NOVANTA INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the Consolidated
Financial Statements and Notes included in Item 1 of this Quarterly Report on
Form 10-Q. The MD&A contains certain forward-looking statements within the
meaning of the United States Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition to historical financial
information, the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. These
forward-looking statements include, but are not limited to the anticipated
impacts of the COVID-19 pandemic on our business, our financial results and our
financial condition; our belief that the Purchasing Managers Index ("PMI") may
provide an indication of the impact of general economic conditions on our sales
into the advanced industrial end market; our strategy; anticipated financial
performance; expected liquidity and capitalization; drivers of revenue growth
and our growth expectations in various markets; management's plans and
objectives for future operations, expenditures and product development, and
investments in research and development; business prospects; potential of future
product releases and expansion of our product and service offerings; anticipated
revenue performance; industry trends; market conditions; our competitive
positions; changes in economic and political conditions, including supply chain
constraints; changes in accounting principles; changes in actual or assumed tax
liabilities; expectations regarding tax exposures; anticipated reinvestment of
future earnings and dividend policy; anticipated expenditures in regard to the
Company's benefit plans; future acquisitions; integration and anticipated
benefits from acquisitions and dispositions; anticipated economic benefits,
costs and timelines of restructuring programs; ability to repay our
indebtedness; our intentions regarding the use of cash; expectations regarding
legal and regulatory environmental requirements and our compliance thereto; and
other statements that are not historical facts. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various important factors, 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
of 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; 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
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Accounting Period
The interim consolidated financial statements of
Business Overview
We are a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers ("OEMs") 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 us to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers' demanding applications.
Reportable Segments
We operate in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities are summarized below.
Photonics
Our Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, solid state laser, ultrafast laser, and optical light engine products, to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures, particularly ophthalmology applications. The vast majority of the segment's product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Vision
Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless technologies, video recorder and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification ("RFID") technologies; thermal chart recorders; spectrometry technologies; and embedded touch screen solutions. The vast majority of the segment's product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Precision Motion
Our Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motors, servo drives and motion control solutions, integrated stepper motors, intelligent robotic end-of-arm technology solutions, air bearings, and air bearing spindles to customers worldwide. The vast majority of the segment's product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
End Markets
We primarily operate in two end markets: the medical market and the advanced industrial market.
Medical Market
For the six months ended
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Advanced Industrial Market
For the six months ended
Strategy
Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:
• disciplined focus on our diversified business model of providing
components and sub-systems to long life-cycle OEM customer platforms in
attractive medical and advanced industrial niche markets;
• improving our business mix to increase medical sales as a percentage of
total revenue by:
- introducing new products aimed at attractive medical applications,
such as minimally invasive and robotic surgery, ophthalmology, patient
monitoring, drug delivery, clinical laboratory testing and life
science equipment;
- deepening our key account management relationships with and driving
cross selling of our product offerings to leading medical equipment
manufacturers; and
- pursuing complementary medical technology acquisitions;
• increasing our penetration of high growth advanced industrial
applications, such as laser materials processing, intelligent end-of-arm
robotic technology solutions, robotics, laser additive manufacturing,
automation and metrology, by working closely with OEM customers to launch
application specific products that closely match the requirements of each
application;
• broadening our portfolio of enabling proprietary technologies and
capabilities through increased investment in new product development, and
investments in application development to further penetrate existing
customers, while expanding the applicability of our solutions to new
markets;
• broadening our product and service offerings through the acquisition of
innovative and complementary technologies and solutions in medical and
advanced industrial technology applications;
• expanding sales and marketing channels to reach new target customers;
• improving our existing operations to expand profit margins and improve
customer satisfaction by implementing lean manufacturing principles,
strategic sourcing across our major production sites; and optimizing and
limiting the growth of our fixed cost base; and
• attracting, retaining, and developing world-class talented and motivated
employees.
Significant Events and Updates
Amendment to Third Amended and Restated Credit Agreement
On
Impact of COVID-19 on Our Business
In response to the COVID-19 pandemic, we have taken proactive, aggressive actions to protect the health and safety of our employees. We established steering committees at both the corporate level and at each of our major facilities to provide leadership for and manage our COVID-19 risk mitigation actions and countermeasures. We established rigorous safety measures in all of our facilities and have adapted our COVID-19 safety measures as the pandemic and related government mandates evolved over the past
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two years. We expect to continue some of these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business. We may take further actions as government authorities require or recommend or as we determine to be in the best interest of our employees. In connection with our COVID-19 remediation actions, we have incurred additional costs to protect the health of our employees, including investments in technologies and monitoring equipment, weekly testing of unvaccinated employees for COVID-19 at certain locations and rearranging some of our facilities to accommodate social distancing and flexible post-pandemic work environment.
