Novanta Inc (NOVTU) 2021 Q4 法說會逐字稿

Good morning. My name is Keith and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated 2021 Fourth Quarter and Full-Year Earnings Call. (Operator Instructions) Please note, this event is being recorded. I now turn the call over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning and welcome to Novanta's fourth quarter and full-year 2021 earnings conference call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chairperson and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you have not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our website at www.novanta.com. Please note, this call is being webcast live and will be archived on our website shortly after the call.

Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings. We may make some comments today both in our prepared remarks and in our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations.

Any forward-looking statements made today represent our views only as of this time. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of these forward-looking statements as representing our views as of any time after this call. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website after this call.

I am now pleased to introduce the Chairperson and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody and thanks for joining us. Novanta delivered another record quarter and a record full-year of 2021. We hit new all-time highs for revenue and bookings with strong operating performance for both the fourth quarter and the full- year of 2021. We exited 2021 at a $800 million revenue run rate, with a record backlog of $569 million and close to $1 billion of full-year bookings. This is a great indicator of the structural long-term demand drivers in the medical and advanced industrial markets we serve. It also sets us up with excellent feasibility to customer demand and sales growth in 2022.

In the fourth quarter, our company delivered $199 million in revenue, representing 35% year-over-year revenue growth on a reported basis and 14% growth on an organic basis, eclipsing the March set last quarter. For the full-year of 2021, Novanta had sales of $707 million, which is up 20% year-over-year on a reported basis and 10% on an organic basis. In addition, we had another quarter of excellent operating performance with adjusted EBITDA of $43 million in the fourth quarter, up 31% year-over-year.

For the full-year, adjusted EBITDA was $153 million, which is up 26% year-over-year. Our adjusted diluted earnings per share in the fourth quarter was $0.67, which is up 26% versus prior year and for the full-year, adjusted EPS was $2.62, which is up 34% versus 2020. We are extremely pleased with and proud of how our teams drove exceptional operating performance using the Novanta growth system tools, despite widely reported supply chain challenges, which I'll speak to in a moment.

We saw another quarter of record-breaking bookings in the fourth quarter, with sequential bookings growth of 32% versus already very strong third quarter and year-over-year bookings growth of 92% versus the fourth quarter of 2020. Excluding the impact of our acquisitions, bookings were still up 67% year-over-year in the fourth quarter. We saw strong demand across all our segments, with each segment having very strong book-to-bill in the quarter.

In the fourth quarter, our overall book-to-bill was 1.55. We saw very healthy orders in many of our advanced industrial applications, as well as most medical applications. As mentioned before, for the full-year of 2021, we saw nearly $1 billion of bookings and the full year book-to-bill was an impressive 1.39.

Before moving on to other operating results, let me take a moment to give an update about the global macroeconomic dynamics and how they're impacting Novanta. First of all, the war between Russia and the Ukraine has obviously increased uncertainty and our thoughts are with the Ukrainian people. While these events are very tragic and hopefully a peaceful solution will be found very soon, the direct Novanta economic exposure with Russia and Ukraine is negligible.

Second, the widely reported supply chain shortages and other disruptions that we commented on last quarter have continued and in some cases have gotten worse during the fourth quarter. This continue to challenge our ability to meet customer demand within our promised lead times. In addition, we are now seeing cost inflation in both raw materials, as well as labor costs, which are being widely reported on in the market.

Robert will comment on these dynamics in more detail in a few moments. However, I'm extremely proud of and impressed by the agility, great and extraordinary efforts of all of our team members throughout the organization, we keep stepping up to manage these pressures and who go above and beyond to keep our customers happy, while protecting our profitability.

Now let's turn to what we're seeing in our markets, where we see ongoing strength in multiple application areas. Novanta sales through advanced industrial markets were 51% of total sales in the fourth quarter. This reflects a full quarter of the ATI acquisition, with the majority of its business exposed to exciting high-growth industrial robotics and automation applications such as electric vehicle production, warehouse automation and an overall accelerated base in robotics penetration.

In the fourth quarter, our sales to advanced industrial markets saw 21% growth sequentially and 55% growth year-over-year. We also continue to experience higher demand specific to microelectronic investments in 5G, high-speed networking and cloud-based infrastructure, higher demand from EUV-based applications, as well as increased penetration and investments into Industry 4.0 and factory automation markets requiring Novanta's enabling technologies.

We expect the increased microelectronics factory 4.0 demand to be sustained well into 2022. For the full-year of 2021, sales through advanced industrial applications were 48% of total sales and grew by 30% versus 2020. Turning to our medical end market. For the full-year of 2021, sales through medical applications were 52% of total sales and grew by 12% year-over-year. In the fourth quarter of 2021, sales through medical applications were 49% of Novanta's total sales and grew 19% versus the fourth quarter of 2020 and 4% sequentially.

