Novanta Inc. — Q3 2016 Form 10-Q
Business and period: Novanta designs and sells precision photonics, vision and motion-control products, primarily to OEMs in medical and advanced industrial markets. The unaudited quarter ended September 30, 2016; nine-month results are compared with the period ended October 2, 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $97.8m | $92.3m | $285.9m | $283.4m |
| Gross profit / margin | $41.2m / 42.1% | $39.9m / 43.3% | $119.6m / 41.8% | $121.3m / 42.8% |
| Operating income | $11.0m | $9.0m | $21.2m | $24.7m |
| Net income | $7.5m | $6.6m | $14.2m | $29.5m |
| Diluted EPS | $0.21 | $0.19 | $0.41 | $0.84 |
| Operating cash flow from continuing operations | Not provided for the quarter | Not provided for the quarter | $34.7m | $25.5m |
- Segment revenue: Q3 Photonics $43.4m (+5.1%), Vision $31.6m (+2.0%), and Precision Motion $22.8m (+14.3%). For nine months, revenue was $129.9m (+1.1%), $88.8m (-4.9%), and $67.2m (+9.1%), respectively.
- Balance sheet and liquidity: Cash and equivalents were $64.7m at September 30, 2016, versus $60.0m at December 31, 2015. Current assets were $196.3m and current liabilities $66.9m. Debt had a $79.6m carrying value, comprising $73.1m of term loans and $10.0m of revolver borrowings before unamortized issuance costs. The $225m revolver had $215m available.
- Cash flows and investment: Nine-month investing cash flow from continuing operations was an outflow of $8.9m; financing cash flow was an outflow of $21.1m. Cash increased $4.8m during the period. Capital expenditures were $7.0m; the company expects approximately $8m for full-year 2016.
Changes and notable items
- Q3 revenue rose 6.0%, but gross margin fell 1.2 percentage points. Management cited product mix and temporary manufacturing inefficiencies during an ERP implementation in Photonics.
- Nine-month revenue was nearly flat and operating income declined 14.1%. Vision revenue and gross profit weakened, including a $1.6m inventory-related charge from discontinuing radiology products. Precision Motion grew, while Photonics was affected by industrial weakness and the prior-year JK Lasers divestiture.
- Nine-month net income and diluted EPS fell substantially from 2015, principally because the prior-year period included a $19.6m gain on the JK Lasers sale. Current-year results also included restructuring and acquisition-related charges.
- Q3 operating income benefited from a $1.6m gain on sale of the Chatsworth, California facility. Q3 SG&A included $1.3m of CEO transition costs. The company acquired Reach Technology in May for approximately $9.4m; Reach contributed $3.2m revenue and a $0.4m pretax loss for the nine-month period.
Outlook, risks and contingencies
- Management stated that operating cash flows should be sufficient for operating and capital expenditure needs for at least the next 12 months. It expects a further $0.3m–$0.4m of charges for the 2016 restructuring plan.
- The May 2016 credit agreement provides a $75m term loan and $225m revolving facility, maturing in May 2021. The company reported compliance with covenants; actual leverage was 1.27 against a maximum of 3.00, and fixed-charge coverage was 3.65 against a minimum of 1.50.
- Principal risks include customer capital-spending cyclicality, industrial-market conditions, foreign exchange and interest rates, acquisition integration, product and supply-chain issues, and the uncertainty following the UK vote to leave the EU. Management said ordinary-course legal claims were not expected to have a material adverse effect, while noting outcomes cannot be assured.
- The 2016 restructuring program was substantially completed in Q2. The filing also reports $5.3m of estimated contingent consideration, dependent on acquired businesses meeting performance targets.
Key facts for investors to verify
- Whether Photonics manufacturing performance improves following the ERP implementation and whether the Q3 margin decline reverses.
- Whether Vision stabilizes after radiology product discontinuation and lower surgical-product demand, and whether Precision Motion growth continues.
- How much of Q3 operating-income improvement reflects recurring operations versus the $1.6m facility-sale gain, and how CEO transition and earn-out costs develop.
- Actual full-year capital expenditures, restructuring costs, acquisition-related cash payments, and progress on Reach integration.
- Debt repayment, revolver usage, covenant headroom, and availability of cash held outside Canada and the United States.