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NOVANTA INC - Quarter Report: 2019 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2019

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File No.: 001-35083

 

NOVANTA INC

(Exact name of registrant as specified in its charter)

  

New Brunswick, Canada

 

98-0110412

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

125 Middlesex Turnpike

Bedford, Massachusetts, USA

 

01730

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (781) 266-5700

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common shares, no par value

 

NOVT

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

  

Accelerated Filer

 

 

 

 

 

Non-accelerated Filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 1, 2019, there were 35,073,830 of the Registrant’s common shares, no par value, issued and outstanding.

 

 

 


 

NOVANTA INC.

TABLE OF CONTENTS

 

Item No.

 

  

Page
No.

 

 

PART I — FINANCIAL INFORMATION

  

1

 

 

 

ITEM 1.

  

FINANCIAL STATEMENTS

  

1

 

 

 

 

  

CONSOLIDATED BALANCE SHEETS (unaudited)

  

1

 

 

 

 

  

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

  

2

 

 

 

 

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

  

3

 

 

 

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

 

4

 

 

 

 

 

 

  

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

  

5

 

 

 

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

  

6

 

 

 

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

32

 

 

 

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

44

 

 

 

ITEM 4.

  

CONTROLS AND PROCEDURES

  

44

 

 

PART II — OTHER INFORMATION

  

46

 

 

 

ITEM 1.

  

LEGAL PROCEEDINGS

  

46

 

 

 

ITEM 1A.

  

RISK FACTORS

  

46

 

 

 

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  

46

 

 

 

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

  

46

 

 

 

ITEM 4.

  

MINE SAFETY DISCLOSURES

  

46

 

 

 

ITEM 5.

  

OTHER INFORMATION

  

46

 

 

 

ITEM 6.

  

EXHIBITS

  

47

 

 

SIGNATURES

  

48

 

 

 

 


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NOVANTA INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars or shares)

(Unaudited)

 

 

September 27,

 

 

December 31,

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

61,405

 

 

$

82,043

 

Accounts receivable, net of allowance of $233 and $321, respectively

 

98,666

 

 

 

83,955

 

Inventories

 

118,573

 

 

 

104,764

 

Prepaid income taxes and income taxes receivable

 

6,356

 

 

 

1,852

 

Prepaid expenses and other current assets

 

11,860

 

 

 

9,155

 

Total current assets

 

296,860

 

 

 

281,769

 

Property, plant and equipment, net

 

76,122

 

 

 

65,464

 

Operating lease assets

 

35,487

 

 

 

 

Deferred tax assets

 

9,938

 

 

 

9,492

 

Other assets

 

2,734

 

 

 

2,269

 

Intangible assets, net

 

168,078

 

 

 

142,920

 

Goodwill

 

268,741

 

 

 

217,662

 

Total assets

$

857,960

 

 

$

719,576

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

$

 

 

$

4,535

 

Accounts payable

 

47,009

 

 

 

50,733

 

Income taxes payable

 

1,661

 

 

 

2,633

 

Current portion of operating lease liabilities

 

5,065

 

 

 

 

Accrued expenses and other current liabilities

 

71,178

 

 

 

46,295

 

Total current liabilities

 

124,913

 

 

 

104,196

 

Long-term debt

 

227,507

 

 

 

202,843

 

Operating lease liabilities

 

32,181

 

 

 

 

Deferred tax liabilities

 

28,980

 

 

 

22,632

 

Income taxes payable

 

4,687

 

 

 

4,463

 

Other liabilities

 

36,815

 

 

 

17,187

 

Total liabilities

 

455,083

 

 

 

351,321

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common shares, no par value; Authorized shares: unlimited;

   Issued and outstanding: 35,089 and 34,886, respectively

 

423,856

 

 

 

423,856

 

Additional paid-in capital

 

51,168

 

 

 

46,018

 

Accumulated deficit

 

(47,536

)

 

 

(79,092

)

Accumulated other comprehensive loss

 

(24,611

)

 

 

(22,527

)

Total stockholders' equity

 

402,877

 

 

 

368,255

 

Total liabilities and stockholders’ equity

$

857,960

 

 

$

719,576

 

 

The accompanying notes are an integral part of these consolidated financial statements.


1


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars or shares, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

$

154,066

 

 

$

160,794

 

 

$

466,397

 

 

$

458,159

 

Cost of revenue

 

90,012

 

 

 

91,160

 

 

 

270,272

 

 

 

261,137

 

Gross profit

 

64,054

 

 

 

69,634

 

 

 

196,125

 

 

 

197,022

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development and engineering

 

13,811

 

 

 

13,204

 

 

 

41,196

 

 

 

37,744

 

Selling, general and administrative

 

27,926

 

 

 

29,147

 

 

 

88,977

 

 

 

87,598

 

Amortization of purchased intangible assets

 

3,970

 

 

 

3,947

 

 

 

11,740

 

 

 

11,538

 

Restructuring and acquisition related costs

 

5,546

 

 

 

2,341

 

 

 

11,913

 

 

 

4,805

 

Total operating expenses

 

51,253

 

 

 

48,639

 

 

 

153,826

 

 

 

141,685

 

Operating income

 

12,801

 

 

 

20,995

 

 

 

42,299

 

 

 

55,337

 

Interest income (expense), net

 

(2,153

)

 

 

(2,396

)

 

 

(6,357

)

 

 

(7,315

)

Foreign exchange transaction gains (losses), net

 

387

 

 

 

66

 

 

 

455

 

 

 

(164

)

Other income (expense), net

 

(48

)

 

 

(44

)

 

 

(186

)

 

 

(131

)

Income before income taxes

 

10,987

 

 

 

18,621

 

 

 

36,211

 

 

 

47,727

 

Income tax provision

 

2,064

 

 

 

3,632

 

 

 

4,655

 

 

 

8,276

 

Consolidated net income

 

8,923

 

 

 

14,989

 

 

 

31,556

 

 

 

39,451

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

(435

)

 

 

 

 

 

(1,986

)

Net income attributable to Novanta Inc.

$

8,923

 

 

$

14,554

 

 

$

31,556

 

 

$

37,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share attributable to Novanta Inc. (Note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.25

 

 

$

0.61

 

 

$

0.90

 

 

$

1.12

 

Diluted

$

0.25

 

 

$

0.60

 

 

$

0.89

 

 

$

1.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

 

35,074

 

 

 

34,899

 

 

 

35,012

 

 

 

34,918

 

Weighted average common shares outstanding—diluted

 

35,585

 

 

 

35,485

 

 

 

35,523

 

 

 

35,469

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 


2


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Consolidated net income

$

8,923

 

 

$

14,989

 

 

$

31,556

 

 

$

39,451

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax (1)

 

(2,821

)

 

 

(490

)

 

 

(3,144

)

 

 

(2,482

)

Pension liability adjustments, net of tax (2)

 

490

 

 

 

223

 

 

 

1,060

 

 

 

978

 

Total other comprehensive income

 

(2,331

)

 

 

(267

)

 

 

(2,084

)

 

 

(1,504

)

Total consolidated comprehensive income

 

6,592

 

 

 

14,722

 

 

 

29,472

 

 

 

37,947

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

 

 

(435

)

 

 

 

 

 

(1,986

)

Comprehensive income attributable to Novanta Inc.

$

6,592

 

 

$

14,287

 

 

$

29,472

 

 

$

35,961

 

 

(1) 

The tax effect on this component of comprehensive income was nominal for all periods presented.

(2) 

The tax effect on this component of comprehensive income was nominal for all periods presented. See Note 4 for the total amount of pension liability adjustments reclassified out of accumulated other comprehensive income (loss).

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands of U.S. dollars or shares)

(Unaudited)

 

 

Novanta Inc. Stockholders

 

 

 

 

Common Shares

 

 

Additional Paid-In

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

 

 

 

 

# of Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

Three Months Ended September 27, 2019

 

Balance at June 28, 2019

 

34,972

 

 

$

423,856

 

 

$

41,065

 

 

$

(56,459

)

 

$

(22,280

)

 

$

386,182

 

Net income

 

 

 

 

 

 

 

 

 

 

8,923

 

 

 

 

 

 

8,923

 

Common shares issued for business combination

 

124

 

 

 

 

 

 

10,900

 

 

 

 

 

 

 

 

 

10,900

 

Common shares issued under stock plans

 

36

 

 

 

 

 

 

425

 

 

 

 

 

 

 

 

 

425

 

Common shares withheld for taxes on vested stock awards

 

(1

)

 

 

 

 

 

(120

)

 

 

 

 

 

 

 

 

(120

)

Repurchases of common shares

 

(42

)

 

 

 

 

 

(3,345

)

 

 

 

 

 

 

 

 

(3,345

)

Share-based compensation

 

 

 

 

 

 

 

2,243

 

 

 

 

 

 

 

 

 

2,243

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,331

)

 

 

(2,331

)

Balance at September 27, 2019

 

35,089

 

 

$

423,856

 

 

$

51,168

 

 

$

(47,536

)

 

$

(24,611

)

 

$

402,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 27, 2019

 

Balance at December 31, 2018

 

34,886

 

 

$

423,856

 

 

$

46,018

 

 

$

(79,092

)

 

$

(22,527

)

 

$

368,255

 

Net income

 

 

 

 

 

 

 

 

 

 

31,556

 

 

 

 

 

 

31,556

 

Common shares issued for business combination

 

124

 

 

 

 

 

 

10,900

 

 

 

 

 

 

 

 

 

10,900

 

Common shares issued under stock plans

 

245

 

 

 

 

 

 

425

 

 

 

 

 

 

 

 

 

425

 

Common shares withheld for taxes on vested stock awards

 

(85

)

 

 

 

 

 

(6,839

)

 

 

 

 

 

 

 

 

(6,839

)

Repurchases of common shares

 

(81

)

 

 

 

 

 

(6,684

)

 

 

 

 

 

 

 

 

(6,684

)

Share-based compensation

 

 

 

 

 

 

 

7,348

 

 

 

 

 

 

 

 

 

7,348

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,084

)

 

 

(2,084

)

Balance at September 27, 2019

 

35,089

 

 

$

423,856

 

 

$

51,168

 

 

$

(47,536

)

 

$

(24,611

)

 

$

402,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 28, 2018

 

Balance at June 29, 2018

 

34,671

 

 

$

423,856

 

 

$

31,793

 

 

$

(112,167

)

 

$

(19,117

)

 

$

324,365

 

Net income

 

 

 

 

 

 

 

 

 

 

14,554

 

 

 

