasers

 

•  MG series CW green lasers

 

•  Excelsior™ low power CW lasers

 

•  Vanguard™ quasi-CW lasers

 

•  3900S and Matisse® CW tunable lasers

 

•  Cyan™ compact low power CW lasers

  

•   Confocal microscopy

 

•   DNA sequencing

 

•   Flow cytometry

 

•   Image recording

 

•   Laser cooling

 

•   Materials processing

 

•   Optical trapping

 

•   Raman imaging

 

•   Semiconductor wafer inspection and metrology

 

•   Solar cell manufacturing

 

•   Ti:Sapphire laser pumping

 

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Category

  

Products

  

Representative Applications

High Energy Pulsed Nd:YAG and Tunable Lasers   

•   Quanta-Ray® pulsed Nd:YAG lasers

 

•   Scan Series High Energy optical parametric oscillators (OPOs)

 

•   Cobra tunable dye lasers

 

•   Credo high-repetition rate dye lasers

  

•   Flat-panel display manufacturing

 

•   Laser ablation

 

•   Laser cleaning

 

•   LIDAR

 

•   Mass spectrometry

 

•   Particle imaging velocimetry combustion diagnostics

 

•   Plastic and ceramic component marking

 

•   Remote sensing

 

•   Spectroscopy

Gas Lasers   

•   Air-cooled argon ion lasers

 

•   Water-cooled ion laser systems

 

•   Nitrogen lasers

  

•   Confocal microscopy

 

•   DNA sequencing

 

•   Flow cytometry

 

•   Fluorescence immunoassay

 

•   Holography

 

•   Laser doppler anemometry

 

•   Laser doppler velocimetry

 

•   Lithography

 

•   Matrix-assisted laser desorption/ionization

 

•   Raman spectroscopy

 

•   Semiconductor wafer inspection

 

•   Spectroscopy

Financial information regarding our business segments and our operations by geographic area is included in Note 15 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K beginning on page F-36. A discussion of our net sales by end market and geographic area is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) beginning on page 42. We discuss certain risks associated with doing business internationally in “Risk Factors — We face significant risks from doing business in foreign countries” on page 20.

 

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Sales and Marketing

We market and sell our products and services through our domestic and international direct sales organizations, an international network of independent distributors and sales representatives, our product catalogs and our web site. Our domestic and international direct sales organizations are comprised of teams of field sales persons, key account managers and business development managers, who work closely with product and applications specialists and other internal sales support personnel based primarily at our domestic locations in California, Connecticut, Massachusetts and New York, and at our international locations in China, France, Germany, Japan and Taiwan. We sell our products and services to three major categories of customers: end-users of standard or option-configured products, OEM customers and capital equipment customers. These categories of customers require very different selling approaches and support requirements, and we have organized our sales teams to address these different requirements. To serve the needs of end users of standard or option-configured products, we have organized our field sales personnel, together with internal sales support personnel, into teams based on their specialized knowledge and expertise relating to specific product groups. These sales teams are closely aligned with their respective product management and operations organizations. Our OEM and capital equipment customers often have unique technical requirements and manufacturing processes, and may request specific system, subsystem or component designs. Sales of our subsystem and capital equipment products often involve complex program management and long sales cycles, and require close cooperation between sales, operations and engineering personnel as well as collaboration across all of our product lines and areas of knowledge and expertise. As such, we have developed teams of key account managers and business development managers to serve the unique requirements of these OEM and capital equipment customers.

We also actively market and sell our products in certain markets outside of North America through independent sales representatives and distributors. We have written agreements with substantially all of our representatives and distributors. In some cases we have granted representatives and distributors exclusive authorization to sell certain of our products in a specific geographic area. These agreements generally have terms of one year which automatically renew on an annual basis, and are generally terminable by either party for convenience following a specified notice period. Most distributor agreements are structured to provide distributors with sales discounts below the list price. Representatives are generally paid commissions for sales of products. No single independent representative or distributor accounted for more than 5% of our net sales in 2010.

We also market our standard products through our comprehensive web site and our product catalog, The Newport Resource®, particularly for the scientific research market. Our web site features an online catalog, providing customers with access to the latest information regarding our products, technical/tutorial and application related materials, sales information, a literature and information request form, and the ability to purchase a majority of our standard products. Our web site is widely used by our customers to review information about our technologies, products and services. Our product catalog provides detailed product information as well as extensive technical and applications data. We mail this catalog to approximately 40,000 existing and potential customers. The Newport Resource is published in English, French, German, Japanese and Mandarin. New product supplements for each catalog are also distributed between publications. We also publish and distribute a variety of sales literature and product brochures which focus on specific products and end markets.

We operate a Technology and Applications Center (TAC) at our Irvine, California headquarters. The TAC is staffed with experienced photonics researchers who develop innovative ways to utilize our lasers and other photonics products together in leading-edge research applications such as solar cell testing and characterization, multiphoton microscopy, ultrafast spectroscopy and laser micro-fabrication. The TAC produces application notes and kits for these applications, publishes technical papers in scientific and technical journals, and provides our research and development teams with ideas for new products and product enhancements. We also operate an Applications Laboratory at the Santa Clara, California facility of our Lasers Division, which provides support to our global sales and marketing team by conducting feasibility studies with prospective customers’ material processing applications using our lasers and photonics products. This laboratory is staffed with experienced laser material processing engineers, and demonstrates the performance of our products and integrated solutions in a wide range of advanced laser applications. We believe that the TAC and the Applications Laboratory reinforce our position as a technology leader in the photonics industry, and that they serve as important sales tools by performing actual experiments to demonstrate how our products will perform in our customers’ applications.

 

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Research and Product Development

We continually seek to improve our technological leadership position through internal research, product development and licensing, and acquisitions of complementary technologies. As of February 28, 2011, we had approximately 200 employees engaged in research and development. We continually work to enhance our existing products and to develop and introduce innovative new products to satisfy the needs of our customers. In addition, we regularly investigate new ways to combine components manufactured by our various operations to produce innovative technological solutions for the markets we serve. Total research and development expenses were $39.3 million, or 8.2% of net sales, in 2010, $36.9 million, or 10.1% of net sales, in 2009, and $46.1 million, or 10.4% of net sales, in 2008. Research and development expenses attributable to our Lasers Division were $15.4 million, or 8.5% of net sales by that division, in 2010, $16.0 million, or 10.9% of net sales by that division, in 2009, and $22.2 million, or 11.9% of net sales by that division, in 2008. Research and development expenses attributable to our PPT Division were $23.9 million, or 8.0% of net sales by that division, in 2010, $20.9 million, or 9.5% of net sales by that division, in 2009, and $23.9 million, or 9.2% of net sales by that division, in 2008.

We are committed to product development and expect to continue our investment in this area in the future. We believe that the continual development or acquisition of innovative new products will be critical to our future success. Failure to develop, or introduce on a timely basis, new products or product enhancements that achieve market acceptance could have a material effect on our business, operating results or financial condition.

Customers

We sell our products to thousands of customers worldwide, in a wide range of end markets, primarily scientific research, microelectronics (which is comprised primarily of semiconductor capital equipment customers), aerospace and defense/security, life and health sciences and industrial manufacturing. We believe that our customer diversification minimizes our dependence on any single industry or group of customers. In 2010, no single customer represented 10% or more of our consolidated net sales. In certain of our end markets, including the microelectronics market, a limited number of customers account for a significant portion of our sales to those markets. In 2010, sales by our PPT Division to one customer in the microelectronics market represented slightly more than 10% of that division’s total net sales. We believe that our relationships with this customer and our other key customers are good. However, if our key customers discontinue or reduce their business with us, or suffer downturns in their businesses, it could have a significant negative impact on our financial results on a short-term basis. For example, from mid-year 2007 to mid-year 2009, several of our key customers in the semiconductor equipment industry suffered significant downturns in their businesses as a result of the cyclical downturn in that industry, which had a significant impact on our financial results in those years. If we lose business from key customers and we are unable to sufficiently expand our customer base to replace the lost business or to reduce our cost structure accordingly, our business and results of operations would be harmed.

 

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Competition

The markets we serve are intensely competitive and characterized by rapidly changing technology. A small number of competitors are dominant in certain of these markets. The products and systems developed and manufactured by both our PPT Division and our Lasers Division serve all of our targeted end markets. The following table summarizes our primary competitors for our principal product categories:

 

Product Category

  

Primary Competitors

Automated Manufacturing Systems   

Asymtek

Datacon Technology GmbH

Jenoptik Laser Optik Systeme GmbH

  

Manz Automation AG

Palomar Technologies

Rofin-Sinar Technologies, Inc.

Diffraction Gratings   

Headwall Photonics, Inc.

Horiba Jobin Yvon

  

Optometrics Corporation

Spectrogon

Lasers   

Coherent, Inc.

CVI Melles Griot

GSI Group/Excel Technology, Inc.

IPG Photonics, Inc.

JDS Uniphase Corporation

  

Jenoptik Laser Optik Systeme GmbH

Rofin-Sinar Technologies, Inc.

Toptica Photonics AG

Trumpf Group

Light Sources and Spectroscopy Instrumentation   

Andor Technology

Acton Research Corporation

Horiba Jobin Yvon

Ocean Optics, Inc.

Photon Technology International

  

Princeton Instruments

Sciencetech, Inc.

Spectral Products

Thorlabs, Inc.

Optics, Optical Hardware and Opto-Mechanical Subassemblies and Subsystems   

CVI Melles Griot

Corning Tropel Corporation

Edmund Optics, Inc.

Jenoptik Laser Optik Systeme GmbH

  

Qioptiq (formerly LINOS)

Sigma Koki Co., Ltd.

Thorlabs, Inc.

Zygo Corporation

Optical Filters   

Oclaro, Inc.

Barr Associates, Inc.

Chroma Technology Corp.

Ferroperm Optics A/S

  

JDS Uniphase Corporation

Omega Optical, Inc.

IDEX Corporation (Semrock)

Photonics Instruments   

Agilent Technologies, Inc.

Coherent, Inc.

CVI Melles Griot

ILX Lightwave Corporation

  

Labsphere, Inc.

Ophir Optronics Ltd.

Picometrix, LLC

Thorlabs, Inc.

Precision Positioning Devices, Systems and Subsystems   

Aerotech Inc.

Danaher Corporation (Dover)

Micos GmbH

Parker Hannifin Corporation

Physik Instrumente

  

Rockwell Automation, Inc. (Anorad)

Sigma Koki Co., Ltd.

Thorlabs, Inc.

Vibration Isolation Systems and Subsystems   

Herzan, LLC

Kinetic Systems, Inc.

  

Technical Manufacturing Corp.

Thorlabs, Inc.

In certain of our product lines, particularly our precision motion systems and opto-mechanical subassembly product lines, we also face competition from certain of our existing and potential customers who have developed or may develop their own systems, subsystems and components.

 

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We believe that the primary competitive factors in our markets are:

 

   

product features and performance;

 

   

quality and reliability of products;

 

   

pricing and availability;

 

   

customer service and support;

 

   

breadth of product portfolio;

 

   

customer relationships;

 

   

ability to manufacture and deliver products on a timely basis;

 

   

ability to customize products to customer requirements; and

 

   

ability to offer complete integrated solutions to OEM customers.

We believe that we currently compete favorably with respect to each of these factors. However, we may not be able to compete successfully in the future against existing or new competitors.

We compete in various markets against a number of companies, some of which have longer operating histories, greater name recognition and significantly greater technical, financial, manufacturing and marketing resources than we do. In addition, some of these companies have long established relationships with our customers and potential customers in our markets. In addition to current competitors, we believe that new competitors, some of whom may have substantially greater financial, technical and marketing resources than us, will seek to provide products to one or more of our markets in the future. Such future competition could harm our business.

Intellectual Property and Proprietary Rights

Our success and competitiveness depends to an extent on our ability to protect our proprietary technology. We protect our technology by controlling access to our proprietary information and by maintaining confidentiality agreements with our employees, consultants, customers and suppliers, and, in some cases, through the use of patents, trademark registrations and licenses. We currently maintain approximately 240 patents in the U.S. and foreign jurisdictions, and we have approximately 75 additional patent applications pending. These patents and patent applications cover various aspects of products in many of our key product categories, particularly our laser products. We also have trademarks registered in the U.S. and foreign jurisdictions. We will continue to actively pursue applications for new patents and trademarks as we deem appropriate.

It is possible that, despite our efforts, other parties may use, obtain or try to copy our products and technology. Policing unauthorized use of our products and technology is difficult and time consuming. The steps we take to protect our rights may not prevent misappropriation of our products or technology. This is particularly the case in foreign jurisdictions, where the intellectual property laws may not afford our intellectual property rights the same protection as the laws of the United States. We have in the past and may in the future initiate claims or litigation against third parties for infringement of our proprietary rights, which claims could result in costly litigation and the diversion of our technical and management personnel.

In addition, infringement, invalidity, right to use or ownership claims by third parties have been asserted against us in the past and may be asserted against us in the future. We expect that the number and significance of these matters will increase as our business expands. In particular, the laser industry is characterized by a very large number of patents, many of which are of questionable validity and some of which appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary

 

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licenses or other rights or develop substitute technology could have a material adverse effect on our business, financial condition and results of operations.

Manufacturing

We manufacture instruments, components, subassemblies and systems at domestic facilities located in Irvine, California; Stratford, Connecticut; Franklin, Massachusetts; North Billerica, Massachusetts; and Rochester, New York, and at international facilities in Beaune-la Rolande, France; Brigueuil, France; and Wuxi, China. We manufacture lasers and laser systems at our facilities in Santa Clara, California and Stahnsdorf, Germany. In addition, we subcontract all or a portion of the manufacture of various products and components, such as laser power supplies, optics, optical meters and certain low power lasers, to a number of domestic and foreign third-party subcontractors and contract manufacturers.

Our manufacturing processes are diverse and consist of: purchasing raw materials, principally stainless steel, aluminum and glass; processing the raw materials into components, subassemblies and finished products; purchasing components, assembling and testing components and subassemblies; and, for selected products, assembling the subassemblies and components into integrated subsystems and systems. We primarily design and manufacture our products internally, although on a limited basis, we purchase completed products from certain third-party suppliers and resell those products through our distribution channels. Most of these completed products are produced to our specifications and carry one of our product brands.

We currently procure various components and materials, such as the sheet steel used in some of our vibration isolation tables, and the laser diodes and laser crystals used in certain of our laser products, from single or limited sources, due to unique component designs or materials characteristics as well as certain quality and performance requirements needed to manufacture our products. In some of such cases, the number of available suppliers is limited by the existence of patents covering the components or materials. In addition, we manufacture certain components internally, and there are no readily available third-party suppliers of these components. If single-sourced components were to become unavailable in adequate amounts at acceptable quality levels or were to become unavailable on terms satisfactory to us, we would be required to purchase comparable components from other sources. While we believe that we would be able to obtain comparable replacement components from other sources in a timely manner, if we were unable to do so, our business, results of operations or financial condition could be adversely affected.

In addition, we obtain some of the critical capital equipment we use to manufacture certain of our products from sole or limited sources due to the unique nature of the equipment. In some cases, such equipment can only be serviced by the manufacturer or a very limited number of service providers due to the complex and specialized nature of the equipment. If service and/or spare parts for such equipment become unavailable, such equipment could be rendered inoperable, which could cause delays in the production of our products, and could require us to procure alternate equipment, if available, which would likely involve long lead times and significant additional cost.

Backlog

Our consolidated backlog of orders totaled $142.0 million at January 1, 2011 and $113.5 million at January 2, 2010. As of January 1, 2011, $129.6 million of our consolidated backlog was scheduled to be shipped on or before December 31, 2011. Orders for many of the products we sell to OEM customers, which comprise a significant portion of our sales, are often subject to rescheduling without penalty or cancellation without penalty other than reimbursement of certain material costs. In addition, because we manufacture a significant portion of our standard catalog products for inventory, we often make shipments of these products upon or within a short time period following receipt of an order. As a result, our backlog of orders at any particular date may not be an accurate indicator of our sales for succeeding periods.

Employees

As of February 28, 2011, we had approximately 1,745 employees worldwide. We believe that our relationships with our employees are good.

 

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Government Regulation

Regulatory Compliance

Our lasers and laser-based systems are subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the United States Food and Drug Administration. Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate certain design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. We are also subject to comparable laser safety regulations with regard to laser products sold in Europe. We believe that we are currently in compliance with these regulations.

Environmental Regulation

Our operations are subject to various federal, state and local regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency (EPA). Comparable authorities exist in other countries. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition.

Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In such event, we could be subject to claims by employees or third parties, and could be liable for damages, which liability could exceed the amount of our liability insurance coverage (if any) and the resources of our business.

Our former facility located in Mountain View, California is an EPA-designated Superfund site and is subject to a cleanup and abatement order from the California Regional Water Quality Control Board. Spectra-Physics, along with several other entities with facilities located near the Mountain View, California facility, have been identified as Responsible Parties with respect to this Superfund site, due to releases of hazardous substances during the 1960s and 1970s. The site is mature, and investigations and remediation efforts have been ongoing for approximately 25 years. Spectra-Physics and the other Responsible Parties have entered into a cost-sharing agreement covering the costs of remediating the off-site groundwater impact. In addition to our remediation obligations, we may be liable for property damage or personal injury claims relating to this site. While we are not aware of any claims at this time, such claims could be made against us in the future. Thermo Fisher Scientific, Inc., formerly known as Thermo Electron Corporation (Thermo), has agreed, in connection with our purchase of Spectra-Physics, to indemnify us, subject to certain conditions, for costs of remediation that are incurred and third party claims that are made prior to July 16, 2014, which arise from the releases of hazardous substances at or from the Mountain View facility and are subject to remediation under the cost-sharing agreement. However, our ultimate costs of remediation and other potential liability are difficult to predict, and this indemnity may not cover all liabilities relating to this site. If significant costs or other liability relating to this site arise in the future and are either not covered by this indemnity or arise after this indemnity expires, our business, financial condition and results of operations could be adversely affected.

In addition, the European Union has enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE) for implementation in each European Union member country. RoHS regulates the use of certain hazardous substances in certain products, and WEEE requires the collection, reuse and recycling of waste from certain products. The European Union member states continue to define the scope of the implementation of RoHS and WEEE. While many of our products are not subject to RoHS and WEEE requirements, based on information we

 

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have received to date, certain of our products sold in these countries are or will likely be subject to these requirements. We will continue to monitor RoHS and WEEE guidance as it is announced by individual jurisdictions to determine our responsibilities. The guidance available to us to date suggests that in some instances we are not directly responsible for compliance with RoHS and WEEE because some of our products may be outside the scope of the directives. However, because the scope of the directives continues to expand in the course of implementation by the European Union member states, we will likely be directly or contractually subject to such regulations in the case of many of our products. In addition, certain of our customers, particularly OEM customers whose end products may be subject to these directives, may require that the products we supply to them comply with these directives. Further, final legislation from individual jurisdictions that have not yet implemented the directives may impose different or additional responsibilities upon us. We are also aware of similar legislation that is currently in force or being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any such regulatory requirements or contractual obligations could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in countries in these regions.

Availability of Reports

We make available free of charge on our web site at www.newport.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We will also provide electronic or paper copies of such reports free of charge, upon request made to our Corporate Secretary at 1791 Deere Avenue, Irvine, California 92606. All such reports are also available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by us with the SEC at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Information regarding operation of the SEC’s public reference room can be obtained by calling the SEC at 1-800-SEC-0330.

 

ITEM 1A. RISK FACTORS

The following is a summary of certain risks we face in our business. They are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in our other filings with the Securities and Exchange Commission.

Our financial results are difficult to predict, and if we fail to meet our financial guidance or the expectations of investors, potential investors and/or securities analysts, the market price of our common stock will likely decline significantly.

Our financial results in any given quarter have fluctuated and will likely continue to fluctuate. These fluctuations are typically unpredictable and can result from numerous factors including:

 

   

fluctuations in our customers’ capital spending, industry cyclicality (particularly in the semiconductor equipment industry), market seasonality (particularly in the scientific research market), levels of government funding available to our customers and other economic conditions within the markets we serve;

 

   

demand for our products and the products sold by our customers;

 

   

the level of orders within a given quarter and preceding quarters;

 

   

the timing and level of cancellations and delays of orders in backlog for our products;

 

   

the timing of product shipments within a given quarter;

 

   

variations in the mix of products we sell;

 

   

changes in our pricing practices or in the pricing practices of our competitors or suppliers;

 

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our timing in introducing new products;

 

   

market acceptance of any new or enhanced versions of our products;

 

   

timing of new product introductions by our competitors;

 

   

timing and level of scrap and warranty expenses;

 

   

the availability, quality and cost of components and raw materials we use to manufacture our products;

 

   

our ability to manufacture a sufficient quantity of our products to meet customer demand;

 

   

changes in our effective tax rates;

 

   

changes in our capital structure, including cash and marketable securities balances, and changes in interest rates;

 

   

changes in bad debt expense based on the collectability of our accounts receivable;

 

   

timing, type, and size of acquisitions and divestitures;

 

   

fluctuations in foreign currency exchange rates; and

 

   

our expense levels.

We may in the future choose to change prices, increase spending, or add or eliminate products in response to actions by competitors or in an effort to pursue new market opportunities. These actions may also adversely affect our business and operating results and may cause our results in a given period to be lower than our results in previous periods.

In addition, we often recognize a substantial portion of our sales in the last month of the quarter. Thus, variations in timing of sales, particularly for our higher-priced, higher-margin products, can cause significant fluctuations in our quarterly sales, gross margin and profitability. Orders expected to ship in one period could shift to another period due to changes in the anticipated timing of customers’ purchase decisions, rescheduled delivery dates requested by our customers, or manufacturing or logistics delays. Our operating results for a particular quarter or year may be adversely affected if our customers, particularly our largest customers, cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping and product acceptance. Also, we base our manufacturing plans on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products and could shift sales to a subsequent period. In addition, our expenses for any given quarter are typically based on expected sales, and if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our limited ability to adjust spending quickly to compensate for the shortfall.

Due to these and other factors, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, are not reliable indicators of our future performance. In any period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to drop.

We are dependent in part on the semiconductor capital equipment market, which is volatile and unpredictable.

A significant portion of our current and expected future business comes from sales of components, subsystems and laser products to manufacturers of semiconductor fabrication, inspection and metrology equipment and sales of capital equipment to integrated semiconductor device manufacturers. The semiconductor capital equipment market has historically been characterized by sudden and severe cyclical variations in product supply and demand. The timing, severity and duration of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. For example, this market experienced a severe down-cycle from mid-year 2007 to mid-

 

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year 2009, which had a significant negative impact on our operating results. The continued cyclicality of this market limits our ability to predict our business prospects or financial results in this market.

During industry downturns, our revenues from this market may decline suddenly and significantly. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to this market, we may incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur, we may have difficulty rapidly and effectively increasing our manufacturing capacity to meet sudden increases in customer demand. If we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

Our operating results may be adversely affected by unfavorable economic and market conditions.

Decreased consumer confidence, volatile corporate operating results, reduced capital spending, lower research budgets, and the effects of reduced availability of credit, have in the recent past led to reduced demand and increased price competition for our products, increased risk of excess and obsolete inventory and higher overhead costs as a percentage of revenue, and could do so in the future. Weakness in our end markets could negatively impact our revenue, gross margin and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations.

Ongoing concerns regarding the availability of credit may make it more difficult for our customers to raise capital, whether debt or equity, to finance their projects and purchases of capital equipment. Delays in our customers’ ability to obtain such financing, or the unavailability of such financing, could adversely affect sales of our products and systems, particularly high-value lasers and systems, and therefore harm our business and operating results.

Further, future disruption of global financial markets could adversely impact the market values or liquidity of our investments. Our investment portfolio includes U.S. government and agency debt securities, corporate debt securities and certificates of deposit. Although we believe our portfolio continues to be comprised of sound investments due to the credit quality and government guarantees of certain of the underlying investments, a further decline in the capital and financial markets would adversely impact the market values of our investments and their liquidity. Such a decline in market value that is other-than-temporary, or any sale of our investments under illiquid market conditions, could result in our recognition of an impairment charge on such investments or a loss on such sales, either of which could have an adverse effect on our financial condition and operating results.

A limited number of customers account for a significant portion of our sales to the microelectronics market, and if we lose any of these customers or they significantly curtail their purchases of our products, our results of operations would be harmed.

Our sales to the microelectronics market (which is comprised primarily of semiconductor capital equipment customers) constituted 31.7%, 23.1% and 29.4% of our consolidated net sales for the years 2010, 2009 and 2008, respectively. We rely on a limited number of customers for a significant portion of our sales to this market. Our top five customers in this market comprised approximately 55.6%, 45.6% and 47.2% of our sales to this market for the years 2010, 2009 and 2008, respectively, with one customer making up a substantial portion of such percentage in each of such years. No single customer in this market comprised 10% or more of our consolidated net sales in 2010, 2009 or 2008. If any of our principal customers discontinues its relationship with us, replaces us as a vendor for certain products or suffers downturns in its business, our business and results of operations could be harmed significantly. In addition, because a relatively small number of companies dominate the semiconductor equipment portion of this market, and because those companies rarely change vendors in the middle of a product’s life cycle, it may be particularly difficult for us to replace these customers if we lose their business.

The microelectronics market is characterized by rapid technological change, frequent product introductions, changing customer requirements and evolving industry standards. Because our customers face uncertainties with regard to the growth and requirements of these markets, their products and components may not achieve, or continue

 

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to achieve, anticipated levels of market acceptance. If our customers are unable to deliver products that gain market acceptance, it is likely that these customers will not purchase our products or will purchase smaller quantities of our products. We often invest substantial resources in developing our products, systems and subsystems in advance of significant sales of these products, systems and/or subsystems to such customers. A failure on the part of our customers’ products to gain market acceptance, or a failure of the microelectronics market to grow would have a significant negative effect on our business and results of operations.

Difficulties in finding suitable acquisition targets and in successfully completing and executing our acquisitions could adversely impact our business.

