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Employees awarded equity as Novanta cuts costs

13 May 2020

Travel ban and hiring freeze among the measures as company prepares to weather global economic downturn.

Novanta, the Nasdaq-listed group whose photonics brands include Cambridge Technology, Laser Quantum, and Synrad, has instigated a wide range of cost-cutting measures at it looks to weather the inevitable economic downturn prompted by the Covid-19 pandemic.

While the company’s total sales in the opening quarter of the year ended up higher than forecast - and only slightly down on the prior year - CEO Matthijs Glastra said that there would be a more noticeable coronavirus effect in the June and September quarters this year.

At $155.5 million, the latest quarterly sales total compares with $157.2 million a year ago. Novanta’s photonics division contributed $55.1 million to that total, down from $59.2 million in the opening quarter of 2019.

That translated to a quarterly net income of $11.9 million for Novanta overall - almost identical to the same period last year.

Post-pandemic positioning
Although bookings remained strong across the board in the March quarter as customers looked to protect themselves from anticipated supply disruptions, Glastra warned that the widespread impact of the pandemic would hit Novanta before long.

“Obviously, the environment is highly uncertain, but there are a few high-level observations we can share,” he told an investor conference call discussing the latest results. “First, it is important to realize that Novanta's revenue might lag our customers by 60 to 90 days - or sometimes even more.

“So the declines that our customers are reporting on in their second quarter will likely be a third-quarter effect for Novanta.”

Currently, the company is expecting its sales to decline to between $130 million and $142 million in the second quarter, but because of the market uncertainty it has withdrawn earlier guidance indicating that full-year sales would be in the region of $650 million.

That said, the CEO pointed out that with close to 60 per cent of Novanta’s sales derived from the medical market, and that its products were directly helping to address Covid-19. “We feel that Novanta is well positioned for a post-pandemic world,” Glastra said, adding:

“We take great pride that our mission-critical technologies are embedded into diagnostic and antibody test equipment detecting Covid-19, into ICU [intensive care unit] and patient monitoring equipment, [into] DNA sequencing equipment to sequence different mutations and strains of the virus, laser coding equipment for critically packaged food supply or production of PPE, and cloud infrastructure equipment.”

Cost controls
Although the company adds that the pandemic will in fact enable it to accelerate the launch of new products set to hit the market towards the end of 2020 and early next year, it has instigated a raft of measures intended to control costs in the near term.

These include a global ban on staff travel, a hiring freeze on non-critical positions, and a furlough program, while previous plans for staff salary increases and bonuses in 2020 have been scrapped.

Executives at the firm have also signed up to a package of measures cutting their own pay that will save the company up to $1.6 million. In addition, a planned $10 million investment in the UK has now been halted.

In lieu of pay increases and bonuses, staff will instead receive equity in the company. “For every single employee of Novanta other than the four [executive] officers, we have made a special one-time restricted stock unit grant in April totaling $14.4 million, which is fully vesting in February of 2021,” explained CFO Robert Buckley.

“We decided on the equity grants, because we strongly believe this grant will keep employees focused through this time of crisis, create an ownership mindset among our employees - and allow us to maintain our talent, culture, and our capabilities so we can quickly recover from the inevitable end of this pandemic,” he added.

“We also strongly believe this equity grant helps to keep our factories running and our employees actively engaged, even from work-from-home environments.”

Adding his thoughts about the scheme, CEO Glastra said: “The pro-active cost measures we have taken are reflective of our values in a ‘shared-gain, shared-pain’ approach.

“I'm very proud and excited that, through our approach, all Novanta colleagues are now shareholders in the company.”

• Following the update, Novanta’s stock price rose in value by around 5 per cent. Like several companies in the photonics sector, it has recovered strongly from the widespread declines witnessed in March, and returned close to pre-pandemic levels.

Trading at just over $92 on the Nasdaq early May 13, Novanta’s stock price was equivalent to a market capitalization of close to $3.3 billion.

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