Novanta Inc (NOVTU) 2011 Q2 法說會逐字稿

Good afternoon, my name is David and I will be your conference operator today. At this time I would like to welcome everyone to the GSI Group second-quarter 2011 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 Mr. Tim Spinella, Assistant Treasurer of GSI Group. Sir, you may begin your conference.

Thank you very much. Good afternoon, and welcome to GSI Group's second-quarter 2011 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 have not received a copy of our earnings press release, you may get one, as well as a copy of this script 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 will need to remind everyone of the Safe Harbor of 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 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 our today's forward-looking statements as representing our views as of any date of 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 the most directly comparable GAAP measures is available as an attachment to our earnings press release and in the script posted to the Investor Relations section of our website at www.gsig.com. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP in the earnings press release, or script, we will provide reconciliations promptly. I'm now pleased to introduce the Chief Executive Officer of GSI Group, John Roush.

Thank you Tim, good afternoon everybody, and welcome to our call. We appreciate your continued interest in the Company. I'm very pleased to report that GSI had another strong quarter in Q2. Our financial results were very good in terms of revenue and profitability and, in both cases, we delivered at the high-end of our prior guidance range.

GAAP revenue for the quarter was $101.4 million representing 18% growth versus a year ago. Adjusted EBITDA was $19.4 million, an increase of 20% versus Q2, 2010. I'm also particularly pleased that all 3 of our operating segments achieved double-digit revenue growth in the quarter. Precision Motion and Technologies had growth of 21%, Laser Products revenue grew 14%, and Semiconductor Systems was up 21%.

As I've indicated in my past remarks, 2011 has been a year of building the organization processes and infrastructure for GSI. This has been particularly true with respect to the staffing of our Management team. So, during the quarter, we made significant strides on this front and I'd like to share with you some of the highlights of that. We have now appointed business leaders for all 3 of the Company's operating segments.

In May, we promoted Dave Clark to the role of Group President for our Laser Products businesses. Dave has been with the Company for over 17 years and has served as the President of our Synrad Laser business since 1998. In July, Jamie Bader joined us as Group President of Precision Motion and Technologies. Jamie was previously with IBM and he had served as a Group Executive with both Motorola and Oak Industries, and he was a Management Consultant with Bain and Company.

Also in July, we brought on Mike Chase to lead our Semiconductor Systems business. Mike has 23 years of experience working with, and consulting to, a number of the leading players in the semiconductor capital equipment space, in areas of business leadership, marketing, and commercialization of new technology. We also recently appointed Peter Chang as our Corporate Controller. Peter joins us from Merck Millipore, where he served Assistant Corporate Controller and prior to that, Peter spent 10 years at Price Waterhouse Coopers, most recently as a Senior Manager in their audit practice.

Last week, we reached agreement with Deborah Mulryan, to have her join us as our Corporate Vice President of Human Resources. Deb has most recently served in a similar capacity for Sycamore Networks and has led human resources for 2 other public companies and has held significant HR leadership roles with Analog Devices, Fidelity, and Stratus Computers. Deb is transitioning now and will be on board here with us within a few weeks.

With these additions we now have a talented, experienced, and energetic leadership team for the Company. As a team, we are now all focused on the task of shaping and executing on our growth strategy for the Company. Overall, GSI is not lacking for growth opportunities. Historically, our businesses have not been managed for strategic growth. If anything, they've been managed to maximize short-term margins. Thus, as we have looked across the Company for untapped growth potential, we found many opportunities.

To some degree this has been the challenge here. The Company plays in many different technologies and applications. The level of growth investment that has existed has generally been insufficient, but the bigger problem has been investment was channeled into too many different projects and businesses. The inevitable result has been that none of the projects really reached critical mass or led to meaningful growth. Given those historic dynamics, focus is one of the key elements of our strategy going forward.

So, at this point, we've identified 3 initiatives where we see the opportunity for breakout growth. By this I mean that we see the opportunity to add tens of millions of dollars of annual revenue from each initiative over the next several years. So, the first major initiative is fiber lasers. This market is over $400 million, it's growing rapidly and spans the power range from just a few watts up to the multi-kilowatt range, spread across a wide range of applications. At GSI we currently offer products up to 500 watts, with a near-term road map to a 1-kilowatt product and a medium-term path to 3-kilowatts. Our strategy here is to focus on the mid- and higher-power ranges in cutting, welding, and drilling applications.

