Executive Summary / Key Takeaways

• Differentiated Technology Driving Growth: Novanta Inc. (NOVT) leverages its proprietary precision technologies in force/torque sensors, servo drives, and laser solutions to capture significant opportunities in high-growth markets like AI-driven robotics, advanced surgery, and digital manufacturing. These technologies offer critical benefits such as extreme precision, embedded safety, and high power density, establishing a strong competitive moat.
• Strong Momentum in Key Segments: The company is experiencing robust growth in its Medical Solutions segment, particularly Advanced Surgery, driven by new product launches and strong patient procedure rates. Its Automation Enabling Technologies segment is poised for significant expansion in physical AI applications like warehouse automation and humanoids, with sales expected to double in 2026 and again in 2027.
• Strategic Mitigation of Macro Headwinds: Despite a volatile macroeconomic and trade environment, Novanta has effectively mitigated tariff impacts on its supply chain and is implementing a regional manufacturing strategy to address trade disruptions and enhance long-term resilience, with potential for 100 basis points of incremental margin expansion.
• Solid Financial Foundation and Outlook: Novanta delivered strong Q3 2025 results, exceeding expectations for sales and margins, and projects a return to positive organic growth in Q4 2025, with mid-single-digit organic growth anticipated for full-year 2026. The company maintains a healthy balance sheet and prioritizes disciplined acquisitions to further evolve its portfolio.
• Innovation and Acquisitions as Core Drivers: A commitment to innovation is evident with $50 million in incremental new product revenue expected in 2025. Strategic acquisitions, such as Keonn Technologies, are expanding Novanta's capabilities in intelligent software-based subsystems and RFID, reinforcing its long-term growth trajectory.

The Precision Engine: Novanta's Strategic Foundation in High-Growth Markets

Novanta Inc. (NOVT), established in 1968 as GSI Group, Inc. and rebranded in 2016, has meticulously carved out a niche as a leading global supplier of core technology solutions for medical and advanced industrial original equipment manufacturers (OEMs). The company's strategy is deeply rooted in identifying and capitalizing on long-term secular tailwinds within precision manufacturing, robotics and automation, advanced surgery, and precision medicine. This focused approach has enabled Novanta to build a diversified business model, demonstrating resilience across various geopolitical and macroeconomic scenarios.

Novanta's competitive standing is built on its ability to deliver highly customized, precision-engineered sub-systems that are critical to its customers' innovation and differentiation. While larger, more diversified competitors like Coherent Inc. (COHR), MKS Instruments Inc. (MKSI), and Danaher Corporation (DHR) operate in overlapping segments, Novanta distinguishes itself through specialized innovation and reliability. For instance, in photonics, Novanta's laser scanning and optical engines offer superior efficiency and reliability in medical applications, providing tangible benefits like enhanced pricing power and improved market share in niche segments compared to COHR's broader industrial focus. Similarly, in precision motion, Novanta's products, such as those under Celera Motion, provide significantly greater accuracy in medical applications, potentially outperforming MKSI's more cost-effective industrial automation solutions. In vision technologies, Novanta's integrated operating room solutions offer higher performance in real-time data collection, differentiating it from DHR's broader diagnostic tools.

Technological Differentiation and Innovation: The Core Moat

Novanta's competitive moat is fundamentally built upon its proprietary technology, which delivers extreme precision and performance tailored to demanding applications. The company's core differentiated technologies span several critical areas:

• Precision Motion and Sensing: Novanta develops advanced force/torque sensors, optical and inductive encoders, and servo drives. These components are integrated into intelligent subsystems that enable "precise touch and safe movement for robots, enabling smarter, faster and more efficient goods handling" . This is particularly critical in physical AI applications like warehouse automation and humanoids, where robots need to operate safely and accurately in unstructured environments. The company's servo drives, such as the Denali and Everest Safe Servo drives, offer industry-leading power density and embedded safety, allowing for fast, low-latency responses in a small form factor. This capability is vital for applications requiring extreme accuracy, where a package cannot be dropped more than "once in 24 hours" . The "sense of haptic feedback in surgical robotics is a key capability" , directly leveraging the same sensing and servo drive technologies used in warehouse automation and humanoids.
• Laser Beam Delivery and Photonics: Novanta's laser beam delivery components and solutions, CO2, solid-state, and ultrafast lasers are crucial for advanced industrial processes and medical laser procedures. These technologies are integral to applications demanding "ever higher demands for throughput and productivity at ever smaller form factor, tighter tolerances and quality levels" .
• Intelligent Subsystems and Software: The company's strategic direction emphasizes expanding into intelligent subsystems with embedded software. This is exemplified by the Keonn Technologies acquisition in April 2025, which integrates proprietary RFID hardware with AI-enhanced cloud-based software for real-time inventory and asset management. This technology fills a "crucial software integration gap for better penetration into the medical market, including hospitals" , aiming to improve traceability, reduce costs, and enhance patient outcomes.

