Novanta Inc (NOVT) 2012 Q1 法說會逐字稿

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Group First Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Mr. Tim Spinella, Assistant Treasurer of GSI Group, you may begin your call.

Thank you very much. Good afternoon, and welcome to GSI Groups' First Quarter 2012 Earnings Conference Call. With me on the call are John Roush, Chief Executive Officer of GSI Group, and Robert Buckley, Chief Financial Officer.

If you've not received a copy of our earnings press release, you may get one from the Investors' section of our website at www.gsig.com. Please note, this call is being webcast live and will be archived on our website.

Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we've outlined in our earnings press release issued earlier this afternoon, and also to those in our SEC filings.

We may make some comments today, both in our prepared remarks and in our responses to questions, that may include forward-looking statements. These involve inherent assumptions, with known and unknown risks, and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So, you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures, a reconciliation of the non-GAAP financial measures we plan to use during this call to most comparably GAAP measures is available as an attachment to our earnings press release. To that extent hat we use non-GAAP financial measures during this call that are not reconciled to GAAP in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website at www.gsig.com.

I am now pleased to introduce our Chief Executive Officer, GSI Group, John Roush.

Thank you, Tim. And good afternoon, everybody. Welcome to our call. We appreciate your continued interest in the Company.

Our first quarter 2012 results reflect solid performance across the Company against a backdrop of a weak macro economic environment, particularly in semi-conductor and electronics markets, and in a period of significant transitions within the Company.

We delivered revenue of $79 million, adjusted EBITDA of just under $11 million, and GAAP earnings per share of $0.04, which included a restructuring charge of $2.7 million that was related primarily to our 12x12 program.

We saw strong orders during the quarter with our book-to-bill ratio at 1.1, and the positive order trend has continued in the early part of Q2, confirming our view that business conditions will improve throughout this year. We also had strong cash generation in the quarter and were able to reduce our net debt to just $5 million, down from over $140 million at the end of 2009.

Our Q1 results were basically in line with the low end of the guidance range we had provided. The fact that we're at the low end is essentially due to one large laser system that we were unable to ship from our Control Laser business in Orlando. This system, which is a precision mask repair tool, represented more than $3 million of revenue with a gross margin above 50% in our Q1 forecast. A critical component of the system was inadvertently damaged during the final days of the quarter, which prevented the system shipping by quarter end. The damaged component has since been replaced and the system was accepted by the customer and shipped, but the revenue and the profits from the system are now in our Q2 estimates.

In our year-end conference call on March 14, we had guided Q1 revenue of $78 million, $81 million, with adjusted EBITDA of $11 million to 12.5 million. The revenue and the profit from that one system accounted for essentially the whole range in our guidance, from top to bottom, for both revenue and adjusted EBITDA. But, unfortunately, it was a binary situation and it didn't go our way. But, otherwise, the quarter turned out very much as we had envisioned it. And the micro electronics market did, in fact, bottom out for us. At some point in Q1, orders began to trend up in a positive way in most of our businesses.

As I mentioned, we had a $1.1 million booked-to-bill ratio for GSI as a whole, led by our Continuum Scientific Laser business that was at $1.9 million booked-to-bill, our Optical and Coder business was at $1.4 million, our CO2 Laser business was at $1.2, and our Scanning business was at $1.05 million.

We've also held numerous detailed discussions with customers in some of the most impacted micro electronics market segments, particularly the PCB, or printed circuit board, via hole drilling market. The consistent theme that we're hearing in these discussions is that these markets will continue to improve throughout the year. In fact, our Westwind Spindles business, which derives about 90% of its revenue from the PCB industry, had April bookings that were 60% of what that business shipped in the entire quarter in Q1, a clear sign that recovery is now well underway. Based on the order rates that we had in Q1, which have continued to be strong in the early part of Q2, we clearly perceive better market conditions and improving results as we move through the rest of 2012.

In terms of our strategic growth focus, I'd like to provide some updates on the Company's progress in several different areas. You know, in past calls we have articulated our strategy to focus growth investment in GSI in three areas. Scanning Solutions, Fiber Lasers and Medical Components. During the quarter, we saw strong progress in all three areas.

First, on the Laser Scanning side, we had a number of promising design wins with OEMs and strong overall demand with our solutions revenue in scanning, increasing about 30% year-over-year. Our scanning business has traditionally realized most of its revenue from lower power applications, but we have recently launched new products that are targeted at kilowatt class applications. And we are now seeing strong interest from customers in those products.

