Novanta Inc (NOVTU) 2012 Q4 法說會逐字稿

Good afternoon. My name is Candace and I will be your conference operator today. At this time I would like to welcome everyone to GSI Group's 2012 fourth-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)

Mr. Robert Buckley, CFO, you may begin your conference.

Thank you very much. Good afternoon, everyone and welcome to GSI Group's fourth-quarter and full-year 2012 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. This call is being webcast live and will be archived on our website.

Before we begin the call, 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 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 statement made today represents our view 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 the 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 measure 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 the Investor Relations section of our website at www.GSIG.com.

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

Thank you, Robert. Good afternoon, everybody. Welcome to our call and we appreciate your continued interest in GSI.

As I reflect on 2012, I'm really extremely proud of the Company's progress relative to our aggressive agenda of change and improvement that we outlined for the year. The fact that the progress was accomplished during a year of weaker and more challenging market conditions resulted in financial performance that I would say is less impressive than we would have preferred, but it in no way diminishes what our team accomplished, and in fact it makes it even more impressive.

In the past 12 months we have successfully implemented our 12x12 consolidation program, built a talented, experienced, and highly capable Management team, upgraded numerous assistance processes, infrastructure, and controls around the Company; we completed the divestiture of two of our Systems businesses -- that would be Control Laser and Valveless. And we believe we are close to completing the final divestiture, which is Semiconductor Systems.

We also took two important strategic steps during the year. One, we worked with an outside industry expert firm and completed an exhaustive market study of the medical components space to map out medical acquisition opportunities. And then we closed on an amended and extended $125 million credit agreement with a group of six Tier 1 banks, led by Bank of America, which closed in December. These two steps enabled us to increase our acquisition capacity, reduce costs, improve the terms on our agreement, and put us in a strong position to complete the acquisition of NDS Surgical Imaging in mid-January in an $82.5 million transaction.

All in all, 2012 was a year of significant transformation for GSI. We accomplished a great deal. As I did mention, our progress was accomplished against a backdrop of a weaker market than we expected in overall capital equipment and also in the microelectronics equipment space in particular. Nonetheless we delivered strong results. In Q4, our continuing operations, excluding NDS, which did not close until January, delivered revenue of $66.4 million and adjusted EBITDA of $9 million. Both of these figures were within our previously communicated guidance ranges.

On a full-year basis we delivered revenue for the Company of $271 million and adjusted EBITDA of $42 million, which is a 15% margin, despite the significant drop in business from our prior-year results and our plan for 2012. So on a year-over-year basis our 2012 revenue was down $32 million or 11%. However, the drop was mostly in two areas, our Westwind spindles business, which was down approximately $19 million year over year; and the impact from our adoption of the ASU 2009-13 revenue recognition rule in 2011, which resulted in approximately $9 million of revenue in 2011 that was essentially one-time and did not recur in 2012. Absent these items and some currency movement, our business was essentially flat year over year in revenue in a very difficult market.

We also ended the year with a very strong balance sheet. Our cash balance exceeded our total debt as of the end of the year, which put us in a very strong position to be able to do the NDS acquisition in mid-January. So Rob will cover all these financial results in a bit more detail in his section.

In terms of the organization, we made a lot of progress here as well. During the latter part of 2012 we made a number of key additions to our leadership team. As previously announced, we brought in Matthijs Glastra as Group President of our Laser businesses; he had a successful 18-year career as an Executive with Phillips. Our new site leader for our Bedford operations joined us from Ingersoll-Rand, where he led operations with headcount in excess of 1,000 people. Our new continuous improvement leader for the Company was driving productivity efforts across all of our sites is a veteran of Crane and Danaher. And in early 2013 we brought aboard a new Vice President and General Manager of our Cambridge Technology Scanning business, who has significant general management leadership experience with Danaher, American Power Conversion, A123, and GT Advanced Technologies. We also recently hired a new Vice President of Sales across all of our Laser businesses who had previously held significant sales and product management leadership roles with both Newport and Baxter.

So now some updates on some of our growth platforms. In Scanning Solutions we saw another quarter of strong growth. Sales in the fourth quarter were up over 40% versus Q4 2011. On a full-year basis, Solutions sales were up more than 25% year over year. Our funnel of Solutions design wins and opportunities continues to expand. Our new Lightning II scanning product, which is seeing significant customer demand, is an all-digital integrated scanning system that has been designed for the highest levels performance.

This has been achieved by optimising state-of-the-art technologies in laser scanner control, communications, servo drives, galvos, encoders, and mirrors into one integrated platform that meets the requirements of the most demanding applications with high accuracy, high speed, and load drift delivered under very high duty cycles. Based on current customer forecast we expect the Solutions business to increase over 30% in 2013 versus 2012.

