Description
Filed with the SEC from Mar 29 to April 04:
GSI Group (GSIG)
JEC Associates decreased its holdings to 2,837,731 shares (8.5%) by selling 330,000 from March 19 through March 23 at $11.98 to $12.06 a share.
BUSINESS OVERVIEW
OVERVIEW
GSI Group Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “ours”) design, develop, manufacture and sell laser-based solutions (consisting of lasers and laser-based systems), laser scanning devices, and precision motion and optical control technologies. Our technology is incorporated into customer products or manufacturing processes for a wide range of applications in a variety of markets, including: electronics, industrial, medical, and scientific. Our products enable customers to make advances in materials and processing technology and to meet extremely precise manufacturing specifications.
GSI Group Inc. was founded and initially incorporated in Massachusetts in 1968 as General Scanning, Inc. (“General Scanning”). General Scanning developed, manufactured and sold components and subsystems used for high-speed micro positioning of laser beams. In 1999, General Scanning merged with Lumonics Inc., a Canadian company that developed, manufactured and sold laser-based, advanced manufacturing systems for electronics, semiconductor, and general industrial applications. The post-merger entity, GSI Lumonics Inc., continued under the laws of the Province of New Brunswick, Canada. In 2005, we changed our name to GSI Group Inc. In August 2008, we acquired Excel Technology, Inc. (“Excel”), a designer, manufacturer and marketer of photonics-based solutions consisting of lasers, laser-based systems, precision motion devices, and electro-optical components primarily used in industrial and scientific applications.
We maintain a website with the address http://www.gsig.com . We are not including the information contained in our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission (“SEC”). In addition, our reports and other information are filed with securities commissions or other similar authorities in Canada, and are available over the Internet at http://www.sedar.com .
Customers
We have a diverse group of customers that include companies that are global leaders in their industries. Many of our customers participate in several market segments. There were no customers with greater than 10% of our sales in 2011. In 2010, one customer within the Semiconductor Systems segment accounted for approximately 11% of our sales. In 2009, a different customer and certain related parties of that customer within the Semiconductor Systems segment accounted for approximately 10% of our sales.
Customers of our Semiconductor Systems segment include some of the major semiconductor, electronic device and silicon wafer producers. Most of these customers are end users who use our systems to manufacture products that include silicon wafers, memory chips, flat panel displays, and analog and hybrid micro-circuits in their factories. A large number of these customers are based in Asia.
Customers of our Precision Motion and Technologies and Laser Products segments include a large number of OEMs who integrate our products into their systems for sale to end users. Our Precision Motion and Technologies and Laser Products segments also sell directly to end users. Precision Motion and Technologies segment and Laser Products segment customers include leaders in the industrial systems, microelectronics, automotive, data storage, and medical equipment markets. A typical OEM customer will usually evaluate a product and our ability to provide application support and customization before deciding to incorporate our product into their product or system. Customers generally choose suppliers based on a number of factors, including product performance, reliability, application support, price, breadth of the supplier’s product offering, the financial condition of the supplier and the geographical coverage offered by the supplier. Once products of our Precision Motion and Technologies segment and Laser Products segment have been designed into a given OEM customer’s product or system, there are generally significant barriers to subsequent supplier changes.
Seasonality
While our sales are not highly seasonal on a consolidated basis, the sales of some of our individual product lines, particularly our laser businesses, are attributable to orders received from governmental entities or research institutions whose budgeting and funding cycles may be different from those of our commercial and industrial customers.
Backlog
As of December 31, 2011, our consolidated backlog was approximately $78.0 million. The majority of orders included in backlog represent open orders for products and services that management has concluded have a reasonable probability of being delivered over the subsequent twelve month period. Orders included in backlog may be canceled or rescheduled by customers without significant penalty. Management believes that backlog is not a meaningful indicator of future business prospects for any of our business segments due to the wide range of lead times required by our various types of customers and the ability of our customers to reschedule or cancel orders. Therefore, backlog as of any particular date should not be relied upon as indicative of our revenues for any future period.
Manufacturing
Manufacturing functions are performed internally when management chooses to maintain control over critical portions of the production process or for cost related reasons. To the extent it makes financial sense, we will consider outsourcing additional portions of the production process. For example, our Semiconductor Systems segment focuses on outsourcing low value parts and modules and internally retains the tasks of final assembly of subsystems, testing and quality control.
Products offered by our Laser Products segment are manufactured at facilities in East Setauket, New York; Orlando, Florida; Santa Clara, California; Rugby, United Kingdom; Mukilteo, Washington; Suzhou, China; and Ludwigsburg, Germany.
Products offered by our Precision Motion and Technologies segment are primarily manufactured at facilities in Bedford and Lexington, Massachusetts; Poole and Taunton, United Kingdom; Chatsworth and Oxnard, California; and Suzhou, China.
The systems offered by our Semiconductor Systems segment are manufactured, assembled and tested in Bedford, Massachusetts.
Many of our products are manufactured under ISO 9001 certification and our encoders are manufactured under ISO 13485 certification.
Competition
The markets in which we compete are dynamic and highly competitive. Due to the wide range of our products, we face many different types of competition and competitors. This affects our ability to sell our products and the prices at which these products are sold. Our competitors range from large foreign and domestic organizations, which produce a comprehensive array of goods and services and may have greater financial and other resources than we do, to small firms producing a limited number of goods or services for specialized market segments. We expect the proportion of large competitors to increase through the continued consolidation of competitors.
Competitive factors in our Precision Motion and Technologies and Laser Products segments include product performance, price, quality and reliability, features, flexibility, compatibility of products with existing systems, technical support, product breadth, market presence, on-time delivery and our overall reputation. The main competitive factors in the Semiconductor Systems segment include product performance, throughput and price. We believe that our products offer a number of competitive advantages; however, some of our competitors are substantially larger and have greater financial and other resources than us.
Raw Materials, Components and Supplies
Each of our businesses uses a wide variety of raw materials, key components and supplies that are generally available from alternative sources of supply and in adequate quantities from domestic and foreign sources. In some instances, we design and/or re-engineer the parts and components used in our products. For certain critical raw materials, key components and supplies used in the production of some of our principal products, we have identified only a limited number of suppliers or, in some instances, a single source of supply. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products.
In the Laser Products segment, we rely upon unaffiliated suppliers for the material components and parts used to assemble our products. Most parts and components purchased from suppliers are available from multiple sources.
Our Precision Motion and Technologies segment sources most of its parts externally while some critical parts are manufactured internally, particularly in the air bearing spindles business. Fully functional electronics as well as certain key components are purchased from external sources.
Our Semiconductor Systems segment purchases major subsystems, such as lasers, motion stages, vision systems and software, fully functional electronics, frames and racks from the merchant market. Some of the optical components used in our systems are internally manufactured while others are purchased externally. In some cases, upper level assemblies and entire subsystems are outsourced to electronic manufacturing services companies.
