NOVANTA INC - Quarter Report: 2008 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended June 27, 2008

Or

Commission File No. 000-25705

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller Reporting Company  ¨

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

As of July 18, 2008, there were 41,685,793 of the Registrant’s common shares, no par value, issued and outstanding.

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GSI GROUP INC.

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PART I — FINANCIAL INFORMATION

GSI GROUP INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(U.S. GAAP and in thousands of U.S. dollars, except share amounts)

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

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GSI GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(U.S. GAAP and in thousands of U.S. dollars, except per share amounts)

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

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GSI GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(U.S. GAAP and in thousands of U.S. dollars)

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

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GSI GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(U.S. GAAP and tabular amounts in thousands of U.S. dollars, except share amounts)

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and 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 accounting principles generally accepted in the United States of America (“GAAP”) have been excluded. The interim consolidated financial statements include the accounts of GSI Group Inc. and its wholly-owned subsidiaries (referred to herein as the “Company,” “we” or “our”). Intercompany transactions and balances have been eliminated. These interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2007. In the opinion of management, all adjustments and accruals necessary for a fair presentation have been made and include only normal recurring adjustments and accruals. The results for interim periods are not necessarily indicative of results to be expected for the year or for any future periods. The amounts are stated in thousands of U.S. dollars, unless otherwise indicated.

Comparative amounts

Certain prior year amounts have been reclassified to conform to the current year presentation in the financial statements and notes as of and for the three and six months ended June 27, 2008. For the three and six months ended June 29, 2007, a reduction in other operating expenses of $100 thousand and $200 thousand, respectively, for sublease income from the Company’s Rugby, United Kingdom facility has been included with selling, general and administrative expenses. These reclassifications had no effect on the previously reported results or financial position.

2. Supplementary Balance Sheet Information

The following tables provide details of selected balance sheet accounts.

Inventories

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Intangible Assets

Goodwill

The Company accounts for Goodwill pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that Goodwill be tested for impairment at least annually. Impairment testing for Goodwill is done at the reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. Only the Precision Technology segment has Goodwill, which was related to the 2004 MicroE acquisition. For purposes of the Goodwill impairment test, the Company has defined a reporting unit as certain aggregated U.S managed product lines within the Precision Technology segment. Annual impairment testing was completed during the second quarter of 2008, which indicated that no impairment existed.

Other Accrued Expenses

Accrued Warranty

Changes in the warranty liability during the periods ended June 27, 2008 and June 29, 2007 were as follows:

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The Company’s Standard Contract Terms and Conditions include a warranty for its products for a period of up to 12 months for reimbursement of materials and labor to repair and service the system or products. In certain instances, the Company varies its warranty terms. A provision for the estimated cost related to warranty is recorded at the time revenue is recognized.

The Company’s estimate of costs to service the warranty obligations are based on historical experience and the expectation of future conditions. To the extent the Company experiences increased warranty claims or increased costs associated with servicing those claims, revisions to the estimated warranty liability are made.

3. New Accounting Pronouncements

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. At initial adoption, SFAS 161 encourages, but does not require, comparative disclosures for earlier periods. The Company does not expect that this new pronouncement will have a material impact on the Company’s financial statements in future periods.

Non-Controlling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply the pronouncement before that date. The Company does not expect that this new pronouncement will have any impact on the Company‘s financial statements in future periods.

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (R) “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for the method in which the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the Goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply the pronouncement before that date. The Company believes that this new pronouncement, once adopted, will have an impact on its accounting for future business combinations, but the effect will be dependent upon the acquisitions that are made in the future.

The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115” (“SFAS 159”). SFAS 159 provides businesses with the option to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, provided that the entity also elects to apply the provisions of SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), as discussed below. The Company adopted SFAS 159 on January 1, 2008 with no impact on its consolidated results and financial position.

Fair Value Measurements

In September 2006, FASB issued SFAS No. 157. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy to classify the source of the information. This statement is effective for the Company beginning January 1, 2008. The Company has adopted SFAS 157 with no impact on its consolidated results and financial position.

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4. Stockholders’ Equity

Capital Stock

The authorized capital of the Company consists of an unlimited number of common shares without par value. During the six months ended June 27, 2008 and June 29, 2007, 218 thousand and 787 thousand common shares, respectively, were issued as a result of the exercise of stock options, warrants and the vesting of restricted stock, resulting in proceeds to the Company of approximately $38 thousand and $6.3 million, respectively.

