NOVANTA INC. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. All amounts are U.S. dollars unless noted.
Business context
Novanta supplies technology components and subsystems to medical and advanced-industrial OEMs, with capabilities in photonics, vision and precision motion. Medical applications generated approximately 52% of 2021 revenue and advanced industrial applications 48%. The company operates through Photonics, Vision and Precision Motion segments.
During 2021, Novanta acquired ATI Industrial Automation and Schneider Electric Motion USA (SEM), expanding its robotics, motion-control, life-science and automation offerings. The acquisitions contributed $43.2 million of reported-year revenue, according to management.
Financial results and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $706.8 million | $590.6 million |
| Gross profit / margin | $300.3 million / 42.5% | $244.5 million / 41.4% |
| Operating income / margin | $64.1 million / 9.1% | $55.9 million / 9.5% |
| Net income / net margin | $50.3 million / 7.1% | $44.5 million / 7.5% |
| Diluted EPS | $1.41 | $1.25 |
| Cash provided by operations | $94.6 million | $140.2 million |
| Capital expenditures | $20.0 million | $10.5 million |
Revenue increased 19.7%, operating income 14.6%, and net income approximately 13.1%. Revenue growth reflected stronger advanced-industrial demand, especially microelectronics and industrial manufacturing, the acquisitions, and a $12.5 million favorable foreign-exchange effect. Management attributed $43.2 million of revenue growth to the 2021 acquisitions.
Segment revenue was $232.5 million for Photonics (+16.5%), $262.1 million for Vision (+0.2%) and $212.3 million for Precision Motion (+64.1%). Segment gross margins were 46.5%, 38.5% and 46.8%, respectively. Precision Motion’s growth included acquired revenue. Vision demand remained affected by deferred elective procedures.
Gross margin improved by 1.1 percentage points, while operating margin declined 0.4 points as operating expenses rose 25.3%, including higher R&D, acquisition-related costs and restructuring charges. Net interest expense was $7.4 million. The effective tax rate was 10.4%, versus 8.0% in 2020.
Financial position, liquidity and debt
- Cash and cash equivalents were $117.4 million at year-end, compared with $125.1 million a year earlier. Current assets were $373.8 million and current liabilities $183.9 million.
- Gross borrowings under senior credit facilities were approximately $438.6 million: $92.0 million term loan and $346.6 million revolving borrowings. The balance sheet reports $434.5 million of debt net of unamortized financing costs. The facilities mature in December 2024; $348.4 million of revolver capacity was available.
- Year-end consolidated leverage ratio was 2.48 against a maximum of 3.50; fixed-charge coverage was 12.20 against a minimum of 1.50. A 100-basis-point rise in interest rates would increase annual pretax interest expense by approximately $4.4 million.
- Operating cash flow fell to $94.6 million, primarily due to increases in receivables and inventory. Cash used in investing was $306.7 million, principally reflecting $284.7 million net cash paid for the two acquisitions. Financing activities provided $204.8 million, mainly from revolver borrowings.
- Management reported $50.9 million of accrued contingent consideration and earn-outs, including $47.5 million estimated due within 12 months. Purchase obligations totaled $169.6 million, mostly due in 2022. Undiscounted operating and finance lease obligations were $74.3 million.
Material changes and unusual items
- ATI was acquired on August 30, 2021; SEM on August 31, 2021. Their stated purchase prices were $223.9 million and $118.6 million, respectively, including contingent consideration where applicable. ATI included $44.0 million estimated contingent consideration payable in 2022, subject to its agreement’s performance measure.
- Restructuring, acquisition and related costs increased to $18.0 million from $3.8 million. The 2020 restructuring program generated $8.1 million of 2021 charges; management expected to complete it in Q4 2022 and anticipated another $3.5–$4.5 million of related charges over the following 12 months.
- The company incurred $30.8 million of payroll withholding tax payments upon vesting of share-based awards, versus $8.6 million in 2020.
- Backlog rose to approximately $568.8 million from $239.6 million. Management cautioned that orders can be canceled or rescheduled without significant penalty and that backlog is not a reliable revenue forecast.
Outlook, management commentary and risks
Management said it expects operating cash flows to cover operating and capital-spending needs for at least the next 12 months, with borrowing capacity as additional liquidity. It forecast approximately $25–$30 million of 2022 capital expenditures. The filing does not provide a specific revenue or earnings forecast.
Management cited persistent supply-chain disruption, electronics and raw-material shortages, transport delays and inflation in materials, labor and freight. Price increases and productivity actions had generally offset higher costs, but full recovery was not assured. COVID-19 effects, elective-procedure deferrals, industrial-market cyclicality, customer order volatility, acquisition integration, competition, foreign exchange, cybersecurity, medical-device regulation and indebtedness are among the other disclosed risks.
The company reported no material information-security breaches in 2019–2021. A 2020 arbitration involving a 2019-acquired business was settled in 2021 without financial damages payments; Novanta said other ordinary-course claims were not expected to materially affect its financial statements, while noting uncertainty. The financial-statement audit was unqualified, and management and the auditor concluded internal control over financial reporting was effective; ATI and SEM were excluded from the 2021 internal-control assessment because they were acquired during the year.
Most important facts for investors to verify
- Whether acquired ATI and SEM businesses deliver the expected growth and integration benefits, and whether purchase-price allocations and contingent consideration estimates change.
- Whether supply constraints, inflation and shipment delays persist, and whether pricing and productivity can protect margins.
- Whether working-capital investment continues to weigh on operating cash flow, given the 2021 decline and increases in receivables and inventory.
- Debt repayment, interest-rate exposure, covenant headroom and the timing and amount of contingent-consideration payments.
- Whether the reported backlog converts to shipments and revenue; cancellations and rescheduling limit its predictive value.
- Progress and remaining costs of the restructuring program, and the expected $25–$30 million of 2022 capital spending.