Novanta Inc. (NOVT) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, my name is Jay, and I will be your conference operator today. At this time, I’d like to welcome everyone to the GSI Group First Quarter 2012 Earnings Call. [Operator Instructions] Thank you. Mr. Tim Spinella, Assistant Treasurer of GSI Group, you may begin your call.

Thank you very much. Good afternoon and welcome to GSI Group’s First Quarter 2012 Earnings Conference Call. With me on the call are John Roush, Chief Executive Officer of GSI Group, and Robert Buckley, Chief Financial Officer. If you’ve not received a copy of our earnings press release, you may get one from the Investors’ section of our website at www.gsig.com. Please note, this call is being webcast live and will be archived on our website. Before we begin, we need to remind everyone of the Safe Harbor of forward-looking statements that we’ve outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. We may make some comments today, both in our prepared remarks and in our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent only as of today, we disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of today’s forward-looking statement as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP in the earnings press release, we will provide reconciliations promptly on the investor relations section of our website at www.gsig.com. I’m now pleased to introduce the Chief Executive Officer of GSI Group, John Roush.

Thank you, Tim, and good afternoon everybody. Welcome to our call. We appreciate your continued interest in the company. So our first quarter 2012 results reflect solid performance across the company against a backdrop of a weak macroeconomic environment particularly in semiconductor and electronics market, and a period of significant transition within the company. We delivered revenue of $79 million, adjusted EBITDA of just under $11 million, and GAAP earnings per share of $0.04, which included a restructuring charge of $2.7 million that was related primarily to our 12x12 program. We saw strong orders during the quarter with our book-to-bill ratio at 1.1, and the positive order trend has continued in the early part of Q2, confirming our view that business conditions will improve throughout this year. We also had strong cash generation in the quarter, and were able to reduce our net debt to just $5 million down from over $140 million at the end of 2009. So our Q1 results were basically in line with the low-end of the guidance range we had provided. The fact that we are at the low end is it’s essentially due to one large laser system that we are unable to ship from our Control Laser business in Orlando. This system, which is a precision math repair tool, represented more than $3 million of revenue with a growth margin above 50% in our Q1 forecast. A critical component of the system was inadvertently damaged during the final days of the quarter, which prevented the system from shipping by quarter end. The damaged component has since been replaced and the system was accepted by the customer and shipped, but the revenue and the profit from the system are now in our Q2 estimates. During our year-end conference call on March 14, we had guided Q1 revenue of $78 million to $81 million with adjusted EBITDA of $11 million to $12.5 million. The revenue and the profit from that one system accounted for essentially the whole range in our guidance from top to bottom for both revenue and adjusted EBITDA, but unfortunately it was a binary situation and it didn't go our way, but otherwise the quarter turned out very much as we had envisioned it. The microelectronics market did in fact bottom out for us, at some point in Q1. Orders began to trend up in a positive way in most of our businesses. As I mentioned, we had a 1.1 book-to-bill ratio for GSI as a whole, led by our continuing scientific related business that was at 1.9 book to bill. Our optical encoder business was at 1.4, our CO2 laser business at 1.2 and our scanning business was at 1.05. We’ve also held numerous detailed discussions with customers in some of the most impacted microelectronic market segments, particularly the PCB or printed circuit board via hole drilling market. The consistency that we’re hearing in these discussions is that these markets will continue to improve throughout the year. In fact our Westwind spindles business, which derived about 90% of its revenue from the PCB industry had April bookings that were 60% of what that business shipped in the entire quarter in Q1, a clear sign that recovery is now well underway. Based on the order rates we had in Q1, which have continued to be strong in the early part of Q2, we clearly foresee better market conditions and improving results as we move through the rest of 2012. In terms of our strategic growth focus, I'd like to provide some updates on the company’s progress in several different areas. In past calls we have articulated our strategy to focus growth investment in GSI in 3 areas, scanning solutions, fiber lasers and medical components. During the quarter, we saw a strong progress in all 3 areas. The first on the laser scanning side, we had a number of promising design wins with OEMs and strong overall demand with our solutions revenue and scanning increasing about 30% year-over-year. Our scanning business has traditionally realized most of its revenue from lower power applications, but we have recently launched new products that are targeted at kilowatt class applications and we are now seeing strong interest from customers in those products. On the fiber laser side, we saw sales double year-over-year and we were pleased to launch our 2 kilowatt product a few weeks ago. We are deft in the initial bill of the 2 kilowatt unit and the interest within our customer base is high. I recently had the chance to visit a number of our fiber laser customers in China and they were enthusiastic about our product and our application support. They urged us to get more high power product to market even faster, something we clearly have in our plans for the remainder of 2012. We also continue to make good progress on expanding fiber laser production capacity, and closing on a variety of cost reduction initiatives both internally and with our supply base. In terms of the medical market, we continue to see attractive opportunities within our current application, such as robotic surgery, OCT retinal scanning, patient monitoring and life sciences instrumentation including DNA sequencing. Our medical business has increased from 13% of our total revenue to 18% over the last year. And revenue from this market is now at an annualized run rate of almost $60 million. In addition we have a program underway with outside experts to map all of the adjacent medical and life sciences component market segments and identify acquisition opportunity. We’ve already surfaced some attractive targets and opportunities, and we’re pursuing several of those, though it’s too early for me to comment in any real detail about the status. By contrast, our microelectronics market revenue has declined by over 40% since Q2 of last year, when we first began collecting market segment data. And this market has gone down from being 36% of our overall revenue to 28% of overall revenue in that timeframe. So the microelectronics market recovery will be very important to us as we move through the year, and we’re pleased to see the order trends are more positive now. So with that, I’d like to turn it over to Robert Buckley to provide some more detail on the financial. Robert?

