Novanta Inc (NOVT) 2013 Q1 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Group 2013 first quarter earnings conference 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.)

I would now like to turn the call over to the Chief Financial Officer of the GSI Group, Robert Buckley. You may begin your conference.

Thank you, Mike. Good afternoon and welcome to GSI Group's first quarter 2013 earnings conference call. With me on the call is John Roush, Chief Executive Officer of GSI Group.

If you've not received a copy of our earnings press release, you may get one from the Investor Relations 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 those in our SEC filings. We may make some comments today, both in our prepared remarks and 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 such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on our Investor Relations section of our website.

I'm now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert. Good afternoon, everybody. Welcome to our call. We do appreciate your continued interest in the Company.

So today we're pleased to announce our results for the first quarter of 2013. This is the first quarter where we're now adding in the results of our NDS acquisition for most of the quarter, as the deal closed on January 15.

On the whole, we are happy with the results, which in my view reflect solid performance across the Company, even given the mixed economic picture that we still face. Our revenue was $83.1 million, and our adjusted EBITDA was $11.5 million. Both figures were in the upper half of the guidance ranges we had previously provided.

GAAP earnings per share from continuing operations was $0.04, which was impacted by the NDS purchase accounting acquisition-related fees, as well as restructuring expenses related to our ongoing efforts to streamline and focus the Company. And Robert will cover the EPS results in more detail in his section.

So during Q1, we saw an improving demand picture in a number of areas. Our reported revenue, of course, was up 28% year over year due to the inclusion of NDS, which added $18 million to the revenue line. But if you look at the base GSI business, excluding NDS, we had organic revenue growth of 1% versus Q1 of last year. We had total orders of $86.6 million, resulting in a book-to-bill ratio of 1.04. These outcomes are more favorable than what we saw on the base business in Q4 of last year.

Obviously, the biggest news for us in the quarter was the acquisition of NDS. We now have the quarter under our belts with the team, and we're very excited about the future prospects of the business. From a tactical standpoint, the integration of NDS has gone well. The technology, capabilities, and customer franchise are everything we had hoped they would be.

The biggest challenge we face is really the transition in ownership of the business from private equity to a strategic growth-oriented company. The NDS culture had evolved in recent times into cash conservation and risk aversion relative to growth opportunities.

As we get to know the team, the customers, and the landscape, we see significant opportunities. We're currently working on the integration of the global sales channels across NDS and some of the GSI medical product lines. There are also joint key account visits underway.

One of the most important opportunities for us is that through our ownership of NDS, we've opened up a number of additional acquisition and collaboration opportunities that were not realistic for us beforehand. In terms of financial performance, as I mentioned, NDS delivered $18.4 million in sales in Q1 and is forecasting about the same number in Q2, with profitability in line with our expectation.

In previous comments in March of this year, I had noted a general softening that we were seeing in the medical markets during the first few months of the year. This dynamic impacted NDS as well as some of our other GSI medical product lines. In our view, this slowdown was the result of market confusion related to the implementation of the US medical device tax as well as uncertainty about Medicare and Medicaid reimbursement rates for the year. Since the March timeframe, we've seen an improvement in medical order rates, and we now believe this slowdown was really a temporary drop in our overall demand.

The second NDS item we had mentioned at that time was a move by one of NDS's OEM customers to dual-source their purchases from NDS. I had multiple meetings with this customer before the deal closed, and I recently had the opportunity to meet again with their senior management. We are disappointed by their decision, coming as it did so soon after we acquired the business. Their decision relates to longstanding policies and practices that NDS had in effect related to technology and the exclusivity thereof.

The good news is that, despite the dual sourcing, we retain a significant portion of this customer's business, and there is now a good channel of communication between the two companies at the top. We're reviewing the policies and practices that created the original concerns, and we've had the chance to present our broader medical capabilities to this customer. There may be opportunities for future growth and share gains.

To summarize the overall situation with NDS, we are very pleased with the acquisition and with the capabilities and opportunities in this business. We believe it will bring benefit to GSI for many years to come.

