NOVT 10-Q Quarter ended March 29, 2013

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 29, 2013

Or

For the transition period from to

Commission File No. 001-35083

GSI Group Inc.

(Exact name of registrant as specified in its charter)

(781) 266-5700

(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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes x No ¨

As of April 29, 2013, there were 33,935,566 of the Registrant’s common shares, no par value, issued and outstanding.

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GSI GROUP INC.

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GSI GROUP INC.

(In thousands of U.S. dollars or shares)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GSI GROUP INC.

(In thousands of U.S. dollars or shares, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GSI GROUP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands of U.S. dollars)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GSI GROUP INC.

(In thousands of U.S. dollars)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 29, 2013

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

GSI Group Inc. and its subsidiaries (collectively referred to as the “Company”) design, develop, manufacture and sell precision photonics and motion control components and sub-systems for applications demanding extremely high levels of performance. The Company’s technology is targeted primarily at Original Equipment Manufacturers (“OEMs”) for incorporation into products and systems for a wide range of applications in major markets including: medical, industrial, electronics and scientific.

The accompanying unaudited consolidated financial statements have been prepared in U.S. dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis. The accounting policies underlying these unaudited consolidated financial statements are those set forth in Note 3 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Those policies are not presented herein, except to the extent that new policies have been adopted, or there is material current period activity or changes to our policies.

The interim consolidated financial statements include the accounts of the Company and its 50% owned joint venture, Excel Laser Technology Private Limited (“Excel SouthAsia JV”). Intercompany transactions and balances have been eliminated.

The Company’s unaudited interim financial statements are prepared on a quarterly basis ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

In the opinion of management, these interim consolidated financial statements include all significant adjustments and accruals necessary for a fair presentation of the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of sales and expenses during the reporting periods. The Company evaluates its estimates based on historical experience, current conditions and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which they are deemed to be necessary. Actual results could differ significantly from those estimates.

Reclassifications and Adjustments

As discussed in Note 2, the Company classified the Semiconductor Systems and Laser Systems businesses as held for sale beginning in the second quarter of 2012. In addition, as discussed in Note 15, we realigned our segment presentation during the first quarter of 2013 in light of the acquisition of NDS Surgical Imaging, LLC and NDS Surgical Imaging KK as well as restructuring activities. As a result, certain prior period information included in the consolidated statements has been reclassified to conform to the current period presentation.

Beginning in 2008, the Company did not properly recognize deferred tax liabilities associated with certain permanent intercompany loans. In addition, the Company did not consider these deferred tax liability amounts when determining the realizability of its deferred tax assets and thereby recorded excess valuation allowances beginning in 2009. The Company identified and corrected this immaterial error related to prior years during the period ended March 29, 2013. The error correction resulted in approximately $0.7 million of an income tax benefit allocated to income from continuing operations and approximately $0.7 million of income tax expense allocated to accumulated other comprehensive loss during the period ended March 29, 2013, which was quantitatively significant to the period. The correction had no effect on income from continuing operations before income taxes or cash flows for any periods presented. The Company evaluated this error considering both qualitative and quantitative factors pursuant to SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” and concluded that these adjustments were not material to the prior years’ consolidated financial statements. The Company also does not believe this adjustment will be material to the 2013 results.

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

AS OF MARCH 29, 2013

(Unaudited)

In addition, certain immaterial reclassifications have been made to the prior year to conform to the current year presentation.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. Similar to goodwill impairment testing guidance, the revised standard allows entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits entities to perform a qualitative assessment by considering events and circumstances which would impact the fair value of the entity’s indefinite-lived intangible assets to determine whether it is more likely than not that the fair value of the entity’s indefinite-lived intangible assets are impaired. If it is determined that this is the case, it is necessary to perform the currently prescribed two-step impairment test. Otherwise, the two-step impairment test is not required. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company will adopt ASU 2012-02 in its annual impairment test to be performed as of the beginning of the second fiscal quarter. The adoption of ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income”. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income (loss) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income (loss) in the financial statements. The standard was effective for interim periods beginning after December 15, 2012. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

2. Discontinued Operations

Beginning in 2011, the Company initiated a strategic review of its businesses to focus its growth priorities and simplify its business model. In June 2012, the Company committed to a plan for the sale of the Semiconductor Systems operating segment, sold under the GSI brand name, and Laser Systems product lines, sold under the Control Laser and Baublys brand names. The Company began accounting for these businesses as discontinued operations beginning in the second quarter of 2012.

In October 2012, the Company sold certain assets and liabilities of the Laser Systems business for $7.0 million, subject to working capital adjustments, and recorded a $2.3 million gain in the consolidated statement of operations during the fiscal year ended December 31, 2012. The Lasers Systems facility in Orlando, Florida was not sold as part of the sale of the business and will be sold as a separate asset. The carrying value of this facility was $5.7 million and $5.7 million as of March 29, 2013 and December 31, 2012, respectively. The Company expects to sell the Laser Systems facility by the end of the fourth quarter of 2013.

In April 2013, the Company entered into an agreement for the sale of certain assets and liabilities of the Semiconductor Systems business for $8.0 million in cash, subject to customary closing conditions. The sale of the Semiconductor Systems business was consummated on May 3, 2013.

