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GSI Group, Inc. (NASDAQ:GSIG)

Q4 2012 Earnings Conference Call

March 12, 2013, 17:00 PM ET

Executives

John A. Roush - CEO

Robert Buckley - CFO

Analysts

Lee Jagoda - CJS Securities, Inc.

Jim Richiutti - Needham & Company, LLC

Stephen Stone - Sidoti & Company

Joe Bess - Roth Capital Partners

Kevin Beck - Paradice Investment Management

Operator

Good afternoon. My name is Candice and I will be your conference operator today. At this time, I would like to welcome everyone to GSI Group 2012 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After our speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Robert Buckley, CFO, you may begin your conference.

Robert Buckley

Thank you very much. Good afternoon, everyone, and welcome to GSI Group's fourth quarter and full year 2012 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 achieved 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 risk and other factors that could cause our future results to differ materially from our current expectations.

Any forward-looking statement made today represents our view only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. You should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During the 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 the most directly comparable GAAP measure 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 at www.gsig.com.

I'm now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

John A. Roush

Thank you, Robert. Good afternoon, everybody, and welcome to our call and we appreciate your continued interest in GSI. So as I reflect on 2012, I'm really extremely proud of the company's progress relative to our aggressive agenda of change and improvement that we outlined for the year.

The fact that the progress we've accomplished during the year of weaker and more challenging market conditions resulted in a financial performance that I would say is less impressive than we would have preferred, but it in no way diminishes what our team accomplished and in fact, it makes it even more impressive.

In the past 12 months, we have successfully implemented our 12x12 consolidation program, build a talented, experienced and highly capable management team, upgraded numerous systems, processes, infrastructure and controls around the company. We completed the divesture of two of our systems businesses; that would be Control Laser and Baublys. And we believe we're close to completing the final divestiture which is Semiconductor Systems.

We also took two important strategic steps during the year. One, we worked with an outside industry expert firm and completed an exhaustive market study of the medical component space to map out medical acquisition opportunities. And then we closed on amended and extended a $125 million credit agreement with a group of six Tier 1 banks led by Bank of America, which closed in December.

These two steps enabled us to increase our acquisition capacity, reduce costs, improve the terms on our agreement and put us in a strong position to complete the acquisition of NDS Surgical Imaging in mid-January, an $82.5 million transaction. So all in all, 2012 was a year of significant transformation for GSI. We accomplished a great deal.

As I did mention, the progress was accomplished against a backdrop of a weaker market than we expected in overall capital equipment and also in the microelectronics equipment space, in particular. Nonetheless, we delivered solid results. In Q4, our continuing operations, excluding NDS which did not close until January, delivered revenue of $66.4 million and adjusted EBITDA of 9 million. Both of these figures were within our previously communicated guidance ranges.

On a full year basis, we delivered revenue for the company of $271 million and adjusted EBITDA of $42 million which is a 15% margin, despite a significant drop in business from our prior-year results and our plan for 2012. So on a year-over-year basis, our 2012 revenue was down $32 million or 11%.

However, the drop was mostly in two areas; our Westwind spindles business which was down approximately $19 million year-over-year and the impact from our adoption of the ASU 2009-13 revenue recognition rule in 2011, which resulted in approximately $9 million of revenue in 2011 that was essentially one-time and did not recur in 2012. Absent these items and some currency movement, our business was essentially flat year-over-year in revenue in a very difficult market.

We also ended the year with a very strong balance sheet. Our cash balance exceeded our total debt as of the end of the year which put us in a very strong position to be able to do the NDS acquisition in mid-January. So Robert will cover all these financial results in a bit more detail in his section.

In terms of the organization, we made a lot of progress here as well. During the latter part of 2012, we made a number of key additions to our leadership team. As previously announced, we brought in Matthijs Glastra as Group President of our Laser businesses. He had a successful 18-year career as an Executive with Philips. Our new site leader for our Bedford operations joined us from Ingersoll-Rand where he led operations with headcount in excess of 1,000 people.

Our new Continuous Improvement Leader for the company who was driving productivity efforts across all of our sites is a veteran of Crane and Danaher. And in early 2013, we brought on board a new Vice President and General Manager of our Cambridge Technology Scanning business who has significant general management leadership experience with Danaher, American Power Conversion A123 and GT Advanced Technologies.

We also recently hired a new Vice President of Sales across all of our laser businesses who have previously held significant sales and product management leadership roles with both Newport and Baxter.

So now some updates on some of our growth platforms. In Scanning Solutions, we saw another quarter of strong growth. Sales in the fourth quarter were up over 40% versus Q4 2011. On a full year basis, solution sales were up more than 25% year-over-year. Our funnel of solutions design wins and opportunities continues to expand. Our new Lighting II scanning product which has seen significant customer demand is an all-digital, integrated scanning system that has been designed for the highest levels performance.

This has been achieved by optimizing state of the art technologies in laser scanner control, communications, server drives, downloads, encoders and mirrors into one integrated platform that meets the requirements of the most demanding applications with high accuracy, high speed and low drift delivered under very high duty cycles. Based on current customer forecasts, we expect the solutions business being increased over 30% in 2013 versus 2012.