Thank you, John, and good afternoon, everyone. I’ll now provide some additional details on our first quarter 2012 results. Following my prepared remarks, we’ll open it up for questions. Despite continuing industry challenge in the microelectronics markets and some disruption caused by the 12x12 initiative, the company delivered on its guidance and demonstrated another solid quarter of performance. For the first quarter of 2012, GSI generated revenue of $78.8 million, a decrease of 14% from $91.9 million in the same period a year ago. Included in the revenue for the first quarter of 2011 was approximately $2.1 million of net revenue that had been deferred under multiple element arrangements, delivered over multiple periods and entered in prior to the adoption of ASU 2009-13. Turning to our segments, our laser products division generated revenue in the first quarter of 2012 of $29.8 million, a 3% decrease compared to $30.7 million in the first quarter of 2011. The decline in revenue was largely caused by a short fall in sales in our industrial lasers and laser systems. As John mentioned previously, the laser systems businesses was expecting to shift a more than $3 million single system order in the final days of the quarter. However, the system is known as the DRS, sale of the ship in the quarter out there significant part was broken before the system was disassembled and packed for shipment. This system was shipped in May, it will be recorded as revenue in the second quarter of 2012. Our precision motion and technologies division generated revenue of $39.5 million in the first quarter of 2012, a 22% decrease compared to $50.6 million in the first quarter of 2011. The decrease in revenue was largely caused by a downturn in the microelectronics market. As an example, the company’s Westwind spindles business declined roughly $7 million year-over-year, driven by downturn in the printed circuit board market segment. It should also be noted that, included in the revenue for the first quarter of 2011 was approximately $2.1 million of net revenue that had been deferred on a multiple element arrangements as discussed previously. Our semiconductor systems division generated revenue of $9.6 million in the first quarter of 2012, a 9% decrease compared to $10.5 million in the first quarter of 2011. The decrease in revenue was largely caused by the downturn in the microelectronics market. Turing to profitability, first quarter gross profit was $32.8 million or 41.6% gross margin compared to 43.4% gross margin during the same period last year. The drop in gross margin was primarily caused by product mix changes within our semiconductor systems business, which is under strategic review; and a decrease in manufacturing capacity utilization, particularly within our laser system businesses, which are also under strategic review. In addition, we recognized roughly $1 million of net gross profit in the first quarter of 2011 from multiple element arrangements entered in prior to the adoption of ASU 2009-13, for which no comparable amount was recognized in the first quarter of 2012. Laser product first quarter gross profit was $10.3 million, reflecting a 34.4% gross margin or 35.2% gross margin for the same period last year. The decline in margin is linked to a drop in manufacturing capacity utilization, due to lower sales volumes during the quarter, particularly in our laser system businesses, which were under strategic review. Precision motion and technologies first quarter gross profit was $18.5 million reflecting a 46.9% gross margin compared to $23.9 million or 47.3% gross margin in the same period last year. The drop in margin was primarily driven by a drop in manufacturing capacity utilization at our Westwind spindles business, as well as roughly $1 million of net gross profit for multiple element arrangements recognized in the first quarter of 2011 as discussed previously. Semiconductor systems first quarter gross profit was $4 million reflecting a 42.1% gross margin compared to $5.2 million in the first quarter of 2011 with a 48.9% gross margin, a nearly 7 point decrease was primarily attributed to product mix as the business sold more systems in the quarter and experienced a drop in higher margin upgrades and retrofit. Operating expenses in the first quarter of 2011 amounted to $27 million, which exclude $2.7 million of restructuring expenses related to our 12x12 program. SG&A expenses for the quarter were $19 million, representing a decline of 300,000 compared the first quarter of 2011. During