Good afternoon. My name is Gary, and I will be your conference Operator today. At this time, I would like to welcome everyone to Novanta Incorporated's Special Announcement Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. 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. Hello, and welcome to this conference call. I'm Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is Matthijs Glastra, Chair and Chief Executive Officer, and Robert Buckley, Chief Financial Officer for Novanta. Earlier today, we issued a press release announcing that we have reached an agreement to acquire Motion Solutions. The press release also includes replay information for today's call. In addition, we have prepared slides to accompany today's call, which are available on the Investor Relations section of our website at www.novanta.com. 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 today. 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 today's forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. The reasons why we use these measures and the reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our third quarter 2023 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 third quarter 2023 earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website. As always, we will leave ample time for your questions at the end. So with that, I'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.
Thank you, Ray. Good evening, everybody. Welcome to our call, and thanks for joining us on such short notice. Today, we announce an exciting event for Novanta, the signing of a definitive agreement to acquire Motion Solutions. This acquisition will significantly advance our long-term strategy with attractive financial returns by expanding our presence in high-growth medical and life sciences applications with intelligent subsystems. In today's call, we will be referring to the announcement presentation, which you can find in the Investor Relations section of our website. Let's start with slide three. Motion Solutions is an excellent strategic fit to Novanta. They are a market-leading business which sells high-precision, customized precision motion, subsystems, and components, and is a trusted engineering partner to market-leading OEMs in medical, life sciences, and advanced industrial applications.
As a leader in their space, they have more than $85 million in annual revenue, selling into end markets, which are growing at high single-digit to low double-digit rates. Their customer base is largely centered on leading OEMs in medical and life science applications, which constitute nearly two-thirds of their sales. Motion Solutions has been in the marketplace for several decades and currently has over 110 long-tenured employees with a strong reputation for precision motion expertise, and about a third of them being highly skilled engineers. Turning to slide four, Motion Solutions designs and manufactures high-precision, customized subsystems and components with proprietary competencies in precision motion and advanced motion subsystem control and automation solutions.
Within medical and life sciences end market, we believe that intelligent motion subsystems are essential for sample positioning and alignment, which is a mission-critical task in nearly any precision medicine application. This makes Motion Solutions a critical partner to many leading OEMs in this space. We believe, by acquiring this business, that we will advance our strategy in a number of ways. Motion Solutions will increase and strengthen our presence in very attractive precision medicine applications that are growing high single-digit to low double-digit rates. The OEM supplier sticky business model in long lifecycle applications matches Novanta's business model in many ways. We will have potential to develop new and unique intelligent subsystems using our combined technology offerings.
Motion Solutions has a great team that has a high cultural fit with Novanta, which will make integration straightforward, and we believe we can achieve very favorable financial returns on this transaction, as Robert will discuss in a moment. Turning to slide five, Motion Solutions really is an excellent business and a strong fit with Novanta's strategy. They have deep and long-term presence in a very attractive secular growth applications within precision medicine, such as spatial biology, Ggenomics, proteomics, and DNA sequencing. The Motion Solutions transaction will give Novanta opportunities to offer new subsystem solutions to these attractive secular growth application areas, giving us sticky long-term growth in these markets. As discussed earlier, Motion Solutions expands Novanta's intelligent, customized subsystem capabilities. Their solutions are attractive to their customers because of their deep knowledge and know-how of the precision medicine application areas they are serving.
We are particularly excited about the potential of combining Novanta technology alongside Motion Solutions technology. We believe this combination will give us a strategic advantage, where we can offer OEM solutions they can't find anywhere else. Finally, we're especially excited to add Motion Solutions to the Novanta portfolio because the high level of synergy with Novanta's existing customer base. We will have the ability to cross-pollinate strong customer relations with one another, with the leading OEMs in the medical and life science end markets. Now, let me provide a bit more color on each of these points in the following slides. Turning to slide six, Motion Solutions is incredibly well-positioned within the medical and life sciences markets they serve. Their motion subsystems and components are mission-critical technology, which allows for extreme precise sample position and alignment of precision medicine applications.
The Motion Solutions team has very deep relations with many of the leading OEMs in this space, and build on the strengths of engineer-to-engineer collaboration on their products. They've had great success in getting design into multiple generations of their customer systems, with a strong track record of increasing their content with their top customers, advancing from components up to subassemblies and up to intelligent subsystems. We believe Novanta can build on this strength as a foundation for expanding our presence in these markets. Could you please now turn to slide seven? One of the fundamental principles of Novanta's strategy is to choose where to play. Our goal is to expand our presence in high-growth end markets, which have secular tailwinds for the next decade or longer. In this sense, the Motion Solutions acquisition is really a terrific match for our strategy.
