UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-71449
----------------
GSI Lumonics Inc.
(Exact name of registrant as specified in its charter)
New Brunswick, Canada 38-1859358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Schneider Road,
Kanata, Ontario, Canada K2K 1Y3
(Address of principal executive offices) (Zip Code)
(613) 592-1460
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES |X| NO |_|
As at July 16, 2001, there were 40,334,695 shares of the Common Stock of GSI
Lumonics Inc., no par value, issued and outstanding.
GSI LUMONICS INC.
TABLE OF CONTENTS
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS.................................................3
CONSOLIDATED BALANCE SHEETS (unaudited)..............................3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)....................4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)....................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)...............6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........23
PART II - OTHER INFORMATION...................................................24
ITEM 1. LEGAL PROCEEDINGS...................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................24
ITEM 5: OTHER INFORMATION...................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................25
SIGNATURES....................................................................26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GSI LUMONICS INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(U.S. GAAP and in thousands of U.S. dollars, except share amounts)
June 29, December 31,
2001 2000
-------- --------
ASSETS
Current
Cash and cash equivalents .................................................... $ 77,169 $113,858
Short-term investments ....................................................... 32,726 20,020
Accounts receivable, less allowance of $2,730 (December 31, 2000 - $2,758) ... 64,497 83,398
Due from related party ....................................................... 657 1,828
Inventories .................................................................. 71,480 77,906
Deferred tax assets .......................................................... 16,472 25,615
Other current assets ......................................................... 11,958 5,465
-------- --------
Total current assets ..................................................... 274,959 328,090
Property, plant and equipment, net of accumulated depreciation of $21,107
(December 31, 2000 - $23,961) ................................................ 33,241 33,368
Deferred tax assets ............................................................. 11,412 6,253
Other assets .................................................................... 41,392 37,398
Intangible assets, net of amortization of $10,834
(December 31, 2000 - $11,363) ................................................ 23,365 26,075
-------- --------
$384,369 $431,184
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Bank indebtedness ............................................................ $ 10,502 $ 11,414
Accounts payable ............................................................. 19,267 30,030
Accrued compensation and benefits ............................................ 9,315 12,797
Income taxes payable ......................................................... 5,964 32,489
Other accrued expenses ....................................................... 32,322 46,561
Current portion of long-term debt ............................................ 3,762 3,821
-------- --------
Total current liabilities ................................................ 81,132 137,112
Long-term debt due after one year ............................................... 2,654 2,697
Deferred compensation ........................................................... 2,024 2,108
-------- --------
Total liabilities ........................................................ 85,810 141,917
Commitments and contingencies (note 7)
Stockholders' equity
Capital stock, no par value; Issued common shares of 40,325,873
(December 31, 2000 - 40,162,608) .......................................... 302,431 301,667
Additional paid-in capital ................................................... 959 759
Retained earnings ............................................................ 9,516 1,152
Accumulated other comprehensive income ....................................... (14,347) (14,311)
-------- --------
Total stockholders' equity ............................................... 298,559 289,267
-------- --------
$384,369 $431,184
======== ========
The accompanying notes are an integral part of these financial statements
3
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(U.S. GAAP and in thousands of U.S. dollars, except share amounts)
Three Months Ended Six Months Ended
------------------- --------------------
June 29, June 30, June 29, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Sales ..................................................... $ 76,542 $ 92,837 $164,249 $180,737
Cost of goods sold ........................................ 47,124 55,835 102,296 106,766
-------- -------- -------- --------
Gross profit .............................................. 29,418 37,002 61,953 73,971
Operating expenses:
Research and development ............................. 6,844 8,770 13,818 17,283
Selling, general and administrative .................. 17,753 19,940 36,788 40,227
Amortization of technology and other intangibles ..... 1,331 1,156 2,664 2,381
Other (note 6) ....................................... -- -- (1,400) (2,670)
-------- -------- -------- --------
Income from operations .................................... 3,490 7,136 10,083 16,750
Gain on sale of assets ............................... -- 708 -- 708
Interest income, net ................................. 1,474 502 2,623 584
Foreign exchange transaction gains (losses) .......... 463 612 247 (1,774)
-------- -------- -------- --------
Income before income taxes ................................ 5,427 8,958 12,953 16,268
Income tax provision ...................................... 1,842 3,135 4,589 5,674
-------- -------- -------- --------
Net income ................................................ $ 3,585 $ 5,823 $ 8,364 $ 10,594
======== ======== ======== ========
Net income per common share:
Basic ............................................. $ 0.09 $ 0.15 $ 0.21 $ 0.29
Diluted ........................................... $ 0.09 $ 0.14 $ 0.20 $ 0.28
Weighted average common shares outstanding (000's) ........ 40,288 38,289 40,251 36,416
Weighted average common shares outstanding and dilutive
potential common shares (000's) ...................... 40,946 40,376 40,952 38,511
The accompanying notes are an integral part of these financial statements.
4
GSI LUMONICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(U.S. GAAP and in thousands of U.S. dollars)
Three Months Ended Six Months Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Cash flows from operating activities:
Net income ................................................. $ 3,585 $ 5,823 $ 8,364 $ 10,594
Adjustments to reconcile net income to cash used in
operating activities:
Compensation expense .................................. -- -- 200 --
Gain on sale of assets ................................ -- (708) -- (708)
Depreciation and amortization ......................... 2,883 2,316 6,237 5,579
Deferred compensation ................................. 167 (116) 215 107
Provision for (recovery of) deferred income taxes ..... 3,955 (1,091) 3,027 483
Changes in current assets and liabilities:
Accounts receivable ................................... 8,037 (3,636) 17,161 (5,594)
Inventories ........................................... 567 (14,955) (4,554) (27,824)
Other current assets .................................. (3,527) 596 (3,380) (1,289)
Accounts payable, accrued expenses, and taxes
payable ............................................... (18,439) 4,554 (50,233) 2,094
-------- -------- -------- --------
Cash used in operating activities .......................... (2,772) (7,217) (22,963) (16,558)
-------- -------- -------- --------
Cash flows from investing activities:
Sale of assets ........................................ 6,000 13,736 6,000 13,736
Additions to property, plant and equipment ............ (1,394) (2,794) (5,027) (4,709)
Maturity of short-term investments .................... 28,134 -- 48,154 7,342
Purchase of short-term investments .................... (32,727) (21,297) (60,860) (21,297)
Decrease (increase) in other assets ................... (466) 123 (2,242) 554
-------- -------- -------- --------
Cash used in investing activities .......................... (453) (10,232) (13,975) (4,374)
-------- -------- -------- --------
Cash flows from financing activities:
Payments of bank indebtedness ......................... (174) (6,398) (912) (6,453)
Repayment on long-term debt ........................... -- (2,737) -- (2,737)
Issue of share capital (net of issue costs) ........... 276 71,878 764 75,161
-------- -------- -------- --------
Cash (used in) provided by financing activities ............ 102 62,743 (148) 65,971
-------- -------- -------- --------
Effect of exchange rates on cash and cash equivalents ...... 271 1,867 397 1,364
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents ........... (2,852) 47,161 (36,689) 46,403
Cash and cash equivalents, beginning of period ............. 80,021 24,514 113,858 25,272
-------- -------- -------- --------
Cash and cash equivalents, end of period ................... $ 77,169 $ 71,675 $ 77,169 $ 71,675
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 100 $ 606 $ 255 $ 721
Income taxes .......................................... $ 1,096 $ 740 $ 32,123 $ 1,940
The accompanying notes are an integral part of these financial statements.