this quarter we made significant progress in our 12x12 program. The transfer of our specialty laser production activities for Marisa [indiscernible] New York facility to our Santa Clara, California facility made significant progress. This effort was largely completed in early May. We also completed the consolidation of 3 sales offices in Japan as one central sales and application office representing all GSI business lines. We find a new lease for our Bedford, Massachusetts facility, which is the first step in a plan to consolidate all Massachusetts State’s operations into one central facility. Finally, we continue to make good progress in evaluating very effective strategies around our semiconductor systems business, SONAR is the GSI brand name, and our laser system businesses which are sold underneath the Control Laser and Baublys brand names. There appears to be meaningful interest in these businesses, we hope to have resolution of these plans in 2012. In aggregate, these 3 businesses contributed approximately $13.6 million of revenue during the first quarter of 2012 with operating profitability below most of our other business lines. As a consequence of these actions, we incur $2.7 million of restructuring charges in the first quarter of 2012 comprised of cash charges of $1.4 million and non-cash charges of $1.3 million. We continue to expect to incur cash charges of $4 million to $5 million related to this program, of which $2.5 million have been recorded through March 30 of 2012. Additionally, we expect to incur non-cash restructuring charges of $3 million to $4 million, of which $2.3 million have been recorded through March 30 of 2012. Adjusted EBITDA, non-GAAP financial measure was $10.8 million for the first quarter of 2012 versus $16.2 million for the same period last year. John mentioned previously, adjusted EBITDA fell close to the lower end of our guidance as the consequence of failing to ship the over $3 million DRS system at our Control Laser business. This system has subsequently been shipped. The company’s earnings per share for the first quarter of 2012 was $0.04 on a diluted basis versus $0.19 for the same period last year. However, included in the GAAP EPS is a $2.7 million restructuring charge. Turning to the balance sheet, we ended the first quarter of 2012 with $50.4 million in cash and cash equivalents, and total debt of $55.5 million. This resulted in approximately $5.1 million of net debt at the end of the first quarter, compared to $13.2 million at the end of the 2011. During the first quarter of 2011, the company repaid $12.5 million of debt of which $2.5 million was the scheduled quarterly principle repayment on the term loan. As a reminder, net debt is a non-GAAP measure, its definition can be found in our earnings release. Finally, free cash flow also a non-GAAP measure which we define as cash flow from operating activities less capital expenditures of nearly $8 million in the first quarter of 2012. So turning to the second quarter of 2012, we expect revenues in the range of an $86 million to $93 million. It should be noted that the second quarter of 2011 included approximately $4.2 million of net revenue recognized that had been deferred under multiple-element arrangements, delivered over multiple periods, and entered into prior to the adoption of ASU 2009-13. We feel this revenue range is appropriate for several reasons. We have 3 system businesses under strategic review, which could cause some short-term disruptions. Furthermore, we have several manufacturing and sales operations undergoing site locations, and we are reaching an inflection with the recovery of several microelectronic market segments. These variables compound and therefore cause some higher abnormal unevenness in our revenue projections. We view these as short-term issues and expect to return to more normal conditions later in the year. For the second quarter of 2012, EBITDA is expected to be in the range of $13 million to $16 million. It should be noted that the second quarter of 2011 included approximately $1.6 million of net gross profit that had been deferred under multiple-element arrangements entered in prior to the adoption of ASU 2009-13. We expect both R&D expense, depreciation and amortization to be roughly in line with the first quarter of 2012, where as SG&A should be in the 22% to 23% of sales range. Finally, the company expects a GAAP tax rate of 13% to 18% for the quarter. This concludes our prepared remarks. I’d now like to open the call up for questions.