So turning to some of our other growth platforms, during Q1, we saw strong demand in our scanning solutions platform, which grew sales by 49% year over year and enabled our overall laser scanning product line, which is our largest single product line in GSI, to grow 6% year over year.

Over the last year, our scanning solutions have been designed into numerous applications across the industry, and our sales are expected to be in the $15 million range for the full year 2013. So we're well on our way to achieving our strategic goals.

Our other growth platform is fiber lasers. In Q1, our sales more than doubled versus a year ago, with a book-to-bill ratio of 1.8. Our fiber laser sales are now at an annualized revenue run rate in the range of $10 million to $12 million per year, with additional growth occurring throughout the year, but at lower percentages year over year than we've seen in the past, when sales were doubling or tripling on a year-over-year basis.

We now offer products up to 3 kilowatts, and we have a great deal of focus on implementing our new fiber laser architecture, which will provide a significant step change reduction in our bill of material costs. Obviously, the cost structure of our fiber laser products is the key for our future success.

We are actually restricting our growth in high-power products now, based on the low gross margins of these products. We're selling only enough units to adequately seed the market while minimizing the impact on our financial results. Our new architecture is intended to significantly close the gap on bill of materials costs and enable us to achieve closer to our average overall gross margins on kilowatt-class fiber lasers.

There is still a significant amount of effort directed at finalizing, qualifying, and launching the new architecture in collaboration with our manufacturing partners. The launch will occur in stages over the latter part of 2013 and into 2014, so that effort is our primary focus for the balance of this year.

Other areas of growth in Q1 included Westwind spindles, which had mid-single-digital year-over-year growth as a result of improved market conditions and very low stock levels at customers. At this point, we expect the improved volumes at Westwind to be sustained at least through Q3 of this year, though it is worth noting that even with the improvement, Westwind revenue is still 25% to 30% below its prior highs from the 2010 to 2011 timeframe.

The restructuring that we did at Westwind last year is helping profitability, but with the recent increase in demand, our lead times are beginning to lengthen. Time will tell as to whether this recent increase in demand will be sustained and whether a capacity increase will be warranted. For the most part, we intend to use overtime and temporary resources to address the increases. At this point, we remain cautious with respect to Westwind demand.

Our scientific laser business also had mid-single-digit growth in the quarter. This was really a function of program timing on a large petawatt laser contract that we have with the French government. The general market for scientific lasers remains very weak due to sequestration and ongoing fiscal issues with governments around the world. Our Q1 book-to-bill ratio in scientific lasers was only 0.59, and we expect to see some sequential deterioration in that business through the year, though this will be partially offset by the revenue from the French program that I mentioned.

We also have an outstanding tender on another large petawatt program that would deliver similar levels of revenue to the French program over the next several years, beginning in 2014. We don't expect a decision on that tender until later this year, but we believe our proposal is highly competitive, so we're cautiously optimistic on that front.

As previously announced, we also completed the sale of our semiconductor systems business to ESI. The transaction closed on May 3. The process was lengthy and was impacted by weak and deteriorating conditions in the semiconductor capital equipment industry, which declined over 15% last year. The hoped-for second half recovery never materialized. Furthermore, the DRAM laser repair application virtually disappeared from the marketplace over the last year. These two factors led to repeated forecast changes in our business and made it difficult for any buyer to readily assess valuation.

In the end, we believe the outcome is the best one, as we are able to close this chapter in our strategic transformation, and the business itself and the employees have the best chance of thriving under the ownership of ESI, which is a company with substantial presence and capabilities in these end markets.

In Q1, we also continued to make progress in building our organization and our talent base. During the quarter, significant new hires included a new leader for our laser scanning business, a sales leader for our radiology display products, a global sales leader for laser products in total, a production leader for our fiber laser site, a finance director for laser products, and a global human resources director.

We continue to find that talent is attracted to the unique opportunities and challenges inherent in being part of the transformation of GSI. Each of these individuals brings new talents, capabilities, and passion into our organization and makes us a stronger company that's better aligned to achieve our ultimate strategic goals.

