Novanta Inc. — Q2 2016 Form 10-Q Summary
Reporting period: Three and six months ended July 1, 2016; comparative periods ended July 3, 2015. Financial amounts below are in U.S. dollars. Novanta designs and sells precision photonics and motion-control components and subsystems to OEMs in medical and advanced industrial markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $97.7 million | $96.5 million | $188.1 million | $191.1 million |
| Gross profit / margin | $41.5 million / 42.5% | $41.3 million / 42.8% | $78.4 million / 41.7% | $81.4 million / 42.6% |
| Operating income | $7.6 million | $10.3 million | $10.2 million | $15.7 million |
| Net income | $4.9 million | $19.5 million | $6.8 million | $22.9 million |
| Diluted EPS | $0.14 | $0.56 | $0.19 | $0.66 |
- Q2 revenue rose 1.3%, but organic revenue declined 0.3%, excluding acquisition/divestiture and currency effects. First-half reported revenue fell 1.6%; organic revenue also declined 0.3%.
- Q2 operating income declined 26.3%; first-half operating income declined 35.2%. Higher restructuring, acquisition and contingent-consideration costs weighed on results. First-half gross profit also fell, including a radiology-product inventory write-down.
- Prior-year earnings included a $19.6 million gain from the JK Lasers divestiture, substantially affecting comparisons of net income and EPS. Q2 foreign-exchange results also improved year over year, from a $3.2 million loss to a $0.7 million gain.
Segments and material changes
- Laser Products: Q2 revenue increased 9.3% to $46.1 million, supported by laser beam-delivery products and customer volumes; first-half revenue decreased 0.8% to $86.5 million. Industrial CO2 laser demand was affected by capital-spending weakness.
- Vision Technologies: Q2 revenue declined 9.3% to $28.3 million and first-half revenue declined 8.3% to $57.2 million. Radiology-product discontinuation and longer surgical-customer qualification cycles affected sales; the segment reported operating losses of $2.7 million for Q2 and $6.5 million for the first half.
- Precision Motion: Q2 revenue increased 0.9% to $23.3 million; first-half revenue increased 6.6% to $44.4 million, with growth partly offset by weakness in air-bearing spindles.
- Novanta acquired Reach Technology, an embedded touch-screen solutions provider, on May 24 for approximately $9.4 million net of cash acquired. Reach contributed $0.9 million of revenue and a $0.1 million pretax loss for the six-month period. Its preliminary purchase-price allocation included $4.8 million of goodwill and $4.0 million of intangible assets.
Cash flow, debt and liquidity
- For the first half, operating cash flow from continuing operations was $23.8 million, versus $14.6 million a year earlier. Capital expenditures were $5.3 million.
- Cash was $60.5 million at July 1, 2016, compared with $60.0 million at year-end 2015. Cash increased by $0.5 million during the half.
- Principal debt outstanding was $90.0 million: $75.0 million term loans and $15.0 million revolving borrowings. The balance-sheet carrying amount, net of unamortized issuance costs, was $86.5 million. The company reported $210 million of unused revolving capacity.
- In May, Novanta refinanced into a $300 million facility maturing in May 2021, comprising a $75 million term loan and $225 million revolver. It reported compliance with covenants; actual leverage ratio was 1.40 against a 3.00 maximum, and fixed-charge coverage was 3.48 against a 1.50 minimum.
- Management stated that expected operating cash flows and available revolver capacity should meet operating and capital needs for at least the next 12 months, while noting liquidity is exposed to business, market and subsidiary cash-transfer risks.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected an additional $0.3–$0.5 million of charges under the 2016 restructuring program, which was substantially completed in Q2. The program included facility consolidation, radiology-product discontinuation and cost reductions; cumulative charges were $7.7 million as of July 1.
- Management cited customer capital-spending cycles, economic conditions, product-demand fluctuations, innovation and commercialization, acquisition integration, supply disruptions, foreign exchange, interest rates and access to subsidiary cash among key risks.
- The filing added uncertainty related to the UK referendum to leave the EU, including potential effects on economic activity, financial markets, currency rates and Novanta’s European operations.
- On August 2, Novanta announced that Matthijs Glastra would become CEO and a director effective September 1, succeeding John Roush, who would serve in an advisory role through a transition period ending by December 31, 2016.
- The company reported ordinary-course legal claims that it did not expect to materially affect its financial statements, while cautioning outcomes cannot be assured. Disclosure controls were deemed effective; the German sales and distribution center was migrating to the primary ERP system.
Important facts for investors to verify
- Whether Vision Technologies can stabilize revenue and operating losses after the radiology exit and amid longer surgical-product qualification cycles.
- How much reported earnings pressure reflects recurring operations versus restructuring, acquisition costs, contingent-consideration revaluations and the prior-year divestiture gain.
- Reach’s final purchase-price allocation, integration progress and contribution to revenue and profitability.
- Cash conversion, capital spending and debt repayment, including covenant headroom and the terms of the May 2021-maturity credit facilities.
- Exposure to UK/EU developments, currency movements and cyclical industrial customer spending, as well as the CEO transition and remaining restructuring charges.