Novanta Inc. (NOVT) Q2 2015 Earnings Report, Transcript and Summary

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

Thank you. Good morning and welcome to GSI Group’s second quarter 2015 earnings conference call. I’m Robert Buckley, Chief Financial Officer at GSI Group. If you have not received a copy of our earnings press release, you may obtain one from the Investor Relations section of our website at www.gsig.com. Please note, the call is being webcast live and will be archived on our website. Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we have outlined in our earnings press release issued earlier this morning and also those in our SEC filings. We may make some comments today both in our prepared remarks and our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to the GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website. And I’m very pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert. Good morning, everyone, and thank you for joining our call. I’m pleased to report that we had a very strong second quarter. We executed well across the company and on balance overall trends are positive, so we believe we are well on-track to achieve our goals for the full-year. I’ll briefly cover the financial highlights and let Robert go into a bit more detail in his section. The Q2 revenue and profitability were strong, and in both cases they were higher than our own expectations. Revenue came in at $96.5 million, which was above both analyst consensus and the high-end of our own guidance range. Organic growth was 5% in the quarter. Adjusted EBITDA was $16.3 million, up 13% year-over-year and again above both analyst consensus and the high-end of our own guidance range. Adjusted EPS was $0.20 in the quarter, which is at the high-end of our guidance range and in line with analyst consensus, but the number was impacted $0.03 by foreign currency losses. So, absent that our adjusted EPS would have been that much higher. On the revenue side, we were pleased to come in at $96.5 million, the dynamic we saw was similar to Q1 with revenue ending up $7 million higher than we expected. We got strong contributions from many areas of the company, the Precision Motion business continued to see strong demand in both medical and industrial applications and delivered year-over-year growth of over 20% driven by double-digit growth in optical encoders as well as the addition of the Applimotion precision motors acquisition, which is performing above our forecast. Our Laser segment grew 9% year-over-year revenue in the quarter, if you adjust for the divesture of JK Lasers, with healthy growth from both our scanning products and our CO2 lasers. So for the first-half of the year, our organic growth was 6.3%. Q2 orders increased 6.6% versus a year-ago, if you again adjust for the JK Lasers divestiture. The Q2 book-to-bill ratio was very close to one between 0.98 and 0.99 for the company as a whole. This puts us at 1.03 on a year-to-date basis. Based on our first-half order rates and our current forecast from customers, we feel we are in a good position to achieve our full-year revenue goal of $370 million. So I’m pleased to see the healthy customer demand across most of the company and the numbers certainly bear that out. I would make the point that much like we saw in Q1 in several cases, customers pulled forward orders into Q2 that we had projected in Q3. We also do recognize that there is a level of seasonality in our business. In recent years, Q2 has been higher than Q3. This is primarily driven by microelectronics customers that we have seen have higher volumes in the late winter and early spring months followed by a summer time low. We do see the same trend to some degree in some of the other markets. But given this dynamic we do see a revenue level in Q3 that will be slightly below that of Q2, but still completely consistent with our view of the full-year. We also note that there continued to be sluggish economic indicators, particularly in China, and also in Europe. These dynamics have been built into our expectations all along for the year and they really haven’t changed. We still expect organic growth to be mid-single-digit for Q3 and for the full-year. From a strategic perspective, we view the company as well-positioned in the right technologies and the right applications to successfully drive profitable growth. So we continue to identify and pursue a good pipeline of designing opportunities for our medical cross-selling initiative. During the course of Q2, we were able to identify $4.4 million of annualized revenue opportunity, that resulted from this cross-selling process, where a given product line is presented to a medical customer through the sales relationship that we have previously had from a different product line. Our medical sales teams across the company continue to meet regularly to exchange leads and ideas, and to share market intelligence on customer product development activities and opportunities for us to get more involved at those customers. As the medical OEMs better understand the breadth of our product offering for the medical market, we see continued opportunities to further penetrate the top 100 OEMs. So while the medical equipment market has been challenging, particularly in the U.S. over the last year, we