As we look forward at Q2 and beyond, I would like to offer some perspective on the end markets. In the medical market, which accounted for 36% of our sales in Q1, the initial sluggishness that we saw earlier in the year seems to have abated. We expect this market to be relatively healthy, and we hope to see sequential increases through the year. As we fully integrate NDS and begin to exploit the opportunities across our entire medical product offering, I expect to see an increased growth opportunity.

The industrial market, which accounted for 40% of Q1 sales, remains stable with slight growth. Consumption growth in most segments remains modest, so manufacturers generally are not adding much capacity. As indicated in the Purchasing Manager Indexes, the Chinese manufacturing sector is growing in the 7% to 8% range, which is several percentage points lower than the prior year, with significant month-to-month variability. These factors will likely constrain our industrial business to year-over-year growth in the low single digits at best.

The microelectronics market is showing some signs of improvement, as I mentioned with respect to the Westwind business. In most cases, customer volumes in microelectronics are still down from a year ago, but we're seeing sequential improvement. It's possible, though far from certain, that we'll see some year-over-year growth in the second half in microelectronics.

As I had mentioned, the scientific market remains weak. Government and academic funding is down across the board. We have seen weak book-to-bill ratios for all scientific products, long approval cycles for new orders, and requests for delivery push-outs on some existing orders.

The one bright spot for us has been the large petawatt market, but in general, these programs will not be sufficient to enable overall growth in this end market. We do expect to see declines throughout the year.

So our overall posture on the markets and the economy remains cautious and mixed. There are some signs of improvement in some areas, but the momentum is not necessarily broad-based, and it has not yet sustained itself for any length of time. So we have generally taken a conservative view of revenue. We focused on expense control, and we have been very selective with investments. I believe that's the right stance for the Company at this time. But obviously, we're prepared to respond if the markets present upside opportunities as we move through the year.

So with those comments, I'd now like to turn things back over to Robert to cover the financials in more detail. Robert?

Thank you, John. During the first quarter of 2013, GSI generated revenue of $83.1 million, an increase of 27.5% from $65.2 million in the first quarter of 2012. The NDS acquisition accounted for roughly 28% revenue increase year over year, while changes in foreign exchange rates adversely impacted revenue, causing a 1.2% decrease in revenue. Excluding the impact of the NDS acquisition and changes in foreign exchange rates, the Company's revenue increased nearly 1% compared to the first quarter of 2012.

As a result of the NDS acquisition and restructuring activities, the Company realigned its reporting segments, resulting in two segments, Laser Products and Precision Technologies. The segment realignment resulted in the laser scanning product line being moved to our Laser Products segment, and NDS being added to our Precision Technologies segment.

Sales of our Laser Products segment for the first quarter of 2013 increased 4.6% to $46.2 million, compared to $44.2 million one year ago. Growth was primarily generated from our scanning solutions and fiber laser products as we continue to release new products in the market and further penetrate new customers. Sales were 1.3% adversely impacted by the fluctuations in foreign exchange rates.

Sales of our Precision Technologies segment for the first quarter of 2013 increased 75.5%, to $36.9 million from $21 million in 2012. The NDS acquisition contributed approximately $18 million in sales year over year. Changes in foreign exchange rates adversely impacted our sales by roughly 1% compared to the prior year.

Excluding NDS and the impact of the exchange rate fluctuations, revenue declined approximately 11%, which were largely attributed to a temporary market decline in the patient monitoring market, impacting our medical printers business, and volume declines in our optical encoders product line, which was impacted by a decline in the data storage market.

Turning to profitability, first quarter gross profit was $33.2 million, or 39.9% gross margin, compared to gross profit of $27.7 million, or 42.5% gross margin, during the same period last year. Laser products' first quarter gross profit was $18 million, reflecting a 39% gross margin, compared to $18.6 million, or a roughly 42.1% gross margin for the same period last year.

