Novanta Announces Financial Results for the Third Quarter 2022

admin November 8, 2022

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Third Quarter 2022 GAAP Revenue increased 26% to $223 million
Third Quarter 2022 GAAP Consolidated Net Income of $22 million
Third Quarter 2022 GAAP Diluted Earnings Per Share increased 66% to $0.63
Third Quarter 2022 Adjusted Earnings Per Share increased 8% to $0.81
Third Quarter 2022 Adjusted EBITDA of $49 million
Raises 2022 Guidance

BEDFORD, Mass.–(BUSINESS WIRE)–Novanta Inc. (Nasdaq: NOVT) (“Novanta” or the “Company”), a trusted technology partner to medical and advanced technology equipment manufacturers, today reported financial results for the third quarter 2022.

Financial Highlights	Three Months Ended
(In millions, except per share amounts)	September 30,		October 1,
	2022		2021
GAAP
Revenue	$	223.0	$	177.7
Operating Income	$	28.7	$	15.3
Consolidated Net Income	$	22.5	$	13.6
Diluted EPS	$	0.63	$	0.38
Non-GAAP*
Adjusted Operating Income	$	40.0	$	31.6
Adjusted Diluted EPS	$	0.81	$	0.75
Adjusted EBITDA	$	49.4	$	40.4
*Reconciliations of GAAP to non-GAAP financial measures, as well as definitions for the non-GAAP financial measures included in this press release and the reasons for their use, are presented below.

“Novanta delivered another record quarter,” said Matthijs Glastra, Chair and Chief Executive Officer of Novanta. “In the third quarter, we delivered double-digit growth for sales and Adjusted EBITDA. Our teams were able to deliver excellent financial performance despite inflationary pressures. Customer demand remains strong across our medical and advanced industrial application areas, with backlog remaining at near-record levels. Our continued success with design wins in high growth application areas positions us to continue to deliver on our strategy as we navigate through these challenging times.”

Third Quarter

During the third quarter of 2022, Novanta generated GAAP revenue of $223.0 million, an increase of $45.2 million, or 25.5%, versus the third quarter of 2021. The Company’s acquisition activities resulted in an increase in revenue of $22.3 million, or 12.6%, compared to the third quarter of 2021. Changes in foreign currency exchange rates year over year adversely impacted our revenue by $13.7 million, or 7.7%, during the third quarter of 2022. Our year-over-year Organic Revenue Growth, which excludes the net impact of acquisitions and changes in foreign currency exchange rates, was an increase of 20.6% for the third quarter of 2022 (see “Organic Revenue Growth” in the non-GAAP reconciliations below).

In the third quarter of 2022, GAAP operating income was $28.7 million, compared to $15.3 million in the third quarter of 2021. GAAP consolidated net income was $22.5 million in the third quarter of 2022, compared to $13.6 million in the third quarter of 2021. GAAP diluted earnings per share (“EPS”) was $0.63 in the third quarter of 2022, compared to $0.38 in the third quarter of 2021.

Adjusted Diluted EPS was $0.81 in the third quarter of 2022, compared to $0.75 in the third quarter of 2021. The Company ended the third quarter of 2022 with 35.9 million diluted weighted average shares outstanding. Adjusted EBITDA was $49.4 million in the third quarter of 2022, compared to $40.4 million in the third quarter of 2021.

Operating cash flow for the third quarter of 2022 was $14.8 million. The Company completed the third quarter of 2022 with approximately $442.8 million of total debt and $84.6 million of total cash. Net Debt, as defined in the non-GAAP reconciliation below, was $363.4 million.

Financial Guidance

“We are very pleased with the positioning and performance of our diversified portfolio of businesses. Novanta’s exposure to long-term secular growth applications is expected to help the company deliver strong year-over-year growth in both the fourth quarter and the full year,” said Matthijs Glastra. “While macroeconomic conditions are becoming more uncertain and challenging, Novanta’s customer backlog remains at near-record levels and our teams continue to demonstrate the agility and resiliency to navigate through difficult environments.”

For the fourth quarter of 2022, the Company expects GAAP revenue of approximately $215 million to $217 million, demonstrating reported growth of 8% to 9%. The Company expects Adjusted EBITDA to be in the range of $45.0 million to $46.0 million and Adjusted Diluted EPS to be in the range of $0.70 to $0.74. The Company’s guidance assumes no significant changes in foreign exchange rates.

