Novanta Inc (NOVTU) 2015 Q1 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time I would like to welcome everyone to the GSI Group 2015 Q1 earnings call. (Operator Instructions) Thank you.

Robert Buckley, Chief Financial Officer, you may begin your conference.

Thank you, Chris. Good morning and welcome to GSI Group's first-quarter 2015 earnings conference call.

If you've not received a copy of our earnings press release, you may obtain 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 morning, and also those in our SEC filings. We may make some comments today, both in our prepared remarks and in 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 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 have changed, 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. The 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'll provide reconciliations promptly on the Investor Relations section of our website.

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

Thank you, Robert. Good morning, everybody. We're glad you could join us today.

So, I'm certainly happy to report that GSI got off to a strong start in 2015, with a very good Q1. Our end markets and customer demand were better than we had anticipated, and we executed very well across the Company during the quarter. Thus, we delivered revenue and profitability that exceeded our own expectations.

Robert will comment on the numbers in more detail in his section, but I'll briefly summarize some things.

Q1 revenue came in at $94.6 million, which was up 20% year over year on a reported basis, with organic growth at 9%. Q1 GAAP earnings per share was $0.10 and adjusted EPS was $0.20, with adjusted EBITDA at $14.3 million, up 26% versus last year. All of these figures were above both our own guidance and analyst consensus.

From a demand perspective, we were pleased to come in at the $94.6 million in revenue, which was several million dollars higher than we had expected. There were several main drivers of that good performance.

First, the precision motion business was stronger than we had forecast. We saw an acceleration of customer demand for both optical encoders and precision motors, in terms of design wins as well as order volumes from existing customer programs. For us, having both the motor and the encoder now makes us a more interesting supplier and a technology partner for many OEMs. It also enables us to make joint approaches to customers to increase content when the customer had been buying only one of the technologies from us in the past.

The second area of upside for us was the medical market. On our last earnings call we had commented that there was a general slowing of medical equipment orders last year from around Labor Day through the end of the year. We knew from our customer feedback that this would recover in 2015, but indications were that Q1 would still be fairly slow, with the recovery really taking hold in Q2. I think the good news for us was that the recovery started to gain some momentum as Q1 progressed, with weekly or monthly delivery quantities at some of the medical customers rising throughout the quarter.

For the most part, revenue in the medical market still was slightly down on a year-over-year basis in Q1, but it was definitely better than we had expected. Robotic surgery and patient monitoring were areas where we saw recovery in the quarter.

Also, within the laser segment, demand strengthened during the quarter and sales exceeded our own internal forecast. And the ophthalmic OCT application was one of the key drivers.

As a company we also had a good quarter in Q1 from an orders perspective. The overall book-to-bill ratio for GSI was 1.08, with all three of the reporting segments above 1. Q1 tends to a strong booking quarter for us, as at least some of the OEMs will place blanket orders for the full year. I'll say that this customer order pattern is diminishing over time, as more and more OEMs operate on shorter lead times. But, in any case, Q1 was strong for us with orders, and this puts us in a good position to deliver strong results in Q2 and beyond.

So, I'm pleased to see the stronger demand across the Company, and the numbers certainly bear that out. I would make the point that in several instances, shipments that we had expected to land in Q2 were actually pulled into Q1 by our customers. 9% organic growth is not necessarily the level we would view as sustainable for GSI at this point.

So, we think it makes sense to look at the first half in aggregate and on that basis revenue performance would be consistent with our mid-single-digit organic growth expectations.

From a strategic perspective we made some important progress in Q1. We closed the Applimotion acquisition in February, and this has proved to a good move for us. As a reminder, Applimotion does very high performance motors and precision motion subsystems in many of the same applications where we play with the MicroE optical encoder technology. We have brought the two teams together under common leadership and they're already collaborating on a number of programs.

The Applimotion founders have strong reputations for developing robust technology solutions using some of the most demanding applications out there, such as battery production for electric vehicles, surgical and industrial robotics, endoscopic surgery, EUV lithography and balloon-based internet services.

The integration process is going well and the acquired business is run rating above our expectations. So we're very pleased with the Applimotion acquisition thus far.

We also recently announced the divestiture of JK Lasers for over $31 million to Trumpf. As you know, the JK business encompassed our fiber laser program, as well as some legacy product lines such as lamp pump and DC CO2 laser sources.

We feel good about the valuation we got for a business that was growing top line, but was not really contributing to the bottom line. Over the last several years, we were able to successfully advance the technology to a point where we could win meaningful OEM programs and demonstrate the viability of our technology such that the value to a large player like Trumpf was significant.

