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GSIG > SEC Filings for GSIG > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for GSI GROUP INC


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 8 of this Annual Report on Form 10-K. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to, expected sale of the Semiconductor Systems business in the first half of 2013; anticipated financial performance; expected liquidity and capitalization; drivers of revenue growth; management's plans and objectives for future operations, expenditures and product development and investments in research and development; business prospects; potential of future product releases; anticipated sales performance; industry trends; market conditions; changes in accounting principles and changes in actual or assumed tax liabilities; expectations regarding tax exposure; anticipated reinvestment of future earnings; anticipated expenditures in regard to the Company's benefit plans; future acquisitions and dispositions and anticipated benefits from prior acquisitions; anticipated outcomes of legal proceedings and litigation matters; and anticipated use of currency hedges. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following:
economic and political conditions and the effects of these conditions on our customers' businesses and level of business activity; our significant dependence upon our customers' capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate; delays in our delivery of new products; our reliance upon third party distribution channels subject to credit, business concentration and business failure risks beyond our control; fluctuations in our quarterly results, and our failure to meet or exceed our expected financial performance; customer order timing and other similar factors beyond our control; our dependence on one customer in our medical components business; disruptions in or breaches in security of our information technology systems; changes in interest rates, credit ratings or foreign currency exchange rates; risk associated with our operations in foreign countries; disruptions to our manufacturing operations as a result of natural disasters; our increased use of outsourcing in foreign countries; our failure to comply with local import and export regulations in the jurisdictions in which we operate; our history of operating losses and our ability to sustain our profitability; our exposure to the credit risk of some of our customers and in weakened markets; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our ability to make divestitures that provide business benefits; our failure to successfully integrate recent and future acquisitions into our business; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors' products; disruptions in the supply of or defects in raw materials, certain key components or other goods from our suppliers; production difficulties and product delivery delays or disruptions; our failure to comply with various federal, state and foreign regulations; changes in governmental regulation of our business or products; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our ability to utilize our net operating loss carryforwards and other tax attributes; fluctuations in our effective tax rates; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; volatility in the market price for our common shares; our dependence on significant cash flow to service our indebtedness and fund our operations; our ability to access cash and other assets of our subsidiaries; the influence over our business of certain significant shareholders; provisions of our articles of incorporation may delay or prevent a change in control; our significant existing indebtedness may limit our ability to engage in certain activities; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the

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events set forth in these statements and that could affect the Company's operating results and financial condition are discussed in Item 1A of this Annual Report on Form 10-K and elsewhere in this Annual Report on Form 10-K. In this Annual Report on Form 10-K, the words "anticipates," "believes," "expects," "intends," "future," "could," "estimates," "plans," "would," "should," "potential," "continues," and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements.

Business Overview

We design, develop, manufacture and sell laser-based solutions, optical control devices, and associated precision technologies. Our technology is incorporated into customer products or manufacturing processes for a wide range of applications in a variety of markets, including: electronics, industrial, medical, and scientific. Our products enable customers to make advances in materials and processing technology and to meet extremely precise manufacturing specifications.

Our Laser Products segment designs, manufactures and markets photonics-based solutions to customers worldwide. The segment serves highly demanding photonics-based applications such as cutting, welding, marking and scientific research. The segment sells these products both directly utilizing a highly technical sales force and indirectly through resellers and distributors.

Our Precision Motion and Technologies segment designs, manufactures and markets air bearing spindles, optical encoders, thermal printers, laser scanning devices, optics and light and color measurement instrumentation to customers worldwide. The vast majority of the segment's product offerings in precision motion and optical control technologies are sold to original equipment manufacturers ("OEMs"). The segment sells these products both directly utilizing a highly technical sales force and indirectly through resellers and distributors.


Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:

driving more consistent, profitable growth by improving our business mix to increase medical sales and reduce microelectronics sales as a percentage of total revenue;

strengthening our strategic position in medical components, scanning solutions, and fiber lasers through continual investment in differentiated new products and solutions;

expanding our market access and reach, particularly in higher growth and emerging regions, through investment in internal sales channels as well as external channel partners;

broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions;

streamlining our existing operations through site consolidations and strategic divestitures and expanding our business through strategic acquisitions; and

expanding operating margins by establishing a continuous improvement culture through formalized productivity programs and initiatives; and

attracting, retaining, and developing talented and motivated employees.

