Novanta Announces Financial Results for the Third Quarter 2018

Novanta Inc. (Nasdaq: NOVT) (the Company), a trusted technology partner to medical and advanced technology equipment manufacturers, today reported financial results for the third quarter 2018.

   

Financial Highlights

Three Months Ended
(In millions, except per share amounts) September 28,     September 29,
2018 2017
GAAP
Revenue $ 160.8 $ 146.3
Operating Income $ 21.0 $ 12.4
Net Income Attributable to Novanta Inc. $ 14.6 $ 7.5
Diluted EPS $ 0.60 $ (0.00 )
Non-GAAP*
Adjusted Operating Income $ 29.8 $ 25.9
Adjusted Diluted EPS $ 0.61 $ 0.45
Adjusted EBITDA $ 34.2 $ 30.3
 

*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.

Third Quarter

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“We are very pleased with our companys performance in the third quarter, said Matthijs Glastra, Chief Executive Officer of Novanta. We delivered record performance from a top line and bottom line perspective. Reported growth was very solid at 10% and our Adjusted EPS and Free Cash Flow showed impressive growth. Despite a more uncertain economic climate, we are confident in the strength of our business model and our teams ability to execute.

During the third quarter of 2018, Novanta generated GAAP revenue of $160.8 million, an increase of $14.5 million, or 9.9%, versus the third quarter of 2017. The Companys acquisition activities resulted in an increase in revenue of $3.2 million, or 2.2%, compared to the third quarter of 2017. Changes in foreign currency exchange rates year over year adversely impacted our revenue by $0.5 million, or 0.3%, during the third quarter of 2018. Our Organic Revenue Growth, which excludes the net impact of acquisitions and changes in foreign currency exchange rates, increased 8.0%, versus the third quarter of 2017 (see Organic Revenue Growth in the non-GAAP reconciliation below).

In the third quarter of 2018, GAAP operating income was $21.0 million, compared to $12.4 million in the third quarter of 2017. GAAP net income attributable to Novanta was $14.6 million in the third quarter of 2018, compared to $7.5 million in the third quarter of 2017. GAAP diluted earnings per share (EPS) was $0.60 in the third quarter of 2018, compared to ($0.00) in the third quarter of 2017. In the third quarter of 2018, the Company purchased the remaining equity interest in Laser Quantum, resulting in a reversal of $6.9 million of the previously recorded redemption value adjustment to reduce the carrying value of the noncontrolling interest to the actual purchase price. This nontaxable adjustment was recognized in retained earnings instead of net income, but resulted in a $0.19 increase in EPS under U.S. GAAP accounting rules.

Adjusted Diluted EPS was $0.61 in the third quarter of 2018, compared to $0.45 in the third quarter of 2017. The Company ended the third quarter of 2018 with 35.5 million weighted average shares outstanding. Adjusted EBITDA was $34.2 million in the third quarter of 2018, compared to $30.3 million in the third quarter of 2017.

Operating cash flow for the third quarter of 2018 was $27.4 million, compared to $11.8 million for the third quarter of 2017. The Company completed the third quarter of 2018 with approximately $256.4 million of total debt and $111.8 million of total cash. Net Debt, as defined in the non-GAAP reconciliation below, was $147.1 million.

Share Repurchase Authorization

Novantas Board of Directors has authorized a new share repurchase program under which the Company may repurchase up to $25 million worth of its common shares. The new program will commence after Novanta completes an existing $10 million share repurchase program, of which approximately $2 million remains available for future share repurchases. The shares may be repurchased under the new program from time to time at the Companys discretion, based on ongoing assessment of the capital needs of the business, the market price of its common stock, and general market conditions. The Company expects that share repurchases will be made pursuant to a program adopted under Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

The share repurchase programs do not obligate the Company to acquire any particular amount of common stock. No time limit is set for the completion of the share repurchase programs, and the programs may be suspended or discontinued at any time. The Company expects to fund the share repurchases through cash on hand and future cash flow from operations.