5
GSI LUMONICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As of June 29, 2001
(U.S. GAAP and tabular amounts in thousands of
U.S. dollars except share amounts)
1. Basis of Presentation
These unaudited interim consolidated financial statements have been prepared by
the Company in United States (U.S.) dollars and in accordance with accounting
principles generally accepted in the United States for interim financial
statements and with the instructions to Form 10-Q and Regulation S-X pertaining
to interim financial statements. Accordingly, these interim consolidated
financial statements do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. The
consolidated financial statements reflect all adjustments and accruals,
consisting only of adjustments and accruals of a normal recurring nature, which
management considers necessary for a fair presentation of financial position and
results of operations for the periods presented. The consolidated financial
statements include the accounts of GSI Lumonics Inc. and its wholly owned
subsidiaries (the "Company"). Intercompany transactions and balances have been
eliminated. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2000. The results for
interim periods are not necessarily indicative of results to be expected for the
year or any future periods.
2. Inventories
Inventories consist of the following:
June 29, December 31,
2001 2000
------- -------
Raw materials.................................... $41,737 $42,468
Work-in-process.................................. 11,261 11,083
Finished goods................................... 11,442 15,392
Demo inventory................................... 7,040 8,963
------- -------
Total inventories........................... $71,480 $77,906
======= =======
3. Stockholders' Equity
Capital stock
The authorized capital of the Company consists of an unlimited number of common
shares without nominal or par value. During the six months ended June 29, 2001,
165,574 shares of common stock were issued pursuant to share options exercised
for proceeds of $0.8 million and 2,309 shares were cancelled.
Accumulated other comprehensive income
At June 29, 2001, accumulated other comprehensive income is comprised of an
unrealized gain of $0.8 million on derivative instruments designated and
qualifying as foreign currency cash flow hedging instruments, an accumulated
unrealized loss of $3.9 million after tax on investment in Packard BioScience
Company common stock and $11.2 million of accumulated foreign exchange
translation adjustments.
6
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
------------------- --------------------
June 29, June 30, June 29, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net income ........................................... $ 3,585 $ 5,823 $ 8,364 $ 10,594
Other comprehensive income (loss)
Cumulative effect change in accounting policy
for cash flow hedges (note 5) ................... -- -- (164) --
Realized loss on cash flow hedging
instruments, net of tax (note 5) ................ -- -- 164 --
Unrealized gain on cash flow hedging
instruments, net of tax (note 5) ................ 806 -- 806 --
Foreign currency translation adjustments ........ 290 (1,279) (2,365) (1,182)
Unrealized gain on equity securities, net of
tax ............................................. 2,566 -- 1,523 --
-------- -------- -------- --------
Comprehensive income ................................. $ 7,247 $ 4,544 $ 8,328 $ 9,412
======== ======== ======== ========
Net income per common share
Basic net income per common share was computed by dividing net income by the
weighted-average number of common shares outstanding during the period. For
diluted net income per common share, the denominator also includes dilutive
outstanding stock options and warrants determined using the treasury stock
method.
Common and common share equivalent disclosures are:
(in thousands) Three Months Ended Six Months Ended
------------------ ------------------
June 29, June 30, June 29, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Weighted average common shares outstanding .... 40,288 38,289 40,251 36,416
Dilutive potential common shares .............. 658 2,087 701 2,095
------ ------ ------ ------
Diluted common shares ......................... 40,946 40,376 40,952 38,511
====== ====== ====== ======
Options and warrants excluded from
diluted income per common share
as their effect would be anti-dilutive ... 1,676 -- 1,688 85
====== ====== ====== ======
At June 29, 2001, the Company had options and warrants outstanding entitling
holders to up to 4,086,783 and 68,024 common shares, respectively.
Employee Stock Purchase Plan
At the Annual General Meeting on May 8, 2001, the Shareholders of the Company
approved the adoption of the Employee Stock Purchase Plan (the "Purchase
Plan"). A total of 300,000 common shares have been reserved for issuance under
the Purchase Plan. The Company will make open market purchases and/or issue
treasury common shares to satisfy employee subscriptions under the Purchase
Plan. The Purchase Plan provides for consecutive offering periods during which
payroll deductions may be accumulated for the purchase of common shares. The
initial offering period commenced on July 1, 2001 and will end on December 31,
2001. Thereafter, each offering period will continue for a period of six months
following commencement. The purchase price per share at which shares will be
sold in an offering period under the Purchase Plan is the lower of 85% of the
Fair Market Value of a common share at the beginning of the offering period or
85% of the Fair Market Value of a common share at the end of the offering
period.
7
4. Related Party Transactions
In addition to matters discussed elsewhere, the Company had the following
transactions with related parties. The Company recorded sales revenue from
Sumitomo Heavy Industries, Ltd., a significant shareholder, of $2.8 million in
the six months ended June 29, 2001 and $5.3 million in the six months ended June
30, 2000 at amounts and terms approximately equivalent to third party
transactions. Transactions with Sumitomo are at normal trade terms. The balance
sheet reflects receivables from Sumitomo as due from related party.
In January of 2001, the Company made an investment of $2 million in a technology
fund, managed by OpNet Partners L.P. Richard B. Black, a member of the Company's
Board of Directors, is a General Partner for OpNet Partners, L.P. This
investment is reflected in long-term other assets on the balance sheet.
5. Financial Instruments
Cash equivalents and short-term investments
At June 29, 2001, the Company had $44.0 million invested in cash equivalents
denominated in U.S. dollars with maturity dates between July 2, 2001 and July
23, 2001. At December 31, 2000, the Company had $81.1 million invested in cash
equivalents denominated in both U.S. and Canadian dollars with maturity dates
between January 8, 2001 and February 27, 2001. Cash equivalents approximate fair
value.
At June 29, 2001, the Company had $32.7 million invested in short-term
investments denominated in U.S. dollars with maturity dates between August 3,
2001 and September 24, 2001. At December 31, 2000, the Company had $20.0 million
invested in short-term investments denominated in U.S. dollars with maturity
dates between January 8, 2001 and March 30, 2001. Short-term investments
approximate fair value.
Derivative financial instruments
On January 1, 2001, the Company implemented, on a prospective basis, Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138
(collectively, the "Statement"). This Statement requires all derivatives to be
recognized in the consolidated balance sheet at fair value, with changes in the
fair value of derivative instruments to be recorded in current earnings or
deferred in accumulated other comprehensive income, depending on whether a
derivative is designated as and is effective as a hedge and on the type of
hedging transaction. The Company recorded a transition adjustment loss of $164
thousand in other comprehensive income as a result of adopting SFAS 133 on
January 1, 2001. The loss was recognized in earnings during the period ended
March 30, 2001, and at that time the underlying hedged transactions were
realized.