[Operator Instructions] The first question comes from Jim Ricchiuti from Needham & Co.

I’m wondering if we could just look a little more closely into the strength you saw in the bookings in a couple of the businesses, if I heard you correctly, John, I think you said that optical encoders, you had a book-to-bill of 1.4?

Yes.

Where was the strength coming from in that business?

Well, I mean some of that actually was from some of the microelectronics to start a turn in the quarter. We would have had to take orders lot of them in Q4 just to realize it much in the shipments in Q1. So I think we’re seeing that part of it get better. We also had strength in the medical part of it, so across the board the demand was pretty strong for the encoders.

Okay, and a little surprising with the CO2 laser business, the booking strength there. Is that just some of the lower marketing business starting to come back in the quarter for some of your customers?

Well, one of the things that really happened was China turned back on for us, because we had actually seen China business for CO2, most of it low power stuff really slowed down after Labor Day of last year. And that impacted clearly our Q4 revenue in that business, and it also affected Q1, at least the earlier part of Q1. But as we got back from the Chinese New Year there was strong orders in that business in that part of the word, and that really helped.

Some will say that’s the credit situation that had tightened, and then started to ease. It may be just general economic conditions in China. But that was a big part of it. The U.S. has been strong for that business throughout most of this time frame. And they are not really in semiconductor, a whole lot either I mean here and there they have a little bit. But that was really more of a China dynamics in CO2.

Got it. And Robert, I may have missed it, but did you size any restructuring charges related to the 12x12 program for this quarter?

For the second quarter, I didn’t mention it, but that should be in a range of around $2 million.

The next question is from Lee Jagoda of CJS Securities.

Can you, Robert, talk a little bit about SG&A expense in terms of the variable and fixed components?

Well the way I’d think about as the -- there are 2 elements driving the increase in the absolute dollars from the first quarter to the second quarter, one of it is the merit cycle, we are actually implementing pay raises throughout the organization, all at the same time. And so there is a little bit of an impact from that, and then there is the impact from the increase in sales. You could probably split the, you could split it probably 50/50 as we go into the second quarter.

Okay, perfect. And then, John, can you talk a little bit about your current market position within fiber lasers, and how you think about GSI competing in the longer term with other larger competitors like an IBG?

Sure. I mean our market position is very small, and we don’t really give out the specific numbers. We’re not trying to draw attention instead of where we’re competing so others can come in, and we tend to sell to a certain extent in our legacy base of end users, where they’re using our older products today, and we have relationships and we know those applications well. So I mean in terms of share, we’re low single digit types of markets share. When you think longer term, I mean even with our growth plans, which are fairly aggressive, where we’ve said, grow that up and add $20 million to $25 million over the next few years, that’s starting from a small base, and that still leaves you with a relatively small share. Okay, so for us it’s not a big share of the market play, it’s kind of an incrementally building off of a small what is essentially kind of a startup position for us as of a year or so ago. It’s attractive for us and customers are very interested in, particularly customers that we’ve done business with for a long time. I think obviously our products need to perform well, they need to be at the industry standard in terms of performance, and they need to stay at industry standard pricing. And we’re doing those things. We have not had a full product offering, prior to the beginning of Q4 last year, we didn’t even have any kilowatt products in the market. We’re kind of operating from 500 watts down. Now we have a 1 kilowatt, and we have a 2 kilowatt, and we have more kilowatt class products on the way, and we’re well aware that we need to be competitive in the market and we don’t expect to have the same kind of cost structure internally that much larger players have. But we think that we can get our cost to place where it’s attractive for us given the overall economics of the company and we do compete successfully. We don’t plan on making a frontal assault on much larger companies through we tend to sell in places where our particular relationships and our particular application knowledge gives us an advantage with that customer.

And one more question and I will hop back in queue. Can you talk a little bit about your acquisition strategy and whether you see opportunities out there to possibly reduce the volatility associated with microelectronic end markets?