During the quarter, we saw very strong orders and shipments to many of our medical OEMs, with particular strength in surgical robotics and DNA sequencing, both of which saw greater than 50% growth in sales year-over-year. Despite this improved strength in the fourth quarter, the overall market for minimally invasive surgical procedures, however, was still subdued and impact by increased -- impacted by increased cases of the Omicron variant. With patient backlogs high, we expect that medical sales minimally evasive surgery procedures will continue to rebound gradually in 2022 as the impact of the Omicron variant starts to subside and hospital CapEx for elective procedures starts to return to prepanamic levels.

From a regional perspective, we saw strong demand across all major geographies in the fourth quarter. We continue to see very strong growth from China, where sales grew 32% year-over-year, helped by our increased exposure to electric vehicle and EV battery production. Sales in Europe grew 22% and sales in the United States grew 45% year-over-year. For the full-year, sales to China were up 35% and sales in Europe and United States were also very strong double-digit growth.

Now let me touch on some of Novanta's strategic growth metrics. For now, these metrics exclude any impact from our ATI and IMS acquisitions. We plan to start including ATI and IMS in these metrics starting sometime in 2022, as we establish the proper tracking and reporting with those teams. For the full-year of 2021, our design wins were more than double the prior year, which is a huge accomplishment for our sales teams. Design wins in the fourth quarter were up double digit versus the prior year, with multiple major wins in most of our businesses.

We saw even more wins in our minimally invasive surgery business, which already had a huge year with multiple major customer wins. We also saw strong design wins on our laser beam steering and precision motion businesses in high-growth application areas such as surgical robotics, laser additive manufacturing, micromachining and electric vehicle battery welding. Our vitality index, which is revenue from new products launched in the last 4 years, continues to be healthy at above 25% of sales for both the fourth quarter and for the full-year with new product sales growing double-digit year-over-year.

We continue to invest in our innovation pipeline with terrific results. For the full-year, we launched 19 new products nearly matching our record high for the number of new products launched in a single year. It's impressive that we managed to achieve this number of product launches despite having to reallocate part of our engineering resources to help mitigate some of the supply chain difficulties that I've spoken about. Yet, as mentioned in our last call, we are seeing some delays in the launch time line of some of our NPIs and some of our customer platforms.

However, at this stage, we do not see any material impact on the long-term growth trajectory of the company as a result of these delays. We are adding supply chain and engineering resources to mitigate these challenges and in the process we're building foundational capability that will benefit us long-term. We continue to have a strong pipeline of new products in the lineup of 2022 product launches is very healthy.

Next I'd like to give a brief update on the ATI and IMS acquisitions. Both businesses were with us for the full fourth quarter and we have made significant progress integrating both businesses with the rest of Novanta. We continue to be very impressed by the performance and the engagement of the ATI and IMS teams and their strong pool for the Novanta growth system tools. These are both fantastic businesses, which are excellent strategic additions to Novanta, expanding our positions in high-growth markets. Both businesses are progressing very well with a strong market tailwind in robotics and automation demand and we saw strong performance for sales and bookings for these businesses in the fourth quarter.

Acquisitions continue to be the primary focus of Novanta's capital deployment and we continue to work on an active pipeline of opportunities in 2022. Finally, none of our performance would be possible without our teams of talented and committed Novanta teammates. We continue to double down and invest in our culture called The Novanta Way, which institutionalizes how we work together in cohesive diverse and inclusive teams, how we behave and interact through our 5 core values and how we execute through the Novanta growth systems, where everybody feels respected, included and engaged around our strategic priorities.

We believe that The Novanta Way has been a differentiator in a tough labor market to attract, retain and develop core tenants and in 2022, we will increase our investments in our culture, our people and the development and growth of our talent. We are staying laser-focused on executing our long-term vision and strategy, which includes strengthening our corporate responsibility efforts.

At Novanta, our vision is to deliver innovations that matter to our customers and enhance people's lives. We are committed to creating a brighter future through environmental sustainability initiatives, building a diversion in equitable and inclusive workforce and maintaining a robust governance system. We are developing action plans to achieve net 0 emission by 2050 and we will publish our 2021 ESG report later this month, which will be in line with the 2 leading global standards, CASB and TCFD.

So in summary, 2021 was a landmark year for Novanta. We achieved never before seen levels of sales, bookings and profit despite some significant disruptions in our supply chain and factory operations. Despite the ongoing short-term challenges, we feel very good as we enter 2022, with record levels of backlog and continued strong demand from our customers. We believe Novanta's long-term strategic positioning is as good as it has ever been.

We continue to broaden our exposure to medical and advanced industrial applications that have long-term secular growth trends such as robotics and automation, healthcare productivity and precision medicine.

So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?

Thank you, Matthijs and good morning, everyone. Our fourth quarter non-GAAP adjusted gross profit was $88.3 million or 44% adjusted gross margin, compared to $65.4 million or 44% adjusted gross margin in the fourth quarter of 2020. For the full-year, our non-GAAP adjusted gross profit was $319 million or a 45% adjusted gross margin, compared to $256 million or 43% in 2020.

For the full-year, adjusted gross margins increased approximately 170 basis points year-over-year. This strong result came as a result of the diligent efforts of our operating teams, who drove the Novanta growth system deeper into our day-to-day activities, allowing the factories to drive productivity and better leverage their costs.

