Novanta Inc Aktie

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. Special Announcement Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to this special announcement call for Novanta. This is Ray Nash, Corporate Finance Leader. If you have not received a copy of our press release announcement issued earlier 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. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We will reference this presentation throughout our prepared remarks.

Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our 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 in the appendix to the presentation. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the presentation, we will provide reconciliations promptly on the Investor Relations section of our website after this call.

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

Good morning, everybody, and thank you for joining us. We have exciting news to share. Today, we're announcing the acquisition of Riverpoint Medical. This is a milestone transaction, our largest acquisition to date with an extremely strong strategic and financial fit for Novanta. Over the last several years, we have defined a consistent strategy with clear acquisition criteria. We aim to accelerate our exposure to medical end markets, expand recurring revenue streams, drive more sustainable revenue and cash flow growth, and deepen Novanta's position with OEM customers as their trusted innovation partner. Riverpoint Medical meets or exceeds every one of these criteria, creating significant value to our customers and our shareholders.

Riverpoint Medical is an elite category leader in high-growth, minimally invasive surgical consumables. They design and manufacture advanced IP-protected private label implantable materials and surgical consumables for leading OEM customers in the high-growth segments of sports medicine, cardiovascular, and other minimally invasive and clinical surgical procedures. The majority of Riverpoint's OEM customers are customers of Novanta, sharing the same call points, the same innovation partnerships, and in the same workflows.

Upon closing, the acquisition will be immediately financially accretive with Riverpoint growing revenues and cash flows twice as fast as Novanta, with stronger gross margins and adjusted EBITDA margins, and with the same asset-light business model. This is a high-quality business with a terrific management team and culture. Combined with its excellent innovation engine, Riverpoint is well positioned to deliver 12% to 15% long-term revenue growth.

Joining me today to discuss the transaction are John Lesica, our Co-Chief Operating Officer, leading our Medical Solutions segment; and Robert Buckley, our CFO. In turn, we will share the high-level strategic logic, take you deeper into the details of the business, and close with financial details. After our prepared remarks, we will open the call for your questions.

For those following along in our posted presentation, we'll start with our strategic logic on Slide 3 and specifically what this transaction will deliver for Novanta shareholders. First, it will accelerate our strategic direction. We have been clear that we want to expand our business mix to medical device and medical consumables to improve the company's sustainable long-term growth and to reduce cyclicality. Riverpoint will increase our exposure to recurring medical consumables from 15% of overall Novanta revenue to 25% of total revenue. And given the strong growth of this segment, we expect it will reach over 30% of Novanta revenue by 2030.

With this business, we're expanding deeper into high-growth minimally invasive surgical segments with many of the same OEM customers we already serve today with proprietary technologies, design-in products and long-term sticky relationships. Riverpoint's tailwinds are durable and structural. Sports medicine volumes are growing as an active aging population drives more procedures. Riverpoint is leading the shift from metal implants to soft fiber-based biomaterial coated constructs, and their solutions are rapidly gaining share in ambulatory surgical centers, one of health care's fastest-growing delivery channels. These trends are secular, playing out over the next decade or more. Combined with its excellent innovation engine, Riverpoint is well positioned to deliver 12% to 15% long-term revenue growth.

Second, based on an early third quarter close, the deal will be immediately financially accretive to earnings per share, and on a pro forma basis, will increase all our key financial metrics, including our gross margins, EBITDA margins and our long-term organic growth rate. Robert will give you the specifics.

Third, it would advance Novanta's in-region manufacturing strategy for North America for our Advanced Surgery business. Riverpoint will bring to Novanta fully operational FDA-registered manufacturing facilities in the United States and Costa Rica, which, combined with our advanced surgical sites in the Czech Republic and Germany, will create a regionally balanced manufacturing footprint, delivering customers a lower trade risk, more efficient supply chain, and stronger in-region for-region innovation and commercial capability.

And fourth, the acquisition will establish a scalable medical device platform with significant bolt-on acquisition opportunities in both its core applications and adjacent high-growth segments, led by a world-class operating team with a scalable manufacturing and engineering footprint, built to generate strong operating leverage and maximize shareholder returns. These 4 areas of opportunities are just the beginning of what we believe is one of the strongest strategic acquisitions we have made at a time when our core businesses are accelerating with the strongest management teams this company has ever assembled. Riverpoint Medical is the right fit, and we are the right owner.

With that, let me hand it over to John Lesica.

Thank you, Matthijs. Riverpoint Medical is the innovation engine behind major new programs at leading surgical OEMs across sports medicine, cardiac interventional, and ortho and trauma. It's a category leader with proprietary technologies, and it mirrors the sticky designed-in customer relationships Novanta is known for. Here's the key differentiator. Riverpoint holds the 510(k) clearances for most of its customers' products. That's the strategic moat.

When a customer collaborates with Riverpoint on a new surgical anchor or implantable construct, Riverpoint takes the concept all the way through design, development, regulatory clearance and volume manufacturing under its own IP. The customer receives an FDA-cleared private label product ready to sell. That sole-source design ownership model creates deep customer stickiness that competitors can't easily replicate.

The financials reflect that advantage, $150 million in revenue, more than 50% adjusted gross margins, roughly 40% adjusted EBITDA margins, both above Novanta's current levels, with 12% to 15% organic revenue CAGR. Over 80 owned and licensed patents protect the core platforms. The result, a highly recurring business growing revenue at twice Novanta's rate with profit and cash flow growing at twice our rate as well. This is a rare asset.

Moving to Slide 5. Riverpoint's $2 billion addressable market is anchored in high-growth surgical applications, sports medicine and cardiovascular, riding a powerful med-tech megatrend, the shift from metal and permanent implants to soft, fiber-based, biomaterial coated, and absorbable constructs. Sports Medicine is Riverpoint's largest and fastest-growing segment. The volume drivers, ACL reconstruction, meniscus repair, rotator cuff repair have aggressively migrated to ambulatory surgery centers over the past 5 years. ASCs demand efficiency, all soft, knotless single-use constructs that deliver great outcomes, reduce OR time and avoid repeat surgeries. Riverpoint is purpose-built for that world.

Within sports medicine, their fiber-based anchor platform stands out. Riverpoint is the leading supplier of fiber-based anchors with osteoconductive coating. We see this platform growing at more than 20% annually. The expansion opportunity is clear, deeper penetration with existing customers, geographical expansion and extending the technology to additional global OEM accounts. Beyond sports medicine, Riverpoint has established and growing cardiovascular surgical consumables presence, leveraging the same precision fiber braiding competencies, a natural adjacency to build share over time, particularly with Novanta's commercial and regulatory resources behind it.

Speaking to Slide 6. One of the most important things to understand about this deal, we are not entering an unfamiliar customer base. We're deepening relationships with Novanta's most important customers. Novanta already sells surgical robotics technologies, insufflators and fluid management systems to minimally invasive surgery OEMs. Those same leading OEMs are Riverpoint's customers for implantable consumables. We already have relationships with the majority of Riverpoint's customer base. We know how they qualify suppliers, manage regulatory pathways and think about sole-source relationship. That shared foundation gives us confidence when we accelerate growth post close, deepening our share of wallet in the U.S. and helping expand Riverpoint's offering into European CE Mark channels. The runway is substantial.

Moving to Slide 7. This is the right fit, at the right time, and we are the right owner. Financially, the deal will be immediately accretive when we close, to EPS, gross margins, EBITDA margins and long-term organic growth. It's rare for a single acquisition to deliver all 4. Strategically, combining Riverpoint with Novanta doubles our recurring medical business.

On timing, Riverpoint doubled its NPI program volume over the past 3 years. Those investments are now entering their revenue ramp, and we would be acquiring the business as that compounding begins. The recent NPI cycles have also brought in all 5 top sports medicine and orthopedic OEMs. The best of the growth story is still ahead. Longer term, this acquisition creates a platform. New engineered materials and coatings are increasingly the substrate on which next-generation minimally invasive surgery is built. OEMs want partners who can take them from material science through a finished, cleared, globally commercialized component. Riverpoint can do that today. With further investment, this platform can expand into adjacent categories and new markets, Europe, in particular. The $2 billion addressable market is the starting point, not the ceiling.

Finally, Riverpoint brings FDA-registered manufacturing scale in the U.S. and Costa Rica, eliminating the need for Novanta to build a North American greenfield facility, saving years and significant capital. And our global presence gives Riverpoint a faster path to Europe and Asia with manufacturing, regulatory and commercial access that accelerates time to market. We are disciplined acquirers. We evaluate many assets in this space. Riverpoint is the one that delivers on all dimensions, manufacturing footprint, OEM relationships, IP estate and a growth profile that makes the platform genuinely credible.

With that, I'll hand it over to Robert for the financials.

Thank you, John. Let me start with synergies on Slide 8. We have identified more than $80 million in cumulative profit and cash flow synergies that we expect to realize over the next 5 years. For the full year of 2027, we expect cost-only synergies in the $6 million to $8 million range, and then doubling that rate in 2028. The largest near-term synergy will be avoiding a potential greenfield investment in North America for FDA-registered medical device manufacturing, which we were starting in 2027. This greenfield site would have incurred more than $30 million in cumulative operating losses for the first few years with more than $20 million in capital expenditures and the potential for further disruptions during the 3-year qualification period.

Riverpoint has a world-class manufacturing facility in Costa Rica that not only has the capacity to meet Riverpoint's volume requirements for the next 5 years without significant new investment, but also has the available capacity, resources, competency and team to manufacture Novanta's medical consumables within the next 12 to 18 months. This factory gives us a low-risk solution and the ability to dramatically accelerate and shorten the time to establishing North America regional manufacturing for Novanta's medical products for its customers, which insulates our customers from the ongoing trade dynamics, while positioning our manufacturing and innovation closer to where they operate.

In addition, we expect to drive significant manufacturing cost savings with the implementation of the Novanta Growth System through accelerating other manufacturing transfers by combining our regulatory models and commercial channels and by leveraging the business' operating structure with Novanta's infrastructure to deliver cost efficiencies. Furthermore, it's important to highlight the 12% to 15% organic revenue growth of the business that will have a material compounding effect on our cost reduction and cash flow enhancing initiatives.

And finally, it's important to highlight a leading indicator around the future opportunities we are still investigating and exploring. We see a path to realizing more than $10 million of incremental revenue synergies, which is clearly just the start to leverage our global regulatory processes, manufacturing footprint and commercial channels to cross-sell our combined customer base and bring Riverpoint medical products to the European market.

We have only factored in a small fraction of the anticipated benefits for now as we engage directly with these customers. We are truly excited about this opportunity, and we expect to update you later after our first year of integration efforts are completed. While these potential cumulative synergies are the largest cash and cost synergies we have identified in an acquisition, the context that they only represent 5% of revenue and around 5% to 8% of combined cost of Riverpoint Medical and our Advanced Surgery business is important to recognize. This further solidifies the strategic rationale for the deal and highlights the strength of this transaction and why we see Novanta as the perfect owner of this business.

Now moving on to Slide 9. I want to put this deal in context of Novanta's strategic direction. Over the last decade, we have shifted the portfolio towards less cyclical, more secular, and more predictable growth, which has biased us towards more medical, including minimally invasive robotic surgery and towards more subsystems and private label products. Medical today is 53% of Novanta's revenue, up from single digits when we started our transformation, and medical consumables stands at 15% of revenue, which is up from 0 a decade ago. The direction we have articulated for 2030 is consistent, more medical, more recurring consumables, higher margins, higher cash flows and less cyclicality. Riverpoint is one large step in that direction.

With this acquisition, Novanta will have more than 60% of its revenue in medical end markets. we will move recurring medical consumables to roughly 25% of total revenue and nearly $300 million revenue platform and put the overall platform on a growth trajectory that grows our recurring medical consumables to approximately 30% of total revenues by 2030. This acquisition is a manifestation of our focus and commitment to our strategy to deliver a more predictable, more sustainable and more consistent organic and profit growth business, which dramatically strengthens our compounding cash flow and capital deployment flywheel strategy.

Moving on to Slide 10. Let me walk you through the pro forma financial impact. The combination of Riverpoint and Novanta would increase our exposure to the medical end markets from 53% of total sales today to approximately 60% of total sales. It will increase Novanta's medical consumable sales from 15% of total revenue today to nearly 25% in 2027. And with an expected 12% to 15% organic growth rate, it will progress to nearly 30% of sales by 2030. These 2 factors alone dramatically improve on Novanta's goal to delivering a less cyclical and more consistent revenue and cash flow stream for our investors. In addition, the transaction will give us a business that is expected to grow revenue 12% to 15% over the next 5 years, which will result in a 100 basis point improvement to Novanta's overall organic revenue growth algorithm.

And finally, Riverpoint Medical's impact on key profitability metrics in both the short term and long term would establish yet another lever for value creation. With a gross margin of 50% and adjusted EBITDA margin of approximately 40%, the business would increase Novanta's overall gross margin and adjusted EBITDA margin by 100 basis points each or better based on the estimated 2025 pro forma results. Taken in combination with the stronger revenue growth of the business, we expect the business to accelerate Novanta's profit growth by nearly 200 basis points per annum. And because of the asset-light nature of the business, this should also translate into stronger cash flow generation, further enabling the flywheel strategy I just discussed. The acquisition of Riverpoint Medical will be accretive to the most important financial metrics of this company, the same metrics that generate the strong returns for our shareholders.

Finally, turning to Slide 11. The total upfront transaction payment is $1.2 billion. There is an additional $250 million milestone payment due in the first quarter of 2027. Over the last 6 months, the business has already demonstrated a stronger book-to-bill and backlog coverage than our own business, putting it well on track to meet their full year 2026 outlook. We signed the deal last night and expect to close the transaction in the third quarter, subject to customary conditions, including receipt of required regulatory approvals.

Riverpoint's strong financial performance, coupled with the combination of a strong strategic and financial rationale generously puts the transaction on track to delivering a high single-digit return on invested capital by year 3 and to achieving our hurdle rate by year 5. Based on an earlier third quarter close, the transaction will be immediately accretive to 2026 adjusted EPS, and we expect 2027 adjusted EPS accretion of $0.18 to $0.25. The upfront purchase price of $1.2 billion represents approximately 19x Riverpoint's estimated 2026 adjusted EBITDA, excluding synergies, or approximately 17x estimated 2026 adjusted EBITDA, including the full value of expected year 5 pro forma synergies.

Inclusive of the $250 million milestone payment expected to be paid in the first quarter of 2027, the total purchase price represents approximately 20x estimated 2027 adjusted EBITDA, excluding synergies, and approximately 15x estimated 2027 adjusted EBITDA, including the full value of the expected year 5 pro forma synergies. The transaction will be financed through a combination of cash on hand, Novanta's existing credit facility, and a recently successfully completed $300 million equity raise. At the close, pro forma net leverage is expected to be 2.7x with gross leverage of less than 3x. Following the $250 million payment in the first quarter of 2027, net leverage will be approximately 2.6x. Because of the strong cash flow generation of the business, we expect to quickly delever our balance sheet to less than 2.3x net leverage by year-end 2027.

At this time, we are reconfirming our previously issued financial guidance for the most recent earnings call for the second quarter and full year 2026 for Novanta on a stand-alone basis. But following the close of this transaction, we'll provide updated financial guidance for 2026 and 2027, reflecting the specific financial impact of the acquisition on our previously issued guidance.

To conclude, Riverpoint Medical is strategically and financially the most attractive acquisition this company has made in nearly a decade, underwritten by strong cash and cost synergies and a cash earnings accretive outlook. The acquisition will accelerate Novanta's long-term goal of establishing a more sustainable, predictable and consistent growth, but also by giving the company a higher revenue growth engine within secular high-growth medical markets with long-term sustainable trends.

I'll now turn it back to Matthijs, and we'll open it up for questions.

Thank you, Robert. Thank you, John. To wrap up, we found a great company, Riverpoint Medical, a category leader in IP-protected surgical consumables for minimally invasive surgery. It's growing double digits with great margins and cash flow and NPI engine at full acceleration with deep relationships with leading surgical OEM customers. Its revenue and cash flow growth outlook is double that of Novanta's. This is a high-quality asset serving attractive high-growth end markets, the same markets where Novanta has been operating successfully for years.

The macro tailwinds of Riverpoint are durable. Sports medicine procedures volumes structurally growing, driven by an active aging population, the shift from metal to fiber-based biomaterial coated construct is accelerating, and ambulatory surgical center adoption is expanding. These trends are secular, playing out over the next decade or so. The commercial story is validated by our customers. The NPI engine is exciting. The synergies are real, and the financials are compelling. With our core businesses accelerating, Novanta compounds by making exactly this kind of move, precisely targeted, deeply diligent, structurally sound. We've been patient and disciplined. We found the right asset from a large pipeline. Riverpoint is the one that delivers on all our dimensions. We're deploying with conviction. Novanta's trajectory from here is up.

Thank you all for joining this call and this morning. Let's open it up for questions.

[Operator Instructions] And our first question will come from Lee Jagoda of CJS Securities.

Congrats on the deal.

Thanks, Lee.

So I guess just a couple for me. First, just the $250 million milestone payment, what, if any, conditions need to be met to achieve that?

At this stage, I would say you should presume that payment is going to be made. The business is outperforming the forecast in which they gave us initially when we started the negotiations with them. Their book-to-bill was already well above a rate necessary to deliver the results. The backlog coverage was the same. Roughly about 40-plus percent of their revenue is new product introductions. And so the business is on a strong, strong revenue growth, profit growth path. So at this point, just presume that we're going to be making that payment in the first quarter of 2027.

Perfect. And then you started to answer my second question, but on the 12% to 15% CAGR for the growth rate, both going backwards and, it sounds like, going forward, how much of that is secular market growth versus their own innovation or share gains?

So it's a little bit of a combination of both, but they are selling product into markets that are growing at those rates. So when you look at the sports medicine and cardiovascular markets, those are both double-digit growth markets. So the growth algorithm for the company kind of mirrors the growth of where the markets in which they participate in. But then you couple on to that, that there's significant new product introductions this year, next year and in the preceding years. So the combination of those activities really solidifies that growth algorithm for the next few years.

Perfect. And then just in terms of their geographic representation, it sounds like they've got a nice North American presence in the U.S. and then in Costa Rica also. How should we think about their revenue today outside the U.S.? And how much of that growth is contemplated in the go forward?

Yes, that's a great question. So I mean, to us, it's one of the big synergies that I think we can bring to them, right? And what I mean by that is, this is largely a North America business where their revenue is going to North America customer base. They have that FDA registered product and the qualifications, but they don't have the CE Mark to sell the product in the European markets. So the opportunity set for them is for us to move their manufacturing into our Czech Republic site and begin to get that CE mark on their products. And we can do that by still supplying out of Costa Rica, but by getting that CE Mark, and that allows our customers in North America to begin selling those products in the European markets, and we can really accelerate that for them as much as this gives us an opportunity to move our products into their Costa Rica facility.

Yes, maybe to add real quick. I mean, it's ultimately also the way to think about it in addition to Robert's great comments, is, remember, the World of Medicine business that we bought, it's a very similar playbook. We doubled that business and then further expanded into new applications and customers. Now that will further compound a little bit in the outer years, but we're very excited. So it's not only geographic, but other applications and mutual customers.

The next question comes from Brian Drab of William Blair.

Congrats on the deal.

Thanks, Brian.

Yes. How do you expect the $80 million in synergies to play out over the 5 years? Is that weighted more towards the front? Or can you talk about that?

Slide 8 has a little graph that kind of gives you a little bit of perspective around how you should think about it. I did give some guidance in my script. It's roughly about $7 million in 2027 -- $7 million to $8 million in 2027, and then it will double that rate in 2028. The graph somewhat kind of depicts that, and then you'll be running at roughly a $20 million run rate thereafter.

Okay. No, I see that. Sorry, I missed that.

