Novanta Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period ended April 1, 2016. All amounts are U.S. dollars unless noted.
Business context
Novanta supplies precision technology components and subsystems to healthcare and advanced industrial OEMs. It reports Photonics, Vision and Precision Motion segments; approximately 40% of revenue came from medical markets and 60% from advanced industrial markets. The quarter included Laser Quantum and ThingMagic from their January 10 acquisitions.
Financial performance
| Metric | Q1 2017 | Prior-year quarter |
|---|---|---|
| Revenue | $109.0 million | $90.3 million |
| Gross profit / margin | $46.1 million / 42.3% | $36.9 million / 40.8% |
| Operating income / margin | $10.2 million / 9.4% | $2.6 million / 2.9% |
| Net income attributable to Novanta | $34.3 million | $1.9 million |
| Diluted EPS | $0.98 | $0.05 |
| Operating cash flow | $12.8 million | $8.3 million |
- Revenue rose 20.7%. Management attributed $10.6 million of the increase to acquisitions and the prior-year discontinuation of radiology products; foreign exchange reduced revenue by $1.2 million.
- Revenue by segment: Photonics $50.7 million (+25.7%), Vision $32.8 million (+13.5%), and Precision Motion $25.5 million (+20.8%).
- Net income included a $26.4 million nontaxable remeasurement gain on Novanta’s previously held Laser Quantum interest. The 3.1% effective tax rate also reflected acquisition-related and other tax items. Reported EPS and net income therefore include a significant unusual gain.
- Cash and cash equivalents were $80.0 million at quarter-end, up from $68.1 million at December 31, 2016. Investing cash outflow was $36.7 million, primarily for acquisitions; capital expenditures were $1.8 million.
- Balance-sheet debt, net of issuance costs, was $118.2 million ($7.4 million current and $110.9 million long-term). The company reported $173.0 million of unused revolving credit availability. Cash exceeded balance-sheet debt by approximately $38.2 million.
- Total assets were $535.3 million and stockholders’ equity was $294.2 million. Inventories rose to $71.0 million from $59.7 million at year-end.
Material changes and unusual items
- Novanta acquired an additional approximately 35% of Laser Quantum for £25.5 million ($31.1 million), increasing ownership from approximately 41% to 76% and bringing it under consolidation. Laser Quantum contributed $7.2 million of revenue from acquisition through quarter-end. A put/call arrangement provides for the purchase and sale of the remaining shares in 2020, subject to conditions, with price based on a defined EBITDA multiple.
- Novanta acquired ThingMagic for approximately $19.2 million. It contributed $1.9 million of revenue from acquisition through quarter-end.
- The acquisitions were partly funded by $42.0 million of revolver borrowings during the quarter. Total outstanding revolver borrowings reached $52.0 million.
- Operating income improved partly because restructuring and related costs declined to $0.8 million from $3.0 million. The 2016 restructuring program was substantially completed in 2016; management expected a further $0.2–$0.3 million of charges related to that program.
Outlook, liquidity and risks
- No specific revenue, earnings or other numerical guidance is provided. Management stated that it expects operating cash flows to cover operating and capital expenditure needs for at least the next 12 months.
- At March 31, the company reported covenant compliance: actual leverage ratio 1.54 against a maximum of 3.00, and fixed-charge coverage ratio 5.10 against a minimum of 1.50. Credit facilities mature in May 2021 and are secured by substantially all assets of the company and certain subsidiaries.
- Management cited demand and customer capital-spending cycles, economic and political conditions, acquisition integration, supply continuity, foreign exchange and interest rates, indebtedness, regulation, and intellectual property among relevant risks. It warned that actual results may differ from forward-looking statements.
- The company reported ordinary-course legal claims but did not expect them to have a material adverse effect; it gave no assurance that claims could not have such an effect. It reported no material changes to risk factors since its 2016 Form 10-K.
- Disclosure controls were assessed as effective at quarter-end; no material change in internal control over financial reporting was reported.
Investor verification points
- Separate recurring operating performance from the $26.4 million Laser Quantum remeasurement gain and assess earnings excluding acquisition-related impacts.
- Verify the final purchase-price allocations, acquired-business contributions, integration progress and the 2020 Laser Quantum put/call terms.
- Track debt, interest expense, covenant headroom and the availability and restrictions on cash held outside Canada and the United States; $52.3 million of cash was held in foreign subsidiaries.
- Monitor working capital: inventory increased, days sales outstanding rose from 59 to 60, and inventory turnover declined from 3.7 to 3.6, as reported by management.
- Assess whether segment growth and margins persist after acquisition effects, purchase-accounting charges and the prior-year radiology discontinuation are considered.