In the end, the high-powered fiber laser materials processing applications of JK did not have synergy with our other product lines, sales channels or infrastructure, so selling the business and redeploying the capital into our core businesses was definitely the right move for us.

At this point I'd like to provide some commercial updates on our progress around the Company, beginning with the precision motion segment. In Q1 we had 24% year-over-year sales growth, driven by the Applimotion acquisition, as well as new programs in our optical encoder product line, which also had over 20% sales growth in the quarter.

MicroE's growth was driven by strong demand in robotic surgery, wire bonding and other advanced industrial applications.

The Applimotion acquisition, if viewed on a standalone basis for the entire quarter, regardless of the particular period of our ownership, that business would have had low-teens organic growth in Q1, and also achieved strategic design wins in battery production equipment for electric vehicles, WiFi systems for commercial aircraft, and balloon-based internet services.

Our Q1 sales of air-bearing spindles were down mid-to high-single digits versus a year ago, primarily due to the strengthening US dollar versus the pound and the euro.

The precision motion segment book-to-bill ratio was 1.14 for the quarter, so we are expecting the segment to see a sequential increase in demand in Q2.

So, turning to the laser products segment, which remains the largest of the three, revenue increased 7% year over year in Q1. JK Lasers was included in the reported results for all of Q1. But the growth rate wouldn't materially change if you exclude JK.

Our CO2 laser product line had another strong quarter in Q1, with sales up mid- to high-single digits versus a year ago, with book-to-bill at 1.07. Coding applications drove much of the growth, as demand increased meaningfully at all of our major OEMs.

And just to remind all of you, when we refer to coding, this is laser marking of variable information such as date codes on food, beverage and pharmaceutical packaging, mostly on plastics and other organic materials.

Demand from converting applications using the higher-power range of our CO2 offerings, up into the low hundreds of watts, was also strong within the quarter. In Q1 we closed on nine new CO2 design wins with OEM customers in applications like the ones I just mentioned.

In our laser scanning and beam delivery product line, revenue growth of mid-high-single digits versus a year ago was strong performance for us, and book-to-bill ratio was 1.05.

We saw the same robust growth in the coding applications that we saw in CO2 laser sources. As I mentioned a few minutes ago, ophthalmic OCT orders improved in the medical market as well for our scanning business, delivering mid-teens year-over-year growth. And we secured a significant new swept-source OCT win with a leading medical OEM that will be worth over $1 million in sales on an annual basis, beginning sometime later this year.

I will also note that scanning orders from medical OEMs in other applications, such as ophthalmic surgery, digital radiology, and microscopy declined year over year within the quarter, as the recovery in hospital capital spending for many technologies remains uneven.

Our scanning orders from OEMs in laser additive manufacturing and converting showed significant growth for the quarter, which helped to offset some of the residual weakness in medical applications.

Now I'll comment on our medical technology segment. As I mentioned earlier, the medical market was very slow for us in the latter part of 2014. And we had expected Q1 2015 to remain slow, with gradual recovery thereafter. But, in fact, we did get some recovery in Q1. It wasn't all the way to where we wanted it to be or where we saw year-over-year growth, but demand was higher than we had anticipated in a number of cases.

Segment revenue increased 39% on a reported basis, driven mainly by the full-quarter impact of the JADAK acquisition, which closed in March of 2014. The segment organic growth was a single-digit decline in the quarter, but it was better than our internal forecast, as I said. Medical segment book-to-bill ratio was 1.05.

During Q1 we consolidated our medical thermal printers product line, a legacy GSI business line, under the leadership of JADAK, primarily due to the overlapping application base of the two business lines. This enables us to gain greater leverage in the medical cross-selling process.

In Q1 we identified over $1 million of new business potential through the cross-selling of our thermal printers and our JADAK auto-ID technologies to common customers. We had 11 new design wins in the quarter in the JADAK business, highlighted by our first-ever design win for a Bluetooth-enabled RFID program for a diagnostic imaging x-ray system. The program is on a fast track market launch with the customer, and could potentially result in production revenues in late 2015, but, if not, in early 2016.

In the NDS business, revenue was down versus a year ago, but book-to-bill was 1.08 in the quarter as a number of the recent new product launches began to make an impact on the business.

It's clear to us, based on our conversations with OEMs and with hospital administrators, that the electronic health records mandate did, in fact, impact hospital spending patterns in 2014. As I indicated, we do expect continued recovery across our medical end markets throughout 2015. Given the uncertainty around the timing and the magnitude of those dynamics, we're taking a cautious approach to our forecasts and we expect a modest sequential improvement in the medical business in Q2.

