gsig-10q_20160401.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2016

Or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File No. 001-35083

 

GSI Group Inc.

(Exact name of registrant as specified in its charter)

 

 

New Brunswick, Canada

 

98-0110412

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

125 Middlesex Turnpike

Bedford, Massachusetts, USA

 

01730

(Address of principal executive offices)

 

(Zip Code)

(781) 266-5700

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of April 29, 2016, there were 34,520,156 of the Registrant’s common shares, no par value, issued and outstanding.

 

 

 

 

 


 

GSI GROUP INC.

TABLE OF CONTENTS

 

Item No.

 

  

Page
No.

 

 

PART I — FINANCIAL INFORMATION

  

1

 

 

 

ITEM 1.

  

FINANCIAL STATEMENTS

  

1

 

 

 

 

  

CONSOLIDATED BALANCE SHEETS (unaudited)

  

1

 

 

 

 

  

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

  

2

 

 

 

 

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

  

3

 

 

 

 

  

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

  

4

 

 

 

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

  

5

 

 

 

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

20

 

 

 

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

30

 

 

 

ITEM 4.

  

CONTROLS AND PROCEDURES

  

30

 

 

PART II — OTHER INFORMATION

  

32

 

 

 

ITEM 1.

  

LEGAL PROCEEDINGS

  

32

 

 

 

ITEM 1A.

  

RISK FACTORS

  

32

 

 

 

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  

32

 

 

 

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

  

32

 

 

 

ITEM 4.

  

MINE SAFETY DISCLOSURES

  

32

 

 

 

ITEM 5.

  

OTHER INFORMATION

  

32

 

 

 

ITEM 6.

  

EXHIBITS

  

33

 

 

SIGNATURES

  

34

 

 

EXHIBIT INDEX

  

35

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GSI GROUP INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars or shares)

(Unaudited)

 

 

April 1,

 

 

December 31,

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

67,892

 

 

$

59,959

 

Accounts receivable, net of allowance of $529 and $500, respectively

 

58,683

 

 

 

57,188

 

Inventories

 

61,764

 

 

 

59,566

 

Income taxes receivable

 

2,454

 

 

 

2,510

 

Prepaid expenses and other current assets

 

4,633

 

 

 

5,989

 

Total current assets

 

195,426

 

 

 

185,212

 

Property, plant and equipment, net

 

36,195

 

 

 

40,550

 

Deferred tax assets

 

7,966

 

 

 

7,885

 

Other assets

 

10,563

 

 

 

12,673

 

Intangible assets, net

 

62,968

 

 

 

66,269

 

Goodwill

 

103,413

 

 

 

103,456

 

Total assets

$

416,531

 

 

$

416,045

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

$

7,395

 

 

$

7,385

 

Accounts payable

 

26,893

 

 

 

24,401

 

Income taxes payable

 

1,770

 

 

 

3,985

 

Accrued expenses and other current liabilities

 

24,274

 

 

 

21,182

 

Total current liabilities

 

60,332

 

 

 

56,953

 

Long-term debt

 

86,763

 

 

 

88,426

 

Deferred tax liabilities

 

556

 

 

 

449

 

Income taxes payable

 

5,919

 

 

 

6,071

 

Other liabilities

 

15,745

 

 

 

19,445

 

Total liabilities

 

169,315

 

 

 

171,344

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common shares, no par value; Authorized shares: unlimited;

   Issued and outstanding: 34,516 and 34,345, respectively

 

423,856

 

 

 

423,856

 

Additional paid-in capital

 

29,320

 

 

 

29,225

 

Accumulated deficit

 

(187,644

)

 

 

(189,550

)

Accumulated other comprehensive loss

 

(18,316

)

 

 

(18,830

)

Total stockholders’ equity

 

247,216

 

 

 

244,701

 

Total liabilities and stockholders’ equity

$

416,531

 

 

$

416,045

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

1

 


 

GSI GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars or shares, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

April 1,

 

 

April 3,

 

 

2016

 

 

2015

 

Revenue

$

90,316

 

 

$

94,614

 

Cost of revenue

 

53,424

 

 

 

54,608

 

Gross profit

 

36,892

 

 

 

40,006

 

Operating expenses:

 

 

 

 

 

 

 

Research and development and engineering

 

8,052

 

 

 

8,215

 

Selling, general and administrative

 

21,187

 

 

 

22,068

 

Amortization of purchased intangible assets

 

2,108

 

 

 

1,889

 

Restructuring, acquisition and divestiture related costs

 

