Thank you for standing by, and welcome to the GSI Group 2012 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, November 7, 2012. I would now like to hand the conference over to your speaker today, Mr. Tim Spinella. Thank you. Please go ahead.

Thank you very much. Good morning, and welcome to GSI Group’s third quarter 2012 earnings conference call. With me on the call are John Roush, Chief Executive Officer of GSI Group; and Robert Buckley, Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investor Section of our website at www.gsig.com. Please note this call is being webcast live and will be archived on our website. Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we’ve outlined in our earnings press release issued early this morning 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. Reconciliation of the non-GAAP financial measures, we plan to use during this call 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 GAAP in the earnings press release, we will provide reconciliation promptly on the Investor Relation section of our website at www.gsig.com. I’m now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Tim. Good morning. Welcome, everybody, and thank you for joining our call here today in the wake of the election and the ongoing effects of Hurricane Sandy. To those of you who may have been facing challenging circumstances after the storm, our thoughts and concerns are definitely with you. So in the third quarter, GSI achieved a solid level of performance in a continued weak market for capital equipment particularly in the microelectronic segments. Despite these conditions, we’re pleased that we’re able to report financial results that were within our previously provided guidance ranges. Revenue was $70 million versus the guidance range of $68 million to $73 million. Adjusted EBITDA was just under $11 million or 16% of sales, versus the guidance range of $10 million to $13 million. As I said in recent quarters, the Company continued to execute well on our aggressive agenda of change and transformation despite the weak markets. As an example of this, on October 29, we closed the sale of our laser systems business Han’s Laser for $7 million. In the transaction, we retain the Orlando, Florida real estate of the business, which has an estimated market value of $6 million. And we do intend to sell that real estate in a separate transaction in the near future. So overall, we’re satisfied with the economics here, given that this business was not contributing much at the EBITDA line. Regarding our Semiconductor Systems divestiture process, that’s still ongoing and we don’t have an update at this time as we’re in confidential discussions with the counter parties. Despite the overall weak market conditions, we did see strength in specific areas of the Company during Q3. As has been the case throughout this year, our fiber laser growth platform saw a strong demand. Sales in…

Thank you, John and good morning everyone. I’ll now provide additional details on our third quarter 2012 results. During the third quarter of 2012, GSI generated revenue of $69.5 million, a decrease of 11.7% from $78.7 million in the third quarter of 2011. The impact of foreign exchange represented approximately 2 percentage points of the 11.7% decrease in revenue in the third quarter of 2012 compared to the third quarter of 2011. Included in the revenue for the third quarter of 2011 was $1.3 million of net revenue that had been deferred under multiple element arrangements, delivered over multiple periods and entered into prior to the adoption of ASU 2009-13. Turning to our segments, sales of laser product segment for the third quarter of 2012 decreased 4.8% to $28.3 million compared to $29.8 million one year ago. This was primarily due to a decline in sales in our Specialty lasers sold into the scientific markets. This product line was negatively impacted by the continued economic challenges and as a consequence of rationalizing certain products with lower profit margins. This decrease was partially offset by significant increases in our fiber laser products, which more than quadrupled in sales, since last year’s comparable period following the launch of our kilowatt class product offerings earlier this year and an increase in sales volume of our industrial fields, CO2 lasers, as a result of the temporary uptick in demand in the China manufacturing sector. Sales of our Precision Motion & Technology segment for the third quarter of 2012 decreased $7.8 million or 15.8% to $41.2 million. The decline in sales was primarily due to a significant decline in demand in the microelectronics market, principally related to mechanical drilling of printed circuit boards. The decline in demand in the mechanical drilling market resulted in a…

[Operator Instructions] Our first question comes from line of Lee Jagoda with CJS Securities.

This is Michael covering for Lee. But he actually just stepped off and he’s on one other call. Can you sort of roll him back into the question queue?

Absolutely.

Our next question comes from the line of Jim Ricchiuti with Needham & Company.

John, I wonder if you can give us an update on some of the efforts you have under way to drive down some of the manufacturing costs in the fiber laser portion of the business just given the growth rate of that business.