Sequentially, our gross margins declined slightly as a consequence of disruptions with our logistic vendors, which required us to deploy short-term costly mitigating actions to ensure our factories were not disrupted and to a lesser extent, the gross margin dilution from the ATI acquisition. Managing the supply chain difficulties and delevering on our customer demand remains -- delivering on our customer demand remains our top priority as a company and as a leadership team. We are seeing rapid inflation on electronic parts, largely caused by significant global shortages, but we also continue to see disruptions at our suppliers and our supplier suppliers around their own electronic part shortages, labor shortages and COVID related outbreaks.

Overall, our manufacturing teams are doing an incredible job at mitigating these impacts. However, due to the magnitude of the challenge, we are working aggressively on sharing some of these costs with our customers in the form of price increases. We have announced meaningful price increases across all our business units, which follow this practice of sharing in the inflationary pressures. We expect the price increases will be phased in, but it's important to say the receptivity and understanding from our customers so far is very high.

The net result of the cost mitigation and pricing actions we are taking is factored into our guidance for 2022, which I'll speak to in a few minutes. I also want to give a brief update on the Taunton U.K. facility, which we spoke about in our last call. During the fourth quarter, the facility remained operational and we began the planned move into our new facility. We are already seeing the benefits of this new facility as it begins to come online. In fact, we recently decided to accelerate the remainder of the move, which will be very beneficial to our customers and our cost structure.

This will result in a temporary reduction in capacity in the first quarter, as well continued redundant cost structures from running 2 factories in that quarter. However, this is the right thing to do to structurally improve our capacity and delivering capabilities sooner in 2022. We are truly excited about how this factory can help us deliver to our customers once fully online and producing our product.

Moving on fourth quarter R&D expenses were $19.4 million or roughly 10% of sales. For the full-year, R&D expenses were $72.5 million or 10% of sales. Fourth quarter SG&A expenses were $35 million or 17.6% of sales. For the full-year, SG&A expenses were $129 million or 18.3% of sales. The sequential increases in operating expenses were in line with prior guidance and were the result of the ATI and IMS acquisitions.

Adjusted EBITDA was approximately $43 million in the fourth quarter of 2021 or a 21% EBITDA margin. For the full-year, adjusted EBITDA was approximately $153 million or a 22% EBITDA margin. Our adjusted EBITDA performance beat our expectations and our previously issued guidance, mainly driven by higher sales volume flowing through to profit. On the tax front, our non-GAAP tax rate for the fourth quarter of 2021 was 22%. This differed from the statutory rate driven mainly by jurisdictional mix of income and the ATI acquisition. This tax rate was higher sequentially due to minimum equity compensation windfall benefits and the effects of financing of the ATI acquisition.

For the full-year, our non-GAAP tax rate was 14%. Our non-GAAP adjusted earnings per share was $0.67 in the quarter compared to $0.53 in the fourth quarter of 2020, an increase of 26% year-over-year. For the full-year, adjusted EPS was $2.62 compared to $1.95 in 2020, an increase of 34% year-over-year. The favorable results for our adjusted EPS were driven by strong profit from the higher sales, somewhat offset by higher financing costs and a slightly higher tax rate. Fourth quarter operating cash flow was nearly $28 million, which was in line with our expectations and represents a ratio of greater than 60% to our adjusted EBITDA.

For the full-year, operating cash flow was $94 million. Finally, we ended the year with gross debt of $439 million and our gross leverage ratio was 2.9x. Our net debt was $321 million. I'll now turn to an update about the performance of the operating segments. I'll first start with Precision Motion segment. This segment experienced 129% year-over-year revenue growth and approximately 35% sequential growth in the quarter. This was heavily impacted by the ATI and IMS acquisitions.

In the fourth quarter, these businesses contributed approximately $32 million of sales, which exceeded our internal guidance. We really could not have been more excited about the performance of these businesses and their talented teams and the future growth opportunities they were offering.

Excluding the acquisitions, Precision Motion grew an impressive 33% year-over-year and bookings grew more than 80% year-over-year. The overall book-to-bill ratio in this segment was 1.43 in the quarter. Excluding the impact of ATI and IMS, the Precision Motion new products revenue nearly doubled and was over 30% of total sales for the segment. Design wins for the full-year were up 51%. Gross margins for the segment came in line with expectations and dropped slightly sequentially due to the effects of the ATI acquisition.

Combined with strong margin and profit performance, it's fair to say the Precision Motion segment had an absolutely fantastic year and we're very proud of the performance of this team.

Turning to the Vision segment. This segment predominantly serves the medical end market and experienced revenue growth of 3% year-over-year, in line with expectations for the business given the difficult comparisons to the prior year. While the volume of elective surgical procedures was impacted by the spike in COVID infections in the fourth quarter and the first couple of months of 2022, all signs now point to an improving environment with surgical procedures rebounding in the second quarter of 2022.