 

 

 

14,554

 

Redeemable noncontrolling interest redemption value adjustment

 

 

 

 

 

 

 

 

 

 

6,877

 

 

 

 

 

 

6,877

 

Acquisition of noncontrolling interest

 

213

 

 

 

 

 

 

14,401

 

 

 

 

 

 

 

 

 

14,401

 

Common shares issued under stock plans

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares withheld for taxes on vested stock awards

 

(2

)

 

 

 

 

 

(116

)

 

 

 

 

 

 

 

 

(116

)

Repurchase of common shares

 

(28

)

 

 

 

 

 

(1,836

)

 

 

 

 

 

 

 

 

(1,836

)

Share-based compensation

 

 

 

 

 

 

 

1,695

 

 

 

 

 

 

 

 

 

1,695

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(267

)

 

 

(267

)

Balance at September 28, 2018

 

34,916

 

 

$

423,856

 

 

$

45,937

 

 

$

(90,736

)

 

$

(19,384

)

 

$

359,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 28, 2018

 

Balance at December 31, 2017

 

34,595

 

 

$

423,856

 

 

$

33,309

 

 

$

(127,740

)

 

$

(17,880

)

 

$

311,545

 

Net income

 

 

 

 

 

 

 

 

 

 

37,465

 

 

 

 

 

 

37,465

 

Redeemable noncontrolling interest redemption value adjustment

 

 

 

 

 

 

 

 

 

 

1,781

 

 

 

 

 

 

1,781

 

Acquisition of noncontrolling interest

 

213

 

 

 

 

 

 

14,401

 

 

 

 

 

 

 

 

 

14,401

 

Common shares issued under stock plans

 

228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares withheld for taxes on vested stock awards

 

(63

)

 

 

 

 

 

(3,483

)

 

 

 

 

 

 

 

 

(3,483

)

Repurchase of common shares

 

(57

)

 

 

 

 

 

(3,765

)

 

 

 

 

 

 

 

 

(3,765

)

Share-based compensation

 

 

 

 

 

 

 

5,475

 

 

 

 

 

 

 

 

 

5,475

 

Adoption of ASU 2016-16

 

 

 

 

 

 

 

 

 

 

(2,242

)

 

 

 

 

 

(2,242

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,504

)

 

 

(1,504

)

Balance at September 28, 2018

 

34,916

 

 

$

423,856

 

 

$

45,937

 

 

$

(90,736

)

 

$

(19,384

)

 

$

359,673

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Consolidated net income

$

31,556

 

 

$

39,451

 

Adjustments to reconcile consolidated net income to

   net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

27,954

 

 

 

27,386

 

Provision for inventory excess and obsolescence

 

1,968

 

 

 

1,765

 

Share-based compensation

 

7,348

 

 

 

5,475

 

Deferred income taxes

 

(3,176

)

 

 

(3,309

)

Inventory acquisition fair value adjustments

 

708

 

 

 

 

Other

 

1,372

 

 

 

510

 

Changes in assets and liabilities which (used)/provided cash, excluding

   effects from business acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

(12,147

)

 

 

(5,747

)

Inventories

 

(7,744

)

 

 

(9,041

)

Prepaid income taxes, income taxes receivable, prepaid expenses

     and other current assets

 

(5,544

)

 

 

1,234

 

Accounts payable, income taxes payable, accrued expenses

     and other current liabilities

 

(16,340

)

 

 

10,101

 

Other non-current assets and liabilities

 

1,888

 

 

 

(105

)

Cash provided by operating activities

 

27,843

 

 

 

67,720

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired and working capital adjustments

 

(53,143

)

 

 

(29,600

)

Purchases of property, plant and equipment

 

(7,951

)

 

 

(11,645

)

Acquisition of assets

 

 

 

 

(1,225

)

Other investing activities

 

42

 

 

 

213

 

Cash used in investing activities

 

(61,052

)

 

 

(42,257

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

66,792

 

 

 

55,253

 

Repayments of term loan and revolving credit facility

 

(40,768

)

 

 

(29,059

)

Payments of withholding taxes from share-based awards

 

(6,839

)

 

 

(3,483

)

Repurchases of common shares

 

(6,684

)

 

 

(3,765

)

Acquisition of noncontrolling interest

 

 

 

 

(30,800

)

Other financing activities

 

(122

)

 

 

(420

)

Cash provided by (used in) financing activities

 

12,379

 

 

 

(12,274

)

Effect of exchange rates on cash and cash equivalents

 

192

 

 

 

(1,432

)

Increase (decrease) in cash and cash equivalents

 

(20,638

)

 

 

11,757

 

Cash and cash equivalents, beginning of the period

 

82,043

 

 

 

100,057

 

Cash and cash equivalents, end of the period

$

61,405

 

 

$

111,814

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

5,832

 

 

$

6,716

 

Cash paid for income taxes

$

12,770

 

 

$

15,173

 

Income tax refunds received

$

515

 

 

$

2,245

 

 

The accompanying notes are an integral part of these consolidated financial statements.  

 

5


 

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

1. Basis of Presentation

Novanta Inc. and its subsidiaries (collectively referred to as “Novanta”, the “Company”, “we”, “us”, “our”) is a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. Novanta combines deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to the customers’ demanding applications.

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in United States (“U.S.”) dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

The Company’s unaudited interim financial statements are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which they are deemed to be necessary. The Company evaluates its estimates based on historical experience, current conditions and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ significantly from those estimates.

6


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Recent Accounting Pronouncements

The following table provides a brief description of recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):

 

Standard

 

Description

 

Effective Date

 

Effect on the Financial Statements or Other Significant Matters

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”

 

ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 should be applied either retrospectively or prospectively.

 

 

January 1, 2020. Early adoption is permitted.

 

The Company adopted ASU 2018-15 on a prospective basis during the first quarter of 2019. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”

 

ASU 2018-02 allows an entity to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the change in the U.S. federal corporate income tax rate under the Tax Reform Act is recognized.

 

  

January 1, 2019.

  

The Company adopted ASU 2018-02 during the first quarter of 2019. The adoption of ASU 2018-02 did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

 

ASU 2016-13 requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates.

 

 

January 1, 2020. Early adoption is permitted.

 

The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

7


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Standard

 

Description

 

Effective Date

 

Effect on the Financial Statements or Other Significant Matters

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”

 

ASU 2016-02 requires a lessee to recognize on the balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases and to disclose key information about leasing arrangements.

 

January 1, 2019.

 

The Company adopted ASU 2016-02 during the first quarter of 2019 using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance. The adoption of ASU 2016-02 resulted in the recording of additional operating lease right-of-use (“ROU”) assets and operating lease liabilities of approximately $35.3 million and $36.5 million, respectively, as of

January 1, 2019. The adoption of ASU 2016-02 did not have an impact on the Company’s accumulated deficit, consolidated statement of operations, or consolidated statement of cash flows.

 

2. Revenue

The Company recognizes revenue when control of promised goods or services is transferred to customers. The transfer of control generally occurs upon shipment when title and risk of loss pass to the customer. The vast majority of the Company’s revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for such products, which is generally at contractually stated prices. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue.

Performance Obligations

Substantially all of the Company’s revenue is recognized at a point in time, upon shipment, rather than over time.

 

At the request of its customers, the Company may perform professional services, generally for the maintenance and repair of products previously sold to those customers and for engineering services. Professional services are typically short in duration, mostly less than one month, and aggregate to less than 3% of the Company’s consolidated revenue. Revenue is typically recognized at a point in time when control transfers to the customer upon completion of professional services. These services generally involve a single distinct performance obligation. The consideration expected to be received in exchange for such services is normally the contractually stated amount.

 

The Company occasionally sells separately priced non-standard/extended warranty services or preventative maintenance plans with the sale of products. The transfer of control over the service plans is over time. The Company recognizes the related revenue ratably over the terms of the service plans. The transaction price of a contract is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using the expected cost plus a margin.

Shipping & Handling Costs

The Company accounts for shipping and handling activities that occur after the transfer of control over the related goods as fulfillment activities rather than performance obligations. The shipping and handling fees charged to customers are recognized as revenue and the related costs are recorded in cost of revenue at the time of transfer of control.

Warranties

The Company generally provides warranties for its products. The standard warranty period is typically 12 months to 24 months for the Photonics and Precision Motion segments and 12 months to 36 months for the Vision segment. The standard warranty period for product sales is accounted for under the provisions of ASC 450, “Contingencies,” as the Company has the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. A provision for the estimated cost related to warranty is recorded to cost of revenue at the time revenue is recognized. The Company’s estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that the Company’s experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue.


8


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Practical Expedients and Exemptions

The Company expenses incremental direct costs of obtaining a contract when incurred if the expected amortization period is one year or less. These costs are recorded within selling, general and administrative expenses in the consolidated statement of operations.

 

The Company does not adjust the promised amount of consideration for the effects of a financing component because the transfer of a promised good to a customer and the customer’s payment for that good are typically one year or less. The Company does not disclose the value of the remaining performance obligation for contracts with an original expected length of one year or less.

Contract Liabilities

Contract liabilities consist of deferred revenue and advance payments from customers, including amounts that are refundable. These contract liabilities are classified as either current or long-term liabilities in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of September 27, 2019 and December 31, 2018, contract liabilities were $4.9 million and $4.7 million, respectively, and are included in accrued expenses and other current liabilities and other liabilities in the accompanying consolidated balance sheets. The increase in the contract liability balance during the nine months ended September 27, 2019 is primarily due to cash payments received in advance of satisfying performance obligations, partially offset by $3.7 million of revenue recognized during the period that was included in the contract liability balance at December 31, 2018.

Disaggregated Revenue

See Note 17 for the Company’s disaggregation of revenue by segment, geography and end market.

 

 

3. Business Combinations

Acquisitions

On July 31, 2019, the Company acquired 100% of the outstanding shares of ARGES GmbH (“ARGES”), a Wackersdorf, Germany-based manufacturer of innovative laser scanning subsystems used in industrial materials processing and medical applications, for a total purchase price of €65.5 million ($72.9 million), subject to customary working capital adjustments. The purchase price consists of €24.0 million ($26.7 million) cash paid at closing, 124 thousand Novanta common shares issued upon closing (with a fair market value of €9.8 million, or $10.9 million, based on the closing market price of $87.58 per share on July 30, 2019), €7.1 million ($7.9 million) estimated fair value of contingent consideration and €24.7 million ($27.4 million) deferred cash consideration, which is expected to be paid on June 29, 2020. The contingent consideration payments will be payable annually based on actual revenue achievement against certain revenue targets from August 2019 through December 2026, with the first payment due in the first quarter of 2021. The undiscounted range of contingent consideration is zero to €10.0 million. The initial cash purchase price was financed with borrowings under the Company’s revolving credit facility. The addition of ARGES complements and expands the Company’s existing portfolio of lasers and laser beam steering solutions capabilities within the Photonics reportable segment.