For the full year 2022, the Company expects GAAP revenue of approximately $857 million to $859 million, demonstrating reported growth of 21% to 22%. The Company expects Adjusted Gross Profit Margin to be approximately 46.0%. The Company expects Adjusted EBITDA to be in the range of $183 million to $184 million and Adjusted Diluted EPS to be in the range of $3.02 to $3.06. The Company’s guidance assumes no significant changes in foreign exchange rates.

Novanta provides earnings guidance on a non-GAAP basis and does not provide earnings guidance on a GAAP basis, with the exception of GAAP revenue guidance. A reconciliation of the Company’s forward-looking Adjusted Gross Profit Margin, Adjusted EBITDA and Adjusted Diluted EPS guidance to the most directly comparable GAAP financial measures is not provided because of the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliations, including future changes in the fair value of contingent considerations; significant discrete income tax expenses (benefits); divestitures and related expenses; acquisitions and related expenses; impact of purchase price allocations for recently completed acquisitions; gains and losses from sale of real estate assets; costs related to product line closures; intangible asset impairment charges and related asset write-offs; future restructuring expenses; foreign exchange gains/(losses); benefits or expenses associated with the completion of tax audits; and other charges reflected in the Company’s reconciliation of historical non-GAAP financial measures, the amounts of which, based on past experience, could be material. For additional information regarding Novanta’s non-GAAP financial measures, see “Use of Non-GAAP Financial Measures” below.

Conference Call Information

The Company will host a conference call on Tuesday, November 8, 2022 at 10:00 a.m. ET to discuss these results and to provide a business update. To access the call, please dial (888) 346-3959 prior to the scheduled conference call time. Alternatively, the conference call can be accessed online via a live webcast on the Events & Presentations page of the Investors section of the Company’s website at www.novanta.com.

A replay of the audio webcast will be available approximately three hours after the conclusion of the call in the Investor Relations section of the Company’s website at www.novanta.com. The replay will remain available until Monday, January 2, 2023.

Use of Non-GAAP Financial Measures

The non-GAAP financial measures used in this press release are Organic Revenue Growth, Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Operating Income and Operating Margin, Adjusted Income before Income Taxes, Adjusted Income Tax Provision/(Benefit) and Effective Tax Rate, Adjusted Consolidated Net Income, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, Free Cash Flow as a Percentage of Consolidated Net Income, and Net Debt.

The Company believes that these non-GAAP financial measures provide useful and supplementary information to investors regarding the operating performance of the Company. It is management’s belief that these non-GAAP financial measures would be particularly useful to investors because of the significant changes that have occurred outside of the Company’s day-to-day business in accordance with the execution of the Company’s strategy. This strategy includes streamlining the Company’s existing operations through site and functional consolidations, strategic divestitures and product line closures, expanding the Company’s business through significant internal investments, and broadening the Company’s product and service offerings through acquisition of innovative and complementary technologies and solutions. The financial impact of certain elements of these activities, particularly acquisitions, divestitures, and site and functional restructurings, is often large relative to the Company’s overall financial performance and can adversely affect the comparability of its operating results and investors’ ability to analyze the business from period to period.

The Company’s Adjusted EBITDA, Organic Revenue Growth and Adjusted Gross Margin are used by management to evaluate operating performance, communicate financial results to the Board of Directors, benchmark results against historical performance and the performance of peers, and evaluate investment opportunities, including acquisitions and divestitures. In addition, Adjusted EBITDA, Organic Revenue Growth and Adjusted Gross Margins are used to determine bonus payments for senior management and employees. The Company also uses Adjusted Diluted EPS as a measurement for performance-based restricted stock units issued to certain executives. Accordingly, the Company believes that these non-GAAP financial measures provide greater transparency and insight into management’s method of analysis.

Non-GAAP financial measures should not be considered as substitutes for, or superior to, measures of financial performance prepared in accordance with GAAP. They are limited in value because they exclude charges that have a material effect on the Company’s reported results and, therefore, should not be relied upon as the sole financial measures to evaluate the Company’s financial results. The non-GAAP financial measures are meant to supplement, and to be viewed in conjunction with, GAAP financial measures. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the tables accompanying this press release.

Safe Harbor and Forward-Looking Information

Certain statements in this release are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on current expectations and assumptions that are subject to risks and uncertainties. All statements contained in this news release that do not relate to matters of historical fact should be considered forward-looking statements, and are generally identified by words such as “expect,” “intend,” “anticipate,” “estimate,” “believe,” “future,” “could,” “should,” “plan,” “aim,” and other similar expressions. These forward-looking statements include, but are not limited to, statements regarding anticipated financial performance and financial position, including our financial outlook for the fourth quarter and full year; expectations for our end markets and market position; expectations regarding our ability to mitigate supply chain disruptions and navigate difficult macroeconomic conditions; inflationary pressures; expectations regarding the benefits of recent acquisitions; expectations regarding our design win and customer order activities and demand in our medical and advanced industrial end-markets; and other statements that are not historical facts.

