Novanta Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 29, 2019. Novanta supplies technology components and subsystems to medical and advanced industrial OEMs through its Photonics, Vision, and Precision Motion segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $157.2 million | $147.0 million | +7.0% |
| Gross profit / margin | $66.3 million / 42.2% | $62.2 million / 42.3% | Profit +6.6%; margin down 0.1 percentage point |
| Operating income / margin | $14.4 million / 9.2% | $17.2 million / 11.7% | Income down $2.8 million |
| Net income attributable to Novanta | $12.3 million | $11.9 million | +2.9% |
| Diluted EPS | $0.35 | $0.18 | Up $0.17 |
| Cash from operations | $5.5 million | $20.4 million | Down $14.9 million |
Revenue growth included a $3.8 million contribution from a prior-year acquisition; foreign exchange reduced reported revenue by $3.9 million. The effective tax rate was 0.6%, compared with 11.0%, mainly reflecting jurisdictional income mix, tax deductions and credits, and stock-award vesting tax benefits.
Segments and material changes
- Photonics: Revenue fell 4.2% to $59.2 million, primarily due to lower optical light engine sales. Gross margin declined to 46.1% from 47.8%, mainly on product mix; operating income fell to $12.3 million from $15.3 million.
- Vision: Revenue rose 17.3% to $65.9 million, primarily from $9.1 million higher minimally invasive surgery product sales. Gross margin improved to 39.4% from 35.1%; operating income increased to $4.6 million from $0.5 million.
- Precision Motion: Revenue rose 10.7% to $32.0 million, primarily reflecting inductive encoder sales following the Zettlex acquisition. Gross margin decreased to 42.2% from 45.8%, citing poor-quality costs and product mix; operating income fell to $5.6 million from $8.6 million.
Operating expenses rose $7.0 million, including $2.0 million of restructuring and acquisition-related costs, while gross profit increased $4.1 million. Reported EPS benefited from the absence of a $5.4 million prior-year redeemable noncontrolling-interest redemption-value adjustment and from a lower tax provision.
Cash, debt and liquidity
- Cash was $74.1 million at March 29, versus $82.0 million at year-end. Operating cash flow was $5.5 million; capital expenditures were $2.4 million; financing used $10.6 million. Cash declined $8.0 million during the quarter.
- Management attributed weaker operating cash flow largely to working-capital timing, including sales and inventory purchases, payment of accrued 2018 bonuses, and a $3.9 million Zettlex earn-out milestone payment.
- Reported debt carrying value was $200.4 million, including $2.2 million current and $198.2 million long-term; the company reported $202.4 million of term and revolving borrowings before unamortized debt issuance costs. Revolving-facility availability was $192.5 million.
- Credit covenants were met: actual leverage ratio 1.62 versus a maximum 3.50; fixed-charge coverage 5.12 versus a minimum 1.50. The facilities mature in May 2021.
- Current assets were $286.6 million and current liabilities $101.1 million. Adoption of the lease standard added operating lease assets of $35.4 million and liabilities of $37.0 million at quarter-end.
Outlook, risks and notable items
No specific revenue or earnings guidance is provided in the filing. Management said it expects operating cash flows to meet operating and capital expenditure needs for at least the next 12 months. It expected to complete the 2019 restructuring program during 2019, with an additional $1.0–$2.5 million of charges, and the 2018 program during Q3 2019, with an additional $0.7–$1.0 million of charges.
Key disclosed risks include cyclical OEM capital spending and demand, economic and trade conditions including tariffs and Brexit, foreign-exchange and interest-rate exposure, supply interruptions, product quality and regulatory requirements, acquisition integration, cybersecurity and data privacy, and the ability to protect intellectual property. The company reported ordinary-course legal claims, but did not expect their outcome to have a material adverse effect; it cautioned that such an outcome cannot be assured. No material risk-factor changes were reported.
On April 16, 2019, after quarter-end, Novanta acquired Ingenia-CAT, a Spanish provider of servo drives and control software. Purchase-price allocation and other acquisition details were not yet available. The company adopted lease accounting in Q1, recording approximately $35.3 million of operating lease right-of-use assets and $36.5 million of liabilities at adoption, with no reported effect on earnings or cash flows.
Important facts for investors to verify
- Whether Vision’s strong growth and margin improvement can offset weakness and margin pressure in Photonics and Precision Motion.
- Whether working-capital timing reverses and operating cash flow improves after the sharp year-over-year decline.
- The eventual purchase price, accounting allocation, and integration impact of the Ingenia acquisition.
- Actual restructuring costs and completion timing compared with management’s remaining-charge estimates.
- The sustainability of the unusually low 0.6% effective tax rate and the impact of tax benefits on reported EPS.
- Debt repayment, covenant headroom, and lease-related obligations; the filing reports $192.5 million of unused revolver capacity and compliance with covenants at quarter-end.