[March 14, 2013]

NEWPORT CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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, subassemblies and subsystems, three-dimensional non-contact measurement and advanced automated manufacturing systems. Our products are used worldwide in industries including scientific research, microelectronics, defense/security, life and health sciences and industrial markets.

During 2012, we operated within three distinct business segments, our Photonics and Precision Technologies (PPT) Division, our Lasers Division and our Ophir Division. These three divisions represent our reportable segments for our fiscal years 2011 and 2012, and our PPT and Lasers Divisions represent our reportable segments for fiscal year 2010, in the financial statements which are included in this Annual Report on Form 10-K. All of our divisions offer a broad array of advanced technology products and services to original equipment manufacturer (OEM) and end-user customers across a wide range of applications in all of our targeted end markets. In January 2013, we reorganized our operations to create three new operating groups, our Photonics Group, our Lasers Group and our Optics Group. These operating groups will represent our reportable segments commencing in the first quarter of 2013. Additional information regarding our new operating groups is included under the heading "Reorganization of Operating Groups" on page 11.

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 Acquisition of Vistek Assets On October 10, 2012, we acquired substantially all of the assets of Advanced Vibration Technologies, Inc., a corporation doing business under the trade name of Vistek (Vistek), for a purchase price of $2.5 million. The purchase price was paid in cash at closing, of which $0.25 million was deposited at closing into escrow until October 10, 2013, to secure certain indemnification obligations of Vistek and its sole shareholder under the asset purchase agreement. We incurred $49 thousand in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. This acquisition expanded our vibration control and isolation product offerings. The results of the Vistek business are included in the results of our PPT Division in the accompanying financial statements.

Acquisition of ILX On January 13, 2012, we acquired all of the outstanding capital stock of ILX Lightwave Corporation (ILX) by means of a merger of our wholly owned subsidiary with and into ILX. The total purchase price for the acquisition was $9.0 million. An initial purchase price of $9.3 million was paid in cash at closing, of which $1.2 million was deposited at closing into escrow until July 12, 2013, to secure certain indemnification and other obligations of the ILX securityholders. The purchase price was subsequently reduced by $0.3 million, based on a calculation of ILX's net assets at closing. We incurred $0.1 million in transaction costs, which have been expensed as incurred and are 40 -------------------------------------------------------------------------------- Table of Contents included in selling, general and administrative expenses in the accompanying consolidated statements of operations. This acquisition expanded our optical power meter, laser diode instrumentation and fiber optic source product offerings, and added laser diode and light emitting diode (LED) burn-in, test and characterization systems to our product portfolio. The results of ILX are included in the results of our PPT Division in the accompanying financial statements.

Purchase Price Allocation for 2012 Acquisitions The consideration paid for our acquisitions is allocated to the assets acquired, net of the liabilities assumed, based upon their estimated fair values as of the date of the acquisition. The estimated fair values of intangible assets acquired were determined using an income approach. The excess of the purchase price over the estimated fair value of the assets acquired, net of the estimated fair value of the liabilities assumed, is recorded as goodwill. Below is a summary of the purchase price, assets acquired and liabilities assumed: Vistek (In thousands) ILX Business Total Assets acquired and liabilities assumed: Cash $ 44 $ - $ 44 Accounts receivable 1,224 - 1,224 Inventories 861 81 942 Other assets 587 26 613 Goodwill 3,762 273 4,035 Developed technology 2,800 1,200 4,000 Customer relationships 1,100 900 2,000 Other intangible assets 1,090 20 1,110 Deferred income taxes (1,841 ) - (1,841 ) Other liabilities (644 ) - (644 ) $ 8,983 $ 2,500 $ 11,483 The goodwill related to our acquisition of ILX has been allocated to our PPT Division and will not be deductible for tax purposes, as it was a merger. The goodwill related to our acquisition of the Vistek business has been allocated to our PPT division and will be deductible for tax purposes as it was an asset purchase.

Acquisition of Opticoat Assets On December 29, 2011, we acquired substantially all of the assets of Opticoat SRL (Opticoat) for a purchase price of $3.0 million in cash, of which $2.0 million was paid upon the closing and $1.0 million was held back to secure certain obligations of Opticoat under the acquisition agreement. We paid an additional $0.85 million in 2012 and absent any indemnification claims by us, we will pay the remaining $0.15 million in 2013. The present value of these payments was determined to be $2.9 million. We incurred $0.1 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. This acquisition expanded our capabilities and capacity in the manufacturing of precision optical components and coatings.

Acquisition of Ophir On October 4, 2011, we acquired all of the outstanding capital stock of Ophir Optronics Ltd. (Ophir) for $242.3 million in cash, of which $242.1 million was allocated to the purchase price and $0.2 million was allocated to the fair value of unearned compensation related to unvested stock options. We funded the purchase price with a combination of $162.8 million of cash on hand and $79.5 million of the net proceeds we received from the senior secured credit facility we obtained in October 2011, described more fully under the heading "Liquidity and Capital Resources" on page 55. We incurred $4.7 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. This acquisition added Ophir's precision infrared optics and lens assemblies, laser measurement instrumentation and three-dimensional non-contact measurement sensors and equipment to our product offerings.