We have already demonstrated that we can effectively leverage our strong historical customer relationships and our deep laser applications expertise to support customers as they transition to fiber lasers. Customer demand for our current product is brisk. Our biggest challenge, frankly, has been to expand our production capacity and our applications resources fast enough to keep up with market demand. Our strategy, in addition to expanding our product range, as indicated, focuses on providing the necessary resources to support the growth of this business.

Our second major growth initiative is in our Precision Motion group and is to expand our laser scanning business. We are the global market leaders in scanning galvanometer technology, which is used to steer and control the beam in a wide range of laser applications. Our addressable market is over $200 million and is seeing significant growth. The drivers of the growth are the natural expansion and proliferation of new laser applications, often driven by fiber lasers, as well as the increasing penetration of the scanning technology within lasers.

This penetration rate is on the order of 10% to 15% today, but is projected to increase significantly over the next few years. As the market leader, we have the broadest technical capabilities and applications experience and we're well positioned to capture significant upside growth. Our strategy and scanning includes offering tailored solutions for specific applications in the market, increasing our content per system, and expanding our global sales and applications reach in scanning, with a particular focus on Europe where our share is lower than it is in other regions.

Our third major growth initiative is to significantly expand our Medical and Life Sciences components revenue, primarily within Precision Motion. Today, we supply a number of products for the medical space, including precision coders, scanners, thermal recorders, and spectroradiometers. Major applications include robotic surgery, ophthalmology, dermatology, radiology, DNA sequencing, and drug discovery tools. The medical market is quite attractive to us, due to the growth dynamics which include the aging population in the developed world and the rising standard of care in the developing world. It's an industry that does value technology differentiation, and it's somewhat less cyclical than other markets.

Our Medical and Life Sciences revenue currently accounts for 13% of GSI's total. Our strategy is to double that percentage by investing, along with key medical OEM customers, to develop and launch next-generation products over the next several years, leveraging our key account relationships to more effectively cross sell our full product range into large medical customers where we have strong existing relationships and increasing our value-added content, and also moving into some of the adjacent technologies that are used with our current products.

Each of these 3 growth initiatives that I mentioned provides us a discrete opportunity to add tens of millions of dollars of annual revenue over the next few years. In addition, these areas will be the focus of our acquisition efforts. We are building a pipeline of promising opportunities in each of these areas and we expect to execute a number of transactions over the next few years. But, as we tighten the focus around our growth investments on these major platforms, it's also important for us to define where we will not invest and we are certainly doing that.

As we have looked across GSI, we've identified several areas of the Company that do not leverage any of our core competencies and do not necessarily fit our growth vision. Thus, we are putting several of our businesses under strategic review. The specific businesses under review are our Laser System Integration Businesses. Today these businesses are part of our Laser Products group and they make complete, stand-alone laser tools which are sold directly to end users. As we carry out the strategic review process, we expect to make a final determination with respect to these businesses by year end. The businesses under review account for nearly $20 million of our annual revenue and have adjusted EBITDA margins that are less than the overall corporate average.

Taken together, we expect these strategies to focus and accelerate profitable growth for the Company. As I mentioned in the past, the GSI portfolio has really not been managed or optimized for growth. On an as-is basis, our revenue growth profile was likely to be mid-single digits in the coming years. But, with the strategy we've outlined, we expect to be able to accelerate the top-line growth to the high single-digit range without acquisitions and to the low double-digit range with acquisitions. During the latter part of this year, you can expect us to begin to attend investor conferences and to make more thorough presentations of our strategy. We will provide further details and financial information at that time.

As we are holding this call, we are cognizant of the fact that financial markets are experiencing significant volatility, and there are increasing questions about the pace of economic growth over the next year. Like all companies, GSI needs to plan for a range of economic scenarios and we are doing so. However, based on the Company's recent progress on so many fronts, there is absolutely no doubt in our minds that we have now firmly established GSI as a strong and resilient company and a formidable player in our served markets. So now, I would like to turn the call over to Robert to cover the financials in more detail, Robert?

Thank you, John, and good afternoon, everyone. I'll now provide additional details on our second-quarter results. Following my prepared remarks, we will open it up for questions.