Yes, I think we do. I mean, we are looking at acquisitions that reinforced our growth platforms that we are pursuing internally. I don’t think we would really sit here and say we are trying to grow in medical components and scanning and fiber lasers and then we are going to go and make acquisitions in some completely different area. I see the 2 as reinforcing each other the internal and the organic and then the acquisitions. Having said that, the reduced volatility, I think is going to come from a lot of the medical and life sciences applications. And as I mentioned in my remarks, we have a specific initiative underway there. We brought in kind of a market expert that’s helping us scan all the segments in medical and life sciences at the component and subsystem level. We have no intention of becoming a medical systems provider. But there is a lot of opportunities out there and finding the ones that fit into our channels and into our technology kind capability is what we are trying to accomplish. But I think if we have some success with that that will reduce overall volatility.

The next question is from Tom Kerr from Singular Research.

Can you refresh my memory on the 12x12, on where most of those cost savings come out of, cost of goods sold versus SG&A. Is it directly split or weighed towards the other. Second question is, just with regards to the strategic review on those business lines, is any other color you can give us as it actively being separate interest or people doing due diligence or anything else you can tell us on that?

Yes, so we haven’t provided specific breakouts around the roughly $5 million of savings. There are manufacturing facilities shutting down, whether it’s from savings or some sales offices as well. I would say it’s fairly evenly split though between operating expenses and our manufacturing costs. So that should be up a little bit there. In terms of the actual process around our strategic review, we have engaged outside resource to help market those businesses. They’re very active at this point with a number of potential interested parties looking at those businesses. But we’re not at a point that we can make any decisions. And I think that as we progress throughout the year, these things will become a lot clear for us.

[Operator Instructions] The next question is from Jack Ripsteen of Potrero Capital Research.

I guess, I have 3; one is just a follow-up on the question you just answered about the strategic process. What kind of things needs to come online, it seems to me like you shop one of these things with a potential set of buyers, and really comes down to put price and interest and time isn't necessarily that critical factor, is kind of why the extended time period. And then on the transition, you mentioned there were some things that had a compounded effect revenues, in terms of closing some facilities and migrating to others, just kind of curious, some specifics there. And then lastly, I think prior to this call you might have said that EBITDA was going to grow about 10% or at least 10%. It sounds like you have pretty good growing visibility on the top line so that should impact the bottom line, is that still a pretty safe guidepost from your prior comments?

Yes, so first of all just let me take question number one, and by the way thanks for your interest. I think we probably saw each other at a conference in the past, prior to having on this call. So in terms of the sale process, I mean we have engaged as Robert said, sell-side advisors on really 2 different programs, one around semiconductor systems, and one around the laser system. So they are running separate processes. And you know there is memorandums and the fact base that has to be put together, data room and then we had literally a larger number of companies get a hold of the books and take a look at the businesses, and then a subset of those as indicated interest, and have made visits, there’s a whole process around it. And then we’re midstream in that, so it's very difficult to kind of say based on the dynamics of how this is going to play out from here that it's going to be another 2 months or another 4 months, I mean it’s not that predictable. I’ve spoken some sense, it really depends on whether in either one of the 2 transactions, but if one buyer steps up and says, I want to preemptively kind of close this thing and cut the process off. So right now we have multiple buyers who seem quite interested in both, and so we are progressing on that basis, and that creates a little bit of uncertainty on the timing.

But you’re not going to set a time table thing, and we expect bids in by [indiscernible] state at this point?

Well, we are doing that, I mean we internally do have a process, yes.

We just went through enough of these to know that, that process doesn’t always stay on scheduled plan.

Okay. But it sounds like 2012 as though, if you were to think back and say, I guess that it could go somewhat in 2013, but it does sound like you have a timeline with a end date rather certain on it, that you’d like to see this wrapped up by.

And plus it also depends what you want to count to, you want to count to when it closes or when there’s kind of a definitive agreement signed, there’s a lot of things that happen between signing a definitive purchase and sale type of agreement, and then when you actually close it.

Okay, but it’s more than just decks have gone out, it sounds like people are kicking tires on real numbers and data room et cetera.