The life science, medical, and automation end markets that Motion Solutions serves are all structurally growing at high single-digit to low double-digit rates for the long term. Motion Solutions is embedded with the winners in these markets with proprietary product offerings, and so we expect Motion Solutions revenue growth to match or exceed the growth of its underlying end markets for the foreseeable future. We believe the expansion into precision medicine markets provides a new avenue for growth for Novanta. We believe applications such as spatial biology, single cell, and other omics platforms, will drive the next frontier of transforming drug discovery, clinical development, and patient treatment in disease categories like oncology or neurology. This will be accretive to Novanta's current organic growth rate framework of mid- to high single-digits. As we turn to slide eight, Motion Solutions products are highly complementary to Novanta's existing product offerings.
Their precision motion subsystems and components will be able to be designed into even more advanced intelligent subsystems, sitting alongside current Novanta's technologies, such as light engine subsystems, advanced position sensors and precision motors, as well as detection and analysis components. The synergy between Novanta's customers and Motion Solutions customers will allow us to jumpstart new designs for market-leading OEMs, providing them unique, customized subsystems that solve more of their engineering challenges in their next-generation platforms. Could you please turn to slide nine? The Motion Solutions team is extremely talented and knowledgeable in their space, with a vast amount of aggregate design expertise. Their approach to innovation is very similar to Novanta's, with the objective being to solve complex problems for their customers, utilizing close collaboration between engineering teams, resulting in custom solutions that are specifically designed for the OEM's application.
Part of their success of collaborating with their customers comes from their close proximity to critical leading players in the life sciences space. Their location in California gives them close access to many of their customers, allowing for rapid co-development work. Motion Solutions facilities are state-of-the-art, with rapid prototyping capabilities and an impressive lab space for their engineering teams. We're extremely excited for the Motion Solutions team to join the Novanta family. We look forward to collaborating together to bring world-class solutions to our mutual OEM customers. We believe the Motion Solutions culture is an excellent fit with Novanta, making integration straightforward. I will now turn the call over to Robert to provide a few more details on the financial aspects of this transaction.
Thank you, Matthijs. If you please turn to slide 10. We have agreed to acquire Motion Solutions, a business with annual sales of roughly $85 million, for a purchase price of $189 million at closing, subject to customary purchase price adjustments and closing conditions, including U.S. regulatory approvals. Motion Solutions' actual in-year revenue contribution to Novanta's financial results will depend on the ultimate date of the closing of the transaction, which we expect sometime in the first quarter of 2024. Based on Motion Solutions' 2023 profitability, the acquisition's Adjusted EBITDA multiple to purchase price is roughly 12x.
We are excited to be inheriting a terrific management team with the business, and we expect to follow our practice of granting some equity-based incentives to the team to incent them to continue to deliver strong future financial performance, while also creating an ongoing ownership mindset that has served us well at Novanta. From a valuation perspective, we expect to exceed our return on invested capital hurdles by year three, which is sooner than we might have normally expected for a deal of this size. This return profile incorporates Novanta's current cost of debt. Pro forma gross leverage is expected to be approximately 2.6 x, with net leverage just above 2 x at close.
Based on our expected cash flows in 2024, we are well positioned to continue our strategy of acquiring businesses that strengthen our customer relationships, improve our value proposition to our customers, and to compound our financial growth. The anticipated future growth rate of this business of high single digit to low double digit makes the business accretive to Novanta's current organic growth profile. Initially, the Motion Solutions business will be dilutive to Novanta's current adjusted gross margins. However, this will be temporary, and we are developing plans to quickly deploy Novanta Growth System tools to the Motion Solutions organization immediately after closing the transaction to help drive margin improvement. With that, I'll turn the call back to Matthijs.
Thanks, Robert. So to wrap up, we're very excited about the Motion Solutions acquisition, its strong fit to our strategy, and its attractive financial returns. The signing of this agreement to acquire Motion Solutions signifies another important milestone in our strategic vision for Novanta. We're excited to expand our content in attractive precision medicine applications with intelligent subsystem technologies that give Novanta the ability to deepen our presence in secular growth medical end markets. The Motion Solutions team is extremely talented and shares our passion for winning with the leading OEM customers through innovation and deep application know-how. Novanta continues to invest in innovation and commercial capabilities to accelerate organic growth, combined with disciplined acquisitions. We are well positioned in medical and advanced industrial sectors with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery, and Industry 4.0.