We have and will continue to acquire businesses, and our ability to successfully identify suitable acquisition targets, complete acquisitions on acceptable terms, and efficiently and effectively integrate our acquired businesses into our organization is critical to our growth. We may not be able to identify target companies that meet our strategic objectives or successfully negotiate and complete acquisitions with companies we have identified on acceptable terms. Further, the process of integrating acquired companies into our operations requires significant resources and is time consuming, expensive and disruptive to our business. Further, we may not realize the benefits we anticipate from these acquisitions because of the following significant challenges:

 

   

potentially incompatible cultural differences between the two companies;

 

   

incorporating the acquired company’s technology and products into our current and future product lines, and successfully generating market demand for these expanded product lines;

 

   

potential additional geographic dispersion of operations;

 

   

the diversion of our management’s attention from other business concerns;

 

   

the difficulty in achieving anticipated synergies and efficiencies;

 

   

the difficulty in integrating disparate operational and information systems;

 

   

unanticipated liabilities associated with the acquired company;

 

   

the difficulty in leveraging the acquired company’s and our combined technologies and capabilities across our product lines and customer base; and

 

   

our ability to retain key customers, suppliers and employees of an acquired company.

Our failure to successfully identify suitable target companies, negotiate and complete acquisitions, or achieve the anticipated benefits of any past or future acquisition or to successfully integrate and/or manage the operations of the companies we acquire could harm our business, results of operations and cash flows. Additionally, we may incur significant charges in future quarters to reflect additional costs associated with past acquisitions, including asset impairment charges and other costs related to divestiture of acquired assets or businesses. Such charges could also include impairment of goodwill associated with past acquisitions. For example, our market capitalization decreased significantly during the fourth quarter of 2008, which caused us to reevaluate the fair values of our divisions. This ultimately led us to determine that goodwill and certain intangible assets associated with our Lasers Division were impaired, and we recorded an impairment charge of $119.9 million to write off the total goodwill balance and certain other intangible assets associated with that division. While we believe that our assumptions currently used in evaluating the goodwill associated with our business are reasonable, we may be required to recognize a goodwill impairment charge in the future.

 

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We face significant risks from doing business in foreign countries.

Our business is subject to risks inherent in conducting business internationally. For the years ended January 1, 2011, January 2, 2010 and January 3, 2009, our international revenues accounted for approximately 51.3%, 53.7% and 53.1%, respectively, of total net sales, with a substantial portion of international sales originating in Europe and Japan. We expect that international revenues will continue to account for a significant percentage of total net sales for the foreseeable future, and that in particular, the proportion of our sales to Asian customers will continue to increase. Our international operations expose us to various risks, which include:

 

   

adverse changes or instability in the political or economic conditions in countries or regions where we manufacture or sell our products;

 

   

challenges of administering our business globally;

 

   

the actions of U.S. and foreign regulatory authorities, including embargoes, export restrictions, tariffs, trade restrictions and trade barriers, license requirements, regulatory requirements, currency controls and other rules and regulations applicable to the importing and exporting of our products, as well as laws prohibiting certain payments or other business practices in foreign countries, all of which are complicated and potentially conflicting and may impose strict and severe penalties for noncompliance;

 

   

longer accounts receivable collection periods;

 

   

overlapping, differing or more burdensome tax structures;

 

   

adverse currency exchange rate fluctuations;

 

   

differing protection of intellectual property;

 

   

more complex and burdensome labor laws and practices in countries where we have employees;

 

   

difficulties in staffing and managing each of our individual foreign operations; and

 

   

increased risk of exposure to terrorist activities.

In addition, fluctuations in foreign exchange rates could affect the sales price in local currencies of our products in foreign markets, potentially making our products less price competitive. Such exchange rate fluctuations could also increase the costs and expenses of our foreign operations when translated into U.S. dollars or require us to modify our current business practices. If we experience any of the risks associated with international business, our business and results of operations could be significantly harmed.

Many of the markets and industries that we serve are subject to rapid technological change, and if we do not introduce new and innovative products or improve our existing products, our business and results of operations will be negatively affected.

Many of our markets are characterized by rapid technological advances, evolving industry standards, shifting customer needs, new product introductions and enhancements, and the periodic introduction of disruptive technology that displaces current technology due to a combination of price, performance and reliability. As a result, many of the products in our markets can become outdated quickly and without warning. We depend, to a significant extent, upon our ability to enhance our existing products, to anticipate and address the demands of the marketplace for new and improved and disruptive technologies, either through internal development or by acquisitions, and to be price competitive. If we or our competitors introduce new or enhanced products, it may cause our customers to defer or cancel orders for our existing products. If we or our competitors introduce disruptive technology that displaces current technology, existing product platforms or lines of business from which we generate significant revenue may be rendered obsolete. In addition, because certain of our markets experience severe cyclicality in capital spending, if we fail to introduce new products in a timely manner we may miss market upturns, or may fail to have our products or subsystems designed into our customers’ products. We may not be successful in acquiring, developing, manufacturing or marketing new products and technologies on a timely or cost-effective basis. If we fail to adequately introduce new, competitive products and technologies on a timely basis, our business and results of operations would be harmed.

 

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We offer products for multiple industries and must face the challenges of supporting the distinct needs of each of the markets we serve.

We offer products for a number of markets. Because we operate in multiple markets, we must work constantly to understand the needs, standards and technical requirements of many different applications within these industries, and must devote significant resources to developing different products for these industries. Product development is costly and time consuming. We must anticipate trends in our customers’ industries and develop products before our customers’ products are commercialized. If we do not accurately predict our customers’ needs and future activities, we may invest substantial resources in developing products that do not achieve broad market acceptance. Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth rate and other factors that contribute to the attractiveness of a particular market. If our product offerings in any particular market are not competitive or our analyses of a market are incorrect, our business and results of operations would be harmed.

Because the sales cycle for some of our products is long and difficult to predict, and certain of our orders are subject to rescheduling or cancellation, we may experience fluctuations in our operating results.

Many of our capital equipment, system and subsystem products are complex, and customers for these products require substantial time to make purchase decisions. These customers often perform, or require us to perform, extensive configuration, testing and evaluation of our products before committing to purchasing them, which can require a significant upfront investment by us. The sales cycle for our capital equipment, system and subsystem products from initial contact through shipment varies significantly, is difficult to predict and can last more than one year. If we fail to anticipate the likelihood, costs, or timing associated with sales of capital equipment, system and subsystem products, our business and results of operations would be harmed.

The orders comprising our backlog are generally subject to rescheduling without penalty or cancellation without penalty other than reimbursement for certain material costs. We have from time to time experienced order rescheduling and cancellations that have caused our revenues in a given period to be materially less than would have been expected based on our backlog at the beginning of the period. If we experience such rescheduling and/or cancellations in the future, our operating results will fluctuate from period to period. These fluctuations could harm our results of operations.

If we are delayed in introducing our new products into the marketplace, our operating results will suffer.

Because many of our products are sophisticated and complex, we may experience delays in introducing new products or enhancements to our existing products. If we do not introduce our new products or enhancements into the marketplace in a timely fashion, our customers may choose to use competitors’ products. In addition, because certain of our markets, such as the semiconductor equipment market, are highly cyclical in nature, if we fail to timely introduce new products in advance of an upturn in the market’s cycle, we may be foreclosed from selling products to certain customers until the next cycle. As such, our inability to introduce new or enhanced products in a timely manner could cause our business and results of operations to suffer.

Uncertainty in the development of the solar energy market could reduce the revenue we expect to generate from product sales to this market.

The solar energy market is evolving and the extent to which solar energy technology will be widely adopted is uncertain. Many factors may affect the viability of widespread adoption of solar energy technology and demand for solar panels, including the cost-effectiveness of solar energy and the performance and reliability of solar panels, compared with conventional and other non-solar renewable energy sources and products, and fluctuations in economic and market conditions that affect the price of, and demand for, conventional and non-solar renewable energy sources, such as increases or decreases in the price of coal, oil, natural gas and other fossil fuels. If solar panel technology is not widely adopted or if demand for solar panels fails to develop sufficiently, we may be unable to generate the revenue we currently anticipate from sales of our products for solar panel manufacturing applications.

 

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We face substantial competition, and if we fail to compete effectively, our operating results will suffer.

The markets for our products are intensely competitive, and we believe that competition from both new and existing competitors will increase in the future. We compete in several specialized markets, against a limited number of companies in each market. We also face competition in some of our markets from our existing and potential customers who have developed or may develop products that are competitive to ours, or who engage subcontract manufacturers or system integrators to manufacture products or systems on their behalf. Some of our existing and potential competitors are more established, enjoy greater name recognition and possess greater financial, technological and marketing resources than we do. Other competitors are small and highly specialized firms that are able to focus on only one aspect of a market. We compete on the basis of product performance, features, quality, reliability, the breadth of our product portfolio and price and on our ability to manufacture and deliver our products on a timely basis. We may not be able to compete successfully in the future against existing or new competitors. In addition, competitive pressures may force us to reduce our prices, which would negatively affect our operating results. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed.

Our international sales and operations may be adversely impacted by export controls.

Exports of our products and technology are subject to export controls imposed by the U.S. Government and administered by the U.S. Departments of Commerce and State. In certain instances, these regulations may require obtaining licenses from the administering agency prior to exporting products or technology to international locations or foreign nationals. For products and technology subject to the Export Administration Regulations administered by the Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product and technology, the final destination and the identity and nationality of the end user. Virtually all exports of defense articles subject to the International Traffic in Arms Regulations administered by the Department of State’s Directorate of Defense Trade Controls require a license. Obtaining export licenses can be difficult and time-consuming, and we may not be successful in obtaining them. Failure to obtain export licenses to enable product and technology exports could reduce our revenue and could adversely affect our business, financial condition and results of operations. Compliance with U.S. Government regulations may also subject us to additional fees and costs. The absence of comparable export restrictions on competitors in other countries may adversely affect our competitive position. In addition, failure to comply with any of these export regulations could result in civil and criminal, monetary and non-monetary penalties, disruptions to our business, limitations on our ability to export products and technology and damage to our reputation.

If we fail to protect our intellectual property and proprietary technology, we may lose our competitive advantage.

Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Patent and trademark laws and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights. In addition, patents issued to us may be challenged, invalidated or circumvented. Our rights granted under those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed. We have in the past and may in the future be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources. The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. We have in the past and may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which claims could result in costly litigation, the diversion of our technical and management personnel and the assertion of counterclaims by the defendants, including counterclaims asserting invalidity of our patents. We will take such actions where we believe that they are of sufficient strategic or economic importance to us to justify the cost. If we

 

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are unsuccessful at effectively protecting our intellectual property, our business, financial condition and results of operations could be harmed.

We have experienced, and may in the future experience, intellectual property infringement claims, which could be costly and time consuming to defend.

We have from time to time received communications from third parties alleging that we are infringing certain trademarks, patents or other intellectual property rights held by them. Whenever such claims arise, we evaluate their merits. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary licenses or other rights or develop substitute technology may divert management’s attention from other matters and could have a material adverse effect on our business, financial condition and results of operations. In addition, the terms of our customer contracts typically require us to indemnify the customer in the event of any claim of infringement brought by a third party based on our products. Any claims of this kind may have a material adverse effect on our business, financial condition or results of operations.

If we are unable to attract new employees and retain and motivate existing employees, our business and results of operations will suffer.

Our ability to maintain and grow our business is directly related to the service of our employees in each area of our business. Our future performance will be directly tied to our ability to hire, train, motivate and retain qualified personnel. Competition for personnel in the technology marketplace is intense. We have from time to time in the past experienced attrition in certain key positions, and we expect to continue to experience this attrition in the future. The absence in prior periods of incentive plan bonuses and equity award vesting as a result of not meeting certain financial performance targets could adversely affect our ability to attract new employees and to retain and motivate our existing employees. If we are unable to hire sufficient numbers of employees with the experience and skills we need or to retain and motivate our existing employees, our business and results of operations would be harmed.

Our reliance on sole source and limited source suppliers and service providers could result in delays in production and distribution of our products.

We obtain some of the materials and components used to build our products, systems and subsystems, such as the sheet steel used in some of our vibration isolation tables, and the crystals and semiconductor laser diodes used in certain of our laser products, from single or limited sources due to unique component designs as well as specialized quality and performance requirements needed to manufacture our products. If our components or raw materials are unavailable in adequate amounts at acceptable quality levels or are unavailable on satisfactory terms, we may be required to purchase them from alternative sources, if available, which could increase our costs and cause delays in the production and distribution of our products. If we do not obtain comparable replacement components from other sources in a timely manner, our business and results of operations will be harmed. Many of our suppliers require long lead times to deliver the quantities of components that we need. If we fail to accurately forecast our needs, or if we fail to obtain sufficient quantities of components that we use to manufacture our products, then delays or reductions in production and shipment of our products could occur, which would harm our business and results of operations.

In addition, we obtain some of the critical capital equipment we use to manufacture certain of our products from sole or limited sources due to the unique nature of the equipment. In some cases, such equipment can only be serviced by the manufacturer or a very limited number of service providers due to the complex and specialized nature of the equipment. If service and/or spare parts for such equipment become unavailable, such equipment could be rendered inoperable, which could cause delays in the production of our products, and could require us to procure alternate equipment, if available, which would likely involve long lead times and significant additional cost.

 

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Our failure to successfully manage the transition of certain of our manufacturing operations to international locations and to contract manufacturers could harm our business.

As part of our ongoing cost-reduction efforts, we continue to transition the manufacture of certain of our product lines and subassemblies from higher-cost manufacturing locations to our facility in Wuxi, China, and to selected contract manufacturers in Asia. If we are unable to successfully manage the transition of the manufacture of these products, our results of operations could be harmed.

In particular, transferring product lines to our facility in Wuxi, China and our contract manufacturers’ facilities in Asia requires us to transplant complex manufacturing equipment and processes across a large geographical distance and to train a completely new workforce concerning the use of this equipment and these processes. If we are unable to manage this transfer and training smoothly and comprehensively, we could suffer manufacturing and supply chain delays, excessive product defects, harm to our results of operations and our reputation with our customers, and loss of customers. We also may not realize the cost and tax advantages that we currently anticipate from locating operations in China, due to rising material, labor and shipping costs and rapidly changing Chinese regulations.

Additionally, qualifying contract manufacturers and commencing volume production are expensive and time-consuming activities, and there is no guarantee we will continue to do so successfully. Further, our reliance on contract manufacturers reduces our control over the assembly process, quality assurance, production costs and material and component supply for our products. If we fail to manage our relationship with our contract manufacturers, or if any of the contract manufacturers experience financial difficulty, or delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. Further, if we or our contract manufacturers are unable to negotiate with suppliers for reduced component costs, our operating results could be harmed.

In addition, our contract manufacturers may terminate our agreements with them upon prior notice to us or for reasons such as if we become insolvent, or if we fail to perform a material obligation under the agreement. If we are required to change contract manufacturers or assume internal manufacturing operations for any reason, including the termination of one of our contracts, we will likely suffer manufacturing and shipping delays, lost revenue, increased costs and damage to our customer relationships, any of which could harm our business.

Our products could contain defects, which would increase our costs and harm our business.

Many of our products, especially our laser and automation products, are inherently complex in design and require ongoing regular maintenance. Further, the manufacture of these products often involves a highly complex and precise process. As a result of the technical complexity of these products, design defects, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could adversely affect our manufacturing yields and product reliability. This could in turn harm our business, operating results, financial condition and customer relationships.

We provide warranties for our products, and we accrue allowances for estimated warranty costs at the time we recognize revenue for the sale of the products. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We establish warranty reserves based on historical warranty costs for our products. If actual return rates or repair and replacement costs differ significantly from our estimates, our results of operations could be negatively impacted.

Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other suppliers, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix defects or other problems, we could experience, among other things:

 

   

loss of customers;

 

   

increased costs of product returns and warranty expenses;

 

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increased costs required to analyze and mitigate the defects or problems;

 

   

damage to our reputation;

 

   

failure to attract new customers or achieve market acceptance;

 

   

diversion of development and engineering resources; or

 

   

legal action by our customers.

The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

Our products are subject to potential product liability claims which, if successful, could adversely affect our results of operations.

Many of our products may be hazardous if not operated properly or if defective. We are exposed to significant risks for product liability claims if property damage, personal injury or death results from the use of our products. We may experience material product liability losses in the future. We currently maintain insurance against product liability claims. However, our insurance coverage may not continue to be available on terms that we accept, if at all. This insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim against us that exceeds our insurance coverage level, or any claim or product recall, could have a material adverse effect on our business, financial condition and results of operations.

Our convertible debt imposes significant financial obligations upon us, and certain provisions of our convertible notes could discourage a change in control.

In February 2007, we issued $175 million of convertible subordinated notes, of which $126.8 million was outstanding as of January 1, 2011. The notes are subordinated to all of our existing and future senior indebtedness. The notes mature on February 15, 2012 and bear interest at a rate of 2.5% per year, payable in cash semiannually in arrears on February 15 and August 15 of each year. Holders of the notes may convert their notes under certain specified circumstances which may occur prior to maturity, and upon conversion, a holder will receive cash in lieu of shares of our common stock for the value of the notes, as determined in the manner set forth in the indenture governing the notes. We may also be required to deliver additional cash or common stock or a combination of cash and common stock upon conversion.

Our ability to meet our semiannual interest payment obligations under the notes and our cash payment obligations upon maturity or conversion of the notes will depend upon our future cash balances. The amount of cash available for repayment of the notes will depend on our usage of our existing cash balances and our operating performance and ability to generate cash flow from operations in future periods, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

In addition, the notes may become immediately due and payable upon an “event of default,” which generally consists of (i) a default in the payment of any principal amount or fundamental change purchase price due with respect to the notes, when the same becomes due and payable, regardless of whether such payment is permitted pursuant to the subordination provisions of the indenture pursuant to which the notes were issued; (ii) a default in payment of any interest (including additional interest) under the notes, which default continues for 30 days, regardless of whether such payment is permitted pursuant to the subordination provisions of the indenture; (iii) a default in the delivery when due of all cash and any shares of common stock payable upon conversion with respect to the notes, which default continues for 15 days, regardless of whether such delivery is permitted pursuant to the subordination provisions of the indenture; (iv) our failure to comply with any of its other agreements in the notes or the indenture upon our receipt of notice of such default from the trustee or from holders of not less than 25% in aggregate principal amount of the notes, and the failure to cure (or obtain a waiver of) such default within 60 days after receipt of such notice; (v) a default in the payment of principal by the end of any applicable grace period or resulting in acceleration of other of our indebtedness for borrowed money where the aggregate principal amount with respect to which the default or acceleration has occurred exceeds $10 million and such acceleration has not been

 

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rescinded or annulled or such indebtedness repaid within a period of 30 days after written notice to us by the trustee or us and the trustee by the holders of at least 25% in aggregate principal amount of the notes, provided that if any such default is cured, waived, rescinded or annulled, then the event of default by reason thereof would not be deemed to have occurred; and/or (vi) certain events of bankruptcy, insolvency or reorganization affecting us or any of our significant subsidiaries.

Upon maturity, or prior to maturity if the notes become immediately due and payable upon an event of default, we would need to obtain additional financing or significantly deplete our available cash, or both, in order to repay the notes. Any additional financing may not be available on reasonable terms or at all, and significant depletion of our available cash could harm our ability to fund our operations or execute our broader corporate objectives, such as potential acquisitions.

In addition, certain provisions of our convertible notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, which include a change in control, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or any portion of the principal amount of such notes. The magnitude of the amount of any repurchase could discourage a third party from acquiring us.

While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting each year, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to rules and regulations promulgated by the Securities and Exchange Commission under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management each year on our internal control over financial reporting. This report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. This report must also contain a statement that our auditors have issued an attestation report on such internal controls. Management’s assessment of internal controls over financial reporting requires management to make subjective judgments, some of which will be in areas that may be open to interpretation. As such, our auditors may not agree with our assessments.

If we are unable to assert each year that our internal control over financial reporting is effective (or if our auditors are unable to attest that our internal control over financial reporting is effective), we could lose investor confidence in the accuracy and completeness of our financial reports, and we may be unable to file such reports in a timely manner, which would have an adverse effect on our stock price. In addition, if any unidentified material weaknesses were to result in fraudulent activity and/or a material misstatement or omission in our financial statements, we could suffer losses and be subject to civil and criminal penalties, all of which could have a material adverse effect on our business, financial condition and results of operations.

Difficulties with our global information technology system could harm our business.

Any failure or malfunctioning of our global information technology system, errors or misuse by system users, or inadequacy of the system in addressing the needs of our operations, could disrupt our ability to timely and accurately manufacture and ship products, which could have a material adverse effect on our business, financial condition and results of operations. Any such failure, errors, misuse or inadequacy could also disrupt our ability to timely and accurately process, report and evaluate key operations metrics and key components of our results of operations, financial position and cash flows. Any such disruptions would likely divert our management and key employees’ attention away from other business matters. Any disruptions or difficulties that may occur in connection with our global information technology system could also adversely affect our ability to complete important business processes such as the evaluation of our internal control over financial reporting and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

 

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Compliance with environmental regulations and potential environmental liabilities could adversely affect our financial results.

Our operations are subject to various federal, state, local and international regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency (EPA). Comparable authorities are involved in other countries. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition.

Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In such event, we could be subject to claims by employees or third parties, and could be liable for damages, which liability could exceed the amount of our liability insurance coverage (if any) and the resources of our business.

Our former facility located in Mountain View, California is an EPA-designated Superfund site and is subject to a cleanup and abatement order from the California Regional Water Quality Control Board. Spectra-Physics, along with several other entities with facilities located near the Mountain View, California facility, have been identified as Responsible Parties with respect to this Superfund site, due to releases of hazardous substances during the 1960s and 1970s. The site is mature, and investigations and remediation efforts have been ongoing for approximately 25 years. Spectra-Physics and the other Responsible Parties have entered into a cost-sharing agreement covering the costs of remediating the off-site groundwater impact. In addition to our remediation obligations, we may be liable for property damage or personal injury claims relating to this site. While we are not aware of any claims at this time, such claims could be made against us in the future. Thermo Fisher Scientific, Inc., formerly known as Thermo Electron Corporation (Thermo), has agreed, in connection with our purchase of Spectra-Physics, to indemnify us, subject to certain conditions, for costs of remediation that are incurred and third party claims that are made prior to July 16, 2014, which arise from the releases of hazardous substances at or from the Mountain View facility and are subject to remediation under the cost-sharing agreement. However, our ultimate costs of remediation and other potential liability are difficult to predict, and this indemnity may not cover all liabilities relating to this site. If significant costs or other liability relating to this site arise in the future and are either not covered by this indemnity or arise after this indemnity expires, our business, financial condition and results of operations could be adversely affected.

The environmental regulations to which we are subject, include a variety of federal, state, local and international environmental regulations restricting the use and disposal of materials used in the manufacture of our products, or requiring design changes or recycling of our products. If we fail to comply with any present or future regulations, we could be subject to future liabilities, the suspension of manufacturing or a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our ability to equip our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations, including expenses associated with the recall of any non-compliant product and the management of historical waste.

From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. For example, the European Union has enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE) for implementation in each European Union member country. RoHS regulates the use of certain hazardous substances in certain products, and WEEE requires the collection, reuse and recycling of waste from certain products. The European Union member states continue to define the scope of the implementation of RoHS and WEEE. Based on information we have received to date, certain of our products sold in these countries are or will likely be subject to RoHS and WEEE requirements. We will continue to monitor RoHS and WEEE guidance as it is announced by individual jurisdictions to determine our responsibilities. The guidance available to us to date suggests that in some instances we are not directly responsible for compliance with RoHS and WEEE because some of our products may be outside the scope of the directives. However, because the scope of the directives continues

 

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to expand in the course of implementation by the European Union member states, we will likely be directly or contractually subject to such regulations in the case of many of our products. In addition, certain of our customers, particularly OEM customers whose end products may be subject to these directives, may require that the products we supply to them comply with these directives. Further, final legislation from individual jurisdictions that have not yet implemented the directives may impose different or additional responsibilities upon us. We are also aware of similar legislation that is currently in force or being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in countries in these regions.

Natural disasters or power outages could disrupt or shut down our operations or those of our contract manufacturers, which would negatively impact our operations.

We are headquartered, and have significant operations, in the State of California and other areas where our operations are susceptible to damages from earthquakes, floods, fire, loss of power or water supplies, or other similar contingencies. Our contract manufacturers’ operations are also subject to these occurrences. We currently have comprehensive business continuation plans for our global information technology systems and for most of our operations and facilities, as well as disaster recovery procedures for our remaining operations and facilities. Despite these contingency plans and procedures, if any of our facilities or those of our contract manufacturers were to experience a catastrophic loss or significant power outages, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility, any of which would harm our business. We are predominantly uninsured for losses and interruptions caused by earthquakes.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

Our corporate headquarters is located at 1791 Deere Avenue, Irvine, California 92606. We lease this facility under a lease expiring in February 2022. Our primary manufacturing operations for each of our divisions are located in the following facilities:

 

Division

  

Primary Facility Locations

  

Approximate Facility Size

Lasers   

Santa Clara, California

Stahnsdorf, Germany

  

139,000 square feet

  12,000 square feet

Photonics and Precision

Technologies

  

Irvine, California

Rochester, New York

Franklin, Massachusetts

North Billerica, Massachusetts

Stratford, Connecticut

Beaune-la Rolande, France

Wuxi, China

Brigueuil, France

  

272,000 square feet

  58,000 square feet

  56,000 square feet

  41,000 square feet

  32,000 square feet

  86,000 square feet

  64,000 square feet

  44,000 square feet

We own portions of our Rochester, New York and Beaune-la Rolande, France facilities, and we own our Brigueuil, France facility. We lease all other facilities under leases with expiration dates ranging from 2011 to 2022. In addition to these primary facilities, we lease a number of other facilities worldwide for administration, sales and/or service. We believe that our facilities are adequate for our current needs and that, if required, we will be able to extend or renew our leases, or locate suitable substitute space, on commercially reasonable terms as our leases expire. We also believe that suitable additional space will be available on commercially reasonable terms in the future to accommodate expansion of our operations.

 

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ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows.