Novanta's R&D initiatives are robust, with 50 new products launched in 2024 and over 50% more planned for 2025. These efforts are expected to generate $50 million in incremental new product revenue in 2025, predominantly from next-generation smoke evacuation insufflators, endoscopic pumps, and surgical/warehouse automation robotics. The Advanced Surgery business, a beneficiary of these innovations, is projected to nearly double its revenue to $400 million by 2030, up from $200 million in 2024. Furthermore, physical AI applications, including warehouse automation, precision robotics, and humanoids, are expected to double sales in 2026 versus 2025 and again in 2027, representing an incremental $1 billion addressable market for Novanta by 2030. The precision manufacturing growth platform is also anticipated to offer an additional $400 million addressable market opportunity by 2030. These technological advancements and continuous innovation directly contribute to Novanta's competitive moat, driving higher average selling prices (ASPs), enabling lower customer costs through efficiency, improving margins, and solidifying its market positioning for long-term growth.

Operational Excellence and Strategic Evolution

Novanta's operational backbone is the Novanta Growth System (NGS), a deeply embedded cultural and operational framework. NGS has been instrumental in enhancing factory performance, commercial execution, R&D, and product management, leading to faster product launches, reduced lead times and inventory, and improved gross margins. This system is also critical in the company's response to external challenges.

In response to a volatile macroeconomic and trade environment, Novanta has implemented a multi-pronged strategy. While trade and tariff changes initially increased manufacturing costs by approximately $20 million annually, the company has largely mitigated this impact through second-sourcing, relocating manufacturing, implementing duty exceptions, and applying price increases. A key strategic initiative is the acceleration of its "in China for China" manufacturing strategy and the establishment of duplicate manufacturing lines in European facilities. These efforts aim to address the deferral of approximately $35 million in U.S.-manufactured product revenue to China and de-risk potential reciprocal tariffs from Europe. This regional manufacturing initiative is expected to be substantially completed by the end of Q1 2026 and could yield approximately 100 basis points of incremental margin expansion by consolidating manufacturing into regional hubs and reducing overall footprint and cost structure.

Organizational changes, including the appointment of two co-Chief Operating Officers in January 2025, further support Novanta's scaling ambitions, both organically and through acquisitions. The company is also deploying a new ERP system, with phased implementation starting in 2026, to enhance scalability, resilience, and further support gross margin expansion and operating expense reduction.

Financial Performance: A Reflection of Strategy

Novanta delivered a strong third quarter in 2025, exceeding its own expectations for sales, margins, and adjusted EPS. Revenue reached $247.8 million, a 1.4% increase year-over-year, primarily driven by current year acquisitions and favorable foreign currency exchange rates. For the nine months ended September 26, 2025, total revenue grew 1.6% to $722.3 million.

Despite a decrease in operating income to $21.8 million in Q3 2025 (down 32.9% year-over-year) due to increased operating expenses, the company's adjusted gross margins over-delivered at 46.5%, up 30 basis points year-over-year and 40 basis points sequentially. Adjusted EBITDA reached $58 million, representing a 23% adjusted EBITDA margin, growing 2% year-over-year and 11% sequentially. New product revenue surged by nearly 60% year-over-year, boosting the Vitality Index to 23%. Customer bookings also reflected an improving outlook, growing 17% year-over-year and 4% sequentially, with a book-to-bill ratio of 1.03.

Segment-wise, the Automation Enabling Technologies segment saw a 2.6% year-over-year revenue decline in Q3 2025, primarily due to decreased demand in precision manufacturing products. However, bookings for the segment were up 15% year-over-year. The Medical Solutions segment demonstrated robust growth, with revenue increasing 5.9% year-over-year, largely driven by the Keonn acquisition and strong sales of advanced surgery products. This segment's adjusted gross margins expanded by 70 basis points year-over-year and 130 basis points sequentially to approximately 45%, attributed to factory productivity improvements and increasing scale from in-house medical consumables manufacturing.