The Motion Solutions acquisition fits in extremely well with this overall market strategy, and so we could not be more pleased. Thank you very much. We would now like to open it up for questions.
We will now begin the question- and- answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question is from Lee Jagoda with CJS Securities. Please go ahead.
Hey, good afternoon, and congratulations.
Hey, Lee. How are you doing?
Pretty good. So I guess maybe start with just some background on the transaction in terms of was it an auction or a negotiated process, and how long it's been on your radar screen as a potential acquisition candidate?
It's been on our radar for a number of years, I would say. We do have some relationships with them. We've done business with them fairly regularly over the last couple of years. I would say that to answer the first part of your question, it was not an overly competitive process that we went through, meaning that there were only really one or two of us really interested in making meaningful progress here.
Got it. And, I guess you answered part of my next question. It sounds like they are a current customer of Novanta. Can you maybe talk to the current overlap of the OEM customer base and even down to an individual product level?
Yeah. I mean, while we've been working very closely together over the last few years, I mean, actually, the overlap is very complementary, I would say. So I would not actually use the word overlap. I would just say it's, it's a very complementary transaction. We're very strong in certain customers where they aren't, and vice versa. And so it really deepens our collective capabilities of both cross-selling our capabilities as well as bundling our mutual strength into solutions that are, we feel, gonna be unique going forward in these markets. So, very complementary transaction.
Got it. And then, one more for me, and I'll just hop back in the queue. So Robert, the roughly 18.5% EBITDA margins, I assume, just like usual, that's pre-synergies, both in terms of costs or revenue?
Correct. Yeah, I would see the opportunity to improve the EBITDA faster in the short term than the gross margins. I think the gross margins will take a year because it just takes a while for the Novanta Growth System to make the progress, but I think on the EBITDA margins, we'll make faster progress there.
Sounds great. Thanks again.
Thanks, Lee.
Again, if you have a question, please press star then one. The next question is from Rob Mason with RW Baird. Please go ahead.
Yes, good afternoon, and congratulations.
Hey, Robert.
I'm gonna see if you could-
Thank you.
Just take a finer cut to the end market mix. 65% in medical and life sciences. I'm just curious, you know, how much of that is more medical, clinical, versus life science research? And then just a little bit of color around the other 35%, if you could.
Yeah, we, we've not split that out in more detail. I would say the growth profile, maybe I can answer it that way, is more geared towards the precision medicine side. So, you know, next generation sequencing, multiomics end market, spatial biology, et cetera. And then not a material piece to the medical device space, and then the remaining portion is in the advanced industrial space, but that is much more.
You know, would they have any 10% customers that you would identify?
... Well, at the Novanta level, definitely not when they're integrated.
On a standalone basis, they would obviously, but on a combined basis, no, it would not have a material impact in terms of customer concentration. And frankly, we talk about customer synergies. In many ways, this is expanding us into new customers that would take, as you know, because of the design-in cycles, you know, three to five years to get ourselves designed into. So this allows us to get a footprint into them faster as a consequence of doing the acquisition.
I see.
Yeah.
I see. Could you just give a little bit of background as well, just on how sales have trended this year to the extent where in $85 million, it has been a choppier year, as you know, we've seen more recently anyway, in some of the life science applications.
Yeah.
What does $85 million represent from, you know, recent growth perspective?
Yeah. So they actually grew and, or are expected to grow in 2023. It is at a slower rate than what they have historically done, but will be accelerating into 2024. Now, the fortunate aspect about their customer mix and product mix is that they are recently designed into a number of new opportunities, so they're a little bit separated from some of the turmoil that we are seeing in the life science space. Because they're designed into new platforms and new innovations that are coming to market, they are getting some growth as a consequence of that earlier in 2024.
Those are hitting in next year, in 2024, is what you're saying?
Yeah.
Yeah.
Yeah.
Correct. So basically, their customers are ramping with them in platforms, in new platforms of customers.
Very good. Thank you.
Thanks, Rob.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.
Thanks, Operator. So to summarize, the Motion Solutions acquisition is an excellent strategic fit for Novanta. We're excited to expand our content in attractive precision medicine applications with intelligent subsystem technologies that give Novanta the ability to deepen our presence in secular growth medical end markets. We're excited to add the Motion Solutions team's passion and expertise into Novanta. In closing, I would like to thank our customers, our employees, and our shareholders 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 very soon for our fourth quarter and full year 2023 earnings call. Thank you very much. The call is now adjourned.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.