So, moving on from the segments, I want to reflect a bit on the ongoing strategic transformation of GSI over the last several years.

If you go back to the beginning of 2012 as a reference point, since that time we have divested six separate businesses and closed on three acquisitions. The divestures represent about 30% of the run rate revenue we had at the beginning of 2012, and the acquisitions would represent over 40% versus that base. Our medical revenue is now 45% of the Company total versus a little over 10% at the beginning of 2012. So, this has really been a significant transformation of GSI that we've achieved over the last several years.

At this point we feel we have a strong portfolio. We're happy to go to battle with what we have. Going forward, we're really focused on building out now from where we are. We're playing in two major verticals, medical equipment and advanced industrial technology equipment.

We have three major product technology platforms -- laser products, precision motion, and our medical segment, which you could really think of as an imaging and visualization technologies product set. It's really all about capturing and displaying images of things, mostly in the medical market, but these technologies can also serve the industrial markets.

So the way the Company is constructed, all three of the product platforms can ultimately address both the medical and the industrial verticals. The fact is, we see strategic growth opportunities in both vertical and all three product areas. We're making organic investments in all of them. We also continue to pursue additional acquisitions that will strengthen our market and technology positions in all of these areas.

At this point we're engaged in conversations with a number of prospective acquisitions that include properties in the laser space, in precision motion, as well as in the imaging-and-visualization-based medical technologies. These targets are all private companies. The discussions are ongoing, but they're good prospects for us to get some additional things done this year and more beyond that. So stay tuned for future developments.

From an operational standpoint, as I look across the Company, overall performance was solid. Our factories executed well, particularly from a tactical standpoint. On-time delivery to customers improved from both Q4 and year-ago levels in most of our factories. Quality metrics, such as yield, scrap, and customer returns, also improved in most cases.

There were no instances were operational constraints prevented shipments or impacted our quarterly revenue. That's meaningful progress for GSI. This is the first quarter since I've been here as CEO where we did not leave revenue on the table due to operational execution challenges.

We also had good gross margin across the board. In Q1 we expanded adjusted gross margin by 170 basis points year over year, with most of our factories seeing the same trend. Part of that was the conversion of the volume increases we saw, but part was the real benefit that we are seeing from the Lean projects we have done in the past year, which are helping us primarily within the laser business and we are now extending that into other areas of the Company.

We recently held Lean events at the CO2 production site during the course of Q1, and we recently held a major Lean event here at the Bedford headquarters, focused on the production cells for our small-size scanning galvanometer product line, which makes up over 70% of our galvo unit volume.

Last year we set up Lean cells for our large galvo production, and though we faced some disruption and margin impact at the time, we ultimately learned a great deal and are getting very good results from those projects. And we're now able to put those insights to good use as we roll out the Lean cells for small galvo production.

There certainly are areas we can and need to improve in our operational performance. First, I'll note the relative immaturity of our capabilities. Those of you who have followed companies that embrace Lean principles and continuous improvement, know that this is really a journey. It's a marathon, not a sprint. The culture, capabilities and the tools of Lean and of strategic sourcing need to become a way of life.

Finding low-hanging fruit and getting immediate benefit is a good thing, but it doesn't really help that much if you can't hold the gains and sustain the improvements over time. At GSI we have had initial successes, but we haven't yet proven we can repeat and sustain the impact of those.

The other issue for us is that our operational planning processes are not yet fully mature, which means we face challenges when volume is ramping up, particularly with direct material procurement.

On the positive side, we have implemented a spend analytics tool which basically tracks all of our material spending by commodity, vendor, and price. This is a big benefit for us in identifying and prioritizing our opportunities to leverage or buy across the Company and generate productivity savings. That's going to be a big benefit for us in driving the productivity going forward.

But the challenge we faced in Q1 was different. It was in our SIOP process, which is really what we call sales, inventory and operational planning. This is the process of forecasting our demand, both the quantity and the mix of end items, and then translating that into the direct material and the labor capacity requirements we need to have in place in our factories.

We generally get the labor side close enough, but that's only 10% to 15% of our product costs. Direct material planning is really more challenging for us, as that represents at least 70% of our costs.

When we're seeing volume increases, particularly when they are back-end loaded within the quarter, the reaction across our factories tends to be to drive excess material at quote/unquote -- a very safe level -- to protect the revenue. In fact, we succeeded in doing exactly that, which is one of the reasons why we didn't leave revenue on the table. So, in one sense, it's a good thing, but this approach all too easily results in a miss on inventory. And that's what happened to us in Q1, where we exceeded our own inventory target by about $2 million.