On the Fiber Laser side, we saw sales double year-over-year. And we were pleased to launch our two kilowatt products a few weeks ago. We are just in the initial build of these two kilowatt units, but interest within our customer base is high. I recently had a chance to visit a number of our Fiber Laser customers in China and they were enthusiastic about our products and our application support. They urged us to get more high-powered products to market even faster, something we clearly have in our plans for the remainder of 2012. We also continue to make good progress on expanding Fiber Laser production capacity and closing on a variety of cost reduction initiatives, both internally and with our supply base.

In terms of the medical market, we continue to see attractive opportunities within our current applications such as robotic surgery, OCT retinal scanning, patient monitoring and life sciences instrumentation, including DNA sequencing. Our medical business has increased from 13% of our total revenue to 18% over the last year. And revenue from this market is now at an annualized run rate of almost $60 million.

In addition, we have program underway with outside experts to map all of the adjacent medical and life sciences component market segments and identify acquisition opportunities. We've already surfaced some attractive targets and opportunities, and we're pursuing several of those, though it's too early for me to comment in any real detail about the status.

By contrast, our micro electronics market revenue has declined by over 40% since Q2 of last year when we first began collecting market segment data. And this market has gone down from being 36% of our overall revenue to 28% of overall revenue in that time frame. So, the micro electronics recovery will be very important to us as we move through the year, and we're pleased to see that the order trends are more positive now.

So, with that, I'd like to turn it over to Robert Buckley to provide some more detail on the financials. Robert?

Thank you, John. And good afternoon, everyone. I'll now provide some additional details on our first quarter 2012 results. Following my prepared remarks, we'll open it up for questions.

Despite continued industry challenges in the micro electronics market, and some disruption caused by the 12x12 initiative, the Company delivered on its guidance and demonstrated another solid quarter of performance.

For the first quarter of 2012, GSI generated revenue of $78.8 million, a decrease of 14% from $91.9 million for the same period a year ago. Included in the revenue for the first quarter of 2011 was approximately $2.1 million of net revenue that had been deferred under multiple element arrangements delivered over multiple periods and entered in prior to the adoption of ASU 2009-13.

Turning to our segments. Our laser products division generated revenue in the first quarter of 2012 of $29.8 million, a 3% decrease compared to $30.7 million in the first quarter of 2011. The decline in revenue was largely caused by a shortfall in sales in our industrial lasers and laser systems. As John mentioned previously, the laser systems businesses was expecting to ship a more than $3 million single system order in the final days of the quarter. However, this system, known as the DRS, failed to ship in the quarter after a significant part was broken before the system was disassembled and packed for shipment. The system was shipped in May and will be recorded as revenue in the second quarter of 2012.

Our Precision Motion and Technologies division generated revenue of $39.5 million in the first quarter of 2012, a 22% decrease compared to $50.6 million in the first quarter of 2011. The decrease in revenue was largely caused by a downturn in the micro electronics markets. As an example, the Company's Westwind Spindle business declined roughly $7 million year-over-year, driven by a downturn in the printed circuit board market segments. It should also be noted that included in the revenue for the first quarter of 2011 was approximately $2.1 million of net revenue that had been deferred on a multi element arrangement as discussed previously.

Our semiconductor systems division generated revenue of $9.6 million in the first quarter of 2012, a 9% decrease compared to $10.5 million in the first quarter of 2011. The decrease in the revenue was largely caused by the downturn in the micro electronics market.

Turning to profitability. First quarter gross profit was $32.8 million, or 41.6% gross margin, compared to 43.4% gross margin during the same period last year. The drop in gross margin was primarily caused by product mix changes within our semiconductor systems business, which is under strategic review; and a decrease in manufacturing capacity utilization, particularly within our laser system businesses, which are also under strategic review.

In addition, we recognized roughly $1 million of net gross profit in the first quarter of 2011 for multiple element arrangements entered in prior to the adoption of ASU 2009-13 for which no comparable amount was recognized in the first quarter of 2012.

Laser Products first quarter gross profit was $10.3 million, reflecting a 34.4% gross margin, or 35.2% gross margin for the same period last year. The decline in margin is linked to a drop in manufacturing capacity utilization due to lower sales volume during the quarter, particularly in our laser system businesses, which are under strategic review.