2,958

 

 

 

2,437

 

Total operating expenses

 

34,305

 

 

 

34,609

 

Operating income from continuing operations

 

2,587

 

 

 

5,397

 

Interest income (expense), net

 

(1,185

)

 

 

(1,397

)

Foreign exchange transaction gains (losses), net

 

83

 

 

 

517

 

Other income (expense), net

 

743

 

 

 

729

 

Income from continuing operations before income taxes

 

2,228

 

 

 

5,246

 

Income tax provision

 

322

 

 

 

1,800

 

Income from continuing operations

 

1,906

 

 

 

3,446

 

Loss from discontinued operations, net of tax

 

 

 

 

 

Consolidated net income

$

1,906

 

 

$

3,446

 

 

 

 

 

 

 

 

 

Earnings per common share from continuing operations:

 

 

 

 

 

 

 

Basic

$

0.05

 

 

$

0.10

 

Diluted

$

0.05

 

 

$

0.10

 

Loss per common share from discontinued operations:

 

 

 

 

 

 

 

Basic

$

 

 

$

 

Diluted

$

 

 

$

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

$

0.05

 

 

$

0.10

 

Diluted

$

0.05

 

 

$

0.10

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

 

34,657

 

 

 

34,506

 

Weighted average common shares outstanding—diluted

 

34,853

 

 

 

34,999

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

2

 


 

GSI GROUP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands of U.S. dollars)

(Unaudited)

 

 

Three Months Ended

 

 

April 1,

 

 

April 3,

 

 

2016

 

 

2015

 

Consolidated net income

$

1,906

 

 

$

3,446

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax (1)

 

65

 

 

 

(4,506

)

Pension liability adjustments, net of tax (2)

 

449

 

 

 

729

 

Total other comprehensive income (loss)

 

514

 

 

 

(3,777

)

Total consolidated comprehensive income (loss)

$

2,420

 

 

$

(331

)

 

(1) 

The tax effect on this component of comprehensive income was nominal for the three months ended April 1, 2016 and $0.5 million for the three months ended April 3, 2015.

(2) 

The tax effect on this component of comprehensive income was not material for all periods presented. See Note 4 for the total amount of pension liability adjustments reclassified out of accumulated other comprehensive income (loss).

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3

 


 

GSI GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

 

 

Three Months Ended

 

 

April 1,

 

 

April 3,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Consolidated net income

$

1,906

 

 

$

3,446

 

Less: Loss from discontinued operations, net of tax

 

 

 

 

 

Income from continuing operations

 

1,906

 

 

 

3,446

 

Adjustments to reconcile income from continuing operations to

   net cash provided by operating activities of continuing operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

5,229

 

 

 

4,762

 

Provision for inventory excess and obsolescence

 

1,493

 

 

 

516

 

Share-based compensation

 

1,342

 

 

 

1,597

 

Deferred income taxes

 

108

 

 

 

(103

)

Earnings from equity-method investment

 

(740

)

 

 

(727

)

Dividend from equity-method investment

 

2,341

 

 

 

 

Non-cash restructuring and acquisition related charges

 

602

 

 

 

288

 

Other

 

195

 

 

 

415

 

Changes in assets and liabilities which (used)/provided cash, excluding

   effects from businesses purchased or classified as discontinued operations:

 

 

 

 

 

 

 

Accounts receivable

 

(1,139

)

 

 

(5,096

)

Inventories

 

(3,519

)

 

 

(3,975

)

Income taxes receivable, prepaid expenses and other current assets

 

(514

)

 

 

649

 

Accounts payable, income taxes payable, accrued expenses

   and other current liabilities

 

1,302

 

 

 

4,660

 

Other non-current assets and liabilities

 

(308

)

 

 

(390

)

Cash provided by operating activities of continuing operations

 

8,298

 

 

 

6,042

 

Cash provided by operating activities of discontinued operations

 

 

 

 

 

Cash provided by operating activities

 

8,298

 

 

 

6,042

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(2,341

)

 

 

(946

)

Acquisition of businesses, net of cash acquired and working capital adjustments

 

422

 

 

 

(13,852

)

Proceeds from the sale of property, plant and equipment

 

3,589

 

 

 

23

 

Cash provided by (used in) investing activities of continuing operations

 

1,670

 

 

 

(14,775

)

Cash provided by investing activities of discontinued operations

 

1,498

 

 

 

 

Cash provided by (used in) investing activities

 

3,168

 

 

 

(14,775

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

 

