Earnings Call Transcript - NOVT Q3 2021

Operator, Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta 2021 Third Quarter 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.

Ray Nash, Corporate Finance Leader

Thank you very much. Good morning, and welcome to Novanta's Third Quarter 2021 Earnings Conference Call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chairperson and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you have not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our website at www.novanta.com. Please note, this call is being webcast live and will be archived on our website shortly after the call. Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings. We may make some comments today, both in our prepared remarks and in our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of this time. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of these forward-looking statements as representing our views as of any time after this call. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website after this call. I'm now pleased to introduce the Chairperson and Chief Executive Officer of Novanta, Matthijs Glastra.

Matthijs Glastra, CEO

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered another exceptional quarter. In the third quarter of 2021, we delivered above our expectations for revenue, bookings, and profit. We again hit new all-time highs for revenue and bookings with excellent operating performance. And in addition, we were very pleased to close the ATI acquisition and the newly rebranded IMS acquisition in the quarter, both of which exceeded our expectations for the third quarter. Those two businesses are a great strategic fit for Novanta, and we are excited to have their teams and product offerings as part of the Novanta family. Speaking in more detail through our third-quarter results, our company delivered approximately $178 million in revenue, representing 24% year-over-year revenue growth on a reported basis and 15% growth on an organic basis. This is the highest-ever single-quarter sales for Novanta due to exceptional execution by our teams and the contribution of our new acquisitions in a difficult environment. In addition, in the third quarter, we had an excellent operating performance with adjusted EBITDA of $40 million, which is up 34% year-over-year. This represents an EBITDA margin of nearly 23% of sales, which is up 160 basis points year-over-year. We are extremely pleased with and proud of how our teams drove exceptional operating performance using the Novanta growth system tools despite widely reported supply chain challenges. Adjusted diluted earnings per share was $0.75, which is up 79% versus 2020. So all in all, very strong results. We saw another quarter of record-breaking bookings in the third quarter with sequential bookings growth of 2% versus a very strong second quarter and year-over-year bookings growth of 84% versus the third quarter of 2020. We saw strong demand across all our segments with each segment having a positive book-to-bill in the quarter. In the third quarter, our overall book-to-bill was 1.32. We saw very healthy orders in many of our advanced industrial applications as well as most medical applications. Before moving on to other operating results, let me take a moment to talk about the global supply chain dynamics and how they're impacting Novanta. The shortages and other disruptions that we commented on last quarter have increased in magnitude and impact during the third quarter and have challenged our ability to meet customer demand within promised lead times. In addition, we saw a major factory disruption at one of our manufacturing sites during the third quarter, which Robert will comment on in more detail in a few moments. However, despite these challenges, our teams delivered record results. And I could not be more proud of and impressed by the tireless and committed efforts of all of our team members throughout the organization who have again stepped up to deal with these supply issues and to fight hard to keep our customers happy. Now let's turn to what we're seeing in our markets, where continued strength in industrial and microelectronics is now joined by strong performance in medical. In the third quarter of 2021, 53% of Novanta's total sales went into medical applications. Overall sales to medical applications grew 21% versus the third quarter of 2020 and grew 7% sequentially. During the quarter, we saw a very healthy pickup in orders and shipments to many of our medical OEM customers with particular strength in surgical robotics and DNA sequencing, both of which nearly doubled in sales year over year. Despite the strength, we see minimally invasive surgical procedures still at approximately 90% of pre-pandemic levels due to the effects of the Delta variant, particularly in the U.S. We expect that medical sales and minimally invasive surgery procedures to continue to grow as we finish the year, barring any further setbacks in the global recovery from the virus. Novanta sales to advanced industrial applications were 47% of total sales in the third quarter, and our sales continued to rebound across multiple application areas with sequential growth of 5% and year-over-year