Our fiber laser growth platform also saw strong growth in the quarter, with revenue 2.5 times higher than what it was in Q4 2011. For the full-year, our fiber laser business was nearly 3 times what it was in 2011. During the year we launched a number of new products, including our 2 kilowatt and 3 kilowatt fiber laser offerings. We also continued to work on our new FL3 and FL4 generations of our fiber laser architecture, which we expect to dramatically reduce our bill of material cost. We're currently scheduled to deploy the FL4 architecture into production by the end of 2013. Though we have seen some recent slowdown in order rates in fiber lasers, particularly in China, we still expect revenues to grow greater than 50% of our fiber laser business in 2013.

As you know, during 2012 we undertook a significant program to rationalize the site infrastructure of GSI, a program which we termed 12x12, meaning the elimination of 12 sites during the year. This program is now essentially complete. The last major move occurred a couple months ago when our Cambridge Technology Scanning business, which is the largest single business within GSI, was moved from Lexington, Massachusetts, over to our headquarters location in Bedford, Massachusetts. During the move we had the benefit of a number of new operational leaders who joined the Company in the latter part of 2012, who had significant experience with this type of site move. We executed on a very detailed plan with numerous contingencies and precautions. I'm happy to say the move was completed with only a few days of planned loss production and virtually zero impact to the business.

During the fourth quarter, as previously mentioned, we completed the divestiture of our Control Laser and Valveless Laser Systems businesses to Han's Laser in a $7 million transaction. We retain ownership of the building in Orlando, Florida, with an estimated value of $6 million. The only significant remaining open item from the 12x12 program is, in fact, the divestiture of the Semiconductor Systems business. This process is ongoing. The timing has been impacted by uncertainty around the timing and magnitude of the expected market recovery and semiconductor capital equipment.

So now I'd like to provide some updates on our NDS Surgical Imaging acquisition. As previously announced, we acquired the business on January 15, for a purchase price of $82.5 million, which we financed with approximately $25 million from our cash balances and the remainder from the new credit agreement. The business, which is based in San Jose, California, is the global leader in surgical visualization products sold to OEMs in that field, and is also the number two global provider of radiology displays.

We are now a few weeks into our ownership of the business. We're learning a great deal day by day about NDS and its capabilities. To date the integration has gone very well. We've had a team on the ground since the day of the close, and we put in place a joint integration team driving the entire program, which I review on a weekly basis with our Senior Management team. Things are going extremely well and most of the action items are on track. I had the opportunity to visit NDS recently with our Chairman of the Board, Steve Bershad, and lay out our vision for growth in the medical space for the NDS employees and the Management team.

We've been very impressed with the technology capabilities and the overall quality of the NDS business. We've identified a number of areas for integration and collaboration across NDS and the GSI medical business within customer sales channels. We will be deploying these changes throughout the year. As we have become more closely involved in the NDS business and we've gotten to know more about their forecasting process and their customer relationships, we have learned that some customers are communicating to us that their orders or their demand will be lower than previously expected in 2013.

The medical equipment market does appear to be experiencing headwinds related to the implementation of the 2.3% medical device tax, the uncertainty around Medicare and Medicaid reimbursement rates for this year. We've seen a similar dynamic in the GSI medical printers business, where order rates in 2013 are down over 30% versus a year ago. In one particular case, NDS faces a risk of losing significant market share at a large European OEM.

These factors have led us to reduce our forecast for NDS somewhat from our prior estimates. While the forecast reduction for NDS is a bit of a disappointment to us, we believe firmly in the strategy that we've articulated to build out our medical components business so we can better serve the leading OEMs in the space.

The rise of the integrated operating room and the growth of minimally invasive procedures provide significant medium-term growth opportunity for us. The OR is a space with demanding requirements and regulations. There are a wide range of technology suppliers that provide various pieces of the puzzle in terms of components. Our customers are the major equipment OEMs in this space, and our strategy is to provide them more of the components and the enabling technologies that they need to meet the evolving needs of hospitals, practitioners, and patients. The NDS business provides us a substantial presence in the medical component industry, and makes us a more valuable and credible supplier to these large OEMs we serve.

So in terms of the market outlook, as we look at business conditions going forward, we do have some concerns that have been increasing in recent weeks. The first of these is the medical market; as I mentioned we have forecast reductions in both our NDS business and our medical printers business relative to where we had estimates at the start of this year. Second, we are seeing some slowdown in industrial activity, particularly in China. This is impacting several businesses for us, including industrial lasers, our MicroE encoder business, and our color measurement business. Orders were actually recently strong out of China in January, but slowed significantly in February and have remained quite slow into the first half of March.