We have lot of people making physical site visits. But the answer to another question you asked around disruption, we are moving manufacturing facilities, a number of different areas we’re moving, sales offices which could have some disruption, but very limited in that sense. And then the businesses under strategic review, I think the first quarter represents some of the disruption that we’re experiencing in our system businesses. It is a challenge for the employees in the organization, and as a consequence we have to manage overall through that. Missing a $3 million instrument order in the final 2 or 3 days of the quarter is not something we actually particularly enjoy. And so there are some challenges here, and take into consideration the vast majority of employee base that’s associated with those businesses are going to be sold off. So that’s sort of what we’ve been talking about in terms of some disruptions that could occur.

Okay, but it’s now lost revenue -- that revenue came back you saw it’s not permanent, it’s just lumpy and when you’re seeing it.

That’s correct.

I think it’s the unpredictability factor.

Fair enough. And then my last question was about the EBITDA. I think you had said previously, plus 10% EBITDA growth is that still pretty much rolling through or it looks possible?

It does, and we still view that as what the likely scenario here for 2012. In terms of the revenue, I mean, I guess the challenges, all the point that Robert made in the guidance section about Q2, create a certain variability of what revenue might be, and some of that is markets and how quickly they recover in Q2, and some of that thing is related to our own restructuring and divestitures initiatives. You roll those in and say, that impacts what a full year kind of revenue scenario looks like, plus the fact that we are seeing this beginning of a significant recovery, but it’s -- and it’s showing up in orders -- particularly sustaining themselves by more than just a one quarter. So our view is we can get to the EBITDA multiple different ways. So if the revenue trends play out the way we see them playing out now, then I think that supports that kind of EBITDA number, a 10% increase. If for whatever reason the electronics market, that recovery is not sustained, if the macroeconomic environment ends up dipping down a little bit or from what our estimates are internally, we would go after the EBITDA in various other ways. We would start to conserve and reduce expenses in certain ways. There is more that one way to get to the EBITDA, and that’s why we’re more focused on that right now. And as we get more confidence around the top line, I think then we’ll be able to speak to that with more specificity on the full year.

And it looks like the book-to-bills were really solid. I am assuming that takes out even the $3 million that sort of got pushed right, that’s not in that equation?

The $3 million DRS was actually booked in 2011, I believe it was the second or third quarter of 2011.

Yes, I mean, it was neither in the bookings or the billings.

The next question is from Chris McDonald of Kennedy Capital.

The first one is on scanners, it sounds like you’re starting to see some momentum there. Could you talk a little bit about the underlying drivers of that momentum and how much progress the company is making, the strategic focus there on new applications, and maybe some new products?

Yes, absolutely. I mean what we are really doing there is stepping up from a true component position in the market into a subsystem. So scanning solution is taking galvanometer, several galvanometers in the servo, the controls and packaging that in a housing and more of a module, but it’s still sold through an OEM or an integrator or somebody who is going to make a system. So we are not system integrator in any case, but it’s an additional value add. It brings us one step closer to the application. So it’s more necessary to work more closely with whoever the OEM or system integrator is to really understand performance and what envelop of performance they really need in that scanning system. Because we have such a high share of the galvanometer market, and so much experience in this business, it lets us put our knowledge to use more effectively. And to kind of get more revenue and more income out of the basic assets and capabilities we have. So we didn’t really have much in the way of solutions, revenue we’re just a component player a couple of year ago, and this thing is now creating a lot of attraction. There are half a dozen or more companies out there that really do these types of solutions, all private companies. So it’s not like we’re creating the market, there is a market already. But what we try to do is, focus rather than going and just trying to dislodge market share from the other companies that do solutions, as we try to focus on some of the new application, where its – it’s almost an open competition, right? We are not trying to steal somebody else’s legacy business, but where an application was not even using lasers or not even using scanners as part of their technology and then they go to a scanned application, we are getting in on the ground floor and then providing them the solutions. And we are having good success with that. In a number of cases, the applications where we are doing this are slightly different than where we had been focused at the component level because they are new applications. Examples of that are some of the processing in automotive lithium-ion battery production, a lot of it is -- some of the cutting of papers and cardboards and other materials that was previously done with mechanical cutting and is now going to rapid, scanned laser cutting. I mean something is ridiculously simple as cardboard boxes, which have to be cut in unusual shapes and each one of those with mechanical cutting and presses that involves a setup change, right. But if you cut them with lasers, it’s just software change. So you can instantaneously cut different shapes of boxes and that blends itself to cutting with a scanner. And so we have a lot of traction in that type of application.