The Company applies hedge accounting as allowed by the Statement. For hedged
forecasted transactions, hedge accounting is discontinued if the forecasted
transaction is no longer intended to occur, and any hedging gains or losses
included in accumulated other comprehensive income are recorded to earnings
immediately. Earnings impacts for all designated hedges are recorded in the
consolidated statement of operations generally on the same line item as the gain
or loss on the item being hedged. The Company records all derivatives at fair
value as assets or liabilities in the consolidated balance sheet, with
classification as current or long-term depending on the duration of the
instrument.
Currency forwards and options are used by the Company to manage exposures to
changes in currency exchange rates associated with sales transactions. These
financial instruments are used to fix the cash flow variable of local currency
costs or selling prices denominated in currencies other than the functional
currency. At June 29, 2001, the Company had six foreign exchange forward
contracts to purchase $15.6 million U.S. dollars and four foreign exchange
option contracts to purchase $11.2 million U.S. dollars with an aggregate fair
value gain of $806 thousand recorded in accumulated other comprehensive income
and maturing in September 2001 and December 2001, respectively. At December 31,
2000, the Company had four foreign exchange forward contracts to purchase $6.5
8
million U.S. dollars with a fair value loss of $164 thousand and maturing at
varying dates during the first quarter of 2001.
6. Restructuring and Other
Restructuring charges
2000
During the fourth quarter of fiscal 2000, a charge of $12.5 million was taken to
accrue employee severance of $1.0 million for approximately 50 employees and
other exit costs of $3.8 for the Company's United Kingdom operation and
worldwide distribution system related to high-power laser systems for certain
automotive applications; costs of $7.7 million associated with restructuring for
excess capacity at three leased facility locations in the United States and
Germany. The Company also recorded a write-down of land and building in the
United Kingdom of $2.0 million. Compensation expense of $0.6 million arising on
the acceleration of vesting of options upon the sale of businesses during the
year was also charged to restructuring. In addition, an inventory write-down to
net realizable value of $8.5 million was recorded in cost of goods sold related
to the high-power laser system product line.
Cumulative draw-downs by cash payments of $2.7 million have been applied against
the provision, resulting in a provision balance of $9.8 million as at June 29,
2001. The remaining provision is expected to be substantially drawn down by the
fourth quarter of 2001, except for certain long-term leased facility costs.
1999
During the first quarter of fiscal 1999, a charge of $19.6 million was taken to
accrue employee severance of $5.6 million, leased facility and related costs of
$4 million associated with the closure of the plant in Oxnard, California and
redundant facilities worldwide, and costs of $10 million associated with the
restructuring and integration of operations as a result of the 1999 merger of
General Scanning and Lumonics. The Oxnard manufacturing operations shutdown was
completed during December 1999. Other integration activities included exit costs
for some product lines, reducing redundant resources worldwide, and abandoning
redundant sales and service facilities. As at June 29, 2001, the provision has
been completely drawn down.
The following table summarizes changes in the restructuring provision.
(in millions) Severance Facilities Other Total
------------ ------------ ------------ ------------
Provision at December 31, 2000........... $ 1.2 $ 8.3 $ 3.8 $ 13.3
Draw-downs during first quarter.......... (0.7) (0.8) (1.3) (2.8)
Draw-downs during second quarter......... (0.2) (0.4) (0.1) (0.7)
------------ ------------ ------------ ------------
Provision at June 29, 2001............... $ 0.3 $ 7.1 $ 2.4 $ 9.8
============ ============ ============ ============
Other
During the first quarter of 2001, the Company adjusted an accrual related to
litigation with Electro Scientific Industries, Inc. and recorded a benefit of
$1.4 million. On April 18, 2001, the U.S. Court of Appeals for the Federal
Circuit affirmed the judgment of the U.S. District Court for the Northern
District of California in a patent infringement action filed by Electro
Scientific Industries, Inc. See Note 7.
During the first quarter of 2000, the Company recorded a benefit of $2.7 million
for licensing some of the Company's technology.
9
7. Commitments and Contingencies
Legal proceedings
Robotic Vision Systems, Inc. v. View Engineering, Inc., USDC Case No. 95-7441.
In March 2000, the United States District Court for the Central District of
California entered judgement in favor of View Engineering, Inc., a wholly owned
subsidiary. Robotic Vision had alleged infringement relating to lead inspection
machines formerly sold by View Engineering and sought damages of $60.5 million.
The District Court found Robotic Vision's patent invalid and Robotic Vision
appealed that decision. The Court of Appeals affirmed the invalidity judgment on
May 7, 2001.
Electro Scientific Industries, Inc. v. GSI Lumonics Inc. On March 16, 2000,
Electro Scientific Industries, Inc. filed an action for patent infringement in
the United States District Court for the Central District of California against
the Company and Dynamic Details Inc., an unrelated party that is one of the
Company's customers. Electro Scientific alleges that the Company offers to sell
and import into the United States the GS-600 high speed laser drilling system
and that Dynamic Details possesses and uses a GS-600 System. It further alleges
that Dynamic Details' use of the GS-600 laser system infringes Electro
Scientific's U.S. patent no.5,847,960 and that the Company has actively induced
the infringement of, and contributorily infringed, the patent. Electro
Scientific seeks an injunction, unspecified damages, trebling of those damages,
and attorney fees. GSI Lumonics has indemnified Dynamic Details with respect to
these allegations. Discovery in the case was closed on June 15, 2001 and trial
is scheduled for October 30, 2001.
GSI Lumonics believes that Electro Scientific's claims in the above action are
without merit and is vigorously defending the proceedings. However, if the
Company was to lose on one or more of the claims and damages are awarded, there
could be a material adverse effect on its operating results and/or financial
condition. The outcome is not determinable at this time.
Electro Scientific Industries, Inc. v. General Scanning, Inc. In September 1998,
the United States District Court for the Northern District of California granted
Electro Scientific's motions for summary judgment against General Scanning in
this case on a claim of patent infringement and on the issue of whether Electro
Scientific committed inequitable conduct by intentionally failing to cite prior
art to the U.S. Patent Office in connection with one of its patents. The Court
denied General Scanning's motion for summary judgment that the Electro
Scientific patents are invalid due to prior art. During March 1999, the Court
granted Electro Scientific's motion for partial summary judgment that upgrade
kits, sold by General Scanning for 1.3 micron laser wavelength memory repair,
infringe the Electro Scientific patents in suit. In April 1999 a federal court
jury issued a verdict that Electro Scientific's patent 5,473,624 was invalid,
and that Electro Scientific's patent 5,265,114 was valid, and awarded a $13.1
million damage judgment against the Company. In July 1999, the Court refused
Electro Scientific's requests to increase damages awarded by the jury in April,
and for attorney fees, but granted interest on the damages. The Company recorded
a provision during the three months ended April 2, 1999 of $19 million to
reflect the amount of the damage award plus accrued interest and related costs.