It's about 5% of the revenue of the combined business is the easiest way to think about it.

Got it. Okay. And then I guess, Lee just mentioned this, I might have missed this, too, but specifically, the growth rate that you gave, 12% to 15% revenue growth, that's the expected go-forward growth rate, but can you put a finer point on what the growth has been for this business year-to-date and since [indiscernible] '25.

Yes. So it'll grow in that range in 2026. I want to be careful about giving the growth rates historical, because they're convoluted. This is a combination of an organic growth business with a handful of acquisitions. So I don't want to give a misleading perspective on the historical growth figures. But you can look at 2026 as being within that range and then having high confidence of 2027 and beyond. A large amount of this has already been locked in with customer contracts.

Okay. And can you give any comments regarding the story of this business and how long you've known them, how long you've been looking at this particular deal?

Yes. So we've known -- it's an interesting business in the structure that it sells into the same customers that we sell to. It sells to the same call points that we sell to. And it's in the same workflows that we're in. So we've obviously known about them for a number of years. It's a business that has got founders still involved in the business. Management has some involvement in the capital structure. There's a private equity firm involved as well, as obviously in the press release.

So it's got this professional management team with that financial discipline applied to an entrepreneurial type of business model. So we've known them for a while. We've engaged with them for a while. John Lesica, our COO, really solidified the relationship with that management team. They're all planning on staying on board. They're all planning on continuing to lead this business on a go-forward basis. So we feel like we really know the business inside and out at this point.

Got it. Okay. Maybe just one more for now. How does this -- and I don't mean to like steer away from talking about this acquisition today, but how does this change your perspective on M&A for the next year?

Well, this year, I can safely say we're done. So what we'll focus on, between now and, let's say, for the first couple of quarters of 2027, is really kind of debt reduction. We're getting strong cash flows out of our base business. Obviously, you saw that in the first quarter. We're getting strong cash flows out of this business. It's an asset-light business. It's got a cash conversion rate that's much higher than Novanta itself.

So it drives a much higher cash earnings ratio than our own business. And so we'll focus on that integration. We'll focus on capturing these cost synergies, capturing the potential revenue synergies, working on future design wins with them, really stabilizing it, getting our own medical manufacturing up and running in their Costa Rica facility. So all time and attention will be spent on that.

And then by the time we get to the end of 2027, when that leverage ratio drops below to a really low number, again, to allow us to start doing bolt-on acquisitions at that point. We'll look to do that into the individual businesses and keep it on a smaller scale at that point.

The next question comes from Quinn Fredrickson of Baird.

Congrats on the news.

Thanks, Quinn.

Yes. Can you speak a little bit to what the competitive landscape looks like for Riverpoint? Would the primary competitors here be captive OEMs and maybe what the level of competition from international players is as well? And then any details on customer concentration?

Yes. First off, let me answer the second one first. Sorry, we're both excited about the business. So the first is there's not a lot of customer concentration in this business. If you project out over the next 5 years, you can imagine like our own advanced surgery business, when you become the lead partner of innovation for your OEM partners, you begin to get a little concentration because the market is concentrated. But I wouldn't say that given the number of sockets in which we're designed in, the risk is extremely low of any sort of concentration risk on customers that people typically focus in on.

In terms of the competitive landscape, think of it very similar to our Advanced Surgery business. Ultimately, our Advanced Surgery business, if you go back in time to when we acquired that business, we were roughly 20% of the insufflator market. Today, we're the standard of care, right? And so the competitional landscape around that was really about convincing customers that we can be their innovation engine, we can be that supplier of choice. We're the better option than trying to organically build out your own competencies around this. So ultimately, that's the true competition. Sorry, Matthijs, I'll let you go.

Yes. No, I think that's well said. So I think they're out innovating, I think, their competition, which is both internal R&D teams of customers, not unlike our Advanced Surgery business. But OEMs appreciate that, because they can innovate faster and grow faster with more up-to-date products, right? And that's just a result of focusing on our core competence.

And then within that, they're the leader in the fastest-growing biomaterials coated, let's say, fiber-based implants, which is in itself the fastest-growing category, and then they have unique IP, which is, of course, one of the reasons why we were so interested in this company. So we feel they have a huge competitive moat. I mean there's not like 0 competition. there's healthy competition. But if you can see at the growth rates and the projected growth rates, they're winning and they have something unique and the team is truly stellar. So very similar in terms of how they work and how they operate with other pieces of Novanta. And we feel, together we can really grow this business very nicely.

Okay. And we discussed geographic expansion, but you also mentioned portfolio expansion opportunities. Could you expand a little bit on what that opportunity might look like? And if you could discuss the osteoconductive coatings, I think you mentioned growing 20%. Just what's the remaining runway and opportunity in that portion of the business?

Yes. So we quoted in our slide deck, this business addresses about a $2 billion market, and it's a $150 million business, right? So it's a fairly fragmented space still, which is very conducive for both organically taking share as well as doing some bolt-ons of particularly technologies that are interested. And hopefully, you understand I'm not going to be too precise here, but one of the major reasons why we're also excited is not only the business today, but its buy-and-build potential going forward.

The osteoconductive piece, just to answer that question, think of it as providing some coating to the fiber-based implants that helps the human tissue, the soft tissue react such that, let's say, the connection with bone is strengthened. So the human body reacts to it such that the connection is strengthened. And as a result, of course, when you have a tear or when you have an issue, that you can get back into kind of playing the sports that you would love to play.

And yes, rather than doing that metal based, which, of course, rubs and is rigid and restricts motion, the fiber-based is a very nice combination of both giving that flexibility, but still being rigid, and then combined with that special coating, it gives the strength that is required as well, that is unique, and really kind of integrating it in the patient body. Riverpoint has a unique set of patents in this area. As John said, it's a high-growth category. It grows 20% within their portfolio, and the market is moving towards that category. So leading that category in where the market is going basically. And we expect further additions to this product line and further permutations. So it's just an early start where we are and a bright future ahead.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator, and thank you, everyone, for your questions. We're extremely excited to have shared with you this announcement for the signing of the acquisition of Riverpoint Medical. To say it again, this is a milestone transaction that represents not only our largest acquisition to date, but also an acquisition with extremely strong strategic and financial fit for Novanta.

So to summarize, this acquisition accelerates our strategic direction, will be immediately financially accretive when we close, will provide our OEM customers with global manufacturing capabilities, and we will establish a platform unlocking future portfolio expansion opportunities. This demonstrates that what we mean when we say that Novanta deploys capital in a disciplined manner. Riverpoint is the right fit, and we're the right owner.

And in closing, as always, we would like to thank our customers, our shareholders and especially our dedicated employees for their ongoing support. I'm also extremely excited to soon welcome all of the Riverpoint Medical employees into the Novanta family. We believe, together we will be a great team, and we will grow our businesses together. We appreciate your participation in today's call. I look forward to joining all of you soon at our second quarter 2026 earnings call.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

Good morning. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc.'s First Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to Novanta's First Quarter 2026 Earnings Conference Call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair 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 last night, 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 last night 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'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta beat expectations for revenue growth in the first quarter, delivering 10% reported growth and 3% organic growth, a step-up versus the prior quarter. Bookings grew 37% year-over-year with a book-to-bill of 1.10 on continued new product momentum and strong commercial execution. Every business delivered double-digit bookings growth and year-over-year revenue growth. Profit performance was equally strong. Adjusted EBITDA grew 14% and our adjusted EBITDA margin expanded 70 basis points year-over-year and adjusted diluted EPS grew 9%. Cash flow performance was particularly encouraging.

Operating cash flow increased by 63% year-over-year. And in the quarter, our cash flow conversion to net income was over 200%. I'm very proud of our team for delivering these solid results in an evolving trade and economic climate. Our momentum is building. We expect organic growth to reach high single digits in the second quarter. The broad-based demand signals across our businesses give us confidence in continued acceleration through the back half of the year, absent a deeper shift in the macro and geopolitical environment.

Our end markets and our performance are trending as we predicted in our last earnings call. And if anything, momentum is better and more broad-based. Robotics & Automation remains robust. minimally invasive and robotic surgery markets are consistently strong. Our Precision Manufacturing business is back to mid- to high single-digit revenue growth. Semiconductor markets are in an upswing, and we're seeing accelerating double-digit growth in AI data center-related applications. In addition, we're taking share in our targeted high-growth markets. New product revenue is up 50% year-over-year. design win momentum is strong and medical consumables continue to grow double digit.

Novanta's long-term strategy is focused on winning in high-growth end markets with durable secular tailwinds, AI-driven Robotics & Automation, minimally invasive and robotic surgery, digital and AI-driven manufacturing and Precision Medicine. We invest in growth platforms within these secular markets that represent a $4 billion incremental market opportunity by 2030. This continues to be the right strategy. In these markets, we've built deep and long-term collaborative partnerships with leading OEMs globally by solving their most complex needs with proprietary technologies and solutions. This creates sticky, exclusively designed-in product relationships that typically last up to a decade on our customers' platforms.

As an innovation-driven company, we maintain our edge through continued investments in the platforms we believe will drive the majority of our long-term growth, next-generation insufflators and pumps, robotic surgery technologies, intelligent physical AI solutions for connected care and precision robotics and intelligent subsystems for laser beam steering and digital AI-driven manufacturing and Precision Medicine.

For 2026, we remain focused on our top three priorities. First, deliver mid-single-digit organic growth or higher for the full year, executing our strategy on the back of record bookings, new product launches and commercial momentum. Second, acquisitions, deploying our increased capacity into larger opportunities in our target markets to accelerate our strategic direction. And third, completing our manufacturing foundation, finishing the regional transfers, scaling competence centers and embedding the Novanta growth system across the organization.

Let me share the progress we're making towards each of these priorities. Starting with organic growth. The first quarter marked a meaningful step forward and the momentum across our businesses gives us confidence that this is a trajectory, not a data point. Let me walk you through what we see in each business. Our Advanced Surgery business delivered double-digit growth in the quarter with consistent strong demand in minimally invasive and robotic surgery applications.

Our next-generation insufflators have set the industry standard for patient safety, smoke evacuation and surgical workflow optimization. The business remains on track for strong full-year growth, driven by continued momentum in insufflation, expansion into robotic surgery and arthroscopy, new product ramps by our customers and a rapidly scaling medical consumables business.

At 15% of Novanta revenue and with a sustained double-digit growth trajectory, our medical consumables franchise has become an important growth engine and capability for the company. Next, our Robotics & Automation business achieved high single-digit revenue growth in the first quarter with bookings up 50% year-over-year. The growth outlook here is sustainable, supported by multiple GenAI-driven tailwinds, new product advancements for precision robotics and warehouse automation and a recovering wafer semiconductor wafer fab equipment market where the up cycle is taking shape.

In March, we joined the NVIDIA Halos AI Systems Inspection Lab, a recognition of our server drive technology leadership in safety validated AI-driven robotics. We expect the momentum to continue in the precision robotics and physical AI space.

Next, our Precision Manufacturing business returned to mid-single-digit growth in the first quarter, the fifth consecutive quarter of double-digit bookings growth. The long-term driver here is the rising automation and digitization of new manufacturing lines with ever-increasing demands for throughput, productivity, smaller form factors and tighter tolerances. Our newly launched intelligent laser beam steering subsystems offer unique proprietary capabilities to meet those needs across probe card production for AI GPU chips, laser additive manufacturing for aerospace and drone production, advanced packaging and substrate production for data center-driven applications and light engines for deep UV and EUV lithography. Together, these create a durable multiyear tailwind for Novanta.

Our Precision Medicine business delivered double-digit revenue growth in the first quarter, driven by the Keonn acquisition, along with modest growth in the core business. Customer demand in sectors outside of life sciences supported the quarter. Our life science exposure is expected to be less than 10% of the company's overall revenue in 2026.

Finally, let me call out our growing exposure to the GenAI data center boom. This exposure spans a broad set of leading customers across multiple application areas.

DUV and EUV lithography, advanced packaging, probe card production, precision robotics and GPU drilling, metrology for advanced semiconductor wafer nodes, wafer fab nodes and other AI data center applications.

Our Robotics & Automation and Precision Manufacturing businesses carry the largest share of this exposure, which we estimate at approximately 15% of total company revenue in the first quarter. Collectively, these applications grew about 20% year-over-year, and we expect this growth rate to increase as we progress further into the year.

The next 2026 priority I wanted to briefly address is acquisitions. Our strategic direction is to expand our business mix and technology leadership in medical technologies, medical consumables and embedded software. further strengthening a portfolio that delivers predictable, sustainable and consistent revenue, profit and cash flow growth. Our pipeline remains deep and active with a strong set of mid- to larger opportunities across these areas and adjacencies such as bioprocessing.

We have the balance sheet capacity to move decisively and a proven track record of creating value from the deals we close. We are working multiple opportunities in parallel and expect to deploy meaningful capital this year. Rounding out our 2026 priorities, transforming our manufacturing footprint for scale and resilience. We're making steady progress on our regional manufacturing initiative with two facility closures on track to be completed in the second quarter. This supports a gross margin step-up in the second half. With more than 20 facilities across the company today, the opportunity is significant.

By consolidating into fewer centers of manufacturing excellence, we gain better scale, stronger systems, deeper talent and full in-region for-region capability. This deepens our preferred supplier relationships with leading OEMs while sustainably expanding both our gross margins and profitability.

Stepping back, let me speak directly to the macro. The environment is generally complex. Trade dynamics, geopolitical tensions and input cost volatility are real, and they affect every company, including ours, and we're watching them closely. The complexity and opportunity often travel together. And what we see in front of us across AI infrastructure, semiconductors, advanced industrial and medical is a strong demand environment with our new product innovations driving record bookings and design wins.

We have the strongest team Novanta has ever had, the right portfolio of innovations and the momentum to capitalize. So to wrap up, the first quarter was a strong start. Organic growth inflected upward, profit and cash flow grew meaningfully year-over-year and execution remained disciplined. The second quarter guidance reflects another meaningful step-up in demand and continued momentum. And the pace of new bookings and design wins tell us our customers see the same trajectory.

We are confidently reaffirming our full year outlook and even more confident that we can navigate the path ahead. Novanta's trajectory from here is up.

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

Thank you, Matthijs. In the first quarter, Novanta bookings increased 37% year-over-year with a book-to-bill ratio of 1.1, supporting a positive outlook and a growing backlog. All of Novanta's businesses had double-digit bookings growth versus the prior year and all had revenue growth versus the prior year. We continue to see sustained and accelerating customer demand supporting our organic growth outlook for 2026.

In addition, new product sales grew over 50% year-over-year, raising the Vitality Index to 27% of sales. Our design wins were also strong with company-wide design wins up nearly 30% versus the prior year. Our sales in the medical end markets represented 53% of total company sales with sales in the advanced industrial markets at 47%. Also in the quarter, our medical consumable sales remained at nearly 15% of total company sales with continued strength in this category due to the high growth rate of our new product launches in our Advanced Surgery business.

Moving on to the financial results. Our first quarter 2026 non-GAAP adjusted gross profit was $118 million or 45.6% adjusted gross margin compared to $108 million or 46% adjusted gross margin in the first quarter of 2025. Adjusted gross margins were down 60 basis points year-over-year and roughly flat sequentially.

Gross margins reflected a price/cost timing impact, resulting in a weaker-than-expected outcome because of higher freight, tariff costs and material costs as a result of geopolitical dynamics that rapidly shifted in the first quarter at a rate that outpaced our ability to surcharge customers and reprice orders. This lag is not an unexpected challenge. However, with some near-term stability and better visibility now, we are quickly shifting resources to offset the higher cost in a manner consistent with prior practices. We are confident that these additional actions, combined with our site closures will put our gross margins back on track to achieving prior full year guidance.

Moving on to R&D expenses were $23 million or approximately 9% of sales. which is down 1 point as a percent of sales versus the prior year. First quarter SG&A expenses, excluding certain adjustments, were $51 million or approximately 20% of sales, which is flat as a percent of sales versus the prior year.

Adjusted EBITDA was $57 million, demonstrating strong growth of 14% year-over-year and achieving a 22% adjusted EBITDA margin, which was up 70 basis points versus the prior year. On the tax front, our non-GAAP tax rate in the first quarter was 19% versus 20% in the first quarter of 2025, and our tax rate decreased year-over-year mainly due to jurisdictional mix of pretax income.

Our non-GAAP adjusted earnings per share was $0.81 for the first quarter, up 9% versus the prior year, which includes the higher share count from our recent equity fundraise. The strong result was achieved while absorbing a $0.03 headwind from the temporary inflation and tariff impact, which I just spoke to.

Operating cash flow in the first quarter was $52 million compared to $32 million in the prior year, representing 63% growth year-over-year and a sixfold increase sequentially from the weak fourth quarter. This represents over 200% cash flow conversion of net income. The rebound was from strong profitability and sales linearity resulting in strong customer collections.

We achieved this while making deliberate investments in safety stocks to insulate ourselves from supply tightness, including electronic components, rare earth materials and inventory tied to our regional manufacturing routes. These investments position us to execute on strong revenue visibility we have for the remainder of the year and avoid part shortages.

For the second quarter and full year, we expect to achieve our cash flow conversion target of 100% or better as a percent of net income. We ended the first quarter with gross debt of $249 million and with a gross leverage ratio of 1.1x. Our first quarter cash balance was $389 million, and so our net debt was negative $139 million, giving us a net leverage ratio of negative 0.6x, maintaining a positive net cash position. In the first quarter, we purchased approximately $18 million worth of company stock. While acquisitions remain our top capital allocation priority, we will continue to repurchase shares opportunistically when temporary dislocations create a compelling return on that capital. But at the same time, the strength of our current acquisition pipeline naturally tempers the pace of that buyback activity.

Now I'll share some details on the operating segments. In the first quarter, Automation Enabling Technologies segment grew by 7% year-over-year, better than expected. The book-to-bill in this segment was 1.15 and bookings were up 35% year-over-year. Our Precision Manufacturing business, which mainly serves industrial equipment markets saw year-over-year revenue growth of 6% and double-digit growth in bookings, continuing the momentum we discussed in the prior quarter. In our Robotics & Automation business, revenue was up 7% year-over-year and bookings were up 50%.

We continue to see a healthy outlook in the business with solid demand for advanced robotic applications and increasing strength in semiconductor applications benefiting from the investment in artificial intelligence.

The overall Automation Enabling Technologies segment adjusted gross margins were approximately 49%, which was roughly flat sequentially and down 60 basis points year-over-year, driven by the tariff and cost inflation dynamics I previously discussed.

New product revenue from this segment grew over 70% year-over-year in the quarter, and customer design wins grew by 25% on the back of both innovation and strong commercial execution of our teams. In addition, the Vitality Index was above 20% of sales, which is nearly double last year's performance.

Moving on to the Medical Solutions segment. Revenue in this segment grew 15% year-over-year, better than expected. This segment saw a book-to-bill of 1.04 in the quarter and bookings were up 40% year-over-year. New product sales grew by nearly 45% year-over-year, and the vitality in this segment was above 30% of sales. Customer design wins grew at strong double-digit rate. Our Advanced Surgery business experienced 11% growth year-over-year, driven by both strong patient procedural growth rates and from our new product launches in our second-generation insufflators, which continue to see very favorable demand from our OEM customers.

In our Precision Medicine business, which predominantly serves the life science and multi-omics market, sales grew by 18% year-over-year. The year-over-year growth in this business was mainly from the Keonn acquisition. Our core business also saw modest positive growth of 2% in the quarter from products sold into hospital equipment markets.

Overall Medical Solutions segment adjusted gross margins were approximately 43%, which is roughly flat year-over-year, but up 80 basis points sequentially. While not as evident in the first quarter margin results, we see the same inflation challenges in the Medical Solutions segment as elsewhere, but strong productivity and higher margins from record new product sales helped mitigate the impact.

