Ladies and gentlemen, thank you for standing by, and welcome to the GSI Group's First Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Robert Buckley, Chief Financial Officer. You may begin.

Thank you very much. Good afternoon and welcome to GSI Group's first quarter 2014 earnings conference call. I am Robert Buckley, Chief Financial 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, 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 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 today's forward-looking statements as representing our views as of any date after today. During this call, we'll be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment in 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'll provide reconciliations promptly on the Investor Relations section of our website. I'm now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert. Good afternoon, everybody, and welcome to the call. So I'm happy to be able to tell you that GSI has gotten off to a strong start in 2014. Our customer demand and our order rates were stronger across most of our markets and applications. We completed the JADAK medical acquisition in mid-March. So it did contribute some sales and income within Q1. And the integration of JADAK has gone extremely well since then. Our revenue and profitability in Q1 both came in slightly ahead of our own expectations, even if you satisfy the contributions that we got from JADAK. As I had mentioned on recent calls, we now have a stronger, deeper and more capable management team across GSI. This team has enabled us to deliver strong results, while continuing to make progress on our strategic agenda for the company. We continued our ship toward a more attractive mix of end markets and applications. We continued to invest in product technologies that enable us to capture design wins from major OEMs in our end markets. And we made significant progress on our continuous improvement operational initiative. As I mentioned, we're generally pleased with our financial results. So I'll only give you a brief summary and Robert will go into more detail in his section. Our Q1 revenue was $79 million, up 5% versus a year ago with JADAK contributing $2 million during the last couple of weeks of March. Adjusted EBITDA was $11.3 million, up slightly from Q1 2013. Both the revenue and adjusted EBITDA figures were above the high end of our previously communicated guidance ranges, even if you exclude the JADAK contributions. Q1 EPS was $0.08 on a GAAP basis and $0.14 on a non-GAAP basis. At this point, I'd like to provide some commercial…

Thank you, John. As John mentioned, we had a number of transactions which affected our financial statement. In the first quarter of 2014, we classified the scientific laser business as held for sale. As a result, certain product period information included in the consolidated financial statements have been reclassified to report the scientific laser business as discontinued operations. It conforms to the current period of presentation. This means the results we will discuss today in our continuing operation results exclude the scientific laser business. Similarly, our Laser Products segment excludes the scientific laser business. In addition, on March 14, 2014, we acquired 100% of JADAK, a North Syracuse, New York-based provider of optical data collection and machine vision technologies to OEM medical device manufacturers. The operating results of JADAK have been concluded in our consolidated statements of operations since the acquisition date. During the first quarter of 2014, GSI generated revenue of $79.1 million, an increase of 5% from $75.1 million in the first quarter of 2013. The JADAK acquisition contributed $2.2 million to the revenue increase year-over-year. Changes in foreign exchange rates favorably impacted revenue, causing a roughly $800,000 increase in revenue. Excluding the impact of the JADAK acquisition and changes foreign exchange rates, the company's revenue increased by 1.4% compared to the first quarter of 2013. Overall, all but one of our businesses reported growth in the first quarter. Sales of our Laser Products for the first quarter of 2014 increased nearly 10% to $41.9 million compared to $38.2 million one year ago. Sales of Medical Technologies for the first quarter 2014 decreased 5% to $22.4 million compared to $23.6 million one year ago. The JADAK acquisition added approximately $2.2 million to this quarter. However, sales of visualization solutions sold under the NDS and Dome brands were well…

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

So in the past, you described your long-term organic growth targets for the business as roughly 5% topline and 10% in the bottomline. Now that over 40% of the business is medical components, does that shift your view at all with respect to growth?

Yeah, Lee, I would say it probably does on a kind of medium-term basis. We think the medical business can do better than that. I mean it sort of depends whether you own it. I've seen a couple of recent studies of medical capital equipment in a couple of different public forums that said growth is 6% to 7%, in those areas. So I don't think you want to get too crazy, but it's probably higher than 5%, right? And then our advanced industrial stuff is a blend of different end markets in there, some low growth ones like the PCB mechanical via hole drilling, but there is some higher growth stuff. So I think that's probably a 4% to 6%. And let's say in medical, it's 6%, 7%. And when you weight average, I think you would come to out something higher than 5%.

