10-Q 1 d10q.txt FORM 10-Q 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 SEPTEMBER 28, 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 98-0110412 (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 October 17, 2001, there were 40,449,229 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...................... 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 22 PART I - OTHER INFORMATION............................................ 23 ITEM 1. LEGAL PROCEEDINGS........................................ 23 ITEM 5. OTHER INFORMATION........................................ 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 23 Signatures............................................................ 24 2 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)
SEPTEMBER 28, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS Current Cash and cash equivalents....................................................... $ 87,894 $113,858 Short-term investments.......................................................... 20,005 20,020 Accounts receivable, less allowance of $3,365 (December 31, 2000 - $2,758)...... 50,175 85,226 Income taxes receivable......................................................... 4,387 -- Inventories..................................................................... 67,102 77,906 Deferred tax assets............................................................. 14,957 25,615 Other current assets............................................................ 9,859 5,465 --------- --------- Total current assets........................................................ 254,379 328,090 Property, plant and equipment, net of accumulated depreciation of $22,093 (December 31, 2000 - $23,961)................................................... 34,102 33,368 Deferred tax assets................................................................ 7,693 6,253 Other assets....................................................................... 39,217 37,398 Intangible assets, net of amortization of $12,170 (December 31, 2000 - $11,363)................................................... 22,037 26,075 --------- --------- $357,428 $431,184 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Bank indebtedness............................................................... $ 11,098 $ 11,414 Accounts payable................................................................ 14,594 30,030 Accrued compensation and benefits............................................... 7,759 12,797 Income taxes payable............................................................ -- 32,489 Other accrued expenses.......................................................... 28,854 46,561 Current portion of long-term debt............................................... 2,654 3,821 --------- --------- Total current liabilities................................................... 64,959 137,112 Long-term debt due after one year.................................................. -- 2,697 Deferred compensation.............................................................. 2,046 2,108 --------- --------- Total liabilities........................................................... 67,005 141,917 Commitments and contingencies (note 7) Stockholders' equity Capital stock, no par value; Issued common shares of 40,448,229 (December 31, 2000 - 40,162,608)............................................. 302,967 301,667 Additional paid-in capital...................................................... 1,159 759 Retained earnings............................................................... 1,029 1,152 Accumulated other comprehensive loss............................................ (14,732) (14,311) --------- --------- Total stockholders' equity.................................................. 290,423 289,267 --------- --------- $357,428 $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 NINE MONTHS ENDED ------------------------- ------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- Sales.................................................. $41,277 $97,631 $205,526 $278,368 Cost of goods sold..................................... 31,969 58,547 134,265 165,313 -------- ------- -------- -------- Gross profit........................................... 9,308 39,084 71,261 113,055 Operating expenses: Research and development.......................... 5,626 8,993 19,444 26,276 Selling, general and administrative............... 16,363 20,625 53,151 60,852 Amortization of technology and other intangibles.. 1,390 1,127 4,054 3,508 Other............................................. (170) (243) (1,570) (2,913) -------- ------- -------- -------- Income (loss) from operations.......................... (13,901) 8,582 (3,818) 25,332 Gain on sale of assets............................ -- 1,680 -- 2,388 Interest income, net.............................. 759 998 3,382 1,582 Foreign exchange transaction gains (losses)....... 9 (229) 256 (2,003) -------- ------- -------- -------- Income (loss) before income taxes...................... (13,133) 11,031 (180) 27,299 Income tax provision (benefit)......................... (4,646) 3,855 (57) 9,529 -------- ------- -------- -------- Net income (loss)...................................... $ (8,487) $ 7,176 $ (123) $ 17,770 ======== ======= ======== ======== Net income (loss) per common share: Basic.......................................... $ (0.21) $ 0.18 $ -- $ 0.47 Diluted........................................ $ (0.21) $ 0.17 $ -- $ 0.45 Weighted average common shares outstanding (000's)..... 40,410 39,807 40,307 37,606 Weighted average common shares outstanding and dilutive potential common shares (000's)................... 40,410 41,731 40,307 39,644