 

On June 5, 2019, the Company acquired 100% of the outstanding stock of Med X Change, Inc. (“Med X Change”), a Bradenton, Florida-based provider of medical grade, high definition and 4K video recording and documentation solutions to OEMs in the medical market. The purchase price of $21.9 million, net of working capital adjustments, was financed with cash on hand and $21.0 million borrowings under the Company’s revolving credit facility. The addition of Med X Change complements and broadens the range of technology capabilities within the Company’s Vision reportable segment by providing its medical OEM customers with more integrated operating room solutions.

 

On April 16, 2019, the Company acquired 100% of the outstanding stock of Ingenia-CAT, S.L. (“Ingenia”), a Barcelona, Spain-based provider of high-performance servo drives and control software to OEMs in the medical and advanced industrial markets, for a total purchase price of €14.3 million ($16.2 million), net of working capital adjustments. The purchase price consists of €8.5 million ($9.6 million) of cash consideration and €5.8 million ($6.6 million) estimated fair value of contingent consideration. The contingent consideration payments will be payable annually based on actual revenue achievement against certain revenue targets from April 2019 through March 2022, with the first payment due in the second quarter of 2020. The undiscounted range of contingent consideration is zero to €8.0 million. The initial cash purchase price was financed with cash on hand and borrowings under the Company’s revolving credit facility. The Ingenia purchase and sale agreement requires €0.8 million ($0.9 million) of the purchase price to be held back by the Company for indemnification of certain representations and warranties claims by the Company until the

9


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

expiration of the holdback agreement in October 2021. The addition of Ingenia enhances the Company’s strategic position in the precision motion control industry by enabling it to offer a broader range of motion control technologies and integrated solutions. Ingenia is included in the Company’s Precision Motion reportable segment.

 

Allocation of Purchase Price

The acquisitions of ARGES, Med X Change and Ingenia have been accounted for as business combinations. The allocation of the purchase price is based upon a valuation of assets acquired and liabilities assumed. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions developed by management. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information obtained with regards to facts and circumstances that existed as of the acquisition date.

 

ARGES

Based upon a preliminary valuation, the total purchase price for ARGES was allocated as follows (in thousands):

 

 

Purchase Price

 

 

Allocation

 

Cash

$

3,159

 

Accounts receivable

 

1,542

 

Inventories

 

8,295

 

Property, plant and equipment

 

13,884

 

Intangible assets

 

24,713

 

Goodwill

 

42,355

 

Other assets

 

1,990

 

Total assets acquired

 

95,938

 

Accounts payable

 

2,598

 

Deferred tax liabilities

 

7,457

 

Other liabilities

 

12,954

 

Total liabilities assumed

 

23,009

 

Total assets acquired, net of liabilities assumed

 

72,929

 

Less: cash acquired

 

3,159

 

Total purchase price, net of cash acquired

 

69,770

 

Less: contingent consideration

 

7,870

 

Less: issuance of common shares

 

10,900

 

Less: deferred cash consideration

 

27,442

 

Net cash used for acquisition of business

$

23,558

 

 

The purchase price allocation is preliminary as the Company is in the process of collecting additional information for the valuation of inventories, intangible assets, contingent consideration and unrecognized tax benefits.

 

 


10


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

The fair value of intangible assets for ARGES is comprised of the following (dollar amounts in thousands):

 

 

 

 

 

 

Weighted Average

 

Estimated Fair

 

 

Amortization

 

Value

 

 

Period

Developed technologies

$

11,355

 

 

15 years

Customer relationships

 

11,800

 

 

15 years

Trademarks and trade names

 

1,225

 

 

10 years

Backlog

 

333

 

 

5 months

Total

$

24,713

 

 

 

 

The purchase price allocation resulted in $24.7 million of identifiable intangible assets and $42.4 million of goodwill. As the ARGES acquisition is an acquisition of outstanding common shares, none of the resulting goodwill is expected to be deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flows potentially attributable to: (i) ARGES’s ability to grow the business with existing and new customers, including leveraging the Company’s customer base; (ii) ARGES’s ability to grow the business through new product introductions; and (iii) cost improvements due to the integration of ARGES’s operations into the Company’s existing infrastructure.

 

The operating results of ARGES were included in the Company’s results of operations beginning on July 31, 2019. ARGES contributed revenues of $1.9 million and a loss before income taxes of $1.4 million for the nine months ended September 27, 2019. Loss before income taxes for the nine months ended September 27, 2019 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $0.9 million.

 

The pro forma financial information reflecting the operating results of ARGES, as if it had been acquired as of January 1, 2018, would not differ materially from the operating results of the Company as reported for the year ended December 31, 2018.

 

Med X Change and Ingenia

Based upon a preliminary valuation, the total purchase price for Med X Change and Ingenia was allocated as follows (in thousands):

 

 

Purchase Price

 

 

Allocation

 

Cash

$

1,000

 

Accounts receivable

 

1,739

 

Inventories

 

2,372

 

Property, plant and equipment

 

496

 

Intangible assets

 

22,376

 

Goodwill

 

13,539

 

Other assets

 

601

 

Total assets acquired

 

42,123

 

Accounts payable

 

604

 

Deferred tax liabilities

 

2,550

 

Other liabilities

 

910

 

Total liabilities assumed

 

4,064

 

Total assets acquired, net of liabilities assumed

 

38,059

 

Less: cash acquired

 

1,000

 

Total purchase price, net of cash acquired

 

37,059

 

Less: contingent consideration

 

6,569

 

Less: purchase price holdback

 

905

 

Net cash used for acquisition of businesses

$

29,585

 

 

11


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

The purchase price allocation is preliminary as the Company is in the process of collecting additional information for the valuation of unrecognized tax benefits.

 

The fair value of intangible assets for Med X Change and Ingenia is comprised of the following (dollar amounts in thousands):

 

 

 

 

 

 

Weighted Average

 

Estimated Fair

 

 

Amortization

 

Value

 

 

Period

Developed technologies

$

11,072

 

 

10 years

Customer relationships

 

10,465

 

 

15 years

Trademarks and trade names

 

639

 

 

9 years

Backlog

 

200

 

 

7 months

Total

$

22,376

 

 

 

 

The Company recorded an aggregate of $22.4 million of identifiable intangible assets and $13.5 million of goodwill from these acquisitions. Goodwill amounting to $6.2 million from the Med X Change acquisition is expected to be fully deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flows potentially attributable to: (i) their ability to grow the business with existing and new customers, including leveraging the Company’s customer base; (ii) their ability to grow business through new product introductions; and (iii) cost improvements due to the integration of Med X Change and Ingenia operations into the Company’s existing infrastructure.

 

The operating results of Med X Change and Ingenia were included in the Company’s results of operations beginning on the respective acquisition dates. These acquisitions contributed revenues of $4.0 million and a loss before income taxes of $0.1 million for the nine months ended September 27, 2019. Loss before income taxes for the nine months ended September 27, 2019 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $1.0 million.

 

The pro forma financial information reflecting the operating results of Med X Change and Ingenia, as if they had been acquired as of January 1, 2018, would not differ materially from the operating results of the Company as reported for the year ended December 31, 2018.

 

Acquisition Costs

Acquisition costs are included in restructuring and acquisition related costs in the consolidated statements of operations. Acquisition costs for ARGES, Ingenia and Med X Change were $1.4 million for the nine months ended September 27, 2019.

 

 

4. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) was as follows (in thousands):

 

 

Total Accumulated

 

 

 

 

 

 

 

 

 

 

Other

 

 

Cumulative

 

 

Pension

 

 

Comprehensive

 

 

Translation

 

 

Liability

 

 

Income (Loss)

 

 

Adjustments

 

 

Adjustments

 

Balance at December 31, 2018

$

(22,527

)

 

$

(12,485

)

 

$

(10,042

)

Other comprehensive income (loss)

 

(2,831

)

 

 

(3,144

)

 

 

313

 

Amounts reclassified from accumulated other comprehensive income (loss) (1)

 

747

 

 

 

 

 

 

747

 

Balance at September 27, 2019

$

(24,611

)

 

$

(15,629

)

 

$

(8,982

)

 

 

(1)

The amounts reclassified from other comprehensive income (loss) were included in other income (expense) in the consolidated statements of operations.

 

12


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

 

5. Earnings per Common Share

Basic earnings per common share is computed by dividing net income attributable to Novanta Inc., after redeemable noncontrolling interest redemption value adjustment, by the weighted average number of common shares outstanding during the period. The Company recognized changes in the redeemable noncontrolling interest redemption value by adjusting the carrying amount of the redeemable noncontrolling interest as of the end of the applicable period to the higher of: (i) the estimated redemption value assuming the end of the period was also the redemption date or (ii) the carrying value without any redemption value adjustments. Such adjustments were recorded in retained earnings in stockholders’ equity instead of net income attributable to Novanta Inc. For both basic and diluted earnings per common share, such redemption value adjustments were included in the calculation of the numerator.

For diluted earnings per common share, the denominator also includes the dilutive effect of outstanding common share equivalents. For the three and nine months ended September 27, 2019 and September 28, 2018, respectively, weighted average shares outstanding for the diluted earnings per common share included the dilutive effect of outstanding restricted stock units, stock options, total shareholder return performance-based restricted stock units and the 2017 non-GAAP EPS performance-based restricted stock units, determined using the treasury stock method. The dilutive effects of market-based contingently issuable shares are included in the weighted average dilutive share calculation based on the number of shares, if any, that would be issuable as of the end of the reporting period. Dilutive effects of attainment-based contingently issuable shares granted to the former Laser Quantum noncontrolling interest shareholders, as well as the 2018 and 2019 non-GAAP EPS performance-based restricted stock units will be included in the weighted average dilutive share calculation when the performance targets have been achieved.

The following table sets forth the computation of basic and diluted earnings per common share (amounts in thousands, except per share data):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019(1)

 

 

2018(2)

 

 

2019(1)

 

 

2018(2)

 

Numerators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

$

8,923

 

 

$

14,989

 

 

$

31,556

 

 

$

39,451

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

(435

)

 

 

 

 

 

(1,986

)

Net income attributable to Novanta Inc.