As John mentioned previously, we had another good quarter of financial performance. For the second quarter of 2011, GSI generated revenue of $101.4 million, an increase of 18% from $85.7 million in the same period a year ago. However, the Company did recognize $4.2 million of net revenue in the quarter that had been deferred under multi-element arrangements, entered into prior to the adoption of ASU 09-13. The majority of this revenue represents the recognition of revenue on orders that were deferred as of year end, and were fulfilled during the quarter.

As John just mentioned, all 3 business segments of the Company experienced double-digit growth in the quarter, compared to the same period a year before. Our Laser Product division recognized revenue of $35.1 million, an increase of 14% from $30.9 million in Q2 of 2010. Demand remains strong across our Laser Products, driven by gains in our industrial lasers and fiber lasers. Our Precision Motion and Technology division recognized revenue of $52.6 million, an increase of 21% from $43.6 million in Q2 of 2010. Strong growth in our optical scanning solutions and air-bearing spindle components continue to drive our performance.

Our Semiconductor Systems division recognized revenue of $13.6 million, a 21% increase from $11.3 million in Q2 of 2010. Demand for our memory and Wafer marking systems remained robust. Turning to profitability, second-quarter gross profit was nearly $45 million, or 44.4% gross margin. This compares to a similar gross margin in the second quarter of 2010, despite shifts in our overall product mix.

Operating expenses represented 29.8% of sales, down 180 basis points from 31.6% in the same period a year ago. Second-quarter operating income increased to $14.8 million from nearly $11 million in the second quarter of 2010, while operating margins increased 180 basis points to 14.6% from 12.8% of sales and 2010. Adjusted EBITDA, a non-GAAP financial measure, was $19.4 million representing a margin of 19.2% of sales. This represented a 20% increase compared to the second quarter of 2010.

However, adjusted EBITDA in the second quarter included $1.6 million of gross profit from the $4.2 million of net revenue that had been previously deferred under multi-element arrangements entered into prior to the adoption of ASU 09-13. Finally, the Company recorded, in the quarter, a tax expense of $1.5 million or an approximately 13% tax rate. This resulted in earnings per share of $0.30, up from a loss of $0.32 in the second quarter of 2010. The Company continues to expect a tax rate for the year of approximately 15%.

Turning to the balance sheet, we finished the quarter with $74 million of cash, a $12.7 million improvement from the first quarter of 2011 and resulting in approximately $34.1 million of net debt versus $50.8 million of net debt at year end. Net debt is a non-GAAP measure. We've defined net debt as total debt minus cash and cash equivalents, a reconciliation of which is available in our earnings release. Free cash flow, also a non-GAAP measure, which we define as cash flows from operating activities less capital expenditures, was $11.8 million, representing 117% of reported GAAP net income in the quarter.

On July 18 of 2011, the Company provided formal notice that it elected to optionally redeem $35 million of its outstanding $180 million of 12.25 Senior Secured PIK Election Notes. After consummation of this redemption on August 17, $73 million in aggregated principal amounts of the notes will remain outstanding. The Company decided to take this action after demonstrating another strong quarter of cash flow generation. In addition, we continue to make good progress on the refinancing of our debt. We expect to complete this effort, which will include the establishment of a bank facility in the third quarter.

Finally, as we continue into the second half of 2011, there is obviously a lot of uncertainty in the global market. The last several weeks in the stock market have been challenging and unsettling. But, it's still too early to determine the effects on capital spending or our businesses. As we currently see the second half, we continue to expect customer demand to remain largely in line with prior forecasts. The only exception is demand for the micro electronics end markets. A portion of our sales through the electronic market -- specifically semiconductor, data storage, and PCB drilling applications -- are expected to experience a sequential and year-over-year drop in sales, partially due to the timing of orders and revenue recognition, and partially due to the end-market dynamics.

However, overall industrial, medical, scientific, and even some niche electronic markets remain positive. For perspective, we believe roughly 40% of our portfolio sells into industrial end-markets, 36% sells into electronic markets, 13% in the medical, and 11% into scientific markets. For the third quarter of 2011, the Company expects revenue to be in the range of $93 million to $95 million. This guidance includes approximately $1 million of expected revenue that had been deferred from multi-element arrangements entered in prior to the adoption of ASU 09-13, versus $4.2 million of such revenue recognized in the second quarter of 2011.

Adjusted EBITDA for the third quarter of 2011 is expected to be in the range of $15 million to $17 million. For the full year of 2011, we expect revenues to be in the high end of our range of our prior guidance of $375 million to $385 million. This is driven predominately by the strong performance in the first half of the year and continued strength in our Laser Products and Optical Scanning Solution businesses. Adjusted EBITDA for the full year is expected to be in the range of $68 million to $73 million. This concludes my prepared remarks. I'll now open up the call to questions.

(Operator Instructions). Lee Jagoda of CJS Securities.

This is actually Arnie Ursaner backing up Lee on the call. Just a really mechanical question first. Your guidance for the year, does that include the businesses that are under review, under strategic review?

Yes, it does.

Okay. And John you mentioned you have your full team in place. 1 of the things you had talked about you wanted to add was an international sales head, did I miss that? Or have you not hired someone for that spot yet?

We do have this division staffed, but the international job was filled by an individual who is already here and has another responsibility. His name is Pat Cooney and Pat is the General Manager of our thermal printers business and he is taking on a second responsibility of heading up international.

My next question is for Robert. Can you try to give us a feel for your run rate SG&A and run rate R&D? I know you have been incurring, what most people would call either duplicate or atypical expenses, things like headhunters. And you did put out a press release indicating you've changed, somewhat of a relationship with FtI, who was providing some of these services. How should we think about run rate SG&A on a go forward basis?

SG&A is roughly 21% of sales. It was 21% of sales in the first quarter and it was 21% of sales in the second quarter. I wouldn't expect that to change through the remainder of the year. I think we could probably get some leverage off of that as we enter 2012. But for now I would leave it roughly around the same. When it comes to R&D, I would take a similar approach.

I mean, the composition is really going to change Arnie. If you take R&D, my comments earlier on the call would suggest we are going to spend the R&D dollars in a more concentrated way to try to move the needle more effectively. But, I'm not sure if see the overall spend changing that much, as a percent of sales. So, I mean we will probably grow R&D in line with sales over time. But, not change the percent.

SG&A is also changing in composition. So, it's true that we had a lot of redundant expenses or extraordinary expenses related to consultants and interim management and higher costs and some those things. Some of those costs will roll off.

The longer we've been here and been able to assess the Company and its controls, processes, capabilities there were a number of areas that were, I would say, significantly neglected that we've had to invest in. And example of that is IT. Where a number of the IT systems across the Company needed upgrades and were not functioning well and had to be dealt with.

So, there's some offset to that and that's the reason why we are kind of holding the line for the balance of 2011.

Focusing on IT, you had indicated you've been outsourcing that completely. Are you hiring someone to do that in-house at this point?

We've hired a number of individuals already and we continue to do so. So it is -- I would say it's fairly on track at this point. We understand where the gaps are and how to address them. And that is part of the cost that we are incurring in our SG&A.

And we did hire a IT leader who joined us several months ago. Who came from Cisco.

Okay. And John you did mentioned in your written remarks to accelerate the progress in driving the growth strategies across the Company. I assume the expanded discussion on the 3 initiatives is what we should focus on the types of things you're looking to accelerate, is that correct?

Absolutely.

Thank you. I'll jump back in que. I have a few more, but I'll jump back in queue.

And your next question comes from the line of Rick Hoss of Roth Capital Partners.

Good afternoon. John can you spend a little bit of time on your fiber laser approach? And I think there's probably some worthy discussion to address fiber versus gas or generally the cannibalization of fiber to other types of lasers.

Yes, fiber lasers is not 1 topic, as I indicated. We actually sell systems in this company that uses 3 watt fiber lasers, very small devices. We're angling for the somewhat medium to higher power fiber laser.

We're looking basically to play in the parts the fiber laser market where we were historically strong with traditional laser technology. So, we're not venturing kind of in the new area.

We are leveraging our existing customer relationships and our existing applications knowledge and basically helping those customers transition to the fiber laser. So, it's not a strategy of attacking a particular part of, say the competitor's business. It's really leveraging our existing capabilities and relationships and transitioning that to fiber. So, I think a lot of the applications that we serve with fiber lasers are rally going to be taking over for diode pumps solid state, YAG type lasers or even lamp pump lasers, in that power range.

And I'm assuming that the strategy would be that the Synrad guys could sell whatever lasers would best fit the application and the JK guys could do that as well.

I think you're getting at, are we going to have sort of a more cross-selling focus in our Laser Products group. I would say the details are not finalized there, but in general the theme and the actions in laser products is greater level integration. So, we have several scientific businesses.

The sales channels there are partly integrated now into 1, and there's further work being done on that. When you get into the JK laser, which is our lamp pumped and fiber lasers, and Synrad, which is our CO2 gas laser business, there are opportunities for those teams to work more closely together.

But that has not been formally integrated at this time. I think that's still more in the planning stages. There are some opportunities.

Sure that's fair. Robert, if we could spend a little bit of time on free cash flow. It looks the CapEx for the quarter was fairly low. What is your expectation for full-year second, the second half of the year? Or maybe just, if you want to answer that, just kind of a general CapEx requirement for the business?

CapEx requirements aren't very large. So, they're in general a few million dollars. There are some 1-time costs associated with some IT investments that we need to make, so probably the back half of this year to early next year will run a little higher. But, for the most part, we're not a very capital intensive business.

The only business that we have that actually has a lot of inherent capital equipment is our spindles business, Westwind Spindles. Which operates both in the UK and in Suzhou, China. And that involves a lot of precision machining and there is a bunch of expensive machining centers in those facilities. But they actually have, I would say, a good level of capacity right now. So, we don't foresee significant additional investment in the medium term for Westwind.

In terms of the cash flow, we generated close to $12 million of cash flow in the quarter, as we define free cash flow. It would be important to note that includes a little over $3 million of interest expense on the 12.5 PIK notes. So, overall I don't see any reasons why would have a deterioration in cash flow going into the back half of the year or even 2012, and quite frankly, historically we have not been very good at managing our working capital. So, we are generating significant cash despite the fact that we haven't put any initiatives in place yet to better manage our working capital.

And that's an example of an area where the IT systems and capabilities in the Company are a limiter. Everyone of our facilities is on a different IT system and they don't talk to each other. Many of them have very weak capabilities for enabling you to manage your whole MRP process. So -- a look at some of the IT spending can help us in that area.

Okay. So, thinking about then the next 2 quarters. It's probably safe to assume that the free cash flow would exceed net income for the next couple of quarters?

Yes, without going through a deep analysis of it, I would say that's a fair assumption.

Okay. Okay great. Thank you gentlemen.

Thanks.

(Operator Instructions). Your next question if from the line Jack Ribstein, of Patero Capital.

Hi, good afternoon. Curious on the strategic initiatives. The elements that you find to be less interesting or potentially less interesting is that something you can sell? Or divisions you can sell? Or are they too intertwined in the rest of the business and would just be something you would wind down and then divert those resources to more lucrative endeavors?

Well it's a good question, thank you for asking it. And I don't want to sort of tell you that the decisions have been made because we are really just entering into those review process on that now. For the most part these are separate operations that exist in their own facilities. They are not extremely intertwined.

That is part of the calculus that we used here. These businesses that are under review don't share a lot of core competencies and businesses processes and have a lot in common with the rest of what we do. For the most part, GSI has a core competence around providing tailored, enabling technology solutions to OEMs. In some cases we are the OEM, we're the system integrator.

That's the more limited part of our business and then these laser integration businesses, we just concluded that it was worth reviewing them strategically to see whether they fit and how we might deal with that. Because they were so different than the rest of what we do.

But you think there is an asset there that 1 could use to pay down debt if you were to sell it? Or is it something that you would purely wind down, I guess is my question.

We don't know the answer. When we have kind of done all of that analysis, we'll report back. Our sense would be that you would be able to sell them if you go down that path.

What proceeds we would realize, we don't know yet. We haven't sort of work through all of the options. I don't necessarily think there would be a scenario where we just wind them down. But I don't want to commit until we've really reviewed all the options.

And then on the initiatives that you see as generating more revenue over time. Do you envision spending increasing so that you would see a weaker EBITDA as you go toward that growth? Or do you think you could maintain the EBITDA margins you have while just diverting resources to the growth initiatives?

Yes, we do not expect to deteriorate our EBITDA margins in the pursuit of those growth initiatives. The way I think about it, first of all, there is a fragmentation of the current investment that is going on.

We will be de-investing in other projects and concentrating our investments in the areas we're talking about. So, that's 1 dimension.

The second thing is there are productivity opportunities across this company. There are real estate and site rationalizations that we can do, so we can have less physical infrastructure. There is a lot of fragmented or redundant business processes. Everyone of our 15 or 16 divisions kind of does everything themselves. So, there's a lot of instances where we are exploring shared services approaches or some rationalization.

