Novanta Inc. — Q3 2018 Form 10-Q Summary
Reporting period: Quarter ended September 28, 2018; year-to-date figures cover the nine months ended that date. Amounts below are in U.S. dollars. Novanta supplies photonics, vision and precision-motion technologies primarily to medical and advanced-industrial OEMs.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $160.8m | $146.3m | $458.2m | $374.4m |
| Gross profit / margin | $69.6m / 43.3% | $58.7m / 40.1% | $197.0m / 43.0% | $158.3m / 42.3% |
| Operating income / margin | $21.0m / 13.1% | $12.4m / 8.5% | $55.3m / 12.1% | $38.5m / 10.3% |
| Net income attributable to Novanta | $14.6m | $7.5m | $37.5m | $51.2m |
| Diluted EPS | $0.60 | ($0.00) | $1.11 | $1.13 |
- Q3 revenue rose 9.9%; management attributed $3.2m, or 2.2%, to current- and prior-year acquisitions, while currency reduced revenue by $0.5m. Nine-month revenue rose 22.4%, including $49.7m from acquisitions and a $5.3m favorable currency effect.
- Q3 diluted EPS includes a $6.9m positive Laser Quantum redeemable noncontrolling-interest redemption-value adjustment; the comparable 2017 quarter included a $7.6m negative adjustment. Nine-month 2017 results included a $26.4m nontaxable gain on gaining control of Laser Quantum, contributing to higher prior-year net income and EPS.
- Q3 segment revenue: Photonics $61.3m, down 1.0%; Vision $62.1m, up 6.8%; Precision Motion $37.4m, up 42.4%. Nine-month growth was strongest in Vision (+37.8%, including WOM) and Precision Motion (+25.2%).
- Q3 gross margins improved in Photonics (47.7% versus 46.8%), Vision (38.9% versus 34.0%) and Precision Motion (44.9% versus 39.2%). Management cited productivity, product mix and lower quality costs; Vision’s quarter also benefited from lower acquired-inventory and technology amortization.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $67.7m, up from $41.3m. Capital expenditures were $11.6m; cash used in investing was $42.3m, including acquisition spending. Cash increased to $111.8m from $100.1m at year-end 2017.
- Debt under the senior credit facilities totaled $256.4m at September 28, 2018: $79.1m term loans and $179.7m revolving borrowings. Cash less debt was approximately $144.6m net debt. The revolving facility had $145.3m of unused availability.
- Credit covenants were met: actual leverage ratio 2.04 against a 3.50 maximum; fixed-charge coverage 5.36 against a 1.50 minimum. Facilities mature in May 2021. The weighted-average facility interest rate was 3.49% in Q3 and 3.55% year to date.
- Management said operating cash flows should meet operating and capital-spending needs for at least the next 12 months, while noting liquidity depends on operating performance, borrowing availability and other risks. $81.0m of cash was held outside Canada and the United States.
Material developments, outlook and risks
- Novanta acquired Zettlex, an inductive-encoder business, on May 1 for a $32.0m purchase price, financed with cash and revolver borrowings. Zettlex contributed $5.0m revenue and a $1.4m pretax loss for the nine-month period; its purchase-price allocation remained preliminary.
- On September 27, Novanta acquired the remaining approximately 24% of Laser Quantum for $45.1m in cash and restricted stock, ending the redeemable noncontrolling interest. The transaction was recorded in equity, with no income-statement gain or loss.
- A 2018 Vision-segment restructuring is expected to continue through Q3 2019. Novanta anticipates a further $1.2m–$1.5m of restructuring charges over the next 12 months. Q3 restructuring and acquisition-related costs totaled $2.3m.
- No specific revenue or earnings guidance was provided. Management’s stated strategy emphasizes profitable growth, product development, acquisitions, medical-market expansion and operational efficiency.
- Effective tax rates were 19.5% for Q3 and 17.3% year to date, versus 11.9% and 11.6% in 2017. The company cited jurisdictional income mix, U.S. tax-law benefits and credits, partly offset by nondeductible Zettlex earn-out expense. Tax Reform Act accounting remained subject to finalization.
- Key disclosed risks include OEM capital-spending cycles and economic conditions, trade and Brexit-related uncertainty, acquisition integration, supply constraints, foreign-exchange and interest-rate exposure, medical-device regulation, cybersecurity, and significant indebtedness. Management reported no material change to the prior annual report’s risk factors; ordinary-course legal matters were not expected to have a material adverse effect, though outcomes are uncertain.
- The company authorized an additional $25m share-repurchase plan in October 2018, after quarter-end. It repurchased $3.8m of shares during the first nine months of 2018.
Important facts for investors to verify
- How much reported growth is organic versus attributable to WOM, Zettlex and other acquisitions, and whether the Q3 Photonics decline persists.
- Whether margin improvements continue after acquired-inventory amortization benefits and other favorable mix or cost effects.
- Zettlex integration, earn-out costs, preliminary purchase accounting and its path from reported loss to contribution.
- Debt repayment, interest costs, covenant headroom and the availability and location of cash to service obligations.
- Working-capital trends: receivables and inventories used cash as revenue grew, while higher payables and accruals supported operating cash flow.
- Final Tax Reform Act adjustments, restructuring charges, and the terms and actual use of the new repurchase authorization.