 

8,923

 

 

 

14,554

 

 

 

31,556

 

 

 

37,465

 

Redeemable noncontrolling interest redemption value adjustment

 

 

 

 

6,877

 

 

 

 

 

 

1,781

 

Net income attributable to Novanta Inc. after adjustment for redeemable noncontrolling interest redemption value

$

8,923

 

 

$

21,431

 

 

$

31,556

 

 

$

39,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding— basic

 

35,074

 

 

 

34,899

 

 

 

35,012

 

 

 

34,918

 

Dilutive potential common shares

 

511

 

 

 

586

 

 

 

511

 

 

 

551

 

Weighted average common shares outstanding— diluted

 

35,585

 

 

 

35,485

 

 

 

35,523

 

 

 

35,469

 

Antidilutive potential common shares excluded from above

 

35

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Common Share Attributable to Novanta Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.25

 

 

$

0.61

 

 

$

0.90

 

 

$

1.12

 

Diluted

$

0.25

 

 

$

0.60

 

 

$

0.89

 

 

$

1.11

 

 

 

(1)

47,147 performance-based restricted stock units granted to certain members of the executive management team and 213,219 shares of restricted stock issued to Laser Quantum former non-controlling interest holders are considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of September 27, 2019.

 

 

(2)

53,968 performance-based restricted stock units granted to certain members of the executive management team and 213,219 shares of restricted stock issued to Laser Quantum former non-controlling interest holders were considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of September 28, 2018.

13


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

6. Fair Value Measurements

ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

 

Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access

 

Level 2: Observable inputs other than those described in Level 1

 

Level 3: Unobservable inputs

Current Assets and Liabilities

The Company’s cash equivalents are highly liquid investments with original maturities of three months or less, which represent an asset the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

Foreign Currency Contracts

The Company addresses market risks from changes in foreign currency exchange rates through a risk management program that includes the use of derivative financial instruments to mitigate certain balance sheet foreign currency transaction exposures. The Company uses foreign currency forward contracts as a part of its strategy to manage exposures related to foreign currency denominated monetary assets and liabilities. The fair value of these foreign currency forward contracts is reported either in other current assets or in other current liabilities as of the end of the period.

Contingent Considerations

On July 31, 2019, the Company acquired ARGES. Under the purchase and sale agreement for the ARGES acquisition, the former owner of ARGES is eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from August 2019 through December 2026. The undiscounted range of possible contingent consideration is zero to €10.0 million. If the revenue targets are achieved, the contingent consideration would be payable annually with the first payment due in the first quarter of 2021. The estimated fair value of the contingent consideration of €7.1 million ($7.9 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of operations in restructuring and acquisition related costs until the liability is fully settled. There have been no changes to the fair value of the contingent consideration since the acquisition date.

On April 16, 2019, the Company acquired Ingenia. Under the purchase and sale agreement for the Ingenia acquisition, the shareholders of Ingenia are eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from April 2019 through March 2022. The undiscounted range of possible contingent consideration is zero to €8.0 million. If the revenue targets are achieved, the contingent consideration would be payable in cash in three annual installments from 2020 to 2022. The estimated fair value of the contingent consideration of €5.8 million ($6.6 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of operations in restructuring and acquisition related costs until the liability is fully settled. There have been no changes to the fair value of the contingent consideration since the acquisition date.

On December 14, 2016, the Company acquired certain video signal processing and management technologies used in medical visualization solutions. Under the purchase and sale agreement, the former owners are eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from 2018 to 2021 from products utilizing the acquired technologies. The undiscounted range of possible contingent consideration is zero to €5.5 million ($6.6 million). If the revenue targets are achieved, the contingent consideration would be payable in cash in four installments from 2019 to 2022. As the acquired assets did not meet the definition of a business, the fair value of the contingent consideration is recognized when probable and estimable and is capitalized as part of the cost of the acquired assets. Subsequent changes in the estimated fair value of this contingent liability are recorded as adjustments to the carrying value of the asset acquired and amortized over the remaining useful life of the underlying

14


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

asset. Based on revenue performance as of September 27, 2019 and the most recent revenue projections for the remainder of 2019 and fiscal years 2020 and 2021, the fair value of the contingent consideration was adjusted to $4.7 million as of September 27, 2019.

Summary by Fair Value Hierarchy

The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of September 27, 2019 (in thousands):

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

Significant Other

 

 

 

 

 

 

Active Markets for

 

 

Significant Other

 

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

 

Observable Inputs

 

 

Inputs

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

3,439

 

 

$

3,439

 

 

$

 

 

$

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

354

 

 

 

 

 

 

354

 

 

 

 

 

$

3,793

 

 

$

3,439

 

 

$

354

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations - Current

$

3,769

 

 

$

 

 

$

 

 

$

3,769

 

Foreign currency forward contracts

 

21

 

 

 

 

 

 

21

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations - Long-term

 

14,998

 

 

 

 

 

 

 

 

 

14,998

 

 

$

18,788

 

 

$

 

 

$

21

 

 

$

18,767

 

 

The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 (in thousands):

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

Significant Other

 

 

 

 

 

 

Active Markets for

 

 

Significant Other

 

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

 

Observable Inputs

 

 

Inputs

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

4,288

 

 

$

4,288

 

 

$

 

 

$

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

15

 

 

 

 

 

 

15

 

 

 

 

 

$

4,303

 

 

$

4,288

 

 

$

15

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

$

182

 

 

$

 

 

$

182

 

 

$

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations - Long-term

 

3,376

 

 

 

 

 

 

 

 

 

3,376

 

 

$

3,558

 

 

$

 

 

$

182

 

 

$

3,376

 

15


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

 

Changes in the fair value of Level 3 contingent considerations during the nine months ended September 27, 2019 were as follows (in thousands):

 

 

Contingent Considerations

 

Balance at December 31, 2018

$

3,376

 

Acquisition of ARGES

 

7,870

 

Acquisition of Ingenia

 

6,569

 

Fair value adjustments

 

1,285

 

Effect of foreign exchange rates

 

(333

)

Balance at September 27, 2019

$

18,767

 

 

The following table provides qualitative information associated with the fair value measurement of the Company’s Level 3 liabilities:

 

 

 

Liability

 

 

September 27, 2019

Fair Value

(in thousands)

 

Valuation Technique

 

 

 

 

Unobservable Inputs

 

 

 

Percentage Applied

Contingent consideration (ARGES)

 

$7,743

 

Monte Carlo method

 

Historical and projected revenues from July 2019 through December 2026

 

N/A

 

 

 

 

 

 

Revenue volatility

 

32.7%

 

 

 

 

 

 

Cost of debt

 

  1.5%

 

 

 

 

 

 

Revenue discount rate

 

  7.4%

 

 

 

 

 

 

 

 

 

Contingent consideration (Ingenia)

 

$6,363

 

Monte Carlo method

 

Historical and projected revenues from April 2019 through March 2022

 

N/A

 

 

 

 

 

 

Revenue volatility

 

31.3%

 

 

 

 

 

 

Cost of debt

 

  1.0%

 

 

 

 

 

 

Revenue discount rate

 

14.3%

 

 

 

 

 

 

 

 

 

Contingent consideration (Other)

 

$4,661

 

Discounted cash flow method

 

Historical and projected revenues for fiscal years 2018 to 2021

 

N/A

 

 

 

 

 

 

Revenue discount rate

 

22.8%

 

Increases or decreases in the unobservable inputs noted above would result in a higher or lower fair value measurement.

 

See Note 10 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.

 

 

7. Foreign Currency Contracts

The Company addresses market risks from changes in foreign currency exchange rates through a risk management program that includes the use of derivative financial instruments to mitigate certain foreign currency transaction exposures from future settlement of non-functional currency monetary assets and liabilities as of the end of a period. The Company does not enter into derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset losses and gains on the underlying hedged exposures. Furthermore, the Company manages its exposures to counterparty risks on derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.

The Company uses forward contracts as a part of its strategy to limit its exposures related to monetary assets and liabilities denominated in currencies other than the functional currencies of the Company and its subsidiaries. These forward contracts are not

16


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

designated as cash flow, fair value or net investment hedges. All changes in the fair value of these forward contracts are recognized in income before income taxes.

As of September 27, 2019, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $29.1 million and a net gain of $0.3 million, respectively. As of December 31, 2018, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $31.2 million and a net loss of $0.2 million, respectively.

The Company recognized an aggregate net gain of $0.7 million and $1.2 million for the three and nine months ended September 27, 2019, respectively, and an aggregate net loss of $0.2 million and an aggregate net gain of $0.7 million for the three and nine months ended September 28, 2018, respectively. These amounts were included in foreign exchange transaction gains (losses) in the consolidated statement of operations for all periods presented.

 

 

8. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The Company tests its goodwill balances annually for impairment as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist. The Company performed the most recent annual goodwill and indefinite-lived intangible asset impairment test as of the beginning of the second quarter of 2019 and noted no impairment.

The following table summarizes changes in goodwill during the nine months ended September 27, 2019 (in thousands):

 

Balance at beginning of the period

$

217,662

 

Goodwill acquired from acquisitions

 

55,894

 

Effect of foreign exchange rate changes

 

(4,815

)

Balance at end of the period

$

268,741

 

 

Goodwill by reportable segment as of September 27, 2019 was as follows (in thousands):

 

 

Reportable Segment

 

 

 

 

 

 

Photonics

 

 

Vision

 

 

Precision

Motion

 

 

Total

 

Goodwill

$

209,506

 

 

$

158,781

 

 

$

51,683

 

 

$

419,970

 

Accumulated impairment of goodwill

 

(102,461

)

 

 

(31,722

)

 

 

(17,046

)

 

 

(151,229

)

Total

$

107,045

 

 

$

127,059

 

 

$

34,637

 

 

$

268,741

 

 

Goodwill by reportable segment as of December 31, 2018 was as follows (in thousands):

 

 

Reportable Segment

 

 

 

 

 

 

Photonics

 

 

Vision

 

 

Precision

Motion

 

 

Total

 

Goodwill

$

168,955

 

 

$

155,017

 

 

$

44,919

 

 

$

368,891

 

Accumulated impairment of goodwill

 

(102,461

)

 

 

(31,722

)

 

 

(17,046

)

 

 

(151,229

)

Total

$

66,494

 

 

$

123,295

 

 

$

27,873

 

 

$

217,662

 

 

17


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Intangible Assets

Intangible assets as of September 27, 2019 and December 31, 2018, respectively, are summarized as follows (in thousands):