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Significant Events and Updates

Acquisition of NDS Surgical Imaging

On January 15, 2013, we completed the acquisition of NDS Surgical Imaging ("NDS"), a San Jose, California-based company that designs, manufactures, and markets high definition visualization solutions and imaging informatics products for the surgical and radiology end-markets, for $82.5 million in cash, subject to customary closing working capital adjustments. We expect the addition of NDS will help us leverage our existing medical OEM sales channels and our expertise in color measurement technology. In addition, the medical applications that NDS serves with its products are adjacent to several of our existing medical applications. There are also a number of common customers with some of our existing businesses, which we expect will strengthen our key OEM customer relationships.

Greater than 10% of NDS historical revenues in recent years were derived from one customer within the surgical display business. There is a risk that this customer may reduce some of its purchases of NDS products in the future. We are actively exploring options to remediate the risk.

Amended and Restated Senior Credit Facility

On December 27, 2012, we entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement"), which matures on December 27, 2017 and provides for an aggregate of $125.0 million credit facility, consisting of a $50.0 million, 5-year, term loan facility and a $75.0 million, 5-year, revolving credit facility (collectively, the "Senior Credit Facilities"). The Amended and Restated Credit Agreement amended and restated the existing credit agreement dated October 19, 2011 that had a maturity date of October 19, 2015 and consisted of a $40.0 million, 4-year, term loan facility and a $40.0 million, 4-year, revolving credit facility (as amended prior to December 27, 2012, the "Original Senior Credit Facility").

Appointment and Departure of Executive Officers

In October 2012, Matthijs Glastra joined the Company as corporate officer and Group President of our Laser Products segment. Mr. Glastra brings significant experience in the opto-electronics space, most recently as Chief Executive Officer of Philips Entertainment Lighting and formerly as Chief Operating Officer of Phillips Lumileds. In September 2012, our former Vice President, Group President of Laser Products and President of Synrad, departed the organization after 18 years of service with the Company.

Discontinued Operations Update

Beginning in 2011, we initiated a strategic review of our businesses to focus our growth priorities and simplify our business model. In June 2012, we committed to a plan for the sale of the Semiconductor Systems operating segment, sold under the GSI brand name, and Laser Systems product lines, sold under the Control Laser and Baublys brand names, and began accounting for these businesses as discontinued operations in the second quarter of 2012. In October 2012, we sold certain assets and liabilities of the Lasers Systems business for $7.0 million, subject to working capital adjustments, and recorded a $2.3 million gain, in the consolidated statement of operations. The Laser Systems facility in Orlando, Florida, which has an estimated fair value less costs to sell of $5.7 million as of December 31, 2012, was retained by the Company. We continue to make progress in the marketing of the Semiconductor Systems business and the Laser Systems facility and expect to sell the Semiconductor Systems business by the end of the second quarter of 2013 and the Laser Systems facility by the fourth quarter of 2013.

2011 Restructuring Plan Update

We have substantially completed our 2011 restructuring program that began in the fourth quarter of 2011, with a goal of eliminating up to twelve (12) facilities and targeting as much as $5.0 million in annualized costs savings. These reductions are expected to be achieved through a combination of site consolidations and

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divestitures, with divestitures resulting in the elimination of up to five facilities. Nine facilities have been exited, including three facilities exited as part of the sale of the Laser Systems business. We completed the consolidation of multiple operations during the year. We consolidated the manufacturing operations of our specialty lasers and optics products, consolidated our German operations into one facility and, in January 2013, consolidated our laser scanners business into our corporate headquarters located in Bedford, Massachusetts. We expect to substantially complete the consolidation and exit of up to three additional facilities in the first half of 2013 primarily as part of the expected sale of our Semiconductor Systems business.

We incurred $6.1 million of charges during the year ended December 31, 2012, related to the 2011 restructuring plan. These consisted of cash and non-cash charges of $4.1 million and $2.0 million, respectively. Cash charges primarily relate to severance, consulting and exit costs associated with the consolidation of our various facilities. Non-cash charges primarily relate to accelerated depreciation resulting from changes in estimated useful lives of certain long-lived assets for which we intend to exit. We expect to incur $1.2 million of cash related charges and $0.1 million of non-cash charges in 2013 related to the plan.

2012 Restructuring Plan Update

During the third quarter of 2012, we initiated a program (the "2012 restructuring program") to identify additional cost savings due to the continued uncertainty and volatility of the macroeconomic environment. This program identified an additional $1.0 million to $2.0 million of annualized cost savings beyond the savings expected from the 2011 restructuring program. We incurred $1.8 million of severance costs associated with the 2012 restructuring program during the year ended December 31, 2012. This plan was completed during the fourth quarter of 2012.