Infection rates and the corresponding public health restrictions vary across the
countries in which we operate. Many governmental authorities have continued to
implement numerous evolving measures to try to contain the virus, such as travel
bans and restrictions, masking recommendations and mandates, vaccine
recommendations and mandates, limitations on gatherings, mandatory quarantines,
shelter-in-place orders, and business shutdowns. While COVID-19 restrictions
have been relaxed in the
Through
To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic and the global electronics and other raw material shortages, we are identifying alternative suppliers and distributors, sourcing raw materials from different supplier and distributor locations, modifying our product designs where feasible to allow for alternative components to be used without compromising quality, performance or other requirements, in-sourcing production of parts where feasible, and taking other actions to ensure a sustainable supply of raw materials. Despite our mitigation actions, if certain suppliers cannot produce a key part or component for us, or if the receipt of certain materials is otherwise delayed, we may miss our scheduled shipment deadlines and our relationship with customers may be harmed.
Additionally, restrictions on or disruptions of transportation, such as reduced availability of air transports, port closures and backlogs, and increased border controls or closures, have resulted in higher costs and delays, both for obtaining raw materials from suppliers and for shipping finished products to customers.
The COVID-19 pandemic and the global electronics and other raw material shortages have caused inflationary pressures on the market prices for certain of our parts and primary raw materials as well as increases in the costs of labor, freight, packaging, energy and other consumables that are used in our manufacturing processes. We have generally been able to offset increases in these costs through various productivity and cost reduction initiatives, as well as adjusting our selling prices to pass through some of these higher costs to our customers; however, our ability to raise our selling prices depends on market conditions and competitive dynamics. Given the timing of our actions compared to the timing of these inflationary pressures, there may be periods during which we are unable to fully recover the increases in our costs.
Russia Ukraine Conflict
In
Our sales to
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Results of Operations for the Three and Six Months Ended
The following table sets forth our unaudited results of operations as a percentage of revenue for the periods indicated:
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 55.8 56.8 55.8 57.2
Gross profit 44.2 43.2 44.2 42.8
Operating expenses:
Research and development and
engineering 10.0 10.1 10.1 10.8
Selling, general and administrative 18.8 18.6 19.0 19.1
Amortization of purchased intangible
assets 3.3 2.1 3.5 2.2
Restructuring, acquisition, and
related costs 1.2 2.8 0.2 2.5
Total operating expenses 33.4 33.7 32.9 34.6
Operating income 10.8 9.5 11.3 8.2
Interest income (expense), net (1.3 ) (0.8 ) (1.4 ) (0.8 )
Foreign exchange transaction gains
(losses), net 0.1 (0.0 ) 0.1 (0.1 )
Other income (expense), net 0.0 (0.1 ) (0.1 ) (0.1 )
Income before income taxes 9.6 8.6 9.9 7.2
Income tax provision (benefit) 1.5 1.7 1.2 0.3
Consolidated net income 8.1 % 7.0 % 8.7 % 7.0 %
Overview of Financial Results
Total revenue of
Total revenue of
Operating income of
Operating income of
Basic earnings per common share ("Basic EPS") of
Basic EPS of
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Revenue
The following table sets forth external revenue by reportable segment for the periods noted (dollars in thousands):
Three Months Ended
July 1, July 2, Increase Percentage
2022 2021 (Decrease) Change
Photonics $ 69,461 $ 62,357 $ 7,104 11.4 %
Vision 65,516 63,447 2,069 3.3 %
Precision Motion 80,379 41,719 38,660 92.7 %
Total $ 215,356 $ 167,523 $ 47,833 28.6 %
Six Months Ended
July 1, July 2, Increase Percentage
2022 2021 (Decrease) Change
Photonics $ 132,243 $ 120,851 $ 11,392 9.4 %
Vision 127,566 131,083 (3,517 ) (2.7 )%
Precision Motion 159,763 78,173 81,590 104.4 %
Total $ 419,572 $ 330,107 $ 89,465 27.1 %
Photonics
Photonics segment revenue for the three months ended
Photonics segment revenue for the six months ended
Vision
Vision segment revenue for the three months ended
Vision segment revenue for the six months ended
Precision Motion
Precision Motion segment revenue for the three months ended
Precision Motion segment revenue for the six months ended
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Gross Profit and Gross Profit Margin
The following table sets forth the gross profit and gross profit margin for each of our reportable segments for the periods noted (dollars in thousands):
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Gross profit:
Photonics $ 31,182 $ 29,593 $ 59,569 $ 57,702
Vision 26,535 24,443 51,765 51,369
Precision Motion 38,864 20,874 77,014 36,951
Unallocated Corporate and Shared Services (1,336 ) (2,504 ) (2,827 ) (4,876 )
Total $ 95,245 $ 72,406 $ 185,521 $ 141,146
Gross profit margin:
Photonics 44.9 % 47.5 % 45.0 % 47.7 %
Vision 40.5 % 38.5 % 40.6 % 39.2 %
Precision Motion 48.4 % 50.0 % 48.2 % 47.3 %
Total 44.2 % 43.2 % 44.2 % 42.8 %
Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, trade tariffs, freight costs, headcount, inventory obsolescence and warranty expenses.