We have implemented a robust SIOP process across all of our factories. To me, it's really just a matter of our teams gaining more experience and more comfort with that process, more cycles of learning, so to speak, so going forward we can make better decisions when we're driving the direct material requirements.

There are a lot of positives here, so I definitely view our operational capability and maturity as an upside for the Company. It's something we're very committed to and we're doing the right things. But we're still early days in this journey, so it's important to keep that in mind.

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

Thank you, John. Good morning, everyone. I'm going to provide you with a financial summary of our first-quarter's results, highlight a number of areas, and provide you with some detail around our second-quarter and full-year 2015 guidance.

First off, I'd like to start by saying we had a solid start to 2015. Reported revenue in the quarter was up 20% to $95 million. Organic growth was up 9%. Unfavorable foreign exchange represented a negative headwind of approximately 5.5%, or $4 million. Revenue growth was driven by solid growth in all three operating segments. Our laser products business was up 7%; medical technologies was up 39%; and precision motion was up 24%.

Laser products experienced growth in all its major product segments, with particular strength in laser scanning solutions, low power and medium power CO2 lasers, and fiber lasers. We continue to invest heavily in new products, with 14 new products under development in 2015 that will expand our products offering to our OEM customers in advanced industrial and medical end market applications.

Medical technologies benefited from the acquisition of JADAK, which offset declines in our visualization solutions product. While the overall medical end market remains weak, the first quarter did demonstrate an earlier recovery than we planned and the stabilization of the market.

The second half of 2014 was clearly impacted by the significant regulatory changes, in particular, the electronic medical records requirements in the US and changes in medical reimbursement rates. While we're still anticipating the first half of 2015 to be impacted by higher than normal IT spending by hospitals and other healthcare providers, we are optimistic with the improvement seen to date, and we expect the second half will be stronger.

Turning to our precision segment, the acquisition of Applimotion benefited the segment as well as strong double-digit in our MicroE optical encoders business line. This business not only experienced growth in both its traditional advanced industrial applications, but also saw strong growth in its medical end market applications.

Overall, from an end market perspective, growth in advanced industrial applications across GSI was partially offset by year-over-year weakness in the medical end market. However, we did start to see some nice pockets of growth return in some of our medical end market applications, such as surgical robotics, blood glucose monitoring, and OCT.

As we announced in early April, we decided to sell JK Lasers, our industrial laser operations, which was also the center of our fiber laser initiative. The divestiture is expected to improve our adjusted gross profit margins by approximately 100 basis points. Although the divestiture did not qualify for discontinued operations accounting treatment, we have provided, as a separate 8-K, restated non-GAAP revenue and gross margins for 2014 and the current quarter.

As mentioned before, JK Lasers generated approximately $22 million of sales in 2014, but did not have a material impact to GSI's profitability in 2014.

We expect to record in the second quarter a pretax gain on the sale of approximately $17 million to $20 million, and expect cash proceeds after expected tax- and transaction-related costs, of roughly $26 million to $28 million.

First-quarter GAAP gross profit was $40 million, or 42.3% gross margin, compared to $32 million, or 40.6% gross margin, in the first quarter of 2014. On a non-GAAP basis, our first-quarter adjusted gross profit was nearly $41.2 million, or 43.5% gross margin, compared to adjusted gross profit of $33.6 million, or 42.4% gross margin, during the same period last year. The 110 basis point improvement in adjusted gross margin was driven by solid progress in our continuous improvement productivity initiative across our business lines, and a better mix of higher-margin product sales.

Overall, I'm pleased with the progress we have made with improving our gross margins, driven by a focus on value-added solutions for our customers and the continuous improvement cost productivity programs taking strong root across the businesses.

Laser products first-quarter adjusted gross profit was $20 million, or 44% gross margin, an improvement of 230 basis points year over year. Medical technologies first-quarter adjusted gross profit was $13 million, or 42% gross margin, a decrease of approximately 90 basis points year over year, while precision motion's first-quarter adjusted gross profit was nearly $9 million, or 46% gross margin, an improvement of roughly 150 basis points year over year.

GAAP operating expenses increased roughly $6.6 million for the first quarter, from $28 million in the prior period. Research and development expenses were $8.2 million, or 8.7% of sales compared to $5.9 million, or 7.4% of sales, in the prior period.

We are really proud of the progress we have made around our new product development. In the quarter we had more than 50 individual product development programs under way across the Company. Some of these programs are focused on expanding our servable market, such as our (inaudible) optical encoder for advanced industrial high-contamination environments, while others allow us to take back our leadership position, such as our new 27-inch surgical display with embedded ultra wideband medical-grade wireless video capability.