growth of 28%. Within this area, we're seeing excellent growth in industrial automation and robotic applications, which saw 23% growth year-over-year. We also continued to experience higher demand specific to microelectronics investments in 5G and high-speed networking and cloud-based infrastructure, as well as higher demand from EUV-based applications. We expect the increased microelectronics demand to be sustained through the end of 2021 and well into 2022. From a regional perspective, we saw strong demand across all major geographies in the quarter. We continue to see very strong growth from China, where sales grew 28% year-over-year. Sales in Europe grew 20%, and sales in the United States grew 27% year-over-year. Now let me touch on some of Novanta's strategic growth metrics. Design wins in the third quarter were double the prior year with multiple design wins in most of our businesses. We saw another major win in our minimally invasive surgery business this time expanding our addressable market into arthroscopy pumps, which is in line with the growth strategy we've spoken to the past few years. We continue to have more customer project demand than forecasted in this area. We are adding R&D resources to help execute these opportunities and expect the impact of these wins and investments to start to impact our sales over the next 2 to 3 years. We also saw strong design wins in our Photonics and Precision Motion businesses in high-growth application areas such as surgical robotics, laser additive manufacturing, micro-machining, and electric vehicle battery welding. Our vitality index, which is revenue from new products launched in the last 4 years, continues to be healthy at above 25% of sales for the third quarter, with new product sales growing over 30% year-over-year. We continue to invest in our innovation pipeline with terrific results. And for our NPI launches, year-to-date, we've launched 11 new products. And let me highlight one of the products launched in the third quarter, which is called Encoder Core. This product comes from our Precision Motion segment. It is a new variety of an inductive encoder, which is a type of a high-precision position sensor. The Encoder Core is very lightweight and compact, specifically designed to be easy to install and activate inside the OEM system. This new product will be very beneficial for applications such as surgical and industrial robotics, and is well suited for robotic systems of the future, which are required to be more compact, but also weightless. As far as our previously stated ambition to launch 25 products this year, we now expect we will fall short of this goal, with five of the launches shifting into the first half of 2022. This change in timing is driven by supply chain shortages and related delays at our customers. However, we do not see any material effect on the long-term growth trajectory of the company as a result of these delays. Next, I'd like to give a brief update on the ATI and IMS acquisitions. As previously announced, these transactions closed at the end of August, and we are actively working through the integration of both businesses. We could not be more pleased about the high level of engagement of the ATI and IMS teams. These are both fantastic businesses, which are an excellent strategic addition to Novanta, expanding our positions in high-growth markets. The businesses are progressing very well with strong post-pandemic tailwinds in robotics and automation demand. As a reminder, ATI develops, manufactures, and sells robotic changing systems, 4-stroke sensors, and collision sensors for the industrial, collaborative, and medical robotic application space. Their focus on robotic applications has positioned them to win in the marketplace with strong long-term secular tailwinds driven by continued penetration of new automation and robotics technologies. They offer proprietary intellectual property and unmatched expertise in their target applications, giving Novanta a significant foothold to allow us to expand content with our existing customers while also serving new customers and applications. As one example of their recent success, the ATI team is winning multiple electric vehicle production lines this year and was recently informed that their 4-stroke sensor has been endorsed as a preferred technology solution by FANUC, a leading robotic OEM. And even after these two excellent transactions, acquisitions continue to be the primary focus of Novanta's capital deployment, and we continue to work on an active pipeline of opportunities. So in summary, our third quarter was exciting and challenging with record sales and bookings and excellent operating results despite some significant disruptions in our supply chain and factory operations. Despite the short-term challenges, we feel very good about the rest of the year and are again raising our guidance for the year. We also continue to feel good about our long-term strategic positioning in both medical and industrial applications with long-term secular trends in robotics and automation, healthcare productivity, and precision medicine. So with that, I will turn the call over to Robert to provide more details on our operations and financial performance.