Release of our Valuation Allowance

During fiscal year 2012, based on an accumulation of positive evidence such as cumulative profits over the prior three years and projections for future growth, we determined that it is more likely than not that the benefits of our deferred tax assets will be realized. Accordingly, a deferred tax valuation allowance release of $15.3 million was recorded as an income tax benefit for the year.

As of December 31, 2012, a deferred tax valuation allowance of $15.5 million continues to be provided on state net operating losses, state tax credit carryforwards and certain foreign tax attributes that the Company determined are not more likely than not to be realized. In conjunction with our ongoing review of our actual results and anticipated future earnings, we will continue to reassess the possibility of releasing the valuation allowance currently in place on our deferred tax assets.

Overview of Financial Results

In 2012, we initiated actions to focus on strategic initiatives, including committing to a plan to sell our Laser Systems and Semiconductor Systems businesses and reporting the results of operations associated with these businesses in discontinued operations. We focused the Company's investments around three strategic growth areas, specifically, medical components, scanning solutions, and fiber lasers. In addition, we consolidated several manufacturing and R&D locations to improve our operating efficiencies while significantly enhancing our employee talent pool with the hiring of new business line leaders, functional leaders, and sales leaders.

Overall sales for 2012 decreased $32.8 million, or 10.8%, versus the prior year primarily as a result of a steep downturn in the capital equipment market, particularly in the microelectronics market. We currently are not expecting a recovery in these markets in 2013. To a lesser extent, the decrease was also attributable to lower specialty laser sales, which primarily serve scientific end markets. In addition, the year-over-year comparison is also affected by our adoption of Accounting Standards Update ("ASU") 2009-13, "Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"), which amended the revenue recognition

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guidance for multi-element arrangements. Following our adoption of ASU 2009-13 as of the beginning of 2011, we did not defer any revenue on new multiple-element orders received from customers during the period but delivered over multiple periods. For orders that had been deferred under multi-element arrangements, delivered over multiple periods, entered into prior to the adoption of ASU 2009-13, we recognized $8.1 million of net revenue with net gross profit of $3.5 million in 2011, with no comparable amounts for 2012.

Income from operations for 2012 of $15.0 million decreased $20.8 million, or 58.1%, versus the prior year. This decrease was primarily attributable to the drop in sales, an $8.0 million charge driven by our 2011 and 2012 restructuring programs, compared to a $2.0 million restructuring charge for the prior year related to our 2011 restructuring program, and $0.8 million in acquisition related costs compared to none in the prior year. Partially offsetting the decrease in income from operations was lower spending on operating costs resulting from restructuring actions taken in the fourth quarter of 2011 and during 2012.

Diluted earnings per share ("EPS") from continuing operations of $0.66 in 2012 increased $0.02 from the prior year. The decrease was largely because of a drop in income from operations of $20.8 million, offset by a $10.2 million reduction in interest expense for 2012 as a result of the reduction in our overall debt levels and refinancing of our debt in Q4 2011 and a release of the Company's valuation allowance of $15.3 million during 2012.

The specific components of our operating results for 2012, 2011 and 2010 are further discussed below.

Results of Operations

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

                                                              Year Ended December 31,
                                                         2012          2011          2010
Sales                                                     100.0 %       100.0 %       100.0 %
Cost of goods sold                                         57.8          56.3          54.3

Gross profit                                               42.2          43.7          45.7

Operating expenses:
Research and development and engineering                    8.2           7.7           7.8
Selling, general and administrative                        24.2          22.3          22.6
Amortization of purchased intangible assets                 1.0           1.1           1.6
Restructuring, restatement related costs,
post-emergence fees and other                               3.3           0.8           1.1

Total operating expenses                                   36.7          31.9          33.1

Income from operations                                      5.5          11.8          12.6
Interest expense, net                                      (1.1 )        (4.3 )        (7.0 )
Foreign exchange transaction gains (losses), net           (0.5 )         0.1           0.1
Other income (expense), net                                 0.3           0.4           0.7

Income from continuing operations before
reorganization items and income taxes                       4.2           8.0           6.4
Reorganization items                                         -             -           (9.2 )

Income (loss) from continuing operations before
income taxes                                                4.2           8.0          (2.8 )
Income tax provision (benefit)                             (4.0 )         0.9           4.2

Income (loss) from continuing operations                    8.2           7.1          (7.0 )
Income (loss) from discontinued operations, net of
tax                                                        (1.9 )         2.4           6.8
Gain on disposal of discontinued operations, net of
tax                                                         0.9            -             -