 

 

September 27, 2019

 

 

December 31, 2018

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and developed technologies

$

155,528

 

 

$

(93,459

)

 

$

62,069

 

 

$

134,034

 

 

$

(86,623

)

 

$

47,411

 

Customer relationships

 

158,550

 

 

 

(73,754

)

 

 

84,796

 

 

 

139,097

 

 

 

(64,174

)

 

 

74,923

 

Customer backlog

 

2,208

 

 

 

(1,925

)

 

 

283

 

 

 

1,738

 

 

 

(1,191

)

 

 

547

 

Non-compete covenant

 

 

 

 

 

 

 

 

 

 

2,514

 

 

 

(2,493

)

 

 

21

 

Trademarks and trade names

 

17,514

 

 

 

(9,611

)

 

 

7,903

 

 

 

15,915

 

 

 

(8,924

)

 

 

6,991

 

Amortizable intangible assets

 

333,800

 

 

 

(178,749

)

 

 

155,051

 

 

 

293,298

 

 

 

(163,405

)

 

 

129,893

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

13,027

 

 

 

 

 

 

13,027

 

 

 

13,027

 

 

 

 

 

 

13,027

 

Totals

$

346,827

 

 

$

(178,749

)

 

$

168,078

 

 

$

306,325

 

 

$

(163,405

)

 

$

142,920

 

 

All definite-lived intangible assets are amortized either on a straight-line basis or an economic benefit basis over their remaining estimated useful life. Amortization expense for patents and developed technologies is included in cost of revenue in the accompanying consolidated statements of operations. Amortization expense for customer relationships and definite-lived trademarks, trade names and other intangibles is included in operating expenses in the accompanying consolidated statements of operations. Amortization expense was as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Amortization expense – cost of revenue

$

2,797

 

 

$

2,492

 

 

$

7,554

 

 

$

7,461

 

Amortization expense – operating expenses

 

3,970

 

 

 

3,947

 

 

 

11,740

 

 

 

11,538

 

Total amortization expense

$

6,767

 

 

$

6,439

 

 

$

19,294

 

 

$

18,999

 

 

Estimated amortization expense for each of the five succeeding years and thereafter as of September 27, 2019 was as follows (in thousands):

 

Year Ending December 31,

 

Cost of Revenue

 

 

Operating

Expenses

 

 

Total

 

2019 (remainder of year)

 

$

2,856

 

 

$

4,060

 

 

$

6,916

 

2020

 

 

10,697

 

 

 

13,602

 

 

 

24,299

 

2021

 

 

10,896

 

 

 

13,307

 

 

 

24,203

 

2022

 

 

9,320

 

 

 

12,510

 

 

 

21,830

 

2023

 

 

8,176

 

 

 

10,880

 

 

 

19,056

 

Thereafter

 

 

20,124

 

 

 

38,623

 

 

 

58,747

 

Total

 

$

62,069

 

 

$

92,982

 

 

$

155,051

 

 

 

18


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

9. Supplementary Balance Sheet Information

The following tables provide the details of selected balance sheet items as of the periods indicated (in thousands):

Inventories

 

 

September 27,

 

 

December 31,

 

 

2019

 

 

2018

 

Raw materials

$

78,489

 

 

$

69,008

 

Work-in-process

 

16,544

 

 

 

15,982

 

Finished goods

 

21,614

 

 

 

17,337

 

Demo and consigned inventory

 

1,926

 

 

 

2,437

 

Total inventories

$

118,573

 

 

$

104,764

 

 

Accrued Expenses and Other Current Liabilities

 

 

September 27,

 

 

December 31,

 

 

2019

 

 

2018

 

Accrued compensation and benefits

$

15,675

 

 

$

24,545

 

Accrued warranty

 

4,728

 

 

 

4,510

 

Contract liabilities, current portion

 

4,549

 

 

 

4,165

 

Deferred purchase price for acquisitions

 

27,027

 

 

 

 

Other

 

19,199

 

 

 

13,075

 

Total

$

71,178

 

 

$

46,295

 

 

Accrued Warranty

 

 

Nine Months Ended

 

 

September 27, 2019

 

 

September 28, 2018

 

Balance at beginning of the period

$

4,510

 

 

$

4,835

 

Provision charged to cost of revenue

 

1,903

 

 

 

2,503

 

Warranty liabilities from acquisitions

 

175

 

 

 

 

Use of provision

 

(1,802

)

 

 

(2,243

)

Foreign currency exchange rate changes

 

(58

)

 

 

(54

)

Balance at end of the period

$

4,728

 

 

$

5,041

 

 

Other Long Term Liabilities

 

 

 

 

 

 

 

 

 

 

September 27,

 

 

December 31,

 

 

2019

 

 

2018

 

Finance lease obligations

$

14,960

 

 

$

7,275

 

Accrued pension liabilities

 

2,473

 

 

 

3,758

 

Accrued contingent considerations

 

14,998

 

 

 

3,376

 

Other

 

4,384

 

 

 

2,778

 

Total

$

36,815

 

 

$

17,187

 

 

 

19


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

10. Debt

Debt consisted of the following (in thousands):

 

 

September 27,

 

 

December 31,

 

 

2019

 

 

2018

 

Senior Credit Facilities – term loan

$

 

 

$

4,600

 

Less: unamortized debt issuance costs

 

 

 

 

(65

)

Total current portion of long-term debt

$

 

 

$

4,535

 

 

 

 

 

 

 

 

 

Senior Credit Facilities – term loan

$

56,125

 

 

$

69,925

 

Senior Credit Facilities – revolving credit facility

 

172,847

 

 

 

135,058

 

Less: unamortized debt issuance costs

 

(1,465

)

 

 

(2,140

)

Total long-term debt

$

227,507

 

 

$

202,843

 

 

 

 

 

 

 

 

 

Total Senior Credit Facilities

$

227,507

 

 

$

207,378

 

 

Senior Credit Facilities

In August 2017, the Company entered into an amendment (the “Third Amendment”) to the second amended and restated credit agreement, dated as of May 19, 2016 (the “Second Amended and Restated Credit Agreement”). The Third Amendment increased the revolving credit facility under the Second Amended and Restated Credit Agreement by $100 million, from $225 million to $325 million, and reset the uncommitted accordion feature to $125 million for potential future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million. Under the Third Amendment, the Company is required to pay quarterly scheduled principal repayments of $2.3 million beginning in October 2017, with the final installment of $56.1 million due upon maturity in May 2021. The Company borrowed $66.8 million under the revolving credit facility in the nine months ended September 27, 2019 to fund the acquisition of Ingenia, Med X Change and ARGES. The Company repaid $40.8 million of its term loan and revolving credit facility in the nine months ended September 27, 2019.

In February 2018, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Second Amended and Restated Credit Agreement. The Fourth Amendment increased the maximum consolidated leverage ratio from 3.00 to 3.50, increased the maximum consolidated leverage ratio for permitted acquisitions and stock repurchases from 2.50 to 3.00, increased the maximum consolidated leverage ratio for a designated acquisition from 3.00 to 3.50, and increased the maximum consolidated leverage ratio for four consecutive quarters following a designated acquisition from 3.50 to 4.00. The Fourth Amendment also made certain other technical changes to the Second Amended and Restated Credit Agreement.

The Company is required to satisfy certain financial and non-financial covenants under the Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement also contains customary events of default. The Company was in compliance with these covenants as of September 27, 2019.

Liens

The Company’s obligations under the Senior Credit Facilities are secured, on a senior basis, by a lien on substantially all of the assets of Novanta Inc., Novanta Corporation, NDS Surgical Imaging LLC, Novanta Europe GmbH, Novanta UK Investments Holding Limited and Novanta Technologies UK Limited. The Second Amended and Restated Credit Agreement also contains customary events of default.

Fair Value of Debt

As of September 27, 2019 and December 31, 2018, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of similar maturities. The fair value of the Company’s debt is classified as Level 2 under the fair value hierarchy.

 

 


20


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

11. Leases

The Company leases certain equipment and facilities. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Many of these leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common-area maintenance or other property management costs). The Company accounts for lease and non-lease components separately. Leases with an initial term of 12 months or less are not recognized on the balance sheet.

Most leases held by the Company expire between 2019 and 2034. In the U.K., where longer lease terms are more common, the Company has a land lease that extends through 2078. Certain leases include terms such as an option to purchase the property, one or more options to renew, with renewal terms that can extend the lease term from one to 10 years, and options to terminate the leases within one year. The exercise of lease renewal or termination option is at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in the Company’s right-of-use assets and operating lease liabilities as they are not reasonably certain of being exercised. The Company regularly evaluates the renewal options and includes the renewal periods in the lease term when they are reasonably certain of being exercised. The depreciable life of right-of-use assets and leasehold improvements is limited to the expected lease terms.

Most leases held by the Company do not provide an implicit rate. The Company uses its incremental borrowing rate for the same jurisdiction and term as the associated lease based on the information available at the lease commencement date to determine the present value of the lease payments. The Company used the incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. The Company has a centrally managed treasury function; therefore, the Company applies a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment.

 

The following table summarizes the components of lease costs (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 27,

 

 

2019

 

 

2019

 

Operating lease cost

$

1,830

 

 

$

5,695

 

Finance lease cost

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

228

 

 

 

583

 

Interest on lease liabilities

 

110

 

 

 

316

 

Variable lease cost

 

505

 

 

 

1,051

 

Total lease cost

$

2,673

 

 

$

7,645

 

21


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

 

The following table provides the details of balance sheet information related to leases (in thousands, except lease term and discount rate):

 

 

September 27,

 

 

2019

 

Operating leases

 

 

 

Operating lease right-of-use assets

$

35,487

 

 

 

 

 

Current portion of operating lease liabilities

$

5,065

 

Operating lease liabilities

 

32,181

 

Total operating lease liabilities

$

37,246

 

 

 

 

 

Finance leases

 

 

 

Property, plant and equipment, gross

$

22,677

 

Accumulated depreciation

 

(7,537

)

Property, plant and equipment, net

$

15,140

 

 

 

 

 

Accrued expenses and other current liabilities

$

1,294

 

Other liabilities

 

14,960

 

Total finance lease liabilities

$

16,254

 

 

 

 

 

Weighted-average remaining lease term (in years)

 

 

 

Operating leases

 

10.1

 

Finance leases

 

5.0

 

Weighted-average discount rate

 

 

 

Operating leases

 

5.73

%

Finance leases

 

5.06

%

 

The following table provides the details of cash flow information related to leases (in thousands):

 

 

Nine Months Ended

 

 

September 27,

 

 

2019

 

Cash paid for amounts included in lease liabilities

 

 

 

Operating cash flows from finance leases

$

404

 

Operating cash flows from operating leases

$

5,124

 

Financing cash flows from finance leases

$

547

 

Right-of-use assets obtained in exchange for new operating lease liabilities

$

5,649

 

Right-of-use assets obtained in exchange for new finance lease liabilities

$

9,209

 

 


22


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Future minimum lease payments under operating and finance leases expiring subsequent to September 27, 2019, including operating leases associated with facilities that have been vacated as a result of the Company’s restructuring actions, are summarized as follows (in thousands):

 

Year Ending December 31,

Operating Lease

 

 

Finance Lease(1)

 

2019 (remainder of year)

$

1,561

 

 

$

433

 

2020

 

6,111

 

 

 

9,891

 

2021

 

5,868

 

 

 

907

 

2022

 

5,065

 

 

 

907

 

2023

 

4,419

 

 

 

930

 

Thereafter

 

28,415

 

 

 

5,394

 

Total minimum lease payments

 

51,439

 

 

 

18,462

 

Less: Interest

 

(14,193

)

 

 

(2,208

)

Present value of lease liabilities

$

37,246

 

 

$

16,254

 

 

 

(1)

Future minimum lease payments under finance lease include the exercise price to purchase a facility in Germany for the year ending December 31, 2020.