We are also making investments in optical scanning technologies, in RFID technologies for critical care applications, a new range of mid-power sealed CO2 pulse laser, higher performing digital laser scanning solutions, and a new platform of radio spectrometers and imagers.

SG&A expense were $22 million, or 23% of sales, benefiting from the impact of restructuring actions and lower spending. This compares to $19.6 million, or 25% of sales, during the first quarter 2014. Adjusted operating income was $10.9 million, or 11.5% of sales, in the first quarter compared to $8.1 million, or 10.2% of sales, in the first quarter of 2014.

Adjusted EBITDA was $14.3 million in the first quarter compared to $11.3 million in the first quarter of 2014.

Net interest expense in the first quarter was $1.4 million compared to $800,000 last year. This was in line with guidance and reflected the acquisition of JADAK in the first quarter of 2014 and the acquisition of Applimotion in the first quarter of 2015. The weighted average interest rate of our senior credit facility was 3.4% for both periods.

Other income was approximately $730,000 in the quarter, representing earnings from our equity interest in Laser Quantum.

Diluted earnings per share from continuing operations was $0.10 in the quarter compared to $0.08 in the first quarter of 2014, while non-GAAP earnings per share was $0.20 in the quarter compared to $0.14 in the prior period, representing a $0.06 increase year over year.

Turning to the balance sheet, we finished the first quarter with approximately $123 million in total debt and $47.5 million in cash. Consequently, we completed the quarter with roughly $75.6 million of net debt. The acquisition of Applimotion resulted in cash outlays of approximately $14 million, slightly more than anticipated due to working capital true-ups, which will be recovered over the quarters.

Operating cash flow from continuing operations for the first quarter was $6 million versus $2.8 million in the first quarter of 2014. While we made tremendous efforts to improve working capital efficiency, our shipment linearity in the quarter due to the timing of customer order scheduling affected our collections efforts and inventory purchases temporarily. This is largely a timing-related impact and therefore we continue to expect operating cash flow for the year to be in line with previously issued guidance.

Overall, we started the year off strong and continue to anticipate positive momentum in our businesses from our growth and productivity initiatives. As we look for the full year and our second quarter of 2015, we need to consider the recent divesture of JK Lasers. The business had approximately $22 million in sales in 2014. We issued a separate 8-K showing our historical non-GAAP adjusted revenue and adjusted gross margin figures, which you should review, as they've been amended to reflect the sale of the JK Laser business line.

For the second quarter of 2015 we expect adjusted revenue, a new non-GAAP measure which excludes JK Lasers, of between $93 million and $95 million. This compares to adjusted revenue for the second quarter of 2014 of $92 million and adjusted revenue for the first quarter of 2015 of $89 million.

As mentioned before, we continue to expect to see a pretty good sized headwind from foreign exchange, specifically the weaker euro, impacting our reported numbers. But organic growth on adjusted revenue is expected to be up mid-single digits.

For the second quarter of 2015 we expect adjusted EBITDA to be approximately $14 million. In addition, we expect adjusted EPS to be in the $0.18 to $0.20 range.

Adjusted gross margins are expected to be approximately 44% to 45%.

R&D expenses are expected to be around 9% of sales, whereas SG&A expenses are expected to be close to 24% of sales.

Below-the-line expenses should be largely in line with the prior quarter, and our non-GAAP tax rate is expected to be between 34% and 35%.

Depreciation and amortization expense should be approximately $5.1 million for the second quarter, and stock compensation expense of roughly $1 million.

Finally, with the close of the JK Lasers divesture, we expect to complete the second quarter of 2015 with cash and cash equivalents of roughly $80 million and approximately $40 million of net debt.

Turning to the full year, as mentioned before, we need to consider the recent divesture of JK Lasers in our 2015 full-year guidance. While the divesture is not expected to have a material impact to our profitability, the business had approximately $22 million in sales in 2014 and we were anticipating approximately $25 million of revenue from the business in our previously issued guidance.

That being said, our revenue growth is stronger than we originally anticipated, and so we are increasing our revenue guidance for the full year, net of the JK Lasers divesture.

For the full year 2015, because of the sale of the JK Lasers business, the Company expects adjusted revenue of approximately $365 million to $370 million. This compares to previously issued guidance of $380 million in revenue, which included approximately $25 million of sales for the full year 2015 from JK Lasers. So despite the sale of the business, we expect to deliver stronger revenue growth. Adjusted revenue of $343 million for the full year 2014 was adjusted from $365 million to eliminate $22 million in sales from JK Lasers.