 

13,000

 

Repayments of long-term debt and revolving credit facility

 

(1,875

)

 

 

(4,875

)

Payments of withholding taxes from stock-based awards

 

(1,320

)

 

 

(1,352

)

Capital lease payments

 

(342

)

 

 

(201

)

Other financing activities

 

88

 

 

 

159

 

Cash provided by (used in) financing activities of continuing operations

 

(3,449

)

 

 

6,731

 

Cash provided by financing activities of discontinued operations

 

 

 

 

 

Cash provided by (used in) financing activities

 

(3,449

)

 

 

6,731

 

Effect of exchange rates on cash and cash equivalents

 

(84

)

 

 

(1,602

)

Increase (decrease) in cash and cash equivalents

 

7,933

 

 

 

(3,604

)

Cash and cash equivalents, beginning of period

 

59,959

 

 

 

51,146

 

Cash and cash equivalents, end of period

$

67,892

 

 

$

47,542

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

810

 

 

$

975

 

Cash paid for income taxes

$

2,470

 

 

$

1,559

 

Income tax refunds received

$

1

 

 

$

16

 

Supplemental disclosure of non-cash financing activity:

 

 

 

 

 

 

 

Assets acquired under capital lease obligations

$

 

 

$

17

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

4

 


 

GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF APRIL 1, 2016

(Unaudited)

 

1. Basis of Presentation

GSI Group Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “our”) design, develop, manufacture and sell precision photonic and motion control components and subsystems to Original Equipment Manufacturers (“OEMs”) in the medical and advanced industrial markets. Our highly engineered enabling technologies include CO2 laser sources, laser scanning and beam delivery products, optical data collection and machine vision technologies, medical visualization and informatics solutions, and precision motion control products. We specialize in collaborating with OEM customers to adapt our component and subsystem technologies to deliver highly differentiated performance in their applications.

The accompanying unaudited interim consolidated financial statements have been prepared in U.S. dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

The Company has a 41% ownership interest in Laser Quantum Ltd. (“Laser Quantum”), a privately held company located in the United Kingdom. The Company records the results of this entity under the equity method as it does not have a controlling interest in the entity.

The Company’s unaudited interim financial statements are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company evaluates its estimates based on historical experience, current conditions and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which they are deemed to be necessary. Actual results could differ significantly from those estimates.

Recent Accounting Pronouncements

Share-Based Compensation

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the income statement in the reporting period in which they occur. In addition, the ASU requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. This ASU also requires that cash paid through directly withholding shares for tax-withholding purposes be classified as a financing activity in the statement of cash flows. In addition, this ASU allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest, consistent with current U.S. GAAP, or account for forfeitures when they occur. The new standard is effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which provides comprehensive lease accounting guidance. The standard requires entities to recognize lease assets and liabilities on the balance sheet and to disclose key information

5

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

about leasing arrangements. ASU 2016-02 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40),” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 will be effective for annual reporting periods ending after December 15, 2016. Early application is permitted. The Company does not expect the adoption of ASU 2014-15 to have an impact on the Company’s consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” and requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. Upon adoption, an entity may apply the new guidance either retrospectively to each prior reporting period presented or retrospectively only to customer contracts not yet completed as of the date of adoption with the cumulative effect of initially applying the standard recognized in beginning retained earnings at the date of the initial application. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year, with the option of early adoption as of the original effective date. The amendment in ASU 2015-14 will result in ASU 2014-09 being effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard on our consolidated financial statements.

 

 

2. Business Combinations

On November 9, 2015, the Company acquired certain assets and liabilities of Lincoln Laser Company (“Lincoln Laser”), a Phoenix, Arizona-based provider of ultrafast precision polygon scanners and other optical scanning solutions for the medical, food processing, and advanced industrial markets, for a total purchase price of $12.1 million, net of working capital adjustments. During the first quarter of 2016, the Company finalized the working capital adjustments with the sellers of Lincoln Laser and received a payment of $0.4 million.  

 

6

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

3. Discontinued Operations and Divestitures

In April 2015, the Company completed the sale of certain assets and liabilities of its JK Lasers business, previously included in the Laser Products segment, for approximately $29.6 million in cash, net of final working capital adjustments and transaction costs. The Company recognized a pre-tax gain on sale of $19.6 million in the consolidated statement of operations. The JK Lasers business divestiture did not qualify for discontinued operations accounting treatment.