The Court also affirmed the jury's decision to invalidate one of the two patents
asserted by Electro Scientific in the case. The Company appealed the decisions
on infringement, the validity of the second patent and the award of damages. The
Company was required to post an unsecured bond with the court in order to
proceed with the appeal. The Court of Appeals affirmed the judgment on April 18,
2001 and the Company paid approximately $15.3 million in May 2001 in
satisfaction of the judgment.
Other. As the Company has disclosed since 1994, a party has commenced legal
proceedings in the United States against a number of U.S. manufacturing
companies, including companies that have purchased systems from GSI Lumonics.
The plaintiff in the proceedings has alleged that certain equipment used by
these manufacturers infringes patents claimed to be held by the plaintiff. While
GSI Lumonics is not a defendant in any of the proceedings, several of GSI
Lumonics customers have notified GSI Lumonics that, if the party successfully
pursues infringement claims against them, they may require GSI Lumonics to
indemnify them to the extent that any of their losses can be attributed to
systems sold to them by GSI Lumonics. GSI Lumonics does not believe that the
outcome of these claims will have a material adverse effect upon GSI Lumonics,
but there can be no assurance that any such claims, or any similar claims, would
not have a material adverse effect upon the Company's financial condition or
results of operations.
10
8. Segment Information
GSI Lumonics Inc. designs, develops, manufactures and markets laser systems and
components as enabling tools for a wide range of high-technology applications,
including computer-chip memory repair processing, inspection systems for solder
paste and component placement on surface-mount printed circuits, via drilling,
hybrid circuit trim and circuit trim on silicon. The Company also provides
precision optics for Dense Wave Division Multiplexing networks. Major markets
for its products include the semiconductor, electronics, and telecommunications
industries. The Company's principal markets are in the United States, Canada,
Europe, Japan and Asia-Pacific.
11
Geographic segment information
The Company attributes revenues to geographic areas on the basis of the customer
location. Long-lived assets are attributed to geographic areas in which Company
assets reside.
(in millions) Three months ended
-------------------------------------------------------------
June 29, 2001 June 30, 2000
--------------------------- ------------------------------
Revenues from external customers:
United States .................. $ 33.6 44% $ 37.5 40%
Canada ......................... 3.4 4% 4.5 5%
Europe ......................... 16.1 21% 20.0 22%
Japan .......................... 14.4 19% 16.6 18%
Asia-Pacific, other ............ 9.0 12% 12.0 13%
Latin and South America ........ 0 0% 2.2 2%
------ ---- ------ ----
Total ..................... $ 76.5 100% $ 92.8 100%
====== ==== ====== ====
Six months ended
-------------------------------------------------------------
June 29, 2001 June 30, 2000
--------------------------- ------------------------------
United States .................. $ 70.0 43% $ 80.1 44%
Canada ......................... 10.2 6% 8.4 5%
Europe ......................... 36.9 23% 43.2 24%
Japan .......................... 28.4 17% 27.4 15%
Asia-Pacific, other ............ 18.1 11% 19.3 11%
Latin and South America ........ 0.6 0% 2.3 1%
------ ---- ------ ----
Total ..................... $164.2 100% $180.7 100%
====== ==== ====== ====
As at
-------------------------------------------------------------
June 29, 2001 December 30, 2000
--------------------------- ------------------------------
Long-lived assets:
United States .................. $ 32.8 $ 35.7
Canada ......................... 10.5 9.9
Europe ......................... 12.2 12.9
Japan .......................... 0.8 0.7
Asia-Pacific, other ............ 0.3 0.2
------ ------
Total ..................... $ 56.6 $ 59.4
====== ======
9. Divestiture
On April 2, 2001, the Company completed the sale of operating assets of the
Laserdyne and custom systems product lines at no gain for proceeds of
approximately $9 million, subject to final adjustment per the terms of the Asset
Purchase Agreement. Sales for these product lines were $2.3 million and $11.0
million for the six months ended June 29, 2001 and June 30, 2000, respectively.
10. Recent Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement No. 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations. Statement No. 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of Statement No.
141 are effective for any business combination accounted for by the purchase
method that is completed after
12
June 30, 2001. Statement No. 142 provides that goodwill and indefinite lived
intangible assets acquired after June 30, 2001 will not be amortized but rather
will be tested at least annually for impairment. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization and
impairment provisions of Statement No. 142 are effective upon its adoption. The
Company will adopt Statement No. 142 beginning January 1, 2002. The Company is
in the process of evaluating the impacts of adopting Statements No. 141 and No.
142 on its consolidated financial statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read this discussion together with the consolidated financial
statements and other financial information included in this report. This report
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in the forward-looking
statements. Please see the special note set forth below under "Forward-Looking
Statements."
Overview
We design, develop, manufacture and market laser systems and components as
enabling tools for a wide range of high-technology applications, including
computer-chip memory repair processing, inspection systems for solder paste and
component placement on surface-mount printed circuits, via drilling, hybrid
circuit trim and circuit trim on silicon. We also provide precision optics for
Dense Wave Division Multiplexing networks. Major markets for our products
include the semiconductor, electronics, and telecommunications industries. In
addition, we sell to other markets such as the medical industry. Our systems
sales depend on our customers' capital expenditures that are affected by
business cycles in the markets they serve.
We continue to focus the Company's resources on our strategic markets and core
businesses, building on synergies we have already created, tightening
operational controls and consolidating operations. In the second quarter of
2001, we took further steps to meet our long-term strategy, including the sale
of operating assets of the Laserdyne and custom systems product lines at our
Maple Grove, MN facility on April 2, 2001 and the subleasing of a portion of the
facility as of that date; and our planned exit of the general-purpose marker
business by December 2001.
Highlights for the Three Months Ended June 29, 2001 and Outlook
o Second quarter sales were $76.5 million and diluted net income per
share was $0.09, which was in line with analysts' expectations and
guidance provided in our press release of April 25th. This is
compared with $92.8 million in sales and $0.14 diluted net income
per share in the second quarter of last year.
o The decline of new orders during the second quarter of 2001
reflected a continued slowdown in demand for systems and products in
the semiconductor, electronics and telecom optics markets. Bookings
were approximately $34 million for the quarter resulting in an
ending backlog of approximately $65 million, as compared with
bookings of $86 million (excluding $22 million related to
discontinued and divested products) and ending backlog of $82
million (excluding $21 million related to discontinued and divested
products) for the second quarter of last year. The declines in
bookings and ending backlog were primarily in the Company's laser
systems products for semiconductor and electronics applications.
o Cash, cash equivalents and short-term investments were $109.9
million at June 29, 2001. In addition, we own approximately 4.5
million unregistered shares of common stock in Packard BioScience
Company with a quoted market value of approximately $37 million as
at June 29, 2001.