Despite this, the Vision segment saw bookings grow 57% year-over-year and a book-to-bill of 1.4. The vitality index in this segment remained above 30% of sales, the new products being a key driver of the resilience we've been seeing in this business. Design win activity was again very impressive in the quarter, more than double the amount of activity from the prior year as the business closed on a few more significant wins with several large medical OEM customers.

For the full-year 2021, design win growth was more than double prior year, a huge accomplishment for this team. As we said before, the long-term growth prospects of this segment is stronger than ever and despite the near-term temporary challenges caused by supply chain difficulties and deferrals, elective procedures, we see this segment as a key driver of Novanta's growth over the next few years once we finally put behind the short-term disruptions caused by the pandemic.

Finally, turning to the Photonics segment in the fourth quarter of 2021, our revenue was up 12% year-over-year. The business continues to experience unprecedented customer demand in their advanced industrial applications and in DNA sequencing. Bookings were up 69% year-over-year, the book-to-bill was 1.9 in the fourth quarter.

In addition, new product revenue stayed strong at greater than 25% of sales in the fourth quarter and total NPI sales were up 22% year-over-year. Design wins for the full-year were up 40% year-over-year, driven by excellent platform wins in applications such as laser additive manufacturing, e-mobility, battery welding, via hole drilling and micromachining.

Despite the strong year-over-year performance, the Photonics segment had disappointed adjusted gross margin performance, which was down sequentially and year-over-year. In the quarter, we certainly saw the impact of the logistics disruptions I mentioned earlier, which result -- which required temporary increases in cost in order to ensure our factories were not disrupted. We also saw the impact of redundant costs of the Taunton U.K. facility hitting this segment.

Although, adjusted gross margins were impacted in the fourth quarter, for the full-year of 2021, this segment saw 150 basis points of expansion in margins versus 2020, which reflects the strong structural improvements the teams have been making. We expect this segment to continue to expand margins in the full-year 2022 as price increases come into effect as the team continues to aggressively drive NGS into their operation and after we complete our relocation of the new Taunton manufacturing facility.

While we expect the first quarter of 2022 gross margins to be roughly flat sequentially, we expect margins to start ramping back up in the second quarter.

Now turning to guidance. If we look at 2022, we continue to see strong demand from our customers. Capital spending in advanced industrial markets remains robust, whereas demand in key medical application such as surgical robotics and DNA sequencing is expected to maintain their solid performance.

Not only does this establish a strong base of customer demand for the company, but we also see further demand tailwinds looking more likely from the recovery in elective surgical procedures post the Omicron wave. This gives us confidence, we have plenty of customer demand levers in 2022 to deal with the challenges. Consequently, we expect 2022 to be characterized as a year with strong customer demand, but also a year with supply chain disruptions in electronic material shortages remain our #1 focus.

The topic is a complex challenge, but we continue to be amazed at the Novanta's production team's ability to find solutions to the steady state of difficulties. Because of their strength and our confidence in them, we're issuing full-year and first quarter guidance. It is fair to say that our leverage and our revenue range is driven almost entirely by scenarios of supply chain disruptions and shortages and not by our expectations around customer demand, which we believe will remain strong.

So starting with revenue guidance for the first quarter of 2022, we stand here today, we expect GAAP revenue in the range of USD192 million and USD200 million. For the full-year 2022, we expect GAAP revenue in the range of USD825 million to USD845 million. We are expecting to see revenue growth of 18% to 23% year-over-year in the first quarter. This range -- revenue range takes into account demand for our products, which remained strong, as well as supply chain and logistics disruptions that we see them today and known disruptions with our customers' production processes from their own challenges.

We expect revenue growth to improve as the year progresses, as the efforts of our supply chain mitigation initiatives continue to gain momentum and as our new Taunton facility comes on the line. We also expect continued strength with bookings, though we anticipate book-to-bill to normalize versus the higher ratios we saw in 2021 and as we start shipping more of our past due orders.

On a segment level, in the first quarter, we expect more modest low single-digit growth in Photonics, which is well below the level of demand our customers expect and is directly caused by the supply chain shortages. The growth in this segment will accelerate as the new Taunton facility comes online in the second quarter and as the mitigation actions around material shortages gain momentum.

Therefore, we expect the segment to see low teens growth for the full-year. The Precision Motion segment will continue to see significant growth, driven both by continued strength in the core businesses, as well as the impact of the acquisitions. As a consequence in the first quarter, we expect sales to be more than double the prior year on a dollar basis.

For the full-year, we expect reported growth will also be strong and organic growth to be in the mid to high single digit, building off the strong organic growth in 2021. Finally, for our Vision segment in the first quarter, we expect to see a 10% decline in revenue on a year-over-year basis, driven solely by part shortages of 2 large vendors, who themselves are experiencing the effects of electronic chip shortages.

These vendors are Fortune 500 companies and expect the first quarter to be the most challenging, but these vendors also have visibility into an improving year as their new suppliers come online. In addition, while we believe a rebound in growth in the minimum invasive surgery market may occur as elective surgical procedures recovering following the Omicron wave, we decided not to include this rebound in our guidance range for now. This is largely because we cannot predict how the virus will behave.