These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following: economic and political conditions and the effects of these conditions on our customers’ businesses, capital expenditures and level of business activities; risks associated with the COVID-19 pandemic and other events outside our control; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate, introduce new products timely, and successfully commercialize our innovations; failure to introduce new products in a timely manner; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our and our third-party providers’ information technology systems; our failure to comply with data privacy regulations; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; our increased use of outsourcing in foreign countries; risks associated with increased outsourcing of components manufacturing; our exposure to increased tariffs, trade restrictions or taxes on our products; negative effects on global economic conditions, financial markets and our business as a result of the United Kingdom’s withdrawal from the European Union; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors’ products; disruptions in the supply of certain key components or other goods from our suppliers; our failure to accurately forecast component and raw material requirements leading to excess inventories or delays in the delivery of our products; production difficulties and product delivery delays or disruptions; our exposure to medical device regulations, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products; potential penalties for violating foreign, U.S. federal, and state healthcare laws and regulations; impact of healthcare industry cost containment and healthcare reform measures; changes in governmental regulations affecting our business or products; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; increasing scrutiny and changing expectations from investors, customers, and governments with respect to Environmental, Social and Governance policies and practices; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; our reliance on original equipment manufacturer customers; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; changes in tax laws, and fluctuations in our effective tax rates; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; our existing indebtedness limiting our ability to engage in certain activities; volatility in the market price for our common shares; and our failure to maintain appropriate internal controls in the future.

Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company’s operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by our subsequent filings with the Securities and Exchange Commission. Such statements are based on the Company’s beliefs and assumptions and on information currently available to the Company. The Company disclaims any obligation to publicly update or revise any such forward-looking statements as a result of developments occurring after the date of this document except as required by law.

About Novanta

Novanta is a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers a competitive advantage. We combine deep proprietary technology expertise and competencies in photonics, vision, and precision motion with a proven ability to solve complex technical challenges. This enables Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers’ demanding applications. The driving force behind our growth is the team of innovative professionals who share a commitment to innovation and customer success. Novanta’s common shares are quoted on Nasdaq under the ticker symbol “NOVT.”

More information about Novanta is available on the Company’s website at www.novanta.com. For additional information, please contact Novanta Investor Relations at (781) 266-5137 or [email protected].

NOVANTA INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of U.S. dollars or shares, except per share amounts) (Unaudited)

	Three Months Ended
	September 30,			October 1,
	2022			2021
Revenue	$	222,958		$	177,726
Cost of revenue		124,550			101,428
Gross profit		98,408			76,298
Operating expenses:
Research and development and engineering		21,349			17,468
Selling, general and administrative		40,301			31,296
Amortization of purchased intangible assets		6,472			4,139
Restructuring, acquisition, and related costs		1,625			8,120
Total operating expenses		69,747			61,023
Operating income		28,661			15,275
Interest income (expense), net		(4,062	)		(1,710	)
Foreign exchange transaction gains (losses), net		2,086			34
Other income (expense), net		87			(71	)
Income before income taxes		26,772			13,528
Income tax provision (benefit)		4,282			(75	)
Consolidated net income	$	22,490		$	13,603

Earnings per common share:
Basic	$	0.63		$	0.38
Diluted	$	0.63		$	0.38

Weighted average common shares outstanding—basic		35,729			35,447
Weighted average common shares outstanding—diluted		35,928			35,764

NOVANTA INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars) (Unaudited)

	September 30,		December 31,
	2022		2021
ASSETS
Current Assets
Cash and cash equivalents	$	84,580	$	117,393
Accounts receivable, net		144,633		115,617
Inventories		162,807		125,657
Prepaid expenses and other current assets		15,715		15,158
Total current assets		407,735		373,825
Property, plant and equipment, net		95,030		87,439
Operating lease assets		43,520		48,338
Intangible assets, net		179,113		220,989
Goodwill		465,052		479,500
Other assets		17,081		17,792
Total assets	$	1,207,531	$	1,227,883
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt	$	4,366	$	5,097
Accounts payable		79,577		68,514
Accrued expenses and other current liabilities		74,114		110,327
Total current liabilities		158,057		183,938
Long-term debt		438,447		429,361
Operating lease liabilities		40,907		45,700
Other long-term liabilities		27,918		47,593
Total liabilities		665,329		706,592
Stockholders’ Equity:
Total stockholders’ equity		542,202		521,291
Total liabilities and stockholders’ equity	$	1,207,531	$	1,227,883