The Company includes all current and historical results of these businesses in income from discontinued operations, net of tax, in the accompanying consolidated statements of operations. The Company classified the assets and liabilities of discontinued operations for both the current and prior year in the consolidated balance sheets as current assets and current liabilities, respectively. The Company’s consolidated statements of cash flows include the cash flows from both continuing and discontinued operations.

The major components of the assets and liabilities of discontinued operations as of March 29, 2013 and December 31, 2012 are as follows (in thousands):

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

AS OF MARCH 29, 2013

(Unaudited)

The following table presents the operating results which are reported as discontinued operations in the Company’s consolidated statements of operations (in thousands):

Operating results for discontinued operations during the three months ended March 30, 2012 were historically included in the Semiconductor Systems and Laser Products segments. The Company restated prior period segment information in the Notes to consolidated financial statements to conform to the current period presentation.

3. Business Combinations

On January 15, 2013, the Company acquired 100% of the outstanding membership interests of NDS Surgical Imaging, LLC and 100% of the outstanding stock of NDS Surgical Imaging KK (collectively, “NDS”) from NDSSI Holdings, LLC and NDS Surgical Imaging, Inc. for $82.7 million in cash consideration, subject to customary closing working capital adjustments. The Company expects the addition of NDS will enable the Company to leverage its existing medical OEM sales channels and expertise in color measurement technology. The Company recognized $1.8 million in cumulative acquisition-related costs related to NDS, of which $1.1 million was recorded in the three month period ended March 29, 2013 and included in restructuring costs and other charges in the consolidated statement of operations. The results of the NDS operations have been included in our consolidated statement of operations since the acquisition date. NDS has contributed $18.4 million to sales and $0.2 million to income from continuing operations since the acquisition date.

The pro forma information for all periods presented below includes the effects of business combination accounting resulting from the acquisition, including amortization charges from acquired intangible assets, interest expense on borrowings in connection with the acquisition, and the related tax effects as though the acquisition had been consummated as of the beginning of 2012. These pro forma results exclude the impact of transaction costs included in the historical results and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2012.

The following unaudited pro forma information presents the combined financial results for the Company and NDS as if the acquisition of NDS had been completed as of January 1, 2012 (in thousands, except per share information):

The acquisition of NDS has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of NDS and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. Our estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date). The purchase price allocation is preliminary and the primary areas of the purchase price allocation that are not yet finalized relate to the settlement of final closing working capital, intangible assets, income taxes, the fair value of certain liabilities and the amount of resulting goodwill.

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

AS OF MARCH 29, 2013

(Unaudited)

Based upon a preliminary valuation, the total purchase price allocation was as follows (in thousands):

The preliminary fair value of intangible assets is comprised of the following (in thousands, except for amortization period):

The preliminary purchase price allocation resulted in $28.7 million of goodwill and $37.0 million of identifiable intangible assets, the majority of which are expected to be deductible for tax purposes. As a result, the Company recorded deferred tax liabilities of $0.3 million in purchase accounting, equal to the tax effect of the amount of the acquired intangible assets other than goodwill. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which economic benefits related to such assets are expected to be realized. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential growth due to additional financial resources to spend on research and development activities, increase of sales resources and the ability to enhance product offerings; (2) the potential to sell NDS products into our customer base and to sell the Company’s products into NDS’s customer base; and (3) our intention to leverage our expertise in light and color measurement.

4. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss is as follows (in thousands):

Reclassification of pension liability adjustments out of accumulated other comprehensive loss and into net income for the three months ended March 29, 2013 was included in selling, general and administrative costs in the consolidated statement of operations.

5. Earnings per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. For diluted earnings per common share, the denominator also includes the dilutive effect of outstanding restricted stock units determined using the treasury stock method. For periods in which net losses are generated the dilutive potential common shares are excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive.

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

AS OF MARCH 29, 2013

(Unaudited)

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

6. Fair Value Measurements

ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

The Company’s cash equivalents are investments in money market accounts, which represent the only asset the Company measures at fair value on a recurring basis. The Company determines the fair value of our cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

The following table summarizes the fair values of our financial assets as of March 29, 2013 (in thousands):

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

AS OF MARCH 29, 2013

(Unaudited)

The following table summarizes the fair values of our financial assets as of December 31, 2012 (in thousands):

See Note 9 to Consolidated Financial Statements for discussion of the estimated fair value of the Company’s outstanding debt.

7. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets and liabilities acquired. The following table summarizes changes in goodwill for the three months ended March 29, 2013 (in thousands):

Goodwill acquired from the NDS acquisition is reflected in the Precision Technologies segment. Goodwill by reportable segment as of March 29, 2013 is as follows (in thousands):

Goodwill by reportable segment as of December 31, 2012, as restated to conform to the current period segment presentation, is as follows (in thousands):

Intangible Assets

Intangible assets as of March 29, 2013 and December 31, 2012, respectively, are summarized as follows (in thousands):

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

AS OF MARCH 29, 2013

(Unaudited)

Definite-lived intangible assets are amortized on either a straight-line basis or an economic benefits basis over their remaining useful life. Amortization expense, by classification in the consolidated statements of operations, is summarized as follows (in thousands):

Estimated amortization expense for each of the five succeeding years and thereafter as of March 29, 2013, is as follows (in thousands):