Novanta Inc.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Group 2013 First Quarter Earnings Conference 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) I would now like to turn the call over to the Chief Financial Officer of the GSI Group, Robert Buckley. You may begin your conference.

[Robert Buckley:]

Thank you, Mike. Good afternoon and welcome to GSI Group’s first quarter 2013 earnings conference call. With me on the call is John Roush, Chief Executive Officer of GSI Group. If you've not received a copy of our earnings press release, you may get one from the Investor Relations 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 the call, we need to remind everyone of the Safe Harbor for 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 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 of 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 measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website. I am now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

[John Roush:]

Thank you, Robert. Good afternoon everybody. Welcome to our call. We do appreciate your continued interest in the company. So today, we are pleased to announce our results for the first quarter of 2013. This is the first quarter where we’re now adding in the results of our NDS acquisition for most of the quarter as the deal closed on January, 15th. On a whole, we are happy with the results which in my view reflects solid performance across the company even given the mixed economic picture that we still face. Our revenue was $83.1 million and our adjusted EBITDA was $11.5 million; both figures were in the upper half of the guidance ranges we have previously provided. GAAP earnings per share from continuing operations were $0.04 which was impacted by the NDS purchase accounting, acquisition related fees as well as restructuring expenses related to our ongoing efforts to streamline and focus the company and Robert will cover the EPS results in more detail in his section. So during Q1, we saw an improving demand picture in a number of areas. Our reported revenue of course was up 28% year-over-year due to the inclusion of NDS which added $18 million to the revenue line. But if you look at the base GSI business excluding NDS, we had organic revenue growth of 1% versus Q1 of last year. We had total orders of $86.6 million resulting in a book-to-bill ratio of 1.04%. These outcomes are more favourable than what we saw on the base business in Q4 of last year. Obviously, the biggest news for us in the quarter was the acquisition of NDS; we now have the quarter under our belts with the team and we are very excited about the future prospects of the business. From a tactical standpoint, the integration of NDS has gone well. The technology capabilities and customer franchise are everything we had hoped they would be. The biggest challenge we face is really the transition and ownership of the business from private equity to a strategic growth oriented company. The NDS culture had evolved in recent times in the cash conservation and risk of aversion relative to growth opportunities. As we get to know the team the customers in the landscape, we see significant opportunities. We are currently working on the integration of the global sales channels across NDS and some of the GSI medical product lines. There are also join key account visits underway. One of the most important opportunities for us is that throughout ownership of NDS, we opened up a number of additional acquisition and collaboration opportunities that were not realistic for us before hand. In terms of financial performance as I mentioned, NDS delivered $18.4 million sales in Q1 and is forecasting about the same number in Q2, with profitability inline with our expectation. In previous comments in March of this year, I had noted a general softening that we were seeing in the medical markets during the first few months of the year. This dynamic impacted NDS as well as some of our other GSI medical product lines. In our view, this slowdown was the result of market confusion related to the implementation of the U.S. medical device tax as well as uncertainty about Medicare and Medicaid reimbursement rates for the year. Since the March timeframe, we have seen an improvement in medical order rates and we now believe this slowdown was really a temporary drop in our overall demand. The second NDS I think we had mentioned at that time was a move by one of NDS’ OEM customers to dual-source their purchases from NDS. I had multiple meetings with this customer before the deal closed and I recently have the opportunity to meet again with their senior management. We are disappointed by the decision coming as it did so soon after we acquired the business. Their decision relates to longstanding policies and practices that NDS had in effect related to technology and exclusivity thereof. The good news is that despite the dual-sourcing, we retained a significant portion of this customers business and there is now good channel communication between the two companies at the top. We are reviewing the policies and practices that created the original concerns and we’ve had the chance to present our broader medical capabilities to this customer. There maybe opportunities for future growth and share gains. To summarize the overall situation of NDS, we are very pleased with the acquisition and with the capabilities and opportunities in this business. We believe it will bring benefit to GSI for many years to come. So turning to some of our other growth platforms, during Q1 we saw a strong demand in our Scanning Solutions platform which grew sales by 49% year-over-year and enabled our overall laser scanning product line which is our largest single product line in GSI to grow 6% year-over-year. Over the last year, our Scanning Solutions have been designed at the numerous applications across the industry and our sales are expected to be in the $15 million range for the full year 2013. So we are well on our way to achieving our strategic goal. Our other growth platform is Fiber Lasers. In Q1, our sales more than doubled versus a year ago with a book-to-bill ratio of 1.8%. Our Fiber Lasers sales are now at an annualized revenue run rate in the range of $10 million to $12 million per year with an additional growth occurring throughout the year; but at lower percentages year-over-year than we've seen in the past when sales were doubling or tripling on a year-over-year basis. We now offer products up to 3 kilowatts and we have a great deal of focus on implementing our new Fiber Laser architecture which will provide a significant step change reduction in our bill of material cost. Obviously, the cost structure of our Fiber Lasers products is