41 -------------------------------------------------------------------------------- Table of Contents Acquisition of High Q On July 29, 2011, we acquired all of the capital stock of High Q Technologies GmbH (High Q). The total purchase price was $18.5 million, consisting of an initial purchase price of $17.2 million, $2.9 million of which was deposited into escrow until December 31, 2013 to secure representations and warranties made by the sellers, and a subsequent payment of $1.3 million, which was paid to the sellers based on a calculation of High Q's net assets at closing. We incurred $0.4 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. This acquisition broadened our ultrafast laser capabilities, particularly for applications in the life and health sciences and industrial markets, and expanded our presence in European laser markets.

Prior to the closing of the acquisition, High Q sold the building that houses its corporate headquarters and its operations to a company established by the then-largest shareholder of High Q for €3.5 million ($4.6 million as of December 29, 2012), and leased the building from the purchaser for a period of at least ten years. High Q financed the purchase price of the building pursuant to a loan agreement with the purchaser that is secured by a mortgage on the building in favor of High Q. Such loan will be repaid over ten years and accrues interest at an annual rate of 2.0%. The principal balance of the loan was €3.2 million ($4.3 million) as of December 29, 2012. As of December 29, 2012, the current portion of the loan was $0.3 million and is included in prepaid expenses and other current assets, and the long-term portion of the loan was $4.0 million and is included in investments and other assets, in the accompanying consolidated balance sheets.

Purchase Price Allocation for 2011 Acquisitions Below is a summary of the purchase price, assets acquired and liabilities assumed for our acquisitions in 2011: (In thousands) Ophir High Q Opticoat Total Assets acquired and liabilities assumed: Cash $ 23,233 $ 5,989 $ - $ 29,222 Accounts receivable 18,732 1,494 - 20,226 Inventories 30,370 7,829 - 38,199 Other current assets 4,478 5,957 - 10,435 Goodwill 66,524 6,745 1,302 74,571 Developed technology 41,530 6,300 705 48,535 In-process research and development 9,560 - - 9,560 Customer relationships 56,640 1,350 148 58,138 Other intangible assets 13,970 4,170 - 18,140 Property and equipment 41,652 1,436 917 44,005 Other noncurrent assets 13,917 225 - 14,142 Short-term borrowings (7,082 ) (10,699 ) - (17,781 ) Accounts payable (7,756 ) (1,792 ) - (9,548 ) Other current liabilities (17,562 ) (3,690 ) - (21,252 ) Long-term debt (9,781 ) (4,161 ) - (13,942 ) Deferred income taxes (23,292 ) (2,063 ) - (25,355 ) Other noncurrent liabilities (10,973 ) (585 ) (137 ) (11,695 ) Non-controlling interests (2,076 ) - - (2,076 ) $ 242,084 $ 18,505 $ 2,935 $ 263,524 For our Ophir and Opticoat acquisitions, the goodwill has been allocated to our Ophir Division and will not be deductible for tax purposes. For our High Q acquisition, the goodwill has been allocated to our Lasers Division, a portion of which will be deductible for Austrian tax purposes.

In 2012, we determined that goodwill and other assets related to Ophir were impaired and recorded impairment charges of $130.9 million. Of these charges, $67.8 million related to goodwill, $62.6 million related to other acquired intangible assets and $0.5 million related to fixed assets. See "Impairment Charges" on page 53 for additional information.

42 -------------------------------------------------------------------------------- Table of Contents Divestiture of Hilger Crystals Limited 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. 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. In 2012, we recognized a gain of $0.2 million related to an earn-out associated with this transaction. Such gain and loss have been included in (Gain) loss on sale of assets and related costs in the accompanying consolidated statements of operations. In addition, during 2010, 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 in the accompanying consolidated statements of operations.

The assets of the Hilger Crystals Limited 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 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 2012 (referred to herein as 2012) ended on December 29, 2012, fiscal year 2011 (referred to herein as 2011) ended on December 31, 2011 and fiscal year 2010 (referred to herein as 2010) ended on January 1, 2011. Each of these fiscal years consisted of 52 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 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) of 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.

43 -------------------------------------------------------------------------------- Table of Contents 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 selling price, 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 exceed our established sales return reserves, our net sales would 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 December 29, 2012 and December 31, 2011, notes receivable, net totaled $1.5 million and $2.1 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 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 December 29, 2012 and December 31, 2011, the principal amount of such promissory notes included in notes receivable, net and short-term borrowings in the accompanying consolidated balance sheets totaled $0.4 million and $1.3 million, respectively.

44 -------------------------------------------------------------------------------- Table of Contents 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.