Precision Motion and Technology's first quarter gross profit was $18.5 million, reflecting a 46.9% gross margin, compared to $23.9 million, or 47.3% gross margin the same period last year. The drop in margin was primarily driven by a drop in manufacturing capacity utilization in our Westwind Spindles business, as well as roughly $1 million of net gross profit for multiple element arrangements recognized in the first quarter of 2011 as discussed previously.

Semiconductor Systems first quarter gross profit was $4 million, reflecting a 42.1% gross margin, compared to $5.2 million in the first quarter of 2011, with a 48.9% gross margin. The nearly seven point decrease was primarily attributed to product mix as the business sold more systems in the quarter and experienced a drop in higher margin upgrades and retrofits.

Operating expenses in the first quarter of 2011 amounted to $27 million, which includes $2.7 million of restructuring expenses related to our 12X12 program. SG&A expenses for the quarter were $19 million, representing a decline of $300,000, compared to the first quarter of 2011.

During the quarter, we made significant progress in our 12x12 program. The transfer of our specialty laser production activities from East Setauket, New York facility to our Santa Clara, California facility made significant progress. This effort was largely completed in early May. We also completed the consolidation of three sales offices in Japan into one central sales and application office representing all GSI business lines. We signed a new lease for our Bedford, Massachusetts, facility, which is the first step in a plan to consolidate all Massachusetts-based operations into one central facility.

Finally, we continue to make good progress in evaluating various exit strategies around our semiconductor systems business sold under the GSI brand name and our laser system businesses, which are sold underneath the Control Laser and Baublys brand names. There appears to be meaningful interest in these businesses and we hope to have resolution of these plans in 2012. In aggregate, these three businesses contributed approximately $13.6 million of revenue during the first quarter of 2012, with operating profitability below most of our other business lines.

As a consequence of these actions, we incurred $2.7 million of restructuring charges in the first quarter of 2012, comprised of cash charges of $1.4 million and non-cash charges of $1.3 million. We continue to expect to incur cash charges of $4 million to $5 million related to this program, of which $2.5 million have been recorded through March 30, 2012. Additionally, we expect to incur non-cash restructuring charges of $3 million to $4 million, of which $2.3 million have been recorded through March 30, 2012.

Adjusted EBITDA non-GAAP financial measure with $10.8 million for the first quarter of 2012, versus $16.2 million for the same period last year. As John mentioned previously, adjusted EBITDA fell close to the lower end of our guidance as a consequence of failing to ship the over $3 million DRS system out of our Control Laser business. This system has subsequently been shipped.

The Company's earnings per share for the first quarter of 2012 was $0.04 on a diluted basis versus $0.19 for the same period last year. However, included in the GAAP EPS is a $2.7 million restructuring charge.

Turning to the balance sheet, we ended the first quarter of 2012 with $50.4 million in cash and cash equivalents and total debt of $55.5 million. This resulted in approximately $5.1 million net debt at the end of the first quarter, compared to $13.2 million at the end of 2011. During the first quarter of 2012, the Company repaid $12.5 million of debt, of which $2.5 million was the scheduled quarterly principle repayment on the term loan.

As a reminder, net debt is a non-GAAP measure. This definition can be found in our earnings release. Finally, free cash flow, also a non-GAAP measure, which we define as cash flow from operating activities less capital expenditures, was nearly $8 million in the first quarter of 2012.

So, turning to the second quarter of 2012, we expect revenues in the range of $86 million to $93 million. It should be noted that the second quarter of 2011 included approximately $4.2 million of net revenue recognized that had been deferred under multiple element arrangements delivered over multiple periods and entered into prior to the adoption of ASU 2009-13. We feel this revenue range is appropriate for several reasons. We have three system business under strategic review which could cause some short term disruptions. Furthermore, we have several manufacturing and sales operations undergoing site relocations. And we are reaching inflection points with the recovery of several micro electronic market segments.

These variables compound and, therefore, cause some higher than normal unevenness in our revenue projections. We view these as short term issues, and expect to return to more normal conditions later in the year.

For the second quarter of 2012, EBITDA is expected to be in the range of $13 million to $16 million. It should be noted that the second quarter of 2011 included approximately $1.6 million of net gross profits that had been deferred until multiple element arrangements entered into prior to the adoption of ASU 2009-13. We expect both R&D expense and depreciation amortization to be roughly in line with the first quarter of 2012, whereas SG&A should be in the 22% to 23% of sales range. Finally the Company expects a GAAP tax rate of 13% to 18% for the quarter.