 

ITEM 4. RESERVED

PART II

 

ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is traded on the NASDAQ Global Select Market under the symbol NEWP. As of February 28, 2011, we had 842 common stockholders of record based upon the records of our transfer agent, which do not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The following table reflects the high and low sales prices of our common stock for each quarterly period during the last two fiscal years:

 

Quarter Ended

   High      Low  
January 1, 2011    $ 18.15       $ 10.85   
October 2, 2010      13.57         8.43   
July 3, 2010      14.48         8.30   
April 3, 2010      12.63         7.74   
January 2, 2010      9.66         7.08   
October 3, 2009      9.46         5.19   
July 4, 2009      6.88         4.56   
April 4, 2009      6.60         2.93   

Dividends

We declared no dividends on our common stock during 2010 or 2009. We do not intend to pay cash dividends in the foreseeable future, however, we will periodically review this issue in the future based on changes in our financial position and investment opportunities, as well as any changes in the tax treatment of dividends.

Purchases of Equity Securities

We made no purchases of our equity securities during the fourth quarter of the year ended January 1, 2011.

 

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Information Regarding Equity Compensation Plans

The following table sets forth information with respect to securities authorized for issuance under our equity compensation plans as of January 1, 2011:

Equity Compensation Plan Information

 

Plan Category

   Number of Securities
to be Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights

(a)
     Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights

(b)
     Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(excluding securities
reflected in column (a))

(c)
 

Equity Compensation Plans Approved by Security Holders(1)

     4,462,739       $ 11.11         2,295,386   

Equity Compensation Plans Not Approved by Security Holders(2)

     10,250       $ 49.68         —     
                    

Total

     4,472,989            2,295,386   
                    

 

(1)

The number of shares reflected in column (a) for equity compensation plans approved by security holders includes (i) outstanding options to purchase an aggregate of 1,729,814 shares of our common stock, which were issued under our 1992 Stock Incentive Plan and our 2001 Stock Incentive Plan, (ii) outstanding stock-settled stock appreciation rights with respect to an aggregate of 1,149,835 shares of our common stock, which were issued under our 2006 Performance-Based Stock Incentive Plan, and (iii) outstanding restricted stock units representing the right to receive upon vesting an aggregate of 1,583,090 shares of our common stock, which were issued under our 2006 Performance-Based Stock Incentive Plan. The weighted-average exercise price reflected in column (b) for equity compensation plans approved by security holders represents the combined weighted-average exercise price (or base value) of all outstanding options (having a weighted-average exercise price of $14.11 per share) and all outstanding stock-settled stock appreciation rights (having a weighted-average base value of $6.60 per share). All outstanding restricted stock units were awarded without payment of any purchase price.

(2)

The number of shares reflected in column (a) for equity compensation plans not approved by security holders consists of outstanding options to purchase shares of our common stock issued under our 1999 Stock Incentive Plan (1999 Plan).

Equity Compensation Plans Not Approved by Security Holders

In November 1999, our Board adopted our 1999 Plan, pursuant to which nonqualified options to purchase shares of our common stock were granted to employees (excluding officers and members of our Board) from November 1999 until May 2001. In May 2001, upon the approval by our stockholders of our 2001 Stock Incentive Plan, the 1999 Plan was terminated for the purposes of future grants. As of January 1, 2011, options to purchase a total of 10,250 shares of our common stock were outstanding under the 1999 Plan. All options granted under the 1999 Plan were granted at an exercise price equal to the fair market value of the common stock on the grant date, and generally vested in 25% increments on each of the first four anniversaries of the grant date. No option is exercisable more than ten years following the grant date.

 

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Stock Performance Graph

The following graph compares the cumulative total stockholder return on $100 invested in our common stock for the five years ended January 1, 2011, with the cumulative total return on $100 invested in each of (i) the Nasdaq Market Index, (ii) our current peer group, and (iii) our prior peer group. The graph assumes all investments were made at market value on December 31, 2005 and the reinvestment of all dividends.

The current peer group reflected in the graph represents a combination of all companies comprising the Morningstar Semiconductor Equipment & Materials Industry Group Index and the Morningstar Scientific & Technical Instruments Industry Group Index, published by Morningstar, Inc., with these indices weighted one-third (1/3) and two-thirds (2/3), respectively. A listing of the companies comprising each index is available from us by written request to our Corporate Secretary.

In 2009, our peer group consisted of a combination of all companies comprising the Hemscott Semiconductor Equipment & Materials Industry Group Index and the Hemscott Scientific & Technical Instruments Industry Group Index, which are also published by Morningstar, Inc., with the same weightings as the corresponding Morningstar indices noted above. This prior peer group is also reflected in the graph below. As a result of Morningstar’s acquisition of Hemscott, Inc., Morningstar is replacing the former series of Hemscott Industry Groups with their Morningstar equivalents. As such, we have updated our peer group to reflect the Morningstar Industry Groups.

COMPARES 5-YEAR CUMULATIVE RETURN AMONG

NEWPORT CORPORATION, NASDAQ MARKET INDEX,

CURRENT PEER GROUP AND PRIOR PEER GROUP

LOGO

The material in this performance graph is not “soliciting material” and is not deemed filed with the SEC and is not to be incorporated by reference in any filing of Newport under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

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ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K and in our annual reports that have been filed for the prior years presented.

 

     For the Year Ended (1)  
     January 1,     January 2,     January 3,     December 29,     December 30,  
(In thousands, except percentages)    2011     2010     2009     2007     2006  
           (2)                    

CONSOLIDATED STATEMENTS OF OPERATIONS:

          

Net sales

   $ 479,787      $ 366,989      $ 445,336      $ 445,197      $ 454,724   

Cost of sales

     274,491        224,387        274,542        259,636        256,756   
                                        

Gross profit

     205,296        142,602        170,794        185,561        197,968   

Selling, general and administrative expenses

     112,754        112,177        118,518        116,476        114,533   

Research and development expense

     39,278        36,948        46,068        42,570        41,981   

Loss (gain) on sale of assets and related costs (3)

     542        4,355        (2,504     —          —     

Impairment charges (4)

     —          360        119,944        —          —     
                                        

Operating income (loss)

     52,722        (11,238     (111,232     26,515        41,454   

Recovery (write-down) of note receivable and other amounts related to previously discontinued operations, net (5)

     —          101        (7,040     —          —     

Write-down of minority interest investment (6)

     —          —          (2,890     —          —     

Gain on extinguishment of debt (7)

     —          328        7,734        —          —     

Interest and other expense, net

     (8,481     (8,564     (6,751     (4,053     (759
                                        

Income (loss) from continuing operations before income taxes

     44,241        (19,373     (120,179     22,462        40,695   

Income tax provision (benefit) (8)

     3,128        (1,967     28,545        (17,229     2,193   
                                        

Income (loss) from continuing operations before discontinued operations

     41,113        (17,406     (148,724     39,691        38,502   

Loss from discontinued operations, net of income tax benefits (9)

     —          —          —          —          (1,075
                                        

Net income (loss)

   $ 41,113      $ (17,406   $ (148,724   $ 39,691      $ 37,427   
                                        

Percentage of net sales:

          

Gross profit

     42.8     38.9     38.4     41.7     43.5

Selling, general and administrative expenses

     23.5     30.6     26.6     26.2     25.2

Research and development expense

     8.2     10.1     10.4     9.6     9.2

Operating income (loss)

     11.0     (3.1 )%      (24.9 )%      5.9     9.1

Income (loss) from continuing operations before discontinued operations

     8.5     (4.8 )%      (33.4 )%      8.9     8.5

Net income (loss)

     8.5     (4.8 )%      (33.4 )%      8.9     8.2

 

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     As of or for the Year Ended  
(In thousands, except per share and worldwide employment figures)    January 1,
2011
     January 2,
2010
    January 3,
2009
    December 29,
2007
     December 30,
2006
 

PER SHARE INFORMATION:

            

Basic net income (loss) per share:

            

Income (loss) from continuing operations before discontinued operations

   $ 1.12       $ (0.48   $ (4.11   $ 1.03       $ 0.95   

Loss from discontinued operations, net of income tax benefits

     —           —          —          —           (0.03
                                          

Net income (loss)

   $ 1.12       $ (0.48   $ (4.11   $ 1.03       $ 0.92   
                                          

Diluted net income (loss) per share:

            

Income (loss) from continuing operations before discontinued operations

   $ 1.09       $ (0.48   $ (4.11   $ 1.02       $ 0.91   

Loss from discontinued operations, net of income tax benefits

     —           —          —          —           (0.02
                                          

Net income (loss)

   $ 1.09       $ (0.48   $ (4.11   $ 1.02       $ 0.89   
                                          

Shares used in computation of income (loss) per share:

            

Basic

     36,647         36,175        36,155        38,479         40,698   

Diluted

     37,726         36,175        36,155        39,058         42,167   

Total stockholders’ equity per diluted share

   $ 7.83       $ 7.04      $ 7.34      $ 10.93       $ 10.32   

BALANCE SHEET INFORMATION:

            

Cash and marketable securities

   $ 200,184       $ 141,923      $ 148,420      $ 143,864       $ 85,413   

Working capital

   $ 288,650       $ 236,510      $ 263,507      $ 284,676       $ 200,808   

Total assets

   $ 556,390       $ 493,407      $ 524,903      $ 698,323       $ 593,015   

Short-term borrowings

   $ 12,468       $ 11,056      $ 14,089      $ 12,402       $ 9,481   

Long-term borrowings (includes borrowings under capital leases)

   $ 123,198       $ 122,636      $ 136,807      $ 153,489       $ 52,125   

Stockholders’ equity

   $ 295,459       $ 254,636      $ 265,197      $ 426,838       $ 434,953   

MISCELLANEOUS STATISTICS:

            

Common shares outstanding at year end

     36,909         36,316        36,049        36,918         41,458   

Average worldwide employment

     1,687         1,683        1,900        1,943         1,940   

Sales per employee

   $ 284       $ 218      $ 234      $ 229       $ 234   

 

(1) We use a 52/53-week accounting fiscal year. Our fiscal year ends on the Saturday closest to December 31, and our fiscal quarters end on the Saturday closest to the end of each corresponding calendar quarter. Fiscal year 2010 (referred to herein as 2010) ended on January 1, 2011, fiscal year 2009 (referred to herein as 2009) ended on January 2, 2010, fiscal year 2008 (referred to herein as 2008) ended on January 3, 2009, fiscal year 2007 (referred to herein as 2007) ended on December 29, 2007 and fiscal year 2006 (referred to herein as 2006) ended on December 30, 2006. Fiscal years 2010 and 2009 each consisted of 52 weeks, and fiscal year 2008 consisted of 53 weeks.
(2) In July 2009, we entered into an asset exchange transaction in which we acquired substantially all of the assets of the New Focus business. Our results of operations for 2009 included the results of operations of the New Focus business from July 4, 2009, the closing date of the acquisition.
(3) In 2010, we sold our Hilger Crystals Limited subsidiary for $4.0 million in cash. We recognized a loss of $0.5 million after considering the net asset carrying value of $2.5 million, charges of $1.4 million related to the pension plan associated with this business, a charge of $0.4 million to write off an inter-company receivable, and transaction expenses of $0.2 million. In 2009, we entered into an asset exchange transaction in which we sold substantially all of the assets of our diode laser business, which had a book value of $14.9 million, which resulted in a loss of $4.4 million after considering the fair value of these assets of $11.1 million and selling costs of $0.6 million. In 2008, we sold a building under a sale-leaseback agreement for $7.0 million, net of $0.3 million in selling costs. We recorded a gain on the sale of the building of $2.5 million after considering the net book value of the building and the present value of the leaseback agreement.
(4)

In 2009, we determined that we would not continue to pursue technology related to purchased in-process research and development and recorded an impairment charge of $0.4 million associated with such technology. In 2008, we determined that goodwill and other intangible assets related to our Lasers

 

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Division were impaired and recorded impairment charges of $104.6 million related to goodwill and $15.4 million related to other acquired intangible assets.

(5) In 2005, we sold our robotic systems operations to Kensington Laboratories LLC (Kensington) for $0.5 million in cash and a note receivable of $5.7 million, after adjustments provided for in the purchase agreement, and subleased the facility relating to such operations to Kensington. In 2008, due to uncertainty regarding collectability of such note receivable and amounts owed under the sublease, we wrote off such note receivable and other amounts owed in full, resulting in charges totaling $7.0 million, net of amounts recovered relating to the sublease. In 2009, we entered into a settlement agreement with Kensington pursuant to which Kensington paid us $0.2 million and transferred to us certain assets included in the collateral securing the note. In 2009, we recognized $0.1 million as a recovery on the note, net of certain costs. See further discussion in Note 16 of the Notes to Consolidated Financial Statements.
(6) In 2008, we determined that a minority interest investment had an other-than-temporary decline in value and wrote off $2.9 million, representing the full carrying value of such investment.
(7) In 2009, we extinguished $20.2 million of our convertible subordinated notes for $18.7 million. After allocating $0.3 million of the extinguished amount to the equity component of the notes, we recorded a gain of $0.3 million on extinguishment of the debt, net of unamortized fees and debt discount. In 2008, we extinguished $28.0 million of our convertible subordinated notes for $16.8 million, and we recorded a gain of $7.7 million on extinguishment of the debt, net of unamortized fees and debt discount.
(8) We have previously established a valuation allowance against our deferred tax assets due to uncertainty as to the timing and ultimate realization of those assets. In 2007, we reduced the valuation allowance against our deferred tax assets by $19.8 million, and in 2008, we reestablished such valuation allowance and recorded an additional valuation allowance of $4.6 million. In 2010, we reduced such valuation allowance by $18.2 million, primarily due to income generated during the year. See further discussion in Note 11 of the Notes to Consolidated Financial Statements regarding our valuation allowance.
(9) In 2005, our Board of Directors approved a plan to sell our robotic systems operations. This divestiture has been accounted for as discontinued operations for all periods presented.

 

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. These statements are based on assumptions that we consider reasonable. When used in this report, the words “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “would,” and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Item 1 (Business) and Item 1A (Risk Factors) of Part I of this Annual Report on Form 10-K.

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 and subsystems and advanced automated manufacturing systems. Our products are used worldwide in industries including scientific research, microelectronics, aerospace and defense/security, life and health sciences and industrial manufacturing. We operate within two distinct business segments, our Lasers Division and our Photonics and Precision Technologies (PPT) Division. Both 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 and 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.

Acquisitions and Divestitures

On July 19, 2010, we sold all of the outstanding capital stock of our Hilger Crystals Limited subsidiary. We received $4.0 million in cash as consideration for the sale. In addition, if Hilger Crystals Limited achieves certain specified revenue targets in the 18-month period following the closing date, we could receive up to an additional $0.75 million in cash.

We recognized a net loss of $0.5 million related to this transaction in 2010. The net asset value of Hilger Crystals Limited at the time of the sale was $2.5 million, including $0.6 million of goodwill allocated to the business, and we incurred charges totaling $1.4 million related to the pension plan associated with the business, a charge of $0.4 million to write off an inter-company receivable that will not be repaid by the new owner and $0.2 million in legal and consulting fees related to this transaction. Such net loss has been included in loss (gain) on sale of assets and related costs in the accompanying consolidated statements of operations. In addition, we recognized $0.6 million in previously unrealized foreign currency losses as a non-operating expense upon the disposition of this business, which is included in interest and other expense, net.

The assets of the Hilger Crystals business had previously been included in our PPT Division. Below is a summary of the assets and liabilities disposed of:

 

(In thousands)       
Assets and liabilities disposed of:   
Current assets    $ 1,714   
Other assets      1,775   
Current liabilities      (1,020
        
   $     2,469   
        

 

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On July 4, 2009, we completed an asset exchange transaction with Oclaro, Inc. (Oclaro), pursuant to which we acquired certain assets and assumed certain liabilities related to Oclaro’s New Focus business, and we sold certain assets and transferred certain liabilities related to our diode laser operations based in Tucson, Arizona to Oclaro. The acquisition of the New Focus business expanded our product offerings to include a number of new high-performance products, including opto-electronics, high-resolution actuators, high-speed detectors and modulators, opto-mechanics, tunable lasers, and custom-engineered solutions designed for OEM customers.

The fair value of the New Focus business on the acquisition date was $14.1 million, and the purchase price was paid by the transfer to Oclaro of our diode laser assets and liabilities, which had a fair value of $11.1 million, and the payment of $3.0 million in cash. We incurred $0.2 million in acquisition related expenses, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Below is a summary of the purchase price, assets acquired and liabilities assumed:

 

(In thousands)       

Assets acquired and liabilities assumed:

  

Current assets

   $ 8,930   

Goodwill

     1,392   

Purchased intangible assets

     4,830   

Other assets

     1,247   

Current liabilities

     (2,299
        
   $     14,100   
        

Our diode laser assets had a net book value of $14.9 million, which resulted in a loss of $4.4 million after considering the fair value of these assets of $11.1 million and selling costs of $0.6 million. This loss has been included in loss (gain) on sale of assets and related costs in our consolidated statements of operations. These assets had previously been included in our Lasers Division. Below is a summary of the assets and liabilities disposed of:

 

(In thousands)       
Assets and liabilities disposed of:   

Current assets

   $ 11,043   

Other assets

     5,106   

Current liabilities

     (1,284
        
   $     14,865   
        

Fiscal Year End

We use a 52/53-week accounting fiscal year. Our fiscal year ends on the Saturday closest to December 31, and our fiscal quarters end on the Saturday closest to the end of each corresponding calendar quarter. Fiscal year 2010 (referred to herein as 2010) ended on January 1, 2011, fiscal year 2009 (referred to herein as 2009) ended on January 2, 2010, and fiscal year 2008 (referred to herein as 2008) ended on January 3, 2009. Fiscal years 2010 and 2009 each consisted of 52 weeks, and fiscal year 2008 consisted of 53 weeks.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires our management to 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

 

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about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. Our significant accounting policies are discussed in Note 1 (Organization and Summary of Significant Accounting Policies) to the Notes to Consolidated Financial Statements, included in Item 15 (Exhibits, Financial Statement Schedules) of this Annual Report on Form 10-K. 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 plans, inventory reserves, warranty obligations, asset impairment, income taxes and stock-based compensation expense. 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 adverse 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.

Revenue Recognition

We recognize revenue after title to and risk of loss of products have passed to the customer, or delivery of the service has been completed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectability is reasonably assured. We recognize revenue and related costs for arrangements with multiple deliverables, such as equipment and installation, as each element is delivered or completed based upon its relative fair value, determined based upon the price that would be charged on a standalone basis. If a portion of the total contract price is not payable until installation is complete, we do not recognize such portion as revenue until completion of installation; however, we record the full cost of the product at the time of shipment. Revenue for extended service contracts is recognized over the related contract periods. Certain sales to international customers are made through third-party distributors. A discount below list price is generally provided at the time the product is sold to the distributor, and such discount is reflected as a reduction in net sales. Freight costs billed to customers are included in net sales, and freight costs incurred are included in selling, general and administrative expenses. Sales taxes collected from customers are recorded on a net basis and any amounts not yet remitted to tax authorities are included in accrued expenses and other current liabilities.

In the event that we determine that all of the criteria for recognition of revenue have not been met for a transaction, the amount of revenue that we recognize in a given reporting period could be adversely affected. In particular, our ability to recognize revenue for high-value product shipments could cause significant fluctuations in the amounts of revenue reported from period to period depending on the timing of the shipments and the terms of sale of such products.

Our customers (including distributors) generally have 30 days from the original invoice date (generally 60 days for international customers) to return a standard catalog product purchase for exchange or credit. Catalog products must be returned in the original condition and meet certain other criteria. Custom, option-configured and certain other products as defined in the terms and conditions of sale cannot be returned without our consent. For certain products, we establish a sales return reserve based on the historical product returns. If actual product returns are significant and/or exceed our established sales return reserves, our net sales could be adversely affected.

Accounts and Notes Receivable

We record reserves for specific receivables deemed to be at risk for collection, as well as a reserve based on our historical collections experience. We estimate the collectability of customer receivables on an ongoing basis by reviewing past due invoices and assessing the current creditworthiness of each customer. A considerable amount of judgment is required in assessing the ultimate realization of these receivables.

Certain of our Japanese customers provide us with promissory notes on the due date of the receivable. The payment dates of the promissory notes generally range between 60 and 150 days from the original receivable due date. For balance sheet presentation purposes, amounts due to us under such promissory notes are reclassified from accounts receivable to notes receivable. At January 1, 2011 and January 2, 2010, notes receivable, net totaled $3.3 million and $2.3 million, respectively. Certain of these promissory notes are sold with recourse to banks in Japan with which we regularly do business. The sales of these receivables have been accounted for as secured borrowings, as we have not met the criteria for sale treatment in accordance with Accounting Standards Codification (ASC) 860-30, Transfers and Servicing - Secured Borrowing and Collateral. The principal amount of the

 

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promissory notes sold with recourse is included in both notes receivable, net and short-term borrowings until the underlying note obligations are ultimately satisfied through payment by the customers to the banks. At January 1, 2011 and January 2, 2010, the principal amount of such promissory notes included in notes receivable, net and short-term borrowings in the accompanying consolidated balance sheets totaled $2.0 million and $1.3 million, respectively.

Pension Plans

Several of our non-U.S. subsidiaries have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon our judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of our pension plans.

Inventories

We state our inventories at the lower of cost (determined on either a first-in, first-out (FIFO) or average cost basis) or fair market value and include materials, labor and manufacturing overhead. Inventories that are expected to be sold within one year are classified as current inventories and are included in inventories, and inventories that we expect to hold for longer than one year are included in other assets in the accompanying consolidated balance sheets. We write down excess and obsolete inventory to net realizable value. Once we write down the carrying value of inventory, a new cost basis is established, and we do not increase the newly established cost basis based on subsequent changes in facts and circumstances. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare those requirements with the current and committed inventory levels. We record any amounts required to reduce the carrying value of inventory to net realizable value as a charge to cost of sales. Should actual demand requirements differ from our estimates, we may be required to reduce the carrying value of inventory to net realizable value, resulting in a charge to cost of sales which could adversely affect our operating results.

Warranty

Unless otherwise stated in our product literature or in our agreements with our customers, products sold by our PPT Division generally carry a one-year warranty from the original invoice date on all product materials and workmanship, other than filters and gratings products, which generally carry a 90 day warranty. Products of this division sold to OEM customers generally carry longer warranties, typically 15 to 19 months. Products sold by our Lasers Division carry warranties that vary by product and product component, but that generally range from 90 days to two years. In certain cases, such warranties for Lasers Division products are limited by either a set time period or a maximum amount of usage of the product, whichever occurs first. Defective products will either be repaired or replaced, generally at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for warranties relating to a product (based on historical experience) as a component of cost of sales at the time revenue for that product is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage and/or service delivery costs negatively differ from our estimates, revisions to the estimated warranty obligation would be required which could adversely affect our operating results. Short-term accrued warranty obligations, which expire within one year, are included in accrued expenses and other current liabilities and long-term warranty obligations are included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets. Short-term warranty obligations were $4.1 million and $3.9 million as of January 1, 2011 and January 2, 2010, respectively. As of January 1, 2011 and January 2, 2010, the amounts accrued for long-term warranty obligations were not material.

 

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Impairment of Assets

We assess the impairment of long-lived assets at least annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances.

We hold minority interests in companies having operations or technologies in areas which were within or adjacent to our strategic focus when acquired, all of which are privately held and whose values are difficult to determine. Investments in technology companies involve significant risks, including the risks that such companies may be unable to raise additional required operating capital on acceptable terms or at all, or may not achieve or maintain market acceptance of their technology or products. In the event that any of such risks occurs, the value of our investment could decline significantly. In addition, because there is no public market for the securities we have acquired, our ability to liquidate our investments is limited, and such markets may not develop in the future. During 2008, we determined that a minority interest investment had an other-than-temporary decline in value and wrote off $2.9 million, representing the full carrying value of such investment. At January 1, 2011 and January 2, 2010, none of our minority interest investments had any carrying value. If we are able to liquidate our holdings in any minority interest investments in the future, any proceeds received from such a transaction will be recognized as a gain in the period in which the stock is sold.

Goodwill represents the excess of the purchase price of the net assets of acquired entities over the fair value of such assets. Under ASC 350-20, Intangibles – Goodwill and Other, goodwill and other intangible assets are not amortized but are tested for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill or other intangible assets. We perform the annual impairment test as of the beginning of the fourth quarter of each year. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired; otherwise, step two is required. Under step two, the implied fair value of goodwill, calculated as the difference between the fair value of the reporting unit and the fair value of the net assets of the reporting unit, is compared with the carrying value of goodwill. The excess of the carrying value of goodwill over the implied fair value represents the amount impaired.

We determine our reporting units by identifying those operating segments or components for which discrete financial information is available which is regularly reviewed by the management of that unit. For any acquisition, we allocate goodwill to the applicable reporting unit at the completion of the purchase price allocation through specific identification.

Fair value of our reporting units is determined using a combination of a comparative company analysis, a comparative transaction analysis, and a discounted cash flow analysis. The comparative company analysis establishes fair value by applying market multiples to our revenue and earnings before interest, income taxes, depreciation and amortization. Such multiples are determined by comparing our reporting units with other publicly traded companies within the respective industries that have similar economic characteristics. The comparative transaction analysis establishes fair value by applying market multiples to our revenue. Such multiples are determined through recent mergers and acquisitions for companies within the respective industries that have similar economic characteristics to our reporting units. The discounted cash flow analysis establishes fair value by estimating the present value of the projected future cash flows of each reporting unit. The present value of estimated discounted future cash flows is determined using our estimates of revenue and costs for the reporting units, driven by assumed growth rates, as well as appropriate discount rates. The discount rate is determined using a weighted-average cost of capital that incorporates market participant data and a risk premium applicable to each reporting unit.

At the end of the fourth quarter of 2008, due to a significant decline in our market capitalization, we reevaluated our goodwill and determined that the goodwill related to our Lasers Division was impaired and recorded a goodwill impairment charge of $104.6 million. There were no such impairments during 2010 or 2009.