do see a robust pipeline of new business opportunities that will help us to drive and deliver growth in 2016 and beyond. Given our confidence in our long-term growth prospect here at GSI, I want to echo some of my comments from previous conference calls, when I said, we believe increased investments are needed to accelerate and sustain organic growth in many of our businesses in 2016 and beyond. So to that end, we expect to see increased R&D and sales and marketing growth investments in the second-half of 2015. We’re currently in a process of launching and staffing our first R&D center of excellence in China, which will initially focus on scanning products. And we are also in the process of adding engineering capabilities within the Vision and Precision Motion segments. We are also having some key capabilities and product marketing across GSI to deepen our understanding of key application areas, and enable us to better align our product roadmaps with customer strategies, so we can differentiate our products over time. On the acquisition front, we continue to cultivate a number of bolt-on transactions across all three of our segments. Most of these potential transactions have revenue below $20 million, although in a few cases they are substantially larger. All of the targets feel attractive adjacencies or they strengthen us in a key application area or geography. In some cases, we are now looking at deals that our primarily technology deals that bring a key capability in an attractive growth area, where we see a significant opportunity to leverage our existing market presence. We’ll keep you updated on all these deals as they process and we have something in a position to be announced. At this point, I’d like to provide some commercial updates on progress across the company. But I’ll start by noting that we have renamed one of our segments. Our segment that had been previously called Medical Technologies is now known as Vision Technologies. The reason for the change is that we increasingly see that all three of our segments have revenue and future potential in the medical space. So when we originally made the strategic decision several years ago to pursue the medical technology vertical, we knew that acquisitions would be a key part of that strategy and we want to be able to group the medical activity into one segment to the great extent possible. But while we ultimately found out that there were meaningful medical opportunities in all of the segments, Precision Motion and Laser products, in addition to what we have been calling medical, so it no longer may sense to refer to a Medical Technologies segment that might have represented in the range of 35% of revenue and then also refer to our total sales in medical end-market that was a significantly higher figure. This is ended up being confusing for people, so we’ve decided to clarify things. So the products in the Medical Technologies segment that we previously had they all relate to capturing, displaying, communicating, networking or analyzing images. It’s the process of visualization, so we are now renaming that segment Vision Technologies. So you can now think of GSI going-forward as having three major product technology families and then two major verticals. The products are laser-related technologies, Precision Motion technologies and Vision Technologies. And then, obviously, the two verticals are medical and advanced industrial. And we see really all three of the segments as having a play in the strategy in both medical and industrial market. So as far as the business update, I’ll start with the Precision Motion segment. In Q2, we had 26% year-over-year sales growth, driven by the Applimotion acquisition, as well as 10% year-over-year revenue growth in optical encoder product line. This was driven by strong customer demand in robotic surgery, wire bonding and metrology applications. The integration of the Applimotion Precision Motor acquisition continues to go well and the business has exceeded our expectations in revenue and profitability. Viewed on a standalone basis for Q2, Applimotion have very strong double-digit year-over-year revenue growth. Our Q2 sales of air bearing spindles were down high single-digit versus year-ago due to the strengthening of the U.S. dollar versus the pound and the euro, as well as slower demand from PCB via hole drilling customers, although the product line was up slightly on an organic basis. The overall Precision Motion book-to-bill ratio was 0.89% for the quarter as much of the Q2 to Q3 seasonality that I mentioned earlier occurs in the segment, with sales expected to be about $2 million lower in the segment in Q3 versus Q2, primarily with these microelectronics customers. Book-to-bill for the segment is at 1.0 on a accumulative year-to-date basis through Q2. Now, let’s turn to our Laser Products segment, which remains the largest of the three. Adjusted revenue increased 9% year-over-year in Q2. Our CO2 Laser product line had another strong quarter in Q2 with sales up low-teens versus a year-ago. As they have all year, coding applications drove much of that growth as demand increased meaningfully at all of our major OEMs. As a remainder when we refer to coding, this is laser marking of variable information such as date codes on food, beverage and