Normally, GSI Lumonics experiences seasonality in both sales and bookings, with
softness in the first quarter, strength in the spring, slowdown in the summer
months, followed by a strong fourth quarter. Given the change in booking
patterns experienced in the first quarter and second quarter of this year, the
discontinuance of our general purpose marker product line, and net of the
recently completed divestiture in early April, we expect that consolidated
quarterly sales will decline in the third and fourth quarters from the sales
level experienced in the second quarter. The Company has initiated a series of
cost reductions. However, the investment in new product development will not be
impacted by these actions, as we believe this is critical to the Company's
success going forward. As a result, the Company expects to incur moderate
operating losses in each of the third and fourth quarters of this calendar year.
14
Results of Operations for the Three Months Ended June 29, 2001
The following table presents unaudited quarterly results of operations as a
percentage of sales. This information has been presented on the same basis as
the consolidated financial statements.
Three months ended
---------------------
June 29, June 30,
2001 2000
----- -----
Sales ................................................ 100.0% 100.0%
Cost of goods sold ................................... 61.6 60.1
----- -----
Gross profit ......................................... 38.4 39.9
Research and development ............................. 8.9 9.4
Selling, general and administrative .................. 23.2 21.5
Amortization of technology and other intangibles ..... 1.7 1.2
----- -----
Income from operations ............................... 4.6 7.8
Gain on sale of assets ............................... -- 0.7
Interest income, net ................................. 1.9 0.5
Foreign exchange transaction gains ................... 0.6 0.6
----- -----
Income before income taxes ........................... 7.1 9.6
Income tax provision ................................. 2.4 3.3
----- -----
Net income ........................................... 4.7% 6.3%
===== =====
Our sales were $76.5 million in the second quarter of 2001 compared to $92.8
million in the second quarter of 2000. On a pro forma basis, net of discontinued
and divested product lines, sales were $71.0 million and $66.6 million,
respectively.
Sales by Market. The following table sets forth sales to our primary markets for
the three months ended June 29, 2001 and June 30, 2000, respectively.
(in millions) Three months ended
---------------------------------------
June 29, 2001 June 30, 2000
---------------- ----------------
% of % of
Sales Total Sales Total
----- ----- ----- -----
Semiconductor .................... $24.2 32% $14.6 16%
Electronics ...................... 14.6 19 30.0 32
Medical .......................... 12.1 16 15.1 16
Components ....................... 7.1 9 6.8 7
Optics ........................... 4.8 6 3.2 4
Other ............................ 2.3 3 10.2 11
Parts and service ................ 11.4 15 12.9 14
----- ----- ----- -----
Total ......................... $76.5 100% $92.8 100%
===== ===== ===== =====
On a pro forma basis net of discontinued and divested product lines, sales for
the three months ended June 29, 2001 declined to levels experienced in the
second quarter of 2000 as a result of reduced and/or deferred capital spending
by our customers in the current economic slowdown. Following a period of strong
economic conditions in 1999 and 2000, we saw tighter capital markets and a rapid
and severe slowdown in the economy resulting in lower capital spending and less
demand for our products in the second quarter of 2001. Semiconductor market
sales for the second quarter grew by $9.6 million compared to the same period of
2000 as backlog orders were filled and electronics market sales declined by
$15.4 million due to decline in market conditions since the middle of 2000.
Sales to the medical market decreased by net $3.0 million from the same period
of 2000 due primarily to the divestiture of the Life Sciences business and
Laserdyne/custom system product lines offset by improvements in sales of imaging
and printer products. Sales of optics for the second quarter of 2001 grew by
$1.6 million compared to the same period of 2000, partly due to the acquisition
of General Optics in the third quarter of 2000. Sales to the other markets
(including aerospace, packaging and automotive) decreased by $7.9 million from
the same period of
15
2000 due to the restructuring of the AM Series product line in Rugby, UK and
sale of the package coding product line in Hull, UK.
Sales by Region. We distribute our systems and services via our global sales and
service network and through third-party distributors and agents. Our sales
territories are divided into the following regions: the United States; Canada;
Europe, consisting of Europe, the Middle East and Africa; Japan; Asia-Pacific,
consisting of ASEAN countries, China and other Asia-Pacific countries; and Latin
and South America. Revenues are attributed to these geographic areas on the
basis of customer location. The following table shows sales to each geographic
region for the three months ended June 29, 2001 and June 30, 2000.
(in millions) Three months ended
---------------------------------------
June 29, 2001 June 30, 2000
---------------- ----------------
% of % of
Sales Total Sales Total
----- ----- ----- -----
United States .................... $33.6 44% $37.5 40%
Canada ........................... 3.4 4 4.5 5
Europe ........................... 16.1 21 20.0 22
Japan ............................ 14.4 19 16.6 18
Asia-Pacific, other .............. 9.0 12 12.0 13
Latin and South America .......... 0 0 2.2 2
----- ----- ----- -----
Total ......................... $76.5 100% $92.8 100%
===== ===== ===== =====
Backlog. We define backlog as unconditional purchase orders or other contractual
agreements for products for which customers have requested delivery within the
next twelve months. Order backlog at June 29, 2001 was $65 million compared to
$108 million (excluding $7 million related to discontinued and divested
products) at March 31, 2001 and $82 million (excluding $21 million related to
discontinued and divested products) at June 30, 2000. The backlog at the end of
the current quarter included approximately $7.5 million in Optics compared to
$10 million at March 31, 2001.
Gross Profit Margin. Gross profit margin was 38.4% in the three months ended
June 29, 2001 compared to 39.9% in the three months ended June 30, 2000. Gross
margins were below expectations primarily due to inventory loss provisions
reflecting lower production volume, discontinued products and exposure due to
market conditions.
Research and Development Expenses. Research and development expenses, net of
government assistance, for the three months ended June 29, 2001 were 8.9% of
sales or $6.8 million compared with 9.4% of sales or $8.8 million for the three
months ended June 30, 2000. The decline was due primarily to the impact of
divested product lines. Research and development activities focused on products
targeted at the electronics, semiconductor and telecommunications markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 23.2% of sales or $17.8 million in the three months
ended June 29, 2001, compared with 21.5% of sales or $19.9 million in the three
months ended June 30, 2000. The decline in spending was due primarily to the
impact of lower sales, divested product lines and cost cutting measures.
Amortization of Technology and Other Intangibles. Amortization of technology and
other intangibles was 1.7% of sales or $1.3 million in the three months ended
June 29, 2001, compared with 1.2% of sales or $1.2 million in the three months
ended June 30, 2000.
Interest Income. Net interest income was $1.5 million in the three months ended
June 29, 2001, compared to $0.5 million in the three months ended June 30, 2000.
The increase was due to the investment of proceeds from the April 2000 share
offering and significant proceeds from the sale of assets during the fourth
quarter of 2000, contributing to an increased average cash and investments
balance during the second quarter of 2001 compared to the same period of 2000.
Income Taxes. The effective tax rate was 33.9% for the second quarter of 2001,
compared with 35.0% in the same period in 2000. The decrease in the tax rate was
due to the utilization of unrecorded tax losses in certain countries.
16
Net Income. As a result of the forgoing factors, net income for the second
quarter of 2001 was $3.6 million, compared with $5.8 million in the same period
in 2000.