We account for our Israeli pension plans using the shut-down method of accounting. Under the shut-down method, the liability is calculated as if it was payable as of each balance sheet date, on an undiscounted basis. In addition, the assets and liabilities of the plans are accounted for on a gross basis.

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 investments and 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 would 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. Products sold by our Ophir Division generally carry a one-year warranty, except for laser beam profilers and dental CAD/CAM scanners, which generally carry a two-year warranty.

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 $3.4 million and $4.3 million as of December 29, 2012 and December 31, 2011, respectively. As of December 29, 2012 and December 31, 2011, the amounts accrued for long-term warranty obligations were not material.

45 -------------------------------------------------------------------------------- Table of Contents 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.

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 indefinite-lived 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 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 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, using a combination of historical results, industry data and competitor data, 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.

We recorded impairment charges related to long-lived assets, goodwill and other intangible assets in 2012. An explanation of such impairment charges is included in the discussion of our results of operations under the heading "Impairment Charges" on page 53. There were no impairment charges in 2011 or 2010.

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 the United States 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.

46 -------------------------------------------------------------------------------- Table of Contents 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 as well as 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.

Since 2002, we have maintained a valuation allowance against a portion of our gross deferred tax assets. We have monitored our actual results, forecast data and other available evidence, both positive and negative, and we have periodically increased or reduced 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 2010, 2011 and 2012 is included in the discussion of our results of operations under the heading "Income Taxes" on page 54.

We utilize ASC 740-10-25, Income Taxes - Recognition, which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC 740-10-25, tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.

Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. As a multi-national corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. As a result of these adjustments, our effective tax rate in a given financial statement period could be materially affected.

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 restricted stock unit awards vest based upon the achievement of one or more financial performance thresholds established by the Compensation Committee of our Board of Directors. Currently, such performance thresholds relate to the fiscal year in which the award is granted, and if such performance thresholds are met, the awards vest in equal installments on the first three anniversaries of the grant date. Until we have determined that performance thresholds 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 thresholds. Estimating the likelihood of achievement of performance thresholds 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.

47 -------------------------------------------------------------------------------- Table of Contents The fair value of stock-based awards, adjusted for estimated forfeitures (and adjusted for estimated or actual achievement of performance thresholds 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 December 29, December 31, January 1, (In thousands) 2012 2011 2011 Cost of sales $ 693 $ 488 $ 392 Selling, general and administrative expenses 6,740 5,029 3,896 Research and development expense 936 684 560 $ 8,369 $ 6,201 $ 4,848 48 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Years Ended December 29, 2012, December 31, 2011 and January 1, 2011 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 December 29, December 31, January 1, 2012 2011 2011 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 56.2 56.0 57.2 Gross profit 43.8 44.0 42.8 Selling, general and administrative expenses 26.8 25.8 23.5 Research and development expense 8.8 8.3 8.2 (Gain) loss on sale of assets and related costs (0.0 ) - 0.1 Impairment charge 22.0 - - Operating income (loss) (13.8 ) 9.9 11.0 Recovery of note receivable and other amounts related to previously discontinued operations, net - 0.1 - Foreign currency translation gain from dissolution of subsidiary - 1.3 - Gain on sale of investments 1.0 - - Loss on extinguishment of debt - (0.1 ) - Interest and other expense, net (1.4 ) (1.9 ) (1.8 ) Income (loss) before income taxes (14.2 ) 9.3 9.2 Income tax provision (benefit) 0.9 (5.3 ) 0.7 Net income (loss) (15.1 ) 14.6 8.5 Net loss attributable to non-controlling interest (0.1 ) - - Net income (loss) attributable to Newport Corporation (15.0 )% 14.6 % 8.5 % 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 2012, 2011 and 2010, our net sales totaled $595.3 million, $545.1 million and $479.8 million, respectively. Our total net sales increased $50.2 million, or 9.2%, in 2012 compared with 2011. Net sales by our PPT Division decreased $14.7 million, or 4.5%, and net sales by our Lasers Division decreased $10.1 million, or 5.3%, in 2012 compared with 2011. ILX, which we acquired on January 13, 2012, contributed $7.2 million to the sales by our PPT Division in 2012, for which there were no comparable sales during 2011. High Q, which we acquired on July 29, 2011, contributed $26.4 million to the sales by our Lasers Division for the full year of 2012, compared with $13.6 million of sales in 2011 following the acquisition date. These additional sales in 2012 were more than offset by decreases in sales in other parts of our PPT Division and Lasers Division. In particular, our Lasers Division's sales in 2012 were impacted by our discontinuation of certain products. Our Ophir Division, which we established in connection with our acquisition of Ophir on October 4, 2011, contributed $102.6 million of net sales for the full year of 2012 compared with $27.6 million of net sales in the remainder of 2011 following the acquisition date.