Photonics
Photonics segment gross profit for the three months ended
Photonics segment gross profit for the six months ended
Vision
Vision segment gross profit for the three months ended
Vision segment gross profit for the six months ended
Precision Motion
Precision Motion segment gross profit for the three months ended
Precision Motion segment gross profit for the six months ended
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gross profit margin was primarily attributable to improved factory efficiency and utilization, offset by an increase in amortization of purchased intangible assets.
Unallocated Corporate and Shared Services
Unallocated corporate and shared services costs primarily represent costs of
corporate and shared services functions that are not allocated to the operating
segments. These costs for the three months ended
Unallocated corporate and shared services costs for the six months ended
Operating Expenses
The following table sets forth operating expenses for the periods noted (in
thousands):
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Research and development and
engineering $ 21,588 $ 16,954 $ 42,517 $ 35,636 Selling, general and administrative 40,538 31,240 79,890 62,893 Amortization of purchased intangible assets
7,173 3,586 14,515 7,161
Restructuring, acquisition, and
related costs 2,655 4,634 1,025 8,365
Total $ 71,954 $ 56,414 $ 137,947 $ 114,055 Research and Development and Engineering Expenses
Research and Development and Engineering ("R&D") expenses are primarily
comprised of employee compensation related expenses and cost of materials for
R&D projects. R&D expenses were
R&D expenses were
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses include costs for sales
and marketing, sales administration, finance, human resources, legal,
information systems, and executive management functions. SG&A expenses were
SG&A expenses were
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets, excluding amortization of developed
technologies that is included in cost of revenue, was
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Amortization of purchased intangible assets, excluding amortization of developed
technologies that is included in cost of revenue, was
Restructuring, Acquisition, and Related Costs
We recorded restructuring, acquisition, and related costs of
We recorded restructuring, acquisition, and related costs of
Operating Income (Loss) by Segment
The following table sets forth operating income (loss) by segment for the periods noted (in thousands):
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Operating Income (Loss)
Photonics $ 13,996 $ 14,196 $ 27,431 $ 26,591
Vision 7,024 3,206 12,066 6,572
Precision Motion 14,083 12,279 32,421 19,724
Unallocated Corporate and Shared Services (11,812 ) (13,689 ) (24,344 ) (25,796 )
Total $ 23,291 $ 15,992 $ 47,574 $ 27,091
Photonics
Photonics segment operating income was
Photonics segment operating income was
Vision
Vision segment operating income was
Vision segment operating income was
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Precision Motion
Precision Motion segment operating income was
Precision Motion segment operating income was
Unallocated Corporate and Shared Services
Unallocated corporate and shared services costs primarily represent costs of
corporate and shared services functions that are not allocated to the operating
segments, including certain restructuring and most acquisition costs. These
costs for the three months ended
Unallocated corporate and shared services costs for the six months ended
Other Income and Expense Items
The following table sets forth other income and expense items for the periods
noted (in thousands):
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Interest income (expense), net
$ 152 $ (76 ) $ 221 $ (333 ) Other income (expense), net$ 68 $ (97 ) $ (477 ) $ (167 )
Interest Income (Expense), Net
Net interest expense was
Net interest expense was
Foreign Exchange Transaction Gains (Losses), Net
Foreign exchange transaction gains (losses) were nominal for both the three and
six months ended
Other Income (Expense), Net
Net other expense was nominal for the three months ended
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Income Tax Provision (Benefit)
Our effective tax rate for the three months ended
Our effective tax rate of 19.2% for the three months ended
Our effective tax rate for the six months ended
Our effective tax rate of 3.5% for the six months ended
Beginning in
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our
operating, investing, and financing activities. Our primary ongoing cash
requirements are funding operations, capital expenditures, investments in
businesses, and repayment of our debt and related interest payments. Our primary
