NOVANTA INC. — Q2 2021 Form 10-Q Summary
Reporting period: Quarter and six months ended July 2, 2021; comparisons are to periods ended July 3, 2020. Novanta supplies photonics, vision, and precision-motion technologies primarily to medical and advanced industrial OEMs. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $167.5m | $144.7m | $330.1m | $300.2m |
| Gross profit / margin | $72.4m / 43.2% | $58.7m / 40.6% | $141.1m / 42.8% | $123.1m / 41.0% |
| Operating income / margin | $16.0m / 9.5% | $13.7m / 9.5% | $27.1m / 8.2% | $27.0m / 9.0% |
| Net income | $11.7m | $11.7m | $23.0m | $23.6m |
| Diluted EPS | $0.33 | $0.33 | $0.64 | $0.66 |
| Cash from operating activities | Six-month period: $52.0m | Prior six-month period: $51.6m |
- Q2 revenue rose 15.8%; six-month revenue rose 10.0%. Management attributed growth mainly to stronger advanced industrial demand, including microelectronics and higher industrial manufacturing spending. Foreign exchange added $6.2m to Q2 revenue and $11.6m for the six months.
- Q2 gross margin improved 2.6 percentage points, reflecting higher production volumes and factory utilization, among other factors. Six-month operating income was nearly flat despite revenue growth, as higher R&D, SG&A, restructuring and acquisition-related costs offset gross-profit growth.
- Q2 net income was essentially unchanged year over year; six-month net income and diluted EPS declined. The company reported a 19.2% Q2 effective tax rate and a 3.5% six-month rate; the prior-year rates were 0.3% and approximately 0%, respectively. Six-month 2021 results benefited from share-award tax windfalls.
- By segment, Q2 revenue grew 30.4% in Photonics and 29.6% in Precision Motion, while Vision declined 2.0%. Six-month revenue showed the same pattern: Photonics +17.4%, Precision Motion +23.1%, and Vision −2.0%. Vision weakness was linked to lower medical spending and deferred minimally invasive surgical procedures.
Cash, debt and liquidity
- Cash and cash equivalents were $133.9m at July 2, 2021, compared with $125.1m at year-end 2020. Six-month investing cash use was $10.8m, including $8.6m of capital expenditures; financing cash use was $32.0m, including $18.4m in payroll taxes on vested share awards and $8.7m to purchase a building under a finance lease.
- Senior Credit Facility borrowings were approximately $196.1m before unamortized debt issuance costs; balance-sheet debt carrying value was $192.2m. The facilities mature in December 2024. The company had $397.9m of unused revolving-credit availability and reported covenant compliance, with leverage of 1.29x against a 3.50x maximum and fixed-charge coverage of 11.20x against a 1.50x minimum.
- Management stated operating cash flow should meet operating and capital needs for at least the next 12 months. Cash-flow risks include demand changes, acquisition integration, and access to borrowing capacity. Some cash is held in foreign subsidiaries; $87.8m of cash was outside Canada and the United States.
Outlook, developments and risks
- No specific revenue or earnings guidance was provided. Management expected fiscal 2021 capital expenditures of approximately $21m–$23m.
- The 2020 restructuring program was expected to be substantially complete in Q4 2021; the company anticipated another $3m–$4m of related charges over the next 12 months. Charges for the program totaled $5.2m cumulatively through July 2.
- After quarter-end, Novanta signed agreements to acquire Schneider Electric Motion USA for $115m cash and ATI Industrial Automation for $172m upfront cash plus contingent payments. Both were anticipated to close in Q3 2021, subject to approvals and customary conditions, and were expected to be funded with cash and credit-facility borrowings.
- Management cited COVID-19 uncertainty, supplier and electronics shortages, freight and input-cost inflation, and possible shipment delays. It said it had generally offset higher costs through productivity measures and some pricing, but recovery of cost increases may lag or be constrained by competition. Other stated risks include cyclical OEM capital spending, delayed medical procedures, product development and integration execution, foreign exchange and interest rates, and regulation.
- A post-acquisition arbitration was settled and formally closed during the quarter with no financial damages payment by Novanta. The company said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be assured. The annual goodwill impairment test found no impairment.
Important facts for investors to verify
- Whether advanced industrial demand and production utilization remain strong, and whether Vision revenue recovers as medical procedures resume.
- Whether input, freight and supply constraints affect margins, customer deliveries, or the ability to pass costs through to customers.
- Closing terms, financing, contingent consideration and integration progress for the SEM and ATI acquisitions.
- Underlying earnings and cash generation excluding unusual tax benefits, share-based compensation, restructuring and acquisition costs.
- Debt and covenant headroom after the planned acquisitions, alongside execution of the restructuring program and expected capital spending.