The 3.1 percentage point decline in gross margin was primarily attributed to product mix, specifically an increase in fiber laser sales. This product has gross margins significantly lower than the Company average. As John mentioned, we are currently taking significant measures over the course of the year that, if successful, we expect will lower the costs of our fiber lasers and improve their profitability going into 2014.

In addition, to a lesser extent, gross margins were also 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.

Precision Technologies' first quarter gross profit was $15.2 million, reflecting a 41.3% gross margin, compared to $9.3 million, or a 44.1% gross margin, in the same period last year. The NDS acquisition accounted for $7 million of the increase in gross profit from the prior year. The increase in NDS gross profit includes amortization of developed technology and amortization of step-up in inventory value of $900,000 related to the acquisition during the three months ending March 29 of 2013.

This increase was partially offset by a decrease in gross profit dollars from our medical printers and optical encoders product lines, primarily as a result of a decline in sales volumes. However, the 2.8 percentage point decrease in gross margins was predominantly caused by purchase accounting adjustments as a result of the NDS acquisition.

Operating expenses amounted to $32.2 million for the first quarter of 2013, which included $2.2 million of amortization of intangibles, $2 million of restructuring expenses, and $1.1 million of acquisition-related fees. This compares to operating expenses of $24.9 million in the first quarter of 2012. The first quarter of 2012 operating expenses included $700,000 amortization of intangibles and $2.2 million of restructuring expenses.

Research and development expenses were $6.6 million, or 8% of sales, in the first quarter of 2013 compared to $5.8 million, or 8.9% of sales in the first quarter of 2012. R&D expenses increased in terms of total dollars primarily due to the acquisition of NDS, offset by lower employee compensation as a result of our 2011 and 2012 restructuring plans.

SG&A expenses were $20.2 million, or 24.4% of sales, in the first quarter of 2013 compared to $16.2 million, or roughly 25% of sales, in the first quarter of 2012. SG&A expenses increased in terms of total dollars due to the acquisition of NDS, which accounted for the majority of the increase in the quarter. To a lesser extent, SG&A expenses increased from higher employee-related costs due to strategic hires made in 2012. These increases were offset by lower depreciation expenses and lower facilities spending as a result of the site consolidation actions executed through our restructuring programs.

Adjusted EBITDA, a non-GAAP financial measure which includes the adjustments noted in the non-GAAP reconciliation attached to our earnings press release, was $11.5 million for the first quarter of 2013 compared to $9.9 million in the first quarter of 2012.

Diluted earnings per share from continuing operations was $0.04 in the first quarter of 2013 compared to $0.03 in the first quarter of 2012. Our earnings per share are largely impacted by one-time charges related to restructuring and acquisition-related fees as well as fluctuations in foreign currency exchange rates. Consequently, we continue to believe that our adjusted EBITDA provides the most meaningful view of the Company's operating and financial performance. We believe adjusted EBITDA allows for better viewing of operating trends and allows for better analytical comparisons.

However, we also recognize that we're beginning to exit the first chapter of our transformation of this Company. Therefore, you can expect us to start providing further guidance around an adjusted non-GAAP earnings per share metric later this year.

Turning to the balance sheet, as of March 29 of 2013, cash and cash equivalents was $36.3 million, with total debt of $103.1 million. In the first quarter of 2013, GSI borrowed $60 million under the revolving credit facility to finance the acquisition of NDS. The weighted average interest rate on the senior credit facility was 2.76% during the first quarter of 2013 versus 3.48% during the first quarter of 2012. The Company completed the first quarter of 2013 with approximately $66.8 million of net debt as defined in the non-GAAP reconciliation table in our earnings release.

Operating cash flow for the first quarter of 2013 was $4.6 million compared to $9.1 million of operating cash flow in the first quarter of 2012. Operating cash flows include the cash flows of both continuing and discontinuing operations. Discontinued operations were cash flow negative in the quarter.

Cash provided by operating activities for the first quarter of 2013 was impacted by cash restructuring payments of $1.8 million, acquisition-related expenses associated with the NDS acquisition of $1.1 million, and an increase in accounts receivable of $6.7 million, which was due in part to the acquisition of NDS and in part to lower-than-expected shipments in January as a result of the consolidation of the Company's Bedford and Lexington, Massachusetts, manufacturing facilities.