We experienced increases in sales in 2012 compared with 2011 in our scientific research and defense/security, life and health sciences, and industrial manufacturing and other end markets, due primarily to the incremental sales 49 -------------------------------------------------------------------------------- Table of Contents by Ophir, High Q and ILX. Ophir's products are sold primarily to customers in the defense/security and industrial manufacturing markets, High Q's products are sold primarily to customers in the life and health sciences market, and ILX's products are sold primarily to customers in the industrial market and the scientific research and defense/security markets. The increases in sales in these markets in 2012 were offset in part by a decrease in sales in our microelectronics end market, due primarily to the cyclical downturn in the semiconductor equipment industry, which began in mid-2011.

Our total net sales increased $65.3 million, or 13.6%, in 2011 compared with 2010. Net sales by our PPT Division increased $28.3 million, or 9.5%, and net sales by our Lasers Division increased $9.4 million, or 5.2%, in 2011 compared with 2010. Our Ophir Division contributed sales of $27.6 million in 2011 following the acquisition on October 4, 2011. Our Lasers Division's sales in 2011 benefited from the additional $13.6 million of sales from High Q, for which there were no comparable sales in 2010. These additional sales were offset in part by a decrease in sales in other parts of our Lasers Division due primarily to our discontinuation of certain products. We experienced increases in net sales in all of our end markets in 2011 compared with 2010, primarily as a result of our additions of Ophir and High Q, improved worldwide macroeconomic conditions and strong conditions in the semiconductor equipment industry during the first half of 2011, offset in part by the significant decline in sales to semiconductor equipment customers in the second half of 2011.

Net sales to the scientific research and defense/security markets were $202.5 million, $183.7 million and $159.7 million for 2012, 2011 and 2010, respectively. The increase of $18.8 million, or 10.3%, in 2012 compared with 2011 was due to our acquisitions of Ophir and ILX, which contributed sales to these markets totaling $51.4 million for the full year of 2012, compared with $13.2 million of sales by Ophir to these markets in the remainder of 2011 following the acquisition date and no comparable sales by ILX in 2011. These increases were offset in part by adverse macroeconomic conditions in these markets as a result of budget constraints and uncertainty in future global research spending levels. The increase of $24.0 million, or 15.0%, in 2011 compared with 2010 was due primarily to our acquisition of Ophir, as well as strength in research funding by governmental entities, corporations and private foundations in 2011. Generally, our net sales to these markets by all of our divisions may fluctuate from period to period due to the timing of large sales relating to major research and defense programs and, in some cases, these fluctuations may be offsetting between our divisions or between such periods.

Net sales to the microelectronics market were $138.8 million, $157.8 million and $153.9 million for 2012, 2011 and 2010, respectively. The decrease of $19.0 million, or 12.0%, in 2012 compared with 2011 was due primarily to the continued cyclical downturn in the semiconductor industry. The increase of $3.9 million, or 2.5%, in 2011 compared with 2010 was due primarily to strong conditions in the semiconductor equipment industry during the first half of 2011, offset in large part by a significant decline in sales to customers in that industry in the second half of 2011, as the industry began to experience a cyclical downturn.

Net sales to the life and health sciences market were $132.3 million, $120.1 million and $96.7 million for 2012, 2011 and 2010, respectively. The increase of $12.2 million, or 10.2%, in 2012 compared with 2011 was due to our acquisitions of High Q and Ophir, which contributed sales to this market totaling $33.2 million for the full year of 2012 compared with $15.6 million of sales in the remainder of 2011 following the acquisition dates. These increases were offset in part by decreased sales of products for analytical instrumentation and bioimaging applications, due primarily to budget constraints and uncertainty in future global research spending levels. The increase of $23.4 million, or 24.1%, in 2011 compared with 2010 was due primarily to our acquisitions of High Q and Ophir, which contributed sales to this market totaling $15.6 million during 2011, and to increased sales of products for bioinstrumentation applications.

Net sales to our industrial manufacturing and other end markets were $121.7 million, $83.5 million and $69.5 million for 2012, 2011 and 2010, respectively, representing an increase of $38.2 million, or 45.8%, in 2012 compared with 2011, and an increase of $14.0 million, or 20.1%, in 2011 compared with 2010. The increases in sales to these markets in both periods were due primarily to the acquisition of Ophir, which contributed $37.9 million in sales to these markets for the full year of 2012, and $9.0 million in sales to these markets in the remainder of 2011 following the acquisition date. In addition, our acquisition of ILX contributed sales to these markets of $4.6 million during 2012, and there were no comparable sales in 2011. In 2011, we also experienced stronger sales of products for electro-optics and telecommunications applications compared with 2010.

50 -------------------------------------------------------------------------------- Table of Contents The table below reflects our net sales by geographic region. Sales are attributed to each location based on the customer address to which the product is shipped.

