Novanta Inc. — Q3 2019 Form 10-Q
Business context and reporting period: Novanta supplies photonics, vision and precision-motion technologies primarily to medical and advanced-industrial OEMs. This unaudited quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. Unless noted otherwise, dollar amounts are in U.S. dollars and millions.
Financial performance
- Revenue: Q3 revenue was $154.1 million, down 4.2% year over year; nine-month revenue was $466.4 million, up 1.8%. Management attributed the Q3 decline mainly to weaker advanced-industrial demand, partly offset by medical-market growth. Acquisitions added $5.0 million to Q3 and $10.6 million to nine-month revenue; foreign exchange reduced revenue by $2.1 million and $9.1 million, respectively.
- Profit and margins: Q3 gross profit was $64.1 million and gross margin 41.6%, versus $69.6 million and 43.3% a year earlier. Operating income was $12.8 million, down from $21.0 million; net income attributable to Novanta was $8.9 million versus $14.6 million. Diluted EPS was $0.25 versus $0.60. For the first nine months, operating income was $42.3 million versus $55.3 million, attributable net income was $31.6 million versus $37.5 million, and diluted EPS was $0.89 versus $1.11. Nine-month gross margin was 42.1% versus 43.0%.
- Segment revenue:
Segment Q3 2019 Q3 change Nine-month 2019 Nine-month change Photonics $54.6 million Down 11.0% $172.1 million Down 8.1% Vision $69.9 million Up 12.6% $201.8 million Up 17.2% Precision Motion $29.6 million Down 20.9% $92.6 million Down 6.3% Management cited strength in Vision, including minimally invasive surgery products, and weakness in Photonics and Precision Motion tied largely to reduced industrial manufacturing spending.
- Cash flow: Nine-month operating cash flow was $27.8 million, down from $67.7 million. The company attributed the decrease primarily to working-capital movements; receivables, inventory and other working-capital changes weighed on cash generation. Investing cash outflow was $61.1 million, including $53.1 million for acquisitions and $8.0 million in capital expenditures. Financing cash inflow was $12.4 million.
- Balance sheet and liquidity: At September 27, cash was $61.4 million, total debt carrying value was $227.5 million, and unused available revolving-credit capacity was $152.2 million. Current assets were $296.9 million and current liabilities $124.9 million. Cash declined from $82.0 million at year-end 2018. About $37.1 million of cash was held outside Canada and the U.S.; management generally intends to use it locally or for acquisitions and debt repayment.
- Credit covenants: The company reported compliance. Actual consolidated leverage was 1.84 against a maximum of 3.50; fixed-charge coverage was 5.41 against a minimum of 1.50. The credit facilities mature in May 2021.
Material changes and notable items
- Novanta acquired ARGES GmbH in July, Med X Change in June and Ingenia in April 2019. The acquisitions expand capabilities in laser scanning, medical video and precision motion. Nine-month acquisition-related cash consideration was $53.1 million, net of cash acquired; the purchase-price allocations remain preliminary.
- Acquisitions and foreign exchange contributed to changes in reported results, while weaker advanced-industrial demand affected organic performance. Vision growth partly offset declines in the other two segments.
- Goodwill rose to $268.7 million from $217.7 million at December 31, 2018, and net intangible assets rose to $168.1 million from $142.9 million, mainly reflecting acquisitions. The company reported no impairment in its latest annual goodwill and indefinite-lived intangible asset test.
- Adoption of the lease standard added operating lease right-of-use assets and liabilities; the filing states adoption did not affect accumulated deficit, the income statement or cash flows.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said operating cash flows should be sufficient for operating and capital needs for at least the next 12 months, while noting liquidity is exposed to demand, acquisition integration, covenant metrics and credit availability.
- The 2019 restructuring program is expected to finish in Q1 2020; management anticipated a further $3.0–$4.5 million of related charges. The 2018 program was expected to finish in Q4 2019 with another $0.4–$0.6 million of charges.
- Q3 restructuring and acquisition-related costs were $5.5 million, versus $2.3 million a year earlier; nine-month costs were $11.9 million versus $4.8 million. The increase reflected restructuring and acquisition professional fees.
- Current-year acquisitions created deferred cash consideration of about $28.0 million, largely payable in 2020, and contingent consideration obligations. The possible undiscounted contingent consideration range for current-year acquisitions was zero to €18.0 million.
- Key disclosed risks include cyclicality and customer capital spending, industrial-market weakness, acquisition integration, supply and delivery disruption, foreign-exchange and interest-rate movements, tariffs and trade restrictions, medical-device regulation, intellectual-property protection, cybersecurity and data privacy, and tax exposures. The company said there were no material changes to the risk factors in its 2018 Form 10-K.
- Ordinary-course legal claims are pending; management did not expect them to materially adversely affect financial condition or results, but noted outcomes cannot be assured. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether medical-market growth can offset continuing weakness in advanced-industrial demand, particularly in Photonics and Precision Motion.
- Whether operating cash flow recovers as working capital normalizes; monitor receivables, inventory and cash conversion.
- Acquisition integration, preliminary purchase accounting, and the timing and amount of deferred and contingent payments.
- Progress on restructuring, including remaining charges and expected completion dates.
- Debt repayment and covenant headroom ahead of the May 2021 credit-facility maturity, alongside the use and accessibility of foreign-held cash.
- How much reported earnings benefited from the nine-month 12.9% effective tax rate, including share-based compensation tax benefits, and whether that rate is sustainable.