Do you have a sense for the proportion of your scanner business that’s being integrated with fiber lasers versus other types of lasers?

That isn’t a metric refastening [ph]. It’s only been in the last few quarter, so we can accurately track the scanner versus the galvanometer. We do participate in a lot of fiber laser business, but we don’t have tying efforts on it right now, so I wouldn’t speculate. But I would say it’s the minority now, but many of the fiber laser programs out there do, particularly at lower power, I mean I mentioned in my remarks, we are not historically playing in a lot of kilowatt class products, but at lower powers we’re certainly integrated with a lot of fiber lasers and we are migrating up in power as well.

Okay, And then maybe this is for Robert but just an update on the roughly $19 million IRS payments from the queue it sounds like that it’s still outstanding but any sense that you have around timing et cetera would be great?

Yes, you are right. It’s roughly $19 million, was the total amount that we were seeking. We did put a range around that, I think it's in the $15 million to $20 million range that we're hoping to receive from the IRS. I say at this point in time we’re waiting for some decisions, final decisions to be made with them and that process will take some time, there was nothing more that we can do at this point and as per now it’s just a waiting game.

[Operator Instructions] The next question is from Stefan Mykytiuk of Pike Place Capital.

Okay. Just on the gross margins, I guess as the revenues pick up in Q2, are we going to see some improvement there? And do you think by year end, we get back to more of the 43, 44, as opposed to 41, 42?

Yes, if you take a look at the gross margin performance from the first quarter or from the fourth quarter to the first quarter, I would say the vast majority of the swing is not all that was associated with our system business. The rest of the businesses there were puts and takes within precision motion later that when we plan on holding on to, but for the most part of that kind of even down and saw gross margins relatively flat in those businesses. There is a great deal of leverage in those business, so as we begin to see the top line move, I think we can really begin to the move the growth margins again. That is baked into the plan for the back half of the year; we’ve seen that before, and so that’s our expectation as we start to recover in microelectronics.

Okay. And how are the -- some of the newer areas where you are growing quickly, are those accretive to gross margins or those -- as you are ramping up are they depressing gross margins a bit?

I would say we didn’t design the growth initiative specifically as margin enhancing initiatives; they really were intended to kind of accelerate growth and keep margins relatively the same. So it was in that vein. So I think in some cases margins are a little lower than what they are in the legacy business, I would say that’s the case in fiber laser now, but there’s plenty of opportunity to increase the margin. Scanning, I think, it’s probably in general about the same; and medical, I would say it’s higher than legacy business. So when you average across it, I think it's probably fairly neutral.

Okay, great. Any update on acquisitions, you’ve generated a lot of cash, the balance sheet in great shape. Is that something we should expect to see kind of in the nearer future or is it really a 2013 event for acquisitions?

Well, we would certainly like to get one or more acquisitions done this year, it’s not always easy to call the timing, I think somebody asked the question about timing relative to things you are selling, and then certain unpredicted ability to that that’s even more when you are buying, because you are trying to convince people to sell in the first place and then get it evaluation that makes sense. So we are in discussions on things, but it just too hard to say whether any of that stands out this year or not, it could what I would not say is our acquisition is definitely a 2013 thing, it's entirely possible we could get something done this year, but isn’t it possible we wouldn’t and we don’t want to go out there and say we will and then -- the valuation to move in the wrong direction and you know.

The next question is from Jim Ricchiuti of Needham & Company.

Robert, the site relocations that you’re planning for the June quarter? Can you elaborate on that. Is there any -- are there any of these manufacturing sites?

Yes. The Eastern Tokyo [ph] facility, is home of our Quantronix business which is one of our specialty laser business line. That is been consolidated into our Santa Clara office which his home of Continuum, another specialty laser business. So that move, all production has already been shifted out of that facility as of today. There is a couple of minor things that we have to finish up with, but for the most part by the end of second quarter we will be completely out of that facility. In the midst of spooling up that production. We in fact we’re now spooling up the production of quantronix product at the Continuum site. And that’s where when we say there could be some disruption when you start up production of these sophisticated products and we have a number of the highly technical sort of PhD type employees who are relocating to the West Coast. Our current internal indicate there is going to be some delays in some production disruption. We’re already -- that’s already factored in at some level. But it’s part of the super size of that.