Our fiber laser growth platform also saw strong growth in the quarter with revenue two and a half times higher than what it was in Q4 2011. For the full year, our fiber laser business was nearly three times than what it was in 2011. During the year, we launched a number of new products including our 2 kilowatt and 3 kilowatt fiber laser offerings.

We also continued to work on our new FL3 and FL4 generations of our fiber laser architecture, which we expect to dramatically reduce our bill of material costs. We're currently scheduled to deploy the FL4 architecture into production by the end of 2013. Though we have seen some recent slowdown in order rates in fiber lasers, particularly in China, we still expect revenues to grow greater than 50% for our fiber laser business in 2013.

As you know, during 2012, we undertook a significant program to rationalize the site infrastructure of GSI, a program which we term 12x12; meaning the elimination of 12 sites during the year. This program is now essentially complete. The last major move occurred a couple of months ago when our Cambridge Technology Scanning business, which is the largest single business within GSI, was moved from Lexington, Massachusetts over to our headquarters location in Bedford, Massachusetts.

During the move, we had the benefit of a number of new operational leaders that joined the company in the latter part of 2012, who had significant experience with this type of site move. We executed on a very detailed plan with numerous contingencies and precautions. I'm happy to say the move was completed with only a few days of planned loss production and virtually zero impact of the business.

During the fourth quarter, as previously mentioned, we completed the divestiture of our Control Laser and Baublys laser systems businesses to Han's Laser and a $7 million transaction. We retain ownership of the building in Orlando, Florida with an estimated value of $6 million.

The only significant remaining open item from the 12x12 program is in fact a divestiture of the Semiconductor Systems business. This process is ongoing. The timing had been impacted by uncertainty around the timing and magnitude of the expected market recovery in semiconductor capital equipment.

So I'd now like to provide some updates on our NDS Surgical Imaging acquisition. As previously announced, we acquired the business on January 15th for a purchase price of $82.5 million which we financed with approximately $25 million from our cash balances and the remainder from the new credit agreement.

The business, which is based in San Jose, California, is the global leader in surgical visualization products sold to OEMs in that field, and it's also the number two global provider of radiology displays. We are now a few weeks into our ownership of the business. We're learning a great deal day-by-day about NDS and its capabilities.

To-date, the integration has gone very well. We've had a team on the ground since the day of the close and we put in place a joint integration team driving the entire program, which I review on a weekly basis with our senior management team. Things are going extremely well and most of the action items are on track.

I had the opportunity to visit NDS recently with our Chairman of the Board, Steve Bershad and layout our vision for growth in the medical space for the NDS employees and the management team. We've been very impressed with the technology, capabilities and the overall quality of the NDS business.

We've identified a number of areas for integration and collaboration across NDS and the GSI medical business within customer sales channels. We will be deploying these changes throughout the year.

As we have become more closely involved in the NDS business and we've gotten to know more about their forecasting process and their customer relationships, we have learned that some customers are communicating to us that their orders or their demand will be lower than previously expected in 2013.

The medical equipment market does appear to be experiencing headwinds related to the implementation of the 2.3% medical device tax, the uncertainty around Medicare and Medicaid reimbursement rates for this year. We've seen a similar dynamic in the GSI medical printers business where order rates in 2013 are down over 30% versus a year ago.

In one particular case, NDS faces a risk of losing significant market share of its large European OEM. These factors have led us to reduce our forecast for NDS somewhat from our prior estimates. While the forecast reduction for NDS is a bit of a disappointment to us, we believe firmly in the strategies that we've articulated to build out our medical components business so we can better serve the leading OEMs in this space.

The rise of the integrated operating room and the growth of minimally invasive procedures provide significant medium-term growth opportunities for us. The OR is a space with demanding requirements and regulations. There are a wide range of technology suppliers that provide various pieces of the puzzle in terms of components.

Our customers are the major equipment OEMs in this space and our strategy is to provide them more of the components and the enabling technology that they need to meet the evolving needs of hospitals, practitioners and patients. The NDS business provides us with substantial presence in the medical component industry and makes us a more valuable and credible supplier to these large OEMs we serve.

So in terms of the market outlook there, we look at business conditions going forward. We do have some concerns that have been increasing in recent weeks. The first of these is the medical market. As I mentioned, we have forecast reductions in both our NDS business and our medical printers business relative to where we had estimates at the start of this year.

Second, we are seeing some slowdown in industrial activity, particularly in China. This is impacting several businesses for us including industrial, lasers, MicroE encoder business and our color measurement business. Orders were actually reasonably strong out of China in January but slowed significantly in February and have remained quite slow into the first half of March.

Economic conditions remain choppy. Our OEM customers continue to avoid committing to forward order coverage and are maintaining minimal inventories. Thus, we're operating on extremely limited visibility. There is certainly the possibility that demand improves from what we see at this particular time, but based on all of these factors we do believe it's prudent to revise our full year estimates for 2013.

Robert will cover this in more detail in his section, but the revenue is being reduced by 10 million on a full year basis and EBITDA is being reduced by 5 million from the prior estimates.

