GSI Group generates revenue of $85.5 million during third quarter 2013

GSI Group Inc. (NASDAQ: GSIG) (the "Company", "we", "our", "GSI"),  a global leader and supplier of precision photonics and motion control components and subsystems to the medical, industrial, electronics and scientific markets, today reported financial results for the third quarter of 2013. Unless otherwise noted, all financial results in this press release are GAAP measures from continuing operations. The reported results from continuing operations exclude the operating results of the Company's Semiconductor Systems and Laser Systems business lines, which were classified as discontinued operations beginning in the second quarter of 2012.

Third Quarter

"We are pleased to report strong financial results across the board for the third quarter," said John Roush, Chief Executive Officer.  "We delivered profitable growth, which reflects progress against our strategic goals as well as improved conditions in some of our end markets." 

During the third quarter of 2013, GSI generated revenue of $85.5 million, an increase of 23% from $69.5 million in the third quarter of 2012.  The acquisition of NDS Surgical Imaging ("NDS") accounted for a 21% increase in revenue year over year, while changes in foreign exchange rates contributed to a (1%) decrease in revenue.  Excluding the impact of the NDS acquisition and changes in foreign exchange rates, the Company's revenue increased 3% compared to the third quarter of 2012.

In the third quarter of 2013, income from operations was $5.7 million, or 6.7% of revenue, compared to $3.8 million, or 5.5% of revenue, during the same period in 2012.  Included in the third quarter of 2013 income from operations was an incremental $1.7 million of amortization of intangibles and acquisition fair value adjustments related to the NDS acquisition, and approximately $1.5 million of restructuring charges, compared to $2.7 million of restructuring charges in the third quarter of 2012.  

Diluted earnings per share ("EPS") from continuing operations was $0.06 in both the third quarter of 2013 and the third quarter of 2012.  Non-GAAP earnings per share, a non-GAAP financial measure that includes the adjustments noted in the reconciliation below, was $0.15 in the third quarter of 2013, compared to $0.12 in the third quarter of 2012.  Included in the third quarter of 2013 non-GAAP earnings per share was ($1.6) million of foreign exchange transaction losses, or approximately ($0.03) per share.

Adjusted EBITDA, a non-GAAP financial measure that includes the adjustments noted in the reconciliation below, was $13.7 million in the third quarter of 2013, compared to $10.8 million in the third quarter of 2012. 

As of September 27, 2013, cash and cash equivalents was $53.7 million, while total debt was $78.4 million. The Company completed the third quarter of 2013 with approximately $24.7 million of Net Debt, as defined in the non-GAAP reconciliation below. 

Operating cash flow for the third quarter of 2013 was $16.8 million, compared to $2.6 million of operating cash flow in the third quarter of 2012. Operating cash flow includes the cash flows of both continuing and discontinued operations.  During the fourth quarter of 2012, the Company reached a settlement agreement with the Internal Revenue Service and Department of Justice regarding the IRS audit for the Company's 2000 through 2008 tax years.  The Company received cash refunds of $12.5 million in the third quarter of 2013 in connection with this settlement.  In addition, the Company expects to realize the benefit relating to the carryback and carryforward of certain net operating losses, which will result in the refund of tax payments made in the carryback periods and lower income tax payments in the carryforward period.

"While we continue to operate in a sluggish capital spending environment, we are making strong progress on our agenda," said John Roush.  "Our growth initiatives are gaining momentum, our restructuring actions have improved our global competitiveness and our strong balance sheet gives us the financial flexibility to continue to invest in growth while delivering attractive returns to our shareholders."

Strategic Update

The Company's focus on laser scanning applications continues to deliver strong growth, with overall scanning revenue up roughly 16% compared to the prior year and scanning solutions products growing approximately 75% compared to the prior year.  The majority of this growth is driven by the Company's Lightning II digital scanning subsystem, which is seeing strong demand in the via hole drilling and scribing applications.  These applications address the growth in smartphones, tablets, and other similar consumer electronic device markets.  The Company has also experienced new design wins and is seeing stronger demand from rapid prototyping and converting applications, which are experiencing increased penetration of laser-based manufacturing processes.    

GSI's medical strategy continues to demonstrate solid progress.  The Company's Encoders business line received a $2.8 million production order for a major medical OEM in the quarter, with the majority of the shipments expected to be made over the next five months.  In addition, NDS launched a new high definition surgical display, specifically designed for emerging markets and engineered for multiple applications within any operating room setting.  NDS was also awarded an over $2 million order for its Dome branded radiology displays. 

During the quarter, the Company implemented a more selective strategy with respect to the fiber laser market.  In a number of cases, the Company declined to pursue less profitable sales opportunities; as a result, sales were up only 1% versus a year ago. The Company also restructured its fiber laser expense and investment levels to better align with the more selective strategy. Given the overall growth in the fiber laser market, attractive opportunities still exist and the Company continues to pursue its program to develop lower cost multi-kilowatt fiber lasers.  This new strategy resulted in the Company's first shipment of a 3-kilowatt fiber laser to an OEM customer.      

Share Repurchase Authorization

GSI's Board of Directors has authorized a share repurchase program under which the Company may repurchase up to $10 million worth of shares of its common stock.  The shares may be repurchased from time to time at the Company's discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock, and general market conditions.  All stock repurchases will be made pursuant to a program adopted under Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 

The share repurchase program does not obligate the Company to acquire any particular amount of common stock.  No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.  The Company expects to fund the repurchase through cash on hand and future cash flow from operations.

"We put in place this share repurchase program as part of our overall capital allocation strategy and as an additional tool to maximize shareholder value," said John Roush. "Our first priority will be investments for organic growth, followed by investments in acquisitions, and returning cash to our shareholders through a stock repurchase program.  We continue to see attractive opportunities to maximize returns through internal investments and acquisitions.  Thus, investors should expect us to be opportunistic in the near-term regarding the share repurchase program."      

Financial Outlook

For the fourth quarter of 2013, the Company expects revenue from continuing operations of between $87 million and $89 million.  On a reported basis, revenue is expected to increase 31% to 34%, compared to the fourth quarter of 2012.  Excluding the impact of the NDS acquisition and changes in foreign exchange rates, revenue is expected to increase 4% to 6%, compared to the fourth quarter of 2012.

The Company expects Adjusted EBITDA to be in the range of $13 million to $14 million for the fourth quarter of 2013.  In addition, the Company expects Net Debt, a non-GAAP financial measure, at the end of the year to be approximately $15 million, excluding any debt that may be incurred or assumed in connection with any future acquisitions and excluding any share repurchases.