This concludes our prepared remarks and now I'd like to open the call up for questions.

(Operator Instructions). The first question comes from Jim Ricchiuti from Needham & Company. Your line is open.

Thank you. Good afternoon. I was wondering if we could just look at little more closely into the strength you saw in the bookings in a couple of the businesses? If I heard you correctly, John, I think you said that Optical Encoders that you had a book-to-bill of $1.4 million?

Yes.

Where was the strength coming from in that business?

Well, some of that actually was from some of the micro electronics that started to turn in the quarter, you know. And we would have had to take orders, a lot of them, in Q4 to realize it much in the shipments in Q1. So, I think we're seeing that part of it get better. We also had strength in the medical part of it. So, across the board, the demand was pretty strong for the encoders.

Okay. And a little surprising with the CO2 laser business, the booking strength there. Is that just some of the lower, the marking business starting to come back in the quarter for some of your customers?

Well, one of the things that really happened was China turned back on for us because we had actually seen the China business for CO2, most of it low power stuff, really slow down after Labor Day of last year. And that impacted, clearly, our Q4 revenue in that business. And it also affected Q1. At least the early part of Q1. But as we got back from the Chinese New Year, there was strong orders in that business in that part of the world and that really helped. Some will say that's the credit situation that had tightened and then started to ease. It may be just general economic conditions in China, but that was a big part of it.

The US has been strong for that business throughout most of this timeframe. They're not really into semiconductors a whole lot either. I mean, here and there they have a little bit, but that was really more than the China dynamics in CO2.

Got it. And, Robert, I may have missed it, did you say size any restructuring charges related to the 12x12 program for this quarter?

For the second quarter - I didn't mention it, but it should be in the range of around $2 million.

Two million. Okay. I'll jump back in the queue. Thanks.

Thanks, Jim.

The next question is from Lee Jagoda of CJS Securities. Your line is now open.

Good afternoon.

Hi, Lee.

Can you, Robert, talk a little bit about SG&A expense in terms of the variable and fixed components?

Well, the way I would think about it is that there are two elements driving the increase in the absolute dollars the first quarter to the second quarter. One of it is the merit cycle. We're actually implementing pay raises across the organization all at the same time. And so there's a little bit of an impact from that. Then there's the impact from the increase in sales. You can probably split - you can probably split it 50 - 50 as we go into the second quarter.

Okay. Thank you. And then, John, can you talk a little bit about your current market position within Fiber Lasers and how you think about GSI competing in longer terms with larger competitors like NIPG?

Sure. I mean, our market position is very small, and we don't really give out the specific numbers. We're not trying to draw attention, say, to where we're competing so that others can come in and - you know. We tend to sell, to a certain extent, in our Legacy base of [vin] users where they use our older products today and we have relationships and we know those applications well. So, in terms of share, we're low single digit types or market shares.

When you think longer term, even with our growth plans, which are fairly aggressive where we've said grow that up and add $20 million to $25 million over the next few years. That's starting from a small base and that still leaves you with a relatively small share.

So, for us it's not a big share of the market place. It's kind of an incrementally building off of a small, what is essentially a startup position for us, as of a year or so ago. It's attractive for us and customers are very interested. Particularly customers that we've done business with for a long time.

I think, obviously, our products need to perform well. They need to be at the industry standard in terms of performance. And they need to sell at industry standard pricing. And we are doing those things. We have not had a full product offering. I mean, prior to the beginning of Q4 of last year, we didn't even have any kilowatt products on the market. We were kind of operating from 500 watts down. Now we have a one, and we have a two, and we have more kilowatt class products on the way. And we are well aware that we need to be competitive in the market. And we don't expect to have the same kind of cost structure internally that much larger players have.

But we think that we can get our costs to a place where it's attractive to us, given the economics of the Company. And we do compete successfully. We don't plan on making a frontal assault on much larger companies. We intend to sell in places where our particular relationships and our particular application knowledge gives us an advantage with that customer.

And one more question and I'll hop back in queue. Can you talk a little bit about your acquisition strategy and whether you see opportunities out there to possibly reduce the volatility associated with micro electronics and markets?