As mentioned in prior earnings releases, the Company reached a settlement with the IRS regarding an IRS audit of 2000 through 2009 tax years. The proposed settlement was submitted to the Congressional Joint Committee on Taxation in December of 2012. There are no new updates as to the status of this settlement. However, we continue to believe our year end income tax receivable of $16.1 million related to this audit is accurate.

Turning to the second quarter of 2013, we expect revenues for our continuing operations to be in the range of $84 million to $86 million. This represents sequential growth from the first quarter's results Turning to profit, we expect the second quarter of 2013 adjusted EBITDA to be in the range of $11 million to $12.5 million.

We expect R&D expenses to be around 8% of sales; SG&A expenses, excluding intangible amortization and restructuring, in the range of 24% to 25% of sales. We expect to pay cash taxes for the year in the 15% to 20% range. However, given local statutory rules, cash taxes paid in a single quarter can vary significantly from quarter to quarter. And because our acquisition and divestiture activities are US GAAP tax rated, they'll continue to fluctuate for at least another quarter. However, for the full year, I would expect it to normalize around a 32% range.

Depreciation and amortization expenses should be around $5.5 million. Finally, we expect $2.5 million to $3.5 million of restructuring expenses in the second quarter of 2013. Nearly half of this is related to the NDS acquisition, while the remainder is further cost reductions in our laser products operating segment to further integrate the organizational and selling structures and to help upgrade the employee talent.

On April 9 of 2013, we entered into an agreement for the sale of our semiconductors systems business to Electro Scientific Industries, ESI, for $8 million in cash, subject to customary closing conditions. The transaction was consummated on Friday, May 3, 2013. We expect net cash proceeds of approximately $5 million after paying out restructuring expenses, divestiture-related fees, and final compensation payments.

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

(Operator Instructions.) Lee Jagoda, CJS Securities.

So you spoke a lot about growth in many of the product lines and with the addition of NDS as well. However, if I look at Q2 on a year-over-year basis, the guidance implies organic declines. So if you can talk a little bit about the offsets?

Excluding NDS, Lee, I would say that Q2 is organic flat. I mean, it's probably down a little bit on the face of it, but there's some FX that when you put it in there, it's flat or it's within a round of flat. I don't see that there's that much difference.

Okay, and --

I guess if you go to the bottom end of the range, yes, you're going to get a little bit of a decline.

And again, you talk about fiber lasers and scanning solutions growing very quickly, as well as medical bouncing back, yet we're only looking at flat growth. So aside from scientific, which I think you've been pretty articulate about it being down, what else is dragging you down?

Some of the areas where we're not seeing a lot of up, and even maybe a little down, would be in the CO2 laser business. Not big percentages, but it's a larger business. It's not trending up at the moment. You have, in the JK laser business, some of the legacy technologies, so we have the fiber going up, but they have some legacy lamp-pumped and other areas.

And actually, I think Robert mentioned in his remarks that the printer business is down year over year. We think that the order rates are coming back and it will show some growth as you go through the year, but this -- and then another area is the encoder business, which has two parts to it. It has the data storage part, which is a very specific application for the track writing for disk drive production. And then all the rest of the encoder business, which serves a variety of applications -- some medical, some industrial, some microelectronics. And so if you were to bifurcate the encoder business, data storage is down significantly. And then the rest of it's actually up.

So there's kind of a mixed bag in there of different things going in different directions.

I think, as you look into the second quarter, you're seeing sequential growth. That's more indicative of demand and the profile of demand. There are some tougher comparisons, as John mentioned, as we cycle over a difficult second quarter last year.

That's especially that data storage, right, where there was a large project done in data storage. The revenue model for the data storage encoders is basically upgrades. When the production capabilities are upgraded in the disk drive producer's site, they will buy a lot of our product. And then they use that for a while, and then they will upgrade again. So it tends to be very episodic in data storage. And we had a bunch of business in Q1 and Q2 last year that is almost zero this year.