the key for our future success. We are actually restricting our growth in high power products now based on the low gross margins of these products. We are selling all enough units to adequately seize the market while minimizing the impact on our financial results. Our new architecture is intended to significantly close the gap on bill of materials costs and enable us to achieve closer to our average overall gross margins on kilowatt class Fiber Lasers. There is still a significant amount of effort directed at finalizing qualifying and launching the new architecture in collaboration with our manufacturing partners. The launch will occur in stages over the latter part of 2013 and into 2014, so that effort is our primary focus for the balance of this year. Other areas of growth in Q1 included Westwind spindles which had mid-single-digit year-over-year growth as a result of improved market conditions and very low stock levels at customers. At this point, we expect the improved volumes at Westwind to be sustained at least through Q3 of this year. Though it is worth noting that even with the improvement, Westwind revenue is still 25% to 30% below its prior highs from the 2011 to 2011 timeframe. The restructuring that we did at Westwind last year is helping profitability. With the recent increase in demand, our lead times are beginning to lengthen. Time will tell as to whether this recent increase in demand will be sustained and whether our capacity increase would be warranted. For the most part, we intend to use overtime and temporary resources to address the increases. At this point, we remain cautious with respect to Westwind demand. Our scientific laser business also had mid-single-digit growth in the quarter. This was really a function of program timing on a large [Pedwalk] laser contract that we have with the French government. The general market for scientific lasers remains very weak due to sequestration and ongoing fiscal issues with governments around the world. Our Q1 book-to-bill ratio in scientific lasers was only 0.59. We expect to see some sequential deterioration in that business through this year, though this will be partially offset by the revenue from the French program that I mentioned. We also have an outstanding tender on another large Pedwalk program that would deliver similar levels of revenue to the French program over the next several years beginning in 2014. We don’t expect a decision on that tender until later this year but we believe our proposal is highly competitive. So we're cautiously optimistic on that front. As previously announced, we also completed the sale of our Semiconductor Systems businesses to ESI. The transaction closed on May 3. The process was lengthy and was impacted by weak and deteriorating conditions in the semiconductor capital equipment industry which declined over 15% last year. The hope for second half recovery never materialized. Furthermore, the DRAM laser repair application virtually disappeared from the market place over the last year. These two factors led the repeated forecast changes in our business and made it difficult for any buyer to readily assess valuation. In the end we believe the outcome is the best one as we are able to close this chapter in our strategic transformation and the business itself, and the employees had the best chance of thriving under the ownership of ESI which is a company with substantial presence and capabilities in these end markets. In Q1, we also continue to make progress in building our organization and our account base. During the quarter significant new hires included a new leader for our laser scanning business, the sales leader for our radiology display products, global sales leader for laser products in total, a production leader for our fiber laser side, a finance director for laser products and a global human resources director. We continue to find the talent is attracted to the unique opportunities and challenges inherent and being part of the transformation of GSI. Each of these individuals brings new talents, capabilities and passion into our organization and makes us stronger company. It's better aligned to achieve our ultimate strategic goals. As we look forward at Q2 and beyond, I would like to offer some perspective on the end markets. In the medical market, which accounted for 36% of our sales in Q1, the initial sluggishness that we saw early in the year seems to have abated. We expect this market to be relatively healthy and we hope to see sequential increases through the year. As we fully integrate NDS and begin to exploit the opportunities across our entire medical product offering, I expect to see an increased growth opportunity. The industrial market, which accounted for 40% of Q1 sales, remains stable with slight growth. Consumption growth in most segments remains modest so manufacturers generally are not adding much capacity. As indicated in the Purchasing Manager Indexes the Chinese manufacturing sector is growing in the 7% to 8% range which is several percentage points lower than the prior year with significant month-to-month variability. These factors will likely constrain our industrial business to year-over-year growth in the low-single-digit at best. The microelectronics market is showing some signs of improvement as I mentioned with respect to the last one business. In most cases, customer volumes in microelectronics are still down from the year ago but we are seeing sequential improvement. It’s possible though far from certain that we will see some year-over-year growth in the second half in microelectronics. As I mentioned the scientific market remains weak. Government and academic funding is down across the board. We have seen weak book-to-bill ratios for all scientific products, long approval cycles for new orders, and request for delivery push-outs on some existing orders. One bright spot for us has been the large Pedwalk market, but in general, these programs will not be sufficient to enable overall growth in the San market. We do expect to see declines throughout the year. So our overall posture on the markets and the economy remains cautious and mixed. There are some signs of improvement in some areas but the momentum is not necessary broad based and it is not yet to send itself for any length of time. So we have generally taken a conservative deal of revenue, we are focused on expense control and we have been very selective with investment. I believe that’s the right stance for the company at this time, but obviously we are prepared to respond if the markets present outside opportunities as we move through the year. So with those comments, I would now like to turn things back over to Robert to cover the financials in more detail.