Economic conditions remain choppy. Our OEM customers continue to avoid committing to forward order coverage and are maintaining minimal inventories, thus we are operating on extremely limited visibility. There is certainly the possibility that demand improves from what we see at this particular time, but based on all these factors we do believe it's prudent to revise our full-year estimates for 2013. Robert will cover this in more detail in his section, but the revenue is being reduced by $10 million on a full-year basis, and EBITDA is being reduced by $5 million from the prior estimates.

So with that, I'd like to turn it over to Robert to provide more details on the financial performance. Robert?

Thank you, John.

I'll now provide some additional details on the fourth-quarter and full-year 2012 results. During the fourth quarter of 2012, GSI generated revenue of $66.4 million, an increase of 1.4% from $65.5 million in the fourth quarter of 2011. Excluding the impact of foreign exchange, which was negative, revenue was up 2%. For the full year 2012, GSI generated revenue of $271.5 million, down 10.8% from $304.3 million in the same period a year ago. Excluding the impact of foreign exchange, which was positive 1.2%, full-year revenue declined 9.6%. Included in revenue for the full year of 2011 was $8.1 million of net revenue that hadn't 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. Sales of our Laser Product segment for the fourth quarter of 2012 increased nearly 6% to $27.8 million, compared to $26.3 million a year ago. This was primarily due to growth in our CO2 lasers and our fiber lasers, partially offset by a decline in our specialty laser business line, which serves the scientific market. On a full-year basis, sales of our Laser Products segment decreased 4.2% to $108.2 million, compared to $112.9 million one year ago. Sales decreased by $4.7 million or 4.2%, primarily due to a decline in sales in our specialty lasers, which were adversely impacted by delays in government spending in the scientific laser market; and for removing a few of the ultrafast laser models from the market to improve their product quality and profitability. This decrease was partially offset by a significant sales volume growth in our fiber lasers, an increase in sales volume on our sealed CO2 lasers.

Sales of Precision Motion and Technology segment for the fourth quarter of 2012 were down 1.5% from $39.2 million to $38.6 million in 2011. Our Westwind spindles business line declined over $2.7 million, driven by a protracted downturn in the capital equipment purchases in the printers circuit board market. The declines in Westwind were largely offset by growth in our scanning solutions business and to a lesser degree from growth in our medical printers and encoder business lines.

On the full-year basis, Precision Motion and Technology segment revenues declined $28.1 million, or 14.7% decrease compared to the prior year. The sales decline was largely driven by significant decline in demand in the microelectronics market, principally related to mechanical drilling and printed circuit boards. Our Westwind spindles product line, which served this market, experienced approximately $19 million decline in sales as compared to 2011. In addition, the Company recognized in 2011 approximately $7.7 million of net revenue with no comparable amount recognized in 2012 for orders that have been deferred under multiple-element arrangements, delivered over multiple periods, entered in prior to the adoption of ASU 2009-13.

Turning to our profitability. Fourth-quarter gross profit was $27.3 million or 41.1% gross margin, compared to gross profit of $27.8 million or 42.4% gross margin during the same period last year. The decline in gross margins was primarily driven by continued growth in our fiber laser product line, which has higher material costs and consequently lower gross margins than our Company average. We're currently taking steps that we expect will lower the cost of our fiber lasers and improve their profitability, including manufacturing efficiencies, and designing a lower material cost product architecture.

Laser Products fourth-quarter gross profit was $9.2 million, reflecting a 33.1% gross margin, compared to $9.7 million or a 37% gross margin for the same period last year. The nearly 4 percentage point decline in gross margin was primarily attributed to product mix as the higher proportion of our sales were from our fiber laser product line. Precision Motion and Technologies fourth-quarter gross profit was $18.3 million, reflecting a 47.4% gross margin, compared to $18.5 million or 47.3% gross margin for the same period last year. While overall gross margins were relatively flat, the reduction in gross profit dollars was primarily driven by the drop in sales from our Westwind spindles product line.

Operating expenses amounted to $24 million for the fourth quarter of 2012, which included $1.4 million of restructuring expenses and acquisition fees. This compares to operating expenses of $24 million in the fourth quarter of 2011. Fourth-quarter 2011 operating expenses included $2 million of restructuring expenses. Research and development expenses were $5.5 million or 8.2% of sales in the quarter, compared to $5.5 million or 8.4% of sales in the fourth quarter of 2011. Dollar saved from our cost reduction initiatives have been reinvested in our strategic growth platforms, specifically our fiber lasers and scanning solutions.

SG&A expenses for the quarter were $16.4 million or 24.7% of sales, compared to $15.8 million or 24.2% of sales in the fourth quarter of 2011. The increase is primarily due to investments in employee talent, and recruiting costs, which were partially offset by lower professional service fees.