For a further discussion of the importance and risks associated with our supply chain, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.
Patents and Intellectual Property
We rely upon a combination of copyrights, patents, trademarks, trade secret laws and restrictions on disclosure to protect our intellectual property rights. We hold a number of registered and pending patents in the United States and other countries. The issued patents cover various products in many of our key product categories, particularly semiconductor systems, laser scanning products, encoders, air bearing spindles, and lasers. In addition, we also have trademarks registered in the United States and foreign countries. We will continue to actively pursue application for new patents and trademarks as we deem appropriate. However, there can be no assurance that any other patents will be issued to us or that such patents, if and when issued, will provide any protection or benefit to us.
Although we believe that our patents and pending patent applications are important, we rely upon several additional factors that are essential to our business success, including: market position, technological innovation, know-how, application knowledge and product performance. There can be no assurance that we will realize any of these advantages.
We also protect our proprietary rights by controlling access to our proprietary information and by maintaining confidentiality agreements with our employees, consultants, and certain customers and suppliers. For a further discussion of the importance of risks associated with our intellectual property rights, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.
Human Resources
As of December 31, 2011 and 2010, we employed 1,539 and 1,593 employees, respectively.
Geographic Information
We are a multinational company with approximately 66% of our 2011 sales outside the United States and approximately 21% of our long-lived assets outside the United States at December 31, 2011. Geographic information is discussed in Note 13 to Consolidated Financial Statements. For a further discussion of the risks associated with our foreign operations, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.
Government Regulation
We are subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health, a branch of the United States Food and Drug Administration. Among other things, those regulations require laser manufacturers to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. We are also subject to certain safety regulations in the United Kingdom related to the manufacturing of beryllium structures. The Control of Substances Hazardous to Health (COSHH) regulations are administered by the Health and Safety Executive and require us to monitor beryllium levels, provide health safety information to our employees and limit exposure to beryllium. Non-compliance with these regulations could result in warnings, penalties or fines. We believe that we are currently in compliance with these regulations.
CEO BACKGROUND
Steven W. Bershad
Chairman of the Board
Mr. Bershad has been a Director of the Company since July 23, 2010 and Chairman of the Board of Directors since July 30, 2010. Mr. Bershad was Chairman of the Board and Chief Executive Officer of Axsys Technologies, Inc. (“Axsys”), a manufacturer of surveillance and imaging equipment, from 1986 until 2009. Prior to that, he was a Managing Director of Lehman Brothers, Inc., an investment banking firm, and its predecessor firms, where he held a series of senior management positions in merchant banking and mergers and acquisitions. Mr. Bershad is a director of EMCOR Group, Inc., a Fortune 500 ® leader in mechanical and electrical construction, energy infrastructure and facilities services for a diverse range of businesses. As a senior executive with Lehman Brothers for more than 15 years and the chief executive officer of Axsys for more than 20 years, Mr. Bershad has an invaluable background in investment banking, finance and business.
Eugene I. Davis
Director
Mr. Davis has been a Director of the Company since July 23, 2010. Mr. Davis is Chairman and Chief Executive Officer of PIRINATE Consulting Group, L.L.C., a privately held consulting firm specializing in crisis and turn-around management and strategic advisory services for public and private business entities. Prior to forming PIRINATE Consulting in 1997, Mr. Davis was Chief Operating Officer of Total-Tel USA Communications, Inc., President of Emerson Radio Corp. and Chief Executive Officer of Sport Supply Group, Inc. Mr. Davis has served as director for numerous public and private companies across various industries. Mr. Davis currently serves on the boards of Atlas Air Worldwide Holdings, Inc., Dex One Corporation, Global Power Equipment Group Inc., Spectrum Brands, Inc. and U.S. Concrete, Inc. Mr. Davis is a director of the following companies but will not stand for re-election at the 2011 annual meeting of shareholders: Knology, Inc., Roomstore, Inc., SeraCare Life Sciences, Inc. and Spansion Inc. Mr. Davis is also a director of Trump Resorts Entertainment, Inc., whose common stock is registered under the Securities Exchange Act of 1934, but does not trade. Mr. Davis is currently on the boards of Ambassadors International, Inc., Footstar, Inc., Orchid Cellmark Inc., Rural/Metro Corp., Smurfit-Stone Container Corporation and YRC Worldwide, Inc. On April 1, 2011, Ambassadors International announced that it had entered into an agreement to sell the Windstar Cruises’ business and operations to Whippoorwill Associates, Inc., a private investment firm, through the Chapter 11 legal process, after which Ambassadors International will no longer be a public company. Footstar has announced a merger transaction pursuant to which it will be acquired by Footstar Acquisitions, Inc. in a going-private transaction. On April 6, 2011, Orchid Cellmark announced that it has entered into a transaction pursuant to which it will be acquired by Laboratory Corporation of America Holdings. On March 28, 2011, Rural/Metro announced that it entered into a definitive agreement that provides for the acquisition of Rural/Metro by the private equity firm Warburg Pincus in a going-private transaction. Smurfit-Stone has announced a transaction to be acquired by Rock-Tenn Company. YRC Worldwide has announced that it has entered into a non-binding term sheet regarding a restructuring. Mr. Davis will no longer serve as a director of Orchid Cellmark, Rural/Metro, Smurfit-Stone or YRC Worldwide upon closing of those transactions or will resign by December 31, 2011 if the transactions have not closed by that time. During the past five years, Mr. Davis has also been a director of American Commercial Lines Inc., Delta Airlines, Foamex International Inc., Granite Broadcasting Corporation, Ion Media Networks, Inc., Media General, Inc., Mosaid Technologies, Inc., Ogelbay Norton Company, PRG-Schultz International Inc., Silicon Graphics International, Terrastar Corp., Tipperary Corporation and Viskase, Inc. Mr. Davis offers leadership and experience from serving as a board member of over 20 public companies and as chairman and chief executive of several companies. Mr. Davis also brings to the Board experience with companies emerging from Chapter 11 restructuring processes and with respect to risk management. Mr. Davis provides insight into matters pertaining to the Company’s capital structure and merger and acquisition opportunities.
Dennis J. Fortino
Director
Mr. Fortino has been a Director of the Company since July 23, 2010. Mr. Fortino is a Consultant with Private Consultant USA Professional Services in Palo Alto, California (“PCUPS”), where he serves as a business consultant to develop business rationalization and growth plans to companies (including the Company) and also serves as an executive coach. Prior to becoming a Consultant with PCUPS in 2006, Mr. Fortino served as the Executive Vice President of the Lithography & Parametric Solutions Group at KLA-Tencor Corporation (“KLA-Tencor”), a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries between September 2000 and November 2005. From August 1997 to September 2000, he served as Vice President and General Manager of the Surfscan Division of KLA-Tencor and from November 1995 to July 1997 as the Vice President and General Manager of the Surface Metrology Division of KLA-Tencor. Mr. Fortino served as Vice President and General Manager for Spectra-Physics Lasers from July 1991 to October 1995. Mr. Fortino has more than 20 years of experience in the semiconductor and related microelectronics industries as well as a deep understanding of the Company’s products and related technologies. Mr. Fortino brings to the Company’s Board of Directors significant technology, operating experience, business acumen and insight into current and emerging business trends.