So with that, I'd like to turn it over to Robert to provide more details on the financial performance. Robert?

Robert Buckley

Thank you, John. I'll now provide some additional details on the fourth quarter and full year 2012 results. During the fourth quarter of 2012, GSI generated revenue of 66.4 million, an increase of 1.4% from 65.5 million in the fourth quarter of 2011. Excluding the impact of foreign exchange, which was negative, revenue was up 2%.

For the full year 2012, GSI generated revenue of 271.5 million, down 10.8% from 304.3 million in the same period a year ago. Excluding the impact of foreign exchange, which was positive 1.2, full year revenue declined 9.6%.

Included in revenue for the full year of 2011 was 8.1 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, sales of our laser product segment for the fourth quarter of 2012 increased nearly 6% to 27.8 million compared to 26.3 million a year ago. This was primarily due to growth in our CO2 lasers and our fiber lasers, partially offset by decline in our specialty laser business line which serves the scientific market.

On a full year basis, sales of our laser product segment decreased 4.2% to 108.2 million compared to 112.9 million one year ago. Sales decreased by 4.7 million or 4.2% primarily due to a decline in sales in our specialty lasers which were adversely impacted by delays and government spending in the scientific laser market and for removing a few of the ultrafast laser models from the market to improve their product quality and profitability. This decrease was partially offset by a significant sales volume growth in our fiber lasers and increase in sales volume on our sealed CO2 lasers.

Sales of Precision Motion and Technologies segment for the fourth quarter of 2012 were down 1.5% from 39.2 million to 38.6 million in 2011. Westwind spindles business line declined over 2.7 million, driven by a protracted downturn in the capital equipment purchases in the printer circuit board market. The declines of Westwind were largely offset by growth in our scanning solutions business and to a lesser degree from growth in our medical printers and encoder business lines.

On the full year basis, Precision Motion and Technologies segment, revenue declined 28.1 million or 14.7% decrease compared to the prior year. The sales decline was largely driven by significant decline in demand in the microelectronics market, principally related to mechanical drilling of printed circuit boards.

Our Westwind spindles product line would serve this market, experienced approximately $19 million decline in sales as compared to 2011. In addition, the company recognized in 2011 a 7.7 million of net revenue with no comparable amount recognized in 2012. Orders that have been deferred on multiple-element arrangements delivered over multiple periods entered in prior to the adoption of ASU 2009-13.

Turning to our profitability. Fourth quarter gross profit was 27.3 million or 41.1% gross margin compared to gross profit of 27.8 million or 42.4% gross margin during the same period last year. The decline in gross margins was primarily driven by continued growth in our fiber laser product line, which has higher material costs and consequently lower gross margins than our company average.

We're currently taking steps that we expect will lower the cost of our fiber lasers and improve their profitability; including manufacturing efficiencies and designing a lower material cost product architecture. Laser products fourth quarter gross profit was 9.2 million reflecting a 33.1% gross margin compared to 9.7 million or a 37% gross margin for the same period last year. With nearly a 4 percentage point decline in gross margin was primarily attributed to product mix as the higher proportion of our sales were somewhat fiber laser and product lines.

Precision Motion and Technologies fourth quarter gross profit was 18.3 million, reflecting a 47.4% gross margin compared to 18.5 million or 47.3% gross margin for the same period last year. The overall gross margins were relatively flat. The reduction in gross profit dollars was primarily driven by the drop in sales from our Westwind spindles product line.

Operating expenses amounted to $24 million for the fourth quarter of 2012 which included 1.4 million of restructuring expenses and acquisition fees. This compared to operating expenses of 24 million in the fourth quarter of 2011. Fourth quarter 2011 operating expenses included 2 million of restructuring expenses.

Research and development expenses were 5.5 million or 8.2% of sales in the quarter compared to 5.5 million or 8.4% of sales in the fourth quarter of 2011. Dollars saved from our cost reduction initiatives have been reinvested in our strategic growth platforms, specifically our fiber lasers and scanning solutions.

SG&A expenses for the quarter were 16.4 million or 24.7% of sales compared to 15.8 million or 24.2% of sales in the fourth quarter of 2011. The increase is primarily due to investments and employee talent and recruiting costs which were partially offset by lower professional service fees.

Adjusted EBITDA, a non-GAAP financial measure which includes the adjustments noted in the non-GAAP reconciliation attached to our earnings press release was $9 million in the fourth quarter of 2012 compared to 10.1 million in the fourth quarter of 2011. The full year 2012 adjusted EBITDA was 41.6 million compared to 56 million in the prior year.

The decline in adjusted EBITDA for the full year was driven by approximately $33 million revenue decline in 2012 versus 2011. However, also included in the 2011 adjusted EBITDA was 3.5 million of net profit recognized on the 8.1 million of net revenue deferred under ASU 2009-13.

The company recorded diluted earnings per share from continuing operations of $0.44 compared to $0.08 in the fourth quarter of 2011. The $0.36 increase in diluted earnings per share is primarily due to 12.4 million of income tax benefit which was a result of the partial release of 15.3 million of deferred tax valuation allowances in the fourth quarter of 2012.