Yes, absolutely, I mean there is a lot of work being done on the design of the product as well as the supply chain. Matthijs Glastra just got on board a few weeks ago and had the opportunity to go and see this. He participated in very similar types of scale up and cost down. He was over five years in the high brightness LED business and then the last, seen a lot of similar kind of ramp up cycles. But he just take an initial look at it, but it’s a combination as I said of a different design, kind of different base architecture to the technology as well as supply chain initiatives that are fairly different from what we’re doing today, where we’re just essentially buying off the shelf types of products. So I don’t really want to comment in more detail about that. I do want to position this, though. The things that we are implementing in that business that will significantly bring down the cost are 12 month types of initiatives. They’re not going to help us in one or two quarters. So I mean we’ll get a benefit of volume as that thing ramps. There is a certain -- we’re investing a little bit ahead of the revenue. Now with engineers and apps people and even people out in the field, that won’t continue forever. So you start to get a leverage on that. But the product costs are the bigger deal. And our whole architecture and approach to the product cost is going to take a good 12 months to really be in place.

Okay. That’s helpful. And they were -- there was comment you made about the scan head business, the Cambridge business. I thought you said it was up approximately 23% year-over-year. And then I thought you mentioned something about some pressure in galva business and I wasn’t sure how to reconcile that.

Well, I think Robert made a comment that there were some production issues there. It was actually a lot of it supply-base driven. We had a couple of vendor issues that cropped up and it was the kind of thing where we recovered the revenue for the most part in the quarter, but it back-end loaded it all, because we had a few weeks where we really couldn’t produce because we couldn’t get some critical components. So the production got kind of stacked up late into the quarter in that business and then the revenue went with it. That’s kind of a different phenomenon because that’s -- it’s a larger business. The scan heads are a minority of the business and they are the -- what grew 23%, although they were somewhat affected by production as well. The galvanometers go into this scan head, so if you have component problems with your vendors, it affects both the galvanometers and scan heads.

So your galvanometer business in general is holding up -- sounds like it’s holding up fairly well, in general, demand wise.

We sell the scanning products into a number of different end markets. So I mean, the microelectronics applications of that are struggling, industrial has got some challenges, but there are some areas doing better. And particularly the scan heads being a new product line, so it’s benefiting from penetration even if the market isn’t great.

Okay. One last question and I’ll jump back in the queue. The MicroE business, you benefited from -- it sounds like from a fairly decent-sized order in the dish-type market. Ex-that, how is that business? Was it down, flat?

Well, in the quarter, it was actually up. So the data storage upgrade program with one of the large customers lasted for a couple of quarters. That’s come in to conclusion. And so we’re going to be under some pressure in the fourth quarter as a consequence of that. The base businesses are actually doing okay. So there is -- we’re not -- it’s not a broad base, it really comes down to a single customer.

So, I mean in Q4, it’s going to show a little year-over-year growth, but off a lower base. I mean so sequentially, it’s coming down, but it will still probably be slightly up year-over-year in Q4. So I think the encoder business is holding up okay. It’s just kind of had a bubble cycling through it because of this one big program.

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

I was hoping, I know you guys aren’t going to give too much color on M&A right now because you are in a quiet period, but maybe you can kind of talk about the size of the deals that you’re kind of looking at?

Size wise, I mean obviously given our size that’s going to put an upper limit on it and I think most things we would look at would certainly be under $100 million. There are quite a few things we’re looking that are in the $10 million range and then anywhere in between that. We’re kind of looking at it more from the strategic fit and what it does for us. But I think -- stuck it below $10 million, it’s not as interesting because it tends not to move the needle. And $100 million represents what might be practical for our balance sheet at this point. Somewhere in between the midpoint of that is probably ideally. $40 million to $50 million would be our sweet spot for a deal, but we don’t always get to sort of determine that. So I think that’s the working range.

Okay. And then I appreciate the book-to-bill ratio for the quarter, could you give us a little bit more color on any sort of strength that number came from? Were there any large orders in particularly in any specific business or any sort of strength or weakness that kind of changed that number?