 

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During 2008, we conducted an impairment analysis on our intangible assets and, due to diminished cash flow projections for certain products, determined that certain developed technology related to our Lasers Division was impaired. Accordingly, we recorded impairment charges totaling $15.4 million, which consisted of a charge of $12.5 million related to developed technology associated with the Spectra-Physics acquisition and a charge of $2.9 million related to developed technology that we acquired from Picarro, Inc. (Picarro) in 2006. During 2009, we determined that we would not continue to pursue technology related to certain purchased in-process research and development related to the New Focus business and recorded an impairment charge of $0.4 million associated with such technology.

Income Taxes

Our income tax expense (benefit), deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining our consolidated income tax expense (benefit).

We utilize the asset and liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or to reverse previously recorded tax liabilities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known.

Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. In accordance with the provisions of ASC 740, a valuation allowance for deferred tax assets is recorded to the extent we cannot determine that the ultimate realization of the net deferred tax assets is more likely than not. Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant management judgment.

We currently maintain a valuation allowance against a significant portion of our gross deferred tax assets. We monitor our actual results, forecast data and other available evidence, both positive and negative, and we periodically increase or reduce the valuation allowance based on our determinations of whether it is more likely than not that we will realize our net deferred tax assets. An explanation of adjustments made to our valuation allowance in 2008, 2009 and 2010 is included in the discussion of our results of operations under the heading “Income Taxes” on page 47 below. As of January 1, 2011, we were in a cumulative three-year loss position in the United States and certain foreign jurisdictions. After evaluating this loss position together with other positive and negative evidence, we could not determine as of January 1, 2011 that it is more likely than not that some or all of our domestic deferred tax assets and certain deferred tax assets related to our foreign subsidiaries will be realized. Therefore, we have maintained a valuation allowance of $42.3 million against our deferred tax assets as of January 1, 2011. We will continue to monitor our cumulative three-year loss position together with all other available evidence, both positive and negative, in determining whether it is more likely than not that we will realize our net deferred tax assets. If we continue to meet our forecast of future income, we may have enough positive evidence to release our valuation allowance against our domestic deferred tax assets during the second half of 2011.

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

 

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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.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Under the fair value recognition provision of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award. We estimate the fair value of stock options and stock appreciation rights granted using the Black-Scholes-Merton option pricing model and a single option award approach. The fair value of restricted stock unit awards is based on the closing market price of our common stock on the date of grant.

Determining the appropriate fair value of stock options and stock appreciation rights at the grant date requires significant judgment, including estimating the volatility of our common stock and expected term of the awards. We compute expected volatility based on historical volatility over the expected term. The expected term represents the period of time that stock options and stock appreciation rights are expected to be outstanding and is determined based on our historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expected exercise behavior.

A substantial portion of our awards vest based upon the achievement of one or more financial performance goals established by the Compensation Committee of our Board of Directors. Currently, such performance goals relate to the fiscal year in which the award is granted, and if such performance goals are met, the awards vest in equal installments on the first three anniversaries of the grant date. For awards issued prior to 2009, the vesting of such awards is conditioned upon achievement of performance goals relating to three annual performance periods. Until we have determined that performance goals have been met, the amount of expense that we record relating to performance-based awards is estimated based on the likelihood of achieving the performance goals. Estimating the likelihood of achievement of performance goals requires significant judgment, as such estimates are based on forecasted results of operations. We also make certain judgments regarding expected forfeitures of all stock-based awards, which may vary significantly from actual forfeitures. If our actual results of operations or forfeitures differ from our estimates, we may need to increase or decrease the compensation expense related to stock-based awards, which could significantly impact the amount of stock-based compensation expense recorded in a given period.

The fair value of stock-based awards, adjusted for estimated forfeitures (and adjusted for estimated or actual achievement of performance goals in the case of awards having performance-based vesting conditions), is amortized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period.

The total stock-based compensation expense included in our consolidated statements of operations was as follows:

 

     Year Ended  

(In thousands)

   January  1,
2011
     January  2,
2010
     January  3,
2009
 
        
Cost of sales    $ 392       $ 137       $ 52   
Selling, general and administrative expenses      3,896         1,979         1,654   
Research and development expense      560         216         97   
                          
     $4,848         $2,332         $1,803   
                          

 

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Results of Operations for the Years Ended January 1, 2011, January 2, 2010 and January 3, 2009

The following table represents our results of operations for the periods indicated as a percentage of net sales:

 

     Percentage of Net Sales  
     For the Year Ended  
     January 1,     January 2,     January 3,  
     2011     2010     2009  

Net sales

     100.0     100.0     100.0

Cost of sales

     57.2        61.1        61.6   
                        

Gross profit

     42.8        38.9        38.4   

Selling, general and administrative expenses

     23.5        30.6        26.6   

Research and development expense

     8.2        10.1        10.4   

Loss (gain) on sale of assets and related costs

     0.1        1.2        (0.6

Impairment charges

     —          0.1        26.9   
                        

Operating income (loss)

     11.0        (3.1     (24.9

Recovery (write-down) of note receivable and other amounts related to previously discontinued operations, net

     —          0.0        (1.6

Write-down of minority interest investment

     —          —          (0.7

Gain on extinguishment of debt

     —          0.1        1.7   

Interest and other expense, net

     (1.8     (2.3     (1.5
                        

Income (loss) before income taxes

     9.2        (5.3     (27.0

Income tax provision (benefit)

     0.7        (0.5     6.4   
                        

Net income (loss)

     8.5     (4.8 )%      (33.4 )% 
                        

In the following discussion regarding our results of operations, due to changes in our market classifications for certain of our customers and product applications, certain prior period amounts have been reclassified among our end markets to conform to the current period presentation.

Net Sales

For 2010, 2009 and 2008, our net sales totaled $479.8 million, $367.0 million and $445.3 million, respectively. Our total net sales increased $112.8 million, or 30.7%, in 2010 compared with 2009. Net sales by our PPT Division increased $78.0 million, or 35.5%, and net sales by our Lasers Division increased $34.8 million, or 23.6%, in 2010 compared with the prior year period. The increased sales in 2010 resulted primarily from improved worldwide macroeconomic conditions across our end markets, particularly the strong market conditions in the semiconductor equipment industry during 2010 following a severe downturn in that cyclical industry in 2008 and 2009. In addition, the acquisition of the New Focus business, which we completed at the end of the second quarter of 2009, contributed to the increase in net sales for the full year of 2010 compared with 2009, which had included only two quarters of sales from the New Focus business. Our sales for 2010 included $36.9 million in sales from the New Focus business, which is included in our PPT Division, compared with $10.3 million in sales for 2009.

Our total net sales decreased $78.3 million, or 17.6%, in 2009 compared with 2008. Net sales by our PPT Division decreased $38.1 million, or 14.8%, and net sales by our Lasers Division decreased $40.2 million, or 21.4%, in 2009 compared with the prior year period. During 2009, we experienced decreases in net sales compared with 2008 in all of our end markets. These decreases resulted primarily from poor worldwide macroeconomic conditions and the cyclical downturn in the semiconductor equipment industry, particularly in the first half of 2009.

 

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Net sales to the scientific research, aerospace and defense/security markets were $160.4 million, $143.7 million and $151.0 million for 2010, 2009 and 2008, respectively. The increase of $16.7 million, or 11.7% in 2010 compared with 2009 was due primarily to an improvement in overall macroeconomic conditions in these markets due to higher levels of research funding by governmental entities, corporations and private foundations. The increase in net sales to these markets for 2010 was also due to the inclusion of a full year of sales of the New Focus business, which we acquired at the end of the second quarter of 2009, which contributed $12.7 million in sales to these markets for 2010 compared with $4.6 million in sales for 2009. The decrease of $7.3 million, or 4.9%, in 2009 compared with 2008 was due primarily to decreased sales to research customers, including universities, resulting from lower funding from governmental entities, corporations and private foundations, and decreased sales to defense contractor customers, offset in part by additional sales from our acquisition of the New Focus business. Generally, our net sales to these markets by both of our divisions may fluctuate from period to period due to the timing of large sales relating to major research programs and, in some cases, these fluctuations may be offsetting between our divisions or between such periods.

Net sales to the microelectronics market were $151.9 million, $84.6 million and $130.2 million for 2010, 2009 and 2008, respectively. The increase of $67.3 million, or 79.4%, in 2010 compared with 2009 was due primarily to a significant increase in sales to customers in the semiconductor equipment industry as a result of the upturn in that cyclical industry during 2010. The increase in net sales to this market was also due to the inclusion of a full year of sales of the New Focus business, which contributed $21.0 million in sales to this market for 2010 compared with $3.3 million in sales for 2009. These increases were offset in part by a decrease in sales of systems for photovoltaic applications. The decrease of $45.6 million, or 35.0%, in 2009 compared with 2008 was due primarily to a significant decline in sales of products and systems to our semiconductor capital equipment customers as a result of the cyclical downturn in that industry, and due to the fact that sales of laser-based disk texturing systems that occurred in 2008 did not recur in 2009.

Net sales to the life and health sciences market were $96.5 million, $87.5 million and $90.1 million for 2010, 2009 and 2008, respectively. The increase of $9.0 million, or 10.3%, in 2010 compared with 2009 was due to an improvement in the overall macroeconomic conditions in this market and an increase in sales of products for bioinstrumentation and bioimaging applications by our PPT Division, offset in part by a reduction in sales of diode laser products. We divested our diode laser operations at the end of the second quarter of 2009, however we continue to distribute certain diode laser products in Japan. Sales of diode laser products to the life and health sciences market in 2010 were $0.9 million, compared with $4.9 million in 2009. The overall decrease of $2.6 million, or 2.9%, in 2009 compared with 2008 was also due primarily to a reduction in sales of diode laser products resulting from the divestiture of our diode laser operations, and to decreased sales of products for bioinstrumentation applications, offset in part by higher sales of products for bioimaging applications.

Net sales to our industrial and other end markets were $71.0 million, $51.2 million and $74.0 million for 2010, 2009 and 2008, respectively, representing an increase of $19.8 million, or 38.8%, in 2010 compared with 2009, and a decrease of $22.8 million, or 30.9%, in 2009 compared with 2008. The increase in sales to these varied markets in 2010 compared with 2009 was due to significantly improved macroeconomic conditions. The decrease in sales in 2009 compared with 2008 was due primarily to the poor worldwide macroeconomic conditions during 2009.

 

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Geographically, net sales were as follows:

 

     Year Ended               
(In thousands, except percentages)    January 1,      January 2,            Percentage  
   2011      2010      Increase     (Decrease)  

United States

   $ 233,479       $ 169,947       $ 63,532        37.4

Europe

     102,369         97,886         4,483        4.6   

Pacific Rim

     123,364         79,770         43,594        54.6   

Other

     20,575         19,386         1,189        6.1   
                            

Total sales

   $ 479,787       $ 366,989       $ 112,798        30.7
                            
     Year Ended            Percentage  
(In thousands, except percentages)    January 2,      January 3,            Increase /  
   2010      2009      Decrease     (Decrease)  

United States

   $ 169,947       $ 208,736       $ (38,789     (18.6 )% 

Europe

     97,886         114,936         (17,050     (14.8

Pacific Rim

     79,770         100,676         (20,906     (20.8

Other

     19,386         20,988         (1,602     (7.6
                            

Total sales

   $ 366,989       $ 445,336       $ (78,347     (17.6 )% 
                            

The increases in sales to customers in the United States and the Pacific Rim in 2010 compared with 2009 were due primarily to increased sales to customers in our microelectronics market as a result of the upturn in the semiconductor equipment industry, as well as to the improved overall macroeconomic conditions in all of our end markets. The increase in sales to customers in Europe in 2010 compared with the prior year was due primarily to increased sales to customers in our industrial manufacturing and microelectronics end markets as a result of the improved overall macroeconomic conditions.

Poor global macroeconomic conditions in 2009 resulted in decreased sales to customers in all geographic regions compared with 2008. In particular, sales to customers in the United States, Europe and the Pacific Rim were negatively impacted by the cyclical downturn in the semiconductor equipment industry, and sales to the Pacific Rim were also negatively impacted by the absence of sales of laser-based disk texturing systems in 2009 compared with significant sales of such systems in 2008.

Gross Margin

Gross margin was 42.8%, 38.9% and 38.4% for 2010, 2009 and 2008, respectively. The increase in gross margin in 2010 compared with 2009 was due primarily to improved absorption of manufacturing overhead resulting from our higher sales level, lower excess and obsolete inventory reserves as a result of increased demand for products, and a higher proportion of sales of higher margin products. The increase in gross margin in 2009 compared with 2008 was due primarily to improved gross margins in our Lasers Division as a result of the divestiture of our diode laser operations, decreased warranty expenses, lower personnel costs resulting from headcount reductions, and improved operating efficiencies at certain facilities as a result of our cost reduction actions. This increase was offset in part by lower absorption of fixed overhead costs resulting from reduced sales.

In general, we expect that our gross margin will vary in any given period depending upon factors including 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 $112.8 million, or 23.5% of net sales, $112.2 million, or 30.6% of net sales, and $118.5 million, or 26.6% of net sales, during 2010, 2009 and 2008, respectively. The slight increase in SG&A expenses in absolute dollars in 2010 compared with 2009 was due primarily to an increase of $8.5 million in expenses related to incentive compensation due to our improved sales and earnings performance, which was offset in

 

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large part by $3.5 million of severance related costs incurred during 2009 that did not recur during 2010 and a decrease of $4.6 million in rent and utilities. The decreased rent was due primarily to duplicate rental charges that we incurred in the 2009 period while we transitioned from our Mountain View facility to our Santa Clara facility that did not recur in 2010, and to the lower rental rate at the Santa Clara facility. The increase in SG&A expenses in absolute dollars in 2010 was also due to increased third party commissions, freight costs and professional fees, offset in part by decreases in bad debt expense and depreciation.

The decrease in SG&A expenses in absolute dollars in 2009 compared with 2008 was due primarily to decreased wages of $3.5 million, consulting expenses of $3.0 million and travel expenses of $2.1 million, offset in part by increased rent of $2.1 million and incentive compensation of $1.3 million. There were also decreases in advertising expenses, shipping costs, accounting fees and insurance expenses, offset in part by increased bad debt expense and benefits costs.

In general, we expect that SG&A expenses will vary as a percentage of sales in the future based on our sales level in any given period. Because the majority of our SG&A expenses are fixed in the short term, these changes in SG&A expenses will likely not be in proportion to the changes in net sales.

Research and Development (R&D) Expense

R&D expense totaled $39.3 million, or 8.2% of net sales, $36.9 million, or 10.1% of net sales, and $46.1 million, or 10.4% of net sales, during 2010, 2009 and 2008, respectively. The increase in R&D expense in absolute dollars in 2010 compared with 2009 was due primarily to the addition of R&D expense related to the New Focus business, for which there was only two quarters of corresponding expense in the prior year, and to increased new product development activity across the remainder of our business. The increase in 2010 was also due to increased personnel costs resulting primarily from higher incentive compensation due to our improved financial performance. The increase was offset in part by the elimination of R&D expense related to our diode laser operations as a result of our divestiture of such operations in July 2009.

The decrease in R&D expense in 2009 compared with 2008 was due to reduced spending in both our Lasers and PPT Divisions. The decrease in R&D spending in our Lasers Division was due primarily to the reduced expenses resulting from the divestiture of our diode laser operations and reduced headcount within the remainder of the division. The decrease in R&D spending in our PPT Division was due primarily to reduced spending on projects related to solar cell manufacturing applications, as the design and development of certain products was completed during 2008, and to reduced headcount.

We believe that the continued development and advancement of our products and technologies is critical to our future success, and we intend to continue to invest in R&D initiatives, while working to ensure that the efforts are focused and the funds 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 the changes in net sales.

Loss / Gain on Sale of Assets and Related Costs

During 2010, we recognized a loss of $0.5 million associated with the sale of our Hilger Crystals Limited subsidiary, which was completed on July 19, 2010, as discussed under “Acquisitions and Divestitures” on page 35. Our Hilger Crystals business had previously been included in our PPT Division.

In the second quarter of 2009, we sold certain assets and transferred certain liabilities related to our diode laser operations based in Tucson, Arizona to Oclaro, and we recorded a loss on the sale of such assets of $4.4 million in 2009. These assets had previously been included in our Lasers Division.

 

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During 2008, we sold a building under a sale-leaseback agreement for $7.0 million, net of $0.3 million in selling costs. We recorded a gain on the sale of the building of $2.5 million after considering the net book value of the building and the present value of the leaseback agreement. The lease of the building expired on December 31, 2009.

Impairment Charges

During the fourth quarter of 2009, we determined that we would not continue to pursue technology related to certain purchased in-process research and development related to the New Focus business and recorded an impairment charge of $0.4 million associated with such technology.

During the fourth quarter of 2008, due to a significant decline in our market capitalization and diminished cash flow projections related to certain laser products, we determined that goodwill and certain purchased intangible assets related to our Lasers Division were impaired. As a result, we recorded goodwill impairment charges totaling $104.6 million, which consisted of a charge of $103.0 million related to goodwill associated with the acquisition of Spectra-Physics and a charge of $1.6 million related to goodwill associated with the acquisition of certain assets from Picarro. In addition, we recorded impairment charges related to certain purchased intangible assets totaling $15.4 million, which consisted of a charge of $12.5 million related to developed technology associated with the acquisition of Spectra-Physics and a charge of $2.9 million related to developed technology acquired from Picarro.

Write-Down of Note Receivable and Other Amounts

In 2005, we sold our robotic systems operations to Kensington Laboratories LLC (Kensington) for $0.5 million in cash and a note receivable of $5.7 million, after adjustments provided for in the purchase agreement, and subleased the facility relating to such operations to Kensington. We had previously classified this business as a discontinued operation. Kensington failed to make certain principal, interest and rent payments due under our agreements. The note was secured by a first-priority security interest in certain Kensington assets. In 2008, due to uncertainty regarding the collectability of such amounts, we wrote off the note receivable and other amounts owed in full, resulting in charges totaling $7.0 million, net of amounts recovered relating to the sublease. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin Topic 5.Z.5, we have recorded this write-down through continuing operations in our consolidated statements of operations. In 2009, we entered into a settlement agreement with Kensington pursuant to which Kensington paid us $0.2 million and transferred to us certain assets included in the collateral securing the note. In 2009, we recognized $0.1 million as a recovery on the note, net of certain costs.

Write-Down of Minority Interest Investment

We own a minority interest in a privately held developer of flip chip and advanced packaging equipment for back-end semiconductor manufacturing applications. During the fourth quarter of 2008, we determined that such investment had declined in value and that such decline was other-than-temporary. Accordingly, we recorded a charge of $2.9 million to write off the full carrying value of this investment. In early 2010, this company filed a registration statement for an initial public offering, which has not yet been completed. If and when this offering is complete, the public market for the company’s stock would create greater liquidity for this investment. If we are able to liquidate our holdings in the future, any proceeds received from such a transaction will be recognized as a gain in the period in which the stock is sold.

Gain on Extinguishment of Debt

During 2009, we extinguished $20.2 million of our convertible subordinated notes at a weighted-average price equal to 91.6% of the principal amount of the notes, or $18.7 million. After allocating $0.3 million to the equity component, we recorded a gain of $0.3 million on extinguishment of debt, net of unamortized fees and debt discount. During 2008, we extinguished $28.0 million of our convertible subordinated notes at a weighted-average price equal to 59.9% of the principal amount of the notes, or $16.8 million. We recorded a gain of $7.7 million on extinguishment of debt, net of unamortized fees and debt discount.

 

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Interest and Other Expense, Net

Interest and other expense, net was $8.5 million, $8.6 million and $6.8 million in 2010, 2009 and 2008, respectively. The decrease in interest and other expense, net in 2010 compared with 2009 was due primarily to a decrease in interest expense as a result of lower outstanding balances on our convertible subordinated notes and transaction gains resulting from foreign currency fluctuations, offset in large part by the write off of $0.6 million for previously unrealized currency translation losses associated with our Hilger Crystals Limited subsidiary, which we sold in the third quarter of 2010, and a decrease in interest income earned due to lower interest rates. The increase in interest and other expense, net in 2009 compared with 2008 was due primarily to lower interest income earned as a result of lower interest rates and transaction losses resulting from foreign currency fluctuations, offset in part by a decrease in interest expense due to lower outstanding balances on our convertible subordinated notes.

Income Taxes

Our effective income tax rate reflected tax expense of 7.1% for 2010, tax benefit of 10.2% for 2009 and tax expense of (23.8%) for 2008. During the fourth quarter of 2008, we determined that goodwill and certain purchased intangible assets related to our Lasers Division were impaired, and we recorded impairment charges of $119.9 million, which resulted in a cumulative three-year loss position as of January 3, 2009. After evaluating this loss position together with other positive and negative evidence, we determined that it was more likely than not that some or all of our net deferred tax assets would not be realized. Therefore, in the fourth quarter of 2008, we recorded a valuation allowance of $19.8 million against our domestic deferred tax assets and certain deferred tax assets related to our foreign subsidiaries. In addition, due to such impairment of goodwill and other intangible assets, we determined that certain qualifying tax planning strategies were no longer deemed prudent and feasible and, as a result, we recorded an additional valuation allowance of $4.6 million in 2008. In the fourth quarter of 2009, after evaluating all positive and negative evidence, it was determined that it was more likely than not that we would realize the net deferred tax assets applicable to our German entity. Therefore, we recorded a release of the valuation allowance associated with this entity of $2.5 million. During 2010, we released a total of $16.9 million of the valuation allowance related to the realization of domestic deferred tax assets as a result of the income we generated in 2010. We also recorded a reduction to foreign deferred tax assets and a corresponding reduction of $1.3 million to the valuation allowance related to deferred tax assets that were lost due to reorganizations, sales, and liquidations of certain foreign entities. As of January 1, 2011, we were still in a cumulative three-year loss position in the United States and certain foreign jurisdictions. After evaluating this loss position together with other positive and negative evidence, we could not determine as of January 1, 2011 that it is more likely than not that some or all of our domestic deferred tax assets and certain deferred tax assets related to our foreign subsidiaries will be realized. Therefore, we maintained a valuation allowance against our deferred tax assets of $42.3 million as of January 1, 2011.

As of January 1, 2011, we had $10.0 million of gross unrecognized tax benefits and a total of $9.1 million of net unrecognized tax benefits, which, if recognized, would affect our effective tax rate. We believe that it is reasonably possible that unrecognized tax benefits may decrease by $1.0 million within the next twelve months. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. Such accrual totaled $0.8 million as of January 1, 2011.

Liquidity and Capital Resources

Our cash and cash equivalents and marketable securities balances increased to $200.2 million as of January 1, 2011 from $141.9 million as of January 2, 2010. This increase was attributable primarily to cash generated from our operations, proceeds from the sale of our Hilger Crystals Limited subsidiary and proceeds from the issuance of common stock under our employee stock plans, offset in part by capital expenditures, net repayments of short-term borrowings, and payments made in connection with the cancellation of restricted stock units for taxes owed by employees upon vesting of restricted stock units issued under our stock incentive plans.

Net cash provided by our operating activities of $70.6 million was attributable primarily to cash provided by our results of operations, an increase of $9.5 million in accounts payable due to the timing of payments and an increase of $8.8 million in accrued payroll expenses due to higher accrued incentive compensation and the timing of payments, offset in part by an increase of $13.9 million in accounts and notes receivable due to higher sales and the

 

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timing of collections and an increase of $11.4 million in gross inventory. During 2010, while our gross inventory balance increased $11.4 million, our net current inventory balance decreased by $5.4 million as a result of transferring $7.0 million to a long-term inventory account, $5.8 million in charges related to excess and obsolete inventory, $2.4 million in amortization of demonstration equipment and $0.9 million in inventory sold in connection with the sale of our Hilger Crystals Limited subsidiary.

Net cash used in investing activities of $62.5 million consisted of net purchases of marketable securities of $57.6 million and purchases of property and equipment of $8.9 million, offset in part by $4.0 million in proceeds we received from the sale of our Hilger Crystals Limited subsidiary.

Net cash used in financing activities of $2.4 million was attributable primarily to the net repayment of short-term borrowings of $3.5 million and payments of $1.3 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 from the sale of stock under employee plans.

As of January 1, 2011, we had cash and cash equivalents of $91.0 million and marketable securities of $109.2 million. The majority of the marketable securities are invested in one portfolio managed by an investment management firm, under the oversight of our senior financial management team. This portfolio manager invests the funds allocated in accordance with our Investment Policy, which is reviewed regularly by our senior financial management and the Audit Committee of our Board of Directors. We expect that our cash balances will fluctuate in the future based on factors such as cash used in or provided by ongoing operations, acquisitions or divestitures, investments in other companies, extinguishment or repayment of notes, capital expenditures and contractual obligations, and changes in interest rates.

In February 2007, we issued $175 million of convertible subordinated notes due 2012, which notes bear interest at a rate of 2.5% per year, payable in cash semiannually in arrears on February 15 and August 15 of each year. The sale of the notes generated net proceeds of $169.4 million after deducting offering fees and expenses. At the time of issuance of the notes, we used $40.0 million of the net proceeds from the offering to repurchase 2.1 million shares of our common stock at a purchase price of $18.86 per share, and $48.2 million of the net proceeds from the offering to prepay all of our long-term debt owed to Thermo pursuant to the note originally issued as part of the purchase price for Spectra-Physics in 2004. During 2007 and 2008, we used a portion of the proceeds from these notes to repurchase shares of our common stock under the stock repurchase programs approved by our Board of Directors. In addition, as noted above, during 2009 and 2008, we extinguished $20.2 million and $28.0 million of these notes for $18.7 million and $16.8 million, respectively. We intend to use the remaining proceeds from the offering for working capital and other general corporate purposes, which may include potential acquisitions, or extinguishment or repayment of the convertible notes. At January 1, 2011, these notes had an outstanding principal balance of $126.8 million, which is due and payable in February 2012 when the notes mature. Our current cash, cash equivalents and marketable securities are sufficient to pay the outstanding principal balance of the notes, although they would be depleted significantly in so doing. We discuss certain risks associated with our ability to pay these notes and the impact of such payment upon us in “Risk Factors — Our convertible debt imposes significant financial obligations upon us, and certain provisions of our convertible notes could discourage a change in control” on page 25.