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 NINE MONTHS ENDED ------------------------- ------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ (8,487) $ 7,176 $ (123) $ 17,770 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Gain on sale of assets............................. -- (1,680) -- (2,388) Translation loss on liquidation of a subsidiary.... 723 -- 723 -- Depreciation and amortization...................... 2,738 2,598 8,975 8,177 Compensation expense............................... 200 -- 400 -- Provision for (recovery of) deferred income taxes.. 5,821 (2,519) 8,848 (2,036) Changes in current assets and liabilities: Accounts receivable................................ 15,456 (8,644) 32,617 (14,238) Inventories........................................ 5,061 (3,012) 507 (30,836) Other current assets............................... 4,232 (1,604) 852 (2,893) Accounts payable, accrued expenses, and taxes payable............................................ (23,929) 10,105 (73,947) 12,306 -------- -------- -------- -------- Cash provided by (used in) operating activities......... 1,815 2,420 (21,148) (14,138) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of a business, net of cash acquired.... -- (6,548) -- (6,548) Sale of assets..................................... -- 12,457 6,000 26,193 Additions to property, plant and equipment......... (1,858) (1,451) (6,885) (6,160) Maturity of short-term investments................. 32,726 21,755 80,880 29,097 Purchase of short-term investments................. (20,005) (31,507) (80,865) (52,804) Decrease (increase) in other assets................ 423 281 (1,819) 835 -------- -------- -------- -------- Cash provided by (used in) investing activities......... 11,286 (5,013) (2,689) (9,387) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Additions to (payments of) bank indebtedness....... 596 (5,989) (316) (12,442) Repayment of long-term debt........................ (3,762) 5 (3,762) (2,732) Issue of share capital (net of issue costs)........ 536 3,090 1,300 78,251 -------- -------- -------- -------- Cash provided by (used in) financing activities......... (2,630) (2,894) (2,778) 63,077 -------- -------- -------- -------- Effect of exchange rates on cash and cash equivalents... 254 582 651 1,946 -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents........ 10,725 (4,905) (25,964) 41,498 Cash and cash equivalents, beginning of period.......... 77,169 71,675 113,858 25,272 -------- -------- -------- -------- Cash and cash equivalents, end of period................ $ 87,894 $66,770 $ 87,894 $ 66,770 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest........................................... $ 188 $ 273 $ 443 $ 994 Income taxes....................................... $ 779 $ 1,973 $ 32,902 $ 3,913
The accompanying notes are an integral part of these financial statements. 5 GSI LUMONICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF SEPTEMBER 28, 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: September 28, December 31, 2001 2000 ------------- ------------ Raw materials............ $37,567 $42,468 Work-in-process.......... 8,274 11,083 Finished goods........... 12,538 15,392 Demo inventory........... 8,723 8,963 ------- ------- Total inventories..... $67,102 $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 nine months ended September 28, 2001, the Company issued 287,930 shares of common stock pursuant to share options exercised for proceeds of $1.3 million and 2,309 shares were cancelled. ACCUMULATED OTHER COMPREHENSIVE INCOME At September 28, 2001, accumulated other comprehensive income was comprised of an accumulated unrealized loss of $5.0 million after tax on investment in Packard BioScience Company common stock and $9.7 million of accumulated foreign exchange translation adjustments. 6 The components of comprehensive income are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- Net income (loss)................................... $(8,487) $ 7,176 $ (123) $ 17,770 Other comprehensive income (loss)................... Cumulative effect of change in accounting policy for cash flow hedges (note 5)........... -- -- (164) -- Realized gain on cash flow hedging instruments, net of tax (note 5)............... (806) -- (642) -- Unrealized (loss) gain on cash flow hedging instruments, net of tax (note 5)............... (32) -- 774 -- Foreign currency translation adjustments....... 870 (1,572) (1,495) (2,754) Translation loss on liquidation of a subsidiary 723 -- 723 -- Unrealized gain (loss) on equity securities, net of tax..................................... (1,140) -- 383 -- --------- --------- --------- --------- Comprehensive income (loss)......................... $(8,872) $5,604 $ (544) $ 15,016 ========= ========= ========= =========
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. As a result of the net losses for the three months and nine months ended September 28, 2001, the effect of converting options was antidilutive. Common and common share equivalent disclosures are:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- ------------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 28, 2001 29, 2000 28, 2001 29, 2000 --------- --------- --------- --------- Weighted average common shares outstanding......... 40,410 39,807 40,307 37,606 Dilutive potential common shares................... -- 1,924 -- 2,038 --------- --------- --------- --------- Diluted common shares.............................. 40,410 41,731 40,307 39,644 ========= ========= ========= =========