In general, book to bill; we consider it not very good, any time we’re running below 1, we don’t like it. I think that the deal really was much higher; it was 1.22 in the first quarter. So it was normalizing back. But if you wanted to say where was it relatively better or worse, I mean there is a slight differences probably. The medical printing business was quite strong in orders in the quarter, the galva scanner business was strong, powered measurement was strong, scientific lasers as I kind of commented on was lower. And actually the encoder business was low, just because of the dynamic that Robert mentioned because they’re cycling off this big project. So that the orders they were taking in Q3 didn’t match up to the Q3 sales, right there. So it had a low book-bill.

Great. Okay.

So then certain extents sequentially drop in Q4. So...

Okay, and then think about your guys at inventory levels. How do you think about that as these book-to-bills kind of fluctuate and what do you think of your levels that you’re currently at?

Well, I would say overall, our inventory tends to run a little bit high. We were planning on bringing our inventory down substantially in the third quarter, but we had some production issues in our Lexington facility that prevented that. As we get a better handle on that, then we start to look for new opportunities to bring that down. Now certainly, the lack of visibility kind of puts a handicap on that. And so we have to manage our way through that. For the most part, we understand where the inflows are coming from, where do we need to bring up higher inventory level and why we need to do that. As John mentioned previously, we have brought in talent into some of our production facilities to better run those facilities. That includes everything from operational leaders for the sites to material managers to get a better handle over the actual purchases of the inventory. So it’s going to go nowhere, but better than where we’ve been.

We put in just a couple of months ago a new kind of worldwide leader, continuous improvement, Lean 6 Sigma and all the operational metrics. Craig Guebert is his name, he is a 12-year veteran at Danaher and then four or five years with Crane after that. He is just in his initial kind of cycling through all of our factories, taking stock of current state and what the improvement opportunities are in these areas and making recommendations and to start to gear up an agenda with all those sites. There is a lot of opportunity. The processes being used in these factories are fairly informal. And I think you reflect that in they cover some of that up with inventory. It’s made worse right now because our demand picture is weak. So as we are obviously working hard to secure orders with customers and hold the revenue line, you don’t know exactly which orders you can break free. I mean in a demand growth environment, it’s very different, right, because customers are eager to order and they are almost pushing you and so you have a higher certainty around your demand. And you can run a little tighter on inventory. But when you don’t know exactly who is going to order and they won’t tell you until very late in the game that you actually get an order, if you then don’t have any on-hand inventory you can’t realize the sale. That’s putting a little pressure on us. And I would say the other thing is too, the moves, right. I mean that we’re going to pick up -- we’re in the process of picking up right now and moving our Lexington shop over here. And that’s couple of hundred employees and a lot of -- with inventory and as well as raw material and not so much finished goods. But you’re picking that up and moving in and not causing hiccups for your customers. So we’re staging that out. And all those things, I think, contributed inventories as good as it would normally be.

Okay. And then just a couple of quick questions. Do you say the tax rate for Q4 is around 15%?

Yes. On a GAAP basis, it should be around 15% unless there is some sort of final conclusion with the IRS in the Congressional Joint Committee on Taxation and then at which point in time it might fluctuate a little bit. But for the most part, it should float around 15% from a GAAP basis. From a cash perspective, we paid something closer to 10%.

Okay. And then the $1.5 million restructuring in Q4, following that, the restrictions wise you complete then [ph], correct?

That’s correct.

[Operator Instructions] Our next question comes from the line of Lee Jagoda with CJS Securities.

I apologize for my screw-up before. I’ll start with you, Robert. Can you comment on the tax refund status?

I really can’t because they largely -- all I could tell you is we came to an agreement with the field office of the IRS that we feel comfortable with. The package itself has been proposed to the Congressional Joint Committee on Taxation. And then they generally take some time to both hear the actual case and then make a final conclusion on it. That’s all I can really kind of expand upon. We feel good about the position. I think it’s a long arduous process, and I think it’s had its conclusion now. But the actual timing and specifics of it are still uncertain.

Okay. And you obviously have a lot of moving parts related to your capital structure. You’ve done a fantastic job paying down high costs debt. You’ve got things for sale, things you want to buy. Maybe if you take a step back, tell us what your view of what do you think your limits or targets might be on capital structure? And that will lead into a follow-on question?

Sort of leverage ratios and that type of thing?

Yes.