Now turning to guidance. The end market trends that Matthijs commented on earlier give us increasing confidence in our outlook for the year. The first quarter beat and excellent bookings positioned us well to deliver on a strong 2026. We are leaning in aggressively on further price and cost reduction actions to give us greater flexibility as the environment evolves. These actions are already underway and embedded in our second quarter's guidance and our second half expectations.

So for the full year of 2026, we now expect GAAP revenue to be approximately $1,040 million to $1,055 million, which raises our previous range and represents reported growth greater than 7% and organic growth of up to 6%. For the rest of our full year guidance, we are reaffirming our previous range. We continue to expect adjusted EBITDA to be between $245 million and $250 million, which represents year-over-year growth of 11% to 13% and adjusted earnings per share to be in the range of $3.50 to $3.65, representing year-over-year growth in the range of 6% to 11%.

We have high confidence in this updated full year guidance, supported by strong committed bookings visibility, solid execution of new product introductions and positive end market dynamics. We believe the right discipline is to incrementally increase the top end and narrow our overall revenue range now, then deliver another strong quarter to shrink the remaining exposure to trade and geopolitical uncertainty before considering a more bullish overall financial outlook.

Turning now to the second quarter of 2026. We expect GAAP revenue to be approximately $259 million to $264 million, which represents year-over-year organic growth of 6% to 8% and reported revenue growth of up to 10%. This revenue outlook is higher than our prior expectations, supported by strong visibility from booking strength and a growing backlog. Looking at growth in our segments in the second quarter, the Automation Enabling Technologies segment is expected to achieve 10% to 12% growth versus the prior year, which represents an acceleration in growth rate versus the first quarter based on building momentum we see in both businesses.

The Medical Solutions segment is expected to achieve high single-digit growth in the quarter. Our Advanced Surgery business is expected to continue to show strong growth from the strength of new product ramps, while our Precision Medicine is expected to also experience mid-single-digit revenue growth from stronger sales of medical equipment and Keonn.

For adjusted gross margins, we expect the second quarter to come in at approximately 45.5% to 46%, roughly flat to modestly ahead of the first quarter. The sequential improvement will be moderate as our surcharging adjustments, price increases and cost reduction initiatives fully take hold. That said, we expect these actions to drive meaningful stronger margin performance in the second half of the year as their full benefit is realized.

On the pricing and surcharging front, we have already implemented product price increases and updated all surcharges to reflect the new tariff rates. The latter will have a more immediate impact. Both are embedded in our new quoting activities, and we're actively working to reprice existing backlog.

In addition, while we have not included any benefit from potential U.S. government tariff refunds in our guidance, we view this as a meaningful risk buffer against any delays in implementation. The combination with the site closures from our regional manufacturing strategy and the additional cost actions, we feel confident in the second half ramp in gross margins and our full year expectations.

For R&D and SG&A expenses in the second quarter, we expect approximately $74 million to $75 million. This represents roughly 28% to 29% of sales. The guidance excludes expected costs associated with our manufacturing MRP system. Depreciation expenses, which were approximately $4 million in the first quarter, will be similar in the second quarter. Stock compensation expense, which was $10 million in the first quarter is expected to be approximately $10 million again in the second quarter. As a reminder, our second half of 2026 is impacted by the timing of some of our equity awards, which includes onetime award that was granted in mid-2025 to replace the normal employee cash bonus program for the year.

Stock compensation expense in the second half of the year will normalize to $8 million per quarter. For adjusted EBITDA for the second quarter of 2026, we expect to be between $58 million and $62 million, representing high teens increase year-over-year, and we expect to achieve approximately a 23% EBITDA margin, which is more than 100 basis points higher than the prior year and quarter.

Interest expense net of interest income was approximately $2 million in the first quarter and is expected to be similar in the second quarter, excluding any material changes in debt balances. We expect our non-GAAP tax rate to be between 20% and 22% for the second quarter of 2026, roughly in line with prior year.

The exact rate will depend mainly on jurisdictional mix of income. Diluted weighted average shares outstanding will be approximately 41 million shares in the second quarter, in line with the first quarter. As a reminder, this includes an estimate of the dilutive effect of our recent equity offering and as explained in detail in our filings, the dilutive effect of the equity offering can vary based on market prices and Novanta common shares. So this guidance only factors in the estimate for dilution based on the recent share price performance.

For the second quarter, we expect diluted earnings per share to be in the range of $0.81 to $0.86, representing year-over-year growth in the range of 6% to 13% year-over-year. We expect cash flow conversion in the second quarter to remain similar to the first quarter and on track to hitting cash conversion of greater than 100% of GAAP net income. Our teams have been working rapidly to drive good cash flow performance despite the dynamic environment.

Finally, I'll reiterate Matthijs' comment on our positive outlook for the acquisition pipeline. We have multiple opportunities under evaluation and are prioritizing transactions that meet our strategic and financial criteria and are walking away from those that do not. We are targeting acquisitions that enhance our growth profile, lower the cyclicality and trade sensitivity characteristics of the business and deliver compelling returns with our payback horizons to justify the investment in capital costs without requiring heroic assumptions. As stewards of shareholder capital, we are committed to deploying capital in a disciplined manner, and we feel confident about the progress we're making.

In summary, we are making strong progress in the high-growth end markets that anchor our strategy, particularly in AI-driven Robotics & Automation, minimum invasive and robotic surgery, digital manufacturing and Precision Medicine. We are excited about our customer wins, the bookings growth and the continued momentum of our new product launches. We see growing momentum and strong customer demand, which gives us confidence in our ability to achieve mid-single-digit organic growth or higher for the full year. This concludes our prepared remarks. We'll now open the call up for questions.

[Operator Instructions] The first question today comes from Lee Jagoda with CJS Securities.

So Matthijs, at the end -- near the end of your prepared remarks, you talked about the DUV, EUV lithography, the board drilling technology and a whole bunch of other things that you lumped together as 15% of total company revenue. That's not all semiconductor. So what are we calling it now? And how should we think about that going forward?

Yes. Lee, basically, there are parts of our business in both Precision Manufacturing as well as the Robotics & Automation units serve applications that are driven by the GenAI infrastructure investments. So we thought it was good to quantify the combination of this, but they're basically inside those two businesses, just to be clear. Yes. And so it's a whole slew of applications. It's not one, right? And the collective of all that, that is driven by the GenAI infrastructure investments is 15% of sales in the first quarter. growing at 20% year-over-year, and we expect that growth rate to actually accelerate and improve throughout the year. It includes current core business to deep UV, EUV lithography, new product ramps in deep UV and EUV lithography, GPU drilling, but also advanced manufacturing aspects like probe card production, which is used for GPU testing.

You need a very advanced manufacturing technique that is especially suited for our advanced subsystems for laser beam steering -- but other applications that include metrology for those really advanced 2-nanometer nodes. Those GPU chips require a lot of metrology. And so these advanced wafer fab nodes require super precision, let's say, both lasers as well as, let's say, motion.

And so our robotics, precision robotics capability is also geared towards these, let's say, high-end nodes or these advanced nodes. So it's all that collective that we felt was important. This is, by the way, not your standard wafer fab equipment. So this is really the advanced nodes that truly are geared towards the wafer fab equipment and advanced manufacturing and advanced industrial manufacturing applications that are being pulled forward through GenAI infrastructure investment.

Got it. And then can you talk a little more about this NVIDIA AI lab announcement, how it positions you within the robotics space? And how we should think about some of the opportunities in growth hitting the P&L at some point?

Yes. Well, first of all, it's a testament. We're the only servo drive manufacturer as far as we are aware that actually got selected. You need to go through a very rigorous certification process. And so what that means is that, yes, our drives are being tested and have been certified in the NVIDIA ecosystem. So whenever there is humanoids and warehouse automation or other precision robotics OEMs that want to use the NVIDIA infrastructure, they want to make sure they use the sensors and, let's say, other technologies that are certified and work within that ecosystem.

So we're very proud to be associated with that. So what that practically means is that while these applications are still in the prototype phase, it just adds tremendous credibility and avoids, I think, for OEMs to actually having to subtest and verify the claims that we're making because they've already been verified by the ecosystem. So that credibility, we see tremendous interest as a result. Again, we're tempering the excitement because still the -- we're still early in the adoption cycle. We expect it to be more meaningful in 2027, but we do see some more meaningful prototype orders coming our way as a result.

The next question comes from Brian Drab with William Blair.

You had this incredible bookings number in the quarter, up 37%. And I know you took the growth expectations, the organic revenue growth expectations up a little bit, too. But can you talk about the difference between those two growth rates, maybe reconcile the bookings growth with the organic revenue growth expectation? And do some of those orders ship in 2027?

Yes. The majority of the orders will ship in the next 12 months, right? So just to be clear, the other thing is just to be fair, it's off a lower number in the first quarter of last year. So that's the second. Third, typically, the first quarter does include, let's say, orders that certain customers prefer to place full year orders on us. So there's a little bit of that -- but the majority is actually a representation of strong demand that we're commenting on, right?

And so you do see, let's say, Precision Manufacturing, of course, coming off a lower level, but there's sequential -- this is the fifth double-digit bookings growth, and you then see about two quarters to three quarters of lag, right, let's say, two quarters between bookings and revenue. So that's typically what we see. This is why we're -- we highlighted and confirmed our confidence in the year. But also at the same time, you see us being disciplined because, of course, it's an interesting world out there, and we just want to be disciplined at the start of the year and get one other strong revenue quarter and profit quarter behind us before we make further adjustments.

Got it. Yes. Understood. And then if you look at your opportunities in the industrial business, which there are many, but if you look at the opportunities this year in industrial, and I wonder if you could kind of rank order them in terms of contribution each will make to overall revenue growth in '26 or how you expect that to play out?

So I'm thinking about the ones that are going to contribute the highest number of incremental dollars in '26 versus '25 and would love to hear where applications like EUV, DUV, warehouse automation, metal 3D printing components, GPU drilling, humanoids, like how -- which are the most impactful to growth this year?

Yes, Brian, I hate to give a nonresponse, but it's actually all of the above. So it's not a single thing, and this is sometimes the challenge with Novanta. We serve all these little niche applications that collectively actually add up, right, to a meaningful amount. And so I think that's also the strength actually. It's not one thing that can turn back on you, right? So if you look from an end market perspective, it is the need for advanced manufacturing that actually is driven by GenAI, but also driven by other markets like aerospace or drone manufacturing or just a need to come up with new manufacturing techniques. Additive manufacturing has a resurgence just because of tariffs, right, and reshoring. And it now achieves as a result of our technologies, a throughput and a cost base that actually becomes realistic -- to use this manufacturing technique.

So -- but it's not one thing. So I would say that's why we're quoting all these things because they're all roughly similar in size. So I'm not able to rank order them here. If one really steps out significantly, you will make sure to make a note of that. That's also why we said, hey, the GenAI infrastructure investments is a collective of multiple applications that ultimately make their way through three steps in the value chain to a data center or to actually the manufacturing process in wafer fabs of a GPU chip, right? So there's a lot of steps in there. And then within that, certain steps were part of.

Yes. That's helpful. And it's helpful how you kind of categorize the AI data center portion of the business. And if I could just ask one more related to that for the moment. The Westwind business, you called this out in -- I think it was the second quarter call of '23 as a business that was doing just about $2 million in revenue per quarter after the downturn in China, et cetera. That business seems to have really caught a tailwind. And I'm wondering if you could just elaborate on what -- I know it's GPU drilling, but if you could just elaborate on what the opportunity is there and -- and can I ask you to try and help us size it? I assume it's not $2 million per quarter now. And any sort of additional color because you've generated a lot of interest in that business over the last couple of quarters mentioning it in terms of GPUs, and we all know how fast that industry is growing.

Yes. So Brian, it's Robert. Just as a reminder, the robotics portion of our business is roughly 20% of sales. The semiconductor business is roughly 10% of sales, right? And embedded within our semiconductor are things like GPU drilling as well as EUV/DUV-based applications, right? So if you look at that overall segment, is it going to outpace the overall business? No. It's likely going to -- it's going to obviously augment the robotics portion of the business and the semi portion of the business will grow at a little bit of a faster rate than our advanced manufacturing, which represents 50% of sales. But overall, those things will pace in check with each other. And that's based on the commentary that Matthijs made earlier. So I would look at it as overall semiconductor is roughly about 10% of sales. It should not materially change as a percent of sales. We have high growth coming in our medical side of the business as well. So everything is kind of keeping pace. Nothing is going to like outpace something else dramatically.

Yes. And I would say, Brian, that, listen, it's not unlike others. I mean, we have unique competencies and capabilities where we're often the only ones in the world or maybe there's one other player that can do what we do, right? And so when we quote these GenAI infrastructure aspects, those are niche leadership positions that we have where we're uniquely positioned. And it so happens that in certain cases, it's really helpful for GenAI infrastructure, right? And this GPU drilling is part of that. But there's many other things. And so the message we're trying to convey is the collective that makes it strong and repeatable versus just highlighting one single business.

Okay. And in this business, I think -- I don't think it's really clear to most people -- I mean a lot of people don't -- have never heard of an air bearing spindle but I mean this business is special because it replaces ball bearings and I think spins at 300,000 RPMs or something like -- why are you the only ones that can do that?

No. Well, I'm happy to explain it. So for these new GPU boards, the boards are really thick. There's about 40 layers, right? You can imagine that if the board is thinner, typically, people prefer to do laser-based drilling because it's precise, it's faster and it's -- you can create tinier holes. By the way, we do that as well, right, the laser beam steering subsystems that we have are actually market-leading in that as well. And there was a trend towards more laser-based drilling for obvious reasons, driven by mobile phone, et cetera.

The data centers and these GPU boards, they require a lot of power, as we all know. So a lot of currents that will create -- that need thick boards that need to be drilled and that needs to be done mechanically. -- lasers cannot penetrate those yet. And we're the #1 by far leading in this area. So we're the only ones who can really do this in a way that requires the level of throughput of precision and form factor, all the elements we typically quote that we're uniquely positioned for in our businesses. And so that's what this is. But again, there is a whole slew of applications that we serve in this market. This is just one of them. It just shows our type of leadership in niche technology applications.

The next question comes from Quinn Fredrickson with Baird.

Yes. Just on your EUV and DUV wins, I think you were talking about that ramping more significantly later this year. I'm just wondering, is there a potential that moves up with the strengthening semi market? Or is that something you're already seeing?

Yes. So Quinn, we have both core business today that we see growing very nicely in line with the growth rates that I mentioned for the GenAI piece, right? And then we have a new piece of business that we -- that has been delayed in the past, but we feel very good about that it will ramp this year. in the second half of the year. Yes. So that will start to accelerate in the second half and will be more pronounced in '27, but will contribute pretty meaningfully already in the second half of this year.

And then geographically, any commentary you could share across your key regions -- perhaps specifically, if you could double-click on the U.S. as I think that was the only region that was down year-over-year, that would be helpful. And then maybe the degree to which your regionalization strategy you feel is helping growth across some of the other regions?

Yes.

Just as a reminder, our sales to regions are really shipping to factories of our customers, and so may not be representative of the end market demand in that area. So -- for example, the U.S. markets, generally speaking, are stronger right now. And yet when you say the sales are down year-over-year, that's just the fact that there's some shift of where our customers produce those products more than anything else. They might have shifted some production down in Mexico or Costa Rica, and now we're shipping to those locations instead of a U.S. location or they've done their own regional structuring.

And so we are now splitting shipments where a smaller allotment will go to a U.S. factory and then some allotment will be shifted to a European factory directly. So be careful about looking at it as like an end market dynamic. I would say, to answer your question more directly, we've had -- where we're seeing the growth is predominantly U.S. We are seeing growth in China. That growth in China is very specific to some semiconductor-based applications and some industrial applications. And then most of the growth that we see in Europe is on the medical side.

I see. Okay. And then the last one would just be on the price/cost timing impact that you mentioned, Robert. Maybe if you could just give us a little more color on what drove that? Was freight the main unexpected driver? Or did something change on the tariff front to the detriment? And just how we should think about the timing of fully closing that gap?

Yes. It's a great question. I would start with tariffs. They were thrown out by the Supreme Court and then rapidly reimplemented and then rapidly escalated again. So the tariff rates changed within a 4-week period in certain categories like aluminum, as an example, went from a 25% tariff to a 50% tariff. The tariffs were applied to immediate shipments, so both inbound and exports. And so it's something very difficult to get your systems to kind of really quickly adapt to. And so that was, I would say, the bigger element. There were certainly higher freight costs. I would argue most of the higher freight costs were customers like the 3PLs, the FedEx, not customers, but vendors like 3PLs, the FedExes, the DHLs of the world rapidly adjusting faster than us on the surcharging. And so that resulted in higher kind of freight charges.

We have pivoted. So we've implemented new surcharge rates. Those are based upon the higher rates that are in place, not only today, but the ones we're expecting to come into place as we get into the second quarter and the third quarter. There are expected to be a couple more tariffs there. We factor that into our surcharging -- to augment that. We've increased price across our products. That has now been implemented on all quoting activity. where teams are going through and repricing the backlog based on those dynamics as well. And so they are adopting the new rate structures, the new pricing structures and you're starting to see that materialize very quickly into our results, which we expect to start to unfold in the third quarter. And that's just the fact that we've already booked 2/3 of our revenue for the year.

And so as a consequence, we really have to kind of go through a repricing initiative. I would expect, though, that the tariffs to be completely muted again in the second quarter and then us moving into a positive price cost ratio as we get into the third quarter, which drives that uptick in gross margins in the third quarter.

And then not to rely solely on that. We have taken some cost out. We finished up the regional manufacturing strategy for our Precision Manufacturing business. We've closed the two sites that were -- have products moving into them. And then what we didn't do is we decided not to factor in any sort of tariff recovery, which is becoming a dynamic where there should be some positivity around that, the timing of which we can't predict right now. But I would say that, that provides a little bit of upside and a little bit of contingency just in case not everything falls out the way we think.

So we have a full year guide that we feel really confident in. We have profitability expectations that we feel really strongly about, particularly in the back half of the year. We'll give another quarter and then we'll take a revisit and see whether or not we can make some further adjustments given the positive momentum.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator, and thank you, everyone, for your questions. Just to wrap up, the first quarter was a strong start. Organic growth inflected upward, profit and cash flow grew meaningfully year-over-year, and the business is executing. The second quarter guidance reflects another meaningful step-up and further momentum based on broad-based demand signals across our businesses and the pace of new bookings, new product revenue growth and design wins tell us our customers agree.

We're confidently reaffirming our full year outlook and even more confident that we can navigate the path ahead. Novanta's trajectory from here is up. In closing, as always, I would like to thank our customers, our shareholders and especially our dedicated employees for their ongoing support. We appreciate your interest in the company, your participation in today's call. I look forward to joining all of you soon at our second quarter earnings call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc.'s Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions].

At this time, I'd like to turn the conference 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 2025 Earnings Conference Call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you've not received a copy of our earnings press release issued last night, 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 last night 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 the 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'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. We said we would return to organic growth and double-digit profit growth in the fourth quarter, and we delivered. Novanta posted record revenue in the fourth quarter with 9% reported growth, 2% organic growth and 4% Sequenta growth. Bookings surged 25% year-over-year and 12% sequentially with a book-to-bill of 1.11. Every single business delivered double-digit bookings growth and a positive book-to-bill in the same quarter. That's the first time that's happened since 2022.

For the full year, we had $981 million in revenue, our biggest year ever. Full year bookings grew 14% new product revenue grew over 60% in the full year, including over 80% growth in the fourth quarter, exceeding our expectations as our commercial excellence and innovation investments are paying off. These results set us up well for mid-single-digit organic growth in 2026. We also demonstrated strong double-digit year-over-year profit performance in the quarter with adjusted EBITDA growing by 17% and adjusted diluted EPS growing by 20%. While these are strong results, margins and cash flow came in below the expectations we set on our third quarter call. This came down to a single deliberate decision.