sources of liquidity are cash flows from operations and borrowings under our
revolving credit facility. We believe our future operating cash flows will be
sufficient to meet our future operating and capital expenditure cash needs for
the foreseeable future, including at least the next 12 months. The availability
of borrowing capacity under our revolving credit facility provides another
potential source of liquidity for any future capital expenditures and other
liquidity needs. In addition, we have the ability to expand our borrowing
capacity by up to
Significant factors affecting the management of our ongoing cash requirements
are the adequacy of available bank lines of credit and our ability to attract
long term capital with satisfactory terms. The sources of our liquidity are
subject to all of the risks of our business and could be adversely affected by,
among other factors, risks associated with events outside of our control, such
as economic consequences of the COVID-19 pandemic, worsening supply chain
disruptions and electronics and other material shortages, a decrease in demand
for our products, our ability to integrate current and future acquisitions,
deterioration in certain financial ratios, higher interest rates in the
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Our cash requirements primarily consist of the principal and interest payments
associated with our Senior Credit Facilities, operating and finance leases,
purchase commitments, pension obligations, contingent considerations and
earn-outs. Such contractual obligations are described in our Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
the Notes to Consolidated Financial Statements, each included in our Annual
Report on Form 10-K for the fiscal year ended
Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. There is no assurance that applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary.
As of
We deferred certain
Senior Credit Facilities
In
In
On
On
As of
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The Credit Agreement contains various covenants that we believe are usual and
customary for this type of agreement, including a maximum consolidated leverage
ratio and a minimum consolidated fixed charge coverage ratio (as defined in the
Credit Agreement). The following table summarizes these financial covenants and
our compliance therewith as of
Requirement Actual
Maximum consolidated leverage ratio (1) 3.50 2.23
Minimum consolidated fixed charge coverage ratio 1.50 9.83
(1) Maximum consolidated leverage ratio shall be increased to
4.00 for four consecutive quarters following a designated
acquisition, as defined in the Fifth Amendment.
Share Repurchase Plans
Our Board of Directors may approve share repurchase plans from time to time.
Under these repurchase plans, shares may be repurchased at our discretion based
on ongoing assessment of the capital needs of the business, the market price of
our common shares, and general market conditions. Shares may also be repurchased
through an accelerated share purchase agreement, on the open market or in
privately negotiated transactions in accordance with applicable federal
securities laws. Repurchases may be made under certain
In
In
Cash Flows for the Six Months Ended
The following table summarizes our cash flows, cash and cash equivalents, and
unused and available funds under our revolving credit facility for the periods
indicated (in thousands):
Six Months Ended
July 1, July 2,
2022 2021
Net cash provided by operating activities $ 35,408 $ 52,014
Net cash used in investing activities $ (12,616 ) $ (10,843 )
Net cash used in financing activities $ (35,473 ) $ (31,994 )
July 1, December 31,
2022 2021
Cash and cash equivalents $ 100,489 $ 117,393
Unused and available funds under the revolving credit
facility $ 364,441 $ 348,421
Operating Cash Flows
Cash provided by operating activities was
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purchases, and a bonus payout in 2022 of
Beginning in
Investing Cash Flows
Cash used in investing activities was
Cash used in investing activities was
We expect to use an aggregate of approximately
Financing Cash Flows
Cash used in financing activities was
Cash used in financing activities was
Critical Accounting Policies and Estimates
The critical accounting policies that we believe impact significant judgments
and estimates used in the preparation of our consolidated financial statements
presented in this periodic report on Form 10-Q are described in our Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
the Notes to Consolidated Financial Statements, each included in our Annual
Report on Form 10-K for the fiscal year ended
Recent Accounting Pronouncements
See Note 1 to Consolidated Financial Statements.
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