K. Peter Heiland
Director
Mr. Heiland has been a Director of the Company since July 23, 2010. Mr. Heiland has over 25 years of domestic and international management experience, as well as an extensive background in technology. Mr. Heiland is the founder and President of Integrated Dynamics Engineering GmbH (“IDE”), a developer and manufacturer of vibration control products, magnetic field compensation systems, acoustic enclosures and robotics, since March 1990. IDE’s products serve several markets, including the semiconductor industry. Mr. Heiland also serves as a manager of JEC II Associates, LLC, a privately held investment company. Mr. Heiland received a degree in mechanical engineering from the University of Wiesbaden for Applied Sciences in Germany. Mr. Heiland’s more than 25 years of experience in technology management positions and with products serving the semiconductor industry brings to the Company’s Board of Directors significant technology, business acumen, substantial operational experience and expertise in corporate strategy development.
Ira J. Lamel
Director
Mr. Lamel has been a Director of the Company since July 23, 2010. Mr. Lamel is Executive Vice President and Chief Financial Officer of The Hain Celestial Group, Inc. (“Hain”), a leading natural and organic food and personal care products company operating in North America and Europe. Prior to joining Hain on October 1, 2001, Mr. Lamel was an audit partner in the New York Area practice of Ernst & Young LLP. He retired from Ernst & Young after a 29 year career serving clients in various industries, one of which included Excel Technology, Inc. (“Excel”), which was acquired by the Company in August 2008. Mr. Lamel served as the audit partner on Excel beginning with the audit for the year ended December 31, 2000 and through the review for the quarter ended June 30, 2001. In addition, Mr. Lamel served on the Board of Directors of Excel between 2004 and 2008. Mr. Lamel also served on the Board of Directors of Harvey Electronics (“Harvey”) between 2004 and 2007. On each such board at Excel and Harvey, Mr. Lamel was the chairman of the Audit Committee and a member of the Compensation Committee. Mr. Lamel brings to the Company’s Board of Directors extensive financial, accounting and auditing expertise, including an understanding of accounting principles, financial reporting rules and regulations and financial reporting processes acquired over the course of his 38-year career. In addition, Mr. Lamel’s prior service on the Board of Directors and as Chairman of the audit committee at Excel Technology, Inc. provides him with invaluable experience.
Byron O. Pond
Director
Mr. Pond has been a Director of the Company since 2000. From August 2006 through December 2006, Mr. Pond served as Interim Chief Executive Officer of Cooper Tire & Rubber Company, an automotive supply company. In 1999, Mr. Pond joined the Cooper Tire & Rubber Company Board of Directors and served until retirement in 2008. Mr. Pond joined the Board of Directors of Precision Castparts Corporation in 2000 and served until retirement in 2007. In February 2001, Mr. Pond joined Amcast Industrial Corporation. During his tenure he served as President, CEO and Chairman before retiring on his contract termination date in February 2004. After retirement, Mr. Pond remained as an Amcast director and also became non-executive Chairman. On November 1, 2004, Mr. Pond was asked to reassume the positions of Amcast Chairman, President and CEO. Amcast filed for protection under Chapter 11 of the U.S. Bankruptcy Code on November 30, 2004. From 1990, Mr. Pond was a senior executive with Arvin Industries, Inc., serving as its President and Chief Executive Officer from 1993 to 1996 and as its Chairman and Chief Executive Officer from 1996 to 1998. He retired as Chairman of Arvin Industries, Inc. in 1999. In 2008, Mr. Pond joined the Board of Directors of EMCON Technologies Inc., (“EMCON”) a global producer of exhaust systems and catalytic converters, controlled by One Equity Partners, a private equity unit of JP Morgan Chase. Mr. Pond retired from the EMCON Board of Directors in 2010 when the company was sold to Faurecia, a global automotive OEM component producer headquartered in France. Currently, Mr. Pond serves on the Board of Directors of ECRM Inc., a producer of laser imaging capital equipment for the printing industry. With more than 40 years of experience working with organizations and management structures, as the past Chairman and CEO of public companies, and as a member of the Company’s Board of Directors for approximately 10 years, Mr. Pond has a deep knowledge of all aspects of the Company’s business. In addition, Mr. Pond’s service on other public company Boards of Directors and his membership on the Company’s audit, compensation, and nominating & corporate governance committees, provide him with invaluable experience.
John A. Roush
Chief Executive Officer, Director
Mr. Roush was appointed the Company’s Chief Executive Officer and elected as a member of the Board of Directors on December 14, 2010. Mr. Roush joined the Company after a 12-year career with PerkinElmer, Inc., a provider of technology and services to the diagnostics, research, environmental, safety and security, industrial and laboratory services markets, where he was a corporate officer and served in several senior leadership positions. Since 2009, Mr. Roush had been serving as president of PerkinElmer’s Environmental Health business. From 2004 to 2009, Mr. Roush led PerkinElmer’s Optoelectronics business unit, which supplies specialty photonics products to biomedical and industrial OEMs. From 1999 to 2004, Mr. Roush served in various general management roles within the Optoelectronics business unit. Prior to joining PerkinElmer, Mr. Roush held management positions with Outboard Marine Corporation, AlliedSignal, Inc., now Honeywell International, McKinsey & Company Inc. and General Electric. As the Company’s Chief Executive Officer, Mr. Roush provides an insider’s perspective in Board discussions about the business and strategic direction of the Company.
MANAGEMENT DISCUSSION FROM LATEST 10K
Business Overview
We design, develop, manufacture and sell laser-based solutions (consisting of lasers and laser-based systems), laser scanning devices, and precision motion and optical control technologies. Our technology is incorporated into customer products or manufacturing processes for a wide range of applications in a variety of markets, including: electronics, industrial, medical, and scientific. Our products enable customers to make advances in materials and processing technology and to meet extremely precise manufacturing specifications.
During the quarter ended April 1, 2011, we realigned the structure of our internal organization and business processes in a manner that caused the composition of our reportable segments to change. This decision was made as a result of our internal assessment of our organization based on information received by our chief operating decision maker, the Chief Executive Officer. As a result of this process, we changed our reportable segments to the following three strategic operating segments: Laser Products, Precision Motion and Technologies, and Semiconductor Systems. Our new reportable segment structure allows us to prioritize our investments, align our resources to meet the demands of the markets we serve, optimize business performance and maximize opportunities for collaboration and synergy within each segment. We evaluate the performance of, and allocate resources to, our segments based on sales and gross profit. Our reportable segments have been identified based on commonality of end markets, customers and technologies amongst our individual product lines, which is consistent with our operating structure and associated management structure. Each segment reports to a separate divisional manager. Consequently, the realignment caused the composition of our reportable segments to change from prior years, with the exception of the Semiconductor Systems segment. Our reportable segment financial information has been restated to reflect the updated reportable segment structure for all periods presented.