Liquidity and Capital Allocation: Fueling Future Growth

Novanta's liquidity is robust, primarily supported by strong operating cash flows and its revolving credit facility. While operating cash flows in Q3 2025 were $8 million, lower than the prior year due to temporary factors like significant tax payments and higher inventory purchases for regional manufacturing, management anticipates a return to historical cash flow conversion rates of greater than 100% of net income in Q4 2025 and for the full year 2026.

As of September 26, 2025, Novanta maintained a healthy balance sheet with gross debt of $457 million, a gross leverage ratio of 2.2x, and net debt of $368 million, resulting in a net leverage ratio of approximately 1.7x. The company's Fourth Amended and Restated Credit Agreement, established in June 2025, provides an aggregate credit facility of approximately $1 billion, including an uncommitted $350 million accordion feature, offering ample capacity for future strategic initiatives.

Capital allocation priorities remain centered on acquisitions, with the Board authorizing an additional $200 million for share repurchases in September 2025, bringing total capacity to $231 million. Share repurchases are executed opportunistically when the stock's valuation offers a superior cash return compared to internal or acquisition investments. The acquisition of Keonn Technologies in April 2025 for an estimated $75.10 million, which contributed $19.90 million in revenue and $1 million in profit before income taxes for the nine months ended September 26, 2025, exemplifies Novanta's disciplined approach to expanding its portfolio into high-growth medical technologies, consumables, and embedded software.

Outlook and Guidance: Charting a Path to Accelerated Growth

Novanta's management expresses confidence in its ability to return to positive organic growth and double-digit profit growth in Q4 2025, projecting GAAP revenue between $253 million and $257 million, representing 3% organic growth and 6% to 8% reported growth year-over-year. For the full year 2025, GAAP revenue is expected to be approximately $975 million to $979 million, with roughly flat organic growth and 3% reported growth. Adjusted gross margins are anticipated to be around 46% for both Q4 and the full year 2025, with adjusted EBITDA for Q4 projected between $62 million and $65 million, reflecting 18% to 24% year-over-year growth. Full-year 2025 adjusted diluted EPS is expected to be between $3.24 and $3.30.

Looking further ahead, Novanta anticipates a "baseline of mid-single-digit organic growth for the full year of 2026" . This outlook is driven by the continued strong performance of the Advanced Surgery and Robotics & Automation segments, a projected return to growth for Precision Manufacturing, and a conservative stance on the Precision Medicine business due to its inherent market volatility. Management is not factoring in growth from the DNA sequencing business, instead redeploying resources to higher-growth areas. The DUV/EUV lithography intelligent subsystem product is expected to build momentum later in 2026 and into 2027.

Risks and Challenges

Despite the optimistic outlook, Novanta operates in a "fluid macroeconomic and trade environment" marked by several risks. Geopolitical tensions and trade policy changes, including tariffs and retaliatory measures, continue to create uncertainty, impacting customer capital expenditures and overall market visibility, particularly in industrial and life sciences. The "size and timing of tariffs, their resolution or retaliatory responses are largely unknown at this point" . Specific challenges include the impact of U.S. government spending cuts on the U.S. National Institute of Health (NIH), which affects the Precision Medicine segment, and inflationary pressures on materials and components. While Novanta has demonstrated a strong ability to mitigate these challenges through strategic operational adjustments, these factors could still influence demand and profitability.

Conclusion

Novanta Inc. stands as a compelling investment story, rooted in its deep technological expertise and strategic focus on high-growth, secular markets. The company's ability to engineer precision components and intelligent subsystems for AI-driven robotics, advanced surgery, and digital manufacturing provides a robust competitive advantage, enabling superior performance and differentiation for its OEM customers. Despite a challenging global backdrop, Novanta's operational resilience, driven by the Novanta Growth System and proactive mitigation strategies against trade disruptions, has allowed it to maintain a strong financial footing and deliver consistent profitability.

With a clear roadmap for innovation, evidenced by significant new product launches and an expanding addressable market in physical AI and advanced medical technologies, Novanta is well-positioned for accelerated organic growth in 2026 and beyond. The company's disciplined approach to capital allocation, balancing opportunistic share repurchases with strategic acquisitions, further strengthens its long-term value proposition. While macroeconomic and geopolitical uncertainties persist, Novanta's technological leadership and adaptable business model underscore its potential to compound cash flows and drive shareholder value in the years to come.