At September 28, 2001, the Company had options and warrants outstanding entitling holders to up to 4,137,864 and 68,024 common shares, respectively. EMPLOYEE STOCK PURCHASE PLAN At the Annual General Meeting of Shareholders 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. Fair Market Value, as defined by the Purchase Plan, is the weighted average sale price of the shares for the five (5) day period preceding the grant date and the exercise date. 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 $3.4 million in the nine months ended September 28, 2001 and $7.3 million in the nine months ended September 29, 2000 at amounts and terms approximately equivalent to third party transactions. Transactions with Sumitomo are at normal trade terms. Receivables from Sumitomo of $0.4 million and $1.8 million as at September 28, 2001 and December 31, 2000, respectively, are included in accounts receivable on the balance sheet. 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 September 28, 2001, the Company had $56.4 million invested in cash equivalents denominated in U.S. dollars with maturity dates between October 2, 2001 and December 10, 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. The carrying value of cash equivalents approximates their fair value. At September 28, 2001, the Company had $20.0 million invested in short-term investments denominated in U.S. dollars with maturity dates between November 1, 2001 and February 4, 2002. 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. The carrying value of short-term investments approximates their 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 and 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. At September 28, 2001, the Company had twelve derivatives that qualified as foreign currency cash flow hedges. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer intended to occur, and any previously deferred hedging gains or losses 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. As of September 28, 2001, the Company had nine foreign exchange forward contracts to purchase $19.9 million U.S. dollars and three foreign exchange option contracts to purchase $17.7 million U.S. dollars with an aggregate fair value loss of $32 8 thousand after-tax recorded in accumulated other comprehensive income and maturing in December 2001, March 2002 and on the 15th of each following month until August 15, 2002. 6. RESTRUCTURING 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, other exit costs of $3.8 million for the Company's United Kingdom operation and worldwide distribution system related to high-power laser systems for certain automotive applications, and 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 $3.2 million have been applied against the provision, resulting in a provision balance of $9.3 million as at September 28, 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. 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) Draw-downs during third quarter.......... (0.2) (0.2) (0.1) (0.5) ------------ ------------ ------------ ------------ Provision at September 28, 2001.......... $ 0.1 $ 6.9 $ 2.3 $ 9.3 ============ ============ ============ ============
OTHER During the third quarter of 2001, the Company recorded a benefit of $0.2 million related to settlement of litigation. During the third quarter of 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line. 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. On August 8, 2001 Robotic Vision filed a Petition for a Writ of Certiorari with the Supreme Court of the United States. On October 9, 2001, View Engineering filed its Brief in Opposition to Robotic Vision's Petition. 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 9 Company and Dynamic Details Inc., an unrelated party that is one of the Company's customers. Electro Scientific alleged that the Company offered to sell and import into the United States the GS-600 high speed laser drilling system and that Dynamic Details possessed and used a GS-600 System. It further alleged that Dynamic Details' use of the GS-600 laser system infringed Electro Scientific's U.S. patent no.5,847,960 and that the Company had actively induced the infringement of, and contributorily infringed, the patent. Electro Scientific sought an injunction, unspecified damages, trebling of those damages, and attorney fees. GSI Lumonics indemnified Dynamic Details with respect to these allegations. On August 14, 2001, the United States District Court for the Central District of California granted GSI Lumonics' motion for summary judgment of non-infringement and denied Electro Scientific's motion for summary judgment of infringement. In the ruling, the Court concluded that the GS-600 system did not literally infringe the asserted claims of the alleged Electro Scientific patent, nor did it infringe under the doctrine of equivalents. On September 7, 2001, Electro Scientific appealed the District Court's decision on the summary judgment motions. The Company intends to vigorously contest Electro Scientific's appeal. 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. 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 ---------------------------------------------------------- SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ---------------------------- ----------------------------- Revenues from external customers: United States................. $ 25.6 62% $ 49.0 50% Canada........................ 0.8 2% 5.0 5% Europe........................ 6.1 15% 15.2 16% Japan......................... 5.6 14% 15.7 16% Asia-Pacific, other........... 3.0 7% 10.7 11% Latin and South America....... 0.2 0% 2.0 2% ------ --- ------ --- Total.................... $ 41.3 100% $ 97.6 100% ====== ======
NINE MONTHS ENDED ---------------------------------------------------------- SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ---------------------------- ----------------------------- United States................. $ 95.6 47% $129.2 46% Canada........................ 11.0 5% 13.4 5% Europe........................ 43.0 21% 58.4 21% Japan......................... 34.0 17% 43.1 15% Asia-Pacific, other........... 21.1 10% 30.0 11% Latin and South America....... 0.8 0% 4.3 2% ------ --- ------ --- Total.................... $205.5 100% $278.4 100% ====== ======