In July 2014, the Company completed the sale of certain assets and liabilities of its Scientific Lasers business for approximately $6.5 million in cash, net of working capital adjustments.  In accordance with the purchase and sale agreement, $1.5 million of the sales proceeds was held in escrow until January 2016. The Company reported the $1.5 million escrow in other current assets on the balance sheet as of December 31, 2015. In January 2016, the $1.5 million escrow was released to the Company in full and is reported as cash flow from investing activities of discontinued operations.

 

4. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) was as follows (in thousands):

 

 

Total accumulated

 

 

 

 

 

 

 

 

 

 

other

 

 

Foreign currency

 

 

 

 

 

 

comprehensive

 

 

translation

 

 

Pension

 

 

income (loss)

 

 

adjustments

 

 

liability

 

Balance at December 31, 2015

$

(18,830

)

 

$

(9,698

)

 

$

(9,132

)

Other comprehensive income (loss)

 

321

 

 

 

65

 

 

 

256

 

Amounts reclassified from other comprehensive income (loss) (1)

 

193

 

 

 

 

 

 

193

 

Balance at April 1, 2016

$

(18,316

)

 

$

(9,633

)

 

$

(8,683

)

 

 

(1)

The amounts reclassified from other comprehensive income (loss) were included in selling, general and administrative expenses in the consolidated statements of operations.

 

5. Earnings per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. For diluted earnings per common share, the denominator also includes the dilutive effect of outstanding restricted stock units and stock options determined using the treasury stock method. Dilutive effects of contingently issuable shares are included in the weighted average dilutive share calculation when the contingencies have been resolved. For periods in which net losses are generated, the dilutive potential common shares are excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive.

7

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

April 1,

 

 

April 3,

 

 

2016

 

 

2015

 

Numerators:

 

 

 

 

 

 

 

Income from continuing operations

$

1,906

 

 

$

3,446

 

Loss from discontinued operations

 

 

 

 

 

Consolidated net income

$

1,906

 

 

$

3,446

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

Weighted average common shares outstanding— basic

 

34,657

 

 

 

34,506

 

Dilutive potential common shares

 

196

 

 

 

493

 

Weighted average common shares outstanding— diluted

 

34,853

 

 

 

34,999

 

Antidilutive common shares excluded from above

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per Common Share:

 

 

 

 

 

 

 

From continuing operations

$

0.05

 

 

$

0.10

 

From discontinued operations

$

 

 

$

 

Basic earnings per share

$

0.05

 

 

$

0.10

 

 

 

 

 

 

 

 

 

Diluted Earnings per Common Share:

 

 

 

 

 

 

 

From continuing operations

$

0.05

 

 

$

0.10

 

From discontinued operations

$

 

 

$

 

Diluted earnings per share

$

0.05

 

 

$

0.10

 

 

Common Stock Repurchases

In October 2013, the Company’s Board of Directors authorized a share repurchase plan under which the Company may repurchase outstanding shares of the Company’s common stock up to an aggregate amount of $10.0 million. The shares may be repurchased from time to time, at the Company’s discretion, based on ongoing assessment of the capital needs of the business, the market price of the Company’s common stock, and general market conditions. Shares may also be repurchased through an accelerated stock purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common stock to be purchased when the Company would otherwise be prohibited from doing so under insider trading laws. The share repurchase plan 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. As of December 31, 2015, the Company had repurchased an aggregate of 172 thousand shares for an aggregate purchase price of $2.2 million at an average price of $12.48 per share. There have been no share repurchases to date in 2016.

 

6. Fair Value Measurements

ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

 

·

Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access.

 

·

Level 2: Observable inputs other than those described in Level 1.

 

·

Level 3: Unobservable inputs.

The Company’s cash equivalents are investments in money market accounts, which represent the only asset the Company measures at fair value on a recurring basis. The Company determines the fair value of our cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable,

8

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

income taxes payable and accrued expenses and other current liabilities (excluding contingent considerations) approximate their carrying values because of their short-term nature.

Contingent consideration

On December 18, 2015, the Company acquired all assets and certain liabilities of Skyetek Inc. (“Skyetek”). Under the purchase and sale agreement for the Skyetek acquisition, the owners of Skyetek are eligible to receive contingent consideration based on the achievement of certain sales order commitment targets from October 2015 through June 2017. If such targets are achieved, the contingent consideration will be payable in 2017. The Company recognized an estimated fair value of $0.2 million as part of the purchase price as of the acquisition date. The estimated fair value of the contingent consideration is reported as an other liability in the consolidated balance sheet as of April 1, 2016 and December 31, 2015, respectively.