Yes. Generally, I mean the existing credit facility wouldn’t put us much above 2. So it can go up to 2.5. I think you get up to 2.5 on a leverage ratio, that’s a little much for this size company. And so I don’t think you would ever kind of go down that path. There is not -- other than that, we wouldn’t be looking to go out into the marketplace at this point in time. We think we could finance most transactions with both cash on hand and what we can get through a bank facility. So we’re not interested in doing anything else at that point.

Yes. We’re not going to do a high yield offering or anything like that at least in the near future.

Or convert or anything equally shareholder unfriendly?

That’s correct.

Yes.

What we’re really sitting and looking at is, as John mentioned, is the acquisition opportunities are attractive in front of us, the degree that they’re not actionable, for whatever reason, and then I think we’ll revisit our overall buyback initiative.

Okay. And it was one of the reasons I was asking about the tax refund. And frankly, about the possibility of selling the property you have is to the extent you picked up $15 million, $20 million of cash that some might think of is one-time, would that change if you went on share repurchase?

It really comes down …

It’s a timing issue, I think. It’s the case of you really don’t want to be using up your cash, in the window where you’re trying to get a deal signed, right. You weaken your position, but, we do see that it’s attractive if this -- we believe this stock is going to be work a lot more over time as the transformation of the company continues to progress. So it’s a bargain right now, and all other things equal, we would be inclined to use some cash to buy back. But not to the extent that it makes us lose out on a deal within the window. So there is some timing related to that. You’re right in principle, right, that some of this cash could be coming in from different things like the IRS or asset sales that is effectively unallocated at the time. And then that would be an opportunity as you describe.

Well, I think at some point your shareholders may say if your stock is trading at X-multiple of EBITDA and you’re doing even attractive strategic acquisitions at much higher multiples, at some point your choice ought be buying the known versus the unknown?

Yes. That’s not a loss on us.

Yes, we get that point, you’re right about that and it is something that we take seriously and look hard at. And we’ll continue to do that.

Okay, we’ve been involved with you guys almost a year and I know you’re trying as hard as you can to be conservative, but you’ve also dealt with an extraordinarily challenging macro environment. Can you give us a feel for maybe the shape of things during the quarter, what you’re hearing as you have dialogs with customers into Q4? I know you don’t have visibility that goes much beyond the quarter, but maybe you could share with us, John., what you are hearing when you speak with customers and how that’s affecting your thinking?

Yes, absolutely. So, I mean if you were to take in sort of, say, our sequential picture, Q2, Q3, Q4, we don’t really see from customers that there’s been a noticeable change in the condition. Okay, there is some fluctuations in our actual results that probably has more to do with specific projects. As we indicated, we had a kind of a significant project we did in the data storage market with encoders and so that create a dynamic. But in general if you average across all of that, customers are telling us, it’s kind of bouncing along the bottom that there’s not been a catalyst for a recovery. The problem was people thought there would be recovery. At this time a year ago, exiting 2011 and heading into 2012, customers across the board were saying we’re in this down cycle that began around the time the U.S. downgraded, got downgraded. But they thought it would recover. Nobody thought this was going to be a weak market all the way through 2012. Our Spindle customers told us that, our scanning customers, our encoder guys, some of the laser guys all said this is going to get better, and then it didn’t happen, right. What we’ve seen is basically just a kind of continued stagnant market. So I think the customers got earned once where they were bullish and said this is going to resolve itself and didn’t. So now you almost have the opposite behavior. But I think customers are being very conservative and very cautious and which is causing us to do that. The cycle is going to turn at some point, but nobody wants to be out there just sort of forecasting that it will turn at some point when you have no clear evidence it will. We have not seen particularly any businesses that are starting to run very favorable in book-bill on a sustained basis, or that you can clearly discern an upward trend that is sustaining itself. We have these pockets, so the CO2 laser was up, but then it’s sequentially trending a little bit back down in Q4. Encoders went up, it’s trending back down. The fiber laser is consistently trending up, but that’s a kind of a secular trend from that technology. So I see it as a steady picture, we will look and we study the data all the time, we’ve gone back and looked at when things started to come out of the cycle, in the 2009 into 2010 timeframe, we looked at our own data and a lot of the other peer companies. And when this thing started to turn it happened pretty quickly, and pretty dramatically. But it was like you couldn’t necessarily see it coming a long time in advance.