AS AT ---------------------------------------------------------- SEPTEMBER 28, 2001 DECEMBER 31, 2000 ---------------------------- ----------------------------- Long-lived assets: United States................... $ 32.6 $ 35.7 Canada.......................... 9.9 9.9 Europe.......................... 12.6 12.9 Japan........................... 0.8 0.7 Asia-Pacific, other............. 0.2 0.2 ------ ------ Total.................... $ 56.1 $ 59.4 ====== ======
9. DIVESTITURE On April 2, 2001, the Company completed the sale of operating assets of the Laserdyne and custom systems product lines without a gain for proceeds of approximately $9 million, subject to final adjustment per the terms of the Asset 11 Purchase Agreement. Sales for these product lines were $2.9 million and $18.6 million for the nine months ended September 28, 2001 and September 29, 2000, respectively. 10. RECENT PRONOUNCEMENTS On June 29, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. As a result, the pooling-of-interests method will be prohibited. SFAS 142 establishes criteria for recognition of intangibles and how they should be accounted for after initial recognition and changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement, which for the Company will be January 1, 2002. However, for any acquisitions completed after June 30, 2001, goodwill and intangible assets with an indefinite life will not be amortized. On October 1, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The distinction is important because assets to be disposed of are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The new rules also will now require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as is presently required. In addition, more dispositions will qualify for discontinued operations treatment in the statement of income. The Company will adopt the Statement effective January 1, 2002. The adoption of SFAS 141 will not have an impact on the business, results of operations, and financial condition of GSI Lumonics. The Company is still evaluating the impact of the adoption of SFAS 142 and SFAS 144 and has not yet determined the effect of adoption on the business, results of operations, and financial condition of the Company. 12 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." All dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in United States dollars, unless otherwise stated, and in accordance with U.S. GAAP. 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. The events of September 11th and thereafter have further hindered our ability to develop any certainty about the timing of any turnaround of the downward trends in the last three quarters. Our strategy is 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. Our efforts continue to focus on reductions in all areas of non-essential costs. HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2001 AND OUTLOOK o Revenues dropped dramatically for the quarter to $41 million from $77 million in the second quarter and $98 million in the third quarter of 2000. o Net loss for the quarter was $8.5 million and net loss per share was $0.21 compared to net income of $7.2 million and $0.17 diluted net income per share in the third quarter of last year. o Orders continued at the same level as the second quarter at $34 million. Ending backlog was $56 million (excluding $1 million related to discontinued and divested products) as compared with $84 million (excluding $19 million related to discontinued and divested products) for the third quarter of last year. o The change in cash, cash equivalents, and investments for the quarter was close to breakeven at a net usage of $2 million including a payment of $4 million related to debt arising on the purchase of General Optics in 2000. Cash, cash equivalents and short-term investments were $107.9 million at September 28, 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 $35.6 million as at September 28, 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 three quarters 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 in the fourth quarter will remain at the sales level experienced in the third quarter. The Company is committed to 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. 13 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 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 ----------------------- SEPTEMBER SEPTEMBER 28, 2001 29, 2000 --------- --------- Sales.......................................................... 100.0% 100.0% Cost of goods sold............................................. 77.4 60.0 --------- --------- Gross profit................................................... 22.6 40.0 Research and development....................................... 13.6 9.2 Selling, general and administrative............................ 39.7 21.1 Amortization of technology and other intangibles............... 3.4 1.2 Other.......................................................... (0.5) (0.3) --------- --------- Income (loss) from operations.................................. (33.6) 8.8 Gain on sale of assets......................................... -- 1.7 Interest income, net........................................... 1.8 1.0 Foreign exchange transaction gains (losses).................... -- (0.2) --------- --------- Income (loss) before income taxes.............................. (31.8) 11.3 Income tax provision (benefit)................................. (11.2) 3.9 --------- --------- Net income (loss).............................................. (20.6)% 7.4% ========= =========
Our sales were $41.3 million in the third quarter of 2001 compared to $97.6 million in the third quarter of 2000. On a pro forma basis, net of discontinued and divested product lines, sales were $37.5 million and $68.9 million, respectively. Sales by Market. The following table sets forth sales to our primary markets for the three months ended September 28, 2001 and September 29, 2000, respectively.