Year Ended December 29, December 31, Percentage (In thousands, except percentages) 2012 2011 Increase Increase United States $ 243,674 $ 240,736 $ 2,938 1.2 % Germany 73,383 61,580 11,803 19.2 Other European countries 78,428 72,957 5,471 7.5 Japan 62,947 52,971 9,976 18.8 Other Pacific Rim countries 94,313 80,731 13,582 16.8 Rest of world 42,601 36,079 6,522 18.1 Total sales $ 595,346 $ 545,054 $ 50,292 9.2 % Year Ended Percentage December 31, January 1, Increase Increase (In thousands, except percentages) 2011 2011 (Decrease) (Decrease) United States $ 240,736 $ 233,479 $ 7,257 3.1 % Germany 61,580 36,982 24,598 66.5 Other European countries 72,957 65,387 7,570 11.6 Japan 52,971 57,915 (4,944 ) (8.5 ) Other Pacific Rim countries 80,731 65,449 15,282 23.3 Rest of world 36,079 20,575 15,504 75.4 Total sales $ 545,054 $ 479,787 $ 65,267 13.6 % The increases in sales to customers in the United States, European countries including Germany, and other areas of the world in 2012 compared with 2011 were due primarily to increased sales to defense customers and to customers in our life and health sciences and industrial manufacturing and other end markets as a result of our acquisitions of Ophir, High Q and ILX. These increases were offset in part by decreased sales to research customers, due primarily to the budget constraints and research funding uncertainty in the United States, and to customers in our microelectronics end market, due primarily to a cyclical downturn in the semiconductor equipment industry that began in the second half of 2011. The increase in sales to customers in Japan in 2012 compared with 2011 was due to our acquisition of Ophir and increased sales to certain microelectronics customers. The increase in sales to customers in the other Pacific Rim countries in 2012 compared with 2011 was attributable primarily to increased sales to customers in our microelectronics end market, due in part to sales being shifted to the Pacific Rim as a result of transfers of manufacturing operations by certain OEM customers to Asia, and to increased sales to customers in our industrial manufacturing and other end markets due to our acquisition of Ophir, offset in part by lower sales to customers in our life and health sciences and scientific research and defense/security end markets. The increases in sales to customers in other areas of the world in 2012 compared to 2011 were due primarily to increased sales to defense customers as a result of the Ophir acquisition.

The increase in sales to customers in the United States in 2011 compared with 2010 was due primarily to increased sales to customers in our life and health sciences end market and to defense customers due to our acquisition of Ophir.

These increases were offset in part by decreased sales to customers in our microelectronics end market, part of which was due to certain OEM sales being shifted to the Pacific Rim as discussed above. The increase in sales to customers in Germany in 2011 compared with 2010 was due to increased sales to all end markets, and the increase in sales to customers in other European countries was due to increased sales to customers in all of our end markets, except our scientific research and defense/security end markets. Sales in Europe were particularly strong in the life and health sciences market in 2011 compared with 2010 due to our acquisition of High Q. The decrease in sales to customers in Japan in 2011 compared with 2010 was due primarily to decreased sales to customers in our microelectronics and life and health sciences end markets, as a result of the earthquake and tsunami that impacted that region in March 2011. The increase in sales to other Pacific Rim countries in 2011 compared with 2010 was due primarily to increased sales to customers in our microelectronics end market (due in 51 -------------------------------------------------------------------------------- Table of Contents part to the transfer described above) and our life and health sciences end market. The increases in sales to customers in other areas of the world in 2011 compared to 2010 were due primarily to increased sales to defense customers as a result of the Ophir acquisition, increased sales to research customers in connection with major research programs, and increased sales to customers in our microelectronics end market.

Gross Margin Gross margin was 43.8%, 44.0% and 42.8% for 2012, 2011 and 2010, respectively.

The decrease in gross margin in 2012 compared with 2011 was due primarily to increased intangible asset amortization associated with technology acquired in our recent acquisitions and to a lower proportion of sales of high margin products by our PPT Division, offset in part by improved margins in our other divisions. The increase in gross margin in 2011 compared with 2010 was due primarily to improved absorption of manufacturing overhead and lower excess and obsolete inventory reserves, offset in part by lower gross margins from our Ophir Division due to increased inventory valuations resulting from purchase accounting, which increased the cost of goods sold of this division.

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 $159.3 million, or 26.8% of net sales, $140.6 million, or 25.8% of net sales, and $112.8 million, or 23.5% of net sales, during 2012, 2011 and 2010, respectively. The increase in total SG&A expenses in 2012 compared with 2011 was attributable primarily to our acquisitions of Ophir, High Q and ILX. In 2012 compared with 2011, personnel expenses increased by $12.2 million, intangible asset amortization increased by $8.3 million, travel expenses increased by $1.4 million, and we also experienced increases in consulting fees and utilities expenses. Our legal fees decreased by $3.7 million in 2012 compared with the prior year period due primarily to the legal fees that we incurred in 2011 relating to our acquisitions, which did not recur in 2012. In addition, third party commissions incurred by our other businesses decreased by $1.2 million in 2012 compared with 2011.