Stock Repurchase Plan

In February 2008, the Company‘s Board of Directors authorized the increase of the share repurchase program to $40.0 million. This plan was initially approved in 2005 at $15.0 million. In the second quarter of 2008, the Company repurchased and cancelled approximately 408 thousand shares of its common stock on the open market in accordance with the Stock Repurchase Plan. These shares were purchased at an aggregate cost of approximately $3.3 million. As of June 27, 2008, approximately $22 million remained in this program. The program was suspended in May 2008 as a result of the Company’s decision to enter into a Letter of Intent to acquire Excel Technology, Inc. (see Section 13 below, Subsequent Events for further information).

Accumulated Other Comprehensive Income

The following table provides the details of accumulated other comprehensive income at:

The components of comprehensive income are as follows:

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, restricted stock and warrants determined using the treasury stock method.

Common and common share equivalent disclosures are:

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5. Stock Based Compensation

Stock Based Compensation

The Company has one active stock-based compensation plan, the GSI Group Inc. 2006 Equity Incentive Plan, under which stock-based grants may be issued and several earlier stock option plans under which no new grants will be made. Although inactive, the stock option plans have outstanding grants issued prior to 2006. The 2006 Equity Incentive Plan provides for grants of various stock based awards including stock options, stock appreciation rights and restricted stock. Since 2006, the Company has issued restricted stock grants to the executives, key employees and directors of the Company under the 2006 Equity Incentive Plan.

Restricted Stock

The Company recorded compensation expense, primarily in selling, general, administrative and other expenses, related to its restricted stock awards totaling $0.7 million and $1.4 million during the three and six months ended June 27, 2008, respectively. The 2008 expense reflects a cumulative favorable adjustment of approximately $0.2 million for estimated forfeitures. For the three and six months ended June 29, 2007, the Company recorded $0.7 million and $1.0, respectively. These expenses have been recorded as an increase in additional paid-in capital on the Company’s balance sheet.

It is the Company’s policy to issue new shares for equity awards. The Company recognizes compensation expense on fixed awards on a straight-line basis over the requisite service period, which is generally from the grant of the awards through the end of the vesting period. The Company estimates the likelihood that performance-shares will be earned based on the probability of meeting the performance criteria. Certain performance-based awards are deemed probable of achievement and therefore an expense has been recorded. Other awards are deemed not probable of achievement and therefore no expense has been recorded.

In March and April 2008, the Compensation Committee granted 749,340 restricted stock awards to selected executives and key employees. Of these restricted awards, 271,500 shares were time-based, and 477,840 shares were performance-based. Consistent with the Company’s prior year grants, the performance based shares are earned based on achievement of 2008 profitability targets set at the time of grant. As of June 27, 2008, no amounts have been expensed for the performance based awards as the targets are not probable of being achieved at this time. All grants vest annually over 3 years in March 2009, 2010 and 2011.

In March 2008, vesting occurred for restricted shares granted to selected executives and key employees in 2006 and 2007. The fair value of the newly vested shares was $1.7 million on the date the shares vested; the Company expensed approximately $2.2 million for these vested shares. As these grants consisted of both time-based and performance based shares, the performance based vesting was determined based on the Company’s actual financial results compared to the profitability targets set at the award dates. Performance shares not earned were forfeited back to the 2006 Equity Incentive Plan.

As of June 27, 2008, there was $11.2 million of unrecognized compensation cost related to unvested restricted stock grants. That cost is expected to be recognized over the weighted-average remaining period of 2.14 years. In May 2008, shareholders at the annual meeting approved a 2.5 million share increase in the shares available to be issued under the 2006 Equity Incentive Plan. As of June 27, 2008, there were 3,044,499 common shares available to issue under this plan.

Stock Option Plans

The Company has several stock option plans and a warrant plan with outstanding grants that pre-date the 2006 Equity Incentive Plan. In 2005, the unvested options were accelerated. No new options will be granted under pre-2006 equity plans, as all future equity grants will be issued exclusively under the 2006 Equity Incentive Plan.

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Stock option and warrant activity for the six months ended June 27, 2008 is presented below.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and warrants and the quoted price of the Company’s common shares for the 122 thousand options and warrants that were in the money at June 27, 2008. The intrinsic value of exercised options and warrants for the three months ended June 27, 2008 and June 29, 2007 was approximately $19 and $800 thousand, respectively. The intrinsic value for the six months ended June 27, 2008 and June 29, 2007 was approximately $40 thousand and $1.0 million, respectively.