Financial Outlook

For the full year 2018, the Company expects GAAP revenue of approximately $610 million to $614 million, Adjusted EBITDA in the range of $122 million to $124 million, and Adjusted Diluted EPS to be in the range of $2.07 to $2.12. The Companys Adjusted Diluted EPS and Adjusted EBITDA 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 Companys forward-looking Adjusted EBITDA and Adjusted 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 adjustments that could be made for noncontrolling interest redemption value adjustments; significant discrete income tax expenses (benefits); divestiture related expenses; acquisition 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; future changes in the fair value of contingent considerations; intangible asset impairment charges and related asset write-offs; future restructuring expenses; foreign exchange gains/(losses) on proceeds from divestitures; benefits or expenses associated with the completion of tax audits; and other charges reflected in our reconciliation of historical non-GAAP financial measures, the amounts of which, based on past experience, could be material. For additional information regarding Novantas non-GAAP financial measures, see Use of Non-GAAP Financial Measures below.

Conference Call Information

The Company will host a conference call at 10:00 a.m. ET on Tuesday, November 6, 2018 to discuss these results. To access the call, please dial (877) 870-4263 prior to the scheduled conference call time. Alternatively, the conference call can be accessed online via a live webcast on the Presentations and Events page of the Investor Relations 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 on the Investor Relations section of the Company’s website at www.novanta.com. The replay will remain available until Friday, January 4, 2019.

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 and Effective Tax Rate, Adjusted Net Income Attributable to Novanta Inc., Net of Tax, Adjusted Diluted EPS, Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow 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 managements belief that these non-GAAP financial measures would be particularly useful to investors because of the significant changes that have occurred outside of the Companys day-to-day business in accordance with the execution of the Companys strategy. This strategy includes streamlining the Companys existing operations through site and functional consolidations, strategic divestitures and product line closures, expanding the Companys business through significant internal investments, and broadening the Companys 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 Companys 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 Companys Adjusted EBITDA and Organic Revenue Growth 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 and Organic Revenue Growth are used to determine bonus payments for senior management and employees. The Company also uses Adjusted Diluted EPS as a measurement for performance shares issued to certain executives. Accordingly, the Company believes that these non-GAAP measures provide greater transparency and insight into managements 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 Companys reported results and, therefore, should not be relied upon as the sole financial measures to evaluate the Companys 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 our ability to deliver strong full year growth; being positioned well in a number of secular growth market categories; our share repurchase programs, including that share repurchases will be made pursuant to a program adopted under Rule 10b-18; executing our strategy; anticipated financial performance, including our financial outlook for the full year 2018; expectations regarding market conditions; expectations regarding the Companys future; 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 and level of business activity; our significant dependence upon our customers capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate 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 information technology systems; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; risks associated with increased outsourcing of components manufacturing; our failure to comply with local import and export regulations in the jurisdictions in which we operate; negative effects on global economic conditions, financial markets and our business as a result of the United Kingdoms impending withdrawal from the European Union and the actions of the current U.S. government, including its policies on trade tariffs and reactions from other countries to any new tariffs imposed by the U.S.; 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 businesses; 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; production difficulties and product delivery delays or disruptions; our exposure to medical device regulation, 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; changes in governmental regulation of our businesses or products; our failure to comply with environmental regulations; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; tax audits by tax authorities; changes in tax laws, and fluctuations in our effective tax rates; anticipated impact from the U.S. Tax Cuts and Jobs Act; 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; our ability to access cash and other assets of our subsidiaries; provisions of our articles of incorporation that may delay or prevent a change in control; 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 Companys 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, 2017, our subsequent filings with the Securities and Exchange Commission (SEC), and in our future filings with the SEC. Such statements are based on the Companys beliefs and assumptions and on information currently available to the Company. The Company disclaims any obligation to update any 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 (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 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. Novantas common shares are quoted on Nasdaq under the ticker symbol NOVT.

More information about Novanta is available on the Companys 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 28,     September 29,
2018 2017
Revenue $ 160,794 $ 146,296
Cost of revenue   91,160   87,589
Gross profit   69,634   58,707
Operating expenses:
Research and development and engineering 13,204 11,659
Selling, general and administrative 29,147 27,590
Amortization of purchased intangible assets 3,947 3,217
Restructuring, acquisition and divestiture related costs   2,341   3,834
Total operating expenses   48,639   46,300
Operating income 20,995 12,407
Interest income (expense), net (2,396 ) (2,111 )
Foreign exchange transaction gains (losses), net 66 (661 )
Other income (expense), net   (44 )   (138 )
Income before income taxes 18,621 9,497
Income tax provision   3,632   1,131
Consolidated net income 14,989 8,366
Less: Net income attributable to noncontrolling interest   (435 )   (834 )
Net income attributable to Novanta Inc. $ 14,554 $ 7,532
 