Yes, I think we do. We're looking at acquisitions that's reinforced our growth platforms that we're pursuing internally. I don't think we would really sit here and say we're trying to grow in medical components, and scanning and micro lasers, and then we're going to go make acquisitions in some completely different area. I see the two as reinforcing each other, the internal and the organic. And then the acquisitions.

Having said that, the reduced volatility, I think, is going to come from a lot of the medical and life sciences applications. And as I mentioned in my remarks, we have a specific initiative underway there. We've brought in a kind of market expert that's helping us scan all the segments in medical and life science at the component and sub-system level. We have no intention of becoming a medical systems provider. But there's a lot of opportunities out there. And finding the ones that fit into our channel, into our technology kind of capability, is what we're trying to accomplish. But I think if we have some success with that, that will reduce overall volatility.

Thanks.

Thanks, Lee.

The next question is from Tom Kerr from Singular Research. Your line is now open.

Hi, guys. Two quick questions. Can you refresh my memory on the 12x12 on where most of those cost savings come out of cost of goods sold versus SG&A? Is it roughly split? Or weighed toward the other? And the second question is just with regards to the strategic review on those business lines, is there any color you can give us? Is it actively being shopped with interest, are people doing due diligence, or anything else you can tell us on that? Thank you.

Yes. So, we haven't provided specific breakouts around the roughly $5 million of savings. There are manufacturing facilities shutting down where there's some savings - some sales offices as well. I would say it's fairly evenly split, though, between operating expenses and our manufacturing costs. That should help you a little bit there.

In terms of the actual process around our strategic reviews, we have engaged outside resources to help market those businesses. They're very active at this point with the number of potential interested parties looking at those businesses. But we're not at a point that we can make any decisions at this - and I think that as we progress throughout the year, I think things will get a lot clearer for us.

Okay. Thanks.

(Operator Instructions). The next question is from Jack Ripstein of Portrero Capital Research. Your line is open.

Hi. Thanks for taking my questions. I guess I have three. One is just a follow-up on the question you just answered about the strategic process. What kind of things need to come into line? It seems like you shop one of these things with a potential set of buyers and it really comes down to price and interest, and time doesn't necessarily - that critical a factor. Why the extended time period? And then on the transition, you mentioned that there were some things that kind of compound to affect revenues in terms of closing some facilities and migrating to others. I'm just kind of curious of some specifics there. And then, lastly, I think prior to this call you might have said that EBITDA was going to grow about 10%, or at least 10%. It sounds you have pretty good growing visibility on the top line, so that should impact the bottom line. Is that still a pretty safe guidepost from your prior comments?

First of all, just let me take question number one. And, by the way, thanks for your interest. I think we saw each other at conference in the past, so glad to have you on this call.

So, in terms of the sale process, you know, we have engaged, as Robert said, outside advisors on really two different programs. One around semiconductor systems and one around the laser systems. So, they're running separate processes. And, you know, there's memorandums and a fact base that has to be put together, a data room. And then we had really a large number of companies get hold of the books and take a look at the businesses. And then a subset of those have indicated interest and have made visits. There's a whole process around it. And we're mid-stream in that, so it's very difficult to say based on the dynamics of how this is going to play out from here that it's going to be another two months or another four months. It's not that predictable.

I suppose in some sense, it really depends on whether, in either one of the two transactions, whether one buyer steps us and says, "I want to preemptively kind of close this thing and cut the process off." So, right now, we have multiple buyers who seem quite interested in both so we're progressing on that basis. And that creates a little bit of uncertainty on the timing.

But you're not going to set a time table thing, "We expect bids in by X date," at this point?

Well, we are doing that. I mean, we internally do have a process. Yes.

We've just been through enough of these to know that that process doesn't always stay on the scheduled plan.

But it sounds like 2012 is - if you were to [ring fence] - I mean, I get that it could go somewhat into 2013. But it does sound like you have a timeline with an end date rather certain on it that you'd like to see this wrapped up by.

Yes. And plus it also depends what you want to count to. You want to count to when it closes or when there's kind of a definitive agreement signed and there's a lot of things that happen in between signing and definitive purchase and sale type of agreement and then when you actually close it.

Okay. But it's more than just [dacks] have gone out. It sounds like people are kicking tires on real numbers and data rooms, et cetera.

We have a lot of people making physical site visits and such.

Okay. Great.