The increase in SG&A expenses in 2011 compared with 2010 was due primarily to increased wages of $8.2 million, $3.7 million of which resulted from the addition of Ophir and High Q, increased professional fees of $7.2 million, primarily related to acquisitions, increased depreciation and amortization of $5.2 million, primarily related to the amortization of intangible assets added as a result of the Ophir and High Q acquisitions, and increased travel expenses of $1.6 million.

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. In addition, any acquisitions would increase our SG&A expenses, and such increases may not be in proportion to the changes in net sales.

Research and Development (R&D) Expense R&D expense totaled $52.7 million, or 8.8% of net sales, $45.3 million, or 8.3% of net sales, and $39.3 million, or 8.2% of net sales, during 2012, 2011 and 2010, respectively. The increase in R&D expense in 2012 compared with 2011 was due primarily to additional R&D expenses resulting from our acquisitions, offset in part by decreased R&D spending across the remainder of our business.

The increase in R&D expense in 2011 compared with 2010 was due primarily to additional R&D expenses resulting from the Ophir and High Q acquisitions, as well as increased R&D activity across the remainder of our business.

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 52 -------------------------------------------------------------------------------- Table of Contents expense will likely not be in proportion to the changes in net sales. In addition, any acquisitions would increase our R&D expenses, and such increases may not be in proportion to the changes in net sales.

(Gain) Loss 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 in July 2010, as discussed under "Divestiture of Hilger Crystals Limited" on page 43. Our Hilger Crystals business had previously been included in our PPT Division. Under the terms of this sale, we were entitled to receive an additional payment of up to $0.75 million in cash if Hilger Crystals achieved certain specified revenue targets during the 18-month period following the closing date. Based on the actual revenue level achieved by Hilger Crystals during such period, we received $0.2 million in 2012.

Impairment Charges During 2012, sales by our Ophir Division were below the levels that we had originally forecasted at the time of our acquisition of Ophir. In light of those sales levels and other factors, in connection with the annual evaluation of our goodwill and other intangible assets in the fourth quarter of 2012, we determined that the cash flow projections of our Ophir Division had diminished and, therefore, the goodwill and other intangible assets associated with that division were impaired. In addition, in connection with our annual evaluation of long-lived assets, we determined that certain fixed assets of Ophir were also impaired. As a result, we recorded impairment charges totaling $130.9 million, consisting of $67.8 million related to goodwill, $62.6 million related to acquired intangible assets, and $0.5 million related to fixed assets.

Recovery 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 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. In 2011, we recognized an additional $0.6 million as a recovery of amounts due from Kensington, net of certain costs, related primarily to the sale of the collateral.

Foreign Currency Translation Gain from Dissolution of Subsidiary During 2011, we recognized a total of $7.2 million in foreign currency translation gains, which had previously been included in other comprehensive income, in connection with the dissolution of our French financing subsidiary.

Gain on Sale of Investments We hold equity interests in privately-held corporations, which were accounted for using the cost method. During previous years, we had reduced the carrying values of these interests to zero due to the corporations' poor financial condition at that time. In the second quarter of 2012, one of these corporations was acquired in a merger transaction, and we received $5.3 million for our interest as a result of the acquisition. In the third quarter of 2012, another of these corporations redeemed its shares from us for $1.0 million.

Loss on Extinguishment of Debt During 2011, we extinguished $114.4 million of our convertible subordinated notes at a weighted-average price equal to 100.5% of the principal amount of the notes, or $115.0 million. After allocating $1.5 million to the equity component, we recorded a loss of $0.1 million on extinguishment of debt, net of unamortized fees and debt discount. In addition, in 2011, we retired Ophir's outstanding publicly traded bonds with a carrying value of approximately $9.1 million for $9.6 million, resulting in a loss of $0.5 million.

53 -------------------------------------------------------------------------------- Table of Contents Interest and Other Expense, Net Interest and other expense, net was $8.6 million, $10.6 million and $8.5 million in 2012, 2011 and 2010, respectively. The decrease in interest and other expense, net in 2012 compared with 2011 was due primarily to a decrease in interest expense as a result of the repayment of our convertible notes and the lower interest expense associated with our term loan compared with our convertible notes, and to gains on derivative instruments, offset in part by foreign currency translation losses in 2012 and a gain on recovery of a note receivable in 2011 that did not recur in 2012. The increase in interest and other expense, net in 2011 compared with 2010 was due primarily to the addition of interest expense associated with our term loan, offset in part by a reduction in interest expense as a result of extinguishing $114.4 million of our convertible notes.

Income Taxes Our effective income tax rate reflected a tax expense of (6.5)% for 2012, a tax benefit of (57.7)% for 2011 and a tax expense of 7.1% for 2010. In 2012, we recorded a loss before income taxes as a result of the impairment charges discussed under the heading "Impairment Charges" on page 53. Certain of these impairment charges were not deductible for tax purposes and, as such, we recorded a tax expense in 2012 notwithstanding such loss. We had previously established a valuation allowance against substantially all domestic and certain foreign deferred tax assets due to the uncertainty as to the timing and ultimate realization of those assets. During 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.