 

 

Future minimum lease payments under operating and capital leases expiring subsequent to December 31, 2018 under Accounting Standards Codification Topic 840, “Leases”, including operating leases associated with facilities that have been vacated as a result of the Company’s restructuring actions, are summarized as follows (in thousands):

 

Year Ending December 31,

Operating Lease (1)

 

 

Capital Lease

 

2019

$

7,797

 

 

$

990

 

2020

 

6,263

 

 

 

980

 

2021

 

5,757

 

 

 

907

 

2022

 

5,264

 

 

 

907

 

2023

 

4,719

 

 

 

930

 

Thereafter

 

26,149

 

 

 

5,394

 

Total minimum lease payments

$

55,949

 

 

$

10,108

 

 

 

(1)

Future minimum lease payments as of December 31, 2018 included common-area maintenance and other property management costs and tax obligations.

 

 

 


23


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

12. Common Shares and Share-Based Compensation

Common Share Repurchases

In October 2018, the Company’s Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $25.0 million worth of the Company’s common shares. During the nine months ended September 27, 2019, the Company repurchased 81 thousand shares for an aggregate purchase price of $6.7 million at an average price of $82.83 per share under the 2018 Repurchase Plan.

Share-Based Compensation Expense

The table below summarizes share-based compensation expense recorded in the consolidated statements of operations (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Selling, general and administrative

$

1,926

 

 

$

1,523

 

 

$

6,546

 

 

$

5,021

 

Research and development and engineering

 

171

 

 

 

114

 

 

 

466

 

 

 

306

 

Cost of revenue

 

146

 

 

 

58

 

 

 

336

 

 

 

148

 

Total share-based compensation expense

$

2,243

 

 

$

1,695

 

 

$

7,348

 

 

$

5,475

 

 

Share-based compensation reported in selling, general and administrative expenses included expenses related to restricted stock units and deferred stock units granted to the members of the Company’s Board of Directors of $0.9 million during the nine months ended September 27, 2019. Share-based compensation reported in selling, general and administrative expenses included expenses related to deferred stock units granted to the members of the Company’s Board of Directors of $0.5 million during the nine months ended September 28, 2018.

Restricted Stock Units and Deferred Stock Units

The Company’s restricted stock units (“RSUs”) have generally been issued with vesting periods ranging from zero to five years and vest based solely on service conditions. Accordingly, the Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company reduces the compensation expense by an estimated forfeiture rate which is based on anticipated forfeitures and historical forfeiture experience.

Deferred stock units (“DSUs”) are granted to the members of the Company’s Board of Directors. Compensation expense associated with DSUs is recognized in full on the date of grant, as the DSUs are fully vested and non-forfeitable upon grant. There were 187 thousand and 179 thousand DSUs outstanding as of September 27, 2019 and December 31, 2018, respectively, which were included in the calculation of weighted average basic shares outstanding for the respective periods.

The table below summarizes activities relating to RSUs and DSUs issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the nine months ended September 27, 2019:

 

 

Shares

(In thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Unvested at December 31, 2018

 

529

 

 

$

26.98

 

Granted

 

111

 

 

$

75.93

 

Vested

 

(170

)

 

$

27.34

 

Forfeited

 

(23

)

 

$

48.01

 

Unvested at September 27, 2019

 

447

 

 

$

37.87

 

Expected to vest as of September 27, 2019

 

427

 

 

 

 

 

 

The total fair value of RSUs and DSUs that vested during the nine months ended September 27, 2019 was $13.2 million based on the market price of the underlying shares on the date of vesting.

24


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Performance Stock Units

The Company granted two types of performance-based stock awards to certain members of the executive management team: non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”). Both types of performance-based restricted stock units generally cliff vest on the first day following the end of the three-year performance period.

The number of common shares to be issued upon settlement following vesting of the EPS-PSUs is determined based on the Company’s cumulative non-GAAP EPS over a three-year performance period against the performance targets established by the Company’s Board of Directors at the time of grant and will be in the range of zero to 200% of the target number of shares. The Company recognizes compensation expense ratably over the performance period based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is performed quarterly and the cumulative effect of a change in the estimated compensation expense, if any, is recognized in the consolidated statement of operations in the period in which such determination is made.  

The number of shares to be issued upon settlement following vesting of the TSR-PSUs is determined based on the relative market performance of the Company’s common shares compared to the Russell 2000 Index over a three-year performance period using a payout formula established by the Company’s Board of Directors at the time of grant and will be in the range of zero to 200% of the target number of shares. The Company recognizes the related compensation expense based on the fair value of the TSR-PSUs, determined using the Monte-Carlo valuation model as of the grant date, on a straight-line basis from the grant date to the end of the three-year performance period. Compensation expense will not be affected by the number of TSR-PSUs that will actually vest at the end of the three-year performance period.

The table below summarizes the activities relating to the performance-based awards issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the nine months ended September 27, 2019:

 

 

Shares

(In thousands)

 

 

Weighted

Average Grant

Date Fair Value

 

Unvested at December 31, 2018

 

137

 

 

$

37.28

 

Granted

 

46

 

 

$

92.63

 

Performance adjustment (1)

 

29

 

 

$

14.13

 

Vested

 

(59

)

 

$

14.13

 

Forfeited

 

 

 

$

 

Unvested at September 27, 2019

 

153

 

 

$

57.92

 

Expected to vest as of September 27, 2019

 

150

 

 

 

 

 

 

(1)

Represents adjustment for performance-based awards granted on March 30, 2016. These units vested at 200% during the nine months ended September 27, 2019 based on the achievement of cumulative Non-GAAP EPS during the performance period of fiscal years 2016 through 2018.

 

 

The total fair value of PSUs that vested during the nine months ended September 27, 2019 was $5.0 million based on the market price of the underlying shares on the date of vesting.

 

The fair value of the TSR-PSUs at the date of grant was estimated using the Monte-Carlo valuation model with the following assumptions:

 

 

Nine Months Ended September 27, 2019

 

Grant-date stock price

$

77.23

 

Expected volatility

 

32.54

%

Risk-free interest rate

 

2.46

%

Expected annual dividend yield

 

 

Fair value

$

108.58

 

25


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

 

Stock Options

The fair value of stock options is estimated using the Black-Scholes valuation model. Key input assumptions include the expected option term, the expected volatility of the common shares over the expected term of the option, the risk-free interest rate, and the expected dividend yield. Compensation expense related to stock options is recognized in the consolidated statement of operations on a straight-line basis over the vesting period. No stock options were granted during the nine months ended September 27, 2019.

 

The total fair value of stock options that exercised during the nine months ended September 27, 2019, based on the difference between market price on the date of exercise and the date of grant, was $2.4 million. The total amount of cash received from the exercise of these stock options was $0.4 million. There were 73 thousand stock options outstanding as of September 27, 2019.

 

 

13. Income Taxes

The Company determines its estimated annual effective tax rate at the end of each interim period based on full-year forecasted pre-tax income and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period with the cumulative effect of any changes in the estimated annual effective tax rate being recorded in the fiscal quarter in which the change is determined. The tax effect of significant unusual items is reflected in the period in which they occur. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 29.0% in the determination of the estimated annual effective tax rate.

The Company’s effective tax rate of 18.8% for the three months ended September 27, 2019 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions and other tax credits.

The Company’s effective tax rate of 12.9% for the nine months ended September 27, 2019 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions, other tax credits, and windfall tax benefits upon vesting of certain share-based compensation awards during the period.

The Company’s effective tax rate of 19.5% for the three months ended September 28, 2018 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions and other tax credits; offset by non-deductible expenses recognized under an earn-out agreement in connection with the Company’s acquisition of Zettlex Holdings Limited (“Zettlex”) in 2018.

The Company’s effective tax rate of 17.3% for the nine months ended September 28, 2018 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions, other tax credits, and windfall tax benefits upon vesting of certain share-based compensation awards during the period; offset by non-deductible expenses recognized under an earn-out agreement in connection with the Zettlex acquisition.

The Company maintains a valuation allowance on some of its deferred tax assets in certain jurisdictions. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.

 

 

26


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

14. Restructuring and Acquisition Related Costs

The following table summarizes restructuring and acquisition related costs in the accompanying consolidated statements of operations (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2019 restructuring

$

1,115

 

 

$

 

 

$

4,047

 

 

$

 

2018 restructuring

 

351

 

 

 

137

 

 

 

789

 

 

 

1,125

 

Total restructuring charges

 

1,466

 

 

 

137

 

 

 

4,836

 

 

 

1,125

 

Acquisition and related charges

 

4,080

 

 

 

2,204

 

 

 

7,077

 

 

 

3,680

 

Total restructuring and acquisition related costs

$

5,546

 

 

$

2,341

 

 

$

11,913

 

 

$

4,805

 

2019 Restructuring

During the fourth quarter of 2018, the Company implemented a restructuring plan intended to realign operations, reduce costs, achieve operational efficiencies and focus resources on growth initiatives. During the three and nine months ended September 27, 2019, the Company recorded $1.1 million and $3.2 million, respectively, in severance and related costs, and zero and $0.8 million, respectively, in facility related costs in connection with the 2019 restructuring plan. As of September 27, 2019, the Company incurred cumulative costs related to this restructuring plan totaling $4.4 million. The Company anticipates completing the 2019 restructuring program in the first quarter of 2020 and expects to incur additional restructuring charges of $3.0 million to $4.5 million related to the 2019 restructuring program.