In June 2008, we issued 300 million yen ($3.7 million at January 1, 2011) in private placement bonds through a Japanese bank and used the proceeds from such issuance to pay the amounts outstanding under an expiring line of credit. These bonds bear interest at a rate of 1.55% per year, payable in cash semiannually in arrears on June 30 and December 31 of each year. The bonds mature on June 30, 2011.

At January 1, 2011, we had a total of three lines of credit, including one domestic revolving line of credit and two revolving lines of credit with Japanese banks. In addition, we had two other agreements with Japanese banks under which we sell trade notes receivable with recourse.

Our domestic revolving line of credit has a total credit limit of $3.0 million and expires on December 1, 2011. Certain certificates of deposit held at this lending institution collateralize this line of credit, which bears interest at either the prevailing London Interbank Offered Rate (LIBOR) (0.26% at January 1, 2011) plus 1.00% or the British Bankers Association LIBOR Daily Floating Rate (0.25% at January 1, 2011) plus 1.00%, at our option, and carries

 

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an unused line fee of 0.25% per year. At January 1, 2011, there were no balances outstanding under this line of credit, with $1.6 million available, after considering outstanding letters of credit totaling $1.4 million.

Our two revolving lines of credit with Japanese banks totaled 900 million yen ($11.0 million at January 1, 2011) and expire as follows: $7.3 million on March 1, 2011 (which has subsequently been extended to June 1, 2011) and $3.7 million on August 31, 2011. The $7.3 million line of credit bears interest at the prevailing bank rate and the $3.7 million line of credit bears interest at LIBOR plus 1.75%. Certain certificates of deposit held by the lending institution’s U.S. affiliate collateralize the $3.7 million line of credit. At January 1, 2011, we had $6.7 million outstanding and $4.3 million available for borrowing under these lines of credit. Amounts outstanding under these revolving lines of credit are included in short-term borrowings in the accompanying consolidated balance sheets. Our two other agreements with Japanese banks, under which we sell trade notes receivable with recourse, totaled 550 million yen ($6.7 million at January 1, 2011), have no expiration dates and bear interest at the bank’s prevailing rate. At January 1, 2011, we had $2.0 million outstanding and $4.7 million available for the sale of notes receivable under these agreements. Amounts outstanding under these agreements are included in short-term borrowings in the accompanying consolidated balance sheets. As of January 1, 2011, the weighted-average effective interest rate on all of our Japanese borrowings, including the private placement bonds, was 2.1%.

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. Purchases may be made under this program from time to time in the open market or in privately negotiated transactions, and the timing and amount of the purchases will be based on factors including our share price, cash balances, expected cash requirements and general business and market conditions. Under this program, we repurchased 127,472 shares for $1.4 million during 2008. We made no purchases under this program in 2009 or 2010. As of January 1, 2011, a total of approximately 3.9 million shares remained available for repurchase under the program.

During 2011, we expect to use $10 million to $15 million of cash for capital expenditures.

We believe our current working capital position, together with our expected future cash flows from operations will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, 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 (see “Risk Factors” on pages 16-28), and there can be no assurance that we will not require additional funding in the future.

Except for the aforementioned capital expenditures, we have no present agreements or commitments with respect to any material acquisitions of other 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. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

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Contractual Obligations

We lease certain of our manufacturing and office facilities and equipment under non-cancelable leases, certain of which contain renewal options. In addition to the base rent, we are generally required to pay insurance, real estate taxes and other operating expenses relating to such facilities. In addition, we have purchase obligations related to minimum usage amounts for telecommunications and data services. We typically exceed these minimum purchase obligations.

Our long-term debt, capital and operating lease obligations, purchase obligations and pension benefit obligations at January 1, 2011 were as follows:

 

(In thousands)    Capital
Leases
    Long-Term
Debt
    Operating
Leases
     Purchase
Obligations
     Pension
Benefits
     Total
Obligations
 

Payments Due By Period:

               

2011

   $ 245      $ 3,169      $ 9,001       $ 420       $ 1,309       $ 14,144   

2012

     206        128,360        6,872         420         810         136,668   

2013

     178        —          6,592         210         743         7,723   

2014

     177        —          6,026         —           755         6,958   

2015

     176        —          4,863         —           809         5,848   

Thereafter

     419        —          28,563         —           15,053         44,035   
                                                   

Total minimum payments

     1,401        131,529      $ 61,917       $ 1,050       $ 19,479       $ 215,376   
                                       

Less amount representing interest

     (264     (4,754           
                           

Present value of obligation

   $ 1,137      $ 126,775              
                           

We have subleased certain of our facilities. Future minimum rentals to be received by us under non-cancelable subleases at January 1, 2011 were as follows:

 

(In thousands)    Operating
Leases
 

Payments Due By Period:

  

2011

   $ 321   

2012

     19   
        

Total minimum sublease payments

   $ 340   
        

Our gross unrecognized tax benefits at January 1, 2011 were $10.0 million. It is reasonably possible that unrecognized tax benefits may decrease by $1.0 million within the next twelve months. However, we are not able to provide a detailed estimate of the timing of payments due to the uncertainty of when the related tax settlements are due.

New Accounting Standards

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, which amends the guidance in ASC 605, Revenue Recognition. ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements regarding multiple-deliverable arrangements. ASU No. 2009-13 became effective for revenue arrangements entered into beginning in our fiscal year of 2011. The adoption of ASU No. 2009-13 has not had a material impact on our financial position or results of operations.

 

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ITEM 7A. 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 changes in foreign exchange rates, which may generate translation and transaction gains and losses, and changes in interest rates.

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.

From time to time we use forward exchange contracts to mitigate the risks associated with certain foreign currency transactions entered into in the ordinary course of business, primarily foreign currency denominated receivables and payables. We do not engage in currency speculation. The forward exchange contracts generally require us to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at the inception of the contracts. If the counterparties to the exchange contracts (typically highly rated banks) do not fulfill their obligations to deliver the contracted currencies, we could be at risk for any currency related fluctuations. Such contracts are typically closed out prior to the end of each quarter. Transaction gains and losses are included in net income (loss) in our consolidated statements of operations. Net foreign exchange gains and losses were not material to our reported results of operations for the last three years. There were no forward exchange contracts outstanding at January 1, 2011 or January 2, 2010.

As currency exchange rates change, translation of the statements of operations of international operations into U.S. dollars affects the 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 they are justified by the exposure or the cost.

Changes in currency exchange rates that would have the largest impact on translating our future international operating income include the euro and Japanese yen. We estimate that a hypothetical 10% change in foreign exchange rates would not have had a material effect on our reported net income for the year ended January 1, 2011. 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 our financing and operating strategies.

Interest Rate Risk

The interest rates we pay on certain of our debt instruments are subject to interest rate risk. Our collateralized line of credit bears interest at either the prevailing London Interbank Offered Rate (LIBOR) plus 1.00% or the British Bankers Association LIBOR Daily Floating Rate plus 1.00%, at our option. Our $3.7 million revolving line of credit with a Japanese bank bears interest at LIBOR plus 1.75%. Our other revolving line of credit and other credit agreements with Japanese banks bear interest at the lending bank’s prevailing rate. Our convertible subordinated notes and private placement bonds bear interest at a fixed rate of 2.5% and 1.55% per year, respectively, and are not impacted by changes in interest rates. Our investments in cash, cash equivalents and marketable securities, which totaled $200.2 million at January 1, 2011, are sensitive to changes in the general level of U.S. interest rates. In addition, certain assets related to our pension plans that are not part of such plans, which totaled $8.6 million at January 1, 2011, are sensitive to interest rates and economic conditions in Europe. We estimate that a hypothetical 10% change in the interest rate earned on our investment portfolio or a 10% change in interest rates on our lines of credit would not have had a material effect on our net income for 2010.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K and are presented beginning on page F-1. The supplementary financial information required by this item is included in Note 17, Supplementary Quarterly Consolidated Financial Data (Unaudited), of the Notes to Consolidated Financial Statements on page F-40.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K (Evaluation Date) have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer where appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This process includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management’s Assessment of the Effectiveness of our Internal Control Over Financial Reporting

Management has evaluated the effectiveness of our internal control over financial reporting as of January 1, 2011. In conducting its evaluation, management used the framework set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under such framework, our management has concluded that our internal control over financial reporting was effective as of January 1, 2011.

 

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Attestation Report

Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K for our fiscal year ended January 1, 2011, has issued an attestation report on our internal control over financial reporting. Such attestation report is included below under the heading “Attestation Report of Independent Registered Public Accounting Firm.”

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of the year ended January 1, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Newport Corporation

Irvine, California

We have audited the internal control over financial reporting of Newport Corporation and subsidiaries (the Company) as of January 1, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of the Effectiveness of our Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 1, 2011 of the Company and our report dated March 7, 2011 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Costa Mesa, California

March 7, 2011

 

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required hereunder is incorporated herein by reference to our Proxy Statement to be filed within 120 days of January 1, 2011 and delivered to stockholders in connection with our 2011 Annual Meeting of Stockholders, which is expected to be held on May 17, 2011.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required hereunder is incorporated herein by reference to our Proxy Statement to be filed within 120 days of January 1, 2011 and delivered to stockholders in connection with our 2011 Annual Meeting of Stockholders, which is expected to be held on May 17, 2011.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

All information required hereunder is incorporated herein by reference to our Proxy Statement to be filed within 120 days of January 1, 2011 and delivered to stockholders in connection with our 2011 Annual Meeting of Stockholders, which is expected to be held on May 17, 2011, with the exception of the information regarding securities authorized for issuance under our equity compensation plans, which is set forth in Item 5 of this Annual Report on Form 10-K under the heading “Information Regarding Equity Compensation Plans” and is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required hereunder is incorporated herein by reference to our Proxy Statement to be filed within 120 days of January 1, 2011 and delivered to stockholders in connection with our 2011 Annual Meeting of Stockholders, which is expected to be held on May 17, 2011.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required hereunder is incorporated herein by reference to our Proxy Statement to be filed within 120 days of January 1, 2011 and delivered to stockholders in connection with our 2011 Annual Meeting of Stockholders, which is expected to be held on May 17, 2011.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

  (a) The following documents are filed as part of this Annual Report on Form 10-K:

 

  (1) Financial Statements.

See Index to Financial Statements and Schedule on page F-1.

 

  (2) Financial Statement Schedules.

See Index to Financial Statements and Schedule on page F-1. All other schedules are omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

 

  (3) Exhibits.

The following exhibits are filed (or incorporated by reference herein) as part of this Annual Report on Form 10-K:

 

Exhibit
Number

 

Description of Exhibit

  2.1   Stock Purchase Agreement dated May 28, 2004 by and among the Registrant, Thermo Electron Corporation and other related parties (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2004).
  3.1   Restated Articles of Incorporation of the Registrant, as amended to date (incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2010).
  3.2   Amended and Restated Bylaws adopted by the Board of Directors of the Registrant effective as of August 16, 2010 (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2010).
  4.1   Indenture, dated February 7, 2007, between the Registrant and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007).
  4.2   Registration Rights Agreement, dated February 7, 2007, between the Registrant and Merrill, Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007).
  4.3   Form of 2.50% Convertible Subordinated Note due 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007).
10.1   Lease Agreement dated March 27, 1991, as amended, pertaining to premises located in Irvine, California (incorporated by reference to Exhibit 10.1 of the Registrant’s Annual Report on Form 10-K for the year ended July 31, 1992).
10.2   First Amendment to Lease dated January 31, 2002, between the Registrant and IRP Muller Associates, LLC pertaining to premises located in Irvine, California (incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).

 

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Exhibit

Number

 

Description of Exhibit

10.3    

  Second Amendment to Lease dated September 28, 2004, between the Registrant and BCSD Properties, L.P. pertaining to premises located in Irvine, California (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2004).

10.4    

  Third Amendment to Lease dated December 15, 2010, between the Registrant and BCSD Properties, L.P. pertaining to premises located in Irvine, California.

10.5*  

  1992 Stock Incentive Plan (incorporated by reference to exhibit in the Registrant’s 1992 Proxy Statement).

10.6*  

  1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).

10.7*  

  Amendment to 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-3, No. 333-40878, filed with the Securities and Exchange Commission on July 6, 2000).

10.8*  

  2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 27, 2001).

10.9*  

  Form of Nonqualified Stock Option Agreement under the Registrant’s 2001 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.10*

  Form of Incentive Stock Option Agreement under the Registrant’s 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.10 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.11*

  Form of Restricted Stock Agreement under the Registrant’s 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2004).

10.12*

  2006 Performance-Based Stock Incentive Plan (incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 10, 2006).

10.13*

  Form of Restricted Stock Unit Award Agreement under the Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2006).

10.14*

  Form of Restricted Stock Unit Award Agreement (as revised March 2009) under the Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 4, 2009).

10.15*

  Form of Stock Appreciation Right Award Agreement under the Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 4, 2009).

10.16*

  Amended and Restated Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).

 

56


Table of Contents

Exhibit

Number

 

Description of Exhibit

10.17*   Severance Compensation Agreement dated April 1, 2008 between the Registrant and Robert J. Phillippy, President and Chief Executive Officer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008).
10.18*   Severance Compensation Agreement dated April 1, 2008 between the Registrant and Charles F. Cargile, Senior Vice President, Chief Financial Officer and Treasurer (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008).
10.19*   Form of Severance Compensation Agreement between the Registrant and certain of its executive and other officers (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008).
10.20*   Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
10.21     Loan Agreement between the Registrant and Bank of America, N.A. dated January 2, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2008).
10.22     Amendment No. 1 to Loan Agreement between the Registrant and Bank of America, N.A. dated December 1, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2008).
10.23     Security Agreement between the Registrant and Bank of America, N.A. dated December 1, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2008).
10.24     Amendment No. 2 to Loan Agreement between the Registrant and Bank of America, N.A. dated November 30, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2009).
21.1       Subsidiaries of the Registrant.
23.1       Consent of Independent Registered Public Accounting Firm.
23.2       Consent of Independent Registered Public Accounting Firm.
24.1       Power of Attorney (included in signature page).
31.1       Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).
31.2       Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.1       Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
32.2       Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

* This exhibit is identified as a management contract or compensatory plan or arrangement pursuant to Item 15(a)(3) of Form 10-K.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on March 7, 2011.

 

NEWPORT CORPORATION
By:  

/s/ Robert J. Phillippy

  Robert J. Phillippy
  President and Chief Executive Officer

POWER OF ATTORNEY

The undersigned directors and officers of Newport Corporation constitute and appoint Robert J. Phillippy and Charles F. Cargile, or either of them, as their true and lawful attorney and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney and agent shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

SIGNATURE

  

TITLE

 

DATE

/s/ Robert J. Phillippy

   President and Chief Executive Officer (Principal Executive Officer)   March 7, 2011
Robert J. Phillippy     

/s/ Charles F. Cargile

   Senior Vice President and Chief Financial Officer (Principal Financial Officer)   March 7, 2011
Charles F. Cargile     

/s/ Mark J. Nelson

   Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)   March 7, 2011
Mark J. Nelson     

/s/ Robert L. Guyett

   Director   March 7, 2011
Robert L. Guyett     

/s/ Oleg Khaykin

   Director   March 7, 2011
Oleg Khaykin     

/s/ Michael T. O’Neill

   Director   March 7, 2011
Michael T. O’Neill     

/s/ C. Kumar N. Patel

   Director   March 7, 2011
C. Kumar N. Patel     

/s/ Kenneth F. Potashner

   Director   March 7, 2011
Kenneth F. Potashner     

/s/ Peter J. Simone

   Director   March 7, 2011
Peter J. Simone     

 

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Table of Contents

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

 

     Page  

Reports of Independent Registered Public Accounting Firms

     F-2   

Consolidated statements of operations for the years ended January 1, 2011, January  2, 2010 and January 3, 2009

     F-4   

Consolidated balance sheets as of January 1, 2011 and January 2, 2010

     F-5   

Consolidated statements of cash flows for the years ended January 1, 2011, January  2, 2010 and January 3, 2009

     F-6   

Consolidated statements of comprehensive income (loss) and stockholders’ equity for the years ended January 1, 2011, January 2, 2010 and January 3, 2009

     F-7   

Notes to consolidated financial statements

     F-8   

Financial Statement Schedule – Schedule II – Valuation and qualifying accounts

     F-41   

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Newport Corporation

Irvine, California

We have audited the accompanying consolidated balance sheets of Newport Corporation and subsidiaries (the “Company”) as of January 1, 2011, and January 2, 2010, and the related consolidated statements of operations, comprehensive income (loss) and stockholders’ equity, and cash flows for the years ended January 1, 2011 and January 2, 2010. Our audits also included the consolidated financial statement schedule listed in Item 15(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2011 and January 2, 2010, and the results of its operations and its cash flows for the years ended January 1, 2011 and January 2, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 1, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Costa Mesa, California

March 7, 2011

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Newport Corporation

We have audited the accompanying consolidated statements of operations, comprehensive income (loss) and stockholders’ equity, and cash flows of Newport Corporation for the year ended January 3, 2009. Our audit also included the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows for the year ended January 3, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Orange County, California

March 16, 2009

 

F-3


Table of Contents

NEWPORT CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)

 

     Year Ended  
     January 1,
2011
    January 2,
2010
    January 3,
2009
 

Net sales

   $ 479,787      $ 366,989      $ 445,336   

Cost of sales

     274,491        224,387        274,542   
                        

Gross profit

     205,296        142,602        170,794   

Selling, general and administrative expenses

     112,754        112,177        118,518   

Research and development expense

     39,278        36,948        46,068   

Loss (gain) on sale of assets and related costs

     542        4,355        (2,504

Impairment charges

     —          360        119,944   
                        

Operating income (loss)

     52,722        (11,238     (111,232

Recovery (write-down) of note receivable and other amounts related to previously discontinued operations, net

     —          101        (7,040

Write-down of minority interest investment

     —          —          (2,890

Gain on extinguishment of debt

     —          328        7,734   

Interest and other expense, net

     (8,481     (8,564     (6,751
                        

Income (loss) before income taxes

     44,241        (19,373     (120,179

Income tax provision (benefit)

     3,128        (1,967     28,545   
                        

Net income (loss)

   $ 41,113      $ (17,406   $ (148,724
                        

Net income (loss) per share:

      

Basic

   $ 1.12      $ (0.48   $ (4.11

Diluted

   $ 1.09      $ (0.48   $ (4.11

Shares used in the computation of income (loss) per share:

      

Basic

     36,647        36,175        36,155   

Diluted

     37,726        36,175        36,155   

See accompanying notes.

 

F-4


Table of Contents

NEWPORT CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

     January 1,
2011
    January 2,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 90,992      $ 87,727   

Marketable securities

     109,192        54,196   

Accounts receivable, net of allowance for doubtful accounts of $2,587 and $3,111 as of January 1, 2011 and January 2, 2010, respectively

     84,238        72,553   

Notes receivable

     3,313        2,264   

Inventories

     84,508        89,908   

Deferred income taxes

     9,424        4,835   

Prepaid expenses and other current assets

     10,362        13,963   
                

Total current assets

     392,029        325,446   

Property and equipment, net

     46,160        52,901   

Goodwill

     69,322        69,932   

Deferred income taxes

     3,493        4,437   

Intangible assets, net

     24,990        28,166   

Investments and other assets

     20,396        12,525   
                
   $ 556,390      $ 493,407   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Short-term borrowings

   $ 12,468      $ 11,056   

Accounts payable

     31,691        24,312   

Accrued payroll and related expenses

     30,804        22,231   

Accrued expenses and other current liabilities

     28,416        31,337   
                

Total current liabilities

     103,379        88,936   

Long-term debt, net of debt discount

     122,042        121,231   

Obligations under capital leases, less current portion

     979        1,231   

Accrued pension liabilities

     13,279        10,215   

Deferred income taxes and other liabilities

     21,252        17,158   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, par value $0.1167 per share, 200,000,000 shares authorized; 36,909,317 and 36,315,834 shares issued and outstanding as of January 1, 2011 and January 2, 2010, respectively

     4,307        4,238   

Capital in excess of par value

     415,757        409,773   

Accumulated other comprehensive income

     4,036        10,379   

Accumulated deficit

     (128,641     (169,754
                

Total stockholders’ equity

     295,459        254,636   
                
   $ 556,390      $ 493,407   
                

See accompanying notes.

 

F-5


Table of Contents

NEWPORT CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

 

     Year Ended  
     January 1,
2011
    January 2,
2010
    January 3,
2009
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income (loss)

   $ 41,113      $ (17,406   $ (148,724

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation and amortization

     18,668        19,932        21,882   

Amortization of discount on convertible subordinated notes

     4,058        4,575        5,182   

Impairment of goodwill and intangible assets

     —          360        119,944   

Deferred income taxes, net

     (131     210        15,186   

Provision for losses on inventories

     5,792        10,298        7,989   

Write-down of note receivable and other amounts related to previously discontinued operations

     —          —          7,061   

Write-down of minority interest investment

     —          —          2,890   

Stock-based compensation expense

     4,848        2,332        1,803   

Provision for doubtful accounts, net

     787        1,346        574   

Loss on sale of assets

     872        3,765        —     

Loss (gain) on disposal of property and equipment

     100        860        (2,818

Gain on extinguishment of debt

     —          (328     (7,734

Increase (decrease) in cash, net of acquisitions and divestitures, due to changes in:

      

Accounts and notes receivable

     (13,937     7,021        9,435   

Inventories

     (11,365     (6,179     5,537   

Prepaid expenses and other assets

     871        (1,419     (64

Accounts payable

     9,549        (2,083     (8,538

Accrued payroll and related expenses

     8,844        293        (1,101

Accrued expenses and other liabilities

     488        1,088        16,223   
                        

Net cash provided by operating activities

     70,557        24,665        44,727   

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of property and equipment

     (8,868     (9,668     (18,575

Proceeds from the sale of business

     4,003        —          —     

Proceeds from the sale of property and equipment, net of selling costs

     —          —          6,983   

Purchase of marketable securities

     (141,307     (36,701     (71,789

Proceeds from the sale and maturity of marketable securities

     83,684        57,485        51,759   

Acquisition of business

     —          (3,000     —     
                        

Net cash provided by (used in) investing activities

     (62,488     8,116        (31,622

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from the issuance long-term debt

     —          —          3,307   

Repayment of long-term debt

     (159     (18,644     (16,850

Proceeds from short term borrowings

     12,336        23,867        33,184   

Repayment of short term borrowings

     (15,819     (26,609     (34,704

Proceeds from the issuance of common stock under employee plans

     2,548        765        2,053   

Tax withholding payment related to net share settlement of equity awards

     (1,343     —          —     

Purchases of the Company’s common stock

     —          —          (12,822
                        

Net cash used in financing activities

     (2,437     (20,621     (25,832

Impact of foreign exchange rate changes on cash balances

     (2,367     693        (1,136
                        

Net increase (decrease) in cash and cash equivalents

     3,265        12,853        (13,863

Cash and cash equivalents at beginning of year

     87,727        74,874        88,737   
                        

Cash and cash equivalents at end of year

   $ 90,992      $ 87,727      $ 74,874   
                        

Supplemental disclosures of cash flow information:

      

Cash paid (received) during the year for:

      

Interest

   $ 3,520      $ 4,185      $ 5,146   

Income taxes, net

   $ (361   $ (53   $ 26   

Property and equipment accrued in accounts payable at year end

   $ 7      $ 1,460      $ —     

See accompanying notes.

 

F-6


Table of Contents

NEWPORT CORPORATION

Consolidated Statements of Comprehensive Income (Loss) and Stockholders’ Equity

(In thousands)

 

                 Capital in
excess of

par value
    Accumulated
other
comprehensive

income
    Accumulated
deficit
    Total
stockholders’

equity
 
     Common Stock          
     Shares     Amount          

December 29, 2007

     36,918        4,308        415,912        10,243        (3,624     426,839   

Net loss

     —          —          —          —          (148,724     (148,724

Foreign currency translation loss

     —          —          —          (3,251     —          (3,251

Unrecognized net pension gain, net of income tax of $48

     —          —          —          6        —          6   

Unrealized loss on marketable securities

     —          —          —          (707     —          (707
                  

Comprehensive loss

               (152,676

Issuance of common stock under employee plans

     320        38        2,015        —          —          2,053   

Stock-based compensation expense

     —          —          1,803        —          —          1,803   

Repurchases of common stock

     (1,189     (139     (12,683     —          —          (12,822
                                                

January 3, 2009

     36,049        4,207        407,047        6,291        (152,348     265,197   

Net loss

     —          —          —          —          (17,406     (17,406

Foreign currency translation gain

     —          —          —          2,394        —          2,394   

Unrecognized net pension loss, net of income tax of $186

     —          —          —          (607     —          (607

Unrealized gain on marketable securities, net of income tax of $600

     —          —          —          2,301        —          2,301   
                  

Comprehensive loss

               (13,318

Issuance of common stock under employee plans

     267        31        734        —          —          765   

Extinguishment of equity component of long-term debt

     —          —          (340     —          —          (340

Stock-based compensation expense

     —          —          2,332        —          —          2,332   
                                                

January 2, 2010

     36,316        4,238        409,773        10,379        (169,754     254,636   

Net income

     —          —          —          —          41,113        41,113   

Foreign currency translation loss

     —          —          —          (4,871     —          (4,871

Unrecognized net pension loss, net of income tax of $489

     —          —          —          (1,007     —          (1,007

Unrealized loss on marketable securities

     —          —          —          (465     —          (465
                  

Comprehensive income

               34,770   

Issuance of common stock under employee plans

     709        83        2,465        —          —          2,548   

Tax withholding payment related to net share settlement of equity awards

     (116     (14     (1,329         (1,343

Stock-based compensation expense

     —          —          4,848        —          —          4,848   
                                                

January 1, 2011

     36,909      $ 4,307      $ 415,757      $ 4,036      $ (128,641   $ 295,459   
                                                

See accompanying notes.