During the fourth quarter of 2011, we achieved a cumulative three-year net income position in the United States, and we expect to achieve future profitability. Management considered this position along with other available evidence, both positive and negative, and determined, as of December 31, 2011, that it was more likely than not that our net deferred tax assets (exclusive of deferred tax liabilities related to indefinite lived intangibles) would be realized, with the exception of domestic capital losses, domestic unrealized losses, foreign net operating loss carryforwards and other miscellaneous foreign deferred tax assets. Accordingly, we recorded a reduction in our valuation allowance of $41.7 million, representing substantially all of the valuation allowance against our U.S. deferred tax assets and resulting in a tax benefit in 2011.

During the first quarter of 2012, we released $1.4 million of our remaining valuation allowance related to certain domestic deferred tax assets due to the expected recovery of certain investments and capital loss carryovers. During the second quarter of 2012, we substantially completed a corporate reorganization related to the U.S. subsidiaries of Ophir, which necessitated updates to the estimated state tax rates used to value our domestic deferred tax assets and liabilities, and as a result, we recognized a $1.0 million tax benefit. During the third quarter of 2012, we released $0.4 million of our valuation allowance related to certain domestic deferred tax assets due to the recovery of certain other investments. During the fourth quarter of 2012, after evaluating all positive and negative facts, we determined that it was not more likely than not that we would realize certain deferred tax assets associated with our Ophir Division. Therefore, we recorded a valuation allowance of $1.9 million, substantially all of which was applicable to Ophir's Optimet business based in Israel. As of December 29, 2012, we maintained a valuation allowance on domestic unrealized losses, certain domestic and foreign net operating loss carryforwards and other miscellaneous foreign deferred tax assets of $3.1 million.

As of December 29, 2012, we had $15.2 million of gross unrecognized tax benefits and a total of $12.4 million of net unrecognized tax benefits, which, if recognized, would affect our effective tax rate. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. Interest and penalties related to unrecognized tax benefits were not significant as of December 29, 2012. We believe that it is reasonably possible that gross unrecognized tax benefits may decrease by $1.1 million within the next twelve months.

54 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our cash and cash equivalents, restricted cash and marketable securities balances increased to $100.4 million as of December 29, 2012 from $72.9 million as of December 31, 2011. This increase was attributable primarily to cash provided by operations and the sale of minority interest investments, offset in part by repayment of debt, capital expenditures and cash used for acquiring and integrating new businesses.

Net cash provided by our operating activities of $81.4 million was attributable primarily to cash provided by our results of operations and a decrease of $9.1 million in accounts and notes receivable due to the timing of receipts and lower sales during the fourth quarter of 2012 as compared with the fourth quarter of 2011. Net cash was reduced by a decrease of $8.2 million in accrued payroll expenses due primarily to incentive payouts made in 2012 based on 2011 performance and the absence of incentive compensation accruals in 2012 due to non-achievement of 2012 performance targets. Net cash was also reduced by a decrease of $3.9 million in accrued expenses related to the reduction of various tax accruals, an increase in prepaid expenses and other assets of $2.2 million due to an increase in taxes receivable, and an increase in gross inventory of $1.9 million.

Net cash used in investing activities of $11.0 million was attributable primarily to purchases of property and equipment of $11.5 million, $11.4 million in cash paid for our acquisitions of ILX and the Vistek business, net of cash acquired, and net purchases of marketable securities of $3.7 million, offset in part by the removal of restrictions on $9.3 million of restricted cash and by $6.4 million in gains on the sale of investments.

Net cash used in financing activities of $37.5 million was attributable primarily to net repayments of borrowings of $38.6 million (which consisted primarily of principal payments on the term loan under our secured credit facility of $13.9 million, the repayment of the remaining $12.4 million of our convertible notes, the repayment of $7.0 million of loans in Israel, and the repayment of all of our loans and lines of credit in Austria totaling $4.2 million) and payments of $3.1 million in connection with the cancellation of restricted stock units for taxes owed by employees upon the vesting of restricted stock units issued under our stock incentive plans, offset in part by proceeds of $3.6 million from the sale of stock under employee plans.

As of December 29, 2012, we had cash and cash equivalents of $88.8 million, restricted cash of $3.1 million and marketable securities of $8.5 million.

Substantially all of our marketable securities are currently invested in certificates of deposit or Euro Over Night Index Average (Eonia) securities.

Our senior financial management and our Board of Directors periodically review our marketable securities to determine the appropriate investment strategy. 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, capital expenditures, debt payment requirements and other contractual obligations, and changes in interest rates.

During 2011, we issued 200 million Japanese yen ($2.3 million at December 29, 2012) in private placement bonds through a Japanese bank. These bonds bear interest at a rate of 0.62% per year, payable in cash semiannually in arrears on June 30 and December 31 of each year, and mature on June 30, 2014. The bonds are included in long-term debt in the accompanying consolidated balance sheets as of December 29, 2012.