As we move through the quarter, we prioritized customer deliveries over the pace of our regional manufacturing transfers. That was the right call for our customers, and it created a temporary period of higher dual running costs and elevated inventory. We have already acted on this in January, and Robert will walk through the specifics and our confidence in the recovery. Given the very highly dynamic environment, I'm very proud of our business performance and our team's ability to stay resilient and deliver these strong results.

Taking a step back, Novanta's long-term growth strategy remains focused on winning in high-growth end markets with durable secular tailwinds, AI-driven robotics and automation, minimally invasive and robotic surgery, digital manufacturing and precision medicine. We hold leading technology positions in these markets with exclusive design and product relationships that typically last up to a decade on our customers' platforms. We have established these unique long-term collaborative partnerships with the leading OEM customers across the world by solving their most complex needs with proprietary technologies and solutions while leveraging the Novanta growth system to deliver on-time, high-quality products at the lowest possible cost. While our products typically represent no more than 10% of our customers' bill of material, they enable differentiation and innovation in their systems for their customers improving clinical outcome, throughput, yield, cost per procedure or part or never before possible performance.

We've made disciplined focused investments in the platforms we believe will drive the majority of our innovation-driven growth. Next-generation insufflation and POPs, robotic surgery technologies, intelligent physical AI solutions for connected care, warehouse automation, humanoid and precision robotics and intelligent subsystems for laser beam steering and precision medicine. These growth platforms represent a $4 billion incremental market opportunity by 2030. Our strategic focus is to continue to expand our business mix and technology leadership in medical technologies, medical consumables and embedded software further strengthening our portfolio that delivers predictable, sustainable and consistent revenue, profit and cash flow growth. With customer destocking behind us and accelerating new product and commercial excellence momentum, we're well on the path to get back to our long-term algorithm.

Mid- to high single-digit organic growth with less cyclicality, better resilience to geopolitical risks and more consistent performance regardless of the market conditions. Acquisitions are the second pillar of our growth strategy, driving double-digit reported revenue growth and compounding cash flows. The setup here has never been stronger. Our teams have built the largest acquisition pipeline in my tenure as CEO, focused on mid- to larger opportunities in metal technologies, medical consumables, bioprocessing and embedded software. In November, we raised more than $600 million, specifically because of our confidence in this pipeline with nearly $1.5 billion in total acquisition capacity and a proven track record of disciplined value creation, we're actively working multiple opportunities and expect to deploy meaningful capital in 2026.

Now here's what we're seeing across our end markets and businesses. Our sales into minimally invasive and robotic surgery applications remain consistently strong with mid-teens double-digit growth in our Advanced Surgery business this past year. Our next-generation insufflator set the industry standard improving patient safety, addressing smoke evacuation requirements and optimizing surgical workflows. We are poised for another year of double-digit revenue growth in 2026 as our new product launches from 2025 continue to scale up and also with additional launches that are happening in 2026 itself. Long term, the business is on track to achieve approximately $400 million in revenue by 2030, driven by continued momentum in insufflation, expansion into robotic surgery in arthroscopy and a rapidly scaling medical consumable business.

Our Robotics and Automation business continues to see a sustainable growth outlook with 3 distinct GenAI-driven tailwinds. First, Novanta's technology leadership in fiscal AI applications, unique capabilities that enable the perception and reaction of precision robotics in this physical world and to do so safely. In 2016, we're ramping several new product launches including content we recently won in the warehouse robotics space. Second, a recovering semiconductor wafer fab equipment market, where we're seeing signs of an up cycle starting to take shape. And third, the highly specific and compelling opportunity in GPU drilling -- our air bearing spindles are currently the only qualified supplier for drilling AI-driven GPU boards, a direct beneficiary of the ongoing build-out of AI compute infrastructure, and this application is growing at a strong double-digit rate.

Together, these 3 drivers underpin our confidence in high single-digit growth for this business in 2026. Next, our precision manufacturing business has seen 4 consecutive quarters of double-digit bookings growth and accelerating sequential revenue momentum in the second half of 2025 driven by strong activity in our target markets. This gives us confidence in seeing mid-single-digit growth in the business in 2026. The long-term growth driver in this market is clear, customers are digitizing and automating their manufacturing lines with ever-increasing demands for throughput productivity, smaller form factors and higher tolerances. This is a durable multiyear tailwind for Novanta. What particularly excites me is our launches of intelligent laser beam steering subsystems with unique proprietary capabilities that we have been building for several years.

We're hitting the market at exactly the right time as new digital and AI-enabled manufacturing capabilities are moving from early adoption into broader deployment. Finally, our precision medicine business experienced another quarter of sequential revenue growth in the fourth quarter. This business continues to gradually digest the life science equipment end market dynamics and the associated technology obsolescence cycle we are working through. We continue to believe in the long-term opportunities in the life science equipment market are seeing investments in connected care and early disease detection as big drivers of health care productivity. In 2026, we expect sales to be roughly flat in this business with some shifts in demand between our different product categories. Our investments in intelligent RFID solutions and advanced machine vision technologies are helping to stabilize the outlook for the business this year and have strong long-term growth prospects.

In particular, we're pleased with the recent Kiam acquisition, which is already outperforming versus our early expectations and helping to offer both near- and long-term growth opportunities for this business. Now let me give you a brief update on how we're building a stronger foundation for future growth as an organization. First, the Novanta growth system continues to become a deeper and more permanent way of working across the company. Our continuous improvement engine embedded in our Novanta way culture. NGS is a competitive differentiator that drives customer success and operational efficiency simultaneously, and that combination is difficult to replicate. Here's what that looks like in practice. This very weak. We have over a dozen simultaneous Kaizen events happening across 9 different global locations with over 150 employees participating. From senior leaders to frontline operators, working together on commercial excellence, innovation road maps, supply chain optimization, on-time delivery and our site regionalization initiatives.

On that last point, our regionalized manufacturing initiative is designed to solidify and expand our preferred supplier status with leading OEMs globally, helping our customers thrive in a deglobalizing world by manufacturing our products in the regions where they sell theirs. We're building manufacturing component centers with better scale, stronger systems and deeper talent with full in-region-for-region capability. The strategic logic is clear. The customer response is very positive, and the long-term benefits to profitability, cash flow and resilience will be durable.

To conclude, I'm very proud of our team's performance in 2025. As we look ahead, our top 3 priorities for 2026 are clear. First, drive mid-single-digit organic growth on the back of record bookings, new product launches and commercial momentum. Second, acquisitions, deploying our $1.5 billion capacity into larger opportunities in our target markets; and third, completing our manufacturing foundation, finishing the regional transfers, scaling competence centers and embedding the Novanta growth system across the organization.

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

Thank you, Matthijs. I'll start by reviewing some of the key performance metrics of the company. In the fourth quarter, Novanta bookings increased 25% year-over-year and 12% sequentially with a book-to-bill of 1.11, indicating a stronger backlog and a positive outlook. All of Novanta's businesses had double-digit bookings growth and all had a positive book-to-bill in the fourth quarter. As Mattias mentioned, this has not happened in a single quarter since 2022 and a strong empirical evidence that our organic growth outlook for 2026 is demand driven and not aspirational.

For the full year, bookings increased 14% and the book-to-bill was 1.01, New product sales in the fourth quarter grew over 80% year-over-year, raising the Vitality Index to 24% of sales. And for the full year, new product sales grew over 60% versus the prior year, and the full year Vitality Index was 22%. Our design wins were also strong, with company-wide design wins for the full year, up over 20% versus the prior year. For both the fourth quarter and full year, our sales in the medical end markets represented 53% of total sales. While sales in advanced industrial markets were 47% also for the full year, our medical consumable sales were 15% of total company sales with this category growing at a strong double-digit rate versus the prior year.

Due to the high attachment rate we see in our next generation insufflator product launches. Now moving on to the financial results. Our fourth quarter 2025 non-GAAP adjusted gross profit was $118 million or 45.5% adjusted gross margin compared to $112 million or 47% adjusted gross margin in the fourth quarter of 2024. Adjusted gross margins were down 150 basis points year-over-year and down sequentially by 100 basis points. Gross margins came in below our November guidance, a direct consequence of the decision Mattias described, prioritizing customer deliveries over transfer timing created higher dual running costs in the quarter. With more than a 100 basis point impact to gross margin and a 400 basis point increase to net working capital as a percent of sales.

In January, we adjusted the cost structure without disrupting deliveries or revenue momentum. Gross margins are expected to step up sequentially in the first quarter and the transfer will be completed by the end of the second quarter. As a result, our full year 2026 gross margin expansion target of approximately 100 basis points of expansion versus 2025 is intact. For the full year of 2025, non-GAAP adjusted gross profit was $452 million or 46% adjusted gross margin compared to $442 million or 46.5% adjusted gross margin.

Moving on to the fourth quarter. R&D expenses were $23 million or approximately 9% of sales. For the full year, R&D expenses were $95 million or approximately 10% of sales. Fourth quarter SG&A expenses, excluding certain adjustments, were $46 million or approximately 18% of sales. Full year expenses, excluding certain adjustments, was $181 million or approximately 18% of sales. Adjusted EBITDA was $61 million in the fourth quarter, demonstrating strong growth of 17% year-over-year and achieving a 23.5% adjusted EBITDA margin. On the tax front, our non-GAAP tax rate in the fourth quarter of 2025 was 20.5% versus 24% in the fourth quarter of 2024. Our tax rate for the full year was 21% versus 20% in the prior year, and our tax rate increased year-over-year due to jurisdictional mix of pretax income. Our non-GAAP adjusted earnings per share was $0.91 in the fourth quarter, up 20% versus the prior year. This result was achieved despite adding 2.7 million incremental shares to our diluted share count from the November equity fund raise.

For the full year 2025, our non-GAAP adjusted EBITDAS was $3.29, an increase of 7% versus the prior year. Operating cash flow in the fourth quarter was $9 million compared to $62 million in the fourth quarter of 2024. For the full year, operating cash flow was $64 million. Cash flow was impacted by the same regional manufacturing dynamics, higher inventory builds and temporary account receivable timing items, most of which have already been collected in January. As these site moves complete in the first half, we expect a significant inventory drawdown and strong cash rebound. Operating cash flow guidance for the full year is $145 million to $185 million, more than double our 2025 result. We ended the fourth quarter with gross debt of $260 million, a gross leverage ratio of 1.2x.

Our cash balance at year-end was $381 million, and so our net debt was negative $121 million giving us a net leverage ratio of a negative 0.5x, which means we're in a positive net cash position for the first time in over a decade. Our debt balance was significantly reduced during the fourth quarter as we used the proceeds from the November fund raise to pay down over $300 million of our revolving credit facility, giving us near-term savings and interest expense. Partly offsetting this revolver paydown is the addition of the amortizing notes that were issued as part of the November offering, which added approximately $111 million in debt to our balance sheet. The remaining funds for November offering are shown as an increase to the equity section of the balance sheet.

In the fourth quarter, we repurchased $19 million worth of company stock. And for the full year, we repurchased nearly $40 million of shares. While acquisitions remain our top capital allocation priority, we'll still repurchase shares under our approved repurchase program when the value of purchasing the stock gives us a greater cash return versus the intristic future value of Novanta.

I'll now share some details on the operating expenses. In the fourth quarter, Automation Enabling Technologies segment revenue grew by 2% year-over-year, better than expected. The book-to-bill in this segment was 1.16 and bookings were up 33% year-over-year. For the full year, Automation Enabling Technologies grew sales by 2% and bookings grew by 20% and the full year book-to-bill was 1.02, Our precision manufacturing business, which mainly serves the industrial equipment market, saw a year-over-year revenue decline of 3% in the fourth quarter. However, this business saw a sequential revenue growth of 8% and double-digit growth in bookings in the quarter, and we continue to see momentum build in this business.

Our Robotics and Automation business grew revenues up 6% year-over-year in the fourth quarter and 2% sequentially. We continue to see a healthy outlook in this business with solid demand for advanced robotic applications and increasing strength in some semiconductor applications, benefiting from the investment in artificial intelligence. For the Automation Enabling Technologies segment, adjusted gross margins were 49%, up sequentially but down year-over-year, driven by the site regionalization dynamics as discussed. For the full year, adjusted gross margins were 49%, roughly flat year-over-year. New product revenue for the segment grew over 80% year-over-year in the quarter and nearly 90% for the full year. Customer design wins for the full year grew over 30% on the back of both innovation and stronger commercial execution by our teams. In addition, the Vitality Index was above 20% in the fourth quarter then at high teens percent for the full year, and this is double last year's performance.

Moving on to Medical Solutions segment. Revenue in the segment grew 16% year-over-year. This segment saw a book-to-bill of 1.07 in the fourth quarter and bookings were up 17% year-over-year. For the full year, Medical Solutions, grew sales by 5%, bookings grew by 8% and the book-to-bill was 1.01. New product sales in the fourth quarter grew by nearly 80% year-over-year and the vitality index in this segment was nearly 28% of sales. For the full year, new product sales grew by over 50% and the Vitality Index was 27% of sales. Our Advanced Surgery business experienced 15% growth year-over-year, driven by both strong patient procedural surgical growth rates and from our new product launches of our second-generation insufflators, which continue to see favorable demand from our OEM customers. These growth dynamics are expected to continue into 2026 and beyond.

In our Precision Medicine business, which serves the Life Science and multi-omics market sales in the fourth quarter grew by 16% year-over-year and grew sequentially by 4% -- the year-over-year growth in this business was largely driven by the Kion acquisition as well as some favorable year-over-year comparables. In the Medical Solutions segment, Advanced gross margins were approximately 43% which is roughly flat year-over-year. The margin performance was impacted by the manufacturing site dynamics as discussed.

Now turning to guidance. We see steady improvement in customer sentiment for capital equipment demand as OEMs and end users have largely adjusted to the current macroeconomic dynamics. As Matthijs covered in his remarks, we see a very favorable growth outlook for 3 of the 4 businesses in 2026. For the full year of 2026, we expect GAAP revenue to be approximately $1.03 to $1.05 billion which represents 4% to 6% organic revenue growth. With the full year range, we expect to see sequentially increasing momentum in our quarterly organic growth. In the first quarter, we expect to see organic growth in the positive 1% to positive 3% range. And in the second quarter, we expect to see organic growth in the positive 5% to positive 7% with a similar level of organic growth in the back half of the year. This confidence in the faster pace of organic revenue growth in the second quarter and beyond is driven by the good visibility we have in the recent booking strength and a growing backlog.

For adjusted gross margin for the full year, we expect to achieve approximately 47%, which is 100 basis points of expansion year-over-year. This expansion is coming from completing the regional manufacturing production moves in the second quarter. Based on progress made thus far in the quarter, we feel good about the momentum we have here. We expect R&D and SG&A expenses for the full year to be approximately $294 million to $298 million. This represents roughly 28% of sales. This guidance excludes expected costs associated with our manufacturing MRP system, which is being deployed to support our regional manufacturing initiative and to position Novanta for further site consolidations and reduce complexity.

Depreciation expense will be approximately $17 million in the full year, and we expect this to be approximately evenly split in each quarter. Stock compensation expense will be nearly $38 million for the full year, but the quarterly amount will vary due to the specific timing of some of our equity awards, including the onetime award that was granted in mid-2025 to replace the normal employee cash bonus program for that year. In the first quarter, we expect approximately $12 million of stock compensation expense. In the second quarter, we expect approximately $11 million of stock compensation expense. And then fall to approximately $8 million a quarter in the second half of 2026.

For adjusted EBITDA, and for the full year 2026, we expect to be between $245 million and $250 million, representing a low double-digit increase year-over-year and we expect to achieve approximately a 24% EBITDA margin. Interest expense, net of interest income is expected to be roughly $8 million for the full year of 2026, excluding any material changes in debt balances. This includes the interest expense associated with the recently issued amortizing notes. We expect our non-GAAP tax rate to be around 21% for the full year of 2026, roughly in line with 2025. Diluted weighted average shares outstanding will be approximately 41 million shares in 2026. This includes an estimate for the dilutive effect of our equity offering.

As explained in details, in our filings, the dilutive effect of the equity offering can vary based on the market price of Novanta's common shares. And so this guidance only factors in an estimate for dilution based on our recent share price performance and does not anticipate material declines in our share price in the future. For the full year, we expect diluted earnings per share to be in the range of $3.50 and $3.65, representing growth of up to 11% year-over-year. Included in this guidance is the unfavorable impact from our equity fundraise in the range of $0.22 to $0.24, spread evenly through the first 4 quarters. This reflects the impact of the higher share count, partially offset by lower interest expense.

Also included in the guidance is the temporary unfavorable impact due to the onetime 2025 all employee equity grant. which I just discussed. This was a $0.14 impact in the first half of 2026 only. Cash flow conversion for the full year is expected to rebound versus 2025. Full year 2026 operating cash flow will be approximately $145 million to $185 million, with the bottom end of the range, driven by higher inventory levels to mitigate risk and manufacturing moves and vendor disruptions and the upper end of the range representing the successful mitigation of these risks.

Turning to the first quarter of 2026. We expect GAAP revenue to be the range of $250 million to $255 million, which represents a year-over-year organic growth of positive 1% to positive 3%, and reported revenue growth of positive 7% to positive 9%. Looking at growth in our segments in the first quarter. Automation Enabling Technology segment is expected to achieve low to mid-single-digit growth versus the prior year, which represents an acceleration in growth rate versus the fourth quarter based on the building momentum we see in the business's bookings and backlog.

Medical Solutions segment is expected to achieve high single-digit to low double-digit reported growth in the quarter. On a sequential basis, the Medical Solutions segment is expected to see normal sequential decline in the first quarter versus the fourth quarter due to seasonality. However, this business -- we'll still see solid year-over-year growth in the first quarter. And as already mentioned, the full year outlook for this business is extremely strong. For adjusted gross margin, we expect to achieve approximately 46.5% in the first quarter. This is a sequential step up from the fourth quarter and roughly flat year-over-year, representing the progress we have already made in the regional manufacturing moves.

And as indicated in our full year guide, we expect stronger year-over-year margin expansion in the second quarter and beyond. We expect R&D and SG&A expenses in the first quarter to be approximately $76 million to $77 million, which represents roughly 30% of sales. This is a higher percent of sales than the rest of the year will be based on 2 factors. First, we are aggressively deploying artificial intelligence tools and resources to our teams to deliver upside to our productivity goals for the year. We are seeing great progress in the adoption of these tools to help us with many different areas, including selling processes, R&D programs, regulatory programs and back-office processes.

Second, there's a higher impact from the stock compensation expense associated with the all-employee grant that only impacts the first half. Depreciation and stock compensation expense in the first quarter will be in line with what I covered in the full year guidance. For adjusted EBITDA for the first quarter, we expect a range of $56 million to $58 million, which represents plus 12% to plus 17% growth year-over-year and an adjusted EBITDA margin roughly 100 basis points higher than the prior year. Interest expense will be approximately $2 million in the first quarter. We expect our non-GAAP tax rate to be between 19% and 20% in the first quarter, slightly lower than the full year based on the timing of recognition of certain tax benefits.

Diluted weighted average shares outstanding will be in line with what was covered in the full year guidance. For the first quarter, we expect adjusted diluted earnings per share to be in the range of 75% and to $0.80, growing up 8% year-over-year. Again, this growth rate is impacted by both the share count increase from the equity issuance and the timing of stock compensation expense in the quarter. Cash flow conversion in the first quarter should improve versus the fourth quarter and should achieve our goal of hitting cash conversion of greater than 100% of GAAP net income. However, with the regionalization site initiatives still underway, we see stronger cash flow materializing after these are completed in the second quarter.