It's worth noting that our diluted EPS for the fourth quarter and full year are significantly affected by the release of the valuation allowance on our deferred tax assets. The full year 2012 diluted EPS from continuing operations of $0.66 increased $0.02 from $0.64 in 2011. We recorded a tax benefit of nearly $11 million in 2012 as compared to a tax expense of 2.5 million in 2011. The company released the portion of its valuation allowance on deferred tax assets 15.3 million which we believe are more likely than not to be realized.

Concerning the IRS settlement, the company reached a settlement with the IRS field office and the Department of Justice regarding our longstanding IRS audit, the 2000 to 2008 tax years. The proposed settlement was submitted to the Congressional Joint Committee on Taxation in December. We received a confirmation from the Joint Committee review staff on January 15 of 2013 confirming the receipt of our case. They are preparing a report for the Joint Committee of Taxation for review.

Because this settlement follows a process in which a Congressional Committee must review and give final approval, the company is not in a position nor does it have any visibility until when a final ruling will be made by the Joint Committee. However, as of year-end, the company has recorded a 16.1 million income tax receivable related to the IRS audit. The company also believes it will have access to certain NOL and credit carryforwards which are approximately $3 million in value.

During the course of 2012, the company substantially completed its 2011 and 2012 restructuring programs. 2012 restructuring program was completed in the fourth quarter of 2012. As part of the 2011 restructuring program, known as the 12x12 program, the company had set a goal of eliminating up to 12 facilities.

The company has exited nine facilities, including three facilities exited as part of the sales to laser systems business. Two of the remaining facilities to be exited are attached to the Semiconductor Systems business and are expected to be exited upon the successful sale of this business which we hope will occur in the first half of 2013.

The remaining third facility associated with our 12x12 program and is associated with our NDS joint venture. We were not expecting any cost savings from this closure as it was strictly an opportunity to monetize an asset. We continue to have discussions with our joint venture partner to work on the best path forward to monetize this asset.

Turning to the balance sheet. As of December 31 of 2012, cash and cash equivalents were approximately 65.8 million while total debt was 50 million which is in the form of an amortizing term loan. On December 27 of 2012, GSI entered into an amended and restated credit agreement which matures in December 27 of 2017 and provide for an aggregate of $125 million credit facility consisting of a 50 million five-year term loan facility and a 75 million five-year revolving credit facility.

Operating cash flow in the fourth quarter of 2012 was approximately $7 million. Operating cash flows include cash flows of both continuing and discontinued operations. In addition, our operating cash flow included approximately 2 million of cash restructuring payments made in the quarter.

Turning to the first quarter of 2013, we expect revenues from our continuing operations to be in the range of $82 million to $84 million. As John mentioned previously, our business has continued to operate in a challenging capital equipment market while we have fairly good visibility at this point in the quarter, our range reflects the risk in the remaining book and ship for the quarter.

Turning to profit, we expect the first quarter of 2013 adjusted EBITDA to be in the range of $10 million to $12 million. This forecast excludes the impact of purchase accounting. We continue to work with our outside advisors who established the company's opening balance sheet and associated purchased value adjustments. We expect to complete this exercise in April at which point we'll be in a better position to explain the specific consequences on the financial statements.

Our adjusted EBITDA guidance will not be impacted by these purchase accounting adjustments. In addition, the company will be issuing an [8kA] before the end of the month which will provide investors with NDS's historical financial information as well as pro forma results of the combined company. We also continue to expect to realize at least $40 million of ending cash with approximately 108 million of ending debt by the end of the first quarter of 2013.

Finally, as John mentioned, we are modifying our full year guidance to reflect the business and economic environment John mentioned previously. We expect revenues for the full year of 2013 on a continuing ops basis to be in the range of 345 million to 355 million. In addition, we expect adjusted EBITDA for the full year of 2013 on a continuing ops basis to be in the range of 50 million to 55 million.

This concludes my prepared remarks. Now, I'd like to open the call up to questions.

Question-and-Answer Session

Operator

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

Lee Jagoda - CJS Securities, Inc.

Hi. Good afternoon.

John A. Roush

Hi, Lee. How are you doing?

Lee Jagoda - CJS Securities, Inc.

Good. So prior to announcing the divestitures and the recent acquisition, there were a number of businesses that were highly cyclical and contributed to significant quarterly volatility. If I look at the current portfolio, are there businesses or product lines in particular that may have been depressed for some time that could see some volatility on the upturn when they rebound?

John A. Roush

Sure. It's a good question, Lee. I mean the areas, we do have a number of them that meet that definition and I think you've seen in public statements, we often point to the Westwind spindles business because it has, I think, the most severe cycle being down 19 million year-over-year. So it certainly would be one that if the printed circuit board drilling business kind of picks up, you would see some lift there. You do have some significant portion of the MicroE encoders business that's tied into the data storage, disk drive tracking writing application.