 

F-7


Table of Contents

NEWPORT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Newport Corporation (the Company) is a global supplier of advanced technology products and systems to a wide range of industries, including scientific research, microelectronics, aerospace and defense/security, life and health sciences, and industrial manufacturing. The Company provides a broad portfolio of products to customers in these end markets, allowing it to offer them an end-to-end resource for photonics solutions.

Basis of Presentation

The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The Company uses a 52/53-week accounting fiscal year ending on the Saturday closest to December 31, and its fiscal quarters end on the Saturday closest to the end of each corresponding calendar quarter. Fiscal year 2010 (referred to herein as 2010) ended January 1, 2011, fiscal year 2009 (referred to herein as 2009) ended January 2, 2010 and fiscal year 2008 (referred to herein as 2008) ended on January 3, 2009. Fiscal years 2010 and 2009 each consisted of 52 weeks, and fiscal year 2008 consisted of 53 weeks.

Foreign Currency Translation

Assets and liabilities for the Company’s international operations are translated into U.S. dollars using current rates of exchange in effect at the balance sheet dates. Items of income and expense for the Company’s international operations are translated using the monthly average exchange rates in effect for the period in which the items occur. The functional currency for the majority of the Company’s international operations is the local currency. Where the local currency is the functional currency, the resulting translation gains and losses are included as a component of stockholders’ equity in accumulated other comprehensive income. Where the U.S. dollar is the functional currency, the resulting translation gains and losses are included in the results of operations. Realized foreign currency transaction gains and losses for all entities are included in the results of operations.

Derivative Instruments

The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company does not engage in currency speculation; however, the Company uses forward exchange contracts to mitigate the risks associated with certain foreign currency transactions entered into in the ordinary course of business, primarily foreign currency denominated receivables and payables. Such contracts do not qualify for hedge accounting and accordingly, changes in fair values are reported in the statement of operations. The forward exchange contracts generally require the Company to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at the inception of the contracts. If the counterparties to the exchange contracts (typically highly rated banks) do not fulfill their obligations to deliver the contracted currencies, the Company could be at risk for any currency related fluctuations. Such contracts are typically closed out prior to the end of each quarter. Transaction gains and losses are included in interest and other expense, net in the accompanying consolidated statements of operations. There were no forward exchange contracts outstanding at January 1, 2011 or January 2, 2010.

Cash and Cash Equivalents and Marketable Securities

The Company considers cash and highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Investments with original maturities exceeding three months at the date of

 

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purchase are classified as marketable securities. All marketable securities are classified as available for sale and are recorded at market value using the specific identification method; unrealized gains and losses are reflected in accumulated other comprehensive income in the accompanying consolidated balance sheets, unless the Company determines there is an other-than-temporary impairment, in which case the loss is recorded in the consolidated statements of operations.

Accounts and Notes Receivable

The Company records reserves for specific receivables deemed to be at risk for collection, as well as a reserve based on its historical collections experience. The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past due invoices and assessing the current creditworthiness of each customer. A considerable amount of judgment is required in assessing the ultimate realization of these receivables.

Certain of the Company’s Japanese customers provide the Company with promissory notes on the due date of the receivable. The payment dates of the promissory notes range between 60 and 150 days from the original receivable due date. For balance sheet presentation purposes, amounts due to the Company under such promissory notes are reclassified from accounts receivable to notes receivable. At January 1, 2011 and January 2, 2010, notes receivable, net totaled $3.3 million and $2.3 million, respectively. Certain of these promissory notes are sold with recourse to banks in Japan with which the Company regularly does business. The sales of these receivables have been accounted for as secured borrowings, as the Company has not met the criteria for sale treatment in accordance with Accounting Standards Codification (ASC) 860-30, Transfers and Servicing-Secured Borrowing and Collateral. The principal amount of the promissory notes sold with recourse is included in both notes receivable, net and short-term borrowings until the underlying note obligations are ultimately satisfied through payment by the customers to the banks. At January 1, 2011 and January 2, 2010, the principal amount of such promissory notes included in notes receivable, net and short-term borrowings in the accompanying consolidated balance sheets totaled $2.0 million and $1.3 million, respectively.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, foreign exchange contracts and accounts receivable. The Company maintains cash and cash equivalents with and purchases its foreign exchange contracts from major financial institutions and performs periodic evaluations of the relative credit standing of these financial institutions in order to limit the amount of credit exposure with any one institution. The majority of the Company’s marketable securities are managed by an investment management firm, under the oversight of the Company’s senior financial management team. The portfolio manager invests the funds in accordance with the Company’s investment policy, which, among other things, limits the amounts that may be invested with one issuer. Such policy is reviewed regularly by the Company’s senior financial management team and the Audit Committee of the Company’s Board of Directors.

The Company’s customers are concentrated in the scientific research, aerospace and defense/security, microelectronics, life and health sciences and industrial manufacturing markets, and their ability to pay may be influenced by the prevailing macroeconomic conditions present in these markets. Receivables from the Company’s customers are generally unsecured. To reduce the overall risk of collection, the Company performs ongoing evaluations of its customers’ financial condition. For the years ended January 1, 2011, January 2, 2010 and January 3, 2009, no customer accounted for 10% or more of the Company’s net sales or 10% or more of the Company’s gross accounts receivable as of the end of such year.

Pension Plans

Several of the Company’s non-U.S. subsidiaries have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets

 

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and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties.

Inventories

Inventories are stated at the lower of cost (determined on either a first-in, first-out (FIFO) or average cost basis) or fair market value and include materials, labor and manufacturing overhead. Inventories that are expected to be sold within one year are classified as current inventories and are included in inventories, and inventories that the Company expects to hold for longer than one year are included in other assets in the accompanying consolidated balance sheets. The Company writes down excess and obsolete inventory to net realizable value. Once the Company writes down the carrying value of inventory, a new cost basis is established, and the Company does not increase the newly established cost basis based on subsequent changes in facts and circumstances. In assessing the ultimate realization of inventories, the Company makes judgments as to future demand requirements and compares those requirements with the current or committed inventory levels. The Company records any amounts required to reduce the carrying value of inventory to net realizable value as a charge to cost of sales.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation expense includes amortization of assets under capital leases. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets as follows:

 

Buildings and improvements    3 to 40 years
Machinery and equipment    2 to 20 years
Office equipment    3 to 10 years

Leasehold improvements are amortized over the shorter of their estimated useful life or the remaining lease term.

Intangible Assets, including Goodwill

Intangible assets, other than goodwill and indefinite-lived trademarks and trade names, are amortized on a straight-line basis over their estimated useful lives as follows:

 

Developed technology    10 years
Customer relationships    10 years
Other    1 to 3 years

Indefinite-lived trademarks and trade names are subject to annual impairment testing and are not amortized.

Goodwill represents the excess of the purchase price of the net assets of acquired entities over the fair value of such assets. Under ASC 350, Intangibles – Goodwill and Other, goodwill and other intangible assets are not amortized but are tested for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill or other intangible assets. The Company performs the annual impairment test as of the beginning of the fourth quarter of each year. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is based upon a comparison of the fair value of each of the Company’s reporting units, as defined, and the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired; otherwise, step two is required. Under step two, the implied fair value of goodwill, calculated as the difference between the fair value of the reporting unit and the fair value of the net assets of the reporting unit, is compared with the carrying value of goodwill. The excess of the carrying value of goodwill over the implied fair value represents the amount impaired.

The Company determines its reporting units by identifying those operating segments or components for which discrete financial information is available which is regularly reviewed by the management of that unit. For any acquisition, the Company allocates goodwill to the applicable reporting unit at the completion of the purchase price allocation through specific identification.

 

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Fair value of the Company’s reporting units is typically determined using a combination of a comparative company analysis, weighted at 25%, a comparative transaction analysis, weighted at 25%, and a discounted cash flow analysis, weighted at 50%. The comparative company analysis establishes fair value by applying market multiples to the Company’s revenue and earnings before interest, income taxes, depreciation and amortization. Such multiples are determined by comparing the Company’s reporting units with other publicly traded companies within the respective industries that have similar economic characteristics. In addition, a control premium is added to reflect the value an investor would pay to obtain a controlling interest, which is consistent with the median control premium for transactions in those industries in which the Company does business. The comparative transaction analysis establishes fair value by applying market multiples to the Company’s revenue. Such multiples are determined through recent mergers and acquisitions for companies within the respective industries that have similar economic characteristics to the Company’s reporting units. The discounted cash flow analysis establishes fair value by estimating the present value of the projected future cash flows of each reporting unit and applying a terminal growth rate. The present value of estimated discounted future cash flows is determined using the Company’s estimates of revenue and costs for the reporting units, driven by assumed growth rates, as well as appropriate discount rates. The discount rate is determined using a weighted-average cost of capital that incorporates market participant data and a risk premium applicable to each reporting unit. Due to recent market volatility, past transactions were deemed not to be comparable to the expected results from current transactions, and therefore, the comparative transaction analysis has been excluded from such analysis in recent years, and an additional weight of 25% has been added to the discounted cash flow analysis.

In the fourth quarter of 2008, due to a decline in its market capitalization, the Company reevaluated its goodwill and determined that the goodwill related to its Lasers Division was impaired and recorded a goodwill impairment charge of $104.6 million. There were no such impairments during 2010 or 2009.

During 2008, the Company conducted an impairment analysis on its intangible assets and, due to diminished cash flow projections for certain products, determined that certain developed technology related to its Lasers Division was impaired. Accordingly, the Company recorded impairment charges totaling $15.4 million, which consisted of a charge of $12.5 million related to developed technology acquired by the Company in connection with its acquisition of Spectra-Physics, Inc. and certain related photonics entities (collectively, Spectra-Physics) in 2004 and a charge of $2.9 million related to developed technology that the Company acquired from Picarro, Inc. (Picarro) in 2006. During 2009, the Company determined it was no longer going to pursue technology related to certain purchased in-process research and development related to the New Focus business and recorded an impairment charge of $0.4 million associated with such technology.

Long-Lived Assets

The Company assesses the impairment of long-lived assets, other than goodwill and other indefinite-lived intangible assets, to determine if their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in the Company’s strategic plan and/or other-than-temporary changes in market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. Long-lived assets are evaluated for impairment at least annually in the fourth quarter of each year, as well as whenever an event or change in circumstances has occurred that could have a significant adverse effect on the fair value of long-lived assets.

Warranty

Unless otherwise stated in the Company’s product literature or in its agreements with customers, products sold by the Company’s Photonics and Precision Technologies (PPT) Division generally carry a one-year warranty from the original invoice date on all product materials and workmanship, other than filters and gratings products, which generally carry a 90 day warranty. Products of this division sold to original equipment manufacturer (OEM) customers generally carry longer warranties, typically 15 to 19 months. Products sold by the Company’s Lasers Division carry warranties that vary by product and product component, but that generally range from 90 days to two years. In certain cases, such warranties for Lasers Division products are limited by either a set time period or a

 

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maximum amount of usage of the product, whichever occurs first. Defective products will either be repaired or replaced, generally at the Company’s option, upon meeting certain criteria. The Company accrues a provision for the estimated costs that may be incurred for warranties relating to a product (based on historical experience) as a component of cost of sales at the time revenue for that product is recognized.

Environmental Reserves

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures are discounted to their present value. Recoveries of environmental remediation costs from other parties are recognized as assets when their receipt is deemed probable. See Note 10 for additional information.

Revenue Recognition

The Company recognizes revenue after title to and risk of loss of products have passed to the customer, or delivery of the service has been completed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectability is reasonably assured. The Company recognizes revenue and related costs for arrangements with multiple deliverables, such as equipment and installation, as each element is delivered or completed based upon its relative fair value, determined based upon the price that would be charged on a standalone basis. If a portion of the total contract price is not payable until installation is complete, the Company does not recognize such portion as revenue until completion of installation; however, the Company records the full cost of the product at the time of shipment. Revenue for extended service contracts is recognized over the related contract periods. Certain sales to international customers are made through third-party distributors. A discount below list price is generally provided at the time the product is sold to the distributor, and such discount is reflected as a reduction in net sales. Freight costs billed to customers are included in net sales, and freight costs incurred are included in selling, general and administrative expenses. Sales taxes collected from customers are recorded on a net basis and any amounts not yet remitted to tax authorities are included in accrued expenses and other current liabilities.

Customers (including distributors) generally have 30 days from the original invoice date (generally 60 days for international customers) to return a standard catalog product purchase for exchange or credit. Catalog products must be returned in the original condition and meet certain other criteria. Custom, option-configured and certain other products as defined in the terms and conditions of sale cannot be returned without the Company’s consent. For certain products, the Company establishes a sales return reserve based on the historical product returns.

Advertising

The Company expenses the costs of advertising as incurred, except for the costs of its product catalogs, which are accounted for as prepaid supplies until they are distributed to customers or are no longer expected to be used. Capitalized catalog costs were not material at January 1, 2011 and January 2, 2010. Advertising costs, including the costs of the Company’s participation at industry trade shows, totaled $3.1 million, $3.3 million and $4.1 million for 2010, 2009 and 2008, respectively.

Shipping and Handling Costs

The Company expenses the costs of shipping and handling as incurred. Shipping and handling costs of $4.9 million, $4.3 million and $5.3 million are included in selling, general and administrative expenses for 2010, 2009 and 2008, respectively.

Research and Development

All research and development costs are expensed as incurred.

 

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Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. In accordance with the provisions of ASC 740, a valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine that the ultimate realization of the net deferred tax assets is more likely than not.

Effective at the beginning of fiscal year 2007, the Company adopted ASC 740-10-25, Income Taxes—Recognition, for the recognition, measurement and disclosure of uncertain tax positions. Under ASC 740-10-25, income tax positions must meet the more-likely-than-not threshold to be recognized in the financial statements. The Company’s policy is to record interest and penalties associated with unrecognized tax benefits as income tax expense.

Income (loss) per Share

Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted income per share is computed using the weighted-average number of shares of common stock outstanding during the period plus the dilutive effects of common stock equivalents (restricted stock units, stock options and stock appreciation rights) outstanding during the period, determined using the treasury stock method. Diluted loss per share excludes the antidilutive effects of common stock equivalents outstanding during the periods.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Under the fair value recognition provision of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and stock appreciation rights granted using the Black-Scholes-Merton option pricing model and a single option award approach. The fair value of restricted stock unit awards is based on the closing market price of the Company’s common stock on the date of grant.

Determining the appropriate fair value of stock options and stock appreciation rights at the grant date requires significant judgment, including estimating the volatility of the Company’s common stock and expected term of the awards. The Company computes expected volatility based on historical volatility over the expected term. The expected term represents the period of time that stock options and stock appreciation rights are expected to be outstanding and is determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expected exercise behavior.

A substantial portion of the Company’s awards vest based upon the achievement of one or more financial performance goals established by the Compensation Committee of the Company’s Board of Directors. Currently, such performance goals relate to the fiscal year in which the award is granted, and if such performance goals are met, the awards vest in equal installments on the first three anniversaries of the grant date. Until the Company has determined that performance goals have been met, the amount of expense that the Company records relating to performance-based awards is estimated based on the likelihood of achieving the performance goals. The fair value of stock-based awards, adjusted for estimated forfeitures (and adjusted for estimated or actual achievement of performance goals in the case of awards having performance-based vesting conditions), is amortized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates made in

 

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preparing the consolidated financial statements include (but are not limited to) those related to revenue recognition, the allowance for doubtful accounts, inventory reserves, warranty obligations, pension plans, asset impairment valuations, income tax valuations, and stock-based compensation expenses.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, which amends the guidance in ASC 605, Revenue Recognition. ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements regarding multiple-deliverable arrangements. ASU No. 2009-13 became effective for revenue arrangements entered into beginning in the Company’s fiscal year of 2011. The adoption of ASU No. 2009-13 has not had a material impact on the Company’s financial position or results of operations.

NOTE 2 ACQUISITIONS, DIVESTITURES AND INVESTMENTS

Divestiture of Hilger Crystals Limited

On July 19, 2010, the Company sold all of the outstanding capital stock of its Hilger Crystals Limited subsidiary. The Company received $4.0 million in cash as consideration for the sale. In addition, if Hilger Crystals Limited achieves certain specified revenue targets in the 18-month period following the closing date, the Company could receive up to an additional $0.75 million in cash.

The Company recognized a net loss of $0.5 million related to this transaction in 2010. The net asset value of Hilger Crystals Limited at the time of the sale was $2.5 million, including $0.6 million of goodwill allocated to the business, and the Company incurred charges totaling $1.4 million related to the pension plan associated with the business (see Note 14 for additional detail), a charge of $0.4 million to write off an inter-company receivable that will not be repaid by the new owner and $0.2 million in legal and consulting fees related to this transaction. Such net loss has been included in loss (gain) on sale of assets and related costs in the accompanying consolidated statements of operations. In addition, the Company recognized $0.6 million in previously unrealized foreign currency losses as a non-operating expense upon the disposition of this business, which are included in interest and other expense, net.

The assets of the Hilger Crystals business had previously been included in the Company’s PPT Division. Below is a summary of the assets and liabilities disposed of:

 

(In thousands)       

Assets and liabilities disposed of:

  

Current assets

   $ 1,714   

Other assets

     1,775   

Current liabilities

     (1,020
        
   $     2,469   
        

Acquisition of New Focus and Divestiture of Diode Laser Operations

On July 4, 2009, the Company completed an asset exchange transaction with Oclaro, Inc. (Oclaro), pursuant to which the Company acquired certain assets and assumed certain liabilities related to Oclaro’s New Focus™ business, and sold certain assets and transferred certain liabilities related to its diode laser operations based in Tucson, Arizona to Oclaro. The acquisition of the New Focus business expanded the Company’s product offerings to include a number of new high-performance products, including opto-electronics, high-resolution actuators, high-speed detectors and modulators, opto-mechanics, tunable lasers, and custom-engineered solutions designed for OEM customers.

 

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The fair value of the New Focus business on the acquisition date was $14.1 million, and the purchase price was paid by the transfer to Oclaro of the Company’s diode laser assets and liabilities, which had a fair value of $11.1 million, and the payment of $3.0 million in cash. The Company incurred $0.2 million in acquisition related expenses, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations.

Below is a summary of the purchase price, assets acquired and liabilities assumed:

 

(In thousands)       

Assets acquired and liabilities assumed:

  

Current assets

   $ 8,930   

Goodwill

     1,392   

Purchased intangible assets

     4,830   

Other assets

     1,247   

Current liabilities

     (2,299
        
   $     14,100   
        

The $1.4 million in goodwill has been allocated to the Company’s PPT Division and will be deductible for tax purposes, as this was an asset acquisition.

The Company’s diode laser assets had a net book value of $14.9 million, which resulted in a loss of $4.4 million after considering the fair value of these assets of $11.1 million and selling costs of $0.6 million. This loss has been included in loss (gain) on sale of assets and related costs in the Company’s consolidated statements of operations. These assets had previously been included in the Company’s Lasers Division. Below is a summary of the assets and liabilities disposed of:

 

(In thousands)       

Assets and liabilities disposed of:

  

Current assets

   $ 11,043   

Other assets

     5,106   

Current liabilities

     (1,284
        
   $     14,865   
        

Investments

The Company owns a minority interest in a privately held developer of flip chip and advanced packaging equipment for back-end semiconductor manufacturing applications. During the fourth quarter of 2008, due to such entity’s continued net losses and a decline in the valuation of its common stock, the Company determined that this investment had experienced an other-than-temporary decline in value and recorded a charge of $2.9 million to write off the full carrying value of such investment. If the Company is able to liquidate this investment in the future, any proceeds received from such a transaction will be recognized as a gain in the period in which the stock is sold.

 

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NOTE 3 MARKETABLE SECURITIES

The Company’s portfolio of marketable securities was as follows:

 

     January 1,      January 2,  
(In thousands)    2011      2010  

U.S. government and agency debt securities

   $ 23,181       $ 13,610   

Corporate debt securities

     78,286         5,156   

Equity securities

     548         20,859   

Asset-backed securities

     —           6,849   

Certificates of deposit

     7,177         7,722   
                 
   $ 109,192       $ 54,196   
                 

All marketable securities were classified as available for sale and were recorded at market value using the specific identification method, and unrealized gains and losses are reflected in accumulated other comprehensive income in the accompanying consolidated balance sheets. The aggregate fair value of available for sale securities and aggregate amount of unrealized gains and losses for available for sale securities at January 1, 2011 were as follows:

 

     Aggregate      Aggregate Amount
of Unrealized
 
(In thousands)    Fair Value      Gains      Losses  

U.S. government and agency debt securities

   $ 23,181       $ 130       $ (7

Corporate debt securities

     78,286         18         (34

Equity securities

     548         65         —     

Certificates of deposit

     7,177         —           —     
                          
   $ 109,192       $ 213       $ (41
                          

 

     Marketable Securities In Cumulative  
     Unrealized Loss Positions  
     Less Than 12 Months     More Than 12 Months  
     Aggregate      Unrealized     Aggregate      Unrealized  
(In thousands)    Fair Value      Loss     Fair Value      Loss  

U.S. government and agency debt securities

   $ 17,754       $ (7   $ —         $ —     

Corporate debt securities

     40,469         (34     —           —     
                                  
   $ 58,223       $ (41   $ —         $ —     
                                  

 

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The aggregate fair value of available for sale securities and the aggregate amount of unrealized gains and losses for available for sale securities at January 2, 2010 were as follows:

 

     Aggregate      Aggregate Amount
of Unrealized
 
(In thousands)    Fair Value      Gains      Losses  

U.S. government and agency debt securities

   $ 13,610       $ 300       $ —     

Corporate debt securities

     5,156         4         —     

Equity securities

     20,859         450         —     

Asset-backed securities

     6,849         172         (3

Certificates of deposit

     7,722         2         —     
                          
   $ 54,196       $ 928       $ (3
                          

 

     Marketable Securities In Cumulative  
     Unrealized Loss Positions  
     Less Than 12 Months      More Than 12 Months  
     Aggregate      Unrealized      Aggregate      Unrealized  
(In thousands)    Fair Value      Loss      Fair Value      Loss  

Asset-backed securities

     —           —           475         (3

The contractual maturities of available for sale securities were as follows:

 

     January 1,      January 2,  
(In thousands)    2011      2010  

0 – 1 Year

   $ 105,262       $ 22,611   

1 – 2 Years

     —           2,598   

2 – 3 Years

     —           3,835   

3 – 5 Years

     887         2,213   

5 – 10 Years

     —           —     

More than 10 years

     2,495         2,080   
                 
   $ 108,644       $ 33,337   
                 

 

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The gross realized gains and losses on sales of available for sale securities were as follows:

 

     Year Ended  
     January 1,      January 2,     January 3,  
(In thousands)    2011      2010     2009  

Gross realized gains

   $ 125       $ 4      $ 123   

Gross realized losses

     —           (314     (3
                         
   $ 125       $ (310   $ 120   
                         

NOTE 4 SUPPLEMENTAL BALANCE SHEET INFORMATION

Inventories

Inventories that are expected to be sold within one year are classified as current inventories and are included in inventories in the accompanying consolidated balance sheets. Such inventories were as follows:

 

     January 1,      January 2,  
(In thousands)    2011      2010  

Raw materials and purchased parts

   $ 54,704       $ 60,543   

Work in process

     9,592         8,317   

Finished goods

     20,212         21,048   
                 
   $ 84,508       $ 89,908   
                 

Property and Equipment, net

Property and equipment, net, including assets under capital leases, were as follows:

 

     January 1,     January 2,  
(In thousands)    2011     2010  

Land

   $ 255      $ 406   

Buildings

     1,346        2,415   

Leasehold improvements

     28,399        29,027   

Machinery and equipment

     58,529        54,054   

Office equipment

     45,824        50,054   
                
     134,353        135,956   

Less accumulated depreciation

     (88,193     (83,055
                
   $ 46,160      $ 52,901   
                

Depreciation expense, including the amortization of assets under capital leases, totaled $12.4 million, $14.2 million and $15.0 million for 2010, 2009 and 2008, respectively. At January 1, 2011 and January 2, 2010, assets under capital leases were $1.5 million and $1.9 million, net of accumulated amortization of $1.3 million and $1.2 million, respectively.

Accrued Warranty Obligations

Short-term accrued warranty obligations, which expire within one year, are included in accrued expenses and other current liabilities and long-term warranty obligations are included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets. Short-term warranty obligations were $4.1 million and $3.9 million as of January 1, 2011 and January 2, 2010, respectively. As of January 1, 2011 and January 2, 2010, the amounts accrued for long-term warranty obligations were not material.

 

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The activity in accrued warranty obligations was as follows:

 

     Year Ended  
     January 1,     January 2,  
(In thousands)    2011     2010  

Balance at beginning of year

   $ 3,898      $ 5,978   

Additions charged to cost of sales

     4,400        4,175   

Warranty claims

     (4,193     (6,255
                

Balance at end of year

   $ 4,105      $ 3,898   
                

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:

 

     January 1,      January 2,  
(In thousands)    2011      2010  

Deferred revenue

   $ 11,294       $ 15,188   

Deferred lease liability

     4,985         1,703   

Short-term accrued warranty obligations

     4,066         3,898   

Other

     8,071         10,548   
                 
   $ 28,416       $ 31,337   
                 

Accumulated Other Comprehensive Income

Accumulated other comprehensive income consisted of the following:

 

     January 1,     January 2,  
(In thousands)    2011     2010  

Cumulative foreign currency translation gains

   $ 4,407      $ 9,278   

Unrecognized net pension losses, net of taxes

     (1,556     (549

Unrealized gains on marketable securities

     1,185        1,650   
                
   $ 4,036      $ 10,379   
                

 

 

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NOTE 5 GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the years ended January 1, 2011 and January 2, 2010 are as follows:

 

     PPT     Lasers        
(In thousands)    Division     Division     Total  

Balance at January 3, 2009:

      

Goodwill

   $ 68,540      $ 104,562      $ 173,102   

Accumulated impairment losses

     —          (104,562     (104,562
                        
     68,540        —          68,540   

Goodwill acquired

     1,392        —          1,392   
                        

Balance at January 2, 2010:

      

Goodwill

     69,932        104,562        174,494   

Accumulated impairment losses

     —          (104,562     (104,562
                        
     69,932        —          69,932   

Goodwill allocated to disposal of Hilger Crystals Limited

     (610     —          (610
                        

Balance at January 1, 2011:

      

Goodwill

     69,322        104,562        173,884   

Accumulated impairment losses

     —          (104,562     (104,562
                        
   $ 69,322      $ —        $ 69,322   
                        

During 2010, the Company allocated $0.6 million in goodwill to the disposal of its Hilger Crystals Limited subsidiary, based on the relative fair values of Hilger Crystals Limited and the Company’s PPT Division.