Under the purchase and sale agreement for the Lincoln Laser acquisition, the shareholders of Lincoln Laser are eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal year 2016. If such targets are achieved, the contingent consideration will be payable in cash in 2017. The estimated fair value of $2.3 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. The estimated fair value of the contingent consideration is reported as an other current liability and an other liability in the consolidated balance sheet as of April 1, 2016 and December 31, 2015, respectively.

On February 19, 2015, the Company acquired Applimotion Inc. (“Applimotion”). The former shareholders of Applimotion are eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal years 2015 to 2017. If such targets are achieved, the contingent consideration will be payable in cash in two installments in 2017 and 2018, respectively. The estimated fair value of $1.0 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. In December 2015, a $0.4 million increase in the estimated fair value was recorded in the consolidated statement of operations in restructuring, acquisition and divestiture related costs. The estimated fair value of the contingent consideration is reported as an other current liability and an other liability in the consolidated balance sheet as of April 1, 2016 and as a long-term liability as of December 31, 2015 in accordance with the timing of the estimated payments.

The following table summarizes the fair values of our financial assets and liabilities as of April 1, 2016 (in thousands):

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

Significant Other

 

 

 

 

 

 

Active Markets for

 

 

Significant Other

 

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

 

Observable Inputs

 

 

Inputs

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

3,607

 

 

$

3,607

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

3,889

 

 

$

 

 

$

 

 

$

3,889

 

 

The following table summarizes the fair values of our financial assets and liabilities as of December 31, 2015 (in thousands):

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

Significant Other

 

 

 

 

 

 

Active Markets for

 

 

Significant Other

 

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

 

Observable Inputs

 

 

Inputs

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

4,657

 

 

$

4,657

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

3,889

 

 

$

 

 

$

 

 

$

3,889

 

 

Changes in the fair value of Level 3 contingent consideration during the three months ended April 1, 2016 were as follows (in thousands):

 

9

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

 

Contingent Consideration

 

Balance at December 31, 2015

$

3,889

 

Fair value adjustment

 

 

Balance at April 1, 2016

$

3,889

 

 

See Note 9 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.

 

 

7. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The Company tests its goodwill balances annually for impairment as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The Company performed its annual goodwill impairment test at the beginning of the second quarter of 2015 and noted no impairment of goodwill. With the exception of our NDS reporting unit, implied fair value of reporting units exceeded their carrying values by at least 20%.

The following table summarizes changes in goodwill during the three months ended April 1, 2016 (in thousands):

 

Balance at beginning of the period

$

103,456

 

Net working capital adjustment of Lincoln Laser acquisition

 

(43

)

Balance at end of the period

$

103,413

 

 

Goodwill by reportable segment as of April 1, 2016 was as follows (in thousands):

 

 

Reportable Segment

 

 

 

 

 

 

Laser

Products

 

 

Vision

Technologies

 

 

Precision

Motion

 

 

Total

 

Goodwill

$

136,278

 

 

$

84,401

 

 

$

33,963

 

 

$

254,642

 

Accumulated impairment of goodwill

 

(102,461

)

 

 

(31,722

)

 

 

(17,046

)

 

 

(151,229

)

Total

$

33,817

 

 

$

52,679

 

 

$

16,917

 

 

$

103,413

 

 

Goodwill by reportable segment as of December 31, 2015 was as follows (in thousands):

 

 

Reportable Segment

 

 

 

 

 

 

Laser

Products

 

 

Vision

Technologies

 

 

Precision

Motion

 

 

Total

 

Goodwill

$

136,321

 

 

$

84,401

 

 

$

33,963

 

 

$

254,685

 

Accumulated impairment of goodwill

 

(102,461

)

 

 

(31,722

)

 

 

(17,046

)

 

 

(151,229

)

Total

$

33,860

 

 

$

52,679

 

 

$

16,917

 

 

$

103,456

 

10

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

 

Intangible Assets

Intangible assets as of April 1, 2016 and December 31, 2015, respectively, are summarized as follows (in thousands):

 

 

April 1, 2016

 

 

December 31, 2015

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and acquired technologies

$

80,977

 

 

$

(65,636

)

 

$

15,341

 

 

$

82,821

 

 

$

(66,297

)

 

$

16,524

 

Customer relationships

 

67,102

 

 

 

(38,411

)

 

 

28,691

 

 

 

67,168

 

 

 

(36,914

)

 

 

30,254

 

Customer backlog

 

2,644

 

 

 

(2,602

)

