Novanta Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 1, 2022; comparisons are to periods ended July 2, 2021, unless otherwise noted. Amounts are in U.S. dollars. Novanta supplies photonics, vision and precision-motion technologies to medical and advanced-industrial OEMs.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $215.4 million | $167.5 million | $419.6 million | $330.1 million |
| Gross profit / margin | $95.2 million / 44.2% | $72.4 million / 43.2% | $185.5 million / 44.2% | $141.1 million / 42.8% |
| Operating income / margin | $23.3 million / 10.8% | $16.0 million / 9.5% | $47.6 million / 11.3% | $27.1 million / 8.2% |
| Net income | $17.5 million | $11.7 million | $36.3 million | $23.0 million |
| Diluted EPS | $0.49 | $0.33 | $1.01 | $0.64 |
| Net cash from operating activities | Not separately presented | Not separately presented | $35.4 million | $52.0 million |
Q2 revenue increased 28.6%; first-half revenue increased 27.1%. Prior-year acquisitions contributed $34.9 million of Q2 growth and $67.8 million of first-half growth. Foreign exchange reduced revenue by $8.6 million and $11.9 million, respectively. Management also attributed growth to demand in medical and advanced-industrial markets. First-half net income rose 58.0% and diluted EPS rose from $0.64 to $1.01.
Q2 gross margin improved 1.0 percentage point year over year; first-half gross margin improved 1.4 points. Photonics margins fell amid supply disruptions and raw-material inflation, while Vision margins benefited from improved factory efficiency. Precision Motion’s first-half margin improved with factory efficiency and utilization, partly offset by acquisition-related intangible amortization. Q2 and first-half operating income benefited from higher gross profit and lower restructuring/acquisition costs, partly offset by higher R&D, SG&A and amortization.
Segment revenue in Q2 was Photonics $69.5 million (+11.4%), Vision $65.5 million (+3.3%) and Precision Motion $80.4 million (+92.7%). First-half revenue was $132.2 million (+9.4%), $127.6 million (-2.7%) and $159.8 million (+104.4%), respectively. Vision’s first-half decline was attributed mainly to raw-material shortages and supply-chain disruption. Precision Motion’s growth included acquisition contributions.
At July 1, 2022, cash was $100.5 million, total debt carrying value was $407.4 million and total current assets and liabilities were $399.4 million and $198.4 million. Debt less cash was approximately $306.9 million. The company reported $364.4 million of unused and available revolving-credit capacity. First-half operating cash flow declined $16.6 million year over year, primarily because inventory used $33.5 million of cash, alongside an $8.4 million bonus payout; higher pre-tax profit partly offset these uses. Capital expenditures were $12.1 million. Cash ended the period $16.9 million below year-end 2021, at $100.5 million.
Debt declined from $434.5 million at December 31, 2021. The credit agreement was amended in March 2022 to extend maturity to March 10, 2027, replace LIBOR with SOFR for U.S.-dollar borrowings, update pricing and increase the uncommitted accordion option to $350 million. The company was compliant with its covenants; actual leverage ratio was 2.23 against a 3.50 maximum, and fixed-charge coverage was 9.83 against a 1.50 minimum. Average borrowing rates rose year over year, contributing to first-half net interest expense of $5.9 million versus $2.8 million.
Outlook, commentary and risks
- No full-year revenue or earnings guidance is stated in the provided filing text. Management said operating cash flows should be sufficient for operating and capital needs for at least the next 12 months.
- Management expects 2022 capital expenditures of approximately $25 million to $30 million. It expects the 2020 restructuring program to be substantially complete in Q4 2022, with another $3.0 million to $3.5 million of related charges.
- The company said the 2022 tax-law requirement to capitalize and amortize R&D costs could reduce 2022 operating cash flow by approximately $10.2 million if not deferred, modified or repealed retroactively.
- Management reported supply-chain and component shortages, higher materials, labor, freight and energy costs, and some impact from China lockdowns. Pricing and productivity initiatives have offset some cost increases, but the company may not recover all increases. It also cited uncertainty from COVID-19, economic and political conditions, inflation, interest and foreign-exchange rates, and the Russia-Ukraine conflict.
- Q2 restructuring, acquisition and related costs were $2.7 million. The first-half total was $1.0 million, including a net credit in acquisition-related charges. ATI acquisition contingent consideration was valued at $45.0 million and payable in Q3 2022; total contingent consideration liabilities were $48.4 million at July 1.
- Foreign-currency translation contributed a $18.7 million first-half loss in other comprehensive income. Goodwill impairment testing at the beginning of Q2 found no impairment. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be assured.
Investor verification points
- Assess how much reported growth reflects acquisitions versus underlying demand, particularly in Precision Motion, and the continuing foreign-exchange headwind.
- Track inventory growth, working-capital conversion and operating cash flow, including the stated potential cash-tax impact of the R&D tax rule.
- Review whether supply constraints, inflation and pricing actions affect segment margins, especially Photonics and Vision.
- Confirm payment and settlement of the $45.0 million ATI contingent consideration, remaining restructuring costs, and the $25 million to $30 million capital-expenditure plan.
- Monitor debt cost, covenant headroom and liquidity; the credit facilities are secured by substantially all company assets, and borrowing rates increased during the period.