And then just switching gears a little bit, how much of the roughly $5 million of continuous improvement costs that you anticipated for this year were incurred in Q1? And then as a follow-up to that, is it still your expectation that the cost and the benefit you receive should roughly offset each other for the full year?

I think it's all still valid. I would say the actual savings realized in Q1 was pretty small in the few hundred thousand range. But we're tracking these initiatives. Some of it is supply chain stuff, where you have that in place.

For consuming your old inventory before you can consume the new inventory. So I think based upon the guidance that we provided earlier this year, that hasn't changed. And for the most part, what you're looking at is a back-end loaded savings for the front-end loaded cost associated with the investments.

Your next question comes from the line of Jim Richiutti with Needham.

With respect to some of these productivity initiatives that you have underway, if we think about the margins in the three business areas, where should we begin to see the benefit of these? You talked about some things you're doing in simulated sealed CO2. As we think of those business units, where should we see the margin improvement from these initiatives? And I realize there are some other things going on as well.

It's fair, Jim. I would just say based on where we've been holding the kaizen events and where we're targeting some of the supply chain sims, it's disproportionately going to hit the laser segment. I mean there is opportunity in other areas, but I think the medical segment probably a bit more the focus is on growth and it's more balanced between growth and productivity in lasers. We've had a series of kaizen, virtually all been touching in either the CO2 or the scanning business at this point. And some of the major kind of supply chain and other initiatives are touching those businesses. Over time, that'll probably balance out, but we're not that far along in terms of deploying lean across every single place we do it. We're building up the institutional learnings and capability as we go. And some of our most experienced people have been deployed thus far in lean and strategic sourcing on the laser side. You said there's $5 million in benefit. I mean we're not actually tracking it that way by segment. But if we said there's $5 million in savings, more than half of that is going to hit lasers.

You mentioned that there were some timing around project spending in R&D. R&D, how should we think about that going forward? I was a little surprised with the level that came in at.

It will tick up a little bit. So as you get into the second quarter, it'll probably stay closer to the 8% to 8.5% and then will come a level out around 8% on a go-forward basis, somewhere around that, with the acquisition of JADAK adding a little bit to that. But you'll see R&D tick up a little bit.

John, you alluded to some non-PCB applications in the spindle business. Can you expand on that, elaborate on where those applications are coming from and how meaningful they might be?

Well, I think we kind of said they're starting to get meaningful for the whole spindle business that it's in the range of 40% of the revenue now. It even almost surprised us as it started to blossom. It's in a few different areas. So some of it is in the aerospace industry and actuation and other kind of precision devices on commercial aircraft. There is some of this in the power generation and the turbine business. Some of it is in polishing and grinding and spraying, even some cutting type applications. It's a variety of things. I mean I think it's really just that team is a very capable team that's been driving the business and their end market got mature on them. But there's 70 microns and below hole diameters. There's a lot more laser via hole drilling going on. By the way, we're participating in some of that on the laser side of the business. But it's impacted the spindle business. So the very good and capable team you have there, started looking for other opportunities. And it took a while for those to bear fruit. We've been working on it for a while, but we're starting to see them move the needle on that. And it's beneficial, because the amount of real PCB spindles is not that much. So even if it went in half, which I see no sign of that happening, but it's not all that painful for us. And 18, 24 months ago, we were sitting on a much higher revenue base in that PCB space, where the downside was more alarming, but it's just not there anymore. Other applications grow, right, so as they come online, I don't think that as volatile and they do grow. Some of them have sort of in the aerospace programs 10-year life on some of this stuff.

Your next question comes from the line of Michael Kurlancheek with Sidoti.

I was just looking at the Q and it appears that the sales of your scientific lasers business closed in May.

That has not closed yet.

It's still in process.

We classified it as a discontinued operations business. So it's a held-for-sale, but negotiations are still in process there. So I wouldn't expect anything at least for now.

So there's about $1.8 million losses in discontinued. Is that a number we should expect to see in the second quarter? Do you think it'll be above or below that?

Well, there's two elements that you see flowing through that. One is that the LOI that we have in place is for amounts slightly west than the book value of the business. And so you're writing down on the assets associated with that. The second was there were some losses incurred in the business. The business itself incurred losses relatively around $1 million in the first quarter. Part of that was just transitioning into a new manufacturing facility out of an old facility. And so there is some interruptions there. It won't sustain those types of losses going into the second quarter. But I wouldn't expect any contributions from this.

And then just in terms of the display sales, I know you guys were feeling a little bit of the dual sourcing effects still to this date. Do you know when those effects should dissipate?

Well, it's a timing thing, right? So we got notified in the latter part of March, a year since. And we actually in this call a year ago, we spoke to it. But that was a notification. So the sales to the other vendor began during the course of Q2. So as you get to that point, now you're cycling up against quarters that were partially or fully impacted by the dual sourcing. Q1 was not at all impacted. So you're comparing 100% share of that customer a year ago than a much smaller share now. I think Q2 will be a lesser effect. And then in the second half, there is no effect.

Right. And the business in the second half is going to start seeing growth on an apples-to-apples comparison at that point in time. And the inherent nature of the business is that we'll have some growth associated to it.

Your next question comes from the line of Tom Kerr with Singular Research.

Maybe just go over sort of M&A market and what you're seeing out there, any opportunistic deals maybe and by each segment, where do you see the most value or opportunities by each of your business segment?

We do see opportunities. And even though we just closed the deal and we're focused on integrating that and getting that strategy right with JADAK, we continue to look at other things. There is a series of smaller opportunities in the medical space that would be, I think, synergistic to what we have now and we are in discussions on some of those. These are definitely less than $50 million deal value type of transactions. But I would say we're not limiting ourselves into just the medical space. There are things both within the laser side of things and the precision motion that we've had ongoing discussions with. The challenge is we typically are sourcing acquisition ideas through our business relationships or through specific strategies. We're not just looking at companies that are for sale. We're trying to cultivate opportunities that may not be for sale. So the timing can be kind of drawn out and unpredictable, privately-held companies. And so it's really hard to say when we could free up something and do it. I would do it probably as later in the year type of opportunity. But there are some things we're looking at.

And there are currently no further questions.

Okay. Thank you, operator. So in wrapping up the call, I would like to reiterate that we are pleased with Q1 as we see it as a strong start to the year. Each quarter, it's becoming clear to me that GSI is making tremendous progress as an organization. With an outstanding management team in place and a more attractive portfolio of products and technologies, we're now in a solid position to deliver sustainable profitable growth over time. Our agenda for 2014 is pretty clear. The integration of the JADAK acquisition is progressing well and the medical strategy and the cost fertilization of our customer channels is gaining momentum. Most, if not all, of our product lines across the company are delivering organic growth as we move through the year. Our efforts to improve our operational capabilities are bearing fruit in terms of customer satisfaction and also cost and margin productivity. Economic conditions continue to improve at a moderate rate growth. If that remains the case during the balance of the year, we're confident 2014 will be a strong year for GSI. But irrespective of the economy, I'm confident we can successfully execute on our plans and achieve our ultimate strategic and financial goals. I know I speak for the board and the management team across GSI when I say that we're all passionate about the company's future and we're committed to deliver on the significant potential we see here. I appreciate your interest in GSI and your participation in today's call. I would also like to note that we will be presenting at two upcoming investor conferences. In two weeks, we'll be at the B. Riley conference in the Los Angeles area. And in July, we'll be at the CJS Securities conference in White Plains, New York. I look forward to seeing some of you at those events and joining all of you in August on our second quarter earnings call. Thank you very much. This call is now adjourned.

Again, thank you for your participation. This concludes today's call. You may now disconnect.