Adjusted EBITDA, a non-GAAP financial measure, which includes the adjustments noted in the non-GAAP reconciliation attached to our earnings press release, was $9 million in the fourth quarter of 2012, compared to $10.1 million in the fourth quarter of 2011. The full-year 2012 adjusted EBITDA was $41.6 million, compared to $56 million in the prior year. The decline in adjusted EBITDA for the full year was driven by approximately $33 million revenue decline in 2012 versus 2011. However, also included in the 2011 adjusted EBITDA was $3.5 million of net profit recognized on the $8.1 million of net revenue deferred under ASU 2009-13.

The Company reported diluted earnings per share from continuing operations of $0.44. That compares to $0.08 in the fourth quarter of 2011. The $0.36 increase in diluted earnings per share is primarily due to $12.4 million of income tax benefit, which was a result of the partial release of $15.3 million as deferred tax valuation allowances in the fourth quarter of 2012. It's worth noting that our diluted EPS for the fourth quarter and full year are significantly affected by the release of the valuation allowance on our deferred tax asset. The full-year 2012 diluted EPS from continuing operations of $0.66, increased $0.02 from $0.64 in 2011.

We recorded a tax benefit of nearly $11 million in 2012 as compared to a tax expense of $2.5 million in 2011. The Company released a portion of its valuation allowance on deferred tax assets of $15.3 million, which we believe are more likely than not to be realized. Concerning the IRS settlement, the Company reached a settlement with the IRS field office and the Department of Justice regarding our long-standing IRS audit in the 2000 to 2008 tax years. The proposed settlement was submitted to the Congressional Joint Committee on Taxation in December; we received a confirmation from the Joint Committee Review Staff on January 15, 2013 confirming the receipt of our case. We are preparing a report for the Joint Committee of Taxation for review.

Because this settlement follows a process in which a Congressional Committee must review and give final approval, the Company is not in a position, nor does it have any visibility into when a ruling will be made by the Joint Committee. However, as of year end, the Company has recorded a $16.1 million income tax receivable related to the IRS audit. The Company also believes it will have access to certain NOL and credit carry-forwards, which are approximately $3 million in value.

During the course of 2012 the Company substantially completed its 2011 and 2012 restructuring programs. 2012 restructuring program was completed in the fourth quarter of 2012. As part of the 2011 restructuring program, known as the 12x12 program, the Company set a goal of eliminating up to 12 facilities. The Company has exited nine facilities, including three facilities exited as part of the sale of the Laser Systems business. Two of the remaining facilities to be exited are attached to the Semiconductor Systems business, and expected to be exited upon the successful sale of this business, which we hope will occur in the first half of 2013.

The remaining third facility associated with our 12x12 program is associated with our India joint venture. We're not expecting any cost savings from its closure, as it was strictly an opportunity to monetize an asset. We continue to have discussions with our joint venture partner to work on the best path forward to monetize this asset.

Turning to the balance sheet. As of December 31, 2012, cash and cash equivalents were approximately $65.8 million, while total debt was $50 million, which is in the form of an amortizing term loan. On December 27 of 2012, GSI entered into an amended and restated credit agreement, which matures in December 27 of 2017 and provides for an aggregated $125 million credit facility consisting of a $50 million five-year term loan facility, and a $75 million five-year revolving credit facility.

Operating cash flow in the fourth quarter of 2012 was approximately $7 million. Operating cash flows include cash flows of both continuing and discontinuing operations. In addition, our operating cash flow included approximately $2 million of cash restructuring payments made in the quarter.

Turning to the first quarter of 2013, we expect revenues from our continuing operations to be in the range of $82 million to $84 million. As John mentioned previously, our businesses continue to operate in a challenging capital equipment market. While we have fairly good visibility at this point in the quarter, our range reflects the risks and remaining book and ship for the quarter.

Turning to profit, we expect the first quarter of 2013 adjusted EBITDA to be in the range of $10 million to $12 million. This forecast excludes the impact of purchase accounting. We continue to work with our outside advisers to establish the Company's opening balance sheet and associated purchase accounting adjustments. We expect to complete this exercise in April, at which point will be in a better position to explain the specific consequences on the financial statements. Our adjusted EBITDA guidance will not be impacted by these purchase accounting adjustments.

In addition, the Company reissuing an 8-KA before the end of the month, which will provide investors with NDS's historical financial information, as well as pro forma results for the combined Company. We also continue to expect to realize at least $40 million in ending cash, with approximately $108 million of ending debt by the end of the first quarter of 2013.