Earnings (loss) per common share attributable to Novanta Inc.:
Basic $ 0.61 $ (0.00 )
Diluted $ 0.60 $ (0.00 )
 
Weighted average common shares outstandingbasic 34,899 34,833
Weighted average common shares outstandingdiluted 35,485 34,833
 

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

 

       
September 28, December 31,
2018 2017
ASSETS
Current Assets
Cash and cash equivalents $ 111,814 $ 100,057
Accounts receivable, net 88,921 81,482
Inventories 98,917 91,278
Prepaid expenses and other current assets   13,522   15,062
Total current assets 313,174 287,879
Property, plant and equipment, net 66,204 61,718
Intangible assets, net 150,648 155,048
Goodwill 219,772 210,988
Other assets   9,638   11,070
Total assets $ 759,436 $ 726,703
LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS EQUITY
Current Liabilities
Current portion of long-term debt $ 9,131 $ 9,119
Accounts payable 48,306 39,793
Accrued expenses and other current liabilities   51,065   49,256
Total current liabilities 108,502 98,168
Long-term debt 247,293 225,500
Other long-term liabilities   43,965   44,567
Total liabilities   399,760   368,235
Redeemable noncontrolling interest     46,923
Stockholders Equity:
Total stockholders equity   359,676   311,545
Total liabilities, noncontrolling interest and stockholders equity $ 759,436 $ 726,703
 

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

(Unaudited)

 

   
Three Months Ended
September 28,     September 29,
2018 2017
Cash flows from operating activities:
Consolidated net income $ 14,989 $ 8,366
Adjustments to reconcile consolidated net income to

net cash provided by operating activities:

Depreciation and amortization 9,199 8,864
Share-based compensation 1,695 1,436
Deferred income taxes (2,088 ) (418 )
Inventory acquisition fair value adjustment 3,719
Other 832 567
Changes in assets and liabilities which (used)/provided cash, excluding

effects from business acquisitions:

Accounts receivable (12,273 ) (1,499 )
Inventories (2,497 ) (897 )
Other operating assets and liabilities   17,498   (8,373 )
Cash provided by operating activities   27,355   11,765
Cash flows from investing activities:
Purchases of property, plant and equipment (4,386 ) (3,385 )
Acquisition of businesses, net of cash acquired and working capital adjustments (2,155 ) (133,534 )
Acquisition of assets (1,225 )
Other investing activities   141   34
Cash used in investing activities   (7,625 )   (136,885 )
Cash flows from financing activities:
Borrowings under revolving credit facility 24,981 134,769
Repayments of long-term debt and revolving credit facility (7,227 ) (6,875 )
Acquisition of noncontrolling interest (30,652 )
Repurchase of common stock (1,836 )
Other financing activities   (252 )   (1,084 )
Cash provided by (used in) financing activities   (14,986 )   126,810
Effect of exchange rates on cash and cash equivalents   (191 )   1,333
Increase in cash and cash equivalents 4,553 3,023
Cash and cash equivalents, beginning of period   107,261   89,126
Cash and cash equivalents, end of period $ 111,814 $ 92,149
 

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

 

 
    Three Months Ended
September 28,     September 29,
2018 2017
Revenue
Photonics $ 61,285 $ 61,882
Vision 62,113 58,150
Precision Motion   37,396   26,264
Total $ 160,794 $ 146,296
 

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 Segment (Non-GAAP):

Three Months Ended
September 28,     September 29,
2018 2017
Photonics
Gross Profit (GAAP) $ 29,218 $ 28,966
Gross Profit Margin (GAAP) 47.7 % 46.8 %
Amortization of intangible assets 673 1,012
Acquisition fair value adjustments    
Adjusted Gross Profit (Non-GAAP) $ 29,891 $ 29,978
Adjusted Gross Profit Margin (Non-GAAP) 48.8 % 48.4 %
 