To ask another question you asked around disruptions. We are moving manufacturing facilities a number of different areas. We're moving sales offices, which could have some disruption, but very limited in that sense. And then the businesses under strategic review. I think the first quarter represents some of the disruption that we're experiencing in our system businesses. It is a challenge for the employees in the organization. And as a consequence, we have to manage our way through that. You know, missing a $3 million instrument order in the final two or three days in the quarter is not something that we actually particularly enjoy. And so there are some challenges here. And we take into consideration that the vast majority of the employee base associated with those businesses are going to be sold off.

So, that's sort of what we've been talking about in terms of disruptions that could occur.

Okay. But it's not a loss. That revenue came back to you, so it's not permanent. It's just lumpy in when you're seeing it.

That's correct.

That's right. I think it's the unpredictability factor.

Yes. Yes. Fair enough. And then my last question is about EBITDA. I think you'd said previously plus 10% EBITDA growth. Does that still pretty much ring true?

Well, I think it does. And we still view that as what the likely scenario here for 2012. In terms of the revenue, I get the challenges. All the points that Robert made in the guidance section about Q2 create a certain variability to what revenue might be. And some of that is markets and how quickly they recover in Q2. And some of that is things related to our own restructuring and divestiture initiatives. You roll those in and say that impacts what a full year kind of revenue scenario looks like. Plus the fact that, you know, we're seeing the beginnings of a significant recovery. And it's showing up in orders but will it sustain themselves by more than just the one quarter?

So, our view is we can get to the EBITDA multiple different ways. So, if the revenue trends play out the way we see them playing out now, then I think that supports that kind of EBITDA number - a 10% increase. If, for whatever reason, the electronics markets, that recovery is not sustained, if the macro economic environment ends up dipping down a little bit or something from what our estimates are internally, we would go after the EBITDA in various other ways. We would start to conserve and reduce expenses in certain ways.

So, there's more than one way to get to the EBITDA. And that's why we're more focused on that right now. And as we get more confidence around the top line, I think then we'll be able to speak to that with more specificity on the full year.

Got you. I appreciate that. Thanks. And it looked like the booked-to-bills were really solid. I'm assuming that takes out even the $3 million that sort of got pushed, right? So, it's not in that equation?

They have $3 million DRS was actually booked in 2011. I believe it was the second or third quarter of 2011.

Yes. It was neither in the bookings or the billings.

Okay. Great. Good work. Appreciate it. Thank you.

Okay. Thank you.

The next question is from Chris McDonald of Kennedy Capital. You line is now open.

Good afternoon. Thanks for taking my question. The first one's on scanners. And it sounds like you're starting to see some momentum there. Could you talk a little bit about the underlying drivers of that momentum and how much progress the Company is making with the strategic focus there on new applications and maybe some new products?

Absolutely. What we're really doing there is stepping up from a true component position in the market to a subsystem. So, a scanning solution is taking a galvanometer, several galvanometers, and the servo, the controls, and packing that and housing in more of a module that is still sold to an OEM or an integrator or somebody who's going to make a system. So, we're not the system integrator in any case. But it's an additional value add. It brings us one step closer to the application. So, it's more necessary to work more closely with whoever the OEM or system integrator is to really understand performance and what envelope of performance they really need in that scanning system.

We, because we have such a high share of the galvanometer market and so much experience in this business, it lets us put our knowledge to use more effectively. And to kind of get more revenue and more income out of the basic assets and capabilities we have. So, we really didn't have much in the way of solutions revenue. We were really just a component player a couple of years ago. And this thing is now creating a lot of traction.

There have been - you know - there are half a dozen or more companies out there that really do these type of solutions, all private companies. So it isn't like we're creating a market. There is a market already. But what we've tried to do is focus, rather than going and trying to just dislodge market share from the companies that do solutions, is we've tried to focus on some of the new applications where it's an almost open competition. It's not trying to steal somebody else's Legacy business. But where an application was not even using lasers or not even using scanners as part of their technology, and then they go to a scanned application, we're getting in on the ground floor and then providing a solution. And we're having good success with that. In a number of cases, the applications where we're doing this are slightly different than where we had been focused at the component level because they're new applications.