In summary, we remain confident in our long-term strategy and business model. We see growing momentum, which will help us achieve mid-single-digit organic growth for the full year. We are excited about our customer wins, our bookings growth and the continued momentum of our new product launches. We continue to make progress in high-growth markets, particularly in medical technology markets and physical AI robotic markets.

And finally, with the successful fund raise we have nearly $1.5 billion in acquisition capacity. This fundraise has unlocked our ability to explore multiple large potential opportunities, and we have a very robust acquisition pipeline. Combined with our track record and discipline of acquiring businesses that exceed our cost of capital within 5 years and our free cash flow accretive day 1, we feel confident in our ability to deploy meaningful capital in 2026 that will drive strong long-term shareholder returns.

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

[Operator Instructions] Our first question today comes from Lee Jagoda from CJS Securities.

So looking at the Automation Enabling Technologies segment first and just a sequential increase in bookings of about $30 million, can you go through sort of what businesses and what product categories are driving that increase? And how much of those bookings are longer lead time versus more book and ship within a quarter or 2?

Yes, Lee, it's pretty broad-based, right? We commented that all our businesses, so including also the Medical Solutions businesses had double-digit bookings growth and a positive book-to-bill for the first time since 2022. And we also commented that actually particular momentum was building actually in the AET businesses where you see a continued strong momentum building in robotics and automation, driven by the drivers that I mentioned. So we have precision robotics where you need more perception and reaction for end of arm, which is both in rare innovation, but also surgical robotics as well as human and kind of a larger segment of precision robotics.

Secondly, we expect to see momentum in the semiconductor capital equipment market improving, and you see some bookings starting to come in. And the third, we have -- we're the sole source supplier for drilling in GPU boards for artificial intelligence, and that business is gaining strong momentum as well. So that's on the robotics and automation side. And on the precision manufacturing side, there's a combination of multiple factors. That business has shown double-digit bookings growth for 4 consecutive quarters last year. And revenue started to sequentially build really in the second half of last year with an 8% sequential growth in Q4. Now that business is still modestly negative year-over-year in the fourth quarter, but we're yes, very confident that business will turn to mid-single-digit growth in 2026 driven by a few dynamics.

One is customer destocking, which has been a headwind for this business for the last 2 years has subsided. So that's one. Secondly, this business has a very strong design win performance and these design wins are coming up to speed in 2026 with bookings starting to appear. And then third, this business has been working for multiple years on intelligent subsystems of laser beam steering and these product launches that started to happen in the latter part of last year starting to hit Resende in 2026. which is primarily driven by a variety of, yes, let's say, manufacturing, advanced manufacturing markets that need extreme precision whether it's laser editor of manufacturing, micromachining actually or processes for Gen AI infrastructure. But also you see some reshoring happening where actually the precision and throughput and productivity improvements are requiring to offset let's say, productivity losses as a result of the reshoring.

So we see multiple drivers in that business. We feel good about that business momentum building sequentially and I think the core message is it's broad-based. It's not a single driver per se of a single business, and we feel good where we are.

Lee, let me give you a couple of pieces of data that might help. So on the precision manufacturing business, the book-to-bill was 1.2 that represented nearly 50% growth in bookings at backlog amount of about 100 -- a little over $100 million. So you can see that backlog is about 2x that of revenue. In the robotics and automation area, business unit, the book-to-bill was 1.13. That was close to 25% growth in the quarter. And our backlog there is also roughly 1.5x our actual quarterly revenue.

The Advanced Surgery business, which amounts will just go through that segment had 1.12 book-to-bill. The backlog is roughly 2x that of quarterly revenue, and that business had close to 15% quarterly growth on a year-over-year basis. And our precision medicine business had a book-to-bill of 1.1 with a backlog of nearly 2x that of our quarterly revenue, and it had bookings growth of 22% year-over-year.

Got it. No, that's all very helpful. One more, and I'll just hop back in the queue. On the industrial robotics order you announced the quarter. So is there any update there? Any revenue expectations for 2026? And then any additional follow-through orders from either that customer or potentially other robotics customers after you kind of disclosed that order?

Yes. I mean we're -- we see that momentum building very steadily and our remarks stay consistent with what we said before, Lee. So it's a first phase of ramp, which will be modest this year, and then it will be sequentially building from there. I think the key takeaway is that it's just a testament to our technology leadership. It is area that leading players are selecting us, and that then creates a halo effect for other opportunities. So I think what I'm most excited about is just the broad-based precision robotics and of our physical AI opportunity for this business, which is both in search robotics warehouse automation, humanoid as well as other precision robotics applications. So that is what we -- which is why we're seeing the momentum of that business sequentially building. So it's just 1 part of multiple drivers.

I will say that the -- you saw a couple of announcements last year around our -- both our servo drives, which are a key enabler of precision motion control within automation, within warehouse robotics and within humanoid. We are working with the industry as well as the ISO organizations to help set the standard around how robots operate safely in a manufacturing environment as well as the home. We are well positioned with that technology and our force torque technology in humanoid and in warehouse automation. We feel it is really superior to anything out there from a competitive perspective. And you can see we are working with pretty much everybody out there when it comes to the humanoid markets and the leading players in warehouse automation.

So we feel really good about that technology. As Mattias said, it will take a little time to kind of fully materialize. And of course, on the humanoid side, a little bit binary in the short term. But we could not be better positioned, both industry-wise and customer-wise and hoping to grapple on to that opportunity.

Our next question comes from Brian Drab from William Blair.

I mean so much momentum on the top line, the bookings, the orders and backlog -- can you just, again -- maybe for Robert, but just bridge that momentum and kind of reconcile that with your expectation for -- at the midpoint, I think it's about 9% EPS growth. And just maybe rank order the investments again, that are happening this year that will kind of maybe result in what might be perceived as a little bit of restrained earnings growth.

Yes. I would say -- so the EPS growth, I forget, we did the fundraise, right? And so the fundraise generated $0.22 to $0.24 of wind. Obviously, we don't want that headwind to materialize. We would like to deploy the capital that we raised towards acquisitions. And so I would look at that as a temporary headwind with the likelihood that we deploy that capital and generate income through the acquisition of a new business. But it's roughly -- the fundraise itself is $0.22 to $0.24. And then there's the all-employee grant that went out to all employees other than the executive team.

And that had about a 14% headwind that only impacts the first half of the year. So the -- if you think about the EPS growth of roughly 10%, it is growing 10% year-over-year despite the dilution from the fundraise and despite the dilution from that equity grant. And so the organic element of that EPS growth is obviously much bigger.

Right. Okay. And through that -- and then you mentioned a number of opportunities here. And 1 of them that stepped out that stood out to me was the GPU Boards opportunity. Does that -- is that something that kind of surprised you that has popped up that is new? Or I haven't heard you talk about that 1 before, and it sounds like that could be a big deal and kind of revise that air bearing spindle business.

Yes. I mean, listen, we haven't talked about this business for a little while. It's -- we're the -- really by far the leader in this space in drilling really thick boards very precisely. And it so happens that the material set in Gen AI and GPU boards are getting tougher and thicker and the only way you can really do this with throughput at Precision, it turns out is with our spindles. And so of course, the visibility is starting to increase around that start to increase in the second half of the year. Of course, these boards can be drilled in a variety of applications, but it became clear that the leader in GPUs had a personal interest in this in terms of scaling that. So that's why we're mentioning it. The business is really starting to be on a tear, and therefore, we felt it was good to start to mention it. We see a multiyear trajectory here that is exciting.

Nevertheless, of course, there's many other drivers in the company that we've been investing in. But this is a leadership position that we've always had. So really cool capability that we've had and it typically was applied in a more cyclical part of the 7 space. It so happens that it's also needed now to drill these really sophisticated boards, and we're the only ones who can do it. So that's why we thought we mentioned it.

And are you finding that opportunities coming with new customers or existing customers that are ramping up to meet the end market demand?

Yes, it's, let's say, new end users, let's put it this way. So the way to think about it is you have the OEMs to the equipment makers that set of customers is similar. I mean, we've been using where we've been working with those customers over decades. It's a strong relationship. And those customers have been approached to provide the support for the drilling these boards. So these applications have been developed with us and together with our customers. So -- but it's really the end users that, of course, are more -- are new geared towards that GPU space. So that's how to see it. Our customers are the same but the application is, of course, rapidly evolving.

And then just 1 last quick question. You said book-to-bill was positive across all of the businesses? Or just to put a finer point on that. Are you talking about the 2 segments or all 4 subsegments? Or what do we mean by that?

Yes. So all 4 business units and then the 2 segments. So book-to-bill was positive. That was the numbers that I was giving Lee in the beginning. Yes. So positive book-to-bill in every business line and then obviously, as a consequence of aggregation, the 2 segments had a positive book-to-bill and then the entire company. Nice momentum building backlog, double-digit bookings in each of the business units -- so -- and then obviously, significant progress in new product revenue, significant progress and design wins. And so the teams are really hitting their stride.

And the key takeaway, Brian, is that it just supports the sequential momentum that is building and that is broad-based based on structural drivers that are not only -- some of it is market, but actually, a lot of it is really innovation, commercial excellence, being at the right place, winning business with the right customers in the right markets, right? So that's the takeaway.

[Operator Instructions] Our next question comes from Rob Mason from Baird.

I think you made a comment, Matthijs, just around the robustness of the M&A pipeline and the capital raise kind of signaled that as well. As you think about your areas of priority, it seems like you're biased to medical. You've also talked about consumables, embedded software. Obviously, there's a lot of discussion around software, but embedded software seems to infer itself a high degree of stickiness. But could you just maybe elaborate on the filtering process you're going through to make sure anything along those lines has the right level of protection and moat around it? And how should we think about that? And also maybe just any comment on valuation fluidity there as well?

Yes, Rob, great question. So I think we've been pretty consistent in where the focus is and why, but let me kind of just go through that. Over the last decade under my tenure, we're really through the medical exposure to now close to 55% of revenue, up from 10%. So that direction of travel is expected to continue both organically and through M&A. So that's first and foremost. And we're working with all the key leading OEMs in both the life sciences as well as the medtech space. So we now have a competitive moat also around customer access and relationships. And the more and more products we can kind of offer our customers and the more and more solutions that -- or problems we can solve will be received very positively by the executives of those OEMs because they need capable suppliers that solve more problems for them and rather than educating individual niche suppliers, they're looking at suppliers like us that have the scale that have the regulatory and quarterly performance and sustainability to really work with them over the long term, yes.

So that's the context. Within that, of course, yes, we have a very strong franchise with the advanced surgery business, and that splits into 2. One is basically, the endoscopy and orthoscopy space, and we're starting to build category leadership around that, but that's only 10% of the minimum invasive surgery market, right? So if you think about it, there's huge expansion potential in surrounding applications to the same customer, right? So the same customer base. So that is one, and that will be received as very positive.

The second piece that I think we've now built a medical consumables business of 15% of revenue that's growing double digits, very strong franchise where you actually need quality and regulatory and operations jobs to deliver these products that mind you, they will be delivered in procedures, right? So you cannot really older on delivery performance because otherwise, patients will not get their surgeries and so that requires a certain level of scale and competence that we feel we now have built. So that's the second better. That's the competence area of medical consumables that we feel we can is a great jump-off point to add more competencies to that, right? So that's a very logical evolutionary next step.

And then there are some surrounding applications and competencies that can further build around that. But the third, on your third question, on embedded software, yes, I know there's a lot of chatter and concern around the whole software space but think about it as our intelligent subsystems where you have embedded software and hardware into subsystems. So you combine just the next layer on top of the hardware. That is what we're talking about, right? This is not the application layer. This is intrinsically combining hardware and software to create functionality, 30% of our business and probably 80% of our product launches are linked to a combination of embedded software and algorithms that work on the hardware, right? That is what we speak about. So there are certain businesses where we are very progressive around this, like the advanced surgery business, where almost everything is intelligent subsystems.

You heard me talk about the beam steering side, where we're now entering the business, entering the market with these new capabilities that quite frankly, achieved never before possible, let's say, capabilities that are actually 2 to 5x better than what is out there in the market just by combining the different competencies together so that's what we're talking about is more of an added competence on top of the hardware that we have. That is a vertical integration that solves problems cheaper, better, faster for our customers. So it's not -- and we feel that is very well protected. It requires some deep proprietary know-how of the application that is not public. And it really runs directly on the hardware, right, and then the firmware. So that, for us, that is what we're talking about. So it's -- we feel a very protected area, and we're growing rapidly in that area as we speak.

Rob, let me answer your question on the financial side.

So the first and foremost, a bolt-on transaction for us. We've been very consistent and has to have a return on invested capital that exceeds our cost of capital by year 2 and a larger 1 by year 5. The metric of return on invested capital for us is the after-tax cash flow has to exceed the investment from a ratio perspective, right? So think of it as like free cash flow accretive and growing at a faster rate than Novanta. So the very top level, we want businesses that are growing. They're top line faster than ours. We want gross margins that are non-dilutive, so therefore, 50% and above type of gross margins and that cash flow really growing at a faster rate. The other metric we tend to look at is the asset intensity of the business. So you can maximize your return multiple ways. The best way that we feel is doing that is acquiring a high cash conversion business. So as a conversion ratio higher than Novanta, meaning it's cash earnings, it seed, it's asset intensity and grow at a faster rate than Novanta is.

And then lastly, we're not looking to overlever the company. And so we try to keep that leverage ratio below 3, 3.5 Obviously, we'll bias to things that are less cyclical than our portfolio and, therefore, generate stronger alpha with less beta. We've been pretty consistent about that. But I think regardless of what type of deal we're looking at or the size of the deal that we're looking at, you should think of us as being highly disciplined around those metrics.

Yes. And then maybe just to put -- finer point to this, if you look at our Advanced Surgery business that we can agree is doing extremely well. I mean we followed exactly the same framework there, right? And just by cross-selling to joint companies or customers, sorry, further investigate innovation and further adding a Novanta growth system to that business. That business has doubled and will double again in the remaining part of the decade. So we feel we can add something to those companies with those returns that ever talk about. So that longer term, we can really drive these strategic opportunities and make those businesses better.

Understood. That's very helpful. Maybe I'll just ask a quick follow-up. You talked about how Kion has kind of outperformed plan thus far. I know that's a project oriented business to some degree and project pipeline has been pretty healthy there. But just what does the first quarter contribution look like in that business before it turns before it goes into the organic bucket.

It does help if you're trying to get at what's -- obviously, you could see the delta between the reported revenue and the organic revenue that we gave. That delta is driven pretty much all by the Kion acquisition, a little bit of FX in there, but for the most part, the Kion acquisition. You're right in the project business, it delivered about $9 million of incremental revenue. It has an element of project-based business, but it also has a recurring revenue stream associated with it as well. So each of the individual customers that we work with, we actually sell a software type of solution package to them that is brain test to purposes middleware. It's not an application. And so we control in all the data that we gather from those readers. And then that data gets sold on to the customer through a recurring revenue stream that they then go out and either mine themselves with artificial intelligence or buy some sort of package application solution that overlays onto it, to give them the insights that they're looking for to maximize those stores.

it's that concept and that the strategic element of it is that really got us attracted to the business and why we see the applicability in the hospital environment and why we're excited about that. I should mention, we did a very small -- you'll probably see it in the 10-K, minority investment into a similar business in Spain that has got frontline access to the hospital environment there to allow us to start beta testing our products in that environment and really understanding the best way to penetrate that market and deal with the regulatory hurdles around data privacy and in patient privacy and how best to package the solution to that marketplace. So we are making progress in the strategic core, which is around the medical field. We continue to feel that we are well positioned to do that.

And then simultaneously, the business is really strongly positioned in its base customers around retail, continue to make design win progress, continue to win new products, new customers and have that momentum. So the growth driver around that, we expect it to exceed the deal model. Not only did it do that in 2025, it will exceed the deal model in 2026. We feel very good that, that momentum has continued to be present.

And with that, everyone, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Matthijs for closing remarks.

Thank you, operator, and thank you, everyone, for your questions. In closing, as always, I would like to thank our customers, our shareholders and especially our dedicated employees for their ongoing support. We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you soon at our first quarter 2020 earnings call.

And with that, everyone, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to Novanta's Third Quarter 2025 Earnings Conference Call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you've not received a copy of our earnings press release issued last night, 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 forward-looking statements that we've outlined in our earnings press release issued last night and also 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'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered above expectations for the third quarter, beating our outlook for sales, margins and adjusted EPS. We continue to see solid sequential momentum in the business with a 3% increase in revenue, driven by investments in our commercial engine and innovation. Revenue reached a record $248 million, surpassing guidance, which represents reported revenue growth of plus 1% and organic revenue declines of 4%.

New product revenue grew by nearly 60% year-over-year. Customer bookings grew 17% year-over-year and 4% sequentially, reflecting an improving outlook. We also saw significant design win activity, up 50% year-to-date. Adjusted gross margins overdelivered at 46.5% and adjusted EBITDA margins was up above -- was above 23%. I'm very proud of our team's ability to successfully execute in a fluid macroeconomic and trade environment.

With the strength of our third quarter results and the sequential improvement we're seeing in bookings and revenue across all of our businesses, we're confident that we've turned the corner and will return to positive organic growth and double-digit profit growth in the fourth quarter. And with our strong momentum of our growth platforms, recent customer design wins and new product launches, we believe this sets us up well to deliver mid-single-digit organic growth for the full year of 2026.

Our long-term growth strategy remains focused on winning in markets with long-term secular tailwinds, such as AI-driven robotics and automation, advanced minimally invasive and robotic surgery, digital manufacturing and precision medicine. Novanta holds strong technology leadership positions in these areas, which are still early in their adoption. We built trusted long-term collaborative partnerships with the world's leading OEM customers in these applications by solving their most complex needs with our proprietary technology solutions, securing up to 10 years of exclusive and sticky design-in platforms.

While our products typically represent no more than 10% of our customers' bill of materials, they enable differentiation and innovation in their systems for their customers, improving clinical outcome, throughput, yield, cost per procedure or part or never before possible performance. Over the past decade, we have extended our proven business model into high-growth health care markets, medical consumables and intelligent subsystems featuring advanced embedded software. Today, medical markets account for 53% of Novanta's year-to-date revenue, intelligent subsystems contribute nearly 30% and medical consumables represent about 15% of sales, the latter growing at a high teens rate.

Looking forward, our strategic direction focuses on continuing to expand our business mix and technology leaderships in medical technologies, consumables and embedded software. By strengthening our portfolio in these areas, we're positioning Novanta to deliver sustainable mid- to high single-digit organic revenue growth with less cyclicality, ensuring resilience and consistent performance regardless of market fluctuations. We have prioritized commercial and innovation investments accordingly with a specific focus on our growth platforms of insufflators and pumps, robotic surgery technologies, intelligent physical AI solutions for connected care, warehouse automation, humanoids and precision robotics and also intelligent subsystems for laser beam steering and precision medicine applications.

We've launched 20 new products year-to-date in these areas and believe these growth platforms offer an additional $4 billion end market opportunity for Novanta by 2030. We are also investing in regionalized manufacturing, are deploying the Novanta growth system and a new ERP system while reducing our manufacturing footprint to build a strong foundation for growth and resilience.

In parallel to these organic investments, we are advancing our robust acquisition pipeline to expand our portfolio towards these same areas of medical technologies, consumables and embedded software. This will have a compounding effect on the sustainability of our growth and the resilience of our business model. We continue to work on multiple acquisition opportunities while maintaining our discipline on leverage and cash returns.

Now let me provide an update on the customer and market dynamics we're seeing. Our sales in minimally invasive robotic surgery markets remain exceptionally strong with high teens double-digit growth in our Advanced Surgery business, driven by new product launches, share gains in surgical robotics, robust patient procedure growth rates and hospital spending. This business supports our strategy by expanding our medical portfolio, boosting intelligent subsystem sales and driving recurring consumables income.