Vision
Gross Profit (GAAP) $ 24,160 $ 19,792
Gross Profit Margin (GAAP) 38.9 % 34.0 %
Amortization of intangible assets 1,615 1,640
Acquisition fair value adjustments     3,719
Adjusted Gross Profit (Non-GAAP) $ 25,775 $ 25,151
Adjusted Gross Profit Margin (Non-GAAP) 41.5 % 43.3 %
 
Precision Motion
Gross Profit (GAAP) $ 16,788 $ 10,291
Gross Profit Margin (GAAP) 44.9 % 39.2 %
Amortization of intangible assets 204 89
Acquisition fair value adjustments    
Adjusted Gross Profit (Non-GAAP) $ 16,992 $ 10,380
Adjusted Gross Profit Margin (Non-GAAP) 45.4 % 39.5 %
 
Unallocated Corporate and Shared Services
Gross Profit (GAAP) $ (532 ) $ (342 )
Amortization of intangible assets
Acquisition fair value adjustments    
Adjusted Gross Profit (Non-GAAP) $ (532 ) $ (342 )
 
Novanta Inc.
Gross Profit (GAAP) $ 69,634 $ 58,707
Gross Profit Margin (GAAP) 43.3 % 40.1 %
Amortization of intangible assets 2,492 2,741
Acquisition fair value adjustments     3,719
Adjusted Gross Profit (Non-GAAP) $ 72,126 $ 65,167
Adjusted Gross Profit Margin (Non-GAAP) 44.9 % 44.5 %
 

NOVANTA INC. Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands of U.S. dollars except per share amounts) (Unaudited)

 

   

 

Adjusted Operating Income and Adjusted EPS (Non-GAAP):

Three Months Ended September 28, 2018

Operating Income

   

Operating Margin

   

Income before Income Taxes

   

Income Tax Provision

   

Effective Tax Rate

   

Net Income Attributable to Novanta Inc., Net of Tax

 

Diluted EPS

GAAP results $ 20,995   13.1 % $ 18,621 $ 3,632   19.5 % $ 14,554
Plus: Redeemable noncontrolling interest redemption value adjustment       6,877
Net income attributable to Novanta Inc. after adjustment for redeemable noncontrolling interest redemption value $ 21,431 $ 0.60
Redeemable noncontrolling interest redemption value adjustment   (6,877 ) (0.19 )
Net income attributable to Novanta Inc. $ 14,554
Non-GAAP Adjustments:
Amortization of intangible assets 6,439 4.0 % 6,439
Restructuring, divestiture and other costs 137 0.1 % 137
Acquisition related costs 2,204 1.3 % 2,204
Tax effect on non-GAAP adjustments 1,703
Non-GAAP tax adjustments               34
Total non-GAAP adjustments   8,780   5.4 %   8,780   1,737   7,043   0.20
 
Adjusted results (Non-GAAP) $ 29,775   18.5 % $ 27,401 $ 5,369   19.6 % $ 21,597 $ 0.61
 
Weighted average shares outstanding – Diluted   35,485
 

NOVANTA INC. Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands of U.S. dollars except per share amounts) (Unaudited)

 

   

Adjusted Operating Income and Adjusted EPS (Non-GAAP):

Three Months Ended September 29, 2017

Operating Income

   

Operating Margin

   

Income before Income Taxes

   

Income Tax Provision

   

Effective Tax Rate

   

Net Income Attributable to Novanta Inc., Net of Tax

   

Diluted EPS

GAAP results $ 12,407   8.5 % $ 9,497 $ 1,131   11.9 % $ 7,532
Less: Redeemable noncontrolling interest redemption value adjustment       (7,585 )
Net income (loss) attributable to Novanta Inc. after adjustment for redeemable noncontrolling interest redemption value $ (53 ) $ (0.00 )
Redeemable noncontrolling interest redemption value adjustment   7,585 0.22
Net income attributable to Novanta Inc. $ 7,532
Non-GAAP Adjustments:
Amortization of intangible assets 5,958 4.1 % 5,958
Acquisition related costs 3,834 2.6 % 3,834
Acquisition fair value adjustment 3,719 2.5 % 3,719
Tax effect on non-GAAP adjustments 3,374
Non-GAAP tax adjustments               1,923
Total non-GAAP adjustments   13,511   9.2 %   13,511   5,297   8,214   0.23
 