NOVANTA INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) (Unaudited)

	Three Months Ended
	September 30,			October 1,
	2022			2021
Cash flows from operating activities:
Consolidated net income	$	22,490		$	13,603
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization		13,143			10,889
Share-based compensation		5,954			8,490
Deferred income taxes		(5,124	)		(2,365	)
Other		410			1,214
Changes in assets and liabilities which (used)/provided cash, excluding effects from business acquisitions:
Accounts receivable		(16,817	)		(5,878	)
Inventories		(13,043	)		(6,298	)
Other operating assets and liabilities		7,746			(5,757	)
Net cash provided by (used in) operating activities		14,759			13,898
Cash flows from investing activities:
Cash paid for businesses acquisition, net of working capital adjustments		(22,385	)		(285,181	)
Purchases of property, plant and equipment		(3,282	)		(6,116	)
Net cash provided by (used in) investing activities		(25,667	)		(291,297	)
Cash flows from financing activities:
Borrowings under revolving credit facilities		69,941			280,000
Repayments under term loan and revolving credit facilities		(24,958	)		(21,330	)
Payments of withholding taxes from share-based awards		(149	)		(12,244	)
Payments of contingent consideration related to acquisitions		(45,879	)		—
Other financing activities		(151	)		(142	)
Net cash provided by (used in) financing activities		(1,196	)		246,284
Effect of exchange rates on cash and cash equivalents		(3,805	)		(343	)
Increase (decrease) in cash and cash equivalents		(15,909	)		(31,458	)
Cash and cash equivalents, beginning of period		100,489			133,853
Cash and cash equivalents, end of period	$	84,580		$	102,395

NOVANTA INC. Revenue by Reportable Segment (In thousands of U.S. dollars) (Unaudited)

	Three Months Ended
	September 30,		October 1,
	2022		2021
Revenue
Photonics	$	70,799	$	55,263
Vision		73,345		65,346
Precision Motion		78,814		57,117
Total	$	222,958	$	177,726

NOVANTA INC. Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands of U.S. dollars) (Unaudited)
Adjusted Gross Profit and Adjusted Gross Profit Margin by Reportable Segment (Non-GAAP):

	Three Months Ended
	September 30,			October 1,
	2022			2021
Photonics
Gross Profit (GAAP)	$	34,699		$	25,311
Gross Profit Margin (GAAP)		49.0	%		45.8	%
Amortization of intangible assets		593			771
Acquisition fair value adjustments		—			—
Adjusted Gross Profit (Non-GAAP)	$	35,292		$	26,082
Adjusted Gross Profit Margin (Non-GAAP)		49.8	%		47.2	%

Vision
Gross Profit (GAAP)	$	28,201		$	24,763
Gross Profit Margin (GAAP)		38.4	%		37.9	%
Amortization of intangible assets		1,204			1,503
Acquisition fair value adjustments		—			—
Adjusted Gross Profit (Non-GAAP)	$	29,405		$	26,266
Adjusted Gross Profit Margin (Non-GAAP)		40.1	%		40.2	%

Precision Motion
Gross Profit (GAAP)	$	36,832		$	27,743
Gross Profit Margin (GAAP)		46.7	%		48.6	%
Amortization of intangible assets		1,450			1,042
Acquisition fair value adjustments		—			280
Adjusted Gross Profit (Non-GAAP)	$	38,282		$	29,065
Adjusted Gross Profit Margin (Non-GAAP)		48.6	%		50.9	%

Unallocated Corporate and Shared Services
Gross Profit (GAAP)	$	(1,324	)	$	(1,519	)
Amortization of intangible assets		—			—
Employee COVID-19 testing costs		—			432
Adjusted Gross Profit (Non-GAAP)	$	(1,324	)	$	(1,087	)

Novanta Inc.
Gross Profit (GAAP)	$	98,408		$	76,298
Gross Profit Margin (GAAP)		44.1	%		42.9	%
Amortization of intangible assets		3,247			3,316
Acquisition fair value adjustments		—			280
Employee COVID-19 testing costs		—			432
Adjusted Gross Profit (Non-GAAP)	$	101,655		$	80,326
Adjusted Gross Profit Margin (Non-GAAP)		45.6	%		45.2	%