Our latest insufflator innovations set industry standards, improve patient safety and efficiently address new smoke evacuation requirements while optimizing surgical workflows. Thanks to our recent product launches in this area, Novanta is on track to achieve $50 million in incremental new product revenue in 2025. In the third quarter, we further extended our market leadership position by securing yet another major new design win with a large OEM for future generation insufflators, reinforcing our position as a trusted partner in this field. This ongoing customer adoption and innovation momentum strengthens our outlook for 2026 and our outlook that the Advanced Surgery business revenue will nearly double to $400 million by 2030.

Moving on, our robotics and automation applications continue to see strong demand as evidenced by the sequential revenue growth in the third quarter. Growth in this business is driven by demand for our products that support physical AI applications such as warehouse automation, precision robotics and humanoids. Robots surpass humans in speed and accuracy when analyzing complex data, but they often struggle to effectively navigate the physical world. Novanta has unique capabilities that enable the perception and reaction of precision robotics in this physical world and to do so safely.

We are excited about our recent design wins in the warehouse automation space, our momentum in surgical robotics and the ongoing development with multiple humanoid and warehouse automation players. We believe these physical AI applications are an important growth platform for Novanta, representing an incremental $1 billion of addressable market by 2030.

Turning to our advanced industrial markets. We saw continued improvement in the quarter as our customers are now back to normalized order patterns. This resulted in sequential growth in our Precision Manufacturing business and another quarter of double-digit growth of customer bookings position us well for further sequential revenue growth in the fourth quarter.

In this third quarter, we also saw a sequential increase in sales to China as our Chinese customers have grown confident in the progress of our in-region for-region manufacturing plants. Design wins in the Precision Manufacturing business also continued their strong pace, showing year-to-date growth of over 60%. We're starting to see customer wins in attractive areas such as additive manufacturing, driven by both aerospace investments and reshoring and applications supporting AI investments like advanced packaging and on-device AI compute with our intelligent light engine and scan system.

This growth platform represents an incremental $400 million of addressable market opportunity for Novanta by 2030 as customers continue to digitize and automate their manufacturing lines with ever higher demands for throughput and productivity at ever smaller form factor, tighter tolerances and quality levels.

Next, in advanced semiconductor applications, which represent roughly 10% of our revenue, we saw some early signs of an up cycle with wafer fab equipment growth expected to achieve mid-single digit next year. Our short-cycle sales remained strong off the back of new construction for data centers and other AI-related infrastructure.

Finally, speaking to life science equipment markets, which is mainly served by our Precision Medicine business, we were pleased to see the business show another quarter of sequential revenue growth in the third quarter, while we continue to work our way through consistent yet challenging end market dynamics. We've invested in intelligent RFID solutions through the Keonn acquisition, and we have added advanced machine vision technology offerings to our portfolio through our new commercial partnership. These steps are helping to support the sequential momentum we're seeing and expect to see going forward.

We continue to believe in the long-term opportunities in the life science equipment market and are seeing investments in early disease detection as a big driver of productivity in the health care industry. To conclude, I'm proud of our team's third quarter performance. We exceeded our expectations for sales, margin and adjusted EPS. Our solid momentum in our growth platforms, design wins and new product launches position us well for a return to positive organic growth in the fourth quarter of 2025 and for mid-single-digit organic growth in 2026.

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. Our third quarter 2025 non-GAAP adjusted gross profit was $115 million or 46.5% adjusted gross margin compared to $113 million or 46.2% adjusted gross margin in 2024. Adjusted gross margins were up 30 basis points year-over-year and up 40 basis points sequentially, which was better than our expectations, notwithstanding the increased cost of tariffs. As we stand here today, the cost of tariffs in our supply chain and the impact on gross margins has now been fully mitigated.

For the third quarter, R&D expenses were $24 million and approximately 10% of sales. SG&A expenses, excluding certain adjustments, were $44 million or 18% of sales. Non-GAAP adjustments included restructuring costs, ERP design costs and legal costs related to the insurance recovery claim. Adjusted EBITDA was $58 million in the third quarter, a 23% adjusted EBITDA margin, demonstrating growth of 2% year-over-year and 11% sequentially.

On the tax front, our non-GAAP tax rate for the third quarter was 24% versus 21% in the prior year. Our tax rate increased year-over-year mainly due to changes in jurisdictional mix of pretax income. Our non-GAAP adjusted earnings per share was $0.87 in the quarter, up 2% versus the prior year and up 14% sequentially. Operating cash flows in the third quarter was $8 million compared to $23 million in the prior year. This was below our expectations, but is driven by temporary factors.

After successfully settling on a German tax audit, we paid more than $5 million in the prior period cash tax payments in the quarter, and this amount is up to $15 million year-over-year on a year-to-date basis. In addition, we have incurred roughly $15 million of restructuring and acquisition-related costs year-to-date with a significant portion paying out in the third quarter.

And finally, we had higher-than-expected inventory purchases to accelerate the ramp of manufacturing in our regional manufacturing centers. We believe these decisions better position the company in the fourth quarter and the full year 2026 to be more resilient and deliver stronger cash flows, and we expect to recover back to our normal levels of greater than 100% conversion to net income. We ended the third quarter with gross debt of $457 million with a gross leverage ratio of 2.2x and a net debt of $368 million, giving us a net leverage ratio of approximately 1.7x.

In the quarter, we purchased $14 million worth of company stock opportunistically and nearly $20 million of shares have been repurchased year-to-date. As we've recently announced, the Board of Directors has authorized an additional $200 million of capacity in our share buyback program. While acquisitions remain our top capital allocation priority, we will repurchase shares whenever the value of the stock gives us a cash return greater than our internal investments or acquisition investments.

Now I'll share some additional performance metrics and details of our operating segments. Novanta bookings increased 17% year-over-year and 4% sequentially with a book-to-bill of 1.03, indicating a stronger backlog and positive outlook. New product sales grew nearly 60% year-over-year, raising the Vitality Index to 23%. Design win activity remains strong with company-wide design wins up 20% year-over-year with more than 50% higher on a year-to-date basis.

In the third quarter, Automation Enabling Technologies segment revenue declined 3% year-over-year, in line with expectations. The book-to-bill in this segment was 0.96. However, bookings were up 15% year-over-year. Our Precision Manufacturing business, which serves the industrial equipment market, saw a year-over-year revenue decline of 7% in the quarter. However, this business saw sequential growth of 3% and double-digit growth in both bookings and design wins, demonstrating building momentum.

In our Robotics and Automation business, revenue was roughly flat year-over-year and grew 3% sequentially. This was also in line with our expectations. We continue to see solid outlook in this business with resiliency in demand for advanced robotic applications and strength in short-cycle semiconductor applications tied to data center investments supporting AI.

For the Automation Enabling Technologies segment, adjusted gross margins were above 48%, approximately flat year-over-year, driven by factory productivity and favorable product mix. In addition, we fully offset the cost of tariffs and temporary redundancies and overhead costs as we execute on our regional manufacturing plans. New product revenue for the segment nearly doubled year-over-year and customer design wins grew 30% on the back of both our innovation and stronger commercial executions by our teams. In addition, the Vitality Index was in the high teens percent of sales, up double from where it was last year.

Moving to the Medical Solutions segment. Revenue in this segment was up 6% year-over-year. This segment saw a book-to-bill of 1.1 in the third quarter, and bookings were up 19% year-over-year and up 14% sequentially on the back of record new product launches. New product sales in the quarter grew by over 40% year-over-year, and the Vitality Index in this segment was nearly 30% of sales. Our Advanced Surgery business experienced 17% growth year-over-year, driven by both strong patient procedural growth rates in health care on a global basis and from the launch of our second-generation insufflators, which have received overwhelming market acceptance and adoption. These growth dynamics are expected to continue into the fourth quarter and well into 2026 and beyond.

In our Precision Medicine business, which serves the life science and multiomics markets, sales declined 4% year-over-year, but grew sequentially by 3%. This business is expected to continue to improve sequentially in subsequent quarters as we work through some of the challenging end market dynamics.

In the Medical Solutions segment, advanced gross margins -- adjusted gross margins were approximately 45% in the quarter, better than expected, which represented margin expansion of 70 basis points year-over-year and 130 basis points sequentially. This solid margin expansion comes from both factory productivity initiatives and from improving scale from our in-house medical consumables manufacturing facility.

Finally, our efforts to mitigate the cost of tariffs on our supply chain and the impact on gross margins were successful and are now offsetting any incremental costs. In addition, our regional manufacturing initiative is on track and is being well received by customers. As a reminder, this initiative helps our customers avoid the increased cost of tariffs by manufacturing their demand in the regions in which they sell their products. The 11% sequential revenue growth in China, along with 17% growth in bookings, 60% growth in new product sales, 20% growth in design wins, all demonstrate the progress we have made here, not only for Novanta, but for our customers.

Overall, across all regions, we see gradual improvement in investment sentiment in the capital equipment demand as OEMs and end users adjust to trade policy dynamics. Nevertheless, while this market momentum continues to build, we continue to prudently manage the company's profitability, including following through on our cost reduction plans, which we announced earlier this year. These plans are on track, and we are seeing some savings this year with full savings run rating into 2026.

Now turning to guidance. Novanta is committed to delivering sequential revenue and profit growth driven by our innovation pipeline and our strong customer demand in our end markets. We are seeing improving momentum as evident by our revenue and bookings growth by the strong design win activity and our successful new product launches. As such, we now expect fourth quarter 2025 GAAP revenue to be in the range of $253 million to $257 million, which represents year-over-year organic revenue growth of 3% and reported revenue growth of 6% to 8%.

This guidance in the fourth quarter is in line with the current Wall Street consensus, and we are confident in this outlook. As a result, for the full year 2025, we now expect GAAP revenue to be approximately $975 million to $979 million, which represents roughly flat organic growth for the full year and 3% reported revenue growth. At the segment level, in the fourth quarter, we expect Automation Enabling Technologies to grow 1% year-over-year and up 3% sequentially.

Our Medical Solutions segment is expected to demonstrate up to 15% reported growth in the fourth quarter, which includes up to 11% organic growth year-over-year and sequential growth of 4%. This growth will come from continued strength in Advanced Surgery at growth rates comparable to the third quarter and from a sequentially improving Precision Medicine business.

For adjusted gross margins, we expect to achieve approximately 46% in both the fourth quarter and the full year. Excluding the cost of our regional manufacturing initiative, we should be on track to achieving our goal of 100 basis points of gross margin expansion this year. We expect R&D and SG&A expenses in the fourth quarter to be approximately $69 million to $70 million and for the full year to be $276 million to $277 million. This represents roughly 28% of sales. This guidance excludes expected costs associated with the design and planning phase of the standard ERP system, which will be deployed over the next few years and further supports our footprint consolidation and regional manufacturing initiatives.

Depreciation expense, which was approximately $4 million in the third quarter, will be similar in the fourth quarter and will be approximately $16 million in the full year. Stock compensation expense, which was below $7 million in the third quarter due to onetime adjustments to certain long-term equity grants will be approximately $11 million in the fourth quarter. And so for the full year would be roughly $33 million. For adjusted EBITDA in the fourth quarter, we expect a range of $62 million to $65 million, which represents 18% to 24% growth year-over-year.

For the full year of 2025, we expect EBITDA to be $222 million to $225 million or approximately a 23% EBITDA margin. Interest expense, which was $6 million in the third quarter will be similar in the fourth quarter and expected to be roughly $24 million for the full year of 2025, excluding any material changes in debt balances. We expect our non-GAAP tax rate to be around 22% in the fourth quarter and for the full year. Diluted weighted average shares outstanding will be approximately 36 million shares.

For the fourth quarter, we expect diluted earnings per share to be in the range of $0.87 to $0.93, growing 14% to 22% year-over-year. For the full year 2025, we expect adjusted diluted earnings per share to be $3.24 and $3.30. Cash flow conversion in the fourth quarter should improve versus the past few quarters as we stabilize our inventory levels as we move beyond some of the large timing-related payments made in the third quarter. For the full year, we expect to achieve a goal of hitting cash conversion of greater than 100% of GAAP net income.

Overall, our latest full year guidance is in line with current Wall Street consensus. And looking ahead to 2026, based on our view of the sequentially improving demand environment, we expect to achieve a baseline of mid-single-digit organic growth for the full year. Of course, in early 2026, we will give you another update with additional details. But given the momentum, we wanted to share our initial views now. And finally, with a strong balance sheet and robust pipeline, we are well positioned to accelerate our acquisition strategy.

In summary, we remain confident in our long-term strategy and business model. We see growing momentum, which will help us return to organic growth in the fourth quarter and maintain our organic growth trajectory into next year. We are excited about our new customer wins, the success of our new product launches, and we continue to make strong progress in high-growth markets, particularly in medical technology markets and physical AI robotic markets. We remain focused on executing with excellence in our strategy and our top priorities no matter what the market environment brings.

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

[Operator Instructions]

And our first question will come from Lee Jagoda of CJS Securities.

So Matthijs, last quarter, you talked about some exciting contracts with a robotics retail customer. Can you give us any update there in terms of how that's trending and where you see that relationship evolving with that customer over time?

Yes. Thanks, Lee. So we -- last quarter, we spoke about multiple design wins. One, I believe you're referring to is the warehouse automation, a large e-commerce player, actually the world's largest e-commerce player. Yes, we're very excited about that win. And I think we're in very early stages still. The deployment will start in 2026 and will grow from there and we will hit really crescendo in '27, '28. Of course, the exact deployment is driven by our customer, but I couldn't be more excited about it. So consistent with what I reported in last quarter in some of our bookings numbers, you actually see already some bookings from that customer.

Got it. And then a lot of the calls we're getting from investors are really focused around this nascent humanoid opportunity. Can you remind us the products that are most relevant on the humanoid robotics and how we should think about the potential for revenue and the ability to scale over time?

Yes. We said the combined physical AI, which is both robotics for warehouse automation and for humanoids is about $1 billion market opportunity for Novanta by 2030. So that's how we sized it. And the deployment will is, like you said, still very nascent and is expected to hit more crescendo in '27, '28. But of course, the design win activity is happening right now.

What I said in my prepared remarks is that robots need help in reacting to and operating efficiently and effectively in unstructured environments, so reacting to their environments like humans can. And for that, you need the perception of humans and you need the safety built in, in case something goes wrong. And so Novanta's unique capabilities are in creating a sense of touch and the combination of touch and reaction is what really Novanta brings, including embedded safety so that a robot when it malfunctions can basically collapse safely and not on humans.

And you can imagine that, that is a big thing in terms of the deployment and adoption of these type of technologies. We feel we're a leader in enabling that perception and safety and -- as well as that reaction speed. So the products are force/torque sensors, but also included our position sensors that are integrated in that into intelligent subsystems and servo drives, which basically intelligently and safely react to all the signals that are there.

And yes, you need these competencies in typically all the joints of a robot, whether that's in the wrist or the ankles or sometimes in other joints as well. And warehouse automation is just another form, right? So we all talk about humanoids, but you need the same type of, let's say, perception and reaction speed, of course, in warehouse automation, where you need to surpass the human's ability to pick accurately, right? And for that -- that's a pretty high bar. And for that, you need our technology. So hopefully, that provides some more insight in there.

I think the -- what we said last quarter and we -- what I still stand by is that the warehouse automation market is starting to get deployed right now. You got large players with a lot of capital and a proven use case. So that is what we see happening first. We're super excited about that. Humanoids is a little bit more, I would say, speculative maybe. The use cases need to kind of get proven still, but the speed at which this market is developing is unmatched, and you can see the improvements happening. So we're very encouraged by all the momentum there, although we're just in design-in mode, we don't see much revenue of that application yet.

Hopefully, that helps providing some color.

Yes. That's great. And if I could sneak one more in for Robert, and I'll hop back in the queue. Just in terms of the regional manufacturing footprint, how far along are we? And once we're fully transitioned there, how do you view the potential margin uplift from either current levels or levels prior to the transition for like -- for just this one item, understanding there's a lot of other moving parts going on at once?

Yes. No, I appreciate that. We obviously -- we're somewhere in the range of around 22 different manufacturing facilities. And so there is an opportunity over a period of time to build some scale into regional hubs and centralize that scale into regional hubs while reducing our overall footprint and overall cost structure. So it's roughly about 100 basis points of incremental margin expansion despite the fact that a traditional regional manufacturing initiative would result in duplication of manufacturing and duplication of cost structure. We have a unique situation where we can actually drive margin expansion by doing that consolidation.

And then, of course, once you're done with establishing that duplication of production in those regions, you're now making yourself resistant or resilient from any sort of future dynamics around trade, which helps our customers ultimately. In our situations, our customers end up paying the tariffs on our products when they import those products into the various regions. And so by manufacturing them in in-region for-region, you're helping them reduce their cost structure, which thereby manifests as higher demand flows for us.

And when do we think that gets completed?

Some of the initiatives we announced back in July will largely be completed by the end of the first quarter. Some are actually -- have already been completed. And so we are up and running in production in some of our facilities today. You see a little bit more so in China and our U.K. facility has started production already. I would say by the fourth quarter, we feel pretty good that the majority of it will be done. But largely by the first quarter, we feel like -- by the end of the first quarter, it will be completed with the first phase of it. There's additional steps we would take, but I would say the first phase of it, that is the majority of the effort getting completed by the end of first quarter.

The next question comes from Rob Mason of Baird.

I wanted to probe the perspective on 2026 around mid-single-digit growth. As you look across your businesses, I think it's probably a safe assumption. Advanced Surgery, curious maybe the most momentum into the year. I'm curious how you're thinking about robotics now from a year-over-year standpoint just for the year and whether -- does it have like double-digit growth potential and we should think about the Precision Manufacturing, Precision Medicine, just again, if we kind of run out with a gradual sequential, maybe there's flattish or a little bit of growth. I'm just curious how the kind of growth dynamics work among your 4 main business units?

Yes. I mean it's fair to say that the 2 higher growth category businesses that we'll have in 2026 will be the Advanced Surgery business and then the Robotics and Automation business, like those 2 businesses are trending in a nice trajectory. I think you'll see Precision Manufacturing continue to sequentially improve. That's what's happening now. It's gone from a double-digit decline to low single digit and they will return to growth next year.

So then the real wildcard is just our Precision Medicine business. The dynamics there are positive, particularly as we start to get into 2026, but the volatility in that end market raises some questions, which is why we established that guideline for 2026 as our kind of baseline of what we're seeing today. It is something that if there's one variable piece of our forecast, it's the Precision Medicine. I think our forecast takes into all the potential dynamics that we've been confronted with. And so we see that as our baseline growth for next year.

Sure. How should we be thinking about -- again, for 2026, how should we be thinking about, I guess, the reliance on new product launches that need to happen in 2026 versus those that occurred in 2025 that are -- would continue to scale and gain volume?

Yes. I mean, Rob, the way to think about it is basically current new product -- current product launches in this year continuing to build momentum. That is the majority of the growth momentum. Of course, we will launch multiple new products next year as well, about the same amount. But typically, the contribution is in year 2 after launch, so 2027, right?

So -- but yes, continue a very steady pace of new product launches. The majority contribution, of course, is from the big launches of this year that -- not all of them are full year. So they will compound in very nicely. So that's why we also feel comfortable with this guide. I will say maybe just if you take a step back and just look further out, right? We do feel that long-term growth algorithm of mid- to high single-digit organic growth is really building midterm.

And based on the strength of the growth platforms we talked about, us gaining share in customers and content, right, with intelligent subsystems as well as the medical consumables continue to drive double digits for the remainder of this decade, right? So those are kind of key drivers. And we believe mid-single digit next year is a good step up towards that.