The guidance represents anticipated year-over-year reported revenue growth of 6% to 8% and year-over-year organic revenue growth in mid-single-digit range.

Now, I should note we are providing this guidance based on today's exchange rates, so the volatility in foreign exchange markets could impact our reported revenues by the time we complete the year. However, we continue to expect to deliver better than expected organic revenue growth.

Finally, our fully diluted shares outstanding should be around 35 million shares.

I'm expecting a non-GAAP tax rate of between 34% and 35%. I should highlight that the US R&D tax credit has not be renewed for 2015 as of now. Historically, this credit has about a 1 to 2 point impact on our rate, depending on the spend in the year.

Interest expense, without any significant debt pay-down, is expected to be flat with 2014 at around $5 million. For the full year, depreciation and amortization expenses should be around $19 million, with depreciation expense closer to $7 million. Stock compensation expense is expected to be around $4.5 million.

For the full year 2015 we expect adjusted EBITDA to be in the range of $60 million to $62 million. And finally, we expect adjusted EPS to be in the range of $0.87 to $0.91.

This concludes our prepared remarks. We'll now open the call up for questions. Chris?

(Operator Instructions) Lee Jagoda; CJS Securities.

Can you start -- and I don't know if you gave this in the prepared remarks, but the contribution from JADAK in Q1 and the growth rate year over year, assuming it was in the business for the full period in both periods?

We did not have that in our prepared remarks. I'll have to get back to you on that.

Yes, but the important thing, year over year it behaved like our other medical business. It was down a little bit. Not big, but it was down kind of high single, comparable to what we saw in basically all the medical business. There was just a few areas ticked up that surprised us and those were the ones we mentioned, which was not affecting JADAK so much.

Okay. And then, given the strong organic growth in Q1, do you feel or think that there was some degree of pull forward on the side of your customers? And if you did, if that is the case, can you quantify that?

Yes, I mean, there definitely was some instances where customers accelerated some things into the first quarter that we had sitting in the second quarter. And when we go back to them and say -- well, is that because business is picking up and there will be a corresponding impact on Q2 -- so far they're not committing to that.

So, I mean, that's why we just said we think if you blend a Q1 and a Q2 together, you're back more in the mid-single range. So you can kind of do the math.

The areas where it really happened, robotic surgery was one. Just sort of general encoder demand was really picking up through the quarter, and to some degree we saw the same thing on Applimotion.

And then the scanning business, Cambridge Technology, had a number of customers that pushed them to get stuff out the door by the end of the quarter that we weren't really planning on doing.

Okay. And then one last question and I'll hop back in queue. Can you update us on the performance within the Laser Quantum minority interest? And maybe comment on where that business fits into the long-term strategic plan?

Well, let me hit the long-term strategic plan. We do like that business. We think they have a good management team. Of course, we sit on the Board so we have the ability to interact with them quite a bit. Matthijs Glastra, our COO, is the one who actually has the board seat. I've met with the management at trade shows.

They are good people. They have good technology. We really like their business model. And they're addressing the sort of latest generation DNA sequencers with their technology. So good place to play.

What we don't like at this point is their overconcentration into one or two customer accounts. And so we're working with the company to kind of address that. If that were to be the case, we have an ever increasing interest in this business. But if it stays kind of tied to a couple of accounts we're more cautious about it.

In terms of the financial impact --

(Inaudible) the business surprisingly does better every year. It's gotten stronger. It is tied, as John said, to one or two key customers that drive the bulk of that growth and profitability. And fortunately for that business, those customers are very solid and are expected to continue to do very well.

But you still, you have some caution about that. So there is a strategy in the business to diversify the product set and the customer base. And that's an ongoing thing. But it hasn't really fully come to fruition yet. So we like it but, you know, it has to develop a little more for us to increase our interest.

Great. Thanks very much.

Jim Ricchiuti; Needham & Company.

Robert, by the way, thanks for some of the help on the specific OpEx items as it relates to JK. I wonder if we could go back to gross margins. If we put aside the improvement that you're expecting from the divesture of JK, would you anticipate -- if you put that aside, would you anticipate your gross margins trending higher as you go through the year just in light of some of the things you're doing in terms of Lean and other areas where you're trying to improve manufacturing and productivity?

Yes, I do. So, for the second half of the year I expect gross margins to come up. And that's one of the reasons why you can get to the profit range that we've guided on.

And, Robert, is that kind of across the board in the three segments? Is one area in particular going to be a driver or is it something that you see fairly broadly across the three businesses?