Robert Buckley, CFO

Thank you, Matthijs, and good morning, everyone. Matthijs discussed our revenue, so I'll start today by giving some additional details about the company results. Our third-quarter non-GAAP adjusted gross profit was $80.3 million or 45% adjusted gross margin compared to $61.9 million or 43% adjusted gross margin in the third quarter of 2020. In the third quarter, adjusted gross margins increased 190 basis points year-over-year. The strong results come as a result of ongoing work from our operating teams to drive the Novanta growth system deeper in our day-to-day work, allowing the factories to better leverage their costs and drive productivity. This improvement came in spite of the significant supply chain challenges and unexpected factory disruption in our Taunton optics facility, which resulted in a production stoppage. In relation to the Taunton facility, we have an aging infrastructure issue that caused our production in that facility to go down in the quarter. We have estimated the costs associated with this disruption at approximately 100 basis points to the overall Novanta gross margins. While production is now back up and running, we continue to expect to experience some additional costs impacting us in the fourth quarter. However, as we mentioned in the prior calls, we have made a more than $10 million capital investment in our new Taunton production facility. The keys to that facility were handed over to us last week. And we are preparing for a phased production move, which is expected to be completed by the end of the second quarter. In the meantime, we continue to make significant improvements in our existing production processes to minimize and mitigate future disruptions. In addition to the Taunton disruption and similar to what other companies are reporting, we continue to experience disruptions in our supply chain. The overall impact of these supply chain constraints resulted in Novanta shipping less product than we had anticipated and obviously below our customers' expectations. The overall impact of the Taunton disruptions and supply chain shortages had a negative impact on revenue in the mid-single-digit range. Despite this, we delivered more than 15% organic growth in the quarter, net of these reductions, and none of those sales were lost as they were rescheduled for future dates. While the disruptions continue to grow, we continue to find new ways to mitigate and minimize the impact to the company and our customers. That being said, we expect this theme to continue to stay with us through the next few quarters. Moving on, the third-quarter R&D expenses were $17.5 million or roughly 10% of sales. And third-quarter SG&A expenses were $31 million or 17.6% of sales. This quarter, R&D and SG&A expenses were artificially low on a dollar basis and as a percent of sales due to the partial quarter of the two acquisitions. Therefore, we're expecting a step-up in the fourth quarter related to having both acquisitions included for the full quarter. Adjusted EBITDA was $40 million in the third quarter of 2021 or 23% EBITDA margin. Our adjusted EBITDA performance beat our expectations and our previously issued guidance, mainly driven by the higher sales volume flowing through the profit and some effect from the partial quarter of operating expenses from the ATI acquisition. On the tax front, our non-GAAP tax rate for the third quarter of 2021 was 10%. This differed from the statutory rate driven mainly by jurisdictional mix of income, along with a significant windfall benefit from equity compensation. On a non-GAAP basis, adjusted earnings per share was $0.75 in the quarter compared to $0.42 in the third quarter of 2020, an increase of 79% year-over-year. The favorable results in our adjusted EPS were driven again by strong profit from higher sales and a more favorable tax rate versus the prior year. Third-quarter operating cash flow was nearly $14 million, which was in line with our expectations. As a reminder, the third-quarter operating cash flow was lower than we normally experienced because of two factors. The first was an $8 million earn-out associated with our Zettlex acquisition from a few years ago, which was paid out of operating cash flows versus financing cash flows. And the second reason was caused by the ATI and IMS acquisitions, where the income earned in the quarter from those deals did not yet generate the corresponding cash. The later issue is due to the timing of the transactions. We expect operating cash flow to normalize in the fourth quarter. In addition, CapEx was $6 million in the third quarter as a result of the progress in our new optics manufacturing facility in Taunton, United Kingdom. This new facility is the replacement manufacturing plant for the site that