Novanta Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 1, 2021; compared with the periods ended October 2, 2020. Unaudited interim results. Novanta supplies technology components and subsystems to medical and advanced industrial OEMs through its Photonics, Vision, and Precision Motion segments. Financial amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $177.7 million | $142.9 million | $507.8 million | $443.1 million |
| Gross profit / margin | $76.3 million / 42.9% | $59.1 million / 41.4% | $217.4 million / 42.8% | $182.3 million / 41.1% |
| Operating income / margin | $15.3 million / 8.6% | $11.9 million / 8.3% | $42.4 million / 8.3% | $38.8 million / 8.8% |
| Net income | $13.6 million | $8.3 million | $36.6 million | $31.9 million |
| Diluted EPS | $0.38 | $0.23 | $1.02 | $0.89 |
- Cash flow: Nine-month operating cash flow was $65.9 million, versus $93.7 million. Investing cash outflow was $302.1 million, principally for acquisitions; financing cash inflow was $214.3 million, principally from revolving-credit borrowings. Capital expenditures were $14.8 million. Cash decreased to $102.4 million from $125.1 million at year-end 2020.
- Liquidity and debt: At October 1, cash was $102.4 million and unused revolving-credit availability was $139.7 million. Debt carrying value was $447.0 million, net of debt issuance costs; stated term-loan and revolver principal was approximately $450.6 million. On October 5, the revolving facility commitment increased from $495 million to $695 million. The company reported compliance with its debt covenants.
- Balance sheet: Current assets were $353.3 million and current liabilities $188.0 million. Inventories rose to $119.4 million from $92.7 million at December 31, 2020; accounts receivable rose to $112.1 million from $75.1 million.
Material changes and drivers
- Q3 revenue increased 24.3%; nine-month revenue increased 14.6%. Management attributed growth mainly to stronger advanced industrial demand, including microelectronics and increased manufacturing spending, against a COVID-affected 2020 comparison. Acquisitions added $11.1 million of revenue in both the quarter and year-to-date period; foreign exchange added $2.2 million in Q3 and $13.8 million year to date.
- Q3 segment revenue: Photonics $55.3 million, up 19.1%; Vision $65.3 million, up 1.6%; Precision Motion $57.1 million, up 77.2%. Year-to-date Vision revenue declined 0.8%, while Photonics rose 17.9% and Precision Motion rose 41.3%.
- Gross margin improved year over year, with management citing higher production volumes and factory utilization, especially in Photonics and Precision Motion. Q3 operating income rose 28.7%; nine-month operating income rose 9.1%, with higher restructuring, acquisition, R&D, and SG&A costs limiting growth.
- ATI Industrial Automation and Schneider Electric Motion USA were acquired on August 30 and 31, respectively, for initial cash consideration of approximately $170.0 million and $115.1 million, net of cash acquired. ATI also carries estimated contingent consideration of $51.9 million, payable in 2022 based on 2021 ATI adjusted EBITDA. Both acquisitions expand Precision Motion; their preliminary purchase-price allocations include substantial goodwill and intangible assets.
Outlook, risks, and unusual items
- The filing provides no specific revenue or EPS guidance. Management expected full-year 2021 capital expenditures of approximately $20–22 million and expected the 2020 restructuring program to be substantially complete in Q2 2022, with a further $3–4 million of restructuring charges anticipated.
- Management said operating cash flows should meet operating and capital needs for the foreseeable future, including at least the next 12 months; this outlook is subject to business and market risks.
- COVID-19, electronics and other material shortages, supplier and transportation disruptions, and inflation raised costs and could delay shipments. Management cited mitigation actions but cautioned that pricing and productivity may not fully offset cost increases. Temporary factory shutdowns in the U.K. and China affected Photonics in Q3.
- Q3 restructuring, acquisition, and related costs were $8.1 million, versus $1.7 million; nine-month costs were $16.5 million, versus $5.6 million. The 2021 nine-month effective tax rate was 2.0%, including significant benefits from share-award vesting and other tax items; these may not recur. Q3 tax benefit was $0.1 million.
- A previously disclosed arbitration involving an acquired business was settled in Q2 2021 with no financial damages payment. The company said ordinary-course claims are not expected to materially affect results, while noting outcomes cannot be assured. No material changes to reported risk factors were identified.
Important facts for investors to verify
- Whether acquisition integration, purchase-price allocations, and ATI’s contingent consideration develop as expected.
- Whether supply constraints, factory disruptions, inflation, and customer demand affect future revenue, margins, inventory, and cash conversion.
- Debt levels, covenant headroom, and available borrowing capacity following the October 5 facility expansion.
- Whether restructuring charges and acquisition-related costs decline as planned, and whether tax benefits underlying the unusually low effective rate persist.
- Future Vision-segment demand, including recovery in minimally invasive surgery products as elective procedures resume.