We talked about even some of the sales channels can be combined. So, there are productivity opportunities. Having said that, I don't plan on taking all of the productivity that we generate over the next few years and adding it directly to the bottom line. Some of that we're going to reinvest back into the business to enable us to spend on these growth initiatives.

So, I think we can self fund some of that. By concentrating investment and by driving productivity. We don't expect to deteriorate margins. We might have less margin expansion than we otherwise would. But, I think we get it back on the flow through from the growth.

Got you, that's basically what I was looking for.

Your next question comes from the line of Jason Young of Temagami Capital.

Just a question on margins. It looks like you had a strong performance in laser products this quarter. Is that a fair assumption run rate margin for the back half, or any reason why that should fluctuate?

It does fluctuate a lot to the degree that John just mentioned. We have a number of different types of businesses within each of these larger divisions. And so, as we go through both the effort to rationalize some of that cost structure, we do see shifts in mix that have difference in the gross margins that could be significant. It does fluctuate a lot.

What I would point out, though, is that overall our gross margins year over year, are roughly the same. So, despite all of the shifts in the business lines, despite all the changes that we're going through, we haven't actually seen a significant decline or any sort of concern around the gross margin.

If you take laser specifically and you say first half, second half comparison. Is there some big mix shift within laser that would cause a very different dynamic. I would say, you know, without kind of doing a very specific line item review of all of the laser products, I don't really see a big shift where division A is doubling in revenue and division B is being cut in half.

I mean, it's roughly the same mix verse the second, at least at the divisional level. Sometimes there are -- there is mix shift within a division, where you do a special program with 1 customer that's higher or lower in margin. But I don't see big shifts. I think we are experiencing actually more mixed dynamics within Precision Motion than we really are within laser.

[Inaudible -- several voices] to the upside in terms of Precision Motion?

Not necessarily, in the periods we've just reported. Some our highest margin businesses within Motion actually were a little down in the most recent quarter. So, it was kind of a headwind in the second quarter and it may be a headwind going through the back half. But on a strategic basis, the most profitable businesses are going to grow the most. So, I think it helps us ultimately, but right now is not helping us.

Okay and in terms of the acquisition strategy. Can you just outline some of the criteria you'll be looking for? To be immediately accretive or how we are you thinking about those acquisitions?

Well the first thing we're going to look at is does it further our strategic objective? So, does it bring in the technology capability or capability to serve customers that makes us a more relevant, more impactful supplier in the market? That's going to be our criteria. Technology or some aspect of the acquisition that is beneficial, and supportable and furthers our strategy.

From a financial criteria, we are obviously going to look to pay an appropriate valuation for the asset. We would look for transactions that are accretive early on. That would be certainly a goal. But I would not categorically rule out that we would ever take some dilution.

We might, for the best strategic deal, we might consider mildly diluted deal. But, in general, that's not our game plan. We are talking about primarily both on acquisition, that fit a strategic need and hopefully would be accretive.

With nice financial returns. We understand the cash we have and we want to deploy that as effectively as possible.

Okay great, and how is the pipeline for those deals looking?

A lot of this is just getting started. So, we've gone down the path now of outlining our strategic plan and we'll be going through the tactical effort of that now.

The new operating management is anywhere from about 8 weeks to about 2 weeks in the Company. And I have been here for a little bit longer period, since the beginning of the year and Robert's here for a few months.

We've been working this with the next level down. But now that we essentially have the senior team in place, we have a lot of the processes and a lot of the controls issues I would say well enhanced. There's a lot more intellectual horse power and bandwidth that is now starting to be applied to the strategy and the acquisitions than was, say, a couple months ago.

I think it's going to really accelerate. We have lists, we have prospects, we've had some dialogue. Expect it to pick up steam.

Great thanks a lot.

Thank you.

And your final question is a follow up from the line of Lee Jagoda of CJS Securities.

It's actually Arnie Ursaner again. You've got a couple of facilities by your headquarters that I think you were hoping to rationalize, can you update us on that?

Yes, Arnie. We're in the process of planning through that. The Company, as a general statement, has more real estate than we really need or are able to take advantage of. And there is multiple different ways that we can move operations into a smaller number of sites.