Okay. And then you provided Q2 revenue and profitability guidance, but you didn't comment at all on the previously issued annual guidance. Can you provide an update there?

We haven't changed anything at this point. Usually our practice is we provide a full year guidance once at the beginning of the year and once midway through the year. I think it gives a better perspective. And then between is the quarterly updates. So I wouldn't say that the lack of update is indicative of anything.

Okay, and one more question and I'll hop back in the queue. Robert, can you just quantify the negative effect that discontinued ops had on cash flow in Q1?

Roughly $1 million.

Okay, thank you.

Stephen Stone, Sidoti.

The first question here is on the NDS acquisition. The growth categories you were talking about there is radiology. Do you still see growth for NDS through the year?

Well, I guess on a sequential basis, we do think that the second half will be greater than the first half. I'm not sure, quarter to quarter to quarter, all the way through the year, it's guaranteed that it rises.

So there are two segments to the business. There's the core, and larger business, is the surgical, minimally invasive part of it. And then the second part is radiology. They actually have two different brand names, NDS really being the surgical brand name, and Dome being the radiology brand name.

So normally, over the past few years, the surgical business has been the higher grower than radiology. But this dual-sourcing thing that came along is really hitting the surgical part of it more than -- it doesn't affect radiology. So I think you could get a temporary change in the growth profile.

We also have some significant new products coming out in the second half in radiology that can give a lift there. So I think our growth rates this year in the two product lines within NDS may be different than what the overall trend has been.

Okay. And now that you've had more time of NDS under the umbrella here, any cost savings you can see, combining the two businesses here?

There are, and we're working on this. Recognizing this was not a cost-based acquisition, it wasn't done specifically just so we can drive out costs. It was to enter a new market and get a greater medical presence. But, having said that, there are a number of sales channel opportunities where offices can be combined, where two companies both had standalone offices.

So we are doing a number of things there. We haven't given an estimate of that, but some of that's contained in our view of the EBITDA there.

Okay, thank you.

Joe Bess, Roth Capital Partners.

John, thinking about the NDS acquisition, and you've commented a little bit about it in your opening remarks, but can you dive in a little bit deeper where you potentially see some opportunities for share gains coming out of this dual-source issue, as well as with some of the other customers that they have?

We're not going to belabor this one customer. First of all, the whole relationship exists under NDA, and the customer takes it very seriously. So I can't really go into all kinds of discussions about what we might do there. But suffice to say, we're getting to know that customer, and they made a decision that they had been thinking about for a long period time, awkwardly made it right at the beginning of our ownership period. And we understand why they did it.

We're disappointed in it, but we are now in a dialogue with the company, and I think they better understand our strategy and our capabilities. There is the opportunity, going forward, to capture back some -- probably not all, but some -- of the share that they took, but also to expose them to other product lines. And it's a pretty significant customer, and they've looked at all the things we do in medical now, and there are opportunities. I can't really comment on what they are, on which ones. None of them are going to happen within the next three to six months, but I think it does present an opportunity for us.

And there's two reasons why NDS, I think, is really important to us. One is just we're more important to the customers now. So we have more angles to have the conversations. Some cases, we have customers where we're significantly penetrated with base GSI products and not penetrated with NDS. And so we're having those conversations to try to almost pull NDS into those relationships.

And then we have the flip of that, which is the case of the one customer that dual-sourced us, where we can actually possibly bring GSI products along into that relationship. So you have this two-way dialogue with the OEM customers about the two sets of offering, and in all cases, we've moved up on the radar screen of the customers.

The other reason is just in the acquisition and partnership and collaboration realm, we have much more points of relevance now to various companies in terms of what would be a sensible acquisition. So we feel like our opportunity set has gone up.

You know, it's really just a measure of our relevance within the medical space. I think that's not necessarily going to come to fruition, again, in the next three to six months; you never know. I think normally the gestation period's a little longer than that. But the OEM relationships and the acquisition and partnering, when you look one to two to three years out, is going to be an impact for us.