During 2009, the Company recorded $1.4 million in goodwill related to its acquisition of New Focus. See Note 2 for additional information.

In the fourth quarter of 2008, due to a significant decline in its market capitalization, the Company reevaluated its goodwill and concluded that the goodwill related to its Lasers Division was impaired. Based upon the implied fair value of goodwill, the Company recorded goodwill impairment charges totaling $104.6 million, which consisted of a charge of $103.0 million related to goodwill associated with the acquisition of Spectra-Physics and a charge of $1.6 million related to goodwill associated with the acquisition of assets from Picarro.

Intangible assets, excluding goodwill, were as follows:

 

     January 1,      January 2,  
(In thousands)    2011      2010  

Intangible assets subject to amortization:

     

Developed technology, net of accumulated amortization of $5,056 and $4,060 as of January 1, 2011 and January 2, 2010, respectively

   $ 5,074       $ 5,740   

Customer relationships, net of accumulated amortization of $12,684 and $10,674 as of January 1, 2011 and January 2, 2010, respectively

     7,416         9,426   

Other, net of accumulated amortization of $340 and $170 as of January 1, 2011 and January 2, 2010, respectively

     —           500   
                 
     12,490         15,666   

Intangible assets not subject to amortization:

     

Trademarks and trade names

     12,500         12,500   
                 

Intangible assets, net

   $ 24,990       $ 28,166   
                 

Amortization expense related to intangible assets totaled $3.2 million, $3.0 million and $3.9 million for 2010, 2009 and 2008, respectively.

 

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During 2009, the Company determined it was no longer going to pursue technology related to certain purchased in-process research and development related to the New Focus business and recorded an impairment charge of $0.4 million associated with such technology.

During 2008, the Company conducted an impairment analysis and, due to diminished cash flow projections for certain products, determined that developed technology related to its Lasers Division was impaired. Accordingly, the Company recorded impairment charges totaling $15.4 million, which consisted of a charge of $12.5 million related to developed technology associated with the Spectra-Physics acquisition and a charge of $2.9 million related to developed technology acquired from Picarro.

Estimated aggregate amortization expense for future fiscal years will be amortized over a weighted-average life of 4.7 years as follows:

 

(In thousands)    Estimated
Aggregate
Amortization
Expense
 
2011    $ 3,023   
2012      3,023   
2013      3,023   
2014      1,799   
2015      353   
Thereafter      1,269   
        
   $ 12,490   
        

NOTE 6 INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net, was as follows:

 

     Year Ended  
     January 1,     January 2,     January 3,  
(In thousands)    2011     2010     2009  
Interest and dividend income    $ 928      $ 2,155      $ 4,208   
Interest expense      (8,292     (9,472     (10,860
Bank and portfolio asset management fees      (742     (638     (612
Other, net      (375     (609     513   
                        
   $ (8,481   $ (8,564   $ (6,751
                        

Interest expense included amortization of the debt discount related to the Company’s convertible subordinated notes of $4.1 million, $4.6 million and $5.2 million for 2010, 2009 and 2008, respectively. See Note 8 for additional information.

 

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NOTE 7 STOCK INCENTIVE PLANS AND STOCK-BASED COMPENSATION

Stock-Based Benefit Plans

In March 2006, the Company’s Board of Directors adopted the 2006 Performance-Based Stock Incentive Plan (2006 Plan) subject to approval of its stockholders, which was received in May 2006. The primary purpose of the 2006 Plan is to enhance the Company’s ability to attract, motivate and retain the services of qualified employees, officers and directors, consultants and other service providers upon whose judgment, initiative and efforts, the successful conduct and development of the Company’s business largely depends.

The 2006 Plan authorizes the Company to grant up to 6,000,000 shares of common stock, which includes the number of shares that had been available for future grant under the Company’s 2001 Stock Incentive Plan (2001 Plan) at the time the 2006 Plan was approved. This number of shares is subject to adjustments as to the number and kind of shares in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. Upon approval of the 2006 Plan by the Company’s stockholders, the 2001 Plan was terminated for purposes of future grants.

The 2006 Plan permits the grant of stock appreciation rights, restricted stock, restricted stock units, incentive stock options and non-qualified stock options. Any stock options or stock appreciation rights granted under the 2006 Plan will have exercise prices or base values not less than the fair market value of the Company’s common stock on the date of grant and terms of not more than seven years. The vesting of substantially all awards granted to directors under the 2006 Plan occurs over a period of one year. The vesting of substantially all awards granted to officers and employees under the 2006 Plan occurs over a period of three years, conditioned on the achievement of performance goals established by the Compensation Committee of the Company’s Board of Directors. Currently, such performance goals relate to the fiscal year in which the award is granted, and if such performance goals are met, the awards vest in equal installments on the first three anniversaries of the grant date. For awards issued prior to 2009, the vesting of such awards is conditioned upon achievement of performance goals relating to three annual performance periods. Such prior awards also provide that if the performance goals are not achieved in full for the initial applicable annual performance period, then fifty percent of the awards tied to such performance goals that do not vest will carry over and be eligible for vesting, subject to the achievement of certain performance goals for the next annual performance period. All awards are subject to forfeiture if employment or other service terminates prior to the vesting of the awards.

The Company maintains an Employee Stock Purchase Plan (Purchase Plan) to provide employees of the Company with an opportunity to purchase common stock through payroll deductions. The Purchase Plan allows employees to purchase common stock in any quarterly offering period at 95% of the fair market value of the stock on the last day of the offering period.

Stock-Based Compensation Expense

ASC 718 requires the Company to recognize compensation expense related to the fair value of its stock-based awards. The Company estimates the fair value of stock options and stock appreciation rights at the date of grant using a Black-Scholes-Merton option-pricing model. The weighted average fair value and underlying assumptions for all stock appreciation rights awarded in 2010 and 2009 are set forth in the table below. No stock appreciation rights or stock options were awarded in 2008.

 

     Year Ended  
     January 1,     January 2,  
   2011     2010  

Fair value

   $ 5.44      $ 1.64   

Expected annual volatility

     50.31     45.50

Risk-free interest rate

     2.27     1.66

Expected term (years)

     4.5        4.4   

Annualized expected dividend yield

     —          —     

 

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The total stock-based compensation expense included in the Company’s consolidated statements of operations was as follows:

 

     Year Ended  
     January 1,      January 2,      January 3,  
(In thousands)    2011      2010      2009  

Cost of sales

   $ 392       $ 137       $ 52   

Selling, general and administrative expenses

     3,896         1,979         1,654   

Research and development expense

     560         216         97   
                          
   $ 4,848       $ 2,332       $ 1,803   
                          

As required by ASC 718, the Company estimates the expected future forfeitures of stock options, stock appreciation rights and restricted stock units and recognizes compensation expense for only those equity awards expected to vest, excluding the expected future forfeitures. If actual forfeitures differ from the Company’s estimates, the amount of compensation expense recognized for the applicable period is cumulatively adjusted. The Company assumed forfeitures rate in recognizing compensation expense of 15.4% for 2010, 2009 and 2008.

At January 1, 2011, the total compensation cost related to unvested stock-based awards granted to employees, officers and directors under the Company’s stock-based benefit plans that had not yet been recognized was $5.6 million (net of estimated forfeitures of $2.2 million). Such amount excludes compensation expense associated with awards that are subject to performance conditions that the Company does not expect to be met. This future compensation expense will be amortized, using the straight-line attribution method over a weighted-average period of 1.5 years. The actual compensation expense that the Company will recognize in the future related to stock-based awards will be adjusted for subsequent forfeitures and will be adjusted based on the Company’s determination as to the extent to which performance conditions applicable to any stock-based awards are achieved. At January 1, 2011, there were 0.4 million performance-based restricted stock units outstanding with a weighted-average grant date fair value of $9.84 per share that were not expected to vest.

Stock-Based Award Activity

The following table summarizes stock option activity for the year ended January 1, 2011:

 

     Number of
Options
(In thousands)
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value

(In  thousands)
 

Outstanding at January 2, 2010

     2,435      $ 20.94         

Exercised

     (139   $ 12.45         

Expired (cancelled post-vesting)

     (556   $ 43.79         
                

Outstanding at January 1, 2011

     1,740      $ 14.32         2.6       $ 6,787   
                

Vested and expected to vest at January 1, 2011

     1,740      $ 14.32         2.6       $ 6,787   

Options exercisable at January 1, 2011

     1,740      $ 14.32         2.6       $ 6,787   

The intrinsic value of options exercised during fiscal years 2010, 2009 and 2008 totaled $0.4 million, $0.4 million and $0.8 million, respectively. The intrinsic value of options exercised is calculated as the difference between the market price on the date of exercise and the exercise price multiplied by the number of options exercised.

The grant date fair value of options that vested during fiscal year 2009 and 2008 totaled $1.1 million and $1.0 million, respectively. No options vested during fiscal year 2010.

 

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The following table summarizes the Company’s restricted stock unit activity for the year ended January 1, 2011:

 

     Number of
Shares

(In thousands)
    Weighted
Average
Grant Date
Fair Value
 

Outstanding at January 2, 2010

     2,351      $ 6.98   

Granted

     439      $ 12.33   

Vested

     (451   $ 4.21   

Forfeited

     (756   $ 8.94   
          

Outstanding at January 1, 2011

     1,583      $ 8.31   
          

The following table summarizes the Company’s stock appreciation rights activity for the year ended January 1, 2011:

 

     Number of
Shares
(In thousands)
    Weighted
Average
Grant Date
Fair Value
 

Outstanding at January 2, 2010

     925      $ 1.64   

Granted

     351      $ 5.44   

Exercised

     (71   $ 1.64   

Forfeited (cancelled pre-vesting)

     (51   $ 2.68   

Expired (cancelled post-vesting)

     (4   $ 1.64   
          

Outstanding at January 1, 2011

     1,150      $ 2.75   
          

At January 1, 2011, the Company had reserved 6,768,375 shares of common stock for future issuance under its stock incentive plans and assumed stock options, which included 2,295,386 shares that were reserved for the future grant of stock-based awards under these plans, and had reserved 1,160,313 shares of common stock for future issuance under the Purchase Plan.

NOTE 8 DEBT AND LINES OF CREDIT

Long-term convertible notes

In February 2007, the Company issued $175 million in convertible subordinated notes. The notes are subordinated to all of the Company’s existing and future senior indebtedness, mature on February 15, 2012 and bear interest at a rate of 2.5% per year, payable in cash semiannually in arrears on February 15 and August 15 of each year. During 2008 and 2009, the Company extinguished $28.0 million and $20.2 million of these notes, respectively.

During 2009, the Company extinguished $20.2 million of its convertible subordinated notes at a weighted-average price equal to 91.6% of the principal amount of the notes, or $18.7 million. The $0.3 million difference between the fair value of the notes and the carrying value of the notes, which included $1.7 million in deferred debt issuance costs and unamortized debt discount, has been recorded as a gain on extinguishment of debt in the Company’s consolidated statements of operations. In addition, $0.3 million was allocated to the extinguishment of the equity component of such notes.

During 2008, the Company extinguished $28.0 million of its convertible subordinated notes at a weighted-average price equal to 59.9% of the principal amount of the notes, or $16.8 million. The $7.7 million difference between the fair value of the notes and the carrying value of the notes, which included $3.5 million in deferred debt issuance costs and unamortized debt discount, has been recorded as a gain on extinguishment of debt in the Company’s consolidated statements of operations.

 

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Holders may convert their notes based on a conversion rate of 41.5861 shares of the Company’s common stock per $1,000 principal amount of notes (equal to an initial conversion price of approximately $24.05 per share) under certain circumstances. Upon conversion, in lieu of shares of the common stock, for each $1,000 principal amount of notes, a holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the indenture. If the conversion value exceeds $1,000, the Company will also deliver, at its election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion. As of January 1, 2011, the conversion value was less than the principal amount of the notes.

At January 1, 2011, the Company had $126.8 million in convertible subordinated notes outstanding with a carrying value of $122.0 million, net of $4.8 million in unamortized debt discount, which is included in long-term debt in the accompanying consolidated balance sheets. At January 2, 2010, the Company had $126.8 million in convertible subordinated notes outstanding with a carrying value of $118.0 million, net of $8.8 million in unamortized debt discount. At January 1, 2011 and January 2, 2010, the carrying value of the equity component was $26.2 million, net of $0.9 million of equity issuance costs. At January 1, 2011 and January 2, 2010, debt issuance costs of $0.8 million and $1.5 million, respectively, net of accumulated amortization, were included in other long-term assets in investments and other assets. The remaining debt issuance costs and unamortized debt discount are being amortized through February 15, 2012 using the effective interest method.

Interest cost on the convertible subordinated notes consisted of the following components:

 

     Year Ended  
     January 1,      January 2,      January 3,  
(In thousands)    2011      2010      2009  

Contractual interest

   $ 3,196       $ 3,636       $ 4,281   

Amortization of debt discount

     4,058         4,575         5,182   
                          

Interest cost on convertible subordinated notes

   $ 7,254       $ 8,211       $ 9,463   
                          

Total long-term debt, net of debt discount, was as follows:

 

     January 1,      January 2,  
(In thousands)    2011      2010  

Japanese private placement bonds due June 2011, interest at 1.55% payable semi-annually

   $ —         $ 3,246   

Convertible notes due February 2012, interest at 2.5% payable semi-annually

     122,042         117,985   
                 

Total long-term debt

   $ 122,042       $ 121,231   
                 

Short-term debt

On June 30, 2008, the Company issued 300 million yen ($3.7 million at January 1, 2011) in private placement bonds through a Japanese bank and used the proceeds from such issuance to pay the amounts outstanding under an expiring line of credit. These bonds bear interest at a rate of 1.55% per year, payable in cash semiannually in arrears on June 30 and December 31 of each year. The bonds mature on June 30, 2011. During 2010, the Company reclassified this debt from long-term to short-term, and the bonds are included in short-term borrowings in the accompanying consolidated balance sheets.

Lines of credit

At January 1, 2011 and January 2, 2010, the Company had a total of three lines of credit, including one domestic revolving line of credit and two revolving lines of credit with Japanese banks. Additionally, the Company has agreements with two Japanese banks under which it sells trade notes receivable with recourse.

 

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The Company’s domestic revolving line of credit has a total credit limit of $3.0 million and expires on December 1, 2011. Certain certificates of deposit held at this lending institution collateralize this line of credit, which bears interest at either the prevailing London Interbank Offered Rate (LIBOR) (0.26% at January 1, 2011) plus 1.00% or the British Bankers Association LIBOR Daily Floating Rate (0.25% at January 1, 2011) plus 1.00%, at the Company’s option, and carries an unused line fee of 0.25% per year. At January 1, 2011, there were no balances outstanding under this line of credit, with $1.6 million available, after considering outstanding letters of credit totaling $1.4 million.

The two revolving lines of credit with Japanese banks totaled 900 million yen ($11.0 million at January 1, 2011) and expire as follows: $7.3 million on March 1, 2011 (which has subsequently been extended to June 1, 2011) and $3.7 million on August 31, 2011. The $7.3 million line of credit bears interest at the prevailing bank rate and the $3.7 million line of credit bears interest at LIBOR plus 1.75%. Certain certificates of deposit held by the lending institution’s U.S. affiliate collateralize the $3.7 million line of credit. At January 1, 2011, the Company had $6.7 million outstanding and $4.3 million available for borrowing under these lines of credit. Amounts outstanding are included in short-term borrowings in the accompanying consolidated balance sheets.

The Company has agreements with two Japanese banks under which it sells trade notes receivable with recourse. These agreements allow the Company to sell receivables totaling up to 550 million yen ($6.7 million at January 1, 2011), have no expiration dates and bear interest at the prevailing bank rate. At January 1, 2011, the Company had $2.0 million outstanding and $4.7 million available for the sale of notes receivable under these agreements. Amounts outstanding under these agreements are included in short-term borrowings in the accompanying consolidated balance sheets, as the sale of these receivables has not met the criteria for sale treatment in accordance with ASC 860.

As of January 1, 2011, the weighted-average interest rate on all of the Company’s Japanese borrowings, including the private placement bonds, was 2.1%.

NOTE 9 NET INCOME (LOSS) PER SHARE

The following table sets forth the numerator and denominator used in the computation of net income (loss) per share:

 

     Year Ended  
     January 1,      January 2,     January 3,  
(In thousands, except per share data)    2011      2010     2009  

Net income (loss)

   $ 41,113       $ (17,406   $ (148,724
                         

Shares:

       

Weighted average shares outstanding - basic

     36,647         36,175        36,155   

Dilutive potential common shares, using treasury stock method

     1,079         —          —     
                         

Weighted average shares outstanding - diluted

     37,726         36,175        36,155   
                         

Net income (loss) per share:

       
                         

Basic

   $ 1.12       $ (0.48   $ (4.11
                         

Diluted

   $ 1.09       $ (0.48   $ (4.11
                         

For 2010, 2009 and 2008, 1,198,164, 2,432,931 and 2,614,368 stock options with weighted-average exercise prices of $15.72, $20.95 and $21.19, respectively, were excluded from the computations of diluted net income (loss) per share, as their inclusion would be antidilutive. In addition, for 2010, 2009 and 2008, 372,091, 1,236,920 and 2,075,140 restricted stock units representing shares that were issuable contingent upon the achievement of performance conditions were excluded from the computation of diluted net income (loss) per share, as the performance criteria had not been met. For 2009 and 2008, an additional 749,524 and 79,514 common stock

 

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equivalents, respectively, have been excluded from the denominator for purposes of computing diluted net loss per share, as their inclusion would be antidilutive due to the Company incurring a net loss.

NOTE 10 COMMITMENTS AND CONTINGENCIES

Facility Leases

The Company leases certain of its manufacturing and office facilities and equipment under non-cancelable leases, certain of which contain renewal options. In addition to the base rent, the Company is generally required to pay insurance, real estate taxes and other operating expenses relating to such facilities. In some cases, base rent increases during the term of the lease based on a predetermined schedule. The Company recognizes rent expense on a straight-line basis over the life of the lease for leases containing stated rent escalations.

Future minimum rental commitments under the terms of these leases at January 1, 2011 were as follows:

 

     Capital     Operating      Total  
(In thousands)    Leases     Leases      Obligations  

Payments Due By Period:

       

2011

   $ 245      $ 9,001       $ 9,246   

2012

     206        6,872         7,078   

2013

     178        6,592         6,770   

2014

     177        6,026         6,203   

2015

     176        4,863         5,039   

Thereafter

     419        28,563         28,982   
                         

Total minimum payments

     1,401      $ 61,917       $ 63,318   
                   

Less amount representing interest

     (264     
             

Present value of obligation

   $ 1,137        
             

Subleases

The Company has subleased certain of its facilities. Future minimum rentals to be received by the Company under non-cancelable subleases at January 1, 2011 were as follows:

 

     Operating  
(In thousands)    Leases  

Payments Due By Period:

  

2011

   $ 321   

2012

     19   
        

Total minimum sublease payments

   $ 340   
        

Rental expense, net of sublease income, under all leases totaled $8.0 million, $11.2 million and $9.0 million for 2010, 2009 and 2008, respectively.

Environmental Reserves

The Company’s former Mountain View, California facility is an EPA-designated Superfund site and is subject to a cleanup and abatement order from the California Regional Water Quality Control Board. Spectra-Physics, along with several other entities with facilities located near the Mountain View, California facility, have been identified as Responsible Parties with respect to this Superfund site, due to releases of hazardous substances during the 1960s and 1970s. The site is mature, and investigations and remediation efforts have been ongoing for approximately 25 years.

 

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Spectra-Physics and the other Responsible Parties have entered into a cost-sharing agreement covering the costs of remediating the off-site groundwater contamination, pursuant to which Spectra-Physics is responsible for 30% of the remediation costs.

At the time of the Company’s acquisition of Spectra-Physics, it established a reserve to cover known costs relating to this site for which it was liable, the balance of which was immaterial at January 1, 2011 and January 2, 2010. In connection with the acquisition, Thermo Fisher Scientific, Inc., formerly known as Thermo Electron Corporation (Spectra-Physics’ former parent) has agreed, subject to certain conditions, to indemnify the Company for certain costs of remediation that are incurred and third party claims that are made prior to July 16, 2014 relating to this site. The Company is unaware of any significant future expenses associated with this site for which the Company will be liable.

Other Contingencies

From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. The Company currently is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on its consolidated results of operations, financial position or cash flows.

NOTE 11 INCOME TAXES

United States and foreign income (loss) before income taxes were as follows:

 

     Year Ended  
     January 1,      January 2,     January 3,  
(In thousands)    2011      2010     2009  

United States

   $ 38,363       $ (15,103   $ (122,927

Foreign

     5,878         (4,270     2,748   
                         
   $ 44,241       $ (19,373   $ (120,179
                         

The income tax provision (benefit) based on income (loss) were as follows:

 

     Year Ended  
     January 1,     January 2,     January 3,  
(In thousands)    2011     2010     2009  

Current:

      

Federal

   $ 565      $ (538   $ (17

State

     687        158        933   

Foreign

     1,340        (1,180     3,105   
                        
     2,592        (1,560     4,021   

Deferred:

      

Federal

     440        431        21,125   

State

     (218     (14     3,567   

Foreign

     314        (824     (168
                        
     536        (407     24,524   
                        
   $ 3,128      $ (1,967   $ 28,545   
                        

 

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The income tax provision (benefit) that was based on income (loss) differs from the amount obtained by applying the statutory tax rate as follows:

 

     Year Ended  
     January 1,     January 2,     January 3,  
(In thousands)    2011     2010     2009  

Income tax (benefit) provision at statutory rate

   $ 15,484      $ (6,781   $ (42,063

Increase (decrease) in taxes resulting from:

      

Impairment or reduction of goodwill

     213        —          36,576   

Non-deductible expenses

     188        204        182   

State tax, net of federal benefit

     1,549        (284     2,864   

Dividend from foreign subsidiary

     2,962        —          —     

Foreign rate variance

     1,328        1,084        (1,090

Income tax credits

     (880     (509     (178

Valuation allowance

     (18,179     1,522        27,067   

Increase of tax contingency

     691        2,152        3,160   

Other, net

     (228     645        2,027   
                        
   $ 3,128      $ (1,967   $ 28,545   
                        

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred taxes were as follows:

 

     January 1,     January 2,  
(In thousands)    2011     2010  

Deferred tax assets:

    

Net operating loss carryforwards

   $ 8,227      $ 33,606   

Accruals and reserves not currently deductible

     24,045        22,045   

Tax credit carryforwards

     17,790        16,515   

Other basis differences

     5,591        4,847   
                

Total gross deferred tax assets

     55,653        77,013   

Valuation allowance

     (42,324     (60,363
                
     13,329        16,650   
                

Deferred tax liabilities:

    

Intangible assets

     6,784        7,186   

Property and equipment

     3,812        5,408   

Convertible debt

     1,735        3,307   

Other basis differences

     44        199   
                

Total deferred tax liabilities

     12,375        16,100   
                

Net deferred tax assets

   $ 954      $ 550   
                

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment.

The Company had previously established a valuation allowance against its deferred tax assets due to the uncertainty as to the timing and ultimate realization of its deferred tax assets. During the fourth quarter of 2008, the Company determined that goodwill and certain purchased intangible assets related to its Lasers Division were impaired, and

 

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the Company recorded impairment charges of $119.9 million, which resulted in a cumulative three-year loss position as of January 3, 2009. After evaluating this loss position together with other positive and negative evidence, the Company determined that it was more likely than not that some or all of its net deferred tax assets would not be realized. Therefore, in 2008, the Company recorded a valuation allowance of $19.8 million against its domestic deferred tax assets and certain deferred tax assets related to its foreign subsidiaries. In addition, due to such impairment of goodwill and other intangible assets, the Company determined that certain qualifying tax planning strategies were no longer deemed prudent and feasible and, as a result, the Company recorded an additional valuation allowance of $4.6 million in 2008. In the fourth quarter of 2009, after evaluating all positive and negative evidence, it was determined that it was more likely than not that the Company would realize the net deferred tax assets applicable to the Company’s German entity. Therefore, the Company recorded a release of the valuation allowance associated with this entity of $2.5 million. During 2010, the Company released a total of $16.9 million of valuation allowance related to the realization of domestic deferred tax assets as a result of the income generated in 2010. The Company also recorded a reduction to foreign deferred tax assets and a corresponding reduction to the valuation allowance of $1.3 million related to deferred tax assets that were lost due to reorganizations, sales, and liquidations of certain foreign entities.

As of January 1, 2011, the Company could not determine that it is more likely than not that some or all of its domestic and certain foreign subsidiaries’ net deferred tax assets would be realized. Therefore, the Company has maintained a valuation allowance of $42.3 million against its domestic and certain foreign subsidiaries’ deferred tax assets.

At January 1, 2011, the Company had gross federal, state, and foreign net operating loss carryforwards totaling approximately $24.7 million, $33.4 million, and $13.0 million, respectively. Of the $24.7 million and $33.4 million federal and state net operating loss, respectively, $16.2 million relates to tax deductions associated with certain stock compensation, the tax benefit of which will be credited to additional paid in capital when recognized. Federal net operating loss carryforwards begin to expire in 2022 and state net operating loss carryforwards begin to expire in 2011. The majority of the Company’s foreign net operating loss carryforwards may be carried forward indefinitely.

At January 1, 2011, the Company had federal and state income tax credit carryforwards of $17.7 million and $5.3 million, respectively. If not previously utilized, the federal carryforwards will begin to expire in 2012. The state carryforwards do not expire.

If the Company has an “ownership change” as defined under the Internal Revenue Code, utilization of its net operating loss and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods.