Examples of that are some of the processing and automotive lithium ion battery production. A lot of it is some of the cutting of papers and cardboards and other materials that was previously done with mechanical cutting and is now going to rapid scanned laser cutting. It's something as ridiculously simple as cutting cardboard boxes which have to be cut in unusual shapes and each one of those with mechanical cutting and presses that involves a set-up change. But if you cut them with lasers, it's just software change so you can instantaneously cut different shapes of boxes. And that lends itself to cutting with a scanner. And so we've had a lot of traction in that type of application.

Do you have a sense for the proportion of your scanner business that's being integrated with fiber lasers versus other types of lasers?

That isn't a metric we've tracked. In all honesty, it's only been in the last few quarters that we can accurately track the scanner versus the galvanometer. We do participate in a lot of fiber laser business but we don't have tight metrics on it right now. So, I wouldn't speculate. But I would say it's the minority now. But many of the fiber laser programs out there do - particularly at lower powers. As I mentioned in my remarks, we're not historically playing in a lot of the kilowatt class products. But at lower powers we're certainly integrated with a lot of fiber lasers. And we are migrating up in power as well.

Okay. Thank you. Maybe this is for Robert, but just an update on the roughly $19 million IRS claim from the queue it sounds like that's still outstanding. But any sense you have around timing, et cetera, it would be great? Thank you.

So, there's - yes, you're right. It's roughly $19 million was the total amount that we were seeking. We did put a range around that. I think it's in the $15 million to $20 million range that we're hoping to receive from the IRS. At this point in time, we're waiting for some decisions, final decisions, to be made with them. And that process takes some time. There's nothing more that we can do at this point. So now it's just a waiting game.

Okay. Thanks a lot.

(Operator Instructions). The next question is from [Stefan Megatruch] of Pipe Place Capital. Your line is open.

Hi. Good afternoon.

Hi, Stefan.

On the gross margins, as the revenues pick up in Q2, are we going to see some improvement there and do you think that by year end you get back to more the 43, 44, as opposed to 41, 42?

Yes. If you take a look at the gross margin performance from the first quarter, or from the fourth quarter to the first quarter, I would say the vast majority of the swing, if not all of it, was associated with our system businesses. The rest of the businesses, there were puts and takes within Precision Motion and Lasers that we plan on holding onto. But for the most part, they kind of evened out and we saw gross margins that were relatively flat in those businesses.

There is great deal of leverage in this business, though. As we begin to see the top line move, I think we can really begin to move the gross margins again. That is baked into the plan for the back half of the year. We've seen that before and that's our expectation as we start to recover in micro electronics.

And how are some of the newer areas where you're growing quickly? Are those accretive to gross margins or are those as you're ramping up are they kind of depressing gross margins a little bit?

You know, I would say we didn't design the growth initiative specifically as margin enhancing initiatives. They really were intended to kind of accelerate growth and keep margins relatively the same. So, it was in that vein.

So, I think in some cases, the margins are a little lower than what they are in the Legacy business. I would say that that's the case in fiber laser now, but there's plenty of opportunities to increase the margins. Scanning, I think, is probably in general about the same. And medical, I would say, is higher than Legacy business. So, when you average across it, I think it's fairly neutral.

Okay. Great. Any update on acquisitions? You've generated a lot of cash. The balance sheets in great shape. Is that something that we should expect to see kind of in the near future, or is it really a 2013 event for acquisitions?

Well, we would certainly like to get one or more acquisitions done this year. It's not always easy to call the timing. I think somebody asked the question about timing relative to things we're selling. And there's a certain unpredictability to that. There's even more when you're buying because you're trying to convince people to sell in the first place, and then get an evaluation that makes sense. We're in discussions on things, but it's just too hard to say whether any of that pans out this year or not. It could. What I would not say is our acquisitions is definitely a 2013 thing. It's entirely possible that we could get something done this year. But it's possible we wouldn't. And we don't want to go out there and say we will and then - you know. Valuations move the wrong direction.

Okay. Fair enough. Thanks very much.

Okay. Good speaking to you.

The next question is from Jim Ricchiuti of Needham and Company. Your line is open.

Robert, the site relocations that you're planning for the June quarter, can you elaborate on that? Are there any of these manufacturing sites?

Yes. The East Setauket facility is home of our Quantronics business, which is one of our specialty laser business lines. That has been consolidated into our Santa Clara office, which is home of Continuum, another specialty laser business.

So, that move - all production has already been shifted out of that facility as of today. There's a couple of minor things that we have to finish up with. But for the most part, by the end of the second quarter, we'll be completely out of that facility.

Okay.