Adjusted results (Non-GAAP) $ 25,918   17.7 % $ 23,008 $ 6,428   27.9 % $ 15,746 $ 0.45
 
Weighted average shares outstanding – Diluted   34,833
 

NOVANTA INC. Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands of U.S. dollars) (Unaudited)

 

   

 

Adjusted EBITDA (Non-GAAP):

Three Months Ended
September 28,     September 29,
2018 2017
Consolidated Net Income (GAAP) $ 14,989 $ 8,366
Net Income Margin 9.3 % 5.7 %
Interest (income) expense, net 2,396 2,111
Income tax provision 3,632 1,131
Depreciation and amortization 9,199 8,864
Share-based compensation 1,695 1,436
Restructuring, acquisition and divestiture related costs 2,341 3,834
Acquisition fair value adjustments 3,719
Other, net   (22 )   799
Adjusted EBITDA (Non-GAAP) $ 34,230 $ 30,260
Adjusted EBITDA Margin (Non-GAAP) 21.3 % 20.7 %
   

Organic Revenue Growth (Non-GAAP):

Three Months Ended September 28, 2018 Compared to Three Months Ended September 29, 2017

Reported Growth (GAAP)   9.9 %
Less: Change attributable to acquisitions 2.2 %
Plus: Change due to foreign currency   0.3 %
Organic Growth (Non-GAAP)   8.0 %
       

Net Debt (Non-GAAP):

September 28, December 31,
2018 2017
Total Debt (GAAP) $ 256,424 $ 234,619
Plus: Deferred financing costs   2,449   3,159
Gross Debt 258,873 237,778
Less: Cash and cash equivalents   (111,814 )   (100,057 )
Net Debt (Non-GAAP) $ 147,059 $ 137,721
   

Free Cash Flow (Non-GAAP):

Three Months Ended
September 28,     September 29,
2018 2017
Cash Provided by Operating Activities (GAAP) $ 27,355 $ 11,765
Less: Purchases of property, plant and equipment (4,386 ) (3,385 )
Plus: Proceeds from sale of property, plant and equipment   141   34
Free Cash Flow (Non-GAAP) $ 23,110 $ 8,414

Non-GAAP Measures

Organic Revenue Growth

We define the term organic revenue as revenue excluding the impact from business acquisitions, divestitures, product line discontinuations, and the effect of foreign currency translation. We use the related term organic revenue growth to refer to the financial performance metric of comparing current period organic revenue with the reported revenue of the corresponding period in the prior year. We believe that this non-GAAP measure, when taken together with our GAAP financial measures, allows us and our investors to better measure our performance and evaluate long-term performance trends. Organic revenue growth also facilitates easier comparisons of our performance with prior and future periods and relative comparisons to our peers. We exclude the effect of foreign currency translation from these measures because foreign currency translation is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because these activities can vary dramatically between reporting periods and between us and our peers, which we believe makes comparisons of long-term performance trends difficult for management and investors. Beginning in 2017, Organic Revenue Growth is also used as a performance metric to determine bonus payments for senior management and employees.

Adjusted Gross Profit and Adjusted Gross Profit Margin

The calculation of Adjusted Gross Profit and Adjusted Gross Profit Margin is displayed in the tables above. Adjusted Gross Profit and Adjusted Gross Profit Margin exclude amortization of acquired intangible assets and inventory fair value adjustments related to business acquisitions because: (1) the amounts are non-cash; (2) the Company cannot influence the timing and amount of future expense recognition; and (3) excluding such expenses provides investors and management better visibility into the components of operating costs.

Adjusted Operating Income and Adjusted Operating Margin

The calculation of Adjusted Operating Income and Adjusted Operating Margin is displayed in the tables above. Adjusted Operating Income and Adjusted Operating Margin exclude amortization of acquired intangible assets and inventory fair value adjustments related to business acquisitions because: (1) the amounts are non-cash; (2) the Company cannot influence the timing and amount of future expense recognition; and (3) excluding such expenses provides investors and management better visibility into the components of operating costs. The Company also excluded restructuring, acquisition and divestiture related costs due to the significant changes that have occurred outside of the Companys day-to-day business for the reasons described above in the introductory paragraphs of the Use of Non-GAAP Financial Measures.