We have some lithography and other microelectronics applications. Wire bonding is part of the MicroE business. So that will be one. You'd also be looking and saying, it has some cycles in there. It's currently at a relatively low revenue run rate based on data storage being quite slow right now. So there could be some pickup there. Cambridge Technology, which is our scanning business, has some exposure in there. It's a smaller percentage, but it does feed into laser via [whole] drilling and a few other microelectronics-related. So, to the extent this PCB, printed circuit board and semiconductor capital equipment space really starts to pick up, those businesses would accelerate.

We also see this general -- I would say it's an industrial kind of thing where China's very inconsistent. January was strong and then February was terrible and March is looking more like February. And so that's affecting actually kind of a little bit different set of business. That's really more around our JK and Synrad laser businesses and color measurements. So those are the areas where you have either the cyclicality of the volatility is tied into microelectronics or industrial capital. So that's what I'd be looking for the lift, if we got it.

Lee Jagoda - CJS Securities, Inc.

Okay, great. And then you mentioned that you decreased your forecast for NDS, so what is the new NDS forecast? Or said maybe a different way, how much of the decrease in forecast came from the core business versus the acquisition?

John A. Roush

If you do an apples-to-apples comparison, the NDS specific reduction in the guidance is less than half of it on a revenue basis.

Lee Jagoda - CJS Securities, Inc.

And what about EBITDA basis?

John A. Roush

Corresponding. It's sort of -- because the revenue and the EBITDA are kind of in proportion on a contribution margin basis. So what we didn't do yet is say, we're going to go like take a bunch of costs out. It's sort of more on a flow-through basis. And there maybe additional cost actions that we would like at probably not as much in the NDS business, but we'd look elsewhere. So you'd see a similar proportion.

Lee Jagoda - CJS Securities, Inc.

Okay. And one more question, I'll hop back in queue. Just, Robert, your view of CapEx for 2013, can you split that maintenance and growth?

Robert Buckley

It probably will flow around the $6 million to $7 million range again. We've historically -- 50% of that has been focused around IT investments and the other 50% has been focused around investments in the business itself. We've finished off on a much lower number. I think that just represents continuing investment in IT. As we look into 2013, it's probably a little bit of a larger mix going into growth platforms and that's largely because we're beginning to now ramp up our fiber laser business has grown. It's still going to require some additional capital. So it's probably in the 60-40 range now.

Lee Jagoda - CJS Securities, Inc.

Okay, great. Thanks very much.

John A. Roush

Thanks, Lee.

Operator

Your next question comes from Jim Richiutti with Needham & Company. Your line is now open.

John A. Roush

Hi, Jim.

Jim Richiutti - Needham & Company, LLC

Hi, John. A question -- just follow-up on the NDS, I'm not completely clear. I believe when you announced the acquisition, you said it would potentially contribute about 80 million, I believe. And what I'm wondering is, are you now looking at something in the order of 75 or a little bit less from that?

John A. Roush

I would say between 75 and 80 would be the full year rate there.

Jim Richiutti - Needham & Company, LLC

Okay, got it.

John A. Roush

We try to be conservative but it looks like it's going to be even a little softer than that. So, like, call it somewhere between 75 and 80 without putting too fine a point on it is the current forecast.

Jim Richiutti - Needham & Company, LLC

Got it. And you mentioned that there was the potential that they may lose a customer in Europe in OEM. Can you…?

John A. Roush

No, lose share within a customers and not…

Jim Richiutti - Needham & Company, LLC

I'm sorry, okay. Thank you.

John A. Roush

No loss of customers in an entirety, but we did get some communication from a customer in Europe that they would be cutting back our share, okay. And like this is very recent news. We haven't had yet the chance to fully meet with that customer and run it to ground. But we sort of took that into account in reducing our estimates. So in a way, it almost becomes an opportunity for us than if we can mitigate some of that because we already factored that into our -- that late breaking news into our guidance. But it was not a complete loss of a customer. It was a reduced share position effectively and some sort of…

Jim Richiutti - Needham & Company, LLC

Thank you for clarifying it.

John A. Roush

…some sort of dual sourcing type of initiative.

Jim Richiutti - Needham & Company, LLC

What is your sense, John, just in terms of the medical business in broad terms? I mean it's clearly seeing some impact from some of the macro forces that are going on out there. Can you give us any sense as to whether you think this is going to be continuing over the balance of the year? You don't have a lot of experience with NDS, but more experience with the medical printer business. What's your sense about the rest of the year?

John A. Roush

Well, customers are telling us and it's a very consistent message from the NDS side of it to the printer side and we actually have some medical business just in our MicroE encoders and then in our scanning business, we do a lot of retinal scanning applications. So we have like a cross-section of these different equipments out there and what we're seeing is that the U.S. is the major issue with the headwinds. And where there's an opportunity is in the emerging markets. That's still relatively strong. So if you're relying on the U.S., you're going to struggle, okay?

And I think that's a little bit the issue that we're -- a lot of the arguments around our acquisition of NDS is we have good infrastructure. In the emerging markets, we have full, well-equipped offices, we have the space for demo labs and space to house and ramp up sales channels in these territories that NDS does not have. And so the hope is that we can counter the softness in the U.S. over time by going more aggressively at the emerging markets.

Jim Richiutti - Needham & Company, LLC

Got it.