Our Laser Products segment designs, manufactures and markets photonics-based solutions, consisting of lasers and laser-based systems, to customers worldwide. The segment serves highly demanding photonics-based applications such as cutting, welding, marking, engraving, micro-machining, and scientific research. The segment sells these products both directly utilizing our highly technical sales force and indirectly through resellers and distributors.
Our Precision Motion and Technologies segment designs, manufactures and markets precision motion and optical control technologies, consisting of air bearing spindles, encoders, thermal printers, laser scanning devices, and light and color measurement devices to customers worldwide. The vast majority of the segment’s product offerings are sold to original equipment manufacturers (“OEM’s”). The segment sells these products both directly utilizing a highly technical sales force and indirectly through resellers and distributors.
Our Semiconductor Systems segment designs, develops and sells laser-based production systems for semiconductor, microelectronics and electronics manufacturing. The segment offers a full spectrum of production systems, featuring high precision laser and motion technology, to process semiconductor wafers, LCD panels and microelectronic components. Semiconductor Systems’ solutions address a wide range of applications in a variety of end markets, including industrial, scientific, consumer electronics, medical, and aerospace. The segment supplies leading global foundries, integrated device manufacturers and component manufacturers.
Recent Events
Refinancing and Reduction of Debt
On August 17, 2011, we optionally redeemed $35.0 million in aggregate principal of our 12.25% Senior Secured PIK Election Notes (the “2014 Notes”), constituting 32% of the outstanding $108.1 million principal amount. On October 19, 2011, we consummated the refinancing of the remaining $73.1 million of 2014 Notes through the proceeds from a new $80.0 million senior secured credit agreement (the “Credit Agreement”) with a syndicate of banks. In December 2011, we voluntarily repaid $5.1 million on our new revolving credit facility. The refinancing and reduction of our principal debt from $107.6 million as of December 31, 2010 to $68.0 million as of December 31, 2011 substantially reduced our interest expense, while extending the maturity of our principal debt.
Restructuring Plan
In the fourth quarter 2011, we initiated a new restructuring program, targeting as much as $5.0 million in annualized cost savings with a goal of eliminating up to twelve (12) facilities. The facility reductions, which include manufacturing and R&D facilities as well as sales offices, are expected to be achieved through a combination of site consolidations and divestitures. Three facilities have been consolidated as of December 31, 2011. We expect to incur cash charges of $4.0 million to $5.0 million related to our 2011 restructuring plan, $1.2 million of which was recorded during 2011. Additionally, we expect to incur non-cash restructuring charges, related to accelerated depreciation of $3.0 million to $4.0 million, $1.0 million of which was recorded during 2011. We expect to substantially complete the restructuring program by the end of 2012.
As part of the restructuring plan, we have placed our Semiconductor Systems segment and laser systems product line, which is sold under the Control Laser and Baublys brand names, under strategic review. We intend to exit these businesses. In aggregate, these three businesses contributed approximately $62.0 million of revenue in 2011, with operating profitability below our other business lines.
Appointment of Executive Officers
We appointed John Roush as Chief Executive Officer in December 2010 and Robert Buckley as Chief Financial Officer in April 2011. During 2011, we appointed Jamie Bader as President and Group Executive of our Precision Motion and Technologies segment; David Clarke as Group Executive of our Laser Products segment; and Deborah Mulryan as Vice President of Human Resources.
Settlement of SEC Investigation
On May 16, 2011, we agreed to settle the SEC’s investigation relating to our historical accounting practices and the restatement of our historical financial statements that began on May 14, 2009, without admitting or denying the findings of the SEC, by consenting to the entry of an administrative order that requires us to cease and desist from committing or causing any violations and any future violations of the reporting, books and records, and internal controls provisions of the Securities Exchange Act of 1934. The SEC did not charge us with fraud nor impose a civil penalty or other money damages as part of the settlement. The settlement completely resolves the SEC investigation as it relates to the Company.
Settlement of Class Action
On February 22, 2011, the United States District Court for the District of Massachusetts entered an order granting final approval of settlement in the putative shareholder class action filed on December 12, 2008. Our contribution to the settlement amount was limited to our self-insured retention amount under our directors and officers insurance policy. As a result of the court’s final approval of the settlement, 993,743 shares of our common stock that were placed in a reserve account and held in escrow for the benefit of the holders of Section 510(b) claims were released to our shareholders entitled to such shares.
Final Closure of Chapter 11 Bankruptcy
On November 20, 2009, GSI Group Inc. and two of its wholly owned subsidiaries, GSI Group Corporation and MES International, Inc. (the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. On July 23, 2010, we emerged from bankruptcy and our Board of Directors was reconstituted. Our bankruptcy cases initiated under Chapter 11 of the Bankruptcy Code were closed on September 2, 2011. We no longer have any legal or material financial liability relating to those cases. Please see Notes 2, 7, and 12 to Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the Chapter 11 proceedings.
Overview of Financial Results
As a result of the recent events discussed above as well as developments in the economy, our financial results in 2011, 2010 and 2009 differ significantly from each other and from those in prior years. In 2011, we reported net income of $29.0 million as compared to net losses of $0.7 million and $71.3 million in 2010 and 2009, respectively. Our 2011 operating results saw a significant decrease in non-recurring charges, which in prior years related to professional fees associated with our bankruptcy filing and restatement of prior period financial statements. Our 2011 results included $2.3 million of restructuring, restatement related costs and other charges, and $0.3 million of post-emergence professional fees resulting from our emergence from bankruptcy on July 23, 2010. Our 2010 operating results included $29.5 million of non-recurring charges comprised of $26.2 million of net reorganization items, $2.6 million of restructuring, restatement related costs and other charges, and $0.7 million of post-emergence professional fees. Our 2009 operating results included $47.9 million of non-recurring charges comprised of $23.6 million of net reorganization items, $16.3 million of restructuring, restatement related costs and other charges, $7.0 million of pre-petition professional fees, and $1.0 million relating to the impairment of our goodwill and intangible assets.
Excluding the impact of the non-recurring bankruptcy and restatement related costs, our financial results for 2011 and 2010 improved significantly compared to 2009. This is a reflection of the adverse impact that the world-wide economic downturn had on the demand for our products beginning in the latter half of 2008. The reduced demand for our products significantly contributed to the $71.3 million loss that we reported for 2009. Our sales began to recover somewhat in the latter part of 2009, and saw increasing demand during 2010 and 2011, exclusive of the Semiconductor System segment’s recognition of revenue of $0.5 million, $45.7 million and $30.4 million for 2011, 2010 and 2009, respectively, relating to orders placed by customers prior to 2009 that had been previously deferred due to undelivered elements or unresolved commitments. The specific components of our operating results for 2011, 2010 and 2009 are further discussed below.