 

The following table summarizes restructuring costs associated with the 2019 restructuring program for each reportable segment and unallocated corporate and shared services costs (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 27,

 

 

2019

 

 

2019

 

Photonics

$

475

 

 

$

2,025

 

Vision

 

367

 

 

 

1,023

 

Precision Motion

 

340

 

 

 

534

 

Unallocated Corporate and Shared Services

 

(67

)

 

 

465

 

Total

$

1,115

 

 

$

4,047

 

 

27


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

2018 Restructuring

During the second quarter of 2018, the Company initiated a program to integrate manufacturing operations as a result of acquisition activities. During the three and nine months ended September 27, 2019, the Company recorded $0.4 million and $0.8 million, respectively, in severance and related costs in connection with the 2018 restructuring plan. These costs were reported in the Vision reportable segment. As of September 27, 2019, the Company incurred cumulative costs related to this restructuring plan totaling $2.4 million. The Company anticipates completing the 2018 restructuring program during the fourth quarter of 2019 and expects to incur additional restructuring charges of $0.4 million to $0.6 million related to the 2018 restructuring program in the Vision reportable segment.

Rollforward of Accrued Expenses Related to Restructuring

The following table summarizes the accrual activities, by component, related to the Company’s restructuring plans recorded in the accompanying consolidated balance sheets (in thousands):

 

 

Total

 

 

Severance

 

 

Facility

 

 

Other

 

Balance at December 31, 2018

$

1,276

 

 

$

876

 

 

$

388

 

 

$

12

 

Restructuring charges

 

4,836

 

 

 

3,437

 

 

 

975

 

 

 

424

 

Cash payments

 

(2,717

)

 

 

(2,381

)

 

 

58

 

 

 

(394

)

Reclassification of reserves (a)

 

(601

)

 

 

 

 

 

(601

)

 

 

 

Non-cash write-offs and other adjustments

 

(964

)

 

 

(144

)

 

 

(820

)

 

 

 

Balance at September 27, 2019

$

1,830

 

 

$

1,788

 

 

$

 

 

$

42

 

(a)

Accrual related to exited facilities was reclassified to operating lease liabilities upon adoption of ASU 2016-02.

Acquisition and Related Charges

Acquisition related costs in connection with business combinations, including finders’ fees, legal, valuation, and other professional or consulting fees, totaled $3.3 million and $4.9 million for the three and nine months ended September 27, 2019, respectively, and $0.5 million and $0.9 million for the three and nine months ended September 28, 2018, respectively. Acquisition related costs recognized under earn-out agreements in connection with acquisitions totaled $0.8 million and $2.2 million for the three and nine months ended September 27, 2019, respectively, and $1.7 million and $2.8 million for the three and nine months ended September 28, 2018, respectively. The majority of acquisition related costs for the three and nine months ended September 27, 2019 were included in the Company’s Precision Motion and Unallocated Corporate and Shared Services reportable segments.

 

 

15. Commitments and Contingencies

Purchase Commitments

There have been no material changes to the Company’s purchase commitments since December 31, 2018.

Legal Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company reviews the status of each significant matter and assesses the potential financial exposure on a quarterly basis. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available as of the date of the consolidated balance sheet. As additional information becomes available, the Company reassesses the potential liability related to any pending claims and litigations and may revise its estimates. The Company does not believe that the outcome of these claims will have a material adverse effect on its consolidated financial statements but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect on the consolidated financial statements.

28


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

Guarantees and Indemnifications

In the normal course of its operations, the Company executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business dispositions, sale of assets, sale of products and operating leases. Additionally, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which they are involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. Certain of the Company’s officers and directors are also a party to indemnification agreements with the Company. These indemnification agreements provide, among other things, that the director and officer shall be indemnified to the fullest extent permitted by applicable law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such officer or director in connection with any proceeding by reason of his or her relationship with the Company. In addition, the indemnification agreements provide for the advancement of expenses incurred by such director or officer in connection with any proceeding covered by the indemnification agreement, subject to the conditions set forth therein and to the extent such advancement is not prohibited by law. The indemnification agreements also set out the procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims for which indemnification is sought, the procedures for enforcement of indemnification rights, the limitations on and exclusions from indemnification, and the minimum levels of directors’ and officers’ liability insurance to be maintained by the Company.

 

 

16. Related Party Transactions

As of March 29, 2019, certain members of the Company’s board of directors served on the board of directors or as advisors of companies that are customers of the Company. All contracts with these related parties were executed at arm’s length in the ordinary course of business. As of the beginning of the second quarter of 2019, these customers were no longer considered to be related parties.

The aggregate revenue from these customers was $11.6 million for the three months ended March 29, 2019. The aggregate revenue from these customers was $8.5 million and $20.3 million for the three and nine months ended September 28, 2018, respectively.

 

 

17. Segment Information

Reportable Segments

The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and assessing performance for the entire Company. The Company evaluates the performance of, and allocates resources to, its segments based on revenue, gross profit and operating profit. The Company’s reportable segments have been identified based on commonality and adjacency of technologies, applications and customers amongst the Company’s individual product lines. The Company determined that disclosing revenue by specific product was impracticable due to the highly customized and extensive portfolio of technologies offered to customers.

Based upon the information provided to the CODM, the Company has determined that it operates in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities consist of the following:

Photonics

The Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, continuous wave and ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Vision

The Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart

29


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

recorders; spectrometry technologies; and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Precision Motion

The Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion control sub-assemblies, servo drives, air bearings, air bearing spindles and precision machined components to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Reportable Segment Financial Information

Revenue, gross profit, gross profit margin, operating income (loss), and depreciation and amortization expenses by reportable segment were as follows (in thousands, except percentage data):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

54,570

 

 

$

61,285

 

 

$

172,081

 

 

$

187,178

 

Vision

 

69,923

 

 

 

62,113

 

 

 

201,754

 

 

 

172,145

 

Precision Motion

 

29,573

 

 

 

37,396

 

 

 

92,562

 

 

 

98,836

 

Total

$

154,066

 

 

$

160,794

 

 

$

466,397

 

 

$

458,159

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

25,289

 

 

$

29,218

 

 

$

79,911

 

 

$

89,510

 

Vision

 

26,922

 

 

 

24,160

 

 

 

78,106

 

 

 

64,322

 

Precision Motion

 

12,504

 

 

 

16,788

 

 

 

39,784

 

 

 

44,750

 

Unallocated Corporate and Shared Services

 

(661

)

 

 

(532

)

 

 

(1,676

)

 

 

(1,560

)

Total

$

64,054

 

 

$

69,634

 

 

$

196,125

 

 

$

197,022

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Gross Profit Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

 

46.3

%

 

 

47.7

%

 

 

46.4

%

 

 

47.8

%

Vision

 

38.5

%

 

 

38.9

%

 

 

38.7

%

 

 

37.4

%

Precision Motion

 

42.3

%

 

 

44.9

%

 

 

43.0

%

 

 

45.3

%

Total

 

41.6

%

 

 

43.3

%

 

 

42.1

%

 

 

43.0

%

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

10,661

 

 

$

14,595

 

 

$

34,637

 

 

$

46,102

 

Vision

 

5,830

 

 

 

5,380

 

 

 

14,602

 

 

 

6,246

 

Precision Motion

 

5,221

 

 

 

8,818

 

 

 

16,839

 

 

 

25,037

 

Unallocated Corporate and Shared Services

 

(8,911

)

 

 

(7,798

)

 

 

(23,779

)

 

 

(22,048

)

Total

$

12,801

 

 

$

20,995

 

 

$

42,299

 

 

$

55,337

 

30


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 27, 2019

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Depreciation and Amortization Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

3,276

 

 

$

2,997

 

 

$

8,486

 

 

$

9,030

 

Vision

 

5,432

 

 

 

5,100

 

 

 

15,658

 

 

 

15,371

 

Precision Motion

 

1,061

 

 

 

1,020

 

 

 

3,613

 

 

 

2,364

 

Unallocated Corporate and Shared Services

 

71

 

 

 

82

 

 

 

197

 

 

 

621

 

Total

$

9,840

 

 

$

9,199

 

 

$

27,954

 

 

$

27,386

 

Revenue by Geography

The Company aggregates geographic revenue based on the customer location where products are shipped. Revenue from these customers was as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

$

63,278

 

 

$

63,073

 

 

$

190,048

 

 

$

181,653

 

Germany

 

21,423

 

 

 

23,089

 

 

 

63,738

 

 

 

64,170

 

Rest of Europe

 

30,489

 

 

 

30,222

 

 

 

97,230

 

 

 

80,629

 

China

 

11,895

 

 

 

17,516

 

 

 

42,395

 

 

 

51,486

 

Rest of Asia-Pacific

 

24,218

 

 

 

24,882

 

 

 

65,367

 

 

 

74,589

 

Other

 

2,763

 

 

 

2,012

 

 

 

7,619

 

 

 

5,632

 

Total

$

154,066

 

 

$

160,794

 

 

$

466,397

 

 

$

458,159

 

The majority of revenue from our Photonics, Vision and Precision Motion segments is generated from sales to customers within the United States and Europe. Each segment also generates revenue across the other geographies, with no significant concentration of any segment’s remaining revenue.

Revenue by End Market

The Company primarily operates in two end markets: the advanced industrial market and the medical market. Revenue by end market was approximately as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Advanced Industrial

 

45

%

 

 

50

%

 

 

45

%

 

 

50

%

Medical

 

55

%

 

 

50

%

 

 

55

%

 

 

50

%

Total

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

The majority of revenue from the Photonics and Precision Motion segments is generated from sales to customers in the advanced industrial market. The majority of revenue from the Vision segment is generated from sales to customers in the medical market.