Results of Operations for the Six Months Ended June 29, 2001
The following table presents unaudited quarterly results of operations as a
percentage of sales. This information has been presented on the same basis as
the consolidated financial statements.
Six months ended
---------------------
June 29, June 30,
2001 2000
-------- --------
Sales ................................................ 100.0% 100.0%
Cost of goods sold ................................... 62.3 59.1
----- -----
Gross profit ......................................... 37.7 40.9
Research and development ............................. 8.4 9.6
Selling, general and administrative .................. 22.4 22.2
Amortization of technology and other intangibles ..... 1.6 1.3
Other ................................................ (0.8) (1.5)
----- -----
Income from operations ............................... 6.1 9.3
Gain on sale of assets ............................... -- 0.4
Interest income, net ................................. 1.6 0.3
Foreign exchange transaction gains (losses)........... 0.2 (1.0)
----- -----
Income before income taxes ........................... 7.9 9.0
Income tax provision ................................. 2.8 3.1
----- -----
Net income ........................................... 5.1% 5.9%
===== =====
Our sales were $164.2 million for the first six months of 2001 compared to
$180.7 million for the first six months of 2000. On a pro forma basis, net of
discontinued and divested product lines, sales were $150.0 million and $129.6
million, respectively.
Sales by Market. The following table sets forth sales to our primary markets for
the six months ended June 29, 2001 and June 30, 2000, respectively.
(in millions) Six months ended
-------------------------------------------
June 29, 2001 June 30, 2000
------------------ ------------------
% of % of
Sales Total Sales Total
------ ------ ------ ------
Semiconductor ................ $ 50.7 31% $ 27.9 16%
Electronics .................. 35.4 22 54.3 30
Medical ...................... 20.3 12 29.8 16
Components ................... 14.9 9 14.3 8
Optics ....................... 11.3 7 5.5 3
Other ........................ 6.5 4 23.7 13
Parts and service ............ 25.1 15 25.2 14
------ ------ ------ ------
Total ..................... $164.2 100% $180.7 100%
====== ====== ====== ======
Sales declined for the six months ended June 29, 2001 compared to the same
period in 2000 as a result of strategic divestitures that have repositioned the
Company to focus on our core businesses.
The decline of new orders during the first six months of 2001 reflected a
continued slowdown in demand for systems and products in the semiconductor,
electronics and telecom optics markets. Bookings were approximately $117 million
resulting in an ending backlog of approximately $65 million, as compared with
bookings of $154
17
million (excluding $48 million related to discontinued and divested products)
and ending backlog of $82 million (excluding $21 million related to discontinued
and divested products) for the first six months of last year.
Sales by Region. The following table shows sales to each geographic region for
the six months ended June 29, 2001 and June 30, 2000.
(in millions) Six months ended
-------------------------------------------
June 29, 2001 June 30, 2000
------------------ ------------------
% of % of
Sales Total Sales Total
------ ------ ------ ------
United States ................ $ 70.0 43% $ 80.1 44%
Canada ....................... 10.2 6 8.4 5
Europe ....................... 36.9 23 43.2 24
Japan ........................ 28.4 17 27.4 15
Asia-Pacific, other .......... 18.1 11 19.3 11
Latin and South America ...... 0.6 0 2.3 1
------ ------ ------ ------
Total ..................... $164.2 100% $180.7 100%
====== ====== ====== ======
Gross Profit Margin. Gross profit margin was 37.7% for the six months ended June
29, 2001 compared to 40.9% for the six months ended June 30, 2000. Gross margins
were below expectations primarily due to inventory loss provisions reflecting
lower production volume, discontinued products and exposure due to market
conditions.
Research and Development Expenses. Research and development expenses, net of
government assistance, for the six months ended June 29, 2001 were 8.4% of sales
or $13.8 million compared with 9.6% of sales or $17.3 million for the six months
ended June 30, 2000. The decline was due primarily to the impact of divested
product lines. Research and development activities focused on products targeted
at the electronics, semiconductor and telecommunications markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 22.4% of sales or $36.8 million for the six months
ended June 29, 2001, compared with 22.2% of sales or $40.2 million for the six
months ended June 30, 2000. The decline in spending was due primarily to the
impact of lower sales, divested product lines and cost cutting measures.
Amortization of Technology and Other Intangibles. Amortization of technology and
other intangibles was 1.6% of sales or $2.7 million for the six months ended
June 29, 2001, compared with 1.3% of sales or $2.4 million for the six months
ended June 30, 2000.
Other. During the first six months of 2001, the Company adjusted an accrual
related to litigation with Electro Scientific Industries, Inc. and recorded a
benefit of $1.4 million. On April 18, 2001, the U.S. Court of Appeals for the
Federal Circuit affirmed the judgment of the U.S. District Court for the
Northern District of California in a patent infringement action filed by Electro
Scientific Industries, Inc.
During the first quarter of 2000, the Company recorded a benefit of $2.7 million
for licensing some of the Company's technology.
Interest Income. Net interest income was $2.6 million for the six months ended
June 29, 2001, compared to $0.6 million for the six months ended June 30, 2000.
The increase was due to the investment of proceeds from the April 2000 share
offering and significant proceeds from the sale of assets during the fourth
quarter of 2000, contributing to an increased average cash and investments
balance during the first half of 2001 compared to the same period of 2000.
Income Taxes. The effective tax rate was 35.4% for the six months ended June 29,
2001, compared with 34.9% for the same period in 2000. Our tax rate reflects the
fact that we do not recognize the tax benefit from losses in certain countries
where future use of the losses is uncertain and other deductible costs.
18
Net Income. As a result of the forgoing factors, net income for the six months
ended June 29, 2001 was $8.4 million, compared with $10.6 million for the same
period in 2000.
Liquidity and Capital Resources
Cash and cash equivalents totaled $77.2 million on June 29, 2001 compared to
$113.9 million at December 31, 2000. In addition, short-term investments were
$32.7 million at June 29, 2001 compared to $20.0 million at December 31, 2000.
The investment in equity securities at June 29, 2001 of $37.3 million,
consisting of approximately 4.5 million shares, or 6.6%, of Packard BioScience
Company common stock, is included in other long-term assets. These equity
securities are subject to market fluctuations and, during the six months ended
June 29, 2001, we recorded an unrealized gain of $2.3 million ($1.5 million
after tax) as a separate component of accumulated other comprehensive income.
Cash flows used in operating activities for the six months ended June 29, 2001
were $23.0 million, compared to $16.6 million during the same period in 2000.
Net income, after adjustment for non-cash items, provided cash of $18.0 million
in the first six months of 2001. Decrease in accounts receivable due to lower
sales provided $17.2 million. This was more than offset by an increase in
inventories and other current assets using $8.0 million and a decrease in
current liabilities using $50.2 million, including $32.1 million of income taxes
paid relating to the gain on sale of the Life Sciences business recognized in
October 2000 and income tax installments for the first half of 2001 and $15.3
million paid in May 2001 in settlement of legal judgment in a patent
infringement action filed by Electro Scientific Industries, Inc. In the first
six months of 2000, net income, after adjustment for non-cash items, provided
cash of $16.0 million, offset by $32.6 million of increases in accounts
receivable, inventories, other current assets and current liabilities.