experienced the production line down issue, as we just discussed. Finally, in the quarter, we borrowed an additional $280 million on our revolving credit facility to close the 2 transactions. Since the deals were closed, we were able to use our cash balances to help start to pay down the debt by $20 million in the quarter, which resulted in ending the third quarter closed at $451 million and a net debt of $348 million. I will now turn to an update on the performance of the operating segments. Starting with the Photonics segment for the third quarter of 2021, our revenue was up 19% year-over-year but down 11% sequentially, despite the strong year-over-year performance, the Photonics segment was hit hard by both the Taunton factory disruption and supply chain shortages. The sequential decline in revenue and gross margin was nearly all caused by the Taunton factory disruption. Despite the challenges, the business continues to experience unprecedented customer demand in various industrial applications and DNA sequencing. Bookings were up 91% year-over-year, and the book-to-bill ratio was 1.46 in the third quarter. In addition, new product revenues stayed strong greater than 25% of sales in the third quarter, and total NPI sales were up 47% year-over-year. Design wins were doubled year-over-year, driven by excellent platform wins in applications such as laser additive manufacturing, e-mobility battery welding, and micro-machining. Turning to the precision motion segment, this segment experienced 77% year-over-year revenue growth and approximately 37% sequential growth in the quarter. This was heavily impacted by the new acquisitions. In the third quarter, these businesses contributed $11 million of sales, which represents the partial quarter and this beat our initial expectations. We're really pleased with the potential these businesses tell us and the new product opportunities that they help bring Novanta. Excluding the acquisitions, precision motion still grew an impressive 43% year-over-year. And booking more than double on a year-over-year basis excluding the impact of the acquisitions. The book-to-bill ratio on this segment was 1.22 in the quarter. Precision motion new product revenue doubled and was over 20% of sales for the segment. Design win activity in this segment also doubled year-over-year and was up 60% on a year-to-date basis. Finally, this segment saw more than 80% growth year-over-year from its customers in China. Combined with strong margin and profit performance, it's fair to say the precision motion segment is having a fantastic year so far. Finally, turning to the vision segment, this segment predominantly serves the medical end-market and experienced revenue growth of plus 2% year-over-year in line with the expectations of the business given the difficult comparisons with the prior year. As Matthijs mentioned, the volume of elective surgical procedures remained below pre-pandemic levels following the spike of the Delta variant virus across the world. The deferral of procedures is expected to continue to impact our revenue in 2021, despite the significant uptick in design win activities. However, the vision segment saw bookings growth up 43% year-over-year and a book-to-bill of 1.30. The vitality index in this segment remained above 30% of sales with new products being a key driver of the resilience we've been seeing in this business. Design win activities were especially good in the quarter, more than doubling the amount of activities from the prior year as the business closed on significant wins with several large medical OEM customers. This is a huge accomplishment and further solidifies the exciting growth prospects this segment has over the next several years. Turning to guidance, as we look at the fourth quarter, we continue to see strong demand from the advanced industrial sector with capital spending continuing a strong recovery. The medical sector is also recovering, although it is still somewhat dampened by the lingering effects of the pandemic. With the strong bookings and backlog progress, it remains very clear that our #1 challenge for the rest of 2021 will be the supply chain disruptions caused by material shortages and third-party logistics constraints. We expect the increased complexity and challenges we experienced in the third quarter to continue into the fourth quarter. And we are using all resources and tools to minimize the impact on our customers and our expectations. While we expect this headwind to continue, we feel we have solid visibility to again raise our full year guidance. Starting with revenue. For the fourth quarter of 2021, as we stand here today, we expect GAAP revenue in the range of $185 million to $195 million. For the full year 2021, this translates into GAAP revenue in the range of $693 million to $703 million. We are expecting to see year-over-year 25% to 32% revenue growth in the fourth quarter. This revenue range takes into account demand for our products, which remains strong as well as continued supply chain and logistics disruptions as we see them today. Energy disruptions currently affecting China and known disruptions with our customer production processes from their own supply chain challenges. In addition, the range also factors in some of the rescheduled demand from the third quarter, which we spoke to earlier. We expect continued strength with bookings, although we anticipate the book-to-bill will gradually normalize. On a segment level, in the fourth quarter, we expect continued strong double-digit growth in Photonics, somewhere in the mid- to high-teens organic growth range. The Precision Motion segment will have significant growth driven by the continued strength of the core business as well as a full quarter of the acquisitions. As a consequence, we expect sales to be approximately double the prior year on a dollar basis. Finally, we expect our vision segment to see low to mid-single-digit growth on a year-over-year basis, driven by continued strength in life sciences and in vitro diagnostics as well as gradual progress in our surgical sales. Moving on to adjusted gross margin. We expect gross margins in the fourth quarter to continue to hold at approximately 45% gross margins. Gross margins are impacted by the acquisitions with combined gross margins in the fourth quarter slightly below the company average and from the higher costs associated with the Taunton production facility disruptions. Both issues are temporary in nature. Gross margins for the full year 2021 are expected to be between 45% and 45.5%, representing over a 150 basis point improvement over 2020. R&D will increase in the third quarter to approximately $19 million to $21 million in the fourth quarter, mainly as a consequence of having a full quarter of the acquisitions as well as timing of some project spend on our key NPI programs. SG&A expenses in the fourth quarter will be approximately $34 million to $35 million, again driven by a full quarter of the acquisitions. Depreciation expense in the fourth quarter will be in line with the third quarter levels, at slightly more than $3 million, and stock compensation expense will be approximately $5 million in the fourth quarter. Amortization expense, which was $8 million in the third quarter, will be higher at nearly $10 million in the fourth quarter as a result of the newly acquired intangibles from the acquisitions. For adjusted EBITDA in the fourth quarter, we expect a range of $37 million to $41 million. For the full year of 2021, we expect adjusted EBITDA to be in the range of $147 million to $151 million. Interest expense, which was about $1.7 million in the third quarter, will be approximately $3 million in the fourth quarter as a result of the higher average debt balances from the acquisitions. We expect our non-GAAP tax rate to be around 19%, absent significant changes in jurisdictional mix of income and other variability of our eligible tax benefits. The increase in the tax rate from the current quarter is the consequence of not expecting any stock-based compensation windfall benefit because there are no expected vesting events taking place in the period. Diluted weighted average shares outstanding will be approximately 36 million shares. For adjusted diluted earnings per share, we expect a range of $0.60 to $0.67 in the fourth quarter, translating to $2.55 to $2.62 for the full year of 2021. Finally, we're expecting operating cash flows in the fourth quarter to return to prior period ratios to EBITDA despite the significant investments in inventory and the continued investments in our Taunton-based operations. As always, this guidance does not assume any significant impacts from foreign exchange rates. By all measures, 2021 is shaping up to be a record year for Novanta. We will achieve a record level of sales, adjusted EBITDA, and adjusted earnings per share. We also experienced record level of bookings activities, design wins, and new product revenues. And the teams are accomplishing this amidst some of the most significant pandemic-related challenges. Given all this, we feel great about the company position and our ability to sustain the progress. We remain very proud of the performance of our employees and their tireless efforts to help us be successful in a very challenging environment. And most importantly, we remain excited about the future and look forward to continuing to deliver on our commitments to our employees, our customers, and our shareholders. This concludes the prepared remarks. We'll now open the call up for questions.

Operator, Operator

Our first question comes from Lee Jagoda of CJS Securities.

Lee Jagoda, Analyst

So I just want to focus in on the Photonics segment for starters. And I think in the prepared remarks, you said that the impact of the facility issue was mid-single digit in total for the company. Was that mid-single digit percentage of sales or single digit millions of dollars? And I guess the follow-up to that would be, in terms of the margin guidance you gave for the Photonics segment, assuming we're up and running, what are the other issues impacting the margin there, if anything?

Robert Buckley, CFO

Sure. Let me break that into two questions. So the comment on the impact to revenue to overall Novanta related to not only the Taunton facility production line down, but also the supply chain challenges and shortages that we're seeing. So I combine the two issues because the Taunton facility only supplies internally for us, and so we consider that as part of the overall supply chain shortages. So the impact to organic growth was somewhere in the mid-single-digit range on a percent basis. So take that in that 4% to 7% type of territory. And that's a high number, I would say. It's a step-up from the second quarter. We're expecting something very similar to that in the fourth quarter. Your second question on gross margins. The gross margins in Photonics will effectively be flat from the third quarter to the fourth quarter. We don't have the line down event in the fourth quarter. But what we do have happening in the fourth quarter is the higher expense associated with keeping the production running. And then the second is that we now have the new Taunton facility done yet empty. And so we're carrying the redundant cost of that new facility or the old facilities, depending upon how you want to look at it into the fourth quarter. So that's going to take a few quarters in order to phase the production in without causing any sort of revenue disruptions. So while we pick up revenue, and you'll see revenue pick up in the Photonics segment, pretty substantially on a not only a year-over-year basis, but on a sequential basis, it doesn't correspond necessarily to margin expansion because we're carrying that extra cost.

Lee Jagoda, Analyst

And once we get past Q2 of 2022...

Robert Buckley, CFO

That will help us pick up gross margin.

Lee Jagoda, Analyst

Yes, I would say that with the old facility going offline and the new facility coming online, compared to what the business previously did in the high 40s range, is it contributing to gross margin in the latter half of 2022?

Robert Buckley, CFO

It would effectively restore the gross margins to what we saw in the first half of the year. This does not take into account any potential expansion from increased volume, but it would bring things back up in that area. The new Taunton facility was primarily designed to meet demand and volume rather than for margin expansion.

Lee Jagoda, Analyst

Got it. And then just shifting gears to the acquisitions, obviously, ahead of plan so far, which is great. If we think about those two acquisitions and their organic growth once things ramp under your ownership versus the organic growth that you would have expected from the legacy core business, is it same, faster, or slower?

Matthijs Glastra, CEO

Yes. Lee, this is Matthijs. So I think what we've commented on in the past is that we expect these businesses to grow mid- to high single digits, particularly the ATI business is, of course, benefiting from a post-pandemic tailwind of investments in robotics and automation. And that expands into general industry, but of course, also surgical robotics as well as electric vehicle production that, as we all know, is ramping very aggressively. So all these robots or automation solutions need the solutions of ATI and therefore, we expect ATI to show some very strong growth in the next coming years. And I would say the other acquisition, IMS, is predominantly in the lab automation and general automation space. So the lab automation is probably a mid-single-digit-ish growth. So overall, we expect both acquisitions to strongly contribute to our growth profile.

Operator, Operator

Our next question will come from Brian Drab of William Blair.

Brian Drab, Analyst

I want to clarify the gross margin. Robert, you mentioned that the factory cost decreased, which I believe resulted in a 100 basis points headwind in the third quarter. There are obviously many other factors at play. I would like to know if you could summarize everything you consider temporary in terms of headwinds to gross margin in the third quarter. What would the total headwind be?

Robert Buckley, CFO

Yes. The main reason we focused on the Taunton facility is that it faced an unexpected temporary issue. Without that issue, Novanta's overall margin would have been slightly above 46%. We view the supply chain disruptions as more long-term rather than short-term. We've been clear that they will persist not just through the end of 2021 but into 2022, and we don't expect them to ease significantly until at least the latter part of the year. Therefore, I wouldn't describe this as a temporary impact. The disruptions are affecting deliveries more than the margin itself. If we had a better supply of products, we would be seeing higher revenue growth than the 15% organic growth reported in the third quarter. The book-to-bill ratio remains strong in the third quarter and is expected to continue to be strong in the fourth quarter. Our focus is on meeting customer demand. As we conclude 2021, we will have the highest backlog level we have ever recorded. This solidifies our production commitments for 2022, but we must be aware that it results from not having all the materials available and not fully meeting customer expectations.

Brian Drab, Analyst

Got it. Okay. I'm sorry if I missed some specific comments. Can you discuss the DNA sequencing business and the Laser Quantum business? Over the last couple of years, it has been somewhat inconsistent. I'm just curious, as you look into the fourth quarter and into 2022, it appears that some major customers in that sector are experiencing significant growth. How do you see your business? Is there still some catch-up needed, or do you expect to grow alongside the industry? How does that dynamic work out as we progress through the next several quarters?

Matthijs Glastra, CEO

Yes, thank you, Brian. This is Matthijs. We mentioned in our prepared remarks that DNA sequencing is recovering to pre-pandemic levels with strong expectations for the full year. In the third quarter, revenues doubled compared to the previous year. The main factors driving this growth include the reopening of research labs, which is increasing demand, as well as the sequencing of COVID variants, which is providing immediate momentum. However, a more significant and encouraging long-term trend is that oncology testing is becoming the standard of care in therapy with DNA sequencing. We are witnessing DNA sequencing becoming more common in clinical applications, moving from research to clinical use, which we have always anticipated. This transition is gradual but clear. Looking ahead to our guidance for the fourth quarter, which reflects this positive momentum, we expect 2022 to be a successful year. Despite this, the adoption of DNA sequencing is still relatively low. Therefore, we remain very optimistic about DNA sequencing in the long run, even though there may be some short-term fluctuations due to specific quarter or customer factors. Overall, we are seeing more encouraging drivers in the long term. Additionally, in comparison to last year, where our sales were somewhat disconnected from those of our main customers, we have now aligned more closely. Our sales are increasingly matching market trends, and we aim to sell in accordance with our customer sales. I hope this provides helpful context.

Brian Drab, Analyst

Yes, that is very helpful. I would like to ask, as you engage with your customers and consider your vision customers in the surgical market, you mentioned that they have returned to about 90% of pre-pandemic levels. What are their plans? Do you have any insight into their expectations for 2022 in relation to pre-pandemic levels? Is there an expectation that we will return to pre-pandemic levels and possibly exceed them in 2022?

Matthijs Glastra, CEO

Yes. They are publicly discussing this. Q3 experienced a slight slowdown due to the Delta variant, particularly in the U.S. However, customers have mentioned that we can expect sequential growth in the fourth quarter and beyond as hospitals improve their ability to manage COVID cases while treating other patients. In our prepared remarks, we noted a gradual recovery ahead. Long term, there is a significant backlog of patients needing care, which will need to be addressed and will lead to further investments. We remain very optimistic about the mid- to long-term outlook for this sector of the business. In the short term, we may face some fluctuations for various reasons, but we are focused on the mid and long term. We are successfully gaining business in this expanding area, and we are excited to increase our investments as a result.

Operator, Operator

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

Matthijs Glastra, CEO

Thank you, operator. So to summarize, Novanta's performance in the third quarter of 2021 was superb. We had all-time highs for sales and bookings, and we beat our expectations for profit. We closed the two new acquisitions, which are performing very well, with strong engagement from the local teams. We saw another quarter of fantastic growth in design wins, and our innovation programs are healthy and progressing despite some minor delays. And all of this came in despite remarkable disruptions in supply chain and logistics, which our teams are fighting hard to manage every day. We're excited to see the continued strength and recovery in the global economy in the advanced industrial sector and also in the medical sector, and Novanta is just very well positioned in these sectors with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery, and Industry 4.0. And in closing, I would like to thank again our customers, our employees, and our shareholders for their ongoing support. I'm very grateful for the dedication and strong contribution of our teams of committed Novanta employees, particularly our supply chain and operations teams, who are working so hard to successfully mitigate shortages. And we appreciate your interest in the company and your participation in today's call, and I very much look forward to joining all of you in several months on our fourth quarter and full year 2021 earnings call. Thank you very much. This call is now adjourned.

Operator, Operator

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