 

 

 

 

 

31


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report on Form 10-Q. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to, our belief that the Purchasing Managers Index (“PMI”) may provide an indication of the impact of general economic conditions on our sales into the advanced industrial end market; our strategy; anticipated financial performance; expected liquidity and capitalization; drivers of revenue growth and our growth expectations in various markets; management’s plans and objectives for future operations, expenditures and product development and investments in research and development; business prospects; potential of future product releases and expansion of our product and service offerings; anticipated revenue performance; industry trends; market conditions; our competitive positions; changes in economic and political conditions; changes in accounting principles; changes in actual or assumed tax liabilities; expectations regarding tax exposures; anticipated reinvestment of future earnings and dividend policy; anticipated expenditures in regard to the Company’s benefit plans; future acquisitions; integration and anticipated benefits from acquisitions and dispositions; anticipated economic benefits, costs and timelines of restructuring programs; ability to repay our indebtedness; our intentions regarding the use of cash; expectations regarding legal and regulatory environmental requirements and our compliance thereto; and other statements that are not historical facts. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following: economic and political conditions and the effects of these conditions on our customers’ businesses and level of business activities; our significant dependence upon our customers’ capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate and successfully commercialize our innovations; failure to introduce new products in a timely manner; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our information technology systems; our failure to comply with data privacy regulations; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; our increased use of outsourcing in foreign countries; risks associated with increased outsourcing of components manufacturing; our exposure to increased tariffs, trade restrictions or taxes on our products; our failure to comply with local import and export regulations in the jurisdictions in which we operate; negative effects on global economic conditions, financial markets and our business as a result of the United Kingdom’s impending withdrawal from the European Union and the actions of the current U.S. government, including its policies on trade tariffs and reactions from other countries to any new tariffs imposed by the U.S.; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors’ products; disruptions in the supply of certain key components or other goods from our suppliers; our failure to accurately forecast component and raw material requirements leading to excess inventories or delays in the delivery of our products; production difficulties and product delivery delays or disruptions; our exposure to medical device regulations, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products; potential penalties for violating foreign, U.S. federal, and state healthcare laws and regulations; changes in governmental regulations affecting our business or products; our compliance, or failure to comply, with environmental regulations; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; tax audits by tax authorities; changes in tax laws, and fluctuations in our effective tax rates; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; our existing indebtedness limiting our ability to engage in certain activities; volatility in the market price for our common shares; provisions of our corporate documents that may delay or prevent a change in control; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company’s operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the heading “Risk Factors.” In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements, except as required under applicable law.

 

32


 

Accounting Period

The interim financial statements of Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “our”) are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

Business Overview

We are a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. We combine deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables us to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers' demanding applications.

Reportable Segments

We operate in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities consist of the following:

Photonics

Our Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, continuous wave and ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Vision

Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies, and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Precision Motion

Our Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motors, motion control sub-assemblies, servo drives, air bearings, air bearing spindles and precision machined components to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

End Markets

We primarily operate in two end markets: the advanced industrial market and the medical market.

Advanced Industrial Market

For the three and nine months ended September 27, 2019, the advanced industrial market accounted for approximately 45% of our revenue. Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, the financial condition of our customers, changes in regulatory requirements and laws, and general economic conditions. We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market.

Medical Market

For the three and nine months ended September 27, 2019, the medical market accounted for approximately 55% of our revenue. Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending,

33


 

changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, trends in surgical procedures, changes in technology requirements, changes in customer or patient preferences, and general demographic trends.

Strategy

Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:

 

disciplined focus on our diversified business model of providing functionality to long life-cycle OEM customer platforms in attractive medical and advanced industrial niche markets;

 

improving our business mix to increase medical sales as a percentage of total revenue by:

 

-

introducing new products aimed at attractive medical applications, such as minimally invasive and robotic surgery, ophthalmology, patient monitoring, drug delivery, clinical laboratory testing and life science equipment;

 

-

deepening our key account management relationships with and driving cross selling of our product offerings to leading medical equipment manufacturers; and

 

-

pursuing complementary medical technology acquisitions;

 

increasing our penetration of high growth advanced industrial applications, such as laser materials processing, robotics, automation and metrology, by working closely with OEM customers to launch application specific products that closely match the requirements of each application;

 

broadening our portfolio of enabling proprietary technologies and capabilities through increased investment in new product development, expanded sales and marketing channels to reach target customers, and investments in application development to further penetrate existing customers, while expanding the applicability of our solutions to new markets;

 

broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications, including increasing our recurring revenue streams such as services, spare parts and consumables;

 

improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean manufacturing principles and strategic sourcing across our major production sites; and

 

attracting, retaining, and developing world-class talented and motivated employees.

Significant Events and Updates

Acquisition of ARGES GmbH

On July 31, 2019, we acquired 100% of the outstanding shares of ARGES GmbH (“ARGES”), a Wackersdorf, Germany-based manufacturer of innovative laser scanning subsystems used in industrial materials processing and medical applications, for a total purchase price of €65.5 million ($72.9 million), subject to customary working capital adjustments. The purchase price consists of €24.0 million ($26.7 million) cash paid at closing, 124 thousand Novanta common shares issued upon closing (with a fair market value of €9.8 million, or $10.9 million, based on the closing market price of $87.58 per share on July 30, 2019), €7.1 million ($7.9 million) estimated fair value of contingent consideration and €24.7 million ($27.4 million) deferred cash consideration, which is expected to be paid on June 29, 2020. The contingent consideration payments will be payable annually based on actual revenue achievement against certain revenue targets from August 2019 through December 2026, with the first payment due in the first quarter of 2021. This initial cash purchase price was financed with borrowings under our revolving credit facility. We expect that the addition of ARGES will complement and expand our existing portfolio of lasers and laser beam steering solutions capabilities within the Photonics reportable segment.

Acquisition of Med X Change, Inc.

On June 5, 2019, we acquired 100% of the outstanding stock of Med X Change, Inc. (“Med X Change”), a Bradenton, Florida-based provider of medical grade, high definition and 4K video recording and documentation solutions to OEMs in the medical market, for a total purchase price of $21.9 million, net of working capital adjustments. The acquisition was financed with cash on hand and $21.0 million borrowings under our revolving credit facility. We expect that the addition of Med X Change will complement and expand the technology capabilities within our Vision reportable segment to provide our medical OEM customers with more integrated operating room solutions.


34


 

Acquisition of Ingenia-CAT, S.L.

On April 16, 2019, we acquired 100% of the outstanding stock of Ingenia-CAT, S.L. (“Ingenia”), a Barcelona, Spain-based provider of high-performance servo drives and control software to OEMs in the medical and advanced industrial markets, for a total purchase price of €14.3 million ($16.2 million), net of working capital adjustments. The purchase price consists of €8.5 million ($9.6 million) of cash consideration and €5.8 million ($6.6 million) estimated fair value of contingent consideration. The contingent consideration payments will be payable annually based on actual revenue achievement against certain revenue targets from April 2019 through March 2022, with the first payment due in the second quarter of 2020. The initial cash purchase price was financed with cash on hand and borrowings under our revolving credit facility. We expect that the addition of Ingenia will enhance our strategic position in the precision motion control industry by enabling us to offer a broader range of motion control technologies and integrated solutions. Ingenia is included in our Precision Motion reportable segment.

Results of Operations for the Three and Nine Months Ended September 27, 2019 Compared with the Three and Nine Months Ended September 28, 2018

The following table sets forth our unaudited results of operations as a percentage of revenue for the periods indicated:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

58.4

 

 

 

56.7

 

 

 

57.9

 

 

 

57.0

 

Gross profit

 

41.6

 

 

 

43.3

 

 

 

42.1

 

 

 

43.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development and engineering

 

9.0

 

 

 

8.2

 

 

 

8.8

 

 

 

8.2

 

Selling, general and administrative

 

18.1

 

 

 

18.1

 

 

 

19.1

 

 

 

19.1

 

Amortization of purchased intangible assets

 

2.6

 

 

 

2.5

 

 

 

2.5

 

 

 

2.5

 

Restructuring and acquisition related costs

 

3.6

 

 

 

1.5

 

 

 

2.6

 

 

 

1.0

 

Total operating expenses

 

33.3

 

 

 

30.2

 

 

 

33.0

 

 

 

30.9

 

Operating income

 

8.3

 

 

 

13.1

 

 

 

9.1

 

 

 

12.1

 

Interest income (expense), net

 

(1.4

)

 

 

(1.5

)

 

 

(1.4

)

 

 

(1.6

)

Foreign exchange transaction gains (losses), net

 

0.3

 

 

 

0.0

 

 

 

0.1

 

 

 

(0.0

)

Other income (expense), net

 

(0.0

)

 

 

(0.0

)

 

 

(0.0

)

 

 

(0.0

)

Income before income taxes

 

7.1

 

 

 

11.6

 

 

 

7.8

 

 

 

10.4

 

Income tax provision

 

1.3

 

 

 

2.3

 

 

 

1.0

 

 

 

1.8

 

Consolidated net income

 

5.8

 

 

 

9.3

 

 

 

6.8

 

 

 

8.6

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

(0.3

)

 

 

 

 

 

(0.4

)

Net income attributable to Novanta Inc.

 

5.8

%

 

 

9.1

%

 

 

6.8

%

 

 

8.2

%

Overview of Financial Results

Total revenue of $154.1 million for the three months ended September 27, 2019 decreased $6.7 million, or 4.2%, from the prior year period primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by revenue growth in our medical market. The effect of our current year acquisitions resulted in an increase in revenue of $5.0 million, or 3.1%. In addition, foreign currency exchange rates adversely impacted our revenue by $2.1 million, or 1.3%, for the three months ended September 27, 2019.

 

Total revenue of $466.4 million for the nine months ended September 27, 2019 increased $8.2 million, or 1.8%, from the prior year period primarily due to increased demand in the medical market, partially offset by decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending. The effect of our current and prior year acquisitions resulted in an increase in revenue of $10.6 million, or 2.3%. In addition, foreign currency exchange rates adversely impacted our revenue by $9.1 million, or 2.0%, for the nine months ended September 27, 2019.

 

Operating income decreased $8.2 million from $21.0 million for the three months ended September 28, 2018 to $12.8 million for the three months ended September 27, 2019. This decrease was primarily attributable to a decrease in gross profit of $5.6 million as a result of lower revenue and an increase in restructuring and acquisition related costs of $3.2 million.

 

35


 

Operating income decreased $13.0 million from $55.3 million for nine months ended September 28, 2018 to $42.3 million for the nine months ended September 27, 2019. This decrease was primarily attributable to an increase in research and development and engineering (“R&D”) spending of $3.5 million and an increase in restructuring and acquisition related costs of $7.1 million.

 

Diluted earnings per share (“Diluted EPS”) of $0.25 for the three months ended September 27, 2019 decreased $0.35 from the prior year period. The decrease was attributable to a decrease in operating income and the positive effect of a $6.9 million Laser Quantum nontaxable redeemable noncontrolling interest redemption value adjustment in the prior year that is not applicable in the current year.

 

Diluted