Novanta Inc. — Q3 2017 Form 10-Q
Business context and period. Novanta supplies photonics, vision and precision-motion technologies to medical and advanced-industrial OEMs. This unaudited filing covers the three and nine months ended September 29, 2017; comparisons are with periods ended September 30, 2016. Amounts are U.S. dollars.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $146.3m | $97.8m | $374.4m | $285.9m |
| Gross profit / margin | $58.7m / 40.1% | $41.2m / 42.1% | $158.3m / 42.3% | $119.6m / 41.8% |
| Operating income | $12.3m | $11.0m | $38.1m | $21.2m |
| Consolidated net income | $8.4m | $7.5m | $52.6m | $14.2m |
| Net income attributable to Novanta | $7.5m | $7.5m | $51.2m | $14.2m |
| Diluted EPS attributable to Novanta | $(0.00) | $0.21 | $1.13 | $0.41 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $41.3m | $34.7m |
Liquidity and debt. At September 29, cash and equivalents were $92.1m, versus $68.1m at year-end 2016. Current assets were $280.4m and current liabilities $95.8m. Reported debt carrying value was $243.3m, up from $77.9m at December 31, 2016; term loans and revolving borrowings totaled $90.6m and $156.1m, respectively. The company reported $168.9m of unused and available revolving capacity. It was within its credit covenants: leverage was 2.35x against a 3.00x maximum, and fixed-charge coverage was 5.56x against a 1.50x minimum.
Changes and key drivers
- Revenue rose 49.5% in Q3 and 31.0% year to date. Management attributed much of the growth to acquisitions: their net contribution was $40.8m in Q3 and $66.8m for the nine-month period. Foreign exchange reduced nine-month revenue by $2.7m.
- Photonics revenue grew 42.5% in Q3; Vision grew 84.0%; Precision Motion grew 15.2%. The WOM and ThingMagic acquisitions drove much of Vision’s Q3 increase. Segment growth also reflected increased demand in certain existing products and markets.
- Q3 gross margin fell to 40.1% from 42.1%, while nine-month margin improved to 42.3% from 41.8%. Vision margins were burdened by acquisition-related inventory fair-value and intangible amortization; Precision Motion cited temporary supply-chain transition issues, production inefficiencies and quality impacts.
- Operating income increased year over year, but Q3 operating expenses rose with acquisitions and related charges. Q3 restructuring, acquisition and divestiture costs were $3.8m, including WOM-related costs; nine-month costs were $6.2m.
Acquisitions, unusual items and outlook
- Novanta acquired WOM on July 3 for approximately $134.9m, financed principally with revolving-credit borrowings. WOM contributed $24.8m of revenue and a $1.6m pretax operating loss for the reported nine-month period, including acquisition-related inventory and intangible amortization.
- In January, Novanta acquired ThingMagic for $19.1m and increased its Laser Quantum ownership from approximately 41% to 76%. The Laser Quantum transaction resulted in a $26.4m nontaxable remeasurement gain. Laser Quantum is consolidated; its remaining shareholders have put/call rights exercisable in 2020.
- The $52.6m nine-month consolidated net income included the $26.4m Laser Quantum gain. The reported Q3 EPS of $(0.00) also reflects a $7.6m adjustment to the estimated redemption value of Laser Quantum’s redeemable noncontrolling interest; the $11.3m nine-month adjustment was recorded in retained earnings, not the income statement, but reduced the EPS numerator.
- Management said operating cash flows should be sufficient for operating and capital needs for at least the next 12 months. The filing gives no specific revenue or earnings forecast. Novanta was preparing to adopt revenue-recognition Topic 606 on January 1, 2018 using the modified retrospective method; quantitative effects remained under evaluation, though management expected only a limited number of contracts might require changes.
- Principal disclosed risks include OEM capital-spending cyclicality, acquisition integration and realization of expected benefits, supply-chain disruption, foreign-exchange and interest-rate exposure, debt obligations and covenant compliance, and reliance on cash flows or distributions from subsidiaries. Management reported no material change to the previously disclosed risk factors; ordinary-course legal claims were not expected to have a material adverse effect, although outcomes cannot be assured.
Important facts for investors to verify
- How much reported growth and future performance reflect acquired businesses versus organic demand, and how WOM integration is progressing.
- Whether acquisition-related margin pressure and Precision Motion supply-chain and quality issues abate, and the resulting segment profitability.
- The effect of the Laser Quantum redemption formula and future estimated redemption-value adjustments on EPS and shareholders’ equity.
- Debt reduction, cash conversion and covenant headroom after acquisition borrowing; $67.0m of cash was held outside Canada and the United States.
- The final purchase-price allocations for recent acquisitions and the eventual quantitative impact of adopting Topic 606.