pharmaceutical packaging, mostly in plastics or organic materials. CO2 Laser demand from both converting and medical applications is also very strong in the quarter. New product introductions continue to make solid traction, with CO2 customers showing strong interest in our new p400 [ph] pulsed mid-power laser. In Q2, we closed on eight new CO2 design wins with OEM customers and applications such as ones I have previously mentioned. So the overall picture for CO2 Laser is very robust. Our laser scanning and beam delivery product line also had a quite strong quarter. This includes high-single-digit revenue growth versus a year-ago with a book-to-bill ratio, up 1.18. Scanning orders were up 43% year-over-year, and were at an all-time record high for the business. We saw the same robust growth in coding applications and converting; for scanning that we have seen in CO2 laser sources. We also had strong scanning demand in laser via hole drilling. On the medical side, our scanning business was a bit mixed. Ophthalmic OCT orders saw strong high-teens revenue growth over a weak comparison last year. On the other hand, scanning demand in laser surgery, cataract surgery and digital radiology were all down versus last year, leaving overall medical sales of scanning products flat. We had nine total scanning design wins in the quarter and made strong progress in launching our China new product development team. So overall, we are very pleased with the progress we’re making in scanning. So now, I’ll comment on our Vision Technologies segment, the former Medical Technologies segment. As I reflected in my earlier comments, most of the sales remain in the medical market, although not all. Overall demand for the segment was sequentially flat versus Q1, but down 10% year-over-year. Sales were up versus last year in printers, RFID technology, surgical informatics and color measurement. Sales declined in machine vision, barcode scanning and surgical and radiology displays. The U.S. hospital capital spending trends continue to be mix. Some technology areas such as robotic surgery and OCT have seen significant recovery. Other areas remain weak. Our customers have communicated a similar demand level for Q3 that we saw in Q2 with improvements coming in Q4. Our book-to-bill ratio in Vision Technologies was 0.89 in Q2 and it’s essentially at 1 on a year-to-date basis. From an operational standpoint, as I look across the company, overall performance was solid. Our factories executed well, particularly from a tactical standpoint. On-time delivery to customers and quality metrics such as yields, scrap, customer returns also improved in most of the factories. We do not leave meaningful revenue on the table anywhere because of an operational constraint. Adjusted gross margins expanded by 140 basis points year-over-year with most of our factories seeing that same trend. Part of that was the contribution of the volume increases from our organic growth, a part was the real benefit we’re seeing from the lean projects we have done in the last year, which had originally focused mainly on the laser businesses, but now have been broadened to include the other segments and locations. Recently held in Q2 the first lean event at JADAK, which we acquired last year in Q2. We saw that the baseline capabilities were very good at the JADAK manufacturing site in Syracuse. But the team was still able to identify opportunities for significant productivity gains with potential annualized savings of over $300,000 from the first event alone. So overall, we are making progress in improving the performance, the efficiency and the consistency of our operations, which will support our growth strategies over time. There are certainly areas we can and need to improve our operational performance. Direct material spend is one area where we see significant productivity opportunity we haven’t yet seen a big impact on the bottom line. Last year, we hired a dedicated strategic sourcing leader for the company, and we invested in the IT capability to track our material spend in a detailed way across suppliers and commodities. This year we have deployed material cost down programs across all of our sites, using that information and capability. Due to first-half savings have run a bit behind our internal budget. In general, we see significant opportunities for savings, but it’s a complex process. It takes time to implement these programs without putting our quality and our customer deliveries at risk. A lot this comes down to maturity. Our productivity engine, our capability is not that mature. We know what we need to do. We haven’t yet built up the experience and cycles of learning across the organization to get outstanding results. I view that as upside. In this productivity, direct materials begin to kick-in. We should be able to see the positive impact on gross margins later this year and particularly in 2016. So, on the whole, there are lots of positives here. Lean manufacturing and continuous improvement are approaches we’re very committed to and we are doing all the right things. We are still in the very early days of this journey, but we’re convinced we will see outstanding results. So with that, I’d like to turn the call over to Robert, to provide more details on the financial performance. Robert?