Cash flow used in investing activities was $14.0 million during the six months
ended June 29, 2001, primarily from net purchases of $12.7 million of short-term
investments and $7.3 million in property, plant and equipment and other assets.
Cash proceeds of $6.0 million were received on the sale of certain assets of the
Laserdyne and custom systems product lines on April 2, 2001. In the first six
months of 2000, investing activities used $4.4 million, primarily from the
purchase of short-term investments and property, plant and equipment. This was
offset primarily by the disposal of assets and the maturity of short-term
investments.
Cash flow used in financing activities was $0.1 million for the six months ended
June 29, 2001. In comparison, financing activities provided $66 million during
the same period in 2000, primarily due to a large issue of share capital.
We have credit facilities of $39.5 million denominated in Canadian dollars, US
dollars, Pound sterling and Japanese yen. Bank indebtedness, of which $10.5
million was outstanding at June 29, 2001, is due on demand and bears interest
based on prime. As at June 29, 2001, the Company had unused and available demand
lines of credit amounting to $20.1 million and outstanding letters of credit of
$8.9 million.
Accounts receivable and inventories have been pledged as collateral for the bank
indebtedness under general security agreements. The borrowings require, among
other things, the Company to maintain specified financial ratios and conditions.
We are currently in compliance with those ratios and conditions.
We believe that existing cash balances, together with cash generated from
operations and available bank lines of credit, will be sufficient to satisfy
anticipated cash needs to fund working capital and investments in facilities and
equipment for the next two years.
Recent Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement No. 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations. Statement No. 141
19
also includes new criteria to recognize intangible assets separately from
goodwill. The requirements of Statement No. 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001. Statement No. 142 provides that goodwill and indefinite lived
intangible assets acquired after June 30, 2001 will not be amortized but rather
will be tested at least annually for impairment. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization and
impairment provisions of Statement No. 142 are effective upon its adoption. The
Company will adopt Statement No. 142 beginning January 1, 2002. The Company is
in the process of evaluating the impacts of adopting Statements No. 141 and No.
142 on its consolidated financial statements.
Forward-Looking Statements
Certain statements in this report on Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance or achievements, expressed or implied by
such forward-looking statements. In making these forward-looking statements,
which are identified by words such as "will", "expects", "intends",
"anticipates" and similar expressions, the Company claims the protection of the
safe-harbor for forward-looking statements contained in the Reform Act. The
Company does not assume any obligation to update these forward-looking
statements to reflect actual results, changes in assumptions, or changes in
other factors affecting such forward-looking statements.
Customers' Cyclical Fluctuations. Several significant markets for our products
have historically been subject to economic fluctuations due to the substantial
capital investment required in the industries served. The timing, length and
severity of these cycles are difficult to predict. Most businesses in the
semiconductor industry have announced a slowdown in new orders as market
conditions weaken. Semiconductor manufacturers may contribute to these cycles by
misinterpreting the conditions in the industry and over- or under-investing in
semiconductor manufacturing capacity and equipment. We may not be able to
respond effectively to these industry cycles. During a period of declining
demand, we must be able to quickly and effectively reduce expenses while
continuing to motivate and retain key employees. Our ability to reduce expenses
in response to any downturn is limited by our need for continued investment in
engineering and research and development and extensive ongoing customer service
and support requirements. In addition, the long lead-time for production and
delivery of some of our products creates a risk that we may incur expenditures
or purchase inventories for products which we cannot sell. During a period of
increasing demand and rapid growth, we must be able to quickly increase
manufacturing capacity to meet customer demand and hire and assimilate a
sufficient number of qualified personnel. Our inability to ramp up in times of
increased demand could harm our reputation and cause some of our existing or
potential customers to place orders with our competitors rather than us.
Quarterly Fluctuations in Operations. We derive a substantial portion of our
sales from products that have a high average selling price and significant lead
times between the initial order and delivery of the product. The timing and
recognition of sales from customer orders can cause significant fluctuations in
our operating results from quarter to quarter. Gross margins realized on product
sales vary depending upon a variety of factors, including the mix of products
sold during a particular period, negotiated selling prices, the timing of new
product introductions and enhancements and manufacturing costs. A delay in a
shipment, or failure to meet our revenue recognition criteria, near the end of a
fiscal quarter or year, due, for example, to rescheduling or cancellations by
customers or to unexpected difficulties experienced by us, may cause sales in a
particular period to fall significantly below our expectations and may
materially adversely affect our operations for that period. Our inability to
adjust spending quickly enough to compensate for any sales shortfall would
magnify the adverse impact of that sales shortfall on our results of operations.
In addition, announcements of new products and technologies by either us or by
our competitors could cause customers to defer purchases of our existing
systems, which could negatively impact our earnings and our financial position.
As a result of these factors, our results of operations for any quarter or year
are not necessarily indicative of results to be expected in future periods. Our
future operating results may be affected by various trends and factors that must
be managed in order to achieve favorable operating results.
Proprietary Rights; Infringement Claims. If we cannot protect or lawfully use
our proprietary technology, we may not be able to compete successfully. We
protect our intellectual property through patent filings, confidentiality
20
agreements and the like. However, these methods of protection are uncertain and
costly. In addition, we may face allegations that we are violating the
intellectual property rights of third parties. These types of allegations are
common in the industry. Claims or litigation could seriously harm our business
or require us to incur significant costs. We are subject to litigation from time
to time, some of which is material to our business. If, in any of these actions,
there is a final adverse ruling against us, it could seriously harm our business
and have a material adverse effect on our operating results and financial
condition, as well as having a significant negative impact on our liquidity.
Among other things, we are currently subject to the claims and actions referred
to in Note 7 to the Financial Statements in this report.
Competition. The industries in which we operate are highly competitive. We face
substantial competition from established competitors, some of which have greater
financial, engineering, manufacturing and marketing resources than we do. Our
competitors can be expected to continue to improve the design and performance of
their products and to introduce new products. Furthermore, competition in our
markets could intensify, or our technological advantages may be reduced or lost
as a result of technological advances by our competitors. We may not be able to
compete successfully in the future, and increased competition may result in
price reductions, reduced profit margins, loss of market share, and an inability
to generate cash flows that are sufficient to maintain or expand our development
of new products.
Reliance on Key Personnel. The loss of key personnel could negatively impact our
operations. Our business and future operating results depend in part upon our
ability to attract and retain qualified management, technical, sales and support
personnel for our operations on a worldwide basis. Competition for qualified
personnel is intense, and we cannot guarantee that we will be able to continue
to attract and retain qualified personnel. Our operations could be negatively
affected if we lose key executives or employees or are unable to attract and
retain skilled executives and employees as needed.