Undistributed earnings of the Company’s historic and acquired foreign subsidiaries for which no federal or state liability has been recorded totaled $22.8 million and $16.9 million at January 1, 2011 and January 2, 2010, respectively. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred federal and state income tax liability and foreign withholding taxes is not practicable because of the complexities associated with this hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the federal liability.

As of January 2, 2010, the Company had $9.5 million of gross unrecognized tax benefits and a total of $9.1 million of net unrecognized tax benefits, which, if recognized, would affect the effective tax rate. Interest and penalties related to unrecognized tax benefits were not significant as of January 2, 2010.

As of January 1, 2011, the Company had $10.0 million of gross unrecognized tax benefits and a total of $9.1 million of net unrecognized tax benefits, which, if recognized, would affect the effective tax rate. Interest and penalties related to unrecognized tax benefits were $0.8 million as of January 1, 2011. The Company anticipates that it is reasonably possible that its unrecognized tax benefits may decrease by $1.0 million within the next twelve months.

 

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A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

     Year Ended  
(In thousands)    January 1,
2011
    January 2,
2010
    January 3,
2009
 

Unrecognized tax benefits at beginning of year

   $ 9,500      $ 8,608      $ 6,896   

Gross increases for tax positions of prior years

     —          2,385        —     

Gross decreases for tax positions of prior years

     —          (691     (1,196

Gross increases for tax positions of current year

     638        815        3,047   

Settlements

     (26     (907     (139

Lapse of statute of limitations

     (159     (710     —     
                        

Unrecognized tax benefits at end of year

   $ 9,953      $ 9,500      $ 8,608   
                        

The Company and its subsidiaries file income tax returns in the U.S. and various state, local and foreign jurisdictions. The tax years that remain subject to examination by significant jurisdiction are as follows:

 

U.S. Federal

  2007 through current periods

California

  2006 through current periods

France

  2007 through current periods

Germany

  2005 through current periods

Japan

  2004 through current periods

However, the use of domestic net operating losses in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination, beginning with the 2001 tax year.

NOTE 12 STOCKHOLDERS’ EQUITY TRANSACTIONS

In May 2008, the Board of Directors approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of the Company’s common stock. Purchases may be made under this program from time to time in the open market or in privately negotiated transactions, and the timing and amount of the purchases will be based on factors including the Company’s share price, cash balances, expected cash requirements and general business and market conditions. During 2008, the Company repurchased 127,472 shares for $1.4 million under this program. As of January 1, 2011, a total of approximately 3.9 million shares remained available for repurchase under the program.

In 2010 and 2008, the Company received and cancelled 116,144 and 5,145 shares of common stock, respectively, in payment by employees of the exercise price and taxes owed upon the exercise of stock options and taxes owed upon the vesting of restricted stock units issued to them under the Company’s stock incentive plans. The value of these shares totaled $1.3 million and $0.1 million, respectively, at the time they were received.

NOTE 13 FAIR VALUE MEASUREMENTS

The Company’s financial instruments include cash and cash equivalents, marketable securities, pension assets not owned by plan, short-term borrowings and long-term debt. The carrying amount of cash and cash equivalents and short-term borrowings approximates fair value due to the short-term maturities of these instruments. The fair value of marketable securities and pension assets not owned by plan were estimated based on quoted market prices. The fair value of the Company’s long-term debt was estimated based on the current rates for similar issues or on the current rates offered to the Company for debt of similar remaining maturities.

 

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The estimated fair values of the Company’s financial instruments were as follows:

 

     January 1, 2011      January 2, 2010  
(In thousands)    Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 90,992       $ 90,992       $ 87,727       $ 87,727   

Marketable securities

   $ 109,192       $ 109,192       $ 54,196       $ 54,196   

Pension assets not owned by plan

   $ 8,628       $ 8,628       $ 8,990       $ 8,990   

Short-term borrowings

   $ 12,468       $ 12,468       $ 11,056       $ 11,056   

Long-term debt

   $ 122,042       $ 123,251       $ 121,231       $ 121,633   

ASC 820-10 requires that for any assets and liabilities stated at fair value on a recurring basis in the Company’s financial statements, the fair value of such assets and liabilities be measured based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Level 1 asset and liability values are derived from quoted prices in active markets for identical assets and liabilities and Level 2 asset and liability values are derived from quoted prices in inactive markets. The Company’s assets measured at fair value on a recurring basis are categorized in the table below based upon their level within the fair value hierarchy.

 

(In thousands)           Fair Value Measurements at Reporting Date Using  

Description

   January 1, 2011      Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Assets:

           

Cash:

           

Cash

   $ 46,242       $ 46,242       $ —         $ —     

Money market funds

     33,785         33,785         —           —     

Short-term investments

     10,965         2,204         8,761         —     
                                   
     90,992         82,231         8,761         —     

Marketable securities:

           

U.S. government and agency

     23,181         —           23,181         —     

Corporate debt securities

     78,286         48,893         29,393         —     

Equity securities

     548         548         —           —     

Certificates of deposit

     7,177         —           7,177         —     
                                   
     109,192         49,441         59,751         —     

Pension assets not owned by plan

     8,628         —           8,628         —     
                                   
   $ 208,812       $ 131,672       $ 77,140       $ —     
                                   

NOTE 14 EMPLOYEE BENEFIT PLANS

Defined Contribution Plan

The Company sponsors a 401(k) defined contribution plan. Generally, all U.S. employees are eligible to participate in and contribute to this plan. The Company makes certain safe harbor matching contributions to this plan based on participating employees’ contributions to the plan and their total compensation. Expense recognized for the plan totaled $4.3 million, $4.1 million and $4.8 million for 2010, 2009 and 2008, respectively.

Defined Benefit Pension Plans

The Company has defined benefit pension plans covering substantially all full-time employees in France, Japan, Germany and the United Kingdom. The French and German plans are unfunded, as permitted under the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs was based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions were based upon management’s judgment, considering all known trends and uncertainties. Actual

 

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results that differ from these assumptions would impact future expense recognition and the cash funding requirements of the Company’s pension plans.

January 1, 2011, January 2, 2010 and January 3, 2009 serve as the measurement dates for the respective amounts shown below. Net periodic benefit costs for the plans in aggregate included the following components:

 

     Year Ended  
(In thousands)    January 1,
2011
    January 2,
2010
    January 3,
2009
 

Service cost

   $ 592      $ 672      $ 668   

Interest cost on projected benefit obligation

     704        705        745   

Expected return on plan assets

     (165     (158     (373

Curtailment loss

     735        —          —     

Amortization of net (gain) loss

     107        (29     —     
                        
   $ 1,973      $ 1,190      $ 1,040   
                        

In July 2010, the Company sold all of the outstanding capital stock of its Hilger Crystals Limited subsidiary (see Note 2 for additional detail). As a result of this transaction, employee participants in the Company’s United Kingdom defined benefit pension plan became deferred participants and stopped accruing additional pension benefits under the plan. As a consequence, the Company recognized a charge of $0.7 million in the second quarter of 2010 related to this plan curtailment, consisting of $0.6 million in previously unrecognized actuarial losses, which had been included in other comprehensive income, and an increase of $0.1 million in the projected benefit obligation, which resulted from a change in actuarial assumptions due to the change in status of the employee participants to deferred membership. In addition, the Company is obligated under the terms of the sale to wind up the pension plan and has therefore accrued $0.7 million in expected costs to complete the wind up.

 

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The changes in projected benefit obligation and plan assets, as well as the ending balance sheet amounts for the Company’s defined benefit plans were as follows:

 

(In thousands)    January 1,
2011
    January 2,
2010
 

Change in projected benefit obligation:

    

Projected benefit obligation, beginning of year

   $ 16,899      $ 17,092   

Service cost

     592        617   

Interest cost

     704        705   

Contributions by plan participants

     5        9   

Actuarial loss (gain)

     2,637        (750

Benefits paid

     (610     (1,162

Curtailment loss

     77        —     

Currency translation adjustments

     24        388   
                

Projected benefit obligation, end of year

     20,328        16,899   
                

Change in plan assets:

    

Fair value of plan assets, beginning of year

     4,835        4,402   

Company contributions

     2,180        1,084   

Contributions by plan participants

     5        9   

Gain on plan assets

     152        39   

Benefits paid

     (172     (843

Currency translation adjustments

     221        144   
                

Fair value of plan assets, end of year

     7,221        4,835   
                

Funded status

   $ (13,107   $ (12,064
                

Amounts recognized in the balance sheet:

    

Prepaid pension asset

   $ 476      $ —     

Current portion of pension liabilities

     (304     (1,849

Accrued pension liabilities

     (13,279     (10,215

Accumulated other comprehensive income

     (1,556     (549
                

Net amount recognized

   $ (14,663   $ (12,613
                

At January 1, 2011, the United Kingdom plan was overfunded and had assets of $4.3 million and a projected benefit obligation of $3.8 million. All other plans were underfunded and had combined assets of $2.9 million and combined projected benefit obligations of $16.5 million.

At January 1, 2011, the aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $20.3 million, $16.0 million and $7.2 million, respectively. At January 2, 2010, the aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $16.9 million, $13.7 million and $4.8 million, respectively.

 

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At January 1, 2011, the estimated benefit payments for the next 10 years were as follows:

 

(In thousands)    Estimated
Benefit
Payments
 

2011

   $ 1,309   

2012

     810   

2013

     743   

2014

     755   

2015

     809   

Thereafter

     15,053   
        
   $ 19,479   
        

The Company expects to contribute $0.9 million to the plans during 2011.

The weighted-average rates used to determine the net periodic benefit costs were as follows:

 

     January 1,
2011
    January 2,
2010
    January 3,
2009
 

Discount rate

     4.10     4.30     4.90

Rate of increase in salary levels

     3.15     2.80     2.90

Expected long-term rate of return on assets

     1.86     2.50     3.60

The weighted-average rates used to determine projected benefit obligations at the respective periods were as follows:

 

     January 1,
2011
    January 2,
2010
 

Discount rate

     3.03     4.70

Rate of increase in salary levels

     2.34     2.70

Expected long-term rate of return on assets

     1.86     2.50

In determining the expected long-term rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes, and economic and other indicators of future performance.

Plan assets were held in the following categories as a percentage of total plan assets:

 

     January 1, 2011     January 2, 2010  
     Amount      Percentage     Amount      Percentage  

Cash

   $ 3,293         45   $ 1,592         33

Bonds

     984         14        975         20   

Pooled funds of insurance companies

     2,944         41        2,268         47   
                                  
   $ 7,221         100   $ 4,835         100
                                  

In general, the Company’s asset management objectives included maintaining an adequate level of diversification to reduce interest rate and market risk while providing adequate liquidity to meet immediate and future benefit payment requirements. In Japan, assets are invested in pooled funds of insurance companies. The expected long-term rate of return on these assets is 1.5%, which is based on the general yield environment for high quality instruments in Japan. The United Kingdom pension plan invests in a combination of high yield cash accounts and bond funds. The bond funds are split between a fixed interest fund and an index linked fund, which are subject to interest rate risk. The allocation mix is designed to minimize risk while providing liquidity and earning a reasonable rate of return. The expected long-term rate of return on these assets is 2.2%, which is based on Government gilt yields and bank base rates. There are two pension plans in Germany and one in France, in which the related assets are not part of the plan,

 

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as discussed below. The Company does not invest in derivative instruments, although the pooled funds it owns may use such instruments in a risk management capacity.

The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. The fair value of bond funds is based on quoted prices provided by the fund issuer and the fair value of pooled funds of insurance companies is based on quoted prices provided by the insurance provider. Since the bond funds and pooled funds of insurance companies are not actively traded, they fall within Level 2 of the fair value hierarchy.

Other Pension-Related Assets

As of January 1, 2011 and January 2, 2010, the Company had assets with aggregate market values of $8.6 million and $9.0 million, respectively, which it has set aside in connection with its French and German pension plans. These assets are invested in group insurance contracts through the insurance companies administering these plans, in accordance with applicable pension laws. The German contracts have a guaranteed minimum rate of return ranging from 2.25% to 4.0%, depending on the contract. The French contracts have an expected rate of return of 2.4%. Because these assets were not assets of the pension plan and could be accessed by the Company, they were not included in the Company’s plan assets shown above. Such assets are included in investments and other assets in the accompanying consolidated balance sheets.

NOTE 15 BUSINESS SEGMENT INFORMATION

The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by the Company’s Chief Executive Officer, who is the Company’s chief operating decision maker, in deciding how to allocate resources and in assessing performance.

The Company develops, manufactures and markets its products within two distinct business segments, its PPT Division and its Lasers Division.

The PPT Division’s products and systems are sold to end users in a wide range of markets, including the microelectronics, scientific research, life and health sciences and industrial manufacturing markets. In addition, the division sells subsystems to third parties that integrate these products into larger systems, particularly for microelectronics and life and health sciences applications. The products sold by this division include photonics instruments and systems, precision positioning systems and subsystems, vibration isolation systems and subsystems, optics, optical hardware, and opto-mechanical subassemblies. The PPT Division also offers automated systems and subsystems for advanced applications in the manufacturing of solar panels and communications and electronic devices, including microwave, optical, radio frequency and multi-chip modules.

The Lasers Division offers a broad array of laser technology products and services to OEM and end-user customers across a wide range of applications and markets, including the microelectronics, scientific research, life and health sciences and industrial manufacturing markets. The lasers and laser-based systems include ultrafast lasers and amplifiers, diode-pumped solid-state lasers, high-energy pulsed lasers, tunable lasers and gas lasers.

The Company measured operating income (loss) reported for each business segment, which included only the costs that were directly attributable to the operations of that segment, and excluded certain unallocated operating expenses, other charges and gains, interest and other expense, net, and income taxes.

 

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Selected segment financial information for the Company’s reportable segments for the years ended January 1, 2011, January 2, 2010 and January 3, 2009 were as follows:

 

     PPT      Lasers        
(In thousands)    Division      Division     Total  

Year ended January 1, 2011

       

Sales to external customers

   $ 297,666       $ 182,121      $ 479,787   

Depreciation and amortization

   $ 7,039       $ 3,583      $ 10,622   

Loss on disposal assets and related costs

   $ 542       $ —        $ 542   

Segment income

   $ 62,759       $ 14,275      $ 77,034   

Segment assets

   $ 237,231       $ 80,433      $ 317,664   

Expenditures for long-lived assets

   $ 4,815       $ 854      $ 5,669   

Year ended January 2, 2010

       

Sales to external customers

   $ 219,645       $ 147,344      $ 366,989   

Depreciation and amortization

   $ 7,341       $ 4,422      $ 11,763   

Impairment charges

   $ 360       $ —        $ 360   

Loss on disposal of diode laser assets and related costs

   $ —         $ 4,355      $ 4,355   

Segment income (loss)

   $ 30,245       $ (5,567   $ 24,678   

Segment assets

   $ 212,551       $ 102,065      $ 314,616   

Expenditures for long-lived assets

   $ 3,317       $ 6,605      $ 9,922   

Year ended January 3, 2009

       

Sales to external customers

   $ 257,800       $ 187,536      $ 445,336   

Depreciation and amortization

   $ 6,290       $ 7,270      $ 13,560   

Impairment charges

   $ —         $ 119,944      $ 119,944   

Segment income (loss)

   $ 39,665       $ (126,313   $ (86,648

Segment assets

   $ 187,920       $ 135,618      $ 323,538   

Expenditures for long-lived assets

   $ 7,216       $ 3,892      $ 11,108   

The segment income reported for the Company’s PPT Division for 2010 included a loss on the sale of assets and related costs, totaling $0.5 million related to the sale of the Company’s Hilger Crystals Limited subsidiary (see Note 2).

The segment income reported for the Company’s PPT Division for 2009 included an impairment charge of $0.4 million related to the write off of in-process research and development related to the New Focus acquisition. The segment loss reported for the Company’s Lasers Division for 2009 included a loss on the sale of assets and related costs, totaling $4.4 million related to the divestiture of the Company’s diode laser operations in July 2009.

The segment loss for the Company’s Lasers Division for 2008 included impairment charges of $119.9 million related to goodwill and intangible assets (see Note 5 for additional detail).

 

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The following reconciles segment income (loss) to consolidated income (loss) before income taxes:

 

     Year Ended  
     January 1,     January 2,     January 3,  
(In thousands)    2011     2010     2009  

Segment income (loss)

   $ 77,034      $ 24,678      $ (86,648

Unallocated operating expenses

     (24,312     (35,916     (27,088

Recovery (write-down) of note receivable and other amounts related to previously discontinued operations, net

     —          101        (7,040

Write-down of minority interest investment

     —          —          (2,890

Gain on extinguishment of debt

     —          328        7,734   

Gain on sale of building

     —          —          2,504   

Interest and other expense, net

     (8,481     (8,564     (6,751
                        

Consolidated income (loss) before income taxes

   $ 44,241      $ (19,373   $ (120,179
                        

The following reconciles segment depreciation and amortization, total assets and expenditures to consolidated amounts:

 

     As of or for the Year Ended  
     January 1,      January 2,      January 3,  
(In thousands)    2011      2010      2009  

Depreciation and amortization for reportable segments

   $ 10,622       $ 11,763       $ 13,560   

Depreciation and amortization for assets held at corporate

     8,046         8,169         8,322   
                          

Total depreciation and amortization

   $ 18,668       $ 19,932       $ 21,882   
                          

Assets of reportable segments

   $ 317,664       $ 314,616       $ 323,538   

Assets held at corporate, primarily cash and cash equivalents and marketable securities

     238,726         178,791         201,365   
                          

Total assets

   $ 556,390       $ 493,407       $ 524,903   
                          

Expenditures for long-lived assets for reportable segments

   $ 5,669       $ 9,922       $ 11,108   

Expenditures for assets held at corporate

     1,745         1,211         7,467   
                          

Total expenditures for long-lived assets

   $ 7,414       $ 11,133       $ 18,575   
                          

 

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Selected financial information for the Company’s operations by geographic area was as follows:

 

     As of or for the Year Ended  
     January 1,      January 2,      January 3,  
(In thousands)    2011      2010      2009  

Geographic area net sales:

        

United States

   $ 233,479       $ 169,947       $ 208,736   

Europe

     102,369         97,886         114,936   

Pacific Rim

     123,364         79,770         100,676   

Other

     20,575         19,386         20,988   
                          
   $ 479,787       $ 366,989       $ 445,336   
                          

Geographic area long-lived assets:

        

United States

   $ 34,939       $ 38,099      

Europe

     7,565         11,027      

Other

     3,656         3,775      
                    
   $ 46,160       $ 52,901      
                    

NOTE 16 WRITE DOWN OF NOTE RECEIVABLE AND OTHER AMOUNTS

In 2005, the Company sold its robotic systems operations to Kensington Laboratories LLC (Kensington) for $0.5 million in cash and a note receivable of $5.7 million, after adjustments provided for in the purchase agreement, and subleased the facility relating to such operations to Kensington. Such business had been previously classified by the Company as a discontinued operation. Kensington failed to make certain principal, interest and rent payments due under its agreements with the Company. The note was secured by a first-priority security interest in certain Kensington assets. Due to uncertainty regarding collectability of such amounts, in 2008, the Company wrote off such note receivable and other amounts owed in full, resulting in charges totaling $7.0 million, net of amounts recovered relating to the sublease. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin Topic 5.Z.5, the Company has recorded this write-down through continuing operations in its consolidated statements of operations. In 2009, the Company entered into a settlement agreement with Kensington pursuant to which Kensington paid to the Company $0.2 million and transferred to the Company certain assets included in the collateral securing the note. In 2009, the Company recognized $0.1 million as a recovery on the note, net of certain costs.

 

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NOTE 17 SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)

 

     First     Second     Third     Fourth  
(In thousands, except per share data)    Quarter     Quarter     Quarter     Quarter  

Year Ended January 1, 2011:

        

Net sales

   $ 107,150      $ 114,600      $ 125,187      $ 132,850   

Gross profit

   $ 43,038      $ 49,693      $ 53,735      $ 58,830   

Net income

   $ 5,054      $ 8,279      $ 12,604      $ 15,176   

Basic income per share (1)

   $ 0.14      $ 0.23      $ 0.34      $ 0.41   

Diluted income per share (1)

   $ 0.14      $ 0.22      $ 0.34      $ 0.40   
     First     Second     Third     Fourth  
(In thousands, except per share data)    Quarter     Quarter     Quarter     Quarter  

Year Ended January 2, 2010:

        

Net sales

   $ 89,536      $ 87,541      $ 88,317      $ 101,595   

Gross profit

   $ 34,307      $ 32,103      $ 35,220      $ 40,972   

Net income (loss)

   $ (4,818   $ (9,143   $ (3,518   $ 73   

Basic income (loss) per share (1)

   $ (0.13   $ (0.25   $ (0.10   $ —     

Diluted income (loss) per share (1)

   $ (0.13   $ (0.25   $ (0.10   $ —     

 

(1) Per share data was computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share information may not equal the annual income per share.

 

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Table of Contents

NEWPORT CORPORATION

Schedule II

Valuation and Qualifying Accounts

 

(In thousands)    Balance at
Beginning
of Period
     Additions
Charged to
Costs and
Expenses
     Charged to
Other
Accounts
     Write-Offs     Other
Charges
Add/Deduct
(1)
    Balance at
End of
Period
 

Year Ended January 1, 2011:

               

Deducted from asset accounts:

               

Allowance for doubtful accounts

   $ 3,111       $ 787       $ —         $ (1,339   $ 28      $ 2,587   

Reserve for inventory obsolescence

   $ 29,655       $ 5,792       $ —         $ (5,850   $ (702   $ 28,895   

Year Ended January 2, 2010:

               

Deducted from asset accounts:

               

Allowance for doubtful accounts

   $ 1,642       $ 1,346       $ —         $ (54   $ 177      $ 3,111   

Reserve for inventory obsolescence

   $ 26,685       $ 10,298       $ —         $ (8,034   $ 706      $ 29,655   

Year Ended January 3, 2009:

               

Deducted from asset accounts:

               

Allowance for doubtful accounts

   $ 1,381       $ 573       $ —         $ (252   $ (60   $ 1,642   

Reserve for inventory obsolescence

   $ 23,144       $ 7,989       $ —         $ (4,825   $ 377      $ 26,685   

 

(1) Amounts reflect the effect of exchange rate changes on translating valuation accounts of foreign subsidiaries in accordance with ASC 830, Foreign Currency Matters and certain reclassifications between balance sheet accounts.

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number
  

Description of Exhibit

  2.1      Stock Purchase Agreement dated May 28, 2004 by and among the Registrant, Thermo Electron Corporation and other related parties (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2004).
  3.1      Restated Articles of Incorporation of the Registrant, as amended to date (incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2010).
  3.2      Amended and Restated Bylaws adopted by the Board of Directors of the Registrant effective as of August 16, 2010 (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2010).
  4.1      Indenture, dated February 7, 2007, between the Registrant and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007).
  4.2      Registration Rights Agreement, dated February 7, 2007, between the Registrant and Merrill, Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007).
  4.3      Form of 2.50% Convertible Subordinated Note due 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007).
10.1      Lease Agreement dated March 27, 1991, as amended, pertaining to premises located in Irvine, California (incorporated by reference to Exhibit 10.1 of the Registrant’s Annual Report on Form 10-K for the year ended July 31, 1992).
10.2      First Amendment to Lease dated January 31, 2002, between the Registrant and IRP Muller Associates, LLC pertaining to premises located in Irvine, California (incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
10.3      Second Amendment to Lease dated September 28, 2004, between the Registrant and BCSD Properties, L.P. pertaining to premises located in Irvine, California (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2004).
10.4      Third Amendment to Lease dated December 15, 2010, between the Registrant and BCSD Properties, L.P. pertaining to premises located in Irvine, California.
10.5*    1992 Stock Incentive Plan (incorporated by reference to exhibit in the Registrant’s 1992 Proxy Statement).
10.6*    1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
10.7*    Amendment to 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-3, No. 333-40878, filed with the Securities and Exchange Commission on July 6, 2000).
10.8*    2001 Stock Incentive Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 27, 2001).


Table of Contents
Exhibit
Number
  

Description of Exhibit

10.9*     Form of Nonqualified Stock Option Agreement under the Registrant’s 2001 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).
10.10*    Form of Incentive Stock Option Agreement under the Registrant’s 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.10 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).
10.11*    Form of Restricted Stock Agreement under the Registrant’s 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2004).
10.12*    2006 Performance-Based Stock Incentive Plan (incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 10, 2006).
10.13*    Form of Restricted Stock Unit Award Agreement under the Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2006).
10.14*    Form of Restricted Stock Unit Award Agreement (as revised March 2009) under the Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 4, 2009).
10.15*    Form of Stock Appreciation Right Award Agreement under the Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 4, 2009).
10.16*    Amended and Restated Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
10.17*    Severance Compensation Agreement dated April 1, 2008 between the Registrant and Robert J. Phillippy, President and Chief Executive Officer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008).
10.18*    Severance Compensation Agreement dated April 1, 2008 between the Registrant and Charles F. Cargile, Senior Vice President, Chief Financial Officer and Treasurer (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008).
10.19*    Form of Severance Compensation Agreement between the Registrant and certain of its executive and other officers (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2008).
10.20*    Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
10.21      Loan Agreement between the Registrant and Bank of America, N.A. dated January 2, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2008).


Table of Contents
Exhibit
Number
  

Description of Exhibit

10.22    Amendment No. 1 to Loan Agreement between the Registrant and Bank of America, N.A. dated December 1, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2008).
10.23    Security Agreement between the Registrant and Bank of America, N.A. dated December 1, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2008).
10.24    Amendment No. 2 to Loan Agreement between the Registrant and Bank of America, N.A. dated November 30, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2009).
21.1      Subsidiaries of the Registrant.
23.1      Consent of Independent Registered Public Accounting Firm.
23.2      Consent of Independent Registered Public Accounting Firm.
24.1      Power of Attorney (included in signature page).
31.1      Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).
31.2      Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.1      Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
32.2      Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

* This exhibit is identified as a management contract or compensatory plan or arrangement pursuant to Item 15(a)(3) of Form 10-K.