Good morning, everyone. I’m going to provide you with the financial summary of our second quarter results highlighting a few areas and giving you an update on our 2015 outlook. I like to start by saying, we continue to make great progress with the year delivering another solid quarter and significantly advancing on our strategic objectives. GAAP revenue was $96.5 million, down slightly from $96.9 million in the second quarter of 2014. However, adjusted revenue in the quarter, which excluded the JK Lasers divestiture revenues from both year was up 5% to $96.5 million from $91.6 million in 2014. Organic revenue growth which excluded acquisitions, divestitures and the impact of foreign exchange was also up 5%. Unfavorable foreign exchange represented a negative headwind on our top line of approximately 5 percentage points for just over $4 million. Revenue was driven by a strong growth in a number of advanced industrial applications such as coding and marking, industrial converting, robotics, and in a number of electronic circuitry applications; as well as solid growth from certain key medical applications such as OCT, patient monitoring and some surgical applications. This was partially offset by continued weakness in endoscopics, drug delivery and diabetes care equipment. From a segment perspective, our Laser Products business adjusted revenue was up 9% year-over-year, our Precision Motion business revenue was up 26% year-over-year, and our Vision Technologies business was down 10%, the latter driven largely by weakness in certain medical applications. I believe, it’s important to reiterate a topic John just raised. As we exited the quarter, we are seeing signs of strengthening in certain key medical applications, which gives us confidence in our full-year revenue numbers. Laser products, which is now comprised of our laser scanning and beam delivery products and our low and medium power CO₂ laser source products delivered strong growth across its product portfolio. Despite some weakness and a handful of medical and market applications, various business lines delivered 9% adjusted revenue growth. Precision Motion delivered a strong quarter with 26% adjusted revenue growth, while revenues increased with the Applimotion acquisition, we also saw solid growth from our optical encoders product line and non-PCB air bearing products. In addition, the Applimotion business experienced strong organic revenue growth on a standalone basis. Finally, our Vision Technologies operating segment experienced 10% decline in revenue, despite a rebound in patient monitoring and stronger growth in color measurement. While endoscopic drug delivery and diabetes care all remain weak, these areas have seen pickup in design activities, improved forecast from our customers and more optimistic tone for our customers. In the second quarter, GAAP gross profit was $41.3 million, or 42.8% gross margin, compared to $38.7 million, or 39.9% gross margin in the second quarter of 2014. On a non-GAAP basis, second quarter adjusted gross profit was $42.6 million, or 44.2% gross margin, compared to adjusted gross profit of $39.2 million, or 42.8% gross margin during the same period last year. The 140 basis point improvement in adjusted gross margin was driven by solid progress with our continuous improvement productivity initiative and a better mix of higher margin product sales. Our gross margin improvements continue to demonstrate our commitment to the continuous improvement productivity culture. We have now established a cadence with our programs, reviewing individual material and nonmaterial productivity projects on a monthly basis across all businesses and factories, incorporating these programs into long-term strategic plans, and reviewing and measuring our progress in both business operating reviews and employee performance reviews. Laser product second quarter adjusted gross profit was $19.5 million, or 46.3% gross margin, an improvement of 400 basis points year-over-year. Vision Technologies second quarter gross profit was $12.7 million, or 40.8% gross margin, a decrease of approximately 240 basis points year-over-year, driven by lower sales and product quality-related expenses, the latter which we expect to have resolved in the second-half of 2015. Precision Motion second quarter adjusted gross profit was nearly $10.7 million, or 46.4% gross margin, an improvement of roughly 180 basis points. GAAP operating expenses decreased roughly $1.1 million for the second quarter to $31 million from $32.2 million in the prior period. Research and development expenses were $7.8 million, or 8% of sales compared to $7.5 million, or 7.7% of sales in the prior period. SG&A expenses were $21 million, or nearly 22% of sales. This compared with roughly $21.4 million, or 22.1% of sales for the second quarter of 2014. Adjusted operating income was $13.8 million, or 14.3% of sales in the second quarter, compared to $11.7 million, or 12% of sales in the second quarter of 2014. Similarly, our adjusted EBITDA was $16.3 million in the second quarter, compared to $14.5 million in the second quarter of 2014. Net interest expense in the second quarter was flat year-over-year and sequentially of $1.4 million, but the weighted average interest rate on our senior credit facility of approximately 3.3%. Other income was approximately $20 million in the second quarter, representing a $19.6 million pre-tax gain related to the JK Laser business sale and earnings of our equity interest in laser quantum. And finally, foreign exchange losses were $3.2 million, which included an unrealized foreign currency loss of $1.6 million associated with the U.S. dollar cash proceeds held in our UK subsidiary from the sale of the JK Laser business. This unrealized foreign exchange loss of $1.6 million was adjusted out of our non-GAAP reconciliations similarly to the gain on the sale of the JK Lasers business. GAAP diluted earnings per share from continuing operations were $0.56 in the quarter compared to $0.10 in the second quarter of 2014. Adjusted earnings per share were $0.20 in the quarter compared to $0.19 in the prior period. But it’s important to recognize that adjusted EPS for the second quarter of 2015 included a $0.03 negative impact related to realized and unrealized losses from foreign currency. So if you exclude this negative $0.03 impact, our non-GAAP earnings per share would have been $0.23. Turning to the balance sheet, we finished the second quarter with approximately $160 million in total debt and $81 million in cash. Consequently, we completed the second quarter with roughly $35 million of net debt. Operating cash flow from continuing operations for the second quarter was $8.5 million and $14.6 million for the first six months of 2015. While shipments’ linearity still