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 |
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98-0110412 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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125 Middlesex Turnpike Bedford, Massachusetts, USA |
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01730 |
(Address of principal executive offices) |
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(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 |
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¨ |
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Accelerated filer |
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x |
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Non-accelerated filer |
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¨ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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¨ |
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.
TABLE OF CONTENTS
Item No. |
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ITEM 1. |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) |
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3 |
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ITEM 2. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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20 |
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ITEM 3. |
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ITEM 4. |
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ITEM 1. |
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ITEM 1A. |
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ITEM 2. |
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ITEM 3. |
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ITEM 4. |
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ITEM 5. |
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ITEM 6. |
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33 |
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34 |
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35 |
GSI GROUP INC.
(In thousands of U.S. dollars or shares)
(Unaudited)
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April 1, |
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December 31, |
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2016 |
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2015 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ |
67,892 |
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$ |
59,959 |
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Accounts receivable, net of allowance of $529 and $500, respectively |
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58,683 |
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57,188 |
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Inventories |
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61,764 |
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59,566 |
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Income taxes receivable |
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2,454 |
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2,510 |
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Prepaid expenses and other current assets |
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4,633 |
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5,989 |
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Total current assets |
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195,426 |
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185,212 |
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Property, plant and equipment, net |
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36,195 |
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40,550 |
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Deferred tax assets |
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7,966 |
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7,885 |
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Other assets |
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10,563 |
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12,673 |
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Intangible assets, net |
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62,968 |
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66,269 |
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Goodwill |
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103,413 |
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103,456 |
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Total assets |
$ |
416,531 |
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$ |
416,045 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Current portion of long-term debt |
$ |
7,395 |
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$ |
7,385 |
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Accounts payable |
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26,893 |
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24,401 |
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Income taxes payable |
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1,770 |
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3,985 |
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Accrued expenses and other current liabilities |
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24,274 |
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21,182 |
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Total current liabilities |
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60,332 |
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56,953 |
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Long-term debt |
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86,763 |
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88,426 |
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Deferred tax liabilities |
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556 |
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449 |
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Income taxes payable |
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5,919 |
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6,071 |
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Other liabilities |
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15,745 |
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19,445 |
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Total liabilities |
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169,315 |
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171,344 |
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Commitments and Contingencies (Note 13) |
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Stockholders’ Equity: |
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Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 34,516 and 34,345, respectively |
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423,856 |
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423,856 |
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Additional paid-in capital |
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29,320 |
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29,225 |
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Accumulated deficit |
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(187,644 |
) |
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(189,550 |
) |
Accumulated other comprehensive loss |
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(18,316 |
) |
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(18,830 |
) |
Total stockholders’ equity |
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247,216 |
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244,701 |
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Total liabilities and stockholders’ equity |
$ |
416,531 |
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$ |
416,045 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars or shares, except per share amounts)
(Unaudited)
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Three Months Ended |
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April 1, |
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April 3, |
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2016 |
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2015 |
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Revenue |
$ |
90,316 |
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$ |
94,614 |
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Cost of revenue |
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53,424 |
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54,608 |
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Gross profit |
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36,892 |
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40,006 |
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Operating expenses: |
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Research and development and engineering |
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8,052 |
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8,215 |
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Selling, general and administrative |
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21,187 |
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22,068 |
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Amortization of purchased intangible assets |
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2,108 |
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1,889 |
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Restructuring, acquisition and divestiture related costs |
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2,958 |
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2,437 |
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Total operating expenses |
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34,305 |
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34,609 |
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Operating income from continuing operations |
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2,587 |
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5,397 |
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Interest income (expense), net |
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(1,185 |
) |
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(1,397 |
) |
Foreign exchange transaction gains (losses), net |
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83 |
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517 |
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Other income (expense), net |
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743 |
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729 |
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Income from continuing operations before income taxes |
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2,228 |
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5,246 |
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Income tax provision |
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322 |
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1,800 |
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Income from continuing operations |
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1,906 |
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3,446 |
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Loss from discontinued operations, net of tax |
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— |
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— |
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Consolidated net income |
$ |
1,906 |
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$ |
3,446 |
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Earnings per common share from continuing operations: |
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Basic |
$ |
0.05 |
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$ |
0.10 |
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Diluted |
$ |
0.05 |
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$ |
0.10 |
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Loss per common share from discontinued operations: |
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Basic |
$ |
— |
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$ |
— |
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Diluted |
$ |
— |
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$ |
— |
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Earnings per common share: |
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Basic |
$ |
0.05 |
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$ |
0.10 |
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Diluted |
$ |
0.05 |
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$ |
0.10 |
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Weighted average common shares outstanding—basic |
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34,657 |
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34,506 |
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Weighted average common shares outstanding—diluted |
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34,853 |
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34,999 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars)
(Unaudited)
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Three Months Ended |
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April 1, |
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April 3, |
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2016 |
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2015 |
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Consolidated net income |
$ |
1,906 |
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$ |
3,446 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments, net of tax (1) |
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65 |
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(4,506 |
) |
Pension liability adjustments, net of tax (2) |
|
449 |
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|
729 |
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Total other comprehensive income (loss) |
|
514 |
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(3,777 |
) |
Total consolidated comprehensive income (loss) |
$ |
2,420 |
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$ |
(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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
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Three Months Ended |
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April 1, |
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April 3, |
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2016 |
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2015 |
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Cash flows from operating activities: |
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Consolidated net income |
$ |
1,906 |
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$ |
3,446 |
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Less: Loss from discontinued operations, net of tax |
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— |
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— |
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Income from continuing operations |
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1,906 |
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3,446 |
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Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations: |
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Depreciation and amortization |
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5,229 |
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4,762 |
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Provision for inventory excess and obsolescence |
|
1,493 |
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|
516 |
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Share-based compensation |
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1,342 |
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1,597 |
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Deferred income taxes |
|
108 |
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(103 |
) |
Earnings from equity-method investment |
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(740 |
) |
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(727 |
) |
Dividend from equity-method investment |
|
2,341 |
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— |
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Non-cash restructuring and acquisition related charges |
|
602 |
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|
|
288 |
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Other |
|
195 |
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|
415 |
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Changes in assets and liabilities which (used)/provided cash, excluding effects from businesses purchased or classified as discontinued operations: |
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Accounts receivable |
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(1,139 |
) |
|
|
(5,096 |
) |
Inventories |
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(3,519 |
) |
|
|
(3,975 |
) |
Income taxes receivable, prepaid expenses and other current assets |
|
(514 |
) |
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|
649 |
|
Accounts payable, income taxes payable, accrued expenses and other current liabilities |
|
1,302 |
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|
|
4,660 |
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Other non-current assets and liabilities |
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(308 |
) |
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|
(390 |
) |
Cash provided by operating activities of continuing operations |
|
8,298 |
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|
|
6,042 |
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Cash provided by operating activities of discontinued operations |
|
— |
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|
|
— |
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Cash provided by operating activities |
|
8,298 |
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|
|
6,042 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(2,341 |
) |
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|
(946 |
) |
Acquisition of businesses, net of cash acquired and working capital adjustments |
|
422 |
|
|
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(13,852 |
) |
Proceeds from the sale of property, plant and equipment |
|
3,589 |
|
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|
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 |
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|
|
— |
|
Cash provided by (used in) investing activities |
|
3,168 |
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|
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(14,775 |
) |
Cash flows from financing activities: |
|
|
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|
|
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Borrowings under revolving credit facility |
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— |
|
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|
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 |
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(3,449 |
) |
|
|
6,731 |
|
Cash provided by financing activities of discontinued operations |
|
— |
|
|
|
— |
|
Cash provided by (used in) financing activities |
|
(3,449 |
) |
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|
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: |
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|
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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: |
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|
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Assets acquired under capital lease obligations |
$ |
— |
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|
$ |
17 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
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):
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Total accumulated |
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|
|
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|
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|
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|
|
other |
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Foreign currency |
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|
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comprehensive |
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translation |
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Pension |
|
|||
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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 |
|
|
|