Novanta Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended April 3, 2020; comparisons are with the three months ended March 29, 2019. Amounts are in U.S. dollars.
Business context and results
Novanta supplies photonics, vision and precision-motion technologies primarily to medical and advanced industrial OEMs. Medical applications represented approximately 58% of Q1 revenue, up from 50% a year earlier; advanced industrial represented 42%.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $155.5 million | $157.2 million | Down 1.1% |
| Gross profit / margin | $64.4 million / 41.5% | $66.3 million / 42.2% | Margin down 0.7 percentage points |
| Operating income / margin | $13.3 million / 8.5% | $14.4 million / 9.2% | Down 7.9% |
| Net income | $11.9 million | $12.3 million | Down 2.5% |
| Diluted EPS | $0.34 | $0.35 | Down $0.01 |
| Cash from operations | $17.8 million | $5.5 million | Improved $12.3 million |
Revenue was pressured by reduced advanced-industrial demand; prior-year acquisitions added $6.6 million, while foreign exchange reduced revenue by $1.5 million. Medical-market growth partly offset industrial weakness. Reported operating results include restructuring and acquisition-related costs of $1.7 million, versus $2.1 million a year earlier. The effective tax rate was a benefit of 0.3%, compared with a 0.6% provision, primarily reflecting jurisdictional income mix, tax deductions and credits, and share-award vesting benefits.
Segments and material changes
- Photonics: Revenue $55.1 million, down 6.9%; operating income $8.9 million versus $12.3 million. Lower industrial demand and optical-light-engine revenue, plus weaker gross margin (44.7% versus 46.1%), weighed on results. ARGES contributed $3.2 million of revenue.
- Vision: Revenue $69.0 million, up 4.7%; operating income $5.6 million versus $4.6 million. Revenue included $2.7 million from the Med X Change acquisition. Gross margin eased to 38.5% from 39.4%.
- Precision Motion: Revenue $31.3 million, down 2.2%; operating income $6.5 million versus $5.6 million. Gross margin improved to 44.4% from 42.2%, aided by product mix and operational improvements.
Company gross margin declined as Photonics and Vision margins weakened. R&D expense increased to $15.3 million from $14.0 million, mainly reflecting acquired businesses; SG&A decreased to $30.8 million from $31.8 million, partly due to elimination of 2020 cash bonuses.
Cash flow, debt and liquidity
- Cash and cash equivalents were $73.7 million at April 3, 2020, versus $78.9 million at year-end 2019. Operating cash flow was $17.8 million; investing cash outflow was $5.1 million and financing cash outflow was $16.0 million. The cash-flow improvement primarily reflected working-capital movements.
- Debt under senior credit facilities was $211.6 million, including $4.9 million current and $206.8 million long-term (net of issuance costs). Cash less reported debt was approximately $137.9 million. The company also had $15.5 million of finance-lease liabilities.
- The revolving-credit commitment was increased by $145 million to $495 million in March. Available borrowing capacity was $374.9 million at April 3. The facilities mature in December 2024. The company reported covenant compliance: leverage ratio 1.83 against a maximum of 3.50; fixed-charge coverage 6.14 against a minimum of 1.50.
- Management stated that cash, expected operating cash flow and available borrowing capacity should meet ordinary-course needs for at least 12 months, and expected continued covenant compliance. This assessment depends on uncertain pandemic and economic conditions.
Outlook, commentary, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management expected a prolonged global slowdown and warned that a severe recession could further reduce demand. COVID-19 had weakened demand in advanced industrial markets and some medical markets, including as healthcare providers deferred elective procedures. The company also cited possible customer inventory-building that could pull demand forward. Manufacturing facilities remained operational and supply-chain disruption was limited at filing, but supplier, transport, staffing and shipment disruptions remained risks.
- To preserve liquidity, Novanta reduced hiring and discretionary spending, restricted travel, deferred some capital and lease spending, eliminated 2020 executive cash bonuses and merit increases, introduced unpaid leave, deferred certain payroll taxes, and temporarily suspended share repurchases.
- In April, after quarter-end, the company agreed to defer ARGES acquisition consideration: €5.0 million (approximately $5.4 million) was expected in June 2020 and €20.0 million (approximately $21.7 million) in December 2020.
- In April, substantially all employees received a one-time restricted-stock-unit grant totaling $14.4 million, scheduled to vest in February 2021; production staff were also to receive special cash incentives. These are post-quarter events.
- The company repurchased $5.5 million of shares during the quarter, then suspended repurchases to conserve cash. It reported $59.5 million remaining under its repurchase plans.
- Goodwill and other long-lived asset estimates could be affected materially in future periods by the duration and severity of COVID-19, although management reported no material pandemic-related estimate impact as of April 3.
- Ordinary-course legal claims were disclosed; management did not expect a material adverse effect, while noting outcomes are uncertain. No material changes to purchase commitments or other off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether pandemic-related weakness, deferred procedures and customer inventory-building affect subsequent revenue, orders and segment margins.
- Whether operating cash generation and the expanded revolver remain sufficient, including the timing of the ARGES payments and compliance with debt covenants.
- Whether the gross-margin decline persists, especially in Photonics and Vision, and whether acquisition contributions translate into operating profit.
- The future accounting and cash effects of the April employee awards, production incentives and cost-reduction measures.
- Whether supplier, logistics, staffing or facility disruptions intensify, and whether COVID-19 requires impairment charges or materially changes estimates and contingencies.