represent a challenge for the businesses. Our cash conversion cycle drops with meaningful improvement in accounts receivable, inventory and payable days outstanding. Overall, we are well on track to achieving our full-year guidance and well-positioned to continue our progress into 2016 and beyond. As we look for the full year our third quarter 2015 remained well on track. For the third quarter of 2015, we expect adjusted revenue to be between $92 and $94 million. This compares to adjusted revenue for the third quarter of 2014 of $89 million. As mentioned before, we continue to expect to see a pretty good sized headwind from foreign currency. But organic growth on an adjusted revenue basis is expected to be up mid-single-digit. I will note the sequential decline in our third quarter revenue from the second quarter is due to normal seasonality trends in our Precision Motion business, and to a small degree, the customer action, as John mentioned in detail before. For the third quarter of 2015, we expect adjusted EBITDA to be approximately $14 million. In addition, we expect adjusted EPS to be in the range of $0.18 to $0.20. Adjusted gross margins are expected to be in line with the second quarter of 2015. We do expect R&D expenses decline slightly to approximately $9 million or 9% of sales. We continue to have confidence in the long-term trajectory of the business in both medical and advanced industrial applications, and due to higher designing activities with customers. SG&A expenses are expected to be around 22% to 23% of sales, as we build out our sales channels in Asia, further build out our application engineering teams to support our medical cross-selling activities, and invest in new ERP environments for our larger manufacturing centers to position us well in 2016 to lower our cost, drive more streamlined processes and better data analytics. Excluding the gain on the JK Lasers sale, below the line expenses should be largely in line with the prior quarter. However, we cannot predict the impact of foreign exchange gain or losses. Our non-GAAP tax rate is expected to be around 36%. I would like to highlight one point related to our tax rate. Our year-to-date non-GAAP tax rate was 36.8%, including the impact of foreign exchange losses. Foreign exchange increased our year-to-date tax rate by approximately 0.5 percentage point, because we realized the foreign exchange losses in tax jurisdictions with rates below the U.S. Our rate projection for the third quarter is based on a 2Q ending foreign exchange rate. It does not consider additional foreign exchange volatility which could impact the rate positively or negatively. Turning to the full year, the economic environment remains relatively best. Industrial capital spending is weak in China, solid in the U.S. and varied in Europe. Similarly, medical capital spending which has been weak for the last four quarters is now showing some signs of recovery. This environment has been something we’ve been living with for the last two years. And we have had - we’ve been managing it very well. While we continue to be confident on our full-year forecasts, the climate is something we are mindful of and consequently, our guidance continues to maintain a level of cautiousness. So for the full year of 2015, we expect adjusted revenue of approximately $370 million, in line with the upper-end of our guidance. Adjusted revenue in 2014 was $343 million. The guidance represents anticipated year-over-year adjusted revenue growth of 6% to 8% and year-over-year organic revenue growth in the mid single-digit range. And the fully diluted shares outstanding should be around 35 million shares. I expect our non-GAAP tax rate of approximately 36%. And as mentioned before, this rate is impacted by foreign exchange and is based on the 2Q ending FX rates. I should also mention that this rate does not include the U.S. R&D tax credit, which is currently under consideration in the U.S. Senate. If this credit is renewed, it would have a favorable impact to our rate. Interest expense without any significant debt pay down is expected to be flat for 2014 at around $5 million. For the full-year, depreciation and amortization expense should be around $19 million with depreciation expense closer to $7 million. Stock compensation expense is expected to be around $4.5 million. Finally, we expect the full-year 2015 adjusted EBITDA to be in the range of $60 to $62 million, and we expect adjusted EPS to be in the range of $0.85 to $0.89, assuming no additional negative impacts due to foreign exchange rates. Now, I should note, we’re providing this guidance based on today’s exchange rates, the volatility in foreign exchange markets could impact our revenues and income by the time we complete the year. This concludes my prepared remarks. I will now open the call up for questions.

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

Hi, good morning.

Hi, Lee, how are you doing?

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

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

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

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

Drug delivery and…

Drug delivery, yes.

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

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

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

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

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

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

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

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

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

$10 million.

Thank you.

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

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

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

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

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

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

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

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

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

Foreign exchange in Applimotion kind of offset.

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

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

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

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

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

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

Yes. Okay. Thanks a lot.

Thanks, Jim.

Yes.

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

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

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