In October 2011, we entered into a credit agreement with certain lenders (Credit Agreement). The Credit Agreement and the related security agreement provide for a senior secured credit facility consisting of a $185 million term loan and a $65 million revolving line of credit, each with a term of five years, which is secured by substantially all of our domestic assets as well as a pledge of certain shares of our subsidiaries. The initial interest rates per annum applicable to amounts outstanding under the term loan and the revolving line of credit are, at our option, either (a) the base rate as defined in the Credit Agreement (Base Rate) plus 1.75%, or (b) the Eurodollar Rate as defined in the Credit Agreement (Eurodollar Rate) plus 2.75%. The margins over the Base Rate and Eurodollar Rate applicable to the term loan and loans outstanding under the revolving line of credit are subject to adjustment in future periods based on our consolidated leverage ratio, as defined in and calculated under the Credit Agreement, provided that the maximum applicable margins are 2.00% for Base Rate loans and 3.00% for Eurodollar Rate loans, and the minimum applicable margins are 1.25% for Base Rate loans and 2.25% for Eurodollar Rate loans. Principal amortization and interest payments on the term loan are due quarterly. At December 29, 2012, we had a remaining balance of $171.1 million outstanding on the term loan with an effective interest rate of 2.96%. At December 29, 2012, there was no balance outstanding under the revolving line of credit, with $63.6 million available after considering outstanding letters of credit totaling $1.4 million. Our ability to borrow funds under the revolving line 55 -------------------------------------------------------------------------------- Table of Contents of credit is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties.

At December 29, 2012, we had (i) four revolving lines of credit with Japanese banks; (ii) two agreements with Japanese banks under which we sell trade notes receivable with recourse; (iii) six loans with Japanese banks; and (iv) three loans with Israeli banks, as follows: Principal Amount Amount Available for Outstanding Borrowing Description (in millions) (in millions) InterestRate(s) Expiration Date(s) Japanese lines of credit $ 5.2 $ 12.0 1.18% to 2.475% Various dates through July 2013 Japanese agreements for $ 0.4 $ 6.4 1.475% No expiration dates sale of receivables Japanese loans $ 1.1 $ - 1.25% to 1.45% Various dates through November 2016 Israeli loans $ 3.6 $ - 2.97% to 4.00% Various dates through October 2015 In May 2008, our Board of Directors approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of our common stock. No purchases were made under this program during 2012, 2011 or 2010. As of December 29, 2012, 3.9 million shares remained available for purchase under the program. However, the terms of the Credit Agreement restrict our ability to purchase additional shares under this program during the term of the Credit Agreement.

We expect to use $12 million to $18 million of cash for capital expenditures during 2013.

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 19-33), 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. We will continue to evaluate potential 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. However, the Credit Agreement only permits us to make investments and acquisitions under certain circumstances, and restricts our ability to incur additional indebtedness. We therefore 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.

56 -------------------------------------------------------------------------------- Table of Contents 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 and other fees for information technology applications. We typically exceed these minimum purchase obligations.

Our long-term debt, capital and operating lease obligations, purchase obligations and pension benefit obligations at December 29, 2012 were as follows: Payments due by period Less than 1-3 3-5 More than (In thousands) 1 year years years 5 years Total Debt obligations $ 32,985 $ 60,457 $ 90,301 $ - $ 183,743 Capital lease obligations 177 352 349 68 946 Operating lease obligations 11,180 15,635 12,280 20,675 59,770 Purchase obligations 1,047 880 - - 1,927 Pension benefits 2,363 3,301 3,277 21,218 30,159 $ 47,752 $ 80,625 $ 106,207 $ 41,961 $ 276,545 Our gross unrecognized tax benefits at December 29, 2012 were $15.2 million. We believe that it is reasonably possible that gross unrecognized tax benefits may decrease by $1.1 million within the next twelve months. However, we are not able to provide a detailed estimate of the timing of payments related to our gross unrecognized tax benefits due to the uncertainty of when the related tax settlements are due.

New Accounting Standards In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires companies to provide information regarding amounts transferred out of accumulated other comprehensive income by component. In addition, companies are required to disclose, either on the face of the income statement or in the notes to the financial statements, significant amounts transferred out of accumulated other comprehensive income, by their respective line items. ASU No. 2013-02 will be effective for fiscal years beginning after December 15, 2013 and early adoption is permitted but has not been elected. The adoption of ASU No. 2013-02 will not have a material impact on our financial position or results of operations.

In July 2012, the Financial Accounting Standards Board issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which amends the guidance in ASC 350, Intangibles-Goodwill and Other. ASU No. 2012-02 allows, but does not require, companies to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired, and then use such assessment as a basis for determining whether it is necessary to perform the quantitative impairment test. ASU No. 2012-02 became effective for fiscal years beginning after September 15, 2012. The adoption of ASU No. 2012-02 will not have a material impact on our financial position or results of operations.

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Software Telco Congress

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