Good morning. My name is Shannon and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Group 2015 Q2 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Chief Financial Officer, Robert Buckley. Mr. Buckley, you may begin your conference.

Thank you. Good morning and welcome to GSI Group’s second quarter 2015 earnings conference call. I’m Robert Buckley, Chief Financial Officer at GSI Group. If you have not received a copy of our earnings press release, you may obtain one from the Investor Relations section of our website at www.gsig.com. Please note, the call is being webcast live and will be archived on our website. Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we have outlined in our earnings press release issued earlier this morning and also those in our SEC filings. We may make some comments today both in our prepared remarks and 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 our views 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 statements 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 such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to the GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website. And I’m very pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert. Good morning, everyone, and thank you for joining our call. I’m pleased to report that we had a very strong second quarter. We executed well across the company and on balance overall trends are positive, so we believe we are well on-track to achieve our goals for the full-year. I’ll briefly cover the financial highlights and let Robert go into a bit more detail in his section. The Q2 revenue and profitability were strong, and in both cases they were higher than our own expectations. Revenue came in at $96.5 million, which was above both analyst consensus and the high-end of our own guidance range. Organic growth was 5% in the quarter. Adjusted EBITDA was $16.3 million, up 13% year-over-year and again above both analyst consensus and the high-end of our own guidance range. Adjusted EPS was $0.20 in the quarter, which is at the high-end of our guidance range and in line with analyst consensus, but the number was impacted $0.03 by foreign currency losses. So, absent that our adjusted EPS would have been that much higher. On the revenue side, we were pleased to come in at $96.5 million, the dynamic we saw was similar to Q1 with revenue ending up $7 million higher than we expected. We got strong contributions from many areas of the company, the Precision Motion business continued to see strong demand in both medical and industrial applications and delivered year-over-year growth of over 20% driven by double-digit growth in optical encoders as well as the addition of the Applimotion precision motors acquisition, which is performing above our forecast. Our Laser segment grew 9% year-over-year revenue in the quarter, if you adjust for the divesture of JK Lasers, with healthy growth from both our scanning products and our CO2 lasers. So…

Good morning, everyone. I’m going to provide you with the financial summary of our second quarter results highlighting a few areas and giving you an update on our 2015 outlook. I like to start by saying, we continue to make great progress with the year delivering another solid quarter and significantly advancing on our strategic objectives. GAAP revenue was $96.5 million, down slightly from $96.9 million in the second quarter of 2014. However, adjusted revenue in the quarter, which excluded the JK Lasers divestiture revenues from both year was up 5% to $96.5 million from $91.6 million in 2014. Organic revenue growth which excluded acquisitions, divestitures and the impact of foreign exchange was also up 5%. Unfavorable foreign exchange represented a negative headwind on our top line of approximately 5 percentage points for just over $4 million. Revenue was driven by a strong growth in a number of advanced industrial applications such as coding and marking, industrial converting, robotics, and in a number of electronic circuitry applications; as well as solid growth from certain key medical applications such as OCT, patient monitoring and some surgical applications. This was partially offset by continued weakness in endoscopics, drug delivery and diabetes care equipment. From a segment perspective, our Laser Products business adjusted revenue was up 9% year-over-year, our Precision Motion business revenue was up 26% year-over-year, and our Vision Technologies business was down 10%, the latter driven largely by weakness in certain medical applications. I believe, it’s important to reiterate a topic John just raised. As we exited the quarter, we are seeing signs of strengthening in certain key medical applications, which gives us confidence in our full-year revenue numbers. Laser products, which is now comprised of our laser scanning and beam delivery products and our low and medium power CO₂ laser…

[Operator Instructions] Your first question comes from the line of Lee Jagoda from CJS Securities. Your line is open. Please go ahead.

Hi, good morning.

Hi, Lee, how are you doing?

Good. So, John, are there any particular areas within medical that you would call out either positively or negatively during the quarter? And then as a follow-up to that just given that you are seeing medical capital spending shown some signs of recovery, are there any specific areas within that bucket that you would call out, as particular areas of strength?

Well, in Q2 what we saw that was strong, there was few areas, robotic surgery was very good for us at a few customers. OCT, which is really a retinal diagnostics, capability was quite strong, although the comparison was low from last year, but still robust there. RFID technology is getting a lot of traction, a lot of interest, also relatively small base. Our OEMs have not adopted that much RFID yet, but - so we saw some strength there. I mean, Rob, any others you would mention?

Patient monitoring as well had some nice growth associated with it and is showing signs of strengthening for the second-half.

Yes. So those were the areas we saw some good progress in Q2. The areas that we’re looking to turnaround, the minimally invasive surgery, the displays we’ve been communicated that that would get better as we go through the year. The barcode scanning and machine vision, which really goes into a few different applications…

Drug delivery and…

Drug delivery, yes.

Those tend to be in the surgical suite as well. So if you look at the overall environment, where there’s a little bit of weakness, but it’s starting to stabilizing and get a little bit better, it’s probably could be cordoned off into the surgical suite.

Another area that has not been doing well is cataract surgery, and we don’t really provide laser sources for that, but we’re involved in the beam delivery of that. And that’s been a good market for us over time, but it struggled quite a bit in Q2, and we do - here are some of the other players point to the same thing.

Okay, great. And then just switching gears into lasers, you are saying within your scanning technology, orders were up 43%. What if anything is driving that, if there is something in particular, or is this just across the board?

Well, there’s quite a few different things. I mean, we listed some of those, so the coding, date coding, marking, kind of market is very strong, and we sell to all the players there.

Industrial converting and robotics are both doing pretty well for us. Metrology applications are doing well for us.

