Novanta Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Novanta supplies photonics, vision and precision-motion technologies to medical and advanced-industrial OEMs. This unaudited quarterly report covers the three and six months ended June 30, 2017; comparisons are with the periods ended July 1, 2016. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $119.1 million | $97.7 million | $228.1 million | $188.1 million |
| Gross profit / margin | $53.5 million / 44.9% | $41.5 million / 42.5% | $99.6 million / 43.7% | $78.4 million / 41.7% |
| Operating income from continuing operations | $15.6 million | $7.6 million | $25.8 million | $10.2 million |
| Net income attributable to Novanta | $9.4 million | $4.9 million | $43.7 million | $6.8 million |
| Diluted EPS from continuing operations | $0.16 | $0.14 | $1.13 | $0.19 |
- First-half operating cash flow was $29.5 million, versus $23.8 million. Investing used $37.9 million, primarily for acquisitions; financing provided $28.3 million. Cash increased by $21.0 million to $89.1 million.
- At June 30, cash was $89.1 million and current assets were $245.7 million against current liabilities of $83.3 million. Inventory was $76.8 million, up from $59.7 million at year-end 2016.
- Senior credit facility principal outstanding was $114.5 million ($67.5 million term loan and $47.0 million revolver); reported debt carrying value was $111.5 million after unamortized issuance costs. The company reported $178 million of unused revolver availability at June 30.
- Q2 operating margin was 13.1%; first-half operating margin was 11.3%. First-half net income and EPS include a $26.4 million nontaxable gain from remeasuring Novanta’s previously held Laser Quantum interest. The first-half effective tax rate was 11.6%, versus 29.4% a year earlier.
Material changes versus prior periods
- Revenue grew 21.9% in Q2 and 21.3% in the first half. Management attributed $15.4 million of Q2 growth and $26.0 million of first-half growth to the net effect of acquisitions and, for the first half, the prior-year radiology product discontinuation. Foreign exchange reduced revenue by $1.3 million in Q2 and $2.5 million in the first half.
- All three segments grew. Q2 revenue increased 25.5% in Photonics, 20.2% in Vision and 16.7% in Precision Motion. The Laser Quantum acquisition was a major contributor to Photonics growth; ThingMagic and Reach contributed to Vision.
- Gross margin improved, including Vision’s Q2 margin increase to 42.4% from 37.2%, which management attributed to product mix and restructuring-related savings. First-half Photonics margin was slightly lower year over year, partly due to acquisition-related inventory and intangible amortization.
- Operating income improved, with lower restructuring costs than in 2016; acquisition-related expenses, higher compensation and acquired-intangible amortization partly offset gains. Q2 net income attributable to Novanta also reflects a $3.7 million adjustment to the redeemable Laser Quantum noncontrolling interest, which reduced EPS through the numerator adjustment.
Outlook, risks and unusual items
- Management stated that operating cash flows should be sufficient for operating and capital needs for at least the next 12 months. The filing gives no numerical revenue or earnings guidance.
- On July 3, 2017, after quarter-end, Novanta acquired WOM for approximately €117.3 million ($134.0 million), funded by a €118.0 million revolver draw. On August 1, the credit amendment increased revolver commitments from $225 million to $325 million, reset the accordion feature to $125 million, and increased the term loan balance to $90.6 million.
- Laser Quantum’s remaining shares are subject to a 2020 call/put arrangement, with price based partly on a multiple of 2019 EBITDA. The redeemable noncontrolling interest was $27.4 million at June 30, including a $3.7 million redemption-value adjustment.
- Risks cited include dependence on OEM customers’ capital spending and cyclical demand, acquisition integration, foreign exchange and interest rates, supply and production disruptions, and existing indebtedness. The company reported compliance with credit covenants at June 30 and no material change to previously disclosed risk factors. Ordinary-course legal claims were not expected by management to have a material adverse effect, though outcomes cannot be assured.
- Management reported effective disclosure controls as of June 30. No material change in internal control was reported apart from migration of the Celera Motion business line to the primary ERP system.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects underlying demand versus acquisitions, product mix and restructuring effects.
- The sustainability of earnings excluding the $26.4 million Laser Quantum remeasurement gain, and the effect of noncontrolling-interest redemption adjustments on attributable earnings and EPS.
- WOM’s final purchase accounting, operating contribution and impact of acquisition financing on leverage, interest expense and liquidity.
- Inventory growth and turnover, and whether working-capital investment converts into operating cash flow.
- The eventual value and terms of the Laser Quantum put/call obligation, which depend partly on future EBITDA.