Precision Motion and Technologies
2011 Compared with 2010
Gross profit increased $2.4 million, or 2.7%, in 2011 as compared to 2010 due to the 5.8% increase in sales. The 1.4 percentage point decrease in gross profit margin was primarily attributable to an unfavorable mix of products sold in 2011 compared to 2010.
2010 Compared with 2009
Gross profit increased $40.6 million, or 84.9%, in 2010 as compared to 2009. The increase in gross profit and the 5.4 percentage point increase in gross profit margin were primarily attributable to volume growth and the higher capacity utilization resulting from the increased demand for our products, particularly in our air bearing spindles, encoders, and laser scanning devices. Our increase in gross profit margin was partially offset by increases in inventory and warranty expenses.
Semiconductor Systems
2011 Compared with 2010
Gross profit decreased $10.4 million, or 33.2%, in 2011 as compared to 2010. The decrease was primarily due to the impact of $20.0 million of gross profit recognized in 2010 related to orders received prior to 2009 for which we did not recognize revenue in the period in which the order was shipped due to previously undelivered elements or unresolved commitments, as compared to the final remaining $0.3 million of gross profit recognized in 2011. Excluding the impact of these transactions, gross profit in terms of dollars and as a percentage of sales, significantly increased. Gross profit margin in 2011 was 47.6% compared to 38.5% in 2010, an improvement of 9.1 percentage points. The increase in gross profit margin percentage was primarily attributable to a favorable product mix, which included a shift to highly profitable upgrade and retrofit sales. Gross profit margin also improved due to lower inventory and warranty expenses.
2010 Compared with 2009
Gross profit increased by $15.2 million, or 93.9%, in 2010 as compared to 2009 and gross profit margin improved 6.0 percentage points from 32.5% in 2009 to 38.5% in 2010. These increases were attributable to higher capacity utilization and absorption and a favorable product mix. Sales in 2010 had a higher proportion of sales attributable to higher margin equipment sales and equipment upgrades. Gross profit of $20.0 million in 2010 and $16.4 million in 2009 resulted from the recognition of revenue that had been deferred from orders placed by customers prior to 2009, but had not been recognized in the period in which shipments occurred due to previously undelivered elements or unresolved commitments. Our increase in gross profit margin was partially offset by increases in inventory and warranty expenses.
Research and Development and Engineering Expenses
Research and development and engineering (“R&D”) expenses are primarily comprised of labor, other employee-related expenses and materials.
2011 Compared with 2010
R&D expenses were $32.0 million, or 8.7% of sales, in 2011, compared with $29.9 million, or 7.8% of sales, in 2010. R&D expenses, in terms of total dollars and as a percentage of sales, increased as a result of increased headcount and higher project spending for the development of new products and technologies in several of our product lines.
2010 Compared with 2009
R&D expenses were $29.9 million, or 7.8% of sales, in 2010, compared with $28.3 million, or 11.1% of sales, in 2009. R&D expenses, in terms of total dollars, increased slightly due to engineering costs for the next generation wafer repair system in our Semiconductor Systems segment, and decreased as a percentage of sales due to the overall increase in sales during 2010.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, facilities and executive management.
2011 Compared with 2010
SG&A expenses were $78.4 million, or 21.4% of sales, in 2011, compared to $74.9 million, or 19.5% of sales, in 2010. SG&A expenses, in terms of total dollars and as a percentage of sales, increased primarily as a result of an increase in employee personnel costs and an increase in selling and marketing costs. These increases were partially offset by decreases in various professional fees, which were significantly higher in 2010 due to the costs associated with the filing of various quarterly and annual financial statements with the SEC related to 2008, 2009 and 2010.
2010 Compared with 2009
SG&A expenses were $74.9 million, or 19.5% of sales, in 2010, compared to $60.4 million, or 23.7% of sales, in 2009. SG&A expenses, in terms of total dollars, increased primarily as a result of an increase in overall selling costs and commissions, and an increase in legal, financial and accounting related consulting and professional fees. Financial and accounting related consulting and professional fees increased due to our efforts to emerge from bankruptcy and to issue our 2009 quarterly and annual financial statements and our 2010 quarterly financial statements. In addition, SG&A included a charge of $1.0 million during 2010 related to severance and stock compensation pursuant to a separation agreement related to the resignation of our former CEO.
Amortization of Purchased Intangible Assets
Amortization of intangible assets is discussed below in “Critical Accounting Policies and Estimates.” Amortization of purchased intangible assets is charged to our Precision Motion and Technologies and Laser Products segments. Amortization for core technology is included in cost of goods sold and charged to our Precision Motion and Technologies and Laser Products segments.
Amortization of purchased intangible assets, excluding the amortization for core technology, was $3.5 million, or 1.0% of sales, in 2011; $4.4 million, or 1.2% of sales, in 2010; and $5.8 million or 2.3%, of sales, in 2009. The decreases, in terms of total dollars and as a percentage of sales, were related to the completion of amortization of certain intangible assets, including intangible assets acquired as part of the 2008 Excel acquisition.
Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets
The two most recent annual goodwill and indefinite-lived intangible asset impairment tests were performed as of the beginning of the second quarter of 2011 and 2010, respectively, noting no impairment. Due to our bankruptcy filing in November 2009, we conducted an interim review as of December 31, 2009 to assess whether the carrying value of our goodwill, intangible assets and other long-lived assets was impaired. Based on our review and evaluation, we noted that the carrying value of certain assets exceeded their fair market value, which resulted in a $1.0 million charge to reduce the carrying amounts of goodwill and intangible assets in 2009.
Restructuring, Restatement Related Costs and Other
We recorded restructuring, restatement related costs and other charges of $2.3 million, $2.6 million and $16.3 million during 2011, 2010 and 2009, respectively.
Restructuring
We recorded a restructuring charge of $2.2 million in December 2011 related to the consolidation of certain operations in Asia and the United States in an effort to reduce manufacturing and operating costs pursuant to the 2011 restructuring program. Three facilities have been eliminated as of December 31, 2011. The $2.2 million charge was related to accelerated depreciation of $1.0 million due to the change in useful lives of certain long-lived assets, severance and retention related costs of $0.8 million, and other restructuring related costs of $0.4 million. We expect to incur cash charges of $4.0 million to $5.0 million related to our 2011 restructuring plan, $1.2 million of which was recorded during 2011. Additionally, we expect to incur non-cash restructuring charges, related to accelerated depreciation of $3.0 million to $4.0 million, $1.0 million of which was recorded during 2011. We expect to substantially complete the restructuring program by the end of 2012.
During 2011, we also recorded a $0.1 million charge related to revised assumptions for our abandoned lease and accretion expense related to a prior year restructuring charge for a German facility, compared to a charge of $0.4 million in 2010 related to this facility.