And finally, I would just say is that the target growth markets that we've talked about are still early in their adoption, right? So about 15% of surgical procedures are performed robotically and approximately 40% minimally invasively with further runway. Penetration of physical AI and robotics, we just talked about it, still very early stages. And precision medicine, while challenged, I would say, short, maybe even midterm -- long term -- less than 5% of diagnostics use precision medicine and multiomic techniques today with less than 1% of the world's population being sequenced, right? So you do see longer term and continued very strong outlook for these markets. So I just want to reiterate that.

Sure. Just real quickly, last question, I'll hop back in the queue as well. We talked earlier in the year about, I'll just call it, trap revenue around just tariff dynamics. It was China, but it's really more of a, I guess, global phenomenon. Maybe it was a $30 million number. Can you just give us an update on where that stands? And have we seen more of that revenue come out in the second half? Or how to think about maybe what carries over to '26?

Yes. So I do think that, that provides -- the more we solidify our manufacturing footprint, the more that revenue starts to recover. You are starting to see the dynamics improve. So it's fair to say that some of the organic growth returning in the fourth quarter is a consequence of us establishing that regional initiatives already in China specifically and then a little bit into Manchester in the U.K.

But if you take a look overall, you just take a step back, you can look at the trajectory, we had solid growth in China on a year-over-year basis. We are seeing strong design win activity in China. We're seeing strong new product revenue in China. So we're seeing nice progress. And that is much more broad than we were anticipating. And so that -- those activities are suggesting a comfort with the new regional structure. You see the same dynamics happening across the company in Europe and in the U.S. and so -- despite the fact that the regional structure is not completed yet.

And so our customers are gaining confidence in the business and our initiative. They're gaining confidence that we're offsetting those costs or we're putting a structure in place to make ourselves immune to those on a go-forward basis. And that's evident in the rollout that you're seeing in the design win progress, the bookings progress, the uptick in revenue in China and so forth.

The next question comes from Brian Drab of William Blair.

I am at a little bit of a disadvantage because I had another earnings call at the exact same time, so I'm catching up. But in that outlook that you have for mid-single digits in 2026, what's the expectation for your DNA sequencing business and for the EUV and DUV business? Are those growth businesses in '26?

No. We -- let's start with DNA sequencing. We're actually not counting on growth in that business actually at all. And as a matter of fact, we are redeploying our resources to other higher growth areas. So in the guide, we're not actually counting on growth, if anything. So that's one. And I think on EUV lithography, we're just linked to our customer adoption. So we're very excited about the midterm there. The exact timing next year is a little too early to say. But again, probably later in '26 and then '27 starts to build nice momentum. So excited midterm, we'll launch when the customer launches with us. So...

So I would say in that case, there's no -- we're not factoring in any sort of individual customer taking off and to get to these numbers. This is a forecast that establishes a baseline based on the trajectory of the business as we exit the fourth quarter. So nice continued progress in Robotics and Automation, nice continued progress in Advanced Surgery, gradually recovering in Precision Manufacturing and then the Precision Medicine business just being a little bit -- let's say, we're being conservative at this stance until we can see some brighter signs of a stabilizing end market.

So there's not -- we're not -- we don't have anything baked in that says, okay, there's 1 or 2 large platforms that are going to take off, and that's going to drive the growth. This is the baseline number that we feel pretty good about.

Okay. And then the warehouse automation opportunity that you announced on the second quarter call, the $50 million opportunity over 3 years. Can you comment at all on how that might be recognized, the pace of that or cadence of that over the 3 years? And is that business expected to be at segment level margin?

Yes. So one thing I'll say is that we are seeing bookings now. We are seeing revenue materializing in 2026, and we will continue to ramp from there. It is a -- it could be a fairly sizable opportunity for us as we sized before. So we feel good overall. I don't want to get into its margin profile, knowing these are public calls and all that and the individual -- the company itself knowing exactly who it is. So I would just clear that.

I would just say that the Robotics and Automation business is a healthy gross margin business. It's got the healthiest gross margin business, and it's most differentiated technology. It's most differentiated technology is uniquely calibrated to serve these marketplaces. So the force/torque sensors, our inductive encoders, our optical encoders, our servo drives are -- have all been calibrated and uniquely designed to serve this physical AI space around mobile robotics, warehouse automation, humanoid-based applications.

We feel extremely strong about what we offer, our competitive differentiation and the market acceptance around those technologies, we're making great progress. And so it's one of the healthiest margin businesses we have. We don't see any reason why that environment -- that would change -- that dynamic would change anytime next year or any time into the future at this point.

Delivering customer value, right, in the process, which is, of course, the most important.

Right. I was just going to ask one more quick one. I think everyone appreciates you reporting the percentage of sales related to consumables. And given the momentum that you have in the insufflator business and the next-gen pump and some of the wins there and getting into robotic surgery with the insufflator, is that a -- is there any reason to not think that, that 15% kind of picks up modestly as we move forward into '26 and beyond?

Yes. I mean what we've commented on is that we see that category growing double digit for the remainder of the decade. So yes, it will be a more pronounced piece of our portfolio. I mean, what we're excited about is that we really build a competence here, right, at close to $150 million. This is really -- you can see this also in the margin profile. We built scale and competence and engineering capability. And so on the back of that, we think this is a great platform to grow and jump off into other applications, whether it's organically or inorganically, right? So you can expect us to further expand us into other areas organically and inorganically because of this strong beachhead that we've now established.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator, and thank you, everyone, for your questions. In closing, as always, I would like to thank our customers, our shareholders and especially our dedicated employees for their ongoing support. We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you soon at the upcoming investor conferences over the coming weeks and early in 2026. Thank you very much. This call is now adjourned.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. [Operator Instructions]. Second Quarter 2025 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to Novanta's Second Quarter 2025 Earnings Conference Call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you've 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'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered solid second quarter results, meeting or exceeding expectations for sales, margins and profit. Revenue reached $241 million, which represents reported revenue growth of 2% and organic revenue declines of 2%, surpassing guidance. New product revenue grew by over 50% year-over-year. Customer orders grew 10% year-over-year and 20% sequentially, reflecting a strengthening outlook. We also saw significant design win activity growing more than 150% year-over-year. Adjusted gross margins held at 46% and adjusted EBITDA margin was 22%, both in line with expectations. These results reflect the strength of Novanta's business model, team and culture and the power of using the Novanta Growth System to optimize company performance in a very fluid macroeconomic and trade environment.

And I'm proud of the team's strong execution of our tariff response strategy. Our long-term growth strategy remains focused on winning in markets with long-term secular tailwinds such as precision and AI-driven robotics and automation, advanced minimally invasive and robotic surgery and precision medicine. We built trusted long-term collaborative partnerships with the world's leading OEM customers by solving their most challenging needs with our proprietary technology solutions, securing up to 10 years of exclusive and sticky designing platforms. While our products typically represent no more than 10% of our customers' bill of material, they enable differentiation and innovation in their systems for their customers in terms of clinical outcome, throughput, yield, cost per procedure or part or never-before-possible performance.

In the last decade, our portfolio has evolved significantly. We've expanded into health care growth markets, which are now approximately 55% of our business. We have increased our recurring consumables revenue to approximately 15% of sales. And we have increased our revenue from intelligent subsystems with embedded software to approximately 30% of sales, which is margin accretive for Novanta.

We intend to continue to expand our portfolio into these areas. Now let me provide an update on the customer demand and market dynamics that we're seeing. Our sales to medical device markets remain exceptionally strong with patient procedure growth rates, hospital spending and our share gains driving sustained double-digit growth in our Advanced Surgery business in the second quarter and year-to-date. Our new product launches in surgical robotics and minimally invasive surgery applications are ramping very successfully. These products are designed to significantly enhance patient safety, improve surgical throughput and help meet new regulatory requirements as U.S. states and countries around the world pass legislation regarding surgical smoke evacuation.

Novanta is on track to reach $50 million of incremental new product revenue for 2025, mainly due to the strong outlook for the next-generation medical devices. Rapid adoption of these products supports our confidence that the Advanced Surgery business revenue will nearly double by 2030, up from $200 million in 2024. Medical consumables, a strategic focus for Novanta are expected to account for approximately 15% of sales in 2025 with ongoing double-digit growth rates.

Our success stems from long-term innovation investment and strong customer relationships, and we believe we now have the expertise and scale to expand into adjacent recurring medical consumable segments. We're also very excited to announce 2 major design wins in the second quarter in the minimally invasive surgery market. First, we won a new product program with one of the largest medical OEM customers to develop a third-generation insufflator device and consumables which will be launched in the next few years. This design win shown our strong long-term partnership with winning OEMs and our ability to provide leading-edge innovations over multiple generations of our products.

Second, with a separate medical OEM customer, we won a contract to develop a next-generation pump for their upcoming endoscopy tower. Our product will provide multifunctional pump capabilities along with proprietary sensing and seamless integration with other devices on the customer's tower. This represents our second major win of next-generation pumps with more in progress. Moving on, our robotics and automation applications continue to see strong demand despite the global trade disruptions as evidenced by the strong double-digit revenue growth in the second quarter.

Growth in this business is driven by demand for our products that support physical AI applications such as warehouse automation, precision robotics and humanoids. We expect sales into these applications to double in 2026 versus 2025 and then to double again in 2027. We believe these physical AI applications represent an incremental $1 billion addressable market for Novanta by 2030. To that point, we're excited to announce a significant contract signed in July with a leading e-commerce and warehouse robotics company. This represents a $50 million revenue opportunity over the next 3 years. Because of the timing, this design win will be included in our third quarter metrics and revenue will start in '26.

Taking a step back, the warehouse automation space is booming because of AI, labor shortages and latest advancements in physical AI sensor technologies. As a result, leading OEM players are aggressively deploying high conviction use cases. Novanta's proprietary technology offers precise touch and safe movement for robots, enabling smarter, faster and more efficient goods handling, critical capabilities for more modern warehouse operations. I'm also pleased to share progress in humanoid robotics.

This emerging field is in early development, and we're collaborating with over 10 leading humanoid players across North America and Europe. We're working with these players on multiple slots with significant content. We hope to announce specific design wins in the future as this market matures and these players finalize their product architectures. The same unique Novanta sensing and server drive capabilities that are used in warehouse automation and surgical robotics are also relevant in humanoids. So we have a competitive advantage with platform technologies relevant for multiple physical AI robotics applications.

This advantage has been built up over years with our growth playbook, consistent investment in innovation, combined with in-depth application know-how, targeted acquisitions and customer intimacy. Turning to other markets. Sales to industrial capital equipment saw declines year-over-year. This market is mainly served by our precision manufacturing business, which was affected by the impact of trade disruptions on customer demand, particularly in China. However, revenue has now stabilized at this lower level and bookings are rising at double-digit pace, both year-over-year and sequentially as customer inventories are mostly depleted and visibility improves.

Coupled with the new design wins more than doubling year-over-year for the second consecutive quarter, this positions us well for sequential revenue growth through the second half of 2025 and beyond. We're gaining traction in additive manufacturing for medical and aerospace applications and applications supporting AI investments like advanced packaging and on-device AI computing, which demand extreme precision throughput and miniaturization, areas where Novanta scan head subsystems excel.

Also, as supply chains regionalize, we see growth opportunities in new markets such as India, where we are expanding our commercial presence and have had recent success winning new customers. Next, in advanced semiconductor applications. In the near term, this market continues to show mixed signals, but appears to be in the early phases of an up cycle, albeit at a slow pace. Our short-cycle sales are still strong on the back of capacity build-out for new data centers and other AI-related infrastructure. As for our new content in deep UV and EUV applications, we're shipping small amounts of early units, and we will be ramping up as our customer ramps in the marketplace. We're designed in on an exclusive basis with this new content, and we expect significant sales growth over the next few years.

Finally, speaking to life science equipment markets, which is mainly served by our Precision Medicine business. This area saw a year-over-year decline caused by weak end market dynamics, including further disruptions at the U.S. NIH and FDA, weak biotech funding, cutbacks in pharma CapEx and trade disruptions. Due to these market disruptions, we're starting to see customers accelerate the replacement cycle away from barcoding and older instruments as they focus their new product development on more advanced technologies such as RFID and machine vision. Over the last 2 years, we've been aggressively shifting our product offering into these new technologies. For RFID, we feel that with the Kion acquisition, we've successfully positioned ourselves at the leading edge of new RFID solutions offerings.

And as for machine vision, we're happy to announce that in the second quarter, we entered into a new commercial partnership with a global leader in machine vision technologies to sell their embedded machine vision to OEM customers in the life sciences sectors. This partnership leverages our partners' leading machine vision technology combined with Novanta's deep domain and application knowledge of medical and life science applications, including our ability to provide tailored support to our OEM customers.

And so while the recent decline in revenue has been more than expected, we were encouraged to see our Precision Medicine business grow double digits sequentially in the second quarter, largely because of our accelerated transition to these more advanced technologies. Based on this, we believe the revenue will stabilize over the next several quarters and expect it to grow sequentially the remainder of this year. We continue to believe in the long-term secular opportunities in the life science equipment market. Early detection of root cause of disease will continue to be a big driver of productivity in the health care industry, and we will continue to execute our long-term growth playbook in this market, albeit that in the near term, we're managing the profit flow-through of this business and shifting our capital allocation plans.

Now I'll provide an update on our acquisition activities. The Kion integration is on track, and the business performance is already beating our initial expectations. Our short time with this team has proven their leading expertise in software development and RFID technology solutions. And they also have succeeded at winning a large new customer, which we believe will offer excellent near-term growth for the business, helping the second half sales outlook of 2025 with continued double-digit growth in 2026.

Looking beyond Kion, acquisitions remain a top priority for our team to continue to evolve our portfolio towards high-growth medical, more recurring consumable-based and more embedded software and intelligent subsystems. We continue to have a large and exciting pipeline of targets. Valuation levels are more attractive, and we believe that the near-term macroeconomic environment is an added catalyst to increase actionability. Our balance sheet is well positioned for additional transactions while maintaining our historical discipline in both cash returns and financial leverage. You should expect us to lean in hard to pursue additional transactions in the second half of 2025.

So to conclude, I'm very pleased with our second quarter performance. We met or exceeded our expectations for sales, margins and profit, driven by double-digit growth in our Advanced Surgery and Robotics Automation businesses, underscoring our strategic focus on high-growth markets and the diversity of our portfolio. Our new product launches continue to ramp, and we remain confident in achieving our goal of $50 million incremental new product sales.

We also had 10% year-over-year growth in bookings, which, combined with the new product ramp sets us up for steadily increasing sequential growth in 2025. We're also well positioned for growth in 2026 based on multiple significant new design wins in high-growth end markets such as minimally invasive surgery and also physical AI applications like warehouse robotics.

And finally, the Kion acquisition is off to a great start, and we have an additional large pipeline of exciting actionable acquisition targets. We remain focused on our top 3 priorities for Novanta in 2025.

First, ramp all our planned new products and achieve the $50 million growth from new products this year.

Second, deliver strong profit margin and cash flow performance by driving NGS deep into our culture and operations and successfully execute on our tariff response playbook.

And third, acquire additional companies that fit our strategy at attractive returns and in a manner that evolve our portfolio to secular growing and resilient markets and business model.

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. Our second quarter 2025 non-GAAP adjusted gross profit was $111 million or 46.1% adjusted gross margin compared to $110 million or 46.6% adjusted gross margin in the second quarter of 2024. Adjusted gross margins were down year-over-year, but flat sequentially and in line with our expectations despite the increased cost of tariffs. For the second quarter, R&D expenses were $25 million or approximately 10% of sales. Second quarter SG&A expenses, excluding ERP design costs, were $45 million or approximately 19% of sales. The ERP design costs for the quarter were approximately $1 million. Adjusted EBITDA was $52 million in the second quarter or 22% adjusted EBITDA margin, demonstrating growth of 2% year-over-year.

On the tax front, our non-GAAP tax rate for the second quarter of 2025 was 21% versus 20% in the prior year. Our tax rate increased year-over-year, mainly due to changes in jurisdictional mix of pretax income. Our non-GAAP adjusted earnings per share was $0.76 in the second quarter, up 4% versus the prior year. Operating cash flow for the second quarter of 2025 was $15 million compared to $41 million in the second quarter of 2024. The year-over-year decrease in operating cash flow was primarily driven by the timing of tax payments, an increase in inventory purchases to mitigate the global trade dynamics, which were at their peak in the second quarter and from the acquisition of Kion.

We expect cash flow conversion rates to return closer to historical averages in the third quarter. We ended the second quarter with gross debt of $465 million with a gross leverage ratio of 2.2x, and our net debt was $355 million, giving us a net leverage ratio of approximately 1.7x. In the quarter, we acquired Kion Technologies for approximately $75 million. As a reminder, Kion combines proprietary RFID hardware with AI-enhanced cloud-based software to offer real-time inventory and asset management, filling a crucial software integration gap for better penetration into the medical markets, including hospitals. We also amended our credit facility in the final week of June, increasing its size to approximately $1 billion and adding a $350 million accordion feature, giving us nearly $1.4 million of borrowing capacity over the next 5 years.

This new pro rata bank facility gives us borrowing capacity to pursue our acquisition strategy while maintaining the debt leverage discipline we have practiced over the last decade.

Now I'll share some additional performance metrics and some details on our operating segments.

For the second quarter, Novanta had a 10% growth year-over-year in bookings and 20% growth sequentially and a book-to-bill ratio of 1.02, reflecting strengthening backlog and a strengthening outlook. We saw a continued strong pace of bookings in both our segments, demonstrating not only stabilization of demand, but also increased demand outlook for 2026 and the continued strong momentum of new product launches. In the second quarter, medical market sales represented 54% of total Novanta sales and advanced industrial markets represented 46% of total sales. New product sales grew by more than 50% year-over-year, and our vitality index climbed to 21% of total sales. We are seeing growth in new product sales across all businesses, but especially the Medical Solutions segment.

Through the first half of the year, we launched over a dozen new products, mainly focused on high-growth end markets in advanced surgery and robotics and automation. Also in the quarter, as we mentioned, we saw excellent design win activity with the company-wide design wins growing over 150% year-over-year. The second quarter Automation Enabling Technologies segment revenue grew by 4% year-over-year, beating expectations and driven by continued strength in the Robotics and Automation business unit, which was up nearly 16% year-over-year. The book-to-bill in this segment was 1.05, and bookings were up 8% year-over-year and 17% sequentially, giving us improving customer visibility.

Adjusted gross margin in this segment were approximately 49%, up 40 basis points year-over-year, driven by favorable mix, but partially offset by the increase in tariff costs. Both new product revenue and customer design wins doubled year-over-year on the back of both our innovation and stronger commercial execution by our teams. In addition, Vitality Index was in the high teens percent of sales, up significantly versus the prior year. Moving on to Medical Solutions. Revenue in this segment was roughly flat year-over-year. This segment saw a book-to-bill of 1 in the second quarter, and bookings were up 13% year-over-year, but up 26% sequentially on the back of record new product launches.

New product sales in this segment grew by over 30% year-over-year, and the vitality index in this segment was over 25% of sales in the second quarter. Our Advanced Surgery business experienced 17% growth year-over-year, driven by both strong patient procedural growth rates in health care on a global basis and from the launch of our second-generation smoke evacuating insufflators, which has received overwhelming market acceptance and adoption. These growth dynamics are expected to continue for the remainder of the year and well into 2026.

Conversely, our Precision Medicine business, which serves the life science and multiomics markets experienced a 13% decline in sales year-over-year.

However, sequentially, the business grew 10% and is expected to continue to improve sequentially in subsequent quarters. Adjusted gross margins in this segment were approximately 44% in the quarter, flat sequentially and in line with the expectations for slightly higher tariff costs, which we expect to mitigate further in the third quarter.