6. Related Party Transactions

Richard B. Black, the Chairman of the Company, is also the President and Chief Executive Officer of ECRM, Inc., a company which manufactures laser systems equipment for the printing and publishing industry and which is a customer of the Company. All sales were made pursuant to the Standard Contract Terms and Conditions. The Nominating and Governance Committee of the Company’s Board of Directors has reviewed and confirmed that ECRM, Inc. received no favored commercial treatment.

The Company recorded sales revenue and raw material purchases from Sumitomo Heavy Industries Ltd., a significant shareholder. The amounts and terms are essential equivalent to similar third-party transactions.

The following table summarizes related party transactions in the statement of operations:

The following table summarizes the related party transactions on the balance sheet:

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7. Financial Instruments

Long-term Investments

Long term investments at June 27, 2008 and December 31, 2007 consist of a 25.1% equity investment in a private United Kingdom company, valued at approximately $1.0 and $0.9 million, respectively. The Company uses the equity method to record the results of this entity. The Company recognized as other income approximately $20 thousand and $120 thousand in earnings for the three and six months ended June 27, 2008.

Derivative Financial Instruments

At June 27, 2008, the Company held forward contracts to sell Japanese Yen and European Union Euros for the approximate amount of U.S. $6.9 million and $2.7 million, respectively, and, forward contracts to buy British Pounds and European Union Euros for the approximate amount of U.S. $3.5 million and $1.6 million, respectively. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rate at the reporting date. At June 27, 2008, the Company had an unrealized gain on outstanding derivative instruments of $68 thousand.

Fair Value Measurement

The Company has adopted SFAS 157, with no impact on its consolidated results and financial position. For the following assets, the in-exchange valuation promise is assumed to bring maximum value and a market approach would be the best valuation technique. Both cash investments and accrued interest income have Level 1 inputs (as defined in SFAS 157) as there are observable quoted prices in active markets and there is little, if any, risk of non-performance of the asset. The inputs for derivative gains and losses marked to market are considered Level 2 (as defined in SFAS 157) as they are based on valuations provided by the Company’s bank, but there are no guaranteed selling prices for these forward currency contracts. Risk of non-performance for these Level 2 assets is considered low.

The following table summarizes the financial assets measured at fair value on a recurring basis:

8. Restructuring and Other

Restructuring Expense (net of benefit)

The following table summarizes restructuring expense (net of benefit) in the statement of operations:

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The following table summarizes the accrued restructuring provisions on the balance sheet:

United Kingdom Restructuring

In 2007 the Company implemented a plan to expand the Company‘s manufacturing operations in China and restructure its manufacturing operations in the United Kingdom. These actions are part of the Company‘s overall plan to expand its presence in Asia and increase profitability. Restructuring expense in 2007 related to this plan was $6.7 million. These restructuring efforts were largely completed in 2007.

On February 29, 2008 and June 27, 2008, the Company executed agreements to sell assets related to its otherwise discontinued Impact product line, and certain assets related to its LaserMark and Excimer laser product lines. The majority of the assets sold in the transaction represent inventory that had already been written off and were included as part of restructuring charges in 2007. The results of the sales were recorded as restructuring expense of $0.1 million and restructuring benefit of $0.3 million in the three and six months ended June 27, 2008, respectively. Payments received on sales that are due beyond one year will be recorded as restructuring benefits when they are received.

Munich Restructuring

As a result of restructuring programs undertaken in 2000-2004, and subsequent sub-lease of the Company’s Munich, Germany facility in May 2007 through the end of its lease term, the Company has carried $1.4 million of reserves for excess, unrented space in the Munich, Germany facility. Each period the Company reviews its Munich, Germany facility excess space restructuring accrual, which covers the anticipated future contractual lease payments (through January 2013) less the proceeds from the sub-lease. As a result of changes in the present value of the net cash flows from expected sub-lease income and lease expense, the Company recorded a reduction to the reserve of $0.1 million for the period ended June 27, 2008.

As of June 27, 2008, cumulative expense related to this restructuring program approximates $2.6 million.