The Boston areas is definitely 1 opportunity that we have. There are others that we are looking at. I don't want to sort of give the final plans there because we are still in the negotiations with the various parties with respect to these. But certainly the Boston area is 1 strong opportunity and we'll keep you posted on that. 2 facilities that are 4 or 5 miles apart.

Okay my next question is, on the M650, can you give us an update on how that process is unfolding?

Not too much that I can really say there. We continue to work on the development of that from a technical perspective. And we don't at this point, have public statements that we can make on when we are going to be formally launching the project.

Okay. Sorry?

It's still underway. I don't have anything I can really add at this time.

Okay, my final question relates to your PIK, obviously you called 0.3 of the outstanding issue. Yet you are incurring negative arbitrage. I'm assuming the reason you are is, you do indicate in your prepared remarks you hope to have this resolved in Q3. Is the issue the location of the cash or are you just planning to keep your offshore cash and do other financing through the banks, is that how we should think about it?

I'm not sure the terminology, negative arbitrage. But what I would say is that we utilize cash available to us in the US, didn't require a lot of effort in order to use, to pay down that debt. And that was it.

We knew we were refinancing the transaction this quarter, we were on a very good path for doing that. And so I didn't necessarily dictate or require an effort to put the cash from overseas. I think we have enough cash in the US and plus with the ability to refinance that this quarter, I didn't view that is a big concern.

The way I would think about this Arnie, is the decision to refinance the existing debt was kind of a strategic balance sheet decision. The decision to call $35 million in the timeframe we id was somewhat opportunistic. Because we generated a sufficient cash balance so we could get a head start on the refinancing.

That is the way I would look at it and it made sense, we had the funding available. We didn't have immediate other needs for the cash so we just got a head start on calling the notes.

Were there any other specific steps you had to take to get the debt refinanced?

Not --

Having trailing numbers or some formal type of filing or any other more mechanical factor that you had to get out of the way before you could refinance?

No. As I mentioned, it was going to be a bank facility at least it will be a revolver in place. In order to get some sort of facility or any sort of lending for that matter, you need to be able to forecast out 5 years, you need to be able to understand what the direction of the business is. You need to be able to conduct a due diligence by the various institutions and you need to be able to have a strategic vision of the Company. So, we're now there at the second quarter and we can now refinance.

It's all coming together in that same timeframe. Where 3 months ago we were not able to talk about as many of these things in this level of detail and now we are.

Okay, thank you very much.

I understand we have 1 more question and then we will wrap up.

Yes sir, and that if from the line of Rick Hoss of Roth Capital Partners.

I figured somebody would ask this, but they didn't. Robert, can you explain the income taxes receivable line on your balance sheet and implications of that and timing of that?

Yes, the largest aspect of that is the discussion that we are having with the US Federal Government regarding some money that we deem that owe us. That is not a 2011 event. I would look at that more as an earlier 2012 event. The scale which is still in discussions, and we just want to be careful expanding upon that.

And for the accounting to actually put a number on your balance sheet -- how does the accounting work? In other words, how do you determine that as of last quarter, I saw your Q was just released, but last quarter it was worth $22 million. How does that value determined if you don't know the certainty of that?

Well I would also -- I mention that there's a receivable and there's a payable associated with it. And so you would have to net the 2 -- there's some disclosure on that in our K, but not a whole lot. We have an idea based on -- a lot of this stems from the restatement process.

So, based on the restatement process we have an idea of what the amount is. It now has to go through the re-audits. We started with an audit dating back to 2000. We finished 2000 through 2008. Now we are completing the remainder. We have a fairly good idea at this point of what the amounts are. I just think it's a timing issue.

Okay. Thank you.

Thanks, Rick. Okay well I'd like to thank everyone for joining us on the call today. We appreciate your continuing interest in GSI. Despite the uncertain environment that we are now operating in, we remain genuinely enthusiastic about our continuing progress with the Company. We now have a strong leadership team in place and a vigorous culture is emerging.

We have a clear focus on the strategic priorities and we are pretty confident in our ability to execute on them. As always, hard work does lie ahead. But we are convinced that GSI continues to have a bright future and we are very committed to making it a reality.

I look forward to joining all of you on our third-quarter 2011 earnings call in mid-November. Thank you very much and this call is now adjourned.

Ladies and gentlemen this does conclude today's conference, thank you for your participation. You may now disconnect.