(in millions) THREE MONTHS ENDED --------------------------------- SEPTEMBER 28, SEPTEMBER 29, 2001 2000 ------------- ------------- % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- Semiconductor....................................... $ 6.6 16% $26.8 27% Electronics......................................... 1.8 4 14.4 15 Medical............................................. 10.7 26 14.4 15 Components.......................................... 5.8 14 8.9 9 Optics.............................................. 3.2 8 4.0 4 Other............................................... 3.7 9 16.4 17 Parts and service................................... 9.5 23 12.7 13 ------ ----- ----- ----- Total............................................ $41.3 100% $97.6 100% ====== ===== ===== =====
On a pro forma basis net of discontinued and divested product lines, sales for the three months ended September 28, 2001 were 56% of sales experienced in the third quarter of 2000 as a result of reduced and/or deferred capital spending by our customers in the continued 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. Decline in bookings over the past four quarters seem to have stabilized at a level of $34 million for second and third quarters of 2001. Semiconductor systems sales for the third quarter decreased by $20.2 million compared to the same period of 2000 and electronics systems sales decreased by $12.6 million due to decline in market conditions since the middle of 2000. Sales to the medical market decreased by net $3.7 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 components for the third quarter of 2001 decreased by $3.1 million compared to the same period of 2000. Sales of optics for the third 14 quarter of 2001 decreased by $0.8 million compared to the same period of 2000 due to a sharp decline in sales to a significant customer offset by additional sales from the acquisition of General Optics at the end of the third quarter of 2000. Sales to the other markets (including aerospace, packaging and automotive) decreased by $12.7 million from the same period of 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. Parts and service sales decreased by $3.2 million from the same period of 2000 as a result of the divestiture of product lines. 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 September 28, 2001 and September 29, 2000, respectively.
(in millions) THREE MONTHS ENDED ------------------------------------------- SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ------------------ ------------------ % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- United States....................................... $25.6 62% $49.0 50% Canada.............................................. 0.8 2 5.0 5 Europe.............................................. 6.1 15 15.2 16 Japan............................................... 5.6 14 15.7 16 Asia-Pacific, other................................. 3.0 7 10.7 11 Latin and South America............................. 0.2 0 2.0 2 ----- ----- ----- ---- Total............................................ $41.3 100% $97.6 100% ===== ===== ===== ====
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 September 28, 2001 was $56 million (excluding $1 million related to discontinued and divested products) compared to $65 million at June 29, 2001 and $84 million (excluding $19 million related to discontinued and divested products) at September 29, 2000. Gross Profit Margin. Gross profit margin was 23% in the three months ended September 28, 2001 compared to 40% in the three months ended September 29, 2000. Gross margins reflect the impact of fixed manufacturing and service overhead costs and inventory loss provisions during a period of lower product and service volumes. Research and Development Expenses. Research and development expenses, net of government assistance, for the three months ended September 28, 2001 were 13.6% of sales or $5.6 million compared with 9.2% of sales or $9.0 million for the three months ended September 29, 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. SG&A expenses were 39.7% of sales or $16.4 million in the three months ended September 28, 2001, compared with 21.1% of sales or $20.6 million in the three months ended September 29, 2000. The decline in spending was due primarily to the impact of lower sales, divested product lines, cost cutting measures, and shutdown days. The impact of continued cost cutting efforts was understated by significant legal costs and expenses for the patent infringement lawsuit with Electro Scientific Industries that was recently resolved in our favor and for the patent infringement lawsuit which the Company initiated against Rofin Baasel, Inc. (formerly AB Lasers, Inc.) and Carl Baasel Lasertechnik, GmbH. SG&A expenses are expected to further decline during the fourth quarter as the impact of initiatives undertaken by us to streamline our business and reduce our cost structure are expected to be realized. Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles was 3.4% of sales or $1.4 million in the three months ended September 28, 2001, compared with 1.2% of sales or $1.1 million in the three months ended September 29, 2000. 15 Other. During the third quarter of 2001, the Company recorded a benefit of $0.2 million related to settlement of litigation. During the third quarter of 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line. Interest Income. Net interest income was $0.8 million in the three months ended September 28, 2001, compared to $1.0 million in the three months ended September 29, 2000. The decrease was due to a combination of declining interest rates and a slightly lower average short-term investments balance during the third quarter of 2000 compared to the third quarter of 2001. Income Taxes. The effective tax rate was 35.4% for the third quarter of 2001, compared with 34.9% in the same period in 2000. The change in the effective tax rate was primarily due to the change in the Company's geographic mix of earnings. Our earnings are subject to different effective tax rates in each of the countries in which we operate. A change in our overall tax rate can result when there is a change in our geographic earnings mix. Net Income (Loss). As a result of the foregoing factors, net loss for the third quarter of 2001 was $8.5 million, compared with net income of $7.2 million in the same period in 2000. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 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.
NINE MONTHS ENDED --------- --------- SEPTEMBER SEPTEMBER 28, 2001 29, 2000 --------- --------- Sales.......................................................... 100.0% 100.0% Cost of goods sold............................................. 65.3 59.4 ----- ----- Gross profit................................................... 34.7 40.6 Research and development....................................... 9.5 9.4 Selling, general and administrative............................ 25.8 21.9 Amortization of technology and other intangibles............... 2.0 1.3 Other.......................................................... (0.8) (1.1) ----- ----- Income (loss) from operations.................................. (1.8) 9.1 Gain on sale of assets......................................... -- 0.8 Interest income, net........................................... 1.6 0.6 Foreign exchange transaction gains (losses).................... 0.1 (0.7) ----- ----- Income (loss) before income taxes.............................. (0.1) 9.8 Income tax provision........................................... 0.0 3.4 ----- ----- Net income (loss).............................................. (0.1)% 6.4% ====== =====
Our sales were $205.5 million for the first nine months of 2001 compared to $278.4 million for the first nine months of 2000. On a pro forma basis, net of discontinued and divested product lines, sales were $187.5 million and $198.6 million, respectively. Sales by Market. The following table sets forth sales to our primary markets for nine months ended September 28, 2001 and September 29, 2000, respectively. 16
(in millions) NINE MONTHS ENDED ------------------------------------------ SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ------------------ ------------------ % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- Semiconductor....................................... $ 57.3 28% $54.7 20% Electronics......................................... 37.2 18 68.7 25 Medical............................................. 31.0 15 44.2 16 Components.......................................... 20.7 10 23.2 8 Optics.............................................. 14.5 7 9.5 3 Other............................................... 10.2 5 40.2 14 Parts and service................................... 34.6 17 37.9 14 ------ --- ------ --- Total............................................ $205.5 100% $278.4 100% ====== === ====== ===
Sales declined for the nine months ended September 28, 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, and weakening economic conditions. The decline of new orders during the first nine months of 2001 reflected a continued slowdown in demand for systems and products in the semiconductor, electronics and telecom optics markets. On a pro forma basis, net of discontinued and divested product lines, bookings were approximately $135 million resulting in an ending backlog of approximately $56 million, as compared with bookings of $225 million and ending backlog of $84 million for the first nine months of last year. Sales by Region. The following table shows sales to each geographic region for the nine months ended September 28, 2001 and September 29, 2000.