[Robert Buckley:]

Thank you, John. During the first quarter of 2013, GSI generated revenue of $83.1 million, an increase of 27.5% from $65.2 million in the first quarter of 2012. The NDS acquisition accounted for roughly 28% revenue increase year-over-year while changes in foreign exchange rates adversely impacted revenue causing a 1.2% decrease in revenue. Excluding the impact of the NDS acquisition and changes in foreign exchange rates, the company's revenue increased nearly 1% compared to the first quarter of 2012. As a result of the NDS acquisition and restructuring activities, the company realigned its reporting segments resulting in two segments, Laser Products and Precision Technologies. The segment realignment resulted in laser scanning product line being moved to our Laser Products segment and NDS being added to our Precision Technologies segment. Sales of our Laser Products segment for the first quarter of 2013 increased 4.6% to $46.2 million compared to $44.2 million one year ago. Growth was primarily generated from our scanning solutions and fiber laser products as we continue to release new products in the market and further penetrate new customers. Sales were 1.3% adversely impacted by the fluctuations in foreign exchange rates. Sales of our Precision Technologies segment for the first quarter of 2013 increased 75.5% to $36.9 million from $21 million in 2012. The NDS acquisition contributed approximately $18 million in sales year-over-year. Changes in foreign exchange rates adversely impacted our sales by roughly 1% compared to the prior year. Excluding NDS and the impact of exchange rate fluctuations, revenue declined approximately 11%, which were largely attributed to a temporary market decline in the patient monitoring market impacting our medical printers business and volume declines in our optical encoders product line which was impacted by a decline in the data storage market. Turning to profitability, first quarter gross profit was $33.2 million or 39.9% gross margin, compared to gross profit of $27.7 million or 42.5 gross margin during the same period last year. Laser Products first quarter gross profit was $18 million, reflecting a 39% gross margin compared to $18.6 million or roughly 42.1% gross margin for the same period last year. The 3.1 percentage point decline in gross margin was primarily attributed to product mix, specifically an increase in fiber laser sales. This product has gross margin significantly lower than the company average. As John mentioned, we're currently taking significant measures over the course of the year that, if successful, we expect to lower the cost of our fiber lasers and improve their profitability going in to 2014. In addition to a lesser extent, gross margins were also adversely impacted by lower absorption in our manufacturing facility for specialty lasers as a result of delays in government funding in the scientific laser market. Precision Technologies first quarter gross profit was $15.2 million, reflecting a 41.3% gross margin compared to $9.3 million or 44.1% gross margin in the same period last year. The NDS acquisition accounted for $7 million of the increase in gross profit from the prior year. The increase in NDS gross profit include amortization of developed technology and amortization of step-up in inventory value of $900,000 related to the acquisition during the three months ending March 29 for 2013. This increase was partially offset by a decrease in gross profit dollars from a medical printers and optical-encoders product-lines primarily as a result of the decline in sales volumes. However, the 2.8 percentage point decrease in gross margins was predominantly caused by purchase accounting adjustments as a result of the NDS acquisition. Operating expenses amounted 32.2 million for the first quarter of 2013, which included 2.2 million of amortization of intangibles, 2 million of restructuring expenses and 1.1 million of acquisition related fees. This compares our operating expenses of 24.9 million in the first quarter of 2012. The first quarter 2012 operating expenses included 700,000 amortization intangibles and 2.2 million restructuring expenses. Research and development expenses were 6.6 million or 8% of sales in the first quarter of 2013 compared to 5.8 million or 8.9% of sales in the first quarter of 2012. R&D expenses increased in term of total dollars primarily due to the acquisition of NDS, offset by lower employee compensation as a result of our 2011 and 2012 restructuring plans. SG&A expenses were 20.2 million or 24.4% of sales in the first quarter of 2013 compared to 16.2 million or roughly 25% of sales in the first quarter of 2012. SG&A expenses increased in terms of total dollars due to the acquisition of NDS, which accounted for the majority of the increase in the quarter. To a lesser extent, SG&A expenses increased from higher employee