Okay, that's helpful. Thank you. And then you guys gave some great color on your end markets. I was hoping you can talk a little more about it on a geographic basis, and then more specifically, what you guys are seeing in Asia at this time.

This is Robert. It gets a little difficult to talk about our geographical sales, because the challenge that, as a component provider, is we sell into a manufacturing facility. And that manufacturing facility then sells a product into an end market. And so the difficulty is, is our end market -- are our geographical sales really relevant to demand? I think the answer is, in most cases, no.

Now, we do look at the Purchasing Managers Index, and I would say that's fairly indicative of the spikes that we see in overall demand. But you're not necessarily going to see -- when we see a downturn in the Chinese market, as an example, we're not necessarily going to see that in our sales into China, but we are going to see it a little bit more across the board because of the facilities that sell into China, our customers selling into China.

I think what you're seeing is mediocre GDP growth, if any, in the US, in Japan, and in Western Europe. Those are the consumption economies, and they're not pulling very hard on the world's manufacturing sectors. And China's the biggest manufacturing sector, and a lot of our stuff goes into China. Our components go into China, but then they're bound for the US or Europe, ultimately.

And so that's where the -- you know, some of China's manufacturing sector, obviously, is for the domestic Chinese economy. But when the growth has decelerated there from 10% or 11% to 7% or 8%, that's a meaningful reduction. So the factories there are not running as hard, and we just haven't seen the volumes.

Quite a bit of that is the microelectronics sector. So if that really does come back in a meaningful way, that can make a difference for us. We don't have a ton of that built into our view. We have a very modest kind of move forward, quarter to quarter to quarter.

Last year, a lot of people were saying there's going to be a big recovery and it didn't happen. So we're almost taking the more cautious approach this year and saying we're just not going to believe until it's in the order book. So now we have Westwind is kind of in the order book. Q2 and Q3, the orders are there. But Q4, it's not in the order book. And some of the other product lines haven't seen quite the resurgence. So we're just taking that cautiously.

But I don't know that you can then really take our sales into the regions and really draw great conclusions from it, as Robert said.

Okay, great. And then, Robert, what are you guys' guidance for free cash flow for the year, as well as CapEx?

From a CapEx perspective, it's probably in the $7 million or $8 million range. We've been under-spending a little bit. But roughly around that, the $7 million to $8 million range.

And then I haven't provided any sort of guidance on our cash flows for the full year. We have to work our way through that as we finish up the purchase accounting on NDS and then the effects of that and it's implementing a new tax structure for it.

Okay, great. That's all I have. Thank you, guys.

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

Thank you, operator. So in conclusion, I would say that on balance, we were pleased with the Q1 results. The Company is executing well on all of the design plays that we have called. None of them have been easy, but we are accomplishing our stated goals. The complexion of the Company and the team has improved. We're moving in the direction of our ultimate strategic vision, with several key milestones being accomplished this quarter.

The financial results were solid, in our view. They're not where we would ultimately want to see them, but they're moving in the right direction, and we are becoming a more predictable Company as well.

As I mentioned before, the external landscape still creates some uncertainty for us, but we see the beginnings of an improving picture for the rest of the year. As a Company, we're better positioned to capture opportunities in an improving scenario. We're also better able to cope with any further headwinds we may encounter.

We have a roadmap that is guiding our strategic priorities and our progress as a Company, and it's becoming clearer as we move forward. We have a strong leadership team in place with significantly enhanced capabilities. Each and every member of the team is proud of what we've accomplished and committed to delivering on all of our goals and objectives for the Company going forward.

In closing, I would like to mention that we will be presenting at the CJS Securities Summer Investor Conference on July 9 in White Plains, New York. We hope to have the chance to meet with some of you at this event.

In any case, we look forward to joining all of you on our second quarter 2013 earnings call, which will happen in August. Thank you very much for your continued interest in GSI, and the call is now adjourned.

This concludes today's conference call. You may now disconnect.