Finally, as John mentioned, we are modifying our full-year guidance to reflect the business and economic environment John mentioned previously. We expect revenues for the full year of 2013 on a continuing ops basis to be in the range of $345 million to $355 million. In addition, we expect adjusted EBITDA for the full year 2013 on a continuing ops basis to be in the range of $50 million to $55 million.

This concludes my prepared remarks. I would now like to open the call up to questions.

(Operator Instructions)

Lee Jagoda, CJS Securities.

So prior to announcing the divestitures and the recent acquisition, there were a number of businesses that were highly cyclical and contributed to significant quarterly volatility. If I look at the current portfolio, are there businesses or product lines in particular that may have been depressed for some time that could see some volatility on the upturn when they rebound?

Sure. It's a good question Lee. The areas that -- we do have a number of them that meet that definition, and I think you've seen in public statements, we often point to the Westwind Spindles business because it has I think the most severe cycle being down $19 million year over year. So it certainly would be one that if the Printed Circuit Board Drilling business kind of picks up, you would see some lift there.

You do have some significant portion of the MicroE Encoders business that is tied into the data storage disk drive track writing application. We have some lithography and other microelectronics applications, wire bonding is part of the MicroE business. So that would be one you'd also be looking and saying it has some cycles in there. It's currently at a relatively low revenue run rate based on data storage being quite slow right now. So there could be some pickup there.

Cambridge Technology, which is our Scanning business, has some exposure in there; it's a smaller percentage, but it does feed into laser via hole drilling, and a few other microelectronics related. So to the extent this PCB, printed circuit board, and semiconductor capital equipment space really starts to pick up, those businesses would accelerate.

We also see this general, I would say it's an industrial kind of thing, where China is very inconsistent. January was strong and then February was terrible. And March looking more like February. And so that's affecting actually kind of a little bit different set of businesses. That's really more around our JK and Synrad laser businesses and color measurement. So those are the areas where you have either the cyclicality or the volatility is tied into microelectronics or industrial capital. So that's where I'd be looking for the lift if we got it.

Okay great. Then you mentioned that you decreased your forecast for NDS. So what is the new NDS forecast? Or said maybe a different way, how much of the decrease in forecast came from the core business versus the acquisition?

If you do an apples-to-apples comparison, the NDS specific reduction in the guidance is less than 50% of it on a revenue basis.

And what about EBITDA basis?

Corresponding. It's sort of because of the revenue and the EBITDA are kind of in proportion on a contribution margin basis, so what we didn't do yet is say we're going to go take a bunch of cost out. It's sort of more on a flow-through basis. And there may be additional cost actions that we would look at' probably not as much in the NDS business, but we look elsewhere. But so you'd see a similar proportion.

Okay. And one more question I'll hop back in queue. Just Robert your view of CapEx for 2013, can you split that maintenance and growth?

It probably will flow around the $6 million to $7 million range again. We've historically -- 50% of that has been focused around IT investments and the other 50% has been focused around investments in the business itself. We finished off in a much lower number. I think that just represents continuing investment in IT.

If you look into 2013, it's probably a little bit of a larger mix going into growth platforms, and that's largely because we're beginning to now ramp up our Fiber Laser business, and it's going to require some additional capital. So it's probably in the 60/40 range now.

Okay great. Thanks very much.

Jim Richiutti, Needham & Company.

Question just follow-up on the NDS. I'm not completely clear, I believe when you announced the acquisition you said it would potentially contribute about $80 million I believe. What I'm wondering is are you now looking at something in the order of $75 million or little bit less from that?

I would say between $75 million and $80 million would be the full-year rate there.

Okay got it.

We tried to be conservative, but it looks like it's going to be even a little softer than that, so like call it somewhere between $75 million and $80 million. Without putting too fine a point on it, is the current forecast.

Got it. And you mentioned that there was the potential that they may lose a customer in Europe, an OEM.

Lose share within a customer. No loss of customers in entirety, but we did get some communication from a customer in Europe that they would be cutting back our share. And it's like this is very recent news. We haven't had yet the chance to fully meet with that customer and run it to ground. But we took that into account in reducing our estimates, so in a way it almost becomes an opportunity for us if we can mitigate some of that. Because we've already factored that into our -- that late-breaking news into our guidance. But it was not a complete loss of a customer. It was a reduced share position. Effectively some sort of duel sourcing type of initiative.

What is your sense John, just in terms of the medical business in broad terms? It's clearly seeing some impact from the some of the macro forces that are going on out there. Do you have -- can you give us any sense as to whether you think this is going to be continuing over the balance of the year? You don't have a lot of experience with NDS, but more experience with the Medical Printer business. What is your sense about the rest of the year?

What customers are telling us, and it's very consistent message from the NDS side of it, to the printer side and we actually have some medical business that's in our MicroE encoders. And then in our Scanning business, we do a lot of retinal scanning applications. So we have like a cross-section of this different equipment stuff, and what we're seeing is the US is the major issue with the headwinds.