John A. Roush

I think the U.S. trend -- I mean obviously, there is an effort in the U.S. to try and get after the overall healthcare spending, but the procedure growth is there, right? So there's an effort to try to spend less money. A lot of it appears to be from some of the industry forums that we're sitting in on now and what you're hearing from the hospital, administrators and CEOs in the like is, the reimbursement environment is a mystery right now. There's just a lack of clarity in what the Medicaid and Medicare is going to be. And therefore people don't want to spend money on equipment.

And then the equipment OEMs pays the tax. We actually have some of the tax ourselves, but for the most part our customers' pays the tax. So if you say our customer is an OEM, an endoscopic OEM, they are caught a little bit in the middle because their customer doesn't have money and they are facing a greater tax. So they're trying to defer purchasing of our components at least temporarily. Sooner or later that gets outstripped by the procedures. So, I mean, with more people need to have this laparoscopies procedures or whatever, eventually the equipment has to be there. So, we think it's sort of a more near-term dynamic that ultimately we're looking at this a little bit longer term and we think it's a good place to be.

Jim Richiutti - Needham & Company, LLC

Got it. Scanning solutions showing -- look like you're showing very good growth in this area with Cambridge business. Is it at the point where the scanning solutions portion is meaningful? I think the growth you cited was 40% up in the quarter. You expect this year to be up 30%. Has it become a meaningful part of their business?

John A. Roush

Yeah, we don't really parse it that finely in a certain sense that we -- and frankly we don't want to let everyone know exactly how big we are and where we're getting that business. But it is becoming -- it's a minority of the overall scanning business, the solutions business, but it's an increasing part. And we also have a mirrors business, so that you have the galvo component business and then solutions in mirrors and other things. It's becoming a more meaningful minority and it is sort of driving the growth of that business.

We would rather -- it always is the case. You realize that when we sell a scanning solution, we tend very often to be cannibalizing our own components business because now we recognize the sale of the module rather than the sale of the individual galvos. But we'd much rather have that, so -- I mean it just gives us -- it brings us closer to the application. We're solving more of the problem for the customer and we're getting more involved in the overall parameters and I think it's a better place to be.

Jim Richiutti - Needham & Company, LLC

Last question from me. Robert, is there any way that you could help us with some of the operating expense lines, how we should think about R&D now with almost the full quarter of NDS and how we might think about SG&A?

Robert Buckley

Yeah, we've finished up in the R&D line, I think, around 8.5%. We don't expect to make significant investments above and beyond that on a percentage of sales basis and I don't think NDS really changes that much for us. So you can expect that roughly around the same sort of level.

I also don't have any sort of significant investments going in from an SG&A perspective. I think you'd look at that as a percentage of sales. There might be some opportunity to reduce that a little further from where we're currently at because we have had a bunch of sort of one-timers running through our numbers as part of this 12x12 restructuring program and the 2012 restructuring program and the talent upgrade and whatnot.

So we're probably looking, when we finished up the fourth quarter, at 24.7. That's a relatively high number for us on a go-forward basis. So, I'd expect that to come down a little bit. And then it really comes down to your amortization of your intangibles. That's going to be a purchase accounting discussion and we're not there yet.

Jim Richiutti - Needham & Company, LLC

That's helpful. Anything on the tax rate that you can say at this point?

Robert Buckley

Again, what happens there is that the acquisition of NDS plays some havoc on our -- we exited kind of a pull down allowance period and so from a -- the important thing to think about for 2013 is that the base GSI businesses are probably operating with a cash tax rate closer to around 10% like that for the full year. But from a GAAP basis, now that the valuation allowances have been released, you can see the GAAP come how much up is really contingent upon how we treat the NDS acquisition.

I would say absent doing NDS, we'd probably see something in the range of 31% to 33% and that sort of level categorizes like a worst case sort of scenario. But there's a lot of effort that we're going to have to do and I think NDS is going to move around a little bit. So we're probably a couple of weeks away from giving some additional indication on that.

Jim Richiutti - Needham & Company, LLC

Okay. Thanks very much.

John A. Roush

Thanks, Jim.

Operator

Your next question comes from Stephen Stone with Sidoti & Company. Your line is now open.

John A. Roush

Hi, Stephen.

Stephen Stone - Sidoti & Company

Hi, guys. Can you give a bit of an update on what your expectations are for the microelectronics business? It seems like the decrease in the revenue that you're seeing or your guidance revenue mostly due to NDS and industrials. Is there any component of the semiconductors that may firm up a bit here?

John A. Roush

Well, the first thing I would say is it's both NDS and our printers business in medical because we're seeing kind of the similar dynamic in those. So we wouldn't want to overlook that. But in terms of the microelectronics, we tried to basically take a stand to say it doesn't get better this year. If there's a significant turnaround in that business, it's not captured in our outlook at all. We're just planning for a stagnation, because frankly no customer has conveyed to us any indication that that is turning around.

Now as I mentioned with lead times and this sort of -- we're hand to mouth with customers, they will not commit to two quarters worth of orders as coverage. So we really have at most kind of the one quarter view on things. So if it going to turn around later this year, we wouldn't really know it until a quarter ahead of time. So we don't see it and we're not forecasting it right now.