At this point it's broad across all three operating segments.

Got it. And just in light of the way the business portfolio has changed, how should we think about seasonality in the business as we look at the second half? I'm just wondering, is there any changes in the way the business operates Q3, Q4 just in light of the divesture?

Well, the one thing I would tell you, Jim, on that point is if you were to look over the last 15, 20 years, most people would tell you that medical capital equipment spending by hospitals is lower towards the back end of the year, that there are a number of key trade shows that occur late in the year and that's the behavior you can expect, is to see a surge in demand late in the year.

Now, we didn't have that happen in 2014 because the whole industry kind of was on this down cycle, to varying degrees based on technology. But so we didn't get -- that was sort of what happened, is the big bump did not occur like it's supposed to last year. But you would expect some seasonality there based on that, particularly with it -- if it's recovering off of weakness.

The industrial market, not necessarily a big seasonality there. I think that's more of the case of you can actually see some dropping.

So I would say with the mix of products we have right now, Q3 tends to get a little weaker as most of Europe goes on vacation and that impacts some of the factory production. And then Q4 will pick up a little bit.

And then, as John mentioned, the medical area should pick up in Q4 based upon historical trends. It didn't happen last year due to really two factors, but that is something that is a possible outcome for this year.

Got it. So, John, so something like, is an RSNA Show, which I guess is in November, is that a big show for you guys now with the different medical properties?

Yes, I would -- historically RSNA has been a minor factor. And I would say it could be even less of a factor. MEDICA in Dusseldorf is a really big show. It's a sort of broader set of applications. RSNA is really radiology and interventional cardiology and certain related fields. But it's diagnostic imaging focused.

And it's interesting; if you look at our array of products, we don't really sell all that much into diagnostic imaging. We're in patient monitoring; we're in the OR and surgical; we're in drug delivery; we're in life sciences tools. But not so much in diagnostic imaging, inside of a CT or an MRI system or an x-ray, radiology system. A little bit, but not a ton.

Got it. Okay. And final question from me is just looking at the R&D line, fairly significant growth in R&D year over year. And some of that obviously due to the new businesses you've added. But just sounds like you have a number of new product initiatives under way. Two questions: How do we think about R&D going forward? And how should we think about some of these initiatives in terms of the timeline for monetizing some of these?

Well, a couple of different points in there, Jim. One thing I would say is -- and we talked about this some, but going back 10 years or more, GSI didn't really have a strong track record of driving the organic growth. And for us it's a two-step process. We don't sell off-the-shelf technology. We have base platforms of products that are generic and then we adapt those to each application. So you have to have good technology kind of on the shelf as a starting point; then you have to be good at adapting that.

And I think GSI has always been good at adapting, working hand in hand with the OEMs. But the base technology needs to be kind of refreshed. So, a lot of the investments you're seeing now are to get better base technologies, so we can have more interesting conversations with the OEMs about what we're going to adapt for their specific needs.

I don't necessarily think the rate of increase is something we need to sustain. There's some catch-up we're doing in a number of the areas -- in the encoders, in the scanners, and in the CO2 lasers -- where we're putting more base technology into the mix so we can then pursue more design wins. That's true of NDS as well.

But you don't have to do that sort of every year all the time. The adapting you have to do every year all the time, the application work. But, if you look and say -- okay, R&D's a lot higher than what it was 12 months ago or whatever, it's not like it has to do that every year. You're not going to get rid of what you have, but you're not going to keep increasing it. I think the percent of sales we have, where we're getting to where it needs to be and then can kind of stay there.

So one of your other questions was how long does it take, and I think that varies, depending upon when you start the projects. But generally speaking, you're looking at on the industrial side somewhere in the range of 18 months, and on the medical side it could be 2 years. And so, we really have to balance that properly and make sure that we get the proper mix of that, so we start getting the returns out sooner.

There are always the projects, and I highlighted a few in the comments, where you get a customer that sees your new technology and it's exactly what they need and it moves fast, right, and even inside of a year you can get into some meaningful revenues. But, that's not the norm. Those are the fast cases. But I think Robert's timelines are right. I mean, we're not starting from T equals 0 right now, though. We've been working on some of this and we're seeing the growth picking up already from things we were doing in the last 12 months.

Got it. That's helpful. Thank you.

(Operator Instructions) Keith Mahar; Singular Research.

I have a question about the JK Lasers divestiture. I understand it sounds like the margins in that business were a little bit below your Company margins, and there were other reasons it didn't -- it lacked some of the synergies. But I was curious as to where it actually came from, that you actually owned it. Did it come into the Company through another acquisition?