And where there's an opportunity is in the emerging markets. That is still a relatively strong. So if you are relying of the US you are going to struggle. And I think that's a little bit the issue that -- one of the arguments around our acquisition of NDS is we have good infrastructure in the emerging markets; we have full well-equipped offices. We have space for demo labs and space to house and ramp up sales channels in these territories that NDS does not have. So, the hope is that we can counter the softness in the US over time by going more aggressively at the emerging markets.

Got it.

I think the US trend -- obviously there is an effort in the US to get after the overall health care spending, but the procedure growth is there. So there's an effort to try to spend less money. A lot of it appears to be from some of the industry forums that we're sitting in on now, and what you're hearing from hospital administrators and CEOs and the like is the reimbursement environment is a mystery right now. There's just a lack of clarity in what the Medicaid and Medicare is going to be. And therefore people don't want to spend money on equipment.

And then the equipment OEMs face the tax. We actually have some of the tax ourselves, but for the most part our customers face the tax. So, if you say our customers is an OEM, an endoscopic OEM. They are caught a little bit in the middle because their customer doesn't have money and they are facing a greater tax, so they're trying to defer purchasing of our components at least temporarily.

Sooner or later that gets outstripped by the procedures though. What more people need to have these laparoscopy procedures or whatever, eventually the equipment has to be there. So we think it's sort of a more near-term dynamic, but ultimately we're looking at this a little bit longer term, and we think it's a good place to be.

Got it. Scanning solutions. Look like you're showing very good growth in this area of Cambridge business. Is it at the point where the scanning solutions portion is meaningful? I think the growth you cited was 40% up in the quarter. You expect this year to be up 30%. Has it become a meaningful part of their business?

Yes, we don't really parse it that finely in a certain sense. And frankly we don't want to let everyone know exactly how big we are and where we're getting that business. But it is becoming -- it's a minority of the overall Scanning business, the Solutions business, but it's an increasing part. And we also have a Mirrors business. So you have the Galvo Component business, and then solutions and mirrors and other things. It's becoming a more meaningful minority, and it is sort of driving the growth of that business.

We would rather -- it always is the case. You realize that, when we sell a scanning solution where -- we can very often be cannibalizing our own Components business. Because now we recognize the sale of the module rather than the sale of the individual galvos. But we'd much rather have that. So I mean it just gives us -- it brings us closer to the application. We're solving more of the problem for the customer, and we're getting more involved in the overall parameters and I think it's a better place to be.

Last question for me. Robert, is there any way that you could help us with some of the operating expense lines, how we should think of that R&D now with almost a full quarter of NDS. And how we might think about SG&A?

Yes, we finished up in the R&D line I think around 8.5%. We don't expect to make significant investments above and beyond that on a percentage of sale basis, and I don't think NDS really changes that much for us. So, you can expect that roughly around the same sort of level.

I also don't have any sort of significant investments going in from an SG&A perspective. I think you look at that as a percentage of sales. There might be some opportunity to reduce that a little further from where we are currently at because we have had a bunch of sort of one-timers running through our numbers as part of the 12x12 restructuring program, and the 2012 restructuring program, and the talent upgrades and what not.

So we're probably looking -- when we finished off the fourth quarter at 24.7%, that's a relatively high number for us on a go-forward basis, so I would expect that to come down a little bit. And then it really comes down to your amortization of your intangibles. That's going to be a purchase accounting discussion, and we're not there yet.

That's helpful. Anything on the tax rate that you can say at this point?

Again, what happens there is that the acquisition of NDS plays some havoc on it. So it's -- we exited a pull down allowance period, and so the important thing to think about for 2013, is that the base GSI businesses are probably operating with a cash tax rate closer to around 10%, so I expect that for the full year.

But from a GAAP basis, now that the valuation allowances have been released, you're going to see the GAAP come up. Now, how much up is really contingent upon how we treat the NDS acquisition. I would say absent doing NDS, you'd probably see something in the range of 31% to 33%. That sort of level categorizes a worst-case sort of scenario. But there's a lot of effort that we're going to have to do and I think NDS is going to move that around a little bit. So we're probably a couple weeks away from getting some additional indication on that.

Okay, thanks very much.

Stephen Stone, Sidoti and Company.

Can you give a bit of an update on what your expectations are for the Microelectronics business? It seems like the decrease in the revenue that you're seeing -- or your guidance revenue mostly due to NDS and industrials. Is there any component of the semiconductors that may firm up a bit here?