Stephen Stone - Sidoti & Company

Okay. And any expectations for the semiconductor sales business, is that something you expect first half of this year or is that still up in the air?

Robert Buckley

I mentioned that we'd like to get it done in the first half of this year. So that being said, it's not done in full term.

Stephen Stone - Sidoti & Company

Okay. Thank you.

Robert Buckley

Sure.

John A. Roush

Thanks, Stephen.

Operator

(Operator Instructions). Your next question comes from Joe Bess with Roth Capital Partners. Your line is now open.

John A. Roush

Hi, Joe.

Joe Bess - Roth Capital Partners

Good afternoon. I was hoping -- you talked a little about Asia and the softness there. I was hoping you can touch a little bit more on what you guys are seeing in some of your other geographic markets?

John A. Roush

Well, it's hard to separate the geographies from the end market dynamic, you know, particularly for an OEM supplier like we are. We are selling into the manufacturing locations for a lot of products. So even if you take some of the medical business, we may be shipping that over to Europe, but the slow order rates are in fact really due to the U.S. But I would the U.S. is a bit of a problem for us because the U.S. is where medical teams will be slow, right? So in the U.S., I don't know, the overall environment is not that bad in the U.S., it's kind of like vary this modest growth, flattish. It's not driving capacity additions.

So anything we would do in the U.S. that's industrial is not really giving us growth, but it's not really killing us either. We're just seeing the medical be the slowdown, it's affecting the U.S. and then when you said Asia, predominately China but some of the other geographies in Asia is a little bit more tied in the industrial and microelectronics. Europe has been kind of stagnant for a long time but I have not noticed really a market change upward or downward in the climate in Europe. It just kind of remains stagnant.

Joe Bess - Roth Capital Partners

Okay. And then thinking about you [guys'] guidance and when we bake in the NDS acquisition, you're looking at -- on the lower end, you're looking at revenue basically flat year-over-year for the combination of your legacy businesses. I was hoping you can give a little bit better or additional clarity on where the growth might be coming from in that versus is there a contraction that you're anticipating on the Precision side?

John A. Roush

Well, if you take it in some of the areas we've kind of conveyed where we're seeing some pretty significant growth. And it's not a surprise, it's really where we're doing some of the investing. So definitely fiber lasers is giving you growth year-over-year. We are seeing some in the scanning business. It's meaningful, particularly the solutions part of scanning but actually the overall scanning is doing pretty well, component and solution. So those will be the areas. And if you say what's not doing well in the full year outlook, I mean even on a year-over-year basis, where are we seeing negativity? Most areas are doing okay in there. The printers business has got a negative year-over-year impact, the color measurement business it's actually kind of flat.

Joe Bess - Roth Capital Partners

Okay.

John A. Roush

Scientific would be another area we're not seeing much…

Joe Bess - Roth Capital Partners

Okay. And then last question just thinking about revenue on a quarterly basis. Are you guys anticipating to see growth throughout the year and be more back half weighted?

Robert Buckley

Well, we always give a little bit of more revenue in Q4. Q1 is kind of be a little bit lighter, so there'll be a little bit of a ramp but not the hockey -- in this forecast, there is no sort of big hockey stick.

John A. Roush

We would normally expect some sequential improvement. I mean if there's a quarter that throws of the sequential pattern, it's often Q3 because you're picking up kind of some late summer slowdowns that we'll see in Europe and certain other geographies. So sometimes Q3 doesn't follow that as well and arguably that's why Q4 is high as Q3 will be low. But all other things equal, you'd normally just see a modest progression through the year.

Joe Bess - Roth Capital Partners

Okay, great. I think I'll jump back in the queue.

John A. Roush

Okay. Thanks, Joe.

Operator

Your next question comes from Kevin Beck with Paradice Investments. Your line is now open.

Kevin Beck - Paradice Investment Management

Hi. Good afternoon, guys.

John A. Roush

Hello.

Kevin Beck - Paradice Investment Management

Just a couple of quick questions. If you look at the guidance, you're basically guiding the core business roughly flat from the Q4 levels and you already talked about NDS and when you look at the EBITDA levels or adjusted EBITDA, it's basically the same. So I guess I wondered the 12x12 savings was looking at sort of 5 million to 6 million on an annualized basis. How should we think about those phasing in 2013 because -- are all those getting reinvested back into the business or I thought we would have seen some leverage there on the savings?

Robert Buckley

Yeah. I would say the way to think about it has been funding our fiber laser business. Predominately, there's been -- we've taken out a significant amount of cost that's helped from that perspective. We've been able to fund a very large investment in there without having a huge impact to us and the ability to maintain kind of flat, kind of EBITDA performance in 2013.

John A. Roush

That's actually when one of our biggest challenges on how to thread the needle with the fiber laser businesses. It wants to grow faster than we would like given our cost structure. I mean that's been the case for a year and a half. So we've been gating it a little bit. But in order to achieve the market, you got to get your product out there and sometimes that's happening out in front of our -- the material cost reduction. So you say, well, let's not lose money in fiber lasers. That would mean don't sell them. And then you fall behind what is a growth market.