Despite this, for now, we expect the Vision segment to demonstrate mid-single-digit growth starting in the second half of 2022 and we expect adjusted gross margins for the Vision to be relatively flat for the full-year. However, we do expect to see gross margin expansion in the second half of the year.

Moving on to overall Novanta's adjusted gross margins, we expect gross margins in the first quarter to be roughly flat sequentially at approximately 44.5%. The first quarter gross margins will continue to be impacted by the disruptions and cost inflation that we've already spoken to, but we expect the impact of these headwinds to be temporary, particularly because of the aggressive actions we have taken to mitigate the issues and from increasing pricing on our products.

Therefore, we expect to continue to expand margins for the full-year. Gross margins for the full-year of 2022 are expected to expand to approximately 46% for the year, inclusive of the lower performance in the first quarter. R&D expenses will increase for the full-year to approximately $87 million to $89 million, which is higher than prior year, mainly as a consequence of having a full-year of acquisitions, as well as further ramp up of project spend in our key NPI programs.

SG&A expenses for the full-year 2022 would be approximately $156 million to $157 million, again driven by full-year of acquisitions. Depreciation expense for the full-year of 2022 will be approximately $15 million, slightly higher than 2021. Stock compensation expense for the full-year of 2022 will be approximately $24 million, also slightly up from 2021, as we deploy equity to our ATI and IMS acquired businesses, as well as additional key talent in the company to maintain the higher retention rates we continue to experience.

Stock compensation expense will be slightly higher in the first quarter versus the rest of the year due to the timing of vesting of certain grants. For adjusted EBITDA, for the first quarter of 2022, we expect a range of $38 million to $41 million. For the full-year of 2022, we expect adjusted EBITDA to be in the range of USD172 million and USD182 million.

Interest expense for the full-year 2022 will be in the range of $12 million to $15 million, which is higher than prior year as a result of the higher average debt balances from the acquisitions. We expect our non-GAAP tax rate to be around 16% for the full-year of 2022, absent significant changes in jurisdictional mix of income or other variability in any of our eligible tax benefits.

We do expect some variation in tax rate from quarter-to-quarter based on the timing of certain discrete tax benefits throughout the year and is similar to prior years. Diluted weighted average shares outstanding will be approximately 36 million shares. For adjusted diluted earnings per share, we expect a range of $0.60 to $0.66 in the first quarter in a range of $2.85 to $3 for the full-year of 2022.

Finally, we expect operating cash flows in 2022 to improve as a ratio to adjusted EBITDA versus 2021 and we expect to have a solid cash flow growth year-over-year. As always, this guidance does not assume any significant changes to foreign exchange rates. To recap, 2021 was a record year for Novanta. We achieved a record level of sales, adjusted EBITDA and adjusted earnings per share. We also experienced record booking levels, design wins, new product revenues.

We entered '22 with the highest backlog the company has ever had and our teams are accomplishing all this despite facing the most significant challenges the modern business environment has seen in recent history. Given all this, we feel great about the company's position and our ability to sustain the progress. The company is seeing strong demand across its applications and its markets. We are retaining our best talent and continue to attract the best talent.

Our innovation engine remains the strongest it has ever been and our operations are maturing to handle the opportunities. We remain very proud of the performance of our employees and their tireless efforts to help us be successful in a very challenging environment. And most importantly, we remain excited about our future about how and where we are positioned in attractive secular growth markets, about our continued innovation partnerships with our customers and look forward to continuing to deliver on our commitments to our employees, our customers, our stakeholders.

This concludes the prepared remarks. We'll now open up the call for questions.

(Operator Instructions) And the first question comes from Lee Jagoda with CJS Securities.

So this I think is the first time you've ever given out a backlog number in your release and historically, I don't really think about this business as a backlog business. Can you talk about how far the backlog stretches out and how that backlog compares to the levels we saw pre-COVID?

So pre-COVID, I'll start with it. It's more than doubled any sort of level that we've had before. It is unusual for us to have backlog and it gives you a little bit of perspective to the supply chain disruptions that we're seeing in the shortages. And it's also why I give a range where I said it's completely dictated by the supply chain and not by customer demand. It's clear that even if we achieve the upper end of the range of that revenue forecast, we are still going to leave shipments on our docks, meaning that we still have some material shortages for the full-year. So the demand environment is even stronger than the upper end of our revenue range for the full-year.

Yes, so in summary, I mean, the reason for including it is that we have -- yes, we feel very good about our demand on our innovation and our design win virtual long-term growth profile, right? And so we wanted to support that with this backlog.

Got it. That's helpful. And then just one more for me. Related to the gross margins, if I look at the 100 basis point increase that's given in your guidance for 2022, are you able to kind of give a bridge of all the contributing factors, holding back that gross margin that should be transitory, obviously, some last a quarter or 2, some may last a year or more. But just so we can get a sense for what gross margins could have been had it not been for some of these transitory issues?