related cost through the strategic hires made in 2012. These increases were offset by lower depreciation expenses and lower facility spending as a result of the five consolidation actions that security through our restructuring programs. Adjusted EBITDA, a non-GAAP financial measure which includes the adjustments noted in the non-GAAP reconciliation attached to our earnings press release was $11.5 million for the first quarter of 2013 compared to 9.9 million in the first quarter of 2012. Diluted earnings per share from continuing operations was $0.04 in the first quarter of 2013 compared to $0.03 in the first quarter of 2012. Our earnings per share are largely impacted by one time charges related to restructuring and acquisition related fees as well as fluctuations in foreign currency exchange rates. Consequently we continue to believe that our adjusted EBITDA provides the most meaningful of the company’s operating and financial performance. We believe adjusted EBITDA allows for better viewing of operating trends and allows for better analytical comparisons. However we also recognize that we will be beginning to exit the first chapter of our transformation of this company. Therefore you can expect us to some providing further guidance around an adjusted non GAAP earnings per share metric later this year. Turning to the balance sheet as of March 29 of 2013 cash and cash equivalents was $36.3 million with total debt of $103.1 million. In the first quarter of 2013 GSI borrowed $16 million under the revolving credit facility to finance the acquisition of NDS. The weighted average interest rate on the senior credit facility was 2.76% during the first quarter of 2013 versus 3.48% during the first quarter of 2012. Company completed the first quarter of 2013 with approximately $66.8 million of net debt as defined in the non GAAP reconciliation table in our earnings release. Operating cash flow for the first quarter of 2013 was $4.6 million compared to $9.1 million of operating cash flow in the first quarter of 2012. Operating cash flows include the cash flows of both continuing and discontinuing operations. Discontinued operations were cash flow negative in the quarter. Cash provided by operating activities for the first quarter of 2013 was impacted by cash restructuring payments of $1.8 million, acquisition related expenses associated with the NDS acquisition of $1.1 million, and an increase in accounts receivables of $6.7 million due in part to the acquisition of NDS. And then parts lower than expected shipments in January as a result of the consolidation of the company's Bedford elections in Massachusetts manufacturing facility. As mentioned in prior earnings releases, the company reached a settlement with the IRS regarding an IRS audit of 2000 to 2009 tax years. The proposed settlement was submitted to Congressional joint committee on succession in December our 2012. There are no new updates as to the status of the settlement. However we continue to believe our year ending contacts receivables of $16.1 million related to this audit is accurate. Turning to the second quarter of 2013, we expect revenues for our continuing operations to be in the range of $84 million to $86 million. This represents sequential growth from the first quarter’s results. Turning to profit, we expect second quarter of 2013 adjusted EBITDA to be in the range of $11 million to $12.5 million. We expect R&D expenses to be around 8% of sales, SG&A expenses excluding intangible amortization of restructuring in the range of 24% to 25% of sales. We expect to pay cash taxes for the year in the 15% to 20% range, however given local statutory rules, cash taxes paid in the single quarter can vary significantly from quarter-to-quarter. And because our acquisition and divestiture activities or US GAAP tax rate will continue to fluctuate for at least another quarter. However, for the full-year, I would expect it to normalize around the 32% range. Depreciation and amortization expenses should be around 5.5 million. Finally, we expect 2.5 million to 3.5 million of restructuring expenses in the second quarter of 2013. Nearly, half of this is related to the NDS acquisition. While the remainder is further cost reduction in our laser product operating segment to further integrate the organizational and selling structures and to help upgrade the employee talent. On April 09 of 2013, we entered in to an agreement for the sale of our Semiconductor Systems business to Electro Scientific Industries or ESI for $80 million in cash subject to customary closing conditions. The transaction was consummated on Friday May 3, 2013. We expect net cash proceeds of approximately $5 million after paying out restructuring expenses, divestiture related fees and final compensation payments. This concludes our prepared remarks and I would like to open the call up to questions. Operator?