The OCT was good for scanning as well. We invest in medical application, but that is with our scanning technology via hole drilling. We play in two different parts with via hole drilling, so we’re in the mechanical part with our spindles and that was down high single-digits reported and sort of flattish organic. So that wasn’t great. But the laser via hole drilling, we do the beam delivery, and that was pretty good.

Gotcha. Very helpful. And then one more question, I’ll hop back in the queue. Just as it relates to your free cash flow, assuming free cash flow holds altogether throughout the year, you should have roughly $10 million or so of net debt remaining on the balance sheet. And I know you called that there were some bolt-on transactions in the sort of $20 million revenue range that you were looking at, but given the Firepower you would have, I would think that there’s probably multiple avenues of capital allocation that you could explore. Can you give us your refreshed overview of capital allocation and the various options and your likelihood to explore each of them?

Yes. I only answered that. I think you’re right on the math. I think you get down to something around $10 million net debt level. We are looking at a number of bolt-on acquisitions relatively smaller in size that we have some confidence in that we’ll get close in the second-half of the year. So that’s going to still provided us with some additional capacity to do something. I don’t see anything larger coming in the second-half of the year. And so when you look at where else we can look at other than paying down debt, where else can we look at reallocating that capital, certainly at these price levels, the stock becomes a lot more attractive to buy for us. And so that’s something that we’re going to take a hard look at. We’ll see how t it trades over the next couple of days here, and then, we’ll really take a relook at that.

And can you just remind us of your color authorization if any?

$10 million.

Thank you.

[Operator Instructions] Your next question comes from the line of Jim Ricchiuti from Needham & Company. Your line is now open. Please go ahead.

Thank you. Good morning. You mentioned that there was some business that was pulled in - some orders pulled in. Was that mostly in the electronics area? John?

Some of it definitely was in microelectronics, which was the same as in Q1, Jim, but not all of it. We just - it’s one of these general trends that we saw a few things we had rolled up that customer sector we have that product now. And so we’re not going to say no to that. I would say probably the majority was microelectronics, but not exclusively so.

Okay. So how should we think about seasonality in the business, particularly as we look out to Q4?

Yes. I mean, it’s - we have not really wanted to view there to be a Q2 to Q3 down cycle, but when you really analytically do it, you’ll see that pattern. And with a rebound where Q4 is normally higher than Q3, in many cases higher than Q2. But Q3 is sort of the bottom out point of the year. And so the guidance reflects that.

Okay. And, Robert, you gave some color as to how we should think about SG&A and that appears to be improving up as you make some investments. Should we see any major changes in R&D over the next couple of quarters, is that also an area that’s going to bumping up your expanding, I think in R&D center in China?

Yes, it is. And part of that in the guidance, I think you will see for, at least, for the third quarter, I think you’ll see it hovering closer to around 9% of sales. And as you get into the fourth quarter, you’re probably still sitting around that level, on a 9% of sales level. So we have increased investments in a number of projects. We have a lot more designing activities going. So as you know, given our design in cycles, that’s going to really start to benefit us next year. And so this is something that we feel very confident about it.

Okay. And two follow-ups, you may have given this out, I may have just missed it. But did you say what Applimotion contributed in the quarter?

We didn’t, but if you do the math, we had - we were up 5% on an adjusted revenue basis, we were up 5% on an organic basis, and foreign exchange was roughly $4 million, so…

Foreign exchange in Applimotion kind of offset.

And the other thing that I didn’t so I think you gave it out was G&A - what’s G&A going-forward?

No change in terms of the guidance for the full-year. So, I still expect depreciation to be somewhere around $7 million, but DNA in total around $19 million. So there is no real change there.

Okay. And just from a macro standpoint, as you look out at some of the geographic markets has been, a lot of noise. I’m kind of curious what you’re seeing in some of your major geographies, particularly in Asia and China, as well as…

China has been kind of stagnant for us. And but they didn’t change. I mean, it’s been that way for a few quarters now. So I don’t know that we saw any big surprise there. It has been weak. The PMI there now is sort of 47, which is not really expansionary. Europe, I think, Robert said is a mix, because we have some applications through certain customers that are very strong in Europe with date coding and some other things. So Europe is not weak across the board for us. But there are pockets that are weak and then the U.S. industrial is pretty good and healthcare has not been good.

Yes. And, just given the mix of business should we assume that - and particularly with - as you implement lean, get the benefits of some of the changes you’ve made in manufacturing. It sounds like we should assume your margins move up from here all-else being equal. So, is it fair to say?

Yes. From a gross margin perspective that’s right We’ll continue to expand those.

Yes. Okay. Thanks a lot.

Thanks, Jim.

Yes.

Again I would like to remind our participants [Operator Instructions] As there are no further questions on the phone lines at this time, I would like to turn the call back to Mr. Roush.

Thank you, operator. So, I’ll conclude today’s call by saying we’re pleased with the company’s progress in the first-half of the year. We’re getting a solid level of growth in a macro-environment that’s somewhat mixed. Our talent, our portfolio, our technology, and our strategic capabilities, are all better than they were a year ago. On the whole, we’re executing very well to company. Our balance sheet and cash generation are strong, which gives us the flexibility to further improve the company through acquisition. So all of that set us up very well to continue our strong performance in the second-half and deliver on the goals we set for ourselves for the year. We’re very proud of the company that we’ve built here at GSI over the last several years. We see significant opportunities in our future. And we’ll completely focus on taking advantage of those. We appreciate your interest in the company and your participation in today’s call. I look forward to joining all of you in several months on our third quarter earnings call in early November. So, thank you very much. Today’s call is now adjourned.

That does conclude today’s conference call. You may now disconnect.