Yes, the way I kind of look at it without some of the logistics disruptions in the fourth quarter, we probably would have been above 45%. So there were some temporary like logistics disruptions we experience. I do expect that to continue into the first quarter, but then subside thereafter as we position the inventory in different localities in order to deal with that. I think there's obviously the U.K. Taun facility, we'll have that cost structure in the fourth quarter. We'll have that cost structure now going into the first quarter, but we'll eliminate that in the second quarter. And so that will allow us second quarter demonstrate a higher gross margin and probably get above that 45% level again.

And then there was some supply chain shortages that we are seeing in the first quarter in the Vision segment. Those will subside as we get through the second quarter and that will allow that third quarter to jump up. And then, of course, the last one is price increases are now in effect across all business units. And so that really positions us as they phase in over the course of the year to really drive that 100 basis points of margin expansion on the full-year. What that really translates to is that you'll see a higher gross margin in the fourth quarter, so we'll even run at a higher rate as a consequence.

And the next question comes from Rob Mason with Baird.

Maybe I'll start just with the acquisitions, they're performing really well. It seems out of the gate, certainly was the case in the third quarter carried into the fourth. So I didn't get an opportunity really to tease out what the contribution would be in '22, but could you clarify that, what your expectations are for acquisition contribution and maybe FX as well on your own topic?

So we're not expecting -- with the FX rate that we're forecasting, obviously, we're not experts on FX forecasting, but the FX that we have in the guidance is the FX that we're currently at today. And so if there's any sort of major shifts around that, that could have implications to at least the reported numbers. We've generally been able to naturally kind of hedge the profitability impacts of that, but there will be an impact on the revenue side.

I would say that we haven't guided specific by business unit for the 2 acquisitions. They are performing fairly well and we expect them to continue to stay fairly robust throughout 2022. I'd be a little careful about run rating the numbers, but you can get kind of close using something directionally around that, taking into account that we didn't own the business completely in the third quarter. The fourth quarter numbers are a pretty good indicator where things are at, probably for 2022, so maybe go up from there.

Okay. Okay. Because the book -- the orders, again, still the orders in the fourth quarter above that level, a book-to-bill of 1 and over 1 in the acquisitions. What is the final purchase price now that we're on the other side of '21?

We have to work our way through that, still there's some disclosure language in the 10-K that you could take a look at around the actual earnout payment. It's earn-out calculations. We have it valued on a Monte Carlo basis. So I might probably direct you over to that, take a look at the 10-K at this point.

Okay.

Okay. And then just maybe last question. You touched on your electronics -- microelectronics exposure and that bookings, again continued apparently to remain strong and you have good visibility. I thought you said around Factory 4.0 demand in that space continuing, but just in totality, can you level set where that business stands in terms of overall percent of revenue? And again, how you're thinking about it through the balance of the year and whether that visibility that you have in your backlog extends to that piece of the business?

Yes, I mean historically, the microelectronics exposure has been 10% to 12% in that order of magnitude. So we consider it to be in that range. I think what I was speaking to was actually the majority of the Advanced Industrial business, which is the dominant piece of that roughly 50% of our business, right? And so we feel there's a multitude of applications that are all driven by long-term secular growth drivers, whether it's warehouse automation, whether it's electric vehicle production, whether it's applications that are driven by accelerated pace of investments in automation and robotics, better structural, as well as a requirement to change your production technologies that are often laser-based and where as you know, we're the leader in steering a laser beam.

So all these we see, yes, tremendous tailwinds for the coming years. So that's -- so I would say that's a multiyear cycle that we're very excited about. And again, Microelectronics is probably, as we all know is maybe the most cyclical of that. But we see for 2022 still a strong demand profile again around 10% to 12% of sales order of magnitude.

And the next question comes from Brian Drab with William Blair.

You mentioned in the prepared remarks that you'd have some revenue limitation, I think in the first quarter associated with the facility move. Can you quantify that possibly?

It's 2 elements impacting the first quarter. One is the facility move and that's really just impacting the cost structure more than anything else. So that results in a little bit higher cost. We effectively shut down production for 2 weeks and then move everything over into the new facility. So you have some stranded overhead costs that you have to deal with for that period of time, that doesn't get absorbed back.

The other issue is tied to -- within the Vision segment, we have Fortune 500 vendor that's unable to deliver enough product. They brought a new vendor online. That new vendor will deliver them -- have been delivering them throughout now, the components they need, but their ability to turn around the product and time to get it to us in the first quarter is limited. And so that's really kind of the hampering of both the revenue number in the first quarter, as well as an impact on the gross margin.

So I would say, absent those 2 things, you're probably looking at a gross margin above 45%. And so as we get into the second quarter, at least 2 of those things are resolved and that helps you tick up in the second quarter. And then there's actually price increases that have now been announced across all our businesses as of January 1st and those are going to be phased in as we go through final discussions with customers, but the receptivity from all the customers has been extremely positive.

Got it. So I understand that there's a gross margin impact, but isn't there also a revenue impact from both of those cutting down the facility for a couple of weeks and you don't have product to ship on the second?