(in millions) NINE MONTHS ENDED ------------------------------------------ SEPTEMBER 28, 2001 SEPTEMBER 29, 2000 ------------------ ------------------ % OF % OF SALES TOTAL SALES TOTAL ----- ----- ----- ----- United States....................................... $ 95.6 47% $129.2 46% Canada.............................................. 11.0 5 13.4 5 Europe.............................................. 43.0 21 58.4 21 Japan............................................... 34.0 17 43.1 15 Asia-Pacific, other................................. 21.1 10 30.0 11 Latin and South America............................. 0.8 0 4.3 2 ----- ----- ----- ----- Total............................................ $205.5 100% $278.4 100% ====== ===== ====== ====
Gross Profit Margin. Gross profit margin was 35% for the nine months ended September 28, 2001 compared to 41% for the nine months ended September 29, 2000. Gross margins reflect the impact of fixed manufacturing and service overhead costs and inventory loss provisions during a period of lower product and service volumes. Research and Development Expenses. Research and development expenses, net of government assistance, for the nine months ended September 28, 2001 were 9.5% of sales or $19.4 million compared with 9.4% of sales or $26.3 million for the nine months ended September 29, 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. SG&A expenses were 25.8% of sales or $53.2 million for the nine months ended September 28, 2001, compared with 21.9% of sales or $60.9 million for the nine months ended September 29, 2000. The decline in spending was due primarily to the impact of lower sales, divested product lines, cost cutting measures, and shutdown days. 17 Amortization of Technology and Other Intangibles. Amortization of technology and other intangibles was 2.0% of sales or $4.1 million for the nine months ended September 28, 2001, compared with 1.3% of sales or $3.5 million for the nine months ended September 29, 2000. Other. During the first nine months of 2001, the Company adjusted an accrual related to litigation with Electro Scientific Industries, Inc. and recorded a benefit of $1.6 million. During the nine months ended September 29, 2000, the Company recorded a benefit of $0.2 million related to royalties earned on the sale of the OLT precision alignment system product line and $2.7 million received for licensing some of the Company's technology. Interest Income. Net interest income was $3.4 million for the nine months ended September 28, 2001, compared to $1.6 million for the nine months ended September 29, 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 nine months of 2001 compared to the same period of 2000. Interest income was negatively impacted by declining interest rates during 2001 compared to 2000. Income Taxes. The effective tax rate was 31.7% for the nine months ended September 28, 2001, compared with 34.9% for the same period in 2000. Our effective 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. Our earnings are subject to different effective tax rates in each of the countries in which we operate. A change in our overall tax rate can result when there is a change in our geographic earnings mix. Net Income (Loss). As a result of the foregoing factors, net loss for the nine months ended September 28, 2001 was $0.1 million, compared with net income of $17.8 million for the same period in 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $87.9 million on September 28, 2001 compared to $113.9 million at December 31, 2000. In addition, short-term investments were $20.0 million at September 28, 2001 compared to $20.0 million at December 31, 2000. The investment in equity securities at September 28, 2001 of $35.6 million, consisting of approximately 4.5 million shares, or 6.5%, of Packard BioScience Company common stock, is included in other long-term assets. These equity securities are subject to market fluctuations and, during the nine months ended September 28, 2001, we recorded an unrealized gain of $0.4 million (after tax) as a separate component of accumulated other comprehensive income. Cash flows used in operating activities for the nine months ended September 28, 2001 were $21.1 million, compared to $14.1 million during the same period in 2000. Net loss, after adjustment for non-cash items, provided cash of $18.8 million in the first nine months of 2001. Decrease in accounts receivable due to lower sales provided $32.6 million. This was more than offset by a decrease in current liabilities using $73.9 million, including $32.9 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 nine months of 2001 and $15.3 million paid in May 2001 in settlement of the legal judgment in a patent infringement action filed by Electro Scientific Industries, Inc. In the first nine months of 2000, net income, after adjustment for non-cash items, provided cash of $21.5 million, offset by $35.7 million of increases in accounts receivable, inventories, other current assets and current liabilities. Cash flow used in investing activities was $2.7 million during the nine months ended September 28, 2001, primarily from the purchase of $80.9 million of short-term investments and $6.9 million of property, plant, and equipment, offset by the maturity of $80.9 million of short-term investments. 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 nine months of 2000, investing activities used $9.4 million, primarily from the purchase of short-term investments and property, plant and equipment, and the acquisition of General Optics. This was offset primarily by the disposal of assets and the maturity of short-term investments. 