Well the first thing I would say it's both NDS and our Printers business in medical because we seeing a similar dynamic in those. So wouldn't want to overlook that. But in terms of the microelectronics, we try to basically take the stance and say it doesn't get better this year. So, if there is a significant turnaround in that business, it's not captured in our outlook at all. We are just planning for stagnation because frankly no customer has conveyed to us any indication that that is turning around.

Now as I mentioned with lead times and -- we're hand to mouth with customers, they will not commit to two quarters worth of orders as coverage. So, we really have at most the one-quarter view on things, so if it is going to turn around later this year we wouldn't really know it until a quarter ahead of time. But we don't see it and we're not forecasting it right now.

Okay. And any expectations for the Semiconductor Sales business? Is that something you are expecting first half of this year or is that still up in the air?

I mentioned that we would like to get it done in the first half of this year. So that being said, it's not done until it's done.

Okay, thank you.

(Operator Instructions)

Joe Bess, ROTH Capital Partners.

I was hoping -- you talked a little about Asia and the softest there, I was hoping you could touch a little bit more on what you guys are seeing in some of your other geographic markets.

Well, I mean it's hard to separate the geographies from the end market dynamics, particularly for an OEM supplier like we are. We are selling into the manufacturing location for a lot of products. So even if you take some of the Medical business, we may be shipping that over to Europe, but the slow order rates are in fact really due to the US.

But I would say the US is a bit of a problem for us because the US is where medical seems to be slow. So, in the US the overall environment is not that bad in the US, it's this modest growth, flattish. It's not driving capacity addition, so anything we would do in the US that's industrial is not really given us growth, but it's not really killing us either. We're just seeing the medical to be the slowdown, expecting the US. And then when you say Asia predominantly China, but some of the other geographies in Asia, is a little bit more tied into the industrial in microelectronics.

Europe has been kind of stagnant, but for a long time, but I have not noticed really a market change upward or downward in the climate in Europe. It's just kind of remains stagnant.

Okay. And then thinking about you guys' guidance, and when we bake in the NDS acquisition, you're looking at -- on the lower end you're looking at revenue basically flat year over year for the combination of your legacy businesses. I was hoping you could give a little bit better or additional clarity on where the growth might be coming from in that versus is there contraction that you're anticipating on the precision side?

Well if you take it in some of the areas, we kind of conveyed where we're seeing some pretty significant growth. And it's not a surprise. It's really where we are doing some of the investing. So definitely fiber lasers is giving you growth year over year. We are seeing some in the Scanning business that's meaningful, particularly the solutions part of scanning, but actually the overall scanning is doing pretty well, component and solution.

So those are the areas. And if you say what is not doing well in the full-year outlook, even on a year-over-year basis where are we seeing negativity. Most areas are doing okay in there. The printers business has got a negative year-over-year impact. The color measurement business, it's actually kind of flat.

Okay.

Scientific would be another area we're not seeing much.

Okay. And last question, just thinking about revenue on a quarterly basis, are you guys anticipating this to grow throughout the year and be more backhalf weighted?

Well, we always get a little bit of more revenue in Q4, Q1 is going to be a bit lighter, so there'd be a little bit of a ramp, but not the hockey -- in this forecast there is no sort of big hockey stick.

We would normally expect some sequential improvement. If there's a quarter that throws off the sequential pattern, it's often Q3, because you are picking up kind of some late summer slowdowns that we'll see in Europe and certain other geographies. So sometimes Q3 doesn't follow that as well, and arguably that's why Q4 is high because Q3 would be low. But all other things equal you'd normally just see a modest progression through the year.

Okay great. Thank you, I'll jump back in the queue.

Kevin Beck, Paradise Investment.

Just a couple quick questions. If you look at the guidance, you're basically guiding the core business roughly flat from the Q4 levels, and you're already talked about NDS, and when you look at the EBITDA levels or adjusted EBITDA, it's basically the same. So I wondered, the 12x12 savings that was looking at $5 million or $6 million on an annualized basis, how should we think about those phasing in 2013? Because are all those getting reinvested back into the Business, or I thought we would've seen some leverage there on the savings?

Yes, I would say the way to think about it, it's been funding our Fiber Laser business predominantly. We've taken out a significant amount of cost that's helped from that perspective. We've been able to fund a very large investment in there without having a huge impact to us, and ability to maintain flat EBITDA performance in 2013.

That's actually when one of our biggest challenges on how to thread the needle with the fiber laser business is it wants to grow faster than we would like, given our cost structure. It's been the case for year and a half. So we've been gating it a little bit, but in order to seed the market, you've got to get your product out there, and sometimes that's happening out in front of our bill of materials cost reduction.

So you say, well let's not lose money in fiber lasers. That would mean don't sell any. And then you fall behind what is a growth market. So we have been selling some and trying to do it, but a lot of times over the past year, year and a half that's picked up, and we've ended up a little bit more negative in fiber laser than we wanted.