Yes, I mean it's probably low single-digit million, so let's say $2 million order of magnitude maybe. And then there is -- the more significant piece is what Robert mentioned was the basically in the Vision segment as this one supplier, which is a larger asset, both of which are timing issues, right? I mean we're accelerating this move on the Taunton side to get into better shape quicker. But we basically originally re-staggered kind of the bottleneck equipment. Right now, we're just accelerating that move, which has a short-term indeed capacity revenue, as well as trend of cost impact.

But those are all timing things, they're not structural, right? And just get us to the right position faster, right? So that's kind of how you need to look at the first quarter. It's temporarily impacted by those things, but they will improve throughout the year. And again, we have this tremendous backlog situation. So it's really not a demand issue, it's really more of an ability to short-term supply issue.

Yes. Got it. Thank you. And then you talked about the tailwinds that you're seeing in the different advanced manufacturing markets additive, you mentioned a different industry core point of it. In the -- I guess within photonics and Precision Motion, like what are you seeing in the semiconductor end market now? There's capacity additions that are coming out, is this a longer-term secular tailwind here at least for the next few years that you're going to see? And what's your exposure to semiconductor at this point? I know it's a lot lower than it used to be?

Yes. So again, I think Rob asked a similar question. So I love it all together in microelectronics, right at 10% to 12%. So it's not substantially more than what it used to be. And a matter of fact, also as a result of our acquisitions, our exposure towards, let's say, electric vehicle production, for example and RAS automation is much higher. So I think we're diversifying that exposure. But nevertheless, we of course, we benefit from, yes, an increased and continued investment climate on the semiconductor side.

Who knows how long this will take? You know us, we're always a little bit cautious about that market because at the moment at all the capacity is coming online, then yes, the market will turn down versus these other markets we talk about, we think there is a decade-long secular investment trend that will keep going because of fundamental underlying driver.

So that's kind of how we're looking at it. We're pleased with the microelectronics momentum for this year for sure. And we were even more excited about all the structural automation and robotics related markets that are -- actually have a much larger exposure to -- in the company and where we feel we're very well positioned, both from being there, as well as through increased innovation. So that's where we focus our expansion predominantly.

Okay.

Sometimes I get a little bit -- the microelectronics category is so broad and include some of the things. Is the -- can you quantify your pure semiconductor exposure today? And is that around like 5% today thereabouts?

Yes, order of magnitude, yes.

Okay, in the ballpark. That's helpful.

Then again, let's say, if you look at, let's say, a large chunk is driven by 5G, cloud-based infrastructure, high-speed networking, even mobile phone devices. All these also include microelectronics, right? So I just want to be clear that some of these drivers are actually similar and which is why we're lumping them together.

(Operator Instructions) And the next question comes from Andrew Buscaglia with Berenberg.

So book-to-bill you said was strong in each segment. You had some interesting commentary around each segment with regards to the underlying demand. I'm curious, which -- can you go deeper into that comment or provide more details about that, just curious how that compares across each of the business segments?

Yes, I mean I can give it a shot and I think Robert characterized it well. But if you start with vision, right, demand drivers were a little bit subdued there because of minimally invasive surgery procedures short-term. But long-term, we feel very good about the long-term growth drivers in that business. I think the -- we see orders coming in though nicely already in that segment, that will further support that. I would say it's fair to say that probably most near-term demand and well structural demand we see is in our robotic surgery DNA sequencing side on the Motion Precision Motion side, as well as warehouse automation, electric vehicle production.

And in the photonics side, we listed a whole slew of automation enabling applications that are driven by, again, robotics and automation, Factory 4.0, like laser additive manufacturing, electric vehicle battery production, a category called micro machining, which is really being driven by a trend of miniaturization and making smaller features and smaller form factors using very precise laser-based technology.

So all these and even via hole drilling as well, driven by 5G and cloud-based infrastructure and networking investments. So those are kind of high level. I think all those markets we feel have a structural tailwind that includes multiple years of expansion, which is what we're seeing. And I think on top of that, a leading indicator that we're providing is design wins. And so we did comment on our excitement in the minimally invasive surgery segment that while short-term maybe elective procedures, demand is subdued.

There are 2 things that really excite us. One is, of course, these procedures will rebound because there is a pretty big patient backlog. But even more fundamentally, we've won some very big customer platforms that we've commented on in the past. We basically said there's 3 areas that we strategically will fundamentally increase this business by a lot is by a) increasing our market share in smoke evacuation insufflation. So we're basically the market leader, we further extended our market lead winning major designs there that will come online in the next few years.

Secondly, expand smoke evacuation insufflation towards robotic surgery, which also become aligned in the next 2, 3 years, which is a new category for insufflation, at least the integration piece. And third is entering using our capability in insufflation, which is basically manipulating CO2 gas and air and pressure in human cavity, using that expertise to enter into pumps, which is kind of basically fluid management.

So entering into a new category where we have low share and where we've just won a major design as well. So you basically see 3 major growth factors on top of a market that will rebound. And so in the next 2, 3 years, we see a tremendous growth potential, right now not only potentially that will happen in that business. So those are kind of the cost to see that.