 

 

42

 

 

 

2,644

 

 

 

(2,589

)

 

 

55

 

Non-compete covenant

 

2,514

 

 

 

(1,016

)

 

 

1,498

 

 

 

2,514

 

 

 

(882

)

 

 

1,632

 

Trademarks and trade names

 

10,667

 

 

 

(6,298

)

 

 

4,369

 

 

 

10,711

 

 

 

(5,934

)

 

 

4,777

 

Amortizable intangible assets

 

163,904

 

 

 

(113,963

)

 

 

49,941

 

 

 

165,858

 

 

 

(112,616

)

 

 

53,242

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

13,027

 

 

 

 

 

 

13,027

 

 

 

13,027

 

 

 

 

 

 

13,027

 

Totals

$

176,931

 

 

$

(113,963

)

 

$

62,968

 

 

$

178,885

 

 

$

(112,616

)

 

$

66,269

 

 

All definite-lived intangible assets are amortized either on a straight-line basis or an economic benefit basis over their remaining useful life. Amortization expense for customer relationships and definite-lived trademarks, trade names and other intangibles is included in operating expenses in the accompanying consolidated statements of operations. Amortization expense for patents and acquired technologies is included in cost of revenue in the accompanying consolidated statements of operations. Amortization expense is as follows (in thousands):

 

 

Three Months Ended

 

 

April 1,

2016

 

 

April 3,

2015

 

Amortization expense – cost of revenue

$

1,184

 

 

$

1,119

 

Amortization expense – operating expenses

 

2,108

 

 

 

1,889

 

Total amortization expense

$

3,292

 

 

$

3,008

 

 

Estimated amortization expense for each of the five succeeding years and thereafter as of April 1, 2016 was as follows (in thousands):

 

Year Ending December 31,

 

Cost of Revenue

 

 

Operating

Expenses

 

 

Total

 

2016 (remainder of year)

 

$

2,909

 

 

$

5,608

 

 

$

8,517

 

2017

 

 

3,542

 

 

 

6,877

 

 

 

10,419

 

2018

 

 

2,044

 

 

 

6,285

 

 

 

8,329

 

2019

 

 

1,751

 

 

 

4,306

 

 

 

6,057

 

2020

 

 

1,494

 

 

 

2,401

 

 

 

3,895

 

Thereafter

 

 

3,601

 

 

 

9,123

 

 

 

12,724

 

Total

 

$

15,341

 

 

$

34,600

 

 

$

49,941

 

 

 

11

 


GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 1, 2016

(Unaudited)

 

8. Supplementary Balance Sheet Information

The following tables provide the details of selected balance sheet items as of the periods indicated (in thousands):

Inventories

 

 

April 1,

2016

 

 

December 31,

2015

 

Raw materials

$

37,486

 

 

$

38,511

 

Work-in-process

 

12,438

 

 

 

10,138

 

Finished goods

 

11,146

 

 

 

9,266

 

Demo and consigned inventory

 

694

 

 

 

1,651

 

Total inventories

$

61,764

 

 

$

59,566

 

 

Accrued Expenses and Other Current Liabilities

 

 

April 1,

2016

 

 

December 31,

2015

 

Accrued compensation and benefits

$

7,741

 

 

$

7,357

 

Accrued warranty

 

3,248

 

 

 

3,335

 

Accrued restructuring

 

2,383

 

 

 

1,652

 

Accrued contingent considerations

 

2,901

 

 

 

 

Accrued professional services fees and other

 

8,001

 

 

 

8,838

 

Total

$

24,274

 

 

$

21,182

 

 

Accrued Warranty

 

 

Three Months Ended

 

 

April 1,

2016

 

 

April 3,

2015

 

Balance at beginning of the period

$

3,335

 

 

$

3,044

 

Provision charged to cost of revenue

 

310

 

 

 

429

 

Acquisition related warranty accrual

 

 

 

 

94

 

Use of provision

 

(393

)

 

 

(342

)

Reclassification to liabilities held for sale

 

 

 

 

(376

)

Foreign currency exchange rate changes

 

(4

)

 

 

(24

)

Balance at end of period

$

3,248

 

 

$

2,825

 

 

 

Other Long Term Liabilities

 

 

April 1,

2016

 

 

December 31,

2015

 

Capital lease obligations

$

8,955

 

 

$

9,173

 

Accrued pension liabilities

 

3,287

 

 

 

3,693

 

Accrued contingent considerations

 

988

 

 

 

3,889

 

Other

 

2,515