Finally, moving to guidance, let me give you an update on our tariff response plan. Speaking first, the impact of tariffs on our supply chain, our cost mitigations are largely on track, and we continue to work on efforts to accelerate our plans. With some of the recently announced trade deals at higher-than-expected permanent tariff rates, we are seeing approximately a $4 million net impact from tariffs year-to-date on our cost of sales. However, we continue to make strong progress with both tariff mitigation strategies and cost mitigation strategies to further reduce the impact in the second half.

Next, to address the matter of impacts on tariffs between the United States and China, while tariffs have remained paused between the 2 countries, there is optimism of trade agreement being reached quickly. Our customers in China continue to be cautious with placing committed purchase orders on goods from our U.S. factories. As such, we are working with them on accelerating our plans to shift production to non-tariff regions and are exploring further short-term mitigation strategies to minimize their risk of ordering products from us. While Chinese customers ordering product from our U.S. factory has been muted, design win activities with our Chinese customers have accelerated, which we believe signals to us that our Chinese customers have confidence that we have the right tariff mitigation strategies to reduce their costs and risks and that they are excited about our new product innovation and what it can do for them in their markets.

In addition, demand for our products manufactured in China, which is our in-China-for-China strategy, accelerated in the quarter, which drove our total China sales up 15% year-over-year in the quarter. And finally, due to the fluid and ever-changing nature of the global trade environment and the resulting implications on end market demand at the end of June, we launched our cost reduction plans that we had previously announced, including changes that support the regional manufacturing strategy. Over the long run, we expect these actions to structurally improve our costs by simplifying our operating model, allowing further expansion of our gross margins while permanently minimizing the disruptions from tariffs on our products and for our customers.

The total restructuring charges related to this program are expected to be in the $20 million to $25 million range, with the bulk of the savings run rating in the fourth quarter of 2025 and into 2026.

Novanta is committed to deliver sequential revenue and profit growth driven by our innovation pipeline, robust customer demand in secular growth markets and operational discipline including our cost reduction efforts and the regional manufacturing strategy. Despite the rapid changes in tariffs and trade agreements, we believe we have navigated this well and have quickly adapted to the environment. After several years of investing heavily in R&D to deliver breakthrough innovations to our customers, the results of those efforts are materializing in our financials, in our design wins and in our new product revenue. And with a stabilizing demand environment as evident by our bookings growth, we believe we are well positioned to accelerate our organic growth initiatives further when the macroeconomic tailwinds improve.

While trade dynamics could further disrupt our outlook, increased visibility from our customers is giving us confidence to reissue full year guidance, albeit with some caution. As such, we now expect full year 2025 GAAP revenue to be approximately $970 million to $985 million, which represents overall revenue growth of 2% to 4%. For adjusted gross margins, we expect to achieve approximately 46%. This outlook includes the cumulative impact of expected tariff costs and the associated temporary redundancy in costs from our regional manufacturing strategy.

Excluding those extra costs, we would be on track to achieving our goal of 100 basis points of gross margin expansion this year. This resilient margin performance is thanks to the Novanta Growth System, the business system that is allowing us to maintain our financial commitments despite the cost headwinds. We expect R&D and SG&A expenses for the full year to be approximately 28% of sales or between $274 million and $278 million. This guidance excludes expected costs associated with the design and planning phase of a standard ERP system, which is scheduled for a phased deployment starting in 2026 and taking place over multiple years, further supporting our footprint consolidation and our regional manufacturing strategy.

Besides improved scalability and resiliency benefits, this also supports our gross margin expansion plans and operating expense reduction plans. Depreciation expense should be approximately $16 million for the full year. Stock compensation expense should be approximately $37 million for the full year, which includes the change in incentive compensation plans, which we made for all our incentive-based employees, aligning them tightly with our strategy, driving strong employee engagement and aggressively driving shareholder value while also reducing near-term cash needs.

For adjusted EBITDA and for the full year of 2025, we expect to be $225 million to $230 million or approximately a 23% EBITDA margin. This represents year-over-year growth of 7% to 10%. Interest expense is expected to be roughly $23 million for the full year of 2025, excluding any material changes in debt balances. We expect our non-GAAP tax rate to be around 22% for the full year. We are still analyzing the effects of the new corporate tax law changes and as such, have not incorporated these changes fully into our full year rate. Diluted weighted average shares outstanding will be between 36 million and 37 million shares. For the full year 2025, our adjusted diluted earnings per share, we now expect to be approximately $3.22 and $3.36, representing growth of 5% to 9%. Finally, we expect strong cash flow for the full year from both lower cash taxes in the second half as well as better inventory management and stronger profit.

Moving to the third quarter of 2025. We expect GAAP revenue in the range of $244 million to $247 million, which represents a year-over-year change in reported revenue growth of flat to up 1% and sequential growth of 1% to 2%.

At the segment level in the third quarter, we expect Automation Enabling Technologies segment to [Technical Difficulty] flat to low single-digit decline year-over-year, caused largely by lower exports from U.S. factories to Chinese customers, something we expect to better mitigate in the fourth quarter. We expect this segment to grow sequentially 1% to 2%. Our Medical Solutions segment is expected to demonstrate mid-single-digit growth year-over-year and up sequentially approximately 3% from continued strength in Advanced Surgery at growth rates comparable to those demonstrated in the second quarter and from a sequentially improving Precision Medicine business.

Moving on to adjusted gross margin for the third quarter, we expect to be at nearly 46%. This outlook includes the cumulative impact of expected announced tariffs as well as some near-term redundancy costs from our regional manufacturing strategy, which we expect to overcome in the fourth quarter. We expect R&D and SG&A expenses in the third quarter to be approximately $68 million to $69 million. Similar to our full year guidance, we have excluded expected costs associated with design and planning phase of our standard ERP system. Depreciation expense, which is approximately $4 million in the second quarter will be similar to the third quarter.

Stock compensation expense was $7.5 million in the second quarter will be nearly $11 million in the third quarter. This increase in quarterly stock compensation expense is driven by both the retention and incentive equity awards associated with the Kion transaction as well as the in-quarter impact of the change of incentive compensation plans, which we discussed earlier. For adjusted EBITDA for the third quarter, we expect a range of $57 million to $60 million. Interest expense, which was $6 million in the second quarter, will be similar in the third quarter, and we expect our non-GAAP tax rate to be around 22%.

For adjusted earnings per share, we expect a range of $0.78 to $0.85 for the third quarter. Finally, we expect third quarter cash flows to rebound versus the second quarter and return to a cash conversion rate closer to the historical averages we have demonstrated. This updated outlook considers our latest view of the end markets, the continued successes of our new product launches, foreign exchange rates based on the second quarter and the signed tariff agreements, trade agreements between the U.S. and its trading partners as of July month end. However, in this environment, the dynamics of both trade and foreign exchange as well as government-sponsored funding and regulatory disruptions is ever evolving and therefore, subject to change.

But we continue to have confidence in our ability to navigate these dynamics and adapt quickly. And finally, with improvements to both our core business and long-term visibility to customer demand, along with a strong balance sheet and strong credit facility, we are well positioned to accelerate our acquisition pipeline with more meaningful and impactful acquisitions. Given our current acquisition pipeline, we feel confident in executing a transaction by year-end.

In summary, we are confident in the fundamentals of our business, the long-term strategy and our business model remains intact. We are excited about our new customer wins and the success of new product launches. We continue to make strong progress in high-growth markets, particularly in medical markets and physical AI robotics markets. As a company, we remain focused on controlling what we can control and executing with excellence on our strategy and top priorities, no matter what the market environment brings.

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

[Operator Instructions]. Our first question will come from Lee Jagoda of CJS Securities.

I guess, Robert, just to start, can you break down your revenue guidance and you can use the midpoint, I guess, in terms of growth from Kion, the impact of FX and then the true organic growth underlying?

For the second half or for the full year?

Full year or second half, either one or both?

Okay. Well, for the full year, the reported -- on an organic basis, it will likely be down 1% to up 1%, somewhere in that range.

And then the -- and what's the FX implied impact or benefit?

The same FX impact that we had in the second quarter. So we just carried that forward for the full year.

Got it.

So the delta is really the Kion acquisition. To be fair, it has done significantly better than expected.

Got it. And then I was hearing all the color around the new products over the next several years was really good and interesting earlier. Given you kind of have pretty good visibility about your product road map, what do you think are the biggest drivers of organic growth in 2026 in terms of the new products independent of whatever the market is going to do?

Yes. Lee, this is Matthijs. So basically a continuation of the advanced surgery product ramps, right, because we are basically having the first year of ramps this year, and that will continue to expand. So that's one. Secondly, the physical AI, so basically the AI-enabled robotics market, so warehouse automation, you heard us comment about a $50 million contract what we've won there, where we see, yes, rapid deployment of robotics in advanced warehouse automation applications.

And these robots need a sense of touch and a sense of fast and safe movement, and we have unique capabilities to help in that application. And third, we see, let's say, related applications, humanoid still will be small, but what we commented on is that the overarching industrial physical AI applications will double in '26 versus '25 and then again, double again, be it from a small base, but that kind of tells you that we're growing.

And then finally, we are seeing, let's say, very, very strong design wins that will start to ramp. So at the company level, 150% year-over-year. Now they won't all ramp in '26 fully, but they will start to ramp, and that's the visibility we have, again, a wide variety of applications.

I commented on let's say, additive manufacturing driven by aerospace and medical. What you see is that, of course, with the whole tariffs and trade environment, people want to produce locally. And actually, additive manufacturing is a very good way to do that. And so we're seeing some significant traction there. And we've won some business, some significant business there. But also what I would call advanced material processing applications that are actually supporting some of the on-device AI investments in advanced packaging related to advanced AI or related markets.

So those are a few areas that we see -- we're excited about that we commented on and that we see growing despite whatever the environment will bring. And it shows you that we're staying laser-focused on the secular growth markets no matter the environment. And then with the innovation and customer intimacy, we're very encouraged by everything that is happening there.

And then within life sciences...

One thing I'd add there -- sorry...

Yes, go ahead.

Sorry, Lee, go ahead.

No, no, go ahead.

The only thing I was going to add is that the Advanced Surgery business should continue to demonstrate the same level of growth, which is kind of the mid-teens type growth as we get into next year.

Our Robotics and Automation business should continue to participate as a consequence of new design wins and new product introductions, somewhere in that 10% type of range. And then if you just factor in that you're not going to see the same level of declines in our Industrial or Precision Manufacturing business nor the Precision Medicine business, that would give you a pretty good indicator of what 2026 is going to look like.

Well, and that's sort of where I was going to go next. So in Industrial and Precision Medicine, it sounds like you're seeing certainly some signs of improvement in the industrial and maybe at a minimum bouncing along the bottom in life sciences. So I guess, have we seen the low point for the year in your mind in those 2 areas? And sitting here today, are we looking at sort of a flattish 2026 for those end markets? Or could they still decline further?

Well, based on what we see today, and again, you never know with, of course, the trade changes. But based on what we see today, based on the bookings and the customer outlook, which is actually improving, right? Customer inventories on the industrial side have been depleted. And so we see 2026 backlog actually building on the industrial side, and we see the business sequentially improving in the second half of the year. So based on that, yes, we see that business has reached bottom and then sequentially improving from here.

The Precision Medicine also we commented that, that's more of a technology shift in addition to market dynamics. The market dynamics, we don't necessarily see improving in the near term, but we do see the technology shift based on the machine vision as well as the RFID transitions that we're making. We see that having a sequential improving effect on the business. And therefore, we see that business sequentially improving as well. So yes.

And then the outlook for life science is a little bit unclear, but what we do is we just focus on what we can control, which is those new technologies as well as we're aggressively managing profit flow-through as well as capital allocation, of course, to these areas that have really strong tailwinds like physical AI, advanced surgery.

The next question comes from Brian Drab of William Blair.

First, Robert, you touched on China and tariffs. Did you say specifically status? Did you talk about in the same context about the $35 million that was held up? And is that still $35 million at risk for the year?

Yes. The $35 million is factored into our guidance right now. So we haven't assumed that we're going to recover that yet. So I would take -- that's where we issued the guidance that I made a comment around with some caution.

So we're not seeing the order behavior yet from our customers in the second quarter. And as we enter the month of August, the same holds true. And that's largely just because of the uncertainty with how those tariffs would unfold. So when you're ordering product from a U.S. factory with a 90-day lead time, they can get themselves stuck in a position on a noncancelable purchase order where they'll be importing at an unknown expense to them because they don't know what the tariff cost is going to be.

Now that being said, what I see as an offset is the local -- first and foremost, we're growing in China, for China. So that strategy, which represents 50% of our sales into overall exposure of China sales is growing. And as a consequence, we saw total China sales up 15% year-over-year. So despite missing that, we got some -- we still got some aggressive growth happening. And then second, the design win activities with our Chinese customers did accelerate. So we are seeing signals from them to design our technology into new products, which effectively you would not do if you thought the situation was going to be permanent.

So effectively, our strategy of how we're going to mitigate tariffs is being well received by our customers, and they're being as patient as they can until we get those fully implemented. So now could we get that turned around by the fourth quarter? Yes, it's possible, not third quarter, but definitely by the fourth quarter. It's possible to get that rectified and start clawing back some of that revenue, but we haven't factored that in at this time until we have better visibility around the execution of that plan.

And of course, it's driven, Brian, by the transfer of manufacturing, right? So our customers, we've shared those plans. They're confident in our plans. That's why the design wins are continuing. And of course, the actual transfers are starting to happen in the fourth quarter, which is really the mitigation, right? So then it really depends how quickly can you rectify and ramp from there. But structurally, we're addressing it. It's really a timing issue that we're working through.

Understood. Are those design wins in China, medical, industrial, robotic surgery, did you say?

Mostly industrial.

Mostly industrial and robotics. Our Robotics and Automation business, of course, Matthijs went into some details around that. There's a lot of new products launched around that, but we're also seeing nice design win activities in our Precision Manufacturing business.

Okay. Can you say if any of those humanoids?

All are -- we've mentioned 10 humanoids from vendors or customers that we have. Those are -- we were very specific in the language saying that there were U.S. and European exposure. So I would say the bulk of our humanoid exposure today is in the U.S. and European markets. We'd be reluctant to say that there's anything in China at this point in junction.

Yes. Some, but not a lot, I would just say. And then -- and we're not banking on that, but there are other precision robotics markets, both surgical as well as kind of adjacent to warehouse automation that are getting traction and where we feel we got a very good offering, so.

Okay. And then just one more for now, I guess. Can you talk a little bit more about maybe the specific use case within the warehouse for the warehouse robotics win? And what type of technology are you winning with? Like is it force torque or servo drives, haptic? And then I've got one more piece to this question. Could this be much bigger than $50 million down the road?

Yes. So let me -- thanks, Brian. Let me kind of try to [ parse ] that out. So first and foremost, what you see is that vision alone is not -- will not do the trick in these really advanced warehouse automation markets where you're going to almost process goods faster than humans. And so you got to mimic humans in terms of touch. And so it's proven by one of the leader players that the touch is actually essential. And then the fast and safe reaction to what you're sensing and then turning that into motion, doing that safely is actually very complicated if you do that in a small form factor at the edge, meaning at the end of factor at where the action happens.

And so Novanta has unique capabilities to do this in a small form factor very precisely and reliably to the extent that the tremendous demands on these applications where you basically cannot drop a package for -- maybe you can drop a package like once in 24 hours, which means extreme accuracy. That's what we bring to the table. And that then provides that high conviction of these warehouse automation players to start deploying this because now it's actually possible to replace humans. So that is what that is. Of course, there is a massive amount of capital that is being deployed. That's all public. So what we like about it is, of course, the use case is there. It's proven in the warehouses. The capital is there. And so it will be a multiyear deployment cycle.

We've commented on -- and you know us, we're kind of conservative. We only will quote things that we have won and that we've contracts signed. So that's the $50 million. I do believe and we do believe that down the line, if you combine all these physical AI applications and you look at the served available market for us based on conservative estimates, that's about $1 billion market in 2030.

And we will -- we're aiming, of course, to get a decent chunk of that. So that's -- so we think it's a sizable opportunity down the line. We're allocating and deploying resources aggressively, to both ramp and continue our new product innovations, which we feel are leading in the industry. So -- and yes, so that is force torque sensing, that is servo drives, but it's also including encoders, let's say, all in a subsystem package that works in the different use cases for these OEM players and whether it's warehouse automation or humanoids or related applications, right?

These robots don't necessarily have to stand on 2 feet. That's maybe the last thing I will say. You see a lot of application-specific related applications that you see robots on wheels or you see them fix in the location. We're doing very similar smart tasks. So hopefully, that answers the question.

Yes, that was really interesting. And congrats on the warehouse win and all the other wins you announced this quarter.

The next question comes from Rob Mason of Baird.

Maybe just a follow on your last response, Matthijs. The -- when you were talking about the entire package of your offering into this market, force torque and servo drives and encoders, was that the case for this particular warehouse automation contract? Or was that just force torque because you mainly were referencing sensing?

Well, it's the sensing in their reaction. So it's actually -- it has the -- both the servo drives as well as the sensing capabilities. And again, we're commenting on this one player, but we've won multiple warehouse automation design wins that are a bit smaller than this, where we use basically the whole gamut of the different capabilities.

And it depends a little bit on the player, how much of one versus the other is being used. But I would say holistically, it's true that both in warehouse automation and humanoids as well as surgical robotics, actually, these capabilities are getting more important going forward. So the sense of haptic feedback in surgical robotics is a key capability. It's basically the same capability that gives the robot in the warehouse a sense of touch as well as the humanoid, right? And in all these applications as well, the low latency, meaning fast response safely.

So humans can work side-by-side with these robots safely. Embedded safely is not trivial, and we do that embedded into our server drives, which is unique at a very small form factor, super precise, very high power density, which means that small form factor, yes, very powerful. So it's all these things combined makes us uniquely qualified for these applications. So the short answer is both capabilities are included in these applications.

I see. I see. And just as you've talked about kind of the ramp in these products in '26 and '27, are you needing to add additional capacity? Do you have current capacity to serve this?

Yes. No, we do. On the other hand, this is -- and I'm glad you asked this question, it's a unique example of how the Novanta Growth System can really help to increase capacity very efficiently. So just -- we just completed a kaizen with over 20 people and just cutting lead times down by a factor of 3, increasing capacity by a factor of 4 to 5 without adding major capacity.

Now down the line, we see this ramp growing beyond that. And there, yes, we will have to automate and either own dog food, so to speak, right? Put automation in our lines to kind of get to these really high volumes. So the answer is yes, and we're using the Novanta Growth System to do this efficiently and reliably.

I see. And maybe just last question. One of the end markets you touched on, you said was mixed was around the semiconductor electronics area. I'm just curious, I mean, we have seen really over the past year, I guess, some pushes to the right in that industry. How does that factor into your second half guide around new products, whether that gets into the lithography space you're talking about? I'm just curious if you've had to shuffle some of the plans again around that?

Yes. I would say that any sort of risk associated with those applications has been factored into our second half guidance as well as the before mentioned China situation where we are not anticipating that revenue in our guidance to come back, although that's looking more and more possible as we get -- particularly as we start to look at Q4.

We are shipping units into those applications in the fourth quarter. So there are some units going out. They're not at the volumes that we were hoping for before. But we are -- we feel very good because we're still designed in on a sole-source basis into those applications. We've doubled the content that we've had from a per unit basis than we've had in prior periods. And then we have some backward compatibility with some of our technology.

So we feel very good that we have the right technology and the right application positioned on a sole-source basis that's positioned for growth. We're just waiting and anticipating as that market works through some dynamics that will allow those shipments to really ramp up to the volumes that we're hoping for and that have been communicated.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator, and thank you, everyone, for your questions. In closing, as always, I would like to thank our customers, our shareholders and especially our dedicated employees for their ongoing support. We appreciate your interest in the company, your participation in today's call. I look forward to joining all of you soon at our third quarter 2025 earnings call. Thank you very much. This call is now adjourned.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.