Consolidated net income (loss)                              7.2           9.5          (0.2 )
Less: Net income attributable to noncontrolling
interest                                                     -             -             -

Net income (loss) attributable to GSI Group Inc.            7.2 %         9.5 %        (0.2 )%

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The following table sets forth external sales by reportable segment for 2012,
2011 and 2010 (dollars in thousands):

                                                                                           % Change
                                      2012          2011          2010         2012 vs. 2011       2011 vs. 2010
Laser Products                      $ 108,186     $ 112,914     $ 105,020              (4.2)%                7.5%
Precision Motion and Technologies     163,312       191,382       180,872             (14.7)%                5.8%

Total                               $ 271,498     $ 304,296     $ 285,892             (10.8)%                6.4%

Laser Products

2012 Compared with 2011

Laser Products sales decreased by $4.7 million, or 4.2%, primarily due to a decline in sales of our specialty lasers, which was adversely impacted by delays in government spending in the scientific laser market. This decrease was partially offset by a significant increase in our fiber laser sales, and an increase in sales volume of our sealed CO2 lasers year over year.

2011 Compared with 2010

Laser Products sales increased by $7.9 million, or 7.5%, primarily due to stronger demand in many of our laser products, particularly demand in our industrial lasers and specialty lasers that serve the industrial, electronics and scientific markets. These increases in sales were partially offset by a slight decrease in sales of certain sealed CO2 lasers.

Precision Motion and Technologies

2012 Compared with 2011

Precision Motion and Technologies sales decreased by $28.1 million, or 14.7%, primarily due to a significant decline in demand in the microelectronics market principally related to mechanical drilling of printed circuit boards. The decline in demand in this market resulted in a decline of approximately $18.8 million in sales of our Westwind spindles product line as compared to the prior year. In addition, the decrease in our Precision Motion and Technologies segment sales was also partially attributable to approximately $7.7 million of net revenue recognized in 2011, with no comparable amount recognized in 2012, for orders that had been deferred under multiple-element arrangements, delivered over multiple periods, entered into prior to the adoption of ASU 2009-13.

2011 Compared with 2010

Precision Motion and Technologies sales increased by $10.5 million, or 5.8%, primarily attributable to strong growth and demand in certain scanning products as a result of the rebound of the electronics and industrial end markets that started in 2010. We also experienced growth in our printed circuit board spindles product line, which serves the PCB drilling industry. These sales increases were partially offset by a decrease in sales in our encoder product line due to weaker demand in the data storage industry.

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Gross Profit

The following table sets forth the external gross profit and external gross
profit margin for each of our reportable segments for 2012, 2011 and 2010
(dollars in thousands):

                                             2012           2011           2010
       Gross profit:
       Laser Products                      $  36,582      $  43,948      $  43,542
       Precision Motion and Technologies      78,819         91,142         88,779
       Corporate                                (925 )       (1,990 )       (1,707 )

       Total                               $ 114,476      $ 133,100      $ 130,614

       Gross profit margin:
       Laser Products                           33.8 %         38.9 %         41.5 %
       Precision Motion and Technologies        48.3 %         47.6 %         49.1 %

       Total                                    42.2 %         43.7 %         45.7 %

Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, headcount, inventory obsolescence, warranty and freight expenses.

Laser Products

2012 Compared with 2011

Laser Products segment gross profit for 2012 decreased $7.4 million, or 16.8%, primarily due to the 4.2% decline in sales. The 5.1 percentage point decrease in gross profit margin was primarily attributable to product mix, as a higher proportion of our sales were from our fiber lasers product line. We are currently taking significant measures that we expect will lower the costs of our fiber lasers and improve their profitability, including manufacturing efficiencies and designing a lower cost product. In addition, gross profit margin was adversely impacted by lower absorption in our manufacturing facility for specialty lasers, as a result of delays in government funding in the scientific laser market.

2011 Compared with 2010

Laser Products segment gross profit for 2011 increased $0.4 million, or 0.9%, primarily due to the 7.5% increase in sales. The 2.6 percentage point decrease in gross profit margin was primarily attributable to unfavorable product mix and pricing among various product lines.

Precision Motion and Technologies

2012 Compared with 2011

Precision Motion and Technologies segment gross profit for 2012 decreased $12.3 million, or 13.5%, primarily due to the significant drop in sales of our Westwind Spindles product line due to a significant decline in demand in the . . .

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