Novanta Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 30, 2018; comparisons are with the three months ended March 31, 2017. Novanta supplies photonics, vision and precision-motion technologies to medical and advanced-industrial OEMs. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $147.0 million | $109.0 million | Up 34.9%; prior-year acquisition contributed $24.6 million and favorable currency $3.6 million. |
| Gross profit / margin | $62.2 million / 42.3% | $46.1 million / 42.3% | Margin unchanged. |
| Operating income / margin | $17.2 million / 11.7% | $10.3 million / 9.5% | Operating income increased $6.9 million. |
| Net income attributable to Novanta | $11.9 million | $34.3 million | Prior period included a $26.4 million nontaxable gain on obtaining control of Laser Quantum. |
| Diluted EPS | $0.18 | $0.98 | Q1 2018 included a $5.4 million Laser Quantum redemption-value adjustment, reducing EPS by $0.16; this adjustment was recorded in equity, but included in the EPS numerator. |
| Operating cash flow | $20.4 million | $12.8 million | Increase attributed primarily to higher operating income. |
| Capital expenditures | $2.9 million | $1.8 million | Cash used in investing activities was $2.9 million versus $36.7 million, which included acquisitions in 2017. |
Segments and operating changes
- Photonics: Revenue rose 21.9% to $61.8 million; gross margin improved to 47.8% from 42.9%, attributed to product mix, productivity and factory utilization.
- Vision: Revenue rose 71.6% to $56.2 million, primarily reflecting the 2017 WOM acquisition. Gross margin declined to 35.1% from 40.1%, and operating income fell to $0.5 million from $1.5 million, amid unfavorable mix, acquired-technology amortization and sales and marketing investment.
- Precision Motion: Revenue rose 13.5% to $28.9 million; gross margin was 45.8% versus 45.2%.
- Medical and advanced-industrial markets each represented approximately 50% of revenue, compared with 40% medical and 60% advanced industrial in Q1 2017.
- Operating expenses rose to $44.9 million from $35.8 million, largely reflecting WOM-related costs and investment. As a share of revenue, R&D and SG&A declined.
Balance sheet, debt and liquidity
- At March 30, 2018, cash and equivalents were $111.1 million, versus $100.1 million at year-end 2017. Current assets were $298.1 million and current liabilities $91.6 million.
- Total debt carrying value was $233.2 million: $9.1 million current and $224.1 million long-term. Cash exceeded the prior-year balance; debt declined slightly from $234.6 million at December 31, 2017.
- Unused and available revolving-credit capacity was $174.9 million. The company reported compliance with its covenants: actual consolidated leverage ratio of 2.06 against a maximum of 4.00, and fixed-charge coverage of 5.17 against a minimum of 1.50.
- Financing cash outflow was $8.3 million, including debt repayments and payroll tax payments on stock awards. The company reported no Q1 share repurchases.
- Management stated that operating cash flows should be sufficient for operating and capital needs for at least the next 12 months. Access to cash can be affected by subsidiary restrictions, demand, acquisitions, covenant ratios and borrowing availability.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings or margin guidance. Management describes growth initiatives in medical and advanced-industrial markets, new product development, acquisitions, cross-selling and operational improvement.
- Key risks cited include cyclical OEM capital spending and customer demand, economic and political conditions, foreign exchange and interest-rate changes, acquisition integration, supply disruptions, product and regulatory issues, cybersecurity, and the ability to protect and commercialize intellectual property. The company said there had been no material change to previously disclosed risk factors.
- The effective tax rate was 11.0%, versus 3.1% in Q1 2017. Management cited jurisdictional income mix, the U.S. tax-law changes, U.K. patent-box benefits, tax credits and equity-award tax benefits; the prior-year rate also benefited from the Laser Quantum transaction. Tax-law accounting remained provisional, with potential adjustments during the measurement period.
- Laser Quantum’s redeemable noncontrolling interest increased to $54.9 million, including the $5.4 million estimated-redemption adjustment. The put/call arrangement covers the remaining shares in 2020, with price tied to cash and EBITDA measures.
- On May 1, 2018, Novanta acquired Zettlex, a provider of inductive encoders; purchase-price allocation was still being evaluated. On May 7, the company extended its Bedford headquarters lease through May 31, 2031.
- Ordinary-course legal claims were not expected by management to have a material adverse effect, though no assurance was given. Disclosure controls were assessed as effective; no material internal-control change was reported.
Important facts for investors to verify
- Whether revenue growth persists excluding the WOM acquisition and favorable currency effects, and how demand develops in each end market.
- Whether Vision margins recover from the mix and acquisition-related pressures, and whether Photonics’ margin improvement is sustainable.
- The effect of the Laser Quantum redemption mechanism on future EPS and the eventual purchase price for the remaining interest.
- Debt reduction, revolving-credit availability and covenant headroom, particularly following acquisitions or changes in operating performance.
- Final tax accounting under the U.S. Tax Cuts and Jobs Act and purchase accounting for the Zettlex acquisition.