All right.

And I think that’s going to be the case here, but we just don’t know. So we have to plan and assume at least for the time being that we’re stuck with what we’re stuck with, and we’re going to manage as carefully and as prudently as we can in circumstances. What we’re not doing at this point is sort of backing off the whole transformation of the company, because we really believe that the roadmap we laid out is the right one for GSI given the core competencies, given the businesses and technologies we have, the channels into the market we have, and we’d sort of been clear about what those priorities are and it’s kind of been agreed with our Board and our investors and we’re staying with it. I mean, it may not pay off in the next one or two quarters, but at a certain point it’s going to turn. And I think we’ll be a much stronger and more vigorous and healthy company when the recovery happens for the actions we’ve taken.

Okay. Well, you know our thesis has been that you’ve got secular growth characteristics being masked on the cyclical issues. So it leads right into my final question for you. Spindles and scientific lasers, you indicated in your prepared remarks accounted for three quarters of the year-over-year decline, and both of those 2 key elements would you view the issues or comment on whether your expectation or these are just cyclical issues and not a secular trend change.

Well, I mean it’s, I think the scientific I’ll take first. Okay. Nobody anywhere would really characterize the scientific laser business as a high growth market. I mean, all the data will tell you is that the kind of 0% to 2% or 3% growth long runs. But it’s so, it so episodic that it’s always hard to see that, right. If you get a big order, it can be a $20 million order in a $20 million business or whatever. I mean, hypothetically speaking, so then it doubles your size for a year and a half and then you go back. So it’s always a little hard to see, but I think long run that always comes back to being the flat businesses, because there just isn’t a kind of long-term growth. So, the current cycle we’re seeing, I don’t think it reflects necessarily any permanent change that we still view scientific as being kind of a flattish business over time. It just happened to be negative, but I don’t know that. It could stay there for year, but I don’t think it’s going to stay there for a long-term. The issue with spindles is a little bit different, okay, because there have been some changes in the technology landscape there. The spindles are used in mechanical drilling of holes via holes in-circuit boards. There is an alternate technologies, laser drill holes, we do by the way, participate in laser via hole drilling with our lasers and our scanners, so we are in, we have the hedge to a certain extent. But there’s some trend there that shift to tablets and to mobile handheld, iPhones and these types of technologies favors smaller holes, which favors laser drilling. The mechanical drilling is PC and server driven, and of those 2 I think everybody knows PCs and the laptops is weaker, and it may not ever really get a lot stronger. The server market still remains pretty viable for mechanical drilling. So I don’t know, I mean, it never was a high growth business, mechanical drilling, if it was at one time a couple percent positive as a growth market, now it’s probably a couple percent negative. But that’s matched by 50% swings in the cycle. So how do you really discern a shift from slightly positive to slightly negative long run growth trend when your business is cycling more than 50% due to the –- we’re the whole essentially in most of the market in mechanical drilling spindles. There is one other provider, but they’re essentially a captive supplier; it’s an OEM that owns their own spindles. But other than that we supply all the OEMs. So we can see when they’re not selling equipment.

There are no further questions at this time, please continue.

Okay. Thank you. So in wrapping up, I would say for the most part of third quarter ended up as we expected. The near-term economic outlook does remain challenging. We’re into this fifth quarter of the cycle of weaker capital spending in our markets. The numbers reflect that as do those of our competitors and peer companies. The cycle is a disappointment to us, as we’ve not yet seen the catalyst to this final [ph] recovery. We have to remain cautious and we’re doing that with respect to our expense levels, our hiring, our inventory policies. We know the markets will ultimately recover. We tend to be ready to capitalize on the upside. At GSI our talented and committed workforce, we’re all striving every day to make it an excellent company. We intend to remain the technology leader in our chosen market segments. But we also want to become a simpler, more customer focus and more operationally excellent company. We’re not there yet, but we intend to be. We’re still in the early innings of this game, but we’re convinced that our goals are right ones and on the path to achieving them. We appreciate your interest in the company and we do thank you for joining today’s call. We look forward to joining all of you on our fourth quarter 2012 earnings call in March 2013. This call is now adjourned. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.