Novi Restructuring

In the second quarter of 2008, the Company implemented a plan to close its Novi, Michigan facility which provided U.S. sales, applications and service support to the Laser product line. The Novi, Michigan facility, was consolidated within the Company’s new Bedford facility. As a result, there was a second quarter restructuring charge of approximately $1.4 million, consisting of $0.7 million for employee severance and $0.7 million in lease abandonment and related costs.

9. Commitments and Contingencies

Operating leases

The Company leases certain equipment and facilities under operating lease agreements. Most of these lease agreements expire between 2008 and 2020. In the United Kingdom, where longer lease terms are more common, the Company has land leases that extend through 2078. The facility leases require the Company to pay real estate taxes and other operating costs. The rent on certain leases is subject to escalation clauses in future years.

In 2007 the Company signed a 12 year lease for a 147,000 square foot facility in Bedford, Massachusetts. The Company consolidated the Natick, Billerica and Wilmington, Massachusetts operations into this facility; the consolidation was substantially completed and fully occupied in the second quarter of 2008. Under the terms of the lease agreement, the landlord has waived the first 5.5 months rent (representing a saving of approximately $0.7 million). The saving will be amortized over the life of the lease.

The Company is committed to the following expenditures in connection with the fit up and occupancy of the Bedford, Massachusetts facility:

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The Company incurred the following expenditures in the second quarter of 2008:

Through June 27, 2008, the Company incurred the following expenditures:

The project is expected to be fully completed in the third quarter of 2008 at or slightly below the cost estimates above.

Legal Proceedings and Disputes

The Company‘s French subsidiary (GSI Lumonics SARL) is subject to a claim by a customer, SCGI, that a Laserdyne 890 system delivered in 1999 had unresolved technical problems. During the second quarter of 2005, GSI France filed for bankruptcy protection, which was granted by the French court on July 7, 2005. On April 18, 2006, the court fixed SCGI’s claim at €598,079, plus court costs and expert fees of €85,945. SCGI accepted the court’s determination.

SCGI is now demanding that the Liquidator bring an action against GSI Group Ltd. (the parent corporation) in the United Kingdom. The Company is not aware of any facts to support a claim. The Company‘s French counsel is addressing these points directly with the Liquidator. At this time, the Company does not believe it will be required to make any payments regarding this action. Accordingly, nothing has been accrued in the financial statements.

The Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon the Company‘s financial conditions or results of operations 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.

Guarantees

In the normal course of its operations, the Company executes agreements that provide for indemnification and/or guarantees to counterparties in transactions such as business dispositions, the sale of assets, sale of products and operating leases. Additionally, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. These indemnities and guarantees are routine and customary in the industry.

Historically, we have not made any significant payments under such indemnifications. At June 27, 2008, nothing has been recorded in the financial statements with respect to these indemnification undertakings.

10. Income Taxes

At the end of each interim reporting period, the Company determines its estimated annual effective tax rate, which is revised, as required, at the end of each successive interim period based on facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period. The tax effect of significant unusual items is reflected in the period in which they occur. The Company’s reported effective tax rate of 26.4% for the six months ended June 27, 2008, differed from the expected Canadian federal statutory rate of 29.5%, primarily due to the mix of jurisdictions in which the Company earns it income, changes to its deferred tax assets in China due to the change in the income tax rate, the adjustment of utilization of net operating losses during the Internal Revenue Services (the “IRS”) appeal review for the tax years from 1999 to 2002, the increase in interest receivable resulting from the IRS audit for the tax years from 1999 to 2002, and recognizing the capital gain on the sale of a building located in United Kingdom.

As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income tax provision (benefit) in each of the jurisdictions in which it operates. This process involves estimating the current income tax provision (benefit) together with assessing the future effects of temporary differences resulting from differing treatment of items for tax and accounting purposes. The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amount and the tax bases of assets and liabilities.

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The Company records a valuation allowance if it is more likely than not that a portion of its deferred tax assets will not be realized. The Company has considered historical losses, future taxable income, and expected reversals of existing temporary differences in assessing the need for a valuation allowance. The Company has not recorded a provision for withholding tax on undistributed earnings of foreign subsidiaries, as the Company currently has no plans to repatriate those earnings. Determination of the amount of unrecognized deferred tax liabilities is not practicable because of the complexities associated with its hypothetical calculation.

As of June 27, 2008, the Company had total unrecognized tax benefits of approximately $3.3 million, all of which, if recognized would favorably affect its effective tax rate. The Company expects that the changes in the unrecognized benefits within the next twelve months would not be material.