In 2009, we determined that we would no longer recover sublease payments from a subtenant in a German facility. As a result of revised sublease assumptions, we recorded restructuring charges of $0.4 million and $1.3 million during 2010 and 2009, respectively. In 2009, we also initiated certain restructuring activities to consolidate our German sales and distribution operations for the Precision Motion and Technologies segment located in Munich, Germany with operations located in Darmstadt, Germany. These consolidation activities were completed in 2009, at a total cost of $0.2 million.
During 2009, we recorded net restructuring costs of $0.7 million related our 2008 U.K. restructuring plan, which moved operations from the U.K. to China.
Restatement Related Costs and Other
During 2011, 2010 and 2009, we incurred costs for professional services performed in connection with the SEC investigation and the restatement of our previously issued financial statements as reported in our Form 10-K for the year ended December 31, 2008 and our Form 10-Q for the quarter ended September 26, 2008. These costs totaled $0.1 million during 2011, primarily related to legal fees associated with the SEC investigation, as compared to $2.2 million in 2010 and $14.1 million in 2009, primarily related to legal fees associated with the SEC investigation and accounting and tax fees associated with the restatement of our previously issued financial statements.
Pre-Petition and Post-Emergence Professional Fees
Pre-petition professional fees represented costs incurred during 2009 prior to the bankruptcy for financial and legal advisors to assist in the analysis of debt restructuring alternatives, as well as costs incurred for financial and legal advisors retained by the holders of our 2008 Senior Notes pursuant to certain binding agreements between the two parties. Post-emergence professional fees represent costs incurred subsequent to bankruptcy emergence for financial and legal advisors to assist with matters in finalizing the bankruptcy process.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Business Overview
We design, develop, manufacture and sell laser-based solutions (consisting of lasers and laser systems), precision motion control devices, optical controls and associated precision technologies, and semiconductor systems. Our customers incorporate our technology into their products or manufacturing processes for a wide range of applications in a variety of markets, including: industrial, electronics, medical, semiconductor, scientific, and aerospace. Our products enable customers to make advances in materials and processing technology and to meet extremely precise manufacturing specifications. We strive to create shareholder value through:
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Driving profitable organic sales growth through our participation in attractive end markets;
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Delivering a continual stream of successful new product launches incorporating differentiated technology;
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Generating high levels of cash flow from operations;
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Broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions; and
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Attracting, retaining and developing talented and motivated employees.
We realigned the structure of our internal organization during the quarter ended April 1, 2011 in a manner that caused the composition of our reportable segments to change to the following three strategic operating segments: Laser Products, Precision Motion and Technologies, and Semiconductor Systems. Our reportable segment financial information has been restated to reflect the updated reportable segment structure for all periods presented.
The Laser Products segment designs, manufactures and markets photonics-based solutions, consisting of lasers and laser-based systems, to customers worldwide. This segment serves highly demanding photonics-based applications such as cutting, welding, marking, engraving, micro-machining, and scientific research. The Precision Motion and Technologies segment designs, manufactures and markets air bearing spindles, encoders, thermal printers, precision motion devices, and light and color measurement systems to customers worldwide. The vast majority of this segment’s product offerings are sold to original equipment manufacturers (“OEM’s”) based on the segment’s core competencies in precision motion and motion control technologies. The Semiconductor Systems segment designs, builds and sells production systems that process semiconductor wafers using laser beams and high precision motion technology. The systems we manufacture are sold to integrated device manufacturers and wafer processors. The systems perform laser-based processing on the following types of semiconductors: general wafers used for logic or memory purposes, dynamic random access memory (DRAM, “Not And” or NAND) chips and high performance analog chips.
Strategy
We strive to expand our presence in the markets we serve both through profitable organic growth and strategic acquisitions. This strategy led to our acquisition of Excel Technologies, Inc. (“Excel”) in the third quarter of 2008. The acquisition of Excel represented a major step in our effort to penetrate attractive markets that depend on photonics-based solutions. The acquisition also allowed our Laser Products and Precision Motion and Technologies segments to expand our presence in several markets. Our primary focus in the near term will be on the implementation of significant productivity initiatives, the continued development and introduction of new products identifying new market opportunities for new and existing products, refocusing the product platforms to drive profitable growth, rightsizing our cost structure to improve profitability, and divesting non-strategic businesses.
In the fourth quarter, we will initiate a new twelve month cost reduction program. This program has a goal of eliminating up to twelve facilities by the end of 2012. The facility reductions, which include manufacturing and R&D facilities as well as sales offices, will be achieved through a combination of site consolidations and divestitures. Furthermore, after conducting a strategic review of our laser systems business lines, which are sold under the Control Laser and Baublys brand names, we intend to explore our options to exit these businesses. In addition, we are placing our Semiconductor Systems business under strategic review.
Significant Events
$35.0 Million Redemption of 2014 Notes
On August 17, 2011, we optionally redeemed $35.0 million in aggregate principal amount (constituting 32% of the $108.1 million in aggregate principal amount) of our outstanding 12.25% Senior Secured PIK Election Notes (the “2014 Notes”). The redemption was financed from a portion of our available cash and cash equivalents.
Refinancing of Debt
On October 19, 2011, we consummated the refinancing of all of our remaining $73.1 million 2014 Notes through the proceeds from a new $80.0 million senior secured credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement provides for a $40.0 million, 4-year, term loan facility and a $40.0 million, 4-year, revolving credit facility (collectively the “Senior Credit Facility”), which matures in 2015. The Credit Agreement also provides for an additional uncommitted $25.0 million incremental facility, subject to satisfaction of certain customary covenants. Concurrent with securing the Credit Agreement on October 19, 2011, we provided formal notice that we had elected to optionally redeem all $73.1 million in aggregate principal amount of our outstanding 2014 Notes. As a result of the delivery of this irrevocable notice of redemption, our obligation to repay the 2014 Notes was accelerated to November 18, 2011. This refinancing is expected to substantially reduce our interest expense, while extending the maturity of our principal debt. We also expect that the financing will provide us with additional flexibility to execute on our strategic initiatives. See Note 15 to Consolidated Financial Statements for a further discussion of the refinancing of our debt.
Closing of Chapter 11 Cases
The Chapter 11 Cases initiated under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for Delaware on November 20, 2009 were closed on September 2, 2011. We no longer have any legal or material financial constraint relating to those cases.
Appointment of Executive Officers
Effective as of September 6, 2011, we appointed Deborah Mulryan, as Vice President, Human Resources and an officer of the Company.
Overview of Financial Results
As a result of our filing and emergence from bankruptcy, our financial results in 2011 and 2010 differ significantly from each other and from those in prior periods. During the nine months ended September 30, 2011, we reported net income of $25.1 million, compared to net income of $1.1 million during the nine months ended October 1, 2010. Overall sales for the nine months ended September 30, 2011 decreased $5.4 million compared to the nine months ended October 1, 2010 primarily as a result of $44.4 million of revenue recognized in our Semiconductor Systems segment in the nine months ended October 1, 2010 as compared to $0.5 million in the nine months ended September 30, 2011 that had been deferred from orders placed by customers prior to 2009, but had not been recognized in the period in which the order was shipped due to previously undelivered elements or unresolved commitments. The revenue related to these orders was recognized once the final deliverables or commitments were resolved. Gross profit on these sales was $0.3 million and $19.2 million for the nine months ended September 30, 2011 and October 1, 2010, respectively. Excluding the impact of the Semiconductor Systems segment, our sales in the Laser Products and Precision Motion and Technologies segments for the nine months ended September 30, 2011 increased approximately 13.2% and 13.9%, respectively.
Our operating results during the nine months ended September 30, 2011 substantially improved due to the reduction in non-recurring items that were incurred during the nine months ended October 1, 2010, which included bankruptcy reorganization items totaling $26.2 million, with no comparable amounts in 2011. The nine months ended October 1, 2010 also included restructuring, restatement related costs, and other expenses totaling $2.0 million, compared to $0.1 million during the nine months ended September 30, 2011. In addition, our interest expense decreased from $16.0 million during the nine months ended October 1, 2010 to $10.4 million during the nine months ended September 30, 2011 as a result of our emergence from bankruptcy and subsequent decrease in outstanding debt, which was reduced from $210.0 million to $107.0 in July 2010, and further reduced to $73.1 million as a result of our redemption of $35.0 million in aggregate principal amount of our outstanding debt in August 2011. We also generated $30.7 million of operating cash flows for the nine months ended September 30, 2011, which increased $38.6 million over the comparable nine months ended October 1, 2010.
Gross profit as a percentage of sales can be influenced by a number of factors, including product mix, pricing from competitors, manufacturing efficiencies and utilization, volume, costs for raw materials and outsourced manufacturing, warranty costs and charges related to excess and obsolete inventory, at any particular time.
During the three months ended September 30, 2011, gross profit of the Laser Products segment increased by $1.2 million, or 10.2%, from $11.7 million during the three months ended October 1, 2010 to $12.9 million during the three months ended September 30, 2011. The Laser Products segment’s gross profit margin was 37.8% during the three months ended September 30, 2011, compared with a gross profit margin of 40.4% during the three months ended October 1, 2010. The overall increase in gross profit was due to increased volume, which was partially offset by a slight decline in gross profit margin percentage, primarily attributable to a less favorable product mix and pricing in certain product lines.
During the three months ended September 30, 2011, gross profit of the Precision Motion and Technologies segment decreased by $0.5 million, or 2.1%, from $23.7 million during the three months ended October 1, 2010 to $23.2 million during the three months ended September 30, 2011, primarily attributable to the overall 3.1% decrease in gross sales. The Precision Motion and Technologies segment’s gross profit margin was 47.5% during the three months ended September 30, 2011, compared with a gross profit margin of 47.0% during the three months ended October 1, 2010. Gross profit margin percentage experienced a slight increase due to product mix in various product lines, which helped to offset the 3.1% decrease in overall sales.
During the three months ended September 30, 2011, gross profit of the Semiconductor Systems segment decreased by $0.8 million, or 13.6%, from $5.5 million during the three months ended October 1, 2010 to $4.7 million during the three months ended September 30, 2011. The Semiconductor System segment’s gross profit margin was 46.9% during the three months ended September 30, 2011, compared with a gross profit margin of 45.8% during the three months ended October 1, 2010. The decrease in the Semiconductor Systems segment gross profit margin was primarily attributable to the $0.9 million gross margin on the $1.5 million of revenue recognized from orders placed and shipped prior to 2009 that was recognized in the three months ended October 1, 2010. Gross profit margin percentage increased due to better management of inventory in the three months ended September 30, 2011 as compared to the three months ended October 1, 2010.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, facilities and executive management. SG&A expenses were $19.4 million during the three months ended September 30, 2011, representing 20.9% of sales, compared to $20.7 million, or 22.6% of sales, during the three months ended October 1, 2010. SG&A expenses, in terms of total dollars and as a percentage of sales, decreased primarily due to the significant professional fees incurred during the three months ended October 1, 2010 related to the preparation and filing of our 2009 annual and quarterly financial statements with the SEC, and the fees and expenses related to the interim management of the Company.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets, excluding the amortization for core technology that is included in cost of goods sold, was $0.9 million, or 0.9% of sales, during the three months ended September 30, 2011, compared with $1.1 million, or 1.2% of sales, during the three months ended October 1, 2010. The decrease in terms of total dollars and as a percentage of sales was due to the completion of amortization of certain intangibles.
Restructuring, Restatement Related Costs and Other
We recorded restructuring, restatement related costs and other charges of less than $0.1 million and $0.3 million during the three months ended September 30, 2011 and October 1, 2010, respectively.
Restructuring
During each of the three months ended September 30, 2011 and October 1, 2010, we recorded less than $0.1 million accretion expense related to a prior year restructuring charge for a German facility.
Restatement Related Costs and Other
During the three months ended October 1, 2010, we incurred costs related to third parties for professional services performed in connection with the SEC investigation and the restatement of our previously issued financial statements as reported in our Form 10-K for the year ended December 31, 2008 and our Form 10-Q for the quarter ended September 26, 2008. These costs totaled $0.3 million during the three months ended October 1, 2010, and primarily related to legal fees associated with the SEC investigation. We did not incur such costs in the three months ended September 30, 2011.
Reorganization Items
Reorganization items represent expense or income amounts that are recorded in the consolidated financial statements as a result of the bankruptcy proceedings. Reorganization items totaled $5.9 million and included a $4.2 million backstop fee to certain holders of our debt in connection with the Rights Offering, professional fees of $1.3 million, and $0.4 million of other items during the three months ended October 1, 2010, with no comparable amount for the three months ended September 30, 2011. See Note 2 to Consolidated Financial Statements.
Income Taxes
The effective tax rate on the income from operations for the three months ended September 30, 2011 was a provision of 9.3%, compared with a provision of 87.8% on the income from operations for the three months ended October 1, 2010. The effective tax rate for the three months ended September 30, 2011 reflects our estimated annual effective tax rate and differs from the Canadian statutory rate primarily due to the release of a portion of our valuation allowance, the income earned in jurisdictions with varying tax rates, and an increase in our liability for uncertain tax positions. The effective tax rate for the three months ended October 1, 2010 differs from the Canadian statutory rate primarily due to the tax treatment of bankruptcy related costs, the release of a portion of our valuation allowance, and the income earned in jurisdictions with varying tax rates.
We maintain a valuation allowance on our deferred tax assets in certain jurisdictions. A valuation allowance is required pursuant to ASC 740, “Accounting for Income Taxes,” when, based upon an assessment which is largely dependent upon objectively verifiable evidence including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.
In conjunction with our ongoing review of actual results and anticipated future earnings, we continuously reassess the possibility of releasing the valuation allowance currently in place on our deferred tax assets. It is reasonably possible that a significant portion of the valuation allowance will be released within the next twelve months. Such a release will be reported as a reduction to income tax expense without any impact on cash flows in the quarter in which it occurs.
During the nine months ended September 30, 2011, gross profit of the Laser Products segment increased by $3.5 million, or 10.3%, from $34.1 million during the nine months ended October 1, 2010 to $37.6 million during the nine months ended September 30, 2011. The Laser Products segment’s gross profit margin was 37.6% during the nine months ended September 30, 2011, compared with a gross profit margin of 38.6% during the nine months ended October 1, 2010. The overall increase in gross profit was due to the 13.2% growth in sales, and the slight decrease in gross profit margin percentage was primarily attributable to product mix and pricing among various product lines.
During the nine months ended September 30, 2011, gross profit of the Precision Motion and Technologies segment increased by $5.3 million, or 8.0%, from $67.0 million during the nine months ended October 1, 2010 to $72.3 million during the nine months ended September 30, 2011, primarily driven by the overall 13.9% increase in gross sales. The Precision Motion and Technologies segment’s gross profit margin was 47.5% during the nine months ended September 30, 2011, compared with a gross profit margin of 50.1% during the nine months ended October 1, 2010. The overall increase in gross profit was due to the overall net increase in sales, while the decrease in gross profit margin percentage was primarily attributable to the decrease in sales in the first half of 2011 of our higher margin encoders for the data storage industry and slight decreases in margin in the air bearing spindles and thermal printers product lines, which combined to offset the 13.9% increase in sales.
During the nine months ended September 30, 2011, gross profit of the Semiconductor Systems segment decreased by $11.1 million, or 41.1%, from $27.0 million during the nine months ended October 1, 2010 to $15.9 million during the nine months ended September 30, 2011, primarily as a result of the impact of the $44.4 million of revenue recognized in the nine months ended October 1, 2010 related to orders received prior to 2009, as compared to the final remaining $0.5 million recognized in the nine months ended September 30, 2011. The Semiconductor System segment’s gross profit margin was 46.4% during the nine months ended September 30, 2011, compared with a gross profit margin of 38.6% during the nine months ended October 1, 2010. The increase in the Semiconductor Systems segment gross profit margin percentage was primarily attributable to favorable product mix and better management of inventory.
Reorganization Items
Reorganization items represent expense or income amounts that are recorded in the consolidated financial statements as a result of the bankruptcy proceedings. Reorganization items, comprised of professional fees totaling $26.2 million, were incurred during the nine months ended October 1, 2010 with no comparable amount for the nine months ended September 30, 2011. See Note 2 to Consolidated Financial Statements.
Income Taxes
The effective tax rate on the income from operations for the nine months ended September 30, 2011 was a provision of 13.8%, compared with a provision of 74.4% on income from operations for the nine months ended October 1, 2010. The effective tax rate for the nine months ended September 30, 2011 reflects our estimated annual effective tax rate and differs from the Canadian statutory rate primarily due to the release of a portion of our valuation allowance, the income earned in jurisdictions with varying tax rates, and an increase in our liability for uncertain tax positions. The effective tax rate for the nine months ended October 1, 2010 differs from the Canadian statutory rate primarily due to the tax treatment of bankruptcy related costs, income earned in jurisdictions with varying tax rates, and the release of a portion of our valuation allowance.
We maintain a valuation allowance on our deferred tax assets in certain jurisdictions. A valuation allowance is required pursuant to ASC 740, “Accounting for Income Taxes,” when, based upon an assessment which is largely dependent upon objectively verifiable evidence including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.
In conjunction with our ongoing review of actual results and anticipated future earnings, we continuously reassess the possibility of releasing the valuation allowance currently in place on our deferred tax assets. It is reasonably possible that a significant portion of the valuation allowance will be released within the next twelve months. Such a release will be reported as a reduction to income tax expense without any impact on cash flows in the quarter in which it occurs.
Liquidity and Capital Resources
Upon our emergence from bankruptcy on July 23, 2010, we issued $107.0 million of 2014 Notes, which mature in July 2014. Interest accrues on the 2014 Notes at a rate of 12.25% per year and is payable quarterly in arrears. In addition, we issued $1.1 million PIK notes related to a 2% reporting default interest penalty during the period from July 23, 2010 to February 14, 2011.
On July 18, 2011, we provided formal notice that we had elected to optionally redeem $35.0 million in aggregate principal amount (constituting 32% of the currently outstanding $108.1 million in aggregate principal amount) of our outstanding 2014 Notes, including PIK notes, leaving an outstanding principal balance of $73.1 million. The redemption was financed from a portion of our available cash and cash equivalents. If the 2014 Notes were to remain outstanding until their scheduled maturity date in 2014, annual cash interest expense on the 2014 Notes would be approximately $11.7 million in 2011, $9.0 million per year from 2012 to 2013 and $5.0 million in 2014. Cash paid for interest on the 2014 Notes was $9.9 million for the nine months ended September 30, 2011.
On October 19, 2011, we consummated the refinancing of our remaining $73.1 million in aggregate principal amount of our outstanding 2014 Notes through the proceeds from a new $80.0 million senior secured credit agreement with a syndicate of banks. The Credit Agreement provides for a $40.0 million, 4-year, term loan facility and a $40.0 million, 4-year, revolving credit facility that matures in 2015. The Credit Agreement also provides for an additional uncommitted $25.0 million incremental facility, subject to satisfaction of certain customary covenants. Concurrent with the refinancing on October 19, 2011, we provided formal notice that we had elected to optionally redeem all $73.1 million of outstanding 2014 Notes. As a result of the delivery of this irrevocable notice of redemption, our obligation to repay the 2014 Notes was accelerated to November 18, 2011.
The refinancing is expected to substantially reduce our interest expense, while extending the maturity of our principal debt. We expect annual interest cost of approximately $2.3 million on $73.1 million of debt, which provides for roughly $6.7 million in annual interest cost savings. The refinancing is expected to save approximately $10.0 million per year in annual interest expense when compared to the annual run rate as of the beginning of this year. The term loan facility requires $2.5 million quarterly repayments beginning on January 15, 2012, while the revolving credit facility is due at maturity in 2015. Outstanding borrowings under the Senior Credit Facility will bear interest at a rate per annum equal to LIBOR plus an initial spread of 275 basis points through March 31, 2012, subject to adjustment thereafter based on our consolidated leverage ratio. In addition, we expect that the financing will provide us with additional flexibility to execute on our strategic initiatives by allowing us to draw upon the committed $40.0 million revolving credit facility and an uncommitted $25.0 million incremental facility. See Note 15 to Consolidated Financial Statements for further discussion of the refinancing of our debt.
As a result of our emergence from bankruptcy, the associated restructuring and refinancing of our debt obligations, and our current level of business activity, we believe we will have sufficient liquidity to fund our operations. However, our ability to make payments on or to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future and have access to capital markets. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
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Fund Letters