We'll be in the midst of spooling up production - in fact we are now spooling up the production of Quantronics products at the Continuum site. And, you know, that's where when we can say there could be some disruption. And when you start up production of a piece of sophisticated products and we have a number of the highly technical sort of Ph.D.-type employees who are relocating to the west coast, our current internal estimates indicate there's going to be some delays and some production disruption. That's already factored in at some level. But it's hard to be too precise about it.

And as far as Q2, any additional manufacturing site relocations? I wasn't sure where you are with Cambridge, moving that facility.

So, we did sign the lease for the Bedford facility. We signed, I think, last week. And so that was the first step that we're taking in order to get prepared to consolidate those businesses. I don't see that necessarily as - it's definitely not a Q2 event. Now that we have the lease signed we'll begin to do the planning and consolidate the businesses. It's likely late Q3 or early Q4 then.

And just getting back to bookings. The very strong book-to-bill at Continuum, was that also partly due to that large contract that you received or was that in a prior . . .

Absolutely was. It was $4.8 million. But there's many periods where Continuum is shipping off of periods where they didn't' get a large booking. So, it's run far below on book-to-bill at many times. But, yes, that was in there.

And last question for me. Just curious - sounds like you're saying some nice recovery in micro electronics. But more broadly, just given people's concerns that the macro economic outlook, are you seeing any areas of where you've seen a bit of a pause in demand as you went through the quarter and any of the more GDP sensitive areas. It doesn't sound like it but I was just wondering if you had seen it.

Well, we did see some. I mean one of the things that's been interesting - we're very bullish, as we've indicated in many forums, on medical life sciences kind of applications for our technologies. And we do see lots of growth opportunities there, organically and even with acquisitions. But, interestingly, some of the big medical OEMs slow down their orders, primarily related to Europe. And that correlates to what we see some of the large medical companies saying that they definitely slowed down some of their purchases from us. Mostly on Legacy products. We don't really see a slowdown in new product development. So we're being designed in to equipment that's launching. A lot of that will pay dividends for us in new programs that ship in 2013. But some of the Legacy medical stuff slowed down a little bit. And we had to take some of our internal product line forecast down.

So, that's one area. That would be the main one. I think everyone else, the demand was pretty consistent. You know, we still see this fits and starts out of China. It's very hard to get a clear trend. China slowed down very hard late last year, but at times it would turn on and we'd see a big burst of orders and then it would stop. We think we've turned the corner on that but it's very unpredictable. So that's an area we watch pretty closely.

John, have you said how much of your business comes out of China?

We haven't broken it out specifically in the past for the country. And that's something that we may do at some point in the future.

But certainly it's enough where if you were to see a change in demand either way, it can impact the business?

Yes.

R&D, Robert. You may have explained it. I may have just missed it. But how do you see R&D going forward? It was down sequentially as well as down year-over-year, and I wasn't sure if that was due to the timing of some things you're doing and should we assume that does ramp up as we go through 2012?

Well, I think in the second quarter, R&D will look very similar to what it was in the first quarter. I think as it begins to ramp up it'll be towards the back half of the year.

Got it. Okay. Thank you.

Okay. Thanks.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you, operator. In conclusion, I would like to say that the worst part to the micro electronics downturn and the slowdown in China seem to be behind us. We're seeing an improving picture for the rest of the year.

We do have some heavy lifting to do in terms of completing the 12x12 program. In fact, some of the most challenging parts of that initiative lie ahead in terms of moving several manufacturing sites, as discussed, and moving some of the sales offices in the coming months. And also finalizing the strategic reviews of our systems businesses. But we have clear roadmaps to complete all these initiatives, and they're on track in virtually all cases. We have a clear sense of our strategic priorities for growth and those initiatives are beginning to pay dividends and the benefit will increase as we move through 2012 and into 2013. We now have a strong leadership team in place, capable of delivering on all of the plans and we're steadfastly committed to delivering on the promise of GSI.

In closing, I'd also like to mention that we will be presenting at two upcoming investor conferences. We will be at the Houlihan Loki Industrials Conference on Thursday of this week in New York. And we'll also present at the B. Riley Investor Conference in Santa Monica, California, on May 22. We hope to have the chance to meet with some of you at these events. And in any case, we look forward to joining all of you on our second quarter 2012 earnings call in August. Thank you very much for your interest in GSI. The call is now adjourned.