Adjusted Income before Income Taxes

The calculation of Adjusted Income before Income Taxes is displayed in the tables above. The calculation of Adjusted Income before Income Taxes excludes amortization of acquired intangible assets, inventory fair value adjustments related to business acquisitions, and restructuring, acquisition and divestiture related costs for the reasons described for Adjusted Operating Income and Adjusted Operating Margin above.

Non-GAAP Income Tax Provision and Effective Tax Rate

The Non-GAAP Income Tax Provision and Effective Tax Rate are calculated based on the Adjusted Income before Income Taxes by jurisdiction and the applicable tax rates currently in effect for the respective jurisdictions. In addition, the Company excluded significant discrete income tax expenses (benefits) related to releases of valuation allowances, benefits or expenses associated with the completion of tax audits, effects of changes in tax laws, effects of acquisition related tax planning actions on our effective tax rate, and the income tax effect of non-GAAP adjustments discussed above.

Adjusted Net Income Attributable to Novanta Inc., Net of Tax

The calculation of Adjusted Net Income Attributable to Novanta Inc., Net of Tax, is displayed in the tables above. Because pre-tax income is included in determining net income attributable to Novanta Inc., net of tax, the calculation of Adjusted Net Income Attributable to Novanta Inc., Net of Tax, also excludes amortization of acquired intangible assets, inventory fair value adjustments related to business acquisitions, and restructuring, acquisition and divestiture related costs for the reasons described for Adjusted Income before Income Taxes. In addition, the Company excluded significant discrete income tax expenses (benefits) related to releases of valuation allowances, benefits or expenses associated with the completion of tax audits, effects of changes in tax laws, effects of acquisition related tax planning actions on our effective tax rate, and the income tax effect of non-GAAP adjustments discussed above.

Adjusted Diluted EPS

The calculation of Adjusted Diluted EPS is displayed in the tables above. Because Net Income Attributable to Novanta Inc., Net of Tax, is used in the diluted EPS calculation, the calculation of Adjusted Diluted EPS excludes amortization of acquired intangible assets, inventory fair value adjustments related to business acquisitions, restructuring, acquisition and divestiture related costs, significant discrete income tax expenses (benefits) related to releases of valuation allowances, benefits or expenses associated with the completion of tax audits, effects of changes in tax laws, effects of acquisition related tax planning actions on our effective tax rate, and the income tax effect of non-GAAP adjustments for the reasons described above for Adjusted Net Income Attributable to Novanta Inc., Net of Tax. In addition, the Company excluded the redeemable noncontrolling interest redemption value adjustment as (1) the adjustment is unusual; (2) the amount is noncash; (3) the amount does not represent a measure of earnings and is excluded from the determination of net income attributable to Novanta Inc.; and (4) the Company believes it may not be indicative of future adjustments and that investors may benefit from an understanding of the Company’s operating results without giving effect to this adjustment.

Adjusted EBITDA and Adjusted EBITDA Margin

The Company defines Adjusted EBITDA as the consolidated net income before deducting interest (income) expense, income taxes, depreciation, amortization, non-cash share-based compensation, restructuring, acquisition related costs, acquisition fair value adjustments, other non-operating income (expense) items, foreign exchange gains (losses), and earnings from an equity-method investment for the reasons described above in the introductory paragraphs of the Use of Non-GAAP Financial Measures.

Adjusted EBITDA includes 100% of the results of our consolidated subsidiaries and therefore does not exclude the Adjusted EBITDA attributable to noncontrolling interests.

Adjusted EBITDA Margin is defined as Adjusted EBITDA as a percentage of Revenue.

In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation.

Free Cash Flow

The Company defines Free Cash Flow as cash provided by (used in) operating activities less cash paid for purchases of property, plant and equipment and plus cash proceeds from sale of property, plant and equipment. Management believes free cash flow is an important measure of its liquidity as well as its ability to service the Companys outstanding debt, and to fund future growth.

Net Debt

The Company defines Net Debt as its total debt as reported on the consolidated balance sheet plus unamortized deferred financing costs and less its cash and cash equivalents as of the end of the period presented. Management uses Net Debt to monitor the Companys outstanding debt obligations that could not be satisfied by its cash and cash equivalents on hand.

Novanta Inc.
Investor Relations Contact:
Robert J.
Buckley
(781) 266-5137

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