The reconciliation of the total amounts of unrecognized tax benefits at the beginning of the first quarter and the end of the second quarter of 2008 is as follows:

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. As of June 27, 2008, the Company had approximately $0.7 million of accrued interest and penalties related to uncertain tax positions. During the six months ended June 27, 2008, the Company recognized approximately $88 thousand in interest and penalties.

The Company files state and federal income tax returns in the United States and in foreign jurisdictions. Generally, the Company is no longer subject to United States federal, state or local, or foreign income tax examinations by tax authorities for the years before 2002 as these years have been effectively settled as described in FSP FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48”. During 2007, the Company settled an audit with the Internal Revenue Service for tax years 1999 – 2002. Furthermore, the Company closed an audit with the Japanese tax authorities for tax years 2004 -2006 resulting in no adjustments. Currently, the Company is under audit in the United States for tax years 2004 and 2005 and in Canada for tax years 2002 – 2004. The Company’s income tax returns may be reviewed in the following countries and for the following periods under the appropriate statute of limitations: United States (2004-present), Canada (2002-present), United Kingdom (2004-present), Germany (2004-present), Japan (2007-present), Taiwan (2003-presnet), and Korea (2003-present).

11. Employee Benefit Plans

United Kingdom Defined Benefit Pension Plan

The Company maintains a pension plan in the United Kingdom which has two components: a Final Salary Plan, which is a defined benefit plan, and a Retirement Savings Plan, which is a defined contribution plan. In 1997, membership in the Final Salary Plan was closed and in 2003 the Company was allowed to stop accruing additional benefits to the participants. Benefits under this plan were based on the employees’ years of service and compensation. Most of the beneficiaries of this plan are no longer employed by the Company. The Company follows a pension funding policy based on widely used actuarial methods as permitted by regulatory authorities. The funded amounts reflect actuarial assumptions regarding compensation, interest and other projections. The assets of this plan consist primarily of equity, real estate and fixed income securities of United Kingdom and foreign issuers.

Pension and other benefit costs reflected in the consolidated statements of operations are based on the projected benefit method of valuation. Within the Consolidated Balance Sheet, pension plan benefit liabilities are included in accrued compensation and benefits.

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The table below sets forth the estimated net periodic pension cost (benefit) of the United Kingdom Defined Benefit Plan:

Japan Defined Benefit Pension Plan

The Company maintains a tax qualified pension plan in Japan. The plan is a quasi defined benefit pension plan which covers substantially all Japanese employees. The Company deposits funds in various fiduciary-type arrangements and/or purchases annuities. Benefits are based on years of service and the employee’s compensation at retirement. Employees with less than twenty years of service to the Company receive a lump sum benefit payout. Employees with twenty or more years of service to the Company receive a benefit that is guaranteed for a certain number of years. Participants may, under certain circumstances, receive a benefit upon termination of employment.

The assumptions that are used to value the costs and obligations of the plan reflect the Japanese economic environment. The Company continues to fund the plan sufficient to meet current benefits as well as fund a portion of future benefits as permitted by regulatory authorities. An actuarial valuation of the plan was conducted as of December 31, 2007.

The table below sets forth the estimated net periodic pension cost of the tax qualified pension plan.

12. Segment Information

General Description

The Company’s segments and their principal activities consist of the following:

Precision Technology

This segment’s products include technologies for precision motion, linear and rotary motion control, medical printers, lasers and precision optics. These products are used in the electronics, aerospace, materials processing, data storage, imaging and other light industrial markets. The products are designed and manufactured at the Company‘s facilities in Billerica and Natick, Massachusetts; Moorpark, California; Taunton, Poole and Rugby, England; and Suzhou, China, and a design facility in Lafayette, Colorado. Since the opening of the Bedford, Massachusetts plant, the Company no longer manufactures in Natick, or Billerica, Massachusetts.

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Semiconductor Systems

Until the opening of its Bedford, Massachusetts facility, the Company‘s semiconductor systems were designed and manufactured at its Wilmington, Massachusetts facility. Specific applications include laser repair to improve yields in the production of memory chips (DRAM, NAND); laser marking systems for WIP management and traceability of silicon wafers; laser trimming of linear and mixed signal integrated circuits and chip resistors; and inspection of solder paste and component placement on printed circuit boards (“PCBs”). The Semiconductor Systems Segment also derives significant revenues from parts and service to its installed base.

Segments

Information on reportable segments is as follows: