Novanta Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 28, 2019; comparisons are to the periods ended June 29, 2018. Amounts are U.S. dollars. Novanta supplies photonics, vision and precision-motion technologies primarily to medical and advanced-industrial OEMs.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $155.1m | $150.4m | $312.3m | $297.4m |
| Gross profit / margin | $65.8m / 42.4% | $65.2m / 43.4% | $132.1m / 42.3% | $127.4m / 42.8% |
| Operating income / margin | $15.1m / 9.7% | $17.1m / 11.4% | $29.5m / 9.4% | $34.3m / 11.5% |
| Net income attributable to Novanta | $10.4m | $11.0m | $22.6m | $22.9m |
| Diluted EPS | $0.29 | $0.32 | $0.64 | $0.50 |
- Q2 revenue increased 3.2%; acquisitions added 1.2 percentage points and foreign exchange reduced growth by 2.0 points, according to management. For the first half, revenue grew 5.0%; acquisitions contributed 1.9 points and currency reduced growth by 2.4 points.
- Q2 operating income declined $2.0m, principally due to lower gross margin and a $1.9m increase in restructuring and acquisition costs. First-half operating income declined $4.8m, reflecting higher R&D investment and a $3.9m increase in restructuring and acquisition costs.
- Q2 net income attributable to Novanta fell from $11.0m to $10.4m. First-half diluted EPS rose despite slightly lower net income, primarily because the comparable 2018 period included a $5.1m redeemable noncontrolling-interest redemption-value adjustment.
Segments and business changes
- Photonics: Q2 revenue fell 9.0% to $58.3m; first-half revenue fell 6.7% to $117.5m. Management cited weaker advanced-industrial demand and lower optical light-engine revenue. Q2 segment operating income was $11.7m versus $16.2m.
- Vision: Q2 revenue rose 22.4% to $65.9m; first-half revenue rose 19.8% to $131.8m, mainly from stronger minimally invasive surgery products. Q2 segment operating income improved to $4.2m from $0.4m.
- Precision Motion: Q2 revenue declined 4.8% to $31.0m; first-half revenue increased 2.5% to $63.0m. Softer industrial demand affected results; Q2 segment operating income was $6.0m versus $7.6m.
- Medical products represented approximately 55% of revenue, versus 50% in the comparable periods; advanced industrial represented approximately 45%, versus 50%.
- Novanta acquired Med X Change, a medical video-recording solutions provider, on June 5 for a stated purchase price of $21.8m, and Ingenia, a servo-drive and control-software provider, on April 16 for €14.3m ($16.2m), including estimated contingent consideration. Combined, the acquisitions contributed $1.0m revenue and a $0.5m pretax loss in the first half; purchase-price allocations remained preliminary.
Cash, debt and liquidity
- At June 28, cash and equivalents were $66.1m, down from $82.0m at year-end 2018. Current assets were $284.9m and current liabilities $98.5m.
- Debt was $214.6m, comprising $58.4m of term loans and $157.8m under the revolving facility; no current debt portion was reported. Cash less debt was approximately $148.5m. The facilities mature in May 2021.
- Unused, available revolving-credit capacity was $167.2m. Novanta reported compliance with its covenants: leverage ratio 1.72 versus a maximum 3.50; fixed-charge coverage 5.52 versus a minimum 1.50.
- First-half operating cash flow was $20.9m, versus $40.4m a year earlier. Investing cash use was $34.4m, largely acquisitions ($28.9m net cash) and capital expenditures ($5.6m). Financing cash use was $2.8m. Working-capital increases were the primary stated reason for lower operating cash flow; inventory turnover declined from 3.4 to 3.2.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said it expects operating cash flows to cover operating and capital-expenditure needs for at least the next 12 months.
- The company expected to complete its 2019 restructuring program in Q1 2020 and incur an additional $3.0m–$4.5m of related charges. It also expected $0.5m–$0.7m of further charges to complete its 2018 restructuring program in Q4 2019.
- On July 31, 2019, Novanta acquired ARGES GmbH for an initial €33.8m ($37.6m), with further €24.8m cash consideration expected in 2020 and up to €10.0m in earnouts tied to revenue targets. ARGES will be included in Photonics.
- Key risks discussed include cyclical customer capital spending and weaker industrial demand; tariffs and trade restrictions; foreign-exchange and interest-rate exposure; supply disruptions and inventory forecasting; medical-device regulation; acquisition integration; restructuring execution; and the ability to service debt. The company reported ordinary-course legal claims but did not expect them to have a material adverse effect; it cautioned that outcomes cannot be assured.
- Adoption of the new lease standard added operating lease assets and liabilities at transition; at June 28, operating lease assets were $38.6m and liabilities $40.3m. Management reported no material effect on earnings or cash flows from adoption.
Investor verification points
- Check whether weaker Photonics and Precision Motion demand stabilizes, and whether Vision’s minimally invasive surgery growth continues.
- Track working capital, especially inventory, receivables and operating cash conversion, alongside the year-over-year cash-flow decline.
- Verify acquisition integration, preliminary purchase accounting, contingent consideration exposure and ARGES’s financing and performance.
- Monitor restructuring charges against the company’s remaining cost estimates, and debt repayment capacity ahead of the May 2021 facility maturity.
- Assess the effect of foreign exchange, tariffs, customer capital-spending cycles and medical-device regulation on results.