[Operator:]

(Operator Instructions) Your first question comes from the line of Lee Jagoda with CJS Securities. Your line is open.

[Lee Jagoda:]

So you spoke a lot about growth in many of the product lines and with the addition of NDS as well. However, if I look at Q2 on a year-over-year basis, the guidance implies organic declines, so you can talk a little bit about the offsets?

[John Roush:]

Well, on excluding NDS Lee I would that Q2 is organic flat, I mean it's probably down a little bit on the face of it, but there is some effects that we put it in there, within around of flat, I don't see there is that much different. I mean I guess you go to the bottom, and the range you are going to get a little bit of a decline.

[Lee Jagoda:]

And again you talk about fiber lasers and scanning solutions growing very quickly as well as medical bouncing back, yet we are only looking at flat growth, so aside from scientific which I think you pretty articulate about it being down, what else is dragging you down?

[John Roush:]

Well, some of these areas where we are not seeing a lot of up and even maybe a little down, it would be in the CO2 laser business. I mean not big percentage, but it's a larger business, it's not trending up at the moment. You have in the JK laser business some of the legacy technologies, so we have the fiber going up but they have some legacy [land] pumps in other areas. Actually I think Robert mentioned in his remarks, but the printer business is down year-over-year. And then we think that the order rates are coming back and it will show some growth as you go through the year with this, and then another area is the encoder business, which kind of has two parts to it, it has the data storage part, which is a very specific application for the track writing for disc drive production, and then all the rest of the encoder business which serves a variety of applications some medical, some industrial, some microelectronics, and so if you would have bifurcate the encoder, data storages is down significantly and then the rest of it is actually up. So let me just -- it’s kind of a mix bag in there of different things going in different directions, but I think as you look into the second quarter there seem sequential growth, that is more indicative of demand and the profile of demand. There are some tougher comparisons as John mentioned as we get cycle over a difficult second quarter of last year.

[John Roush:]

And that especially the data storage, right, where there was a large project done in the data storage, the revenue model for the data storage encoders is basically upgrades when the production of capabilities are upgraded in the disk drive producer site, they will buy a lot of our products, okay. And then they use that for while and then they will upgrade again. So it tends to be very episodic in data storage and we had a bunch of business Q1, Q2 last year had just kind of almost zero this year.