And then on the DNA sequencing side, of course, you see a few drivers there. You see, of course, more COVID related surveillance being put in place. That's a nice little adder, but more strategically and long-term, we feel it is that modality going clinical, meaning being used for daily tests for you and me for all kinds of disease and therefore catching and early, let's say, cancer or other related diseases.

And when you catch things early, you can actually cure them much better. So we think long-term, this is a modality that is still very underpenetrated and will continue to grow as well. Now, so those are I think, if you look at it, there are multiple applications that we're super excited about.

Yes, now all that sounds great. So maybe kind of switching to the other side like the supply challenges or supply chain challenges, what do you want to call them. I'm curious, it sounds a little bit you specifically called it out in (inaudible) each segment kind of like where you're seeing this. I guess what's changed the most to you, I guess, in the last 3 months that you're talking a little bit more cautious maybe around issues that your customers are seeing in terms of their ability to move things along to before they implement, yes I guess what changes the most -- question.

Yes, let me comment on that. I don't think -- I think, well, first of the electronic materials, which are basically semiconductor chips and interconnects are in short supply. There is an enormous amount of new supply coming online and there's just a transitory nature of how that how that rolls back into the supply chain, right? So the fourth quarter and the first quarter are probably the fourth quarter was and the first quarter will be probably the more difficult quarters to deal through that. But I think as you get into the second and third and fourth quarter, things will actually begin to free up and we'll look a lot better from a supply perspective.

We see that with some of our largest vendors, some of the vendors we do business with are $20 billion, $30 billion, $40 billion in size. And so they're putting capacity online and they're getting -- and they're solving for some of these issues to get us that continuity of supply. It just -- there's a little gap effect that takes place, which you see in the first quarter.

So I wouldn't say we're necessarily more negative on it than we were before, we're just more cognizant that there's a bigger transitory effect of it happening in the fourth quarter and happening in the first quarter. The fourth quarter, we would have been able to mitigate most of that, but there were some logistics disruptions that occurred. And then we're also trying to carry a new manufacturing facility and we have completed.

So it's a little bit of a few things happening at the same time, but the teams have worked really well to work their way through that. So we feel very good about our ability to start expanding the margins as we get back into the second, third and fourth quarters. And I think that's what you'll see unfold as the year progresses. We don't have a demand problem, right? And I think that's what the commentary is that I think we've been trying to articulate. Our demand far outstrips even the guidance that we have out there.

And so we feel pretty good from that perspective. So it's really just kind of boiling and hunkering down on working through these short-term disruptions, so that we can get that supply in. And for us, the big benefit is our customers partner with us in that effort. They partner with us in the form of sharing some of the costs, but they also partner with us in helping solve these problems.

Right. And you...

So it's temporary and time related and it's not structural, right? So that's kind of the key takeaway. And we see improvement as we continue to expand into the year.

Yes, so maybe things gradually get improved, but it sounds like you guys really not betting a ton of improvement, but to be prudent, but...

I think we're just being conservative right now. We have additional levers, we haven't forecasted elective surgical procedures to rebound significantly to drive additional demand, that is more likely than not. But given that there's been some disruptions with variance, it's not prudent for us to bake that into our forecast yet.

And I think being a little bit more conservative on the gross margin expansion is the right thing to do in this environment, but it's not something that, obviously, our internal plans would demonstrate.

Yes, for example, the Omicron variant impact on hospital procedures was, of course, I don't think anybody would have predicted that, right? So it was much larger and all the major medical OEMs were kind of set back by that as well temporarily. So again, fundamentally, this will resolve itself, but you -- it's still a little too early to kind of give all signs clear. So call us a bit prudent in that area.

Thank you. And this concludes our Question-and-Answer Session. I would now like to turn the conference over to Matthijs Glastra for any closing remarks.

Thank you, operator. So to summarize, 2021 was a landmark year for Novanta. We had all-time highs for sales, bookings and profit. We exited 2021 at $800 million revenue run rate, with a record backlog close to a $1 billion full year bookings. We closed 2 new acquisitions, which are performing very well, with strong engagement from their local teams. We saw a record growth in design wins and our innovation programs are healthy and progressing despite some minor delays. And we achieved all of this despite some tremendous disruptions in global supply chain. We just talked about that all of which our teams are fighting hard to manage every day.

And we're excited to see the continued strength and recovery in the global economy, in the advanced industrial sector and also in the medical sector. Novanta is extremely well positioned in these sectors, with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery and Industry 4.0.

In closing, I would like to thank again our customers, our employees and our shareholders for their ongoing support and very grateful for the resilience and strong contribution of our teams and have committed Novanta employees who are working so hard to mitigate the shortages and the challenges. We appreciate your interest in the company, your participation in today's call. I look forward to joining all of you in several months on our first quarter 2022 earnings call. Thank you very much. This call is now adjourned.

Yes. Thank you. As much of the conference has now concluded, thank you for attending today's presentation. You may now disconnect your lines.