So we have been selling some and trying to do it. But a lot of times over the past year, year and a half that's picked up and then we've ended up a little bit more negative in fiber lasers than we wanted, but we even had the luxury of continuing that there. But at some point that resolved itself because your cost get in line and you don't do that anymore. I mean it's sort of a start-up type dynamic, the fiber laser business.

Robert Buckley

The other consideration is I think we wanted to make sure because it's been a different dynamic in 2011 when we gave guidance around 2012, but we wanted to make sure we had a guidance range that we're very comfortable with achieving. And so we're trying to take that position on this. We don't want to have an opportunity to disappoint people.

John A. Roush

So late '11 or when we were kind of setting up what 2012 would look like, okay, there had been a slowdown in microelectronics in particular that really hit around Labor Day in 2011 and started to impact Q4. People knew that heading into 2012, there would be a weak first half but everybody was saying back half recovery, back half recovery, back half recovery. Customers were saying it. Competitors were saying it. The whole world was saying it. There was no back half recovery. It just didn't happen.

And then we were in a position where at midyear, we were looking at this back half recovery that was kind of build in and we had to deal with that. So we're not doing that this year. So at some point, there is a recovery. And so we'd rather have a recovery not assumed and have it occur than the other way around where we assume it occurs and then it doesn't.

Kevin Beck - Paradice Investment Management

Great. And do you think fiber laser gets to break even this year on a core basis?

John A. Roush

Exiting the year is the -- the FL4 architecture that -- there's a huge amount of work going on with the team; different design, different manufacturing process, different suppliers involved in the manufacturing process, there's a whole bunch of pieces of it that comes together and get qualified out. And our plan is to have that all deployed by the end of the year. We call the FL4 architecture. And if we get there, we kind of exit the year where we want to be. But there's still a lot of work. It's not a guarantee, but that's a stretch goal that we have.

Kevin Beck - Paradice Investment Management

Great. And then my last question, maybe for you, Robert is, as you think about moving past 12x12, is there opportunity at least in working capital as you move forward here? And I don't know how much that changes with NDS here, but as you think about getting past the plant closures, et cetera?

Robert Buckley

Well, (inaudible) we've articulated a few times that we're not very good in our inventory management. We had a negative focus area in 2011 or 2012 because of all the priorities, but we'll be focused on a go-forward basis. John's going to speak to it a little, so I'll have him outline it. There's a big opportunity there. We just have to get out.

John A. Roush

Right. If I might just chip in. I mean one of the things that you saw in 2012 was just moving parts. A lot of operations have been picked up and moved, even the ones that didn't appear to move were affected by moves because we had a number of operations that were on the receiving end of moves. So, that affects you and there was inventory builds to cover the moves. There was a lot of relaying out of production sells and the like. It was not a good year for us to really see those improvements, because it was an unstable kind of set of sites.

In 2013, there's really no planned facility moves. We are kind of in a much cleaner footprint. We really do the vast majority of our production now in four sites. There's a few others that are quite small, but the vast majority is happening in four locations. And so you can kind of focus on those and really implement lean and continuous improvement, Six Sigma and I think there's a lot of opportunity not only in working capital, I think in driving down inventory.

And certainly given a kind of a flattish revenue picture, it's going to be important to try to drive these inventories down and improve those processes. But the yields, the customer facing metrics, the delivery, the customer return rates and the field quality all, I think, are significant opportunities for us that are both a productivity and cost save item but also customers' satisfaction improvement.

Now when you take an example like the scanning business, a great business; makes money, satisfies the customers in a lot of ways, a terrific technology, they have some work to do on inventory management and they have some work to do on their delivered quality. And I think those things only help a strong business get stronger.

Kevin Beck - Paradice Investment Management

Great. Thanks so much.

John A. Roush

Thank you.

Operator

We have no further questions at this time. I'll turn the call back to our presenters for closing remarks.

John A. Roush

Thank you, operator. So as we move forward in 2013, it's clear that GSI has made a lot of progress as an organization. We've now built an outstanding team and we have a solid foundation on which we can drive growth and improvement. Our agenda for 2013 is clear. We'll complete the successful integration of NDS and look to follow-on with additional growth initiatives and acquisitions within the medical components space. We will continue to invest on our other growth platforms; scanning solutions, fiber lasers, both of which entail organic growth investment and possible acquisitions into those platforms.

On the operational front, we will build on the foundation created by 12x12 by deploying our continuous improvement initiative across our factories this year. With the completion of that program, the vast majority of our production takes place in four major sites and they're the focus of our team. It's true that economic uncertainty remains a significant part of the landscape in which we operate. I don't expect that to change anytime soon. We've factored that into our plans as best we can.

If the fiscal concerns that plague major nations make progress and the macro environment improves, that will be an upside to our plans and our estimates. We have a strong committed management team here at GSI and we all remain excited about the company's future and what we can achieve here over time.

I appreciate your interest in the company and your participation in today's call. I would look forward to joining you all in early May on our first quarter earnings call. Thank you very much. The call is now adjourned.

Operator

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

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