[Lee Jagoda:]

Okay. And then you provided Q2 revenue and profitability guidance, but you didn't comment at all on the previously issued annual guidance, can you provide an update there?

[Robert Buckley:]

We haven't anything at this point, I mean really usually our practice is we provide the full year guidance once at the beginning of the year, once midway through the year, they gave a better perspective than any between as the quarterly updates. So I wouldn’t say that the lack of update is indicative of anything.

[Lee Jagoda:]

Okay. And one more question, and I will hop back in the queue. Robert, can you just quantify the negative effect of discontinued ops had on cash flow in Q1?

[Robert Buckley:]

Roughly a $1 million.

[Operator:]

Your next question comes from the line of Stephen Stone from Sidoti.

[Stephen Stone:]

I guess my first question here is on the NDS acquisitions, the growth categories you were talking about there is radiology, do you still see kind of growth for NDS through the year?

[John Roush:]

Well, I mean, I guess on a sequential basis, we do think that there -- you know the second half would be greater than the first half, I mean I'm not sure quarter to quarter to quarter all the way through the year it’s guaranteed. So there are two segments to the business, there's the core and larger businesses, the surgical minimally invasive part of it and then the second part is radiology. They actually have two different brand names, NDS really being the surgical brand name and Dome being the radiology brand name. So normally over the past few years the surgical business has been the higher grower than radiology, but you know this dual sourcing thing that came along is really hitting the surgical part of it more than, it doesn't affect radiology. So I think you can get kind of a temporary change in the growth profile. We also have some significant new products coming out in the second half in radiology that can give a lift there. So I think our growth rate this year in the two product lines within the NDS maybe different than what the overall trend has been.

[Stephen Stone:]

Okay. And now that you've had more time of NDS, I guess under the umbrella here, any cost savings you can see combining the two businesses here?

[John Roush:]

There are and we are working on this, I mean recognizing this was not a cost based application -- acquisition rather, it wasn’t done specifically just so we can drive our cost. It was to kind of enter a new market and get a greater medical presence. But having said that, there are a number of sales channel opportunities where offices can be combined that’s where two companies are both had standalone offices. So we are doing a number of things there. We haven't kind of given an estimate of it, some of that's contained in our view of the EBITDA there.

[Operator:]

Your next question comes from the line of Joe Bess from Roth Capital Partners.

[Joe Bess:]

John, thinking about the NDS acquisition and you kind of commented a little bit about it in your opening remarks, but can you dive in a little bit deeper where you potentially see some opportunities for share gains coming under the dual source issue as well as with some of the other customer issues that you have?

[John Roush:]

Look, we're not going to be labeled as one customer. First of all, the whole relationship is just under NDA and the customer takes it very seriously. So I mean I can’t really kind of go in to all kind of discussions about what we might do there. But suffice to say, we're getting to know that customer and they made a decision that they had been thinking about for a long period of time, awkwardly made it right at the beginning of our ownership period and we understand why they did it. We're disappointing in it, but we're now in a dialogue with the company and I think they better understand our strategy and our capability. There is the opportunity going forward to capture back some, probably not all but some of the shares that they took but also they expose them to other product lines and it's a pretty significant customers and they’ve looked at all the things we do in medical now and there are opportunities. I can’t really comment on what they are and which ones. None of them are going to happen within next three to six months, but I think it does present an opportunity for us and that there is two reasons why NDS is I think really important to us. One is just we're more important to the customers now. So we have more angles to have the conversations. In some cases we have customers where we're significantly penetrated with based GSI products and not penetrated with NDS. And so we're having those conversations to try to almost pull NDS into those relationships and then we have a slip of that which is the case of the one customer that dual source us where we can actually possibly bring GSI products along into that relationship. So you have this two way dialogue with the OEM customers about the two sets of offering and in all cases, we moved up on the radar screen of the customers. The other reason is just in the acquisition and partnership and collaboration around, we have much more sort of points of relevance now to various companies in terms of what would be a sensible acquisition. So we feel like our opportunity set is gone up. It's really just a measure of our relevance within the medical space. And I think that’s not necessary going to come to fruition again in the next three or six months. You never know, I think normally the gestation period is a little longer than that, but the OEM relationships and the acquisition and partnering, when you look one to two to three years out it's going to be an impact for us.