Rapid Technological Change. The markets for our products experience rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. Developing new technology is a
complex and uncertain process requiring us to be innovative and to accurately
anticipate technological and market trends. We may have to manage the transition
from older products to minimize disruption in customer ordering patterns, avoid
excess inventory and ensure adequate supplies of new products. We may not
successfully develop, introduce or manage the transition to new products. Failed
market acceptance of new products or problems associated with new product
transitions could harm our business.
Acquisitions. We have made, and continue to pursue, strategic acquisitions,
involving significant risks and uncertainties. Our identification of suitable
acquisition candidates involves risks inherent in assessing the values,
strengths, weaknesses, risks and profitability of acquisition candidates,
including the effects of the possible acquisition on our business, diversion of
our management's attention and risks associated with unanticipated problems or
liabilities. Should we acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of our
existing business. We must manage the growth of our business effectively.
Dependence on limited source suppliers. We depend on limited source suppliers
that could cause substantial manufacturing delays and additional cost if a
disruption of supply occurs. We obtain some components from a single source. We
also rely on a limited number of independent contractors to manufacture
subassemblies for some of our products. If suppliers or subcontractors
experience difficulties that result in a reduction or interruption in supply to
us or fail to meet any of our manufacturing requirements, our business would be
harmed until we are able to secure alternative sources. These components and
manufacturing services may not continue to be available to us at favorable
prices, if at all.
Operating in Foreign Countries. In addition to operating in the United States,
Canada and the United Kingdom, we have sales and service offices in France,
Germany, Italy, Japan, Singapore, Hong Kong, Korea, Taiwan, Malaysia and the
Philippines. We may in the future expand into other international regions.
Because of the scope of our international operations, we are subject to risks
which could materially impact our results of operations, including foreign
exchange rate fluctuations, longer payment cycles, greater difficulty in
collecting accounts receivable,
21
utilization of different systems and equipment, and difficulties in staffing and
managing foreign operations and diverse cultures.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to market risk associated with changes in
interest rates relates primarily to our cash equivalents, short-term investments
and debt obligations. At June 29, 2001, the Company had $44.0 million invested
in cash equivalents and $32.7 million invested in short-term investments. Due to
the average maturities and the nature of the investment portfolio, a change in
interest rates is not expected to have a material effect on the value of the
portfolio. We do not use derivative financial instruments in our investment
portfolio. We do not actively trade derivative financial instruments but may use
them to manage interest rate positions associated with our debt instruments. We
currently do not hold interest rate derivative contracts.
Foreign Currency Risk. We have substantial sales and expenses and working
capital in currencies other than U.S. dollars. As a result, we have exposure to
foreign exchange fluctuations, which may be material. To reduce the Company's
exposure to exchange gains and losses, we generally transact sales and costs and
related assets and liabilities in the functional currencies of the operations.
We have a foreign currency hedging program using currency forwards and currency
options to hedge exposure to foreign currencies. These financial instruments are
used to fix the cash flow variable of local currency costs or selling prices
denominated in currencies other than the functional currency. We do not
currently use currency forwards or currency options for trading purposes. At
June 29, 2001, the Company had six foreign exchange forward contracts to
purchase $15.6 million U.S. dollars and four foreign exchange option contracts
to purchase $11.2 million U.S. dollars with an aggregate fair value gain of $806
thousand recorded in accumulated other comprehensive income and maturing in
September 2001 and December 2001, respectively.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the description of legal proceedings in Note 7 to the Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual and special shareholders meeting on May 8, 2001.
The matters submitted to vote at this meeting were the election of
directors, the appointment of Ernst & Young LLP as auditors and the
approval of our Employee Stock Purchase Plan. The table below sets
forth information concerning voting at the meeting.
- -------------------------------------------------------------------------------------------------
Votes against or Abstention and
Votes for withheld broker non-votes
- -------------------------------------------------------------------------------------------------
Election of Directors:
Richard B. Black 25,067,182 99,327 --
Paul F. Ferrari 25,065,200 101,309 --
Phillip A. Griffiths, Ph.D 25,063,746 102,763 --
Byron O. Pond 25,053,451 113,058 --
Benjamin J. Virgilio 25,053,401 113,108 --
Charles D. Winston 25,066,820 99,689 --
- -------------------------------------------------------------------------------------------------
The appointment of Ernst & 25,049,799 53,067 --
Young LLP as auditors and
authorizing the board of
directors to fix their
remuneration
- -------------------------------------------------------------------------------------------------
Resolution No. 1 - Proposal to 22,850,090 1,736,572 --
approve the Employee Stock
Purchase Plan
- -------------------------------------------------------------------------------------------------
ITEM 5: OTHER INFORMATION
The Company has entered into severance agreements with certain members of its
executive team who recently joined the Company. In addition, the Company entered
into severance agreements with certain members of the existing management team,
which supercede termination agreements previously entered into. The agreements
provide for a severance payment and certain other benefits if employment with
the Company is terminated upon or following defined change of control events or
by the Company without cause. The effective date for each of the agreements with
Messrs. Swain, Winston, and Woolley, and Ms. Casal and Palmer is May 24, 2001.
The agreements entered into continue for a minimum term of three (3) years from
their respective dates and will automatically extend for periods of one year
after the initial term unless the Company or the executive gives notice at least
ninety days prior to the expiration of the current period that the agreement
will not be extended. Under each such agreement, the payment in the event of
termination without cause is equal to a minimum of one year and a maximum of two
years of the sum of (a) annual base salary; (b) targeted annual bonus; (c)
prorated portion of annual bonus; and (d) the cost of certain employment
benefits, except that with respect to Mr. Winston, the payment is equal to a
minimum of two years and a maximum of three years of the sum of (a)-(d). If the
termination of employment occurs upon or following a defined change of control
of the Company, the payment is equal to three times the sum of (a)-(d), except
that with respect to Mr. Winston, the payment is equal to four times the sum of
(a)-(d). Pursuant to the agreements, all unvested options then held will
immediately vest, provided that such options shall expire upon the earlier of
(i) three years or the remainder of the option term in the event of a change of
control, or (ii) six months or the remainder of the option term in the event of
a termination for cause.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) List of Exhibits
10.19 Severance Agreement between the Registrant and Thomas
Swain dated May 24, 2001.
10.20 Severance Agreement between the Registrant and Charles
Winston dated May 24, 2001.
10.21 Severance Agreement between the Registrant and Victor
Woolley dated May 24, 2001.
10.22 Severance Agreement between the Registrant and Eileen
Casal dated May 24, 2001.
10.23 Severance Agreement between the Registrant and Linda
Palmer dated May 24, 2001.
b) Reports on Form 8-K
None
25
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant, GSI Lumonics Inc., has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GSI Lumonics Inc.
(Registrant)
Name Title Date
- ------------------------- ---------------------------------------------- ----------------------
/s/ CHARLES D. WINSTON Director and Chief Executive Officer August 8, 2001
- ---------------------- (Principal Executive Officer)
Charles D. Winston
/s/ THOMAS R. SWAIN Vice President Finance and Chief Financial August 8, 2001
- ------------------- Officer (Principal Financial and Accounting
Thomas R. Swain Officer)
26