Well, the JK Lasers business is a legacy GSI business that goes back a long time, back to the sort of 1999 timeframe when the old General Scanning merged with Lumonics Laser. So it was a legacy business.

Now, having said that, the fiber laser program that was done within JK was a somewhat more recent phenomenon. It was kind of an organic startup of fiber laser development inside of an existing division. Basically you had JK Lasers -- the old Lumonics technologies were in lamp pump lasers and DCCO2, which were going down. And so we sort of took the infrastructure and invested and repurposed that into a fiber laser program.

And, you know, ultimately we had some success with it. And we commented that to take it to the next level, I think it was better in the hands of other companies that were deeply committed to the high power industrial materials processing, and that's not something we really do in the Company anywhere else. So, it wasn't a great fit.

But it ended up being attractive. The proceeds we got for it, I mean, that's a real positive for us.

Okay. So, I think in the short term it sounded like you just probably use it to pay down debt and then redeploy in the future.

That's correct. I think immediately we probably use it to look at our debt balances. But ideally in the short term we would actually like to do acquisitions. We have a number of different targets in sight, a lot more bolt-on type of transactions, similar to what you saw with the Applimotion deal. And so, to the degree if we can redeploy that capital back to those returns, that's a much more attractive thing for us to do.

Okay. Any other divestitures planned, say, this year?

I think for the most part you could say anything of any significance we've done with. At this point in time, as John mentioned before, we're sort of done with the transition of this company to a portfolio of products that we feel very good about and that we can, as John said, go to battle with.

And there's always small things that you might be looking at from time to time. But the things that really are transformative, I don't think so. You know, small at the margin is possible, a product line here, but we feel the portfolio is well designed now to do what we want to do. It's just we want to make it bigger and we want to scale and prosper over a longer period of time.

Okay. One more question before I hop back in queue. On the Applimotion acquisition -- so it closed in February, and I understand it sounds like you're probably going to do some integration work so you can go out to the market with solutions that use their technology and technology you already have. How quickly does that happen in terms of getting the product ready to go out and go out and try and get some design wins?

Well, what I would tell you is when we say, okay, it's an 18-month cycle in industrial, that's an average, and a couple of years in medical, that's an average. When you are going into an account because of the strength of the relationship you already have and saying -- by the way, I have this other technology and you're already using that on a platform that I'm already involved in and it's the people I already know, it can be faster.

It's not going to be massively faster, but there are cases where we think well inside of a year we can get some actual revenue out of that, just because the cross-selling, it's an easier prospect than a clean, fresh-start sell with someone you don't know as well.

Okay. That was helpful. Thanks a lot. That's all I had.

(Operator Instructions) It appears that we have no further questions at this time. I'll turn the call back over to Mr. Roush for any closing remarks.

Oh, thank you. So, I'd like to wrap up today's call by reiterating that we're pleased Q1 was a successful start to the year for GSI. We made strong progress on our strategic agenda. We executed well commercially and operationally. And we had reasonably healthy end markets. That combination adds up to success.

So, as we move through the year, we expect to see continued reported and organic revenue growth as we benefit from the momentum we are seeing in precision motion, the recovering capital spending in the healthcare space, and the ongoing solid performance of our laser product line. We're benefiting in all of these areas from new product platforms we've launched in the last year, as well as design wins we were awarded over the last several years.

While the global economic picture continues to remain uneven and subject to some disruption, my view continues to be that if you put all of this together it adds up to mid-single-digit organic growth for us this year. Our profitability continues to be solid as we emphasize applications where our technology creates value and differentiation for our OEM customers and that enables us to defend pricing and margins.

At the same time, our programs focused on Lean manufacturing, strategic sourcing, and other key productivity areas like value engineering, enable us to drive out waste and unproductive costs and let us replace it with investments in new products, applications resources, and expanded sales coverage, all of which enable us to sustain our organic growth over time. And we can make these investments while still delivering profitable growth to our shareholders.

So, to summarize, we feel good about the way the Company is now positioned and aligned for success. We're very proud of the extended leadership team we've built here at GSI over the last couple of years. They are very focused on the right programs and initiatives, and they're all committed to delivering strong results this year and over time.

I know I speak for all of them and our Board of Directors when I say that we greatly appreciate the support of our investor base as we continue to transform GSI into a world-class technology company. We appreciate your interest in the Company and your participation in today's call.

We look forward to joining all of you in several months on our second-quarter earnings call. And I'll mention that we hope to visit with some of you in person at the CJS Securities summer conference, which we will be attending in July.

Thank you very much. The call is now adjourned.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.