[Joe Bess:]

And then you guys gave some great color on your end markets, so I was hoping you can talk a little more about on geographic basis and then more specifically, what you guys are seeing at this time?

[Robert Buckley:]

Well, it is Robert. It gets a little difficult to talk about our geographical sales because the challenge that as a component provider is we fell into a manufacturing facility and that manufacturing facility then sales a product into an end market. And so the difficulty is, is our end market, our geographical sales really relevant to the ban, I think the answer is in most cases, no. Now we do look at the Purchasing Managers Index and I would say that’s fairly indicative of these spikes that we see in overall demand, but you are not necessarily going to see, when we see a down turn in the Chinese market as an example but not necessarily going to see that in our sales into China. But we are going to see in a little bit more across the board because of the facilities that sell into China, our customers selling into China.

[John Roush:]

I think what you are saying is mediocre GDP growth if any in US, in Japan and western Europe, those are the consumption economies and they are not pulling very hard on the worlds manufacturing sectors, and China is the biggest manufacturing sector and lot of our stuff goes in the China, our components into China but then they are bound for the US or Europe ultimately. Some of China’s manufacturing sector obviously is for the domestic Chinese economy, but when the growth has decelerated there from 10% or 11% to 7% or 8% that’s meaningful reduction so the factories there are not running as hard and we just haven’t seen the volumes. Quite of bit of that is the micro electronics sector, so that really does come back in a meaningful way, that could make a difference for us. We don't have a ton of that built into our view, we have a very modest kind of move forward quarter-to-quarter-to-quarter. Last year a lot of people were saying there is going to be big recovery and didn’t happen, so we are kind of almost taking the more cautious approach this year and saying we are just not going to believe it until it is in the order book. So now we have west wind, you know it is kind of in the order book. Q2 and Q3 the orders are there, but Q4 is not in the order book and some of the other product lines haven't seen quite the resurgence. So we are just taking that cautiously, but I don't know that you can then really take our sales into the region and really draw great conclusions from it, as Robert said.

[Joe Bess:]

Okay, great. And then Robert what is your guidance for free cash flow for the year as well as CapEx?

[Robert Buckley:]

From the CapEx perspective, it’s probably in the $7 million to $8 million range. We have been underspending a little bit but roughly around that in the $7 million to $8 million range. And then I have then provided any sort of guidance on the cash flow for the full year. We have to work our way through that as we finish up the purchase accounting on NDS and then the effects of that and its implementing a new structure forward.

[Operator:]

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

[John Roush:]

Thank you, operator. So in conclusion I would say that on balance we are pleased with the Q1 results. The company is executing well on all of the design plays that we have called. None of them have been easy, but we are accomplishing our stated goals. The complexion of the company and the team has improved. We are moving in the direction of our ultimate strategic vision with several key milestones being accomplished this quarter. The financial results were solid in our view. They are not where we would ultimately want to see them but they are moving in the right direction and we are becoming a more predictable company as well. As I mentioned before the external landscape still creates some uncertainty for us but we see the beginning of an improving picture for the rest of the year. As a company we are better positioned to capture opportunities in an improving scenario. We are also better able to cope with any further headwinds we may encounter. We have a roadmap that is guiding our strategic priorities in our progress as a company and it’s becoming clear as we move forward. We have a strong leadership and team in place with significantly enhanced capabilities. Each and every member of the team is proud of what we've accomplished and committed to delivering on all of our goals and objectives for the company going forward. In closing, I would like to mention that we will be presenting at the CJS Securities Summer Investor Conference on July 9 in White Plains, New York. We hope to have the chance to meet with some of you at this event. In any case we look forward to joining all of you on our second quarter 2013 earnings call which will happen in August. Thank you very much for your continued interest in GSI and the call is now adjourned.

[Operator:]

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