But we even had the luxury of continuing invest there. But at some point that resolves itself because your costs get in line and you don't do that anymore. It's sort of a startup type dynamic, the Fiber Laser business.

The other consideration is, I think, we wanted to make sure, because we had a different dynamic in 2011 when we gave guidance around 2012. But we wanted to make sure we had a guidance range that we were very comfortable with achieving. And so we're trying to take that position on this. We don't have an opportunity to disappoint people.

So in 20-late-11 or when we were setting up what 2012 would look like, there was -- there had been a slowdown in microelectronics in particular that really hit around Labor Day in 2011 and started to impact Q4. People knew that heading into 2012 there would be a weak first half, but everybody was saying back half recovery, back half recovery, back half recovery. Customers were saying it, competitors were saying it, the whole world was saying it.

There was no back half recovery. It just didn't happen, and then we're in a position where at midyear we were looking at this back half recovery that was built-in and we had to deal with that, so we're not doing that this year. So at some point there is a recovery, and so we would rather have the recovery not assumed and have it occur than the other way around, where we assume it occurs and then it doesn't.

Great. And do you think fiber laser gets to breakeven this year on a core basis?

Exiting the year -- the FL4 architecture that -- there's a huge amount of work going on with the team, different design, different manufacturing process, different suppliers involved in the manufacturing process, there's a whole bunch of pieces of it that come together and get qualified out. And our plan is to have that all deployed by the end of the year. We call that FL4 architecture. And if we get there, we exit the year where we want to be. But there is still a lot of work, it's not a guarantee. But that's a stretch goal that we have.

Great. And then my last question for you Robert is, as you think about moving past 12x 2, is there opportunity at least in working capital as you move forward here? And I don't know how much that changes with NDS here, but as you think about getting past the plant closures, et cetera.

As I would say, I think we've articulated a few times that we're not very good in our inventory management. We had a negative focus area in 2011 or 2012 because of all the priorities. There will be a focus on a go forward basis. John is going to speak to it a little bit, so I'll have him outline it. There is a big opportunity there, we just have to get at it.

Right. If I might just chip in. One of the things that you saw in 2012 was just moving parts. A lot of operations being picked up and moved, even the ones that didn't appear to move were affected by moves. Because we had a number of operations that were on the receiving end of moves. So, that affects you, and there was inventory builds to cover the moves. There was a lot of re-laying out of production sales and the like. It was not a good year for us to really see those improvements, because it was an unstable kind of set of sites.

In 2013 there's really no planned facility moves, we are in a much cleaner footprint. We really do the vast majority production now in four sites. We have a few others that are quite small, but vast majorities happening in four locations. And so you can focus on those and really implement lean and continuous improvement, Six Sigma, and I think there's a lot of opportunity not only in working capital, I think in driving down inventory. And certainly given a kind of a flattish revenue picture it's going to be important to try to drive these inventories down and improve those processes.

But the yields, the customer facing metrics, the delivery, the customer return rates, and the field quality all, I think, are significant opportunities for us, that are both a productivity and cost save item, but also the customer satisfaction improvement. When you take an example like the Scanning business. A great business, makes money, satisfies its customers in a lot of ways, has terrific technology. They have some work to do on inventory management, and they have some work to do on their delivered quality. I think those things only help a strong business get stronger.

Great. Thanks so much.

We have no further questions at this time. I'll turn the call back to our presenters for closing remarks.

Thank you operator. So as we move forward in 2013 it's clear that GSI has made a lot of progress as an organization. We've now built an outstanding team, and we have a solid foundation on which we can drive growth and improvement.

Our agenda for 2013 is clear. We'll complete the successful integration of NDS and look to follow on with additional growth initiatives and acquisitions within the medical component space. We will continue to invest in our other growth platforms, scanning solutions, fiber lasers, both of which entail organic growth investment and possible acquisitions into those platforms.

On the operational front, we will build on the foundation created by 12x12 by deploying our continuous improvement initiatives across our factories this year. With the completion of that program the vast majority of our production takes place in four major sides and they're the focus of our team.

It's true that economic uncertainty remains a significant part of the landscape in which we operate. I don't expect that to change anytime soon. We factored that into our plan the best we can. If the fiscal concerns that plague major nations make progress and the macroenvironment improves, that will be an upside to our plans and our estimates.

We have a strong, committed Management team here at GSI, and we all remain excited about the Company's future and what we can achieve here over time. I appreciate your interest in the Company and your participation in today's call. I look forward to joining you all in early May on our first-quarter earnings call. Thank you very much. The call is now adjourned.

And this concludes today's conference call. You may now disconnect.