18 Cash flow used in financing activities was $2.8 million for the nine months ended September 28, 2001. In comparison, financing activities provided $63.1million during the same period in 2000, primarily due to a large issue of share capital. We have credit facilities of $39.1 million denominated in Canadian dollars, US dollars, Pounds sterling and Japanese yen. Bank indebtedness, of which $11.1 million was outstanding at September 28, 2001, is due on demand and bears interest based on the prime rate. As at September 28, 2001, the Company had unused and available demand lines of credit amounting to $19.9 million and outstanding letters of credit of $8.1 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 On June 29, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. As a result, the pooling-of-interests method will be prohibited. SFAS 142 establishes criteria for recognition of intangibles and how they should be accounted for after initial recognition and changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement, which for the Company will be January 1, 2002. However, for any acquisitions completed after June 30, 2001, goodwill and intangible assets with an indefinite life will not be amortized. On October 1, 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The distinction is important because assets to be disposed of are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The new rules also will now require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as is presently required. In addition, more dispositions will qualify for discontinued operations treatment in the statement of income. The Company will adopt the Statement effective January 1, 2002. The adoption of SFAS 141 will not have an impact on the business, results of operations, and financial condition of the Company. The Company is still evaluating the impact of the adoption of SFAS 142 and SFAS 144 and has not yet determined the effect of adoption on the business, results of operations, and financial condition of the Company. 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 19 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 production volumes, 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 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. 20 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, utilization of different systems and equipment, and difficulties in staffing and managing foreign operations and diverse cultures. General Economic, Political and Market Conditions. Our business is subject to the effects of general economic and political conditions in the United States and globally. Our revenues and operating results have declined and been adversely affected by the tragic events of September 11, 2001 and the unfavorable economic conditions. If the economic and political conditions in the United States and globally do not improve or if the economic slowdown continues to deteriorate, we may continue to experience material adverse impacts on our business, operating results and the financial condition of the Company. 21 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 September 28, 2001, the Company had $56.4 million invested in cash equivalents and $20.0 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. As of September 28, 2001, the Company had nine foreign exchange forward contracts to purchase $19.9 million U.S. dollars and three foreign exchange option contracts to purchase $17.7 million U.S. dollars with an aggregate fair value loss of $0.03 million recorded in accumulated other comprehensive income and maturing in December 2001, March 2002 and on the 15th of each following month until August 15, 2002. 22 PART I - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See the description of legal proceedings in Note 7 to the Financial Statements. ITEM 5: OTHER INFORMATION The Company has entered into severance agreements with Kurt A. Pelsue, V.P. Technology and Alfonso DaSilva, V.P. Customer Service. The agreements, in each instance, 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 the agreement is May 24, 2001 for Mr. Pelsue and July 9, 2001 for Mr. DaSilva. Each agreement continues for a minimum term of three (3) years from its respective date 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 the 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. 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). Pursuant to these 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. The Company entered into a Separation Agreement and General Release on August 21, 2001 with its V.P. Sales, Patrick D. Austin. Pursuant to the terms of the agreement, Mr. Austin, whose employment with the Company ended on September 28, 2001, will continue to receive salary payments and health benefit coverage for a period not to exceed twelve (12) months. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A) LIST OF EXHIBITS 10.24 Severance Agreement between the Registrant and Kurt A. Pelsue dated May 24, 2001 10.25 Severance Agreement between the Registrant and Alfonso DaSilva dated July 9, 2001. 10.26 Separation Agreement and General Release between the Registrant and Patrick D. Austin dated August 21, 2001. B) REPORTS ON FORM 8-K None 23 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 November 8, 2001 ---------------------- (Principal Executive Officer) Charles D. Winston /s/ THOMAS R. SWAIN Vice President Finance and Chief Financial November 8, 2001 ------------------- Officer (Principal Financial and Accounting Thomas R. Swain Officer)
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