Novanta Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended July 3, 2020; comparisons are to periods ended June 28, 2019. Amounts are in U.S. dollars unless noted. Novanta supplies photonics, vision, and precision-motion technologies primarily to medical and advanced-industrial OEMs.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $144.7 million | $155.1 million | $300.2 million | $312.3 million |
| Gross profit / margin | $58.7 million / 40.6% | $65.8 million / 42.4% | $123.1 million / 41.0% | $132.1 million / 42.3% |
| Operating income / margin | $13.7 million / 9.5% | $15.1 million / 9.7% | $27.0 million / 9.0% | $29.5 million / 9.4% |
| Net income | $11.7 million | $10.4 million | $23.6 million | $22.6 million |
| Diluted EPS | $0.33 | $0.29 | $0.66 | $0.64 |
| Operating cash flow | Not separately reported for the quarter | $51.6 million | $20.9 million |
- Quarterly revenue fell 6.7%; six-month revenue fell 3.9%. Management attributed the declines mainly to COVID-19-related reductions in industrial spending and postponed elective procedures. Foreign exchange reduced revenue by 0.9% in both comparison periods; acquisitions added 1.1% to quarterly revenue and 2.6% to six-month revenue.
- Q2 segment revenue: Photonics $47.8 million, down 18.0%; Vision $64.7 million, down 1.8%; Precision Motion $32.2 million, up 3.9%. Photonics was most affected by weaker demand; Precision Motion benefited partly from microelectronics demand.
- Gross margin weakened, particularly in Photonics, which reported Q2 margin of 43.7% versus 46.9% a year earlier. The company cited factory operating costs and unfavorable product mix; Precision Motion also cited inventory obsolescence for a discontinued product.
- Q2 net income and EPS increased despite lower operating income, principally because the tax provision fell to $0.04 million from $2.5 million. The six-month 2020 tax provision was effectively zero, including a $1.3 million valuation-allowance release and tax benefits from share-based award vesting.
Financial position and liquidity
- At July 3, 2020, cash and cash equivalents were $97.5 million, versus $78.9 million at year-end 2019. Current assets were $310.4 million and current liabilities $129.3 million.
- Total debt carrying value was $217.0 million, including $5.1 million current and $211.9 million long-term; cash less debt was approximately $119.5 million net debt. Debt facilities mature in December 2024. The company had $372.1 million of available revolver capacity after expanding its commitment to $495 million.
- Debt covenants were met at quarter-end: actual leverage ratio 1.66 against a maximum of 3.50; fixed-charge coverage ratio 7.26 against a minimum of 1.50. Management expected covenant compliance for the next 12 months.
- Six-month operating cash flow was $51.6 million, up from $20.9 million, primarily reflecting working-capital improvement and lower income-tax payments. Investing used $7.3 million, mainly for $4.6 million of capital expenditures and a $2.6 million acquired-technology payment. Financing used $25.0 million, including acquisition payments, share repurchases, debt repayment, and credit-amendment fees.
- Management estimated fiscal 2020 capital expenditures of approximately $6 million to $8 million. Share repurchases were suspended beginning in April to preserve cash.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said cash, anticipated operating cash flows, and available revolver capacity should cover ordinary-course cash needs for at least the next 12 months.
- COVID-19 had reduced demand in both end markets, while elective-procedure deferrals affected medical products. Facilities remained operational and supply-chain disruption was limited as of the filing, but management warned that renewed outbreaks, customer weakness, component shortages, transport delays, or prolonged shutdowns could further harm results and cash flows.
- Cash-preservation actions included reduced hiring and discretionary spending, salary and bonus measures, unpaid time off for many non-production employees, deferred investment and some lease payments, and deferred $1.1 million of U.S. payroll taxes. The company also postponed part of ARGES acquisition consideration: €5.0 million was paid in June and €20.0 million was expected in December 2020.
- Employees received a one-time restricted-stock grant totaling $14.4 million; on-site production staff also received special cash bonuses. Executive officers waived merit increases and bonuses and took unpaid time off; directors waived third-quarter retainers.
- An arbitration demand relating to a pre-acquisition joint-development contract alleges breach and seeks compensatory and punitive damages, lost profits, and other relief. Novanta said it believes the claims lack merit and recorded no accrual; the filing does not provide a clear estimate of potential exposure.
- Management reported no goodwill impairment in its second-quarter 2020 annual test. COVID-19’s duration and financial impact remain uncertain and could materially affect future estimates and results.
Important facts for investors to verify
- Whether medical and advanced-industrial demand recovered after the quarter, and whether COVID-19-related procedure deferrals and customer delays persisted.
- Whether gross margins—especially Photonics margins—stabilized as volume, product mix, and factory utilization changed.
- Whether working-capital-driven cash generation was sustainable, and whether the expected €20.0 million ARGES payment was made in December 2020.
- Subsequent debt balances, borrowing availability, interest expense, and covenant headroom under the credit agreement.
- Developments in the arbitration, including any damages estimate, accrual, or material change in the company’s assessment.
- Whether the unusually low tax rate, including the valuation-allowance release and share-award tax benefits, recurred in later periods.