And as far as Q2 any additional manufacturing site relocations. I wasn’t sure where you’re with Cambridge moving that facility?

So we did sign the lease for the Bedford facility, we signed that last week and so that was organically -- that was the first step that we are taking in order to get compared to consolidate those businesses. I don’t see that necessarily as a -- it’s definitely not a Q2 event, now that we have the lease signed, we have begun doing the planning and consolidate the businesses. It’s likely late Q3, early Q4 event.

Okay. And just getting back to bookings, the bookings -- the very strong book-to-bill and continuum was that also partly due to that large contract that you received or was that in a prior quarter?

Sure. Absolutely it was. It was $4.8 million, but there’s many periods where continuum is shipping off of periods where they didn’t get a large booking. So it’s run far below on book-to-bill at many times, but yes, that was in there.

Okay. And last question for me, I’m just curious, I mean you sound like you are seeing some nice recovery in microelectronics, but more broadly just given people’s concerns about the macroeconomic outlook, are you seeing any areas of where you’ve seen a bit of a pause in demand as you went through the quarter? And any of them were GDP sensitive areas, doesn’t sound like it, so I’m just wondering if you have seen it?

Well, we did see some. I mean one of things that’s been interesting, we are very bullish as we’ve indicated in many forums on medical life sciences kind of applications for our technologies and we do see lots of growth opportunities there organically and even with acquisitions. But interestingly some of the big medical OEM slowdown their orders primarily related to Europe. And that correlates to what we see some of the large medical companies saying that they definitely slowdown some of their purchases from us. Mostly on legacy products, we don’t really see a slowdown in new product development, so we are being designed into equipment that’s launching and a lot of that will pay dividends for us in new programs that ship in 2013. But some of the legacy medical stuff slow down a little bit, and then we had to take some of our internal product line forecast down. So that’s one area. That would be the main one, I think everything else the demand was pretty consistent. We still see this fits and starts out of China. It’s very hard to get a clear trend, China slowed down very hard late last year, but at times it would turn on and we'd see a big burst of orders and then it would stop. And then we think we’ve turned the corner on that, but it’s very unpredictable. So that’s an area we watch pretty closely.

Have you said how much of your business comes out of China?

We haven’t broken it out specifically in the past for the country. And that’s something we may do at some point in the future but…

Okay. But certainly it’s enough where if you were to see a change in demand either way it can impact the business?

Yes, definitely.

R&D, Robert, you may have explained it, I may have just missed it, but how do you see R&D going forward? It was just down sequentially as well as down year-over-year, and I just wasn't sure that’s due to the timing of something you are doing. And we -- should we presume that, that does ramp up as we go through 2012?

Well, I think in the second quarter, R&D will look very similar to what it was in the first quarter. I think it just begins to ramp up it'll be towards the back half of the year.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you operator. So in conclusion, I’d like to say that the worst parts of the microelectronics downturn and the slowdown in China seem to be behind us. We’re seeing an improving picture for the rest of the year. We do have some heavy lifting to do in terms of completing the 12x12 program, in fact some of the most challenging parts of that initiative do lie ahead in terms of moving several manufacturing sites, as discussed and moving some of the sales offices in the coming months. And also finalizing the strategic reviews of our systems businesses, but we have clear roadmaps to complete all these initiatives and they are on track in virtually all cases. We have a clear sense of our strategic priorities for growth, and those initiatives are beginning to pay dividends. And the benefit will increase as we move through 2012, and into 2013. We now have a strong leadership and team in place capable of delivering on all of the plans and we are steadfastly committed to delivering on the promise of GSI. In closing, I’d like to also mention that we will be presenting at 2 upcoming investor conferences. We will be at the Houlihan Lokey Global Industrials Conference on Thursday of this week in New York and we are also present at the B Riley Investor Conference in Santa Monica, California on May 22. We hope to have the chance to meet with some of you at these events and in any case we look forward to joining all of you on our second quarter 2012 earnings call now. Thank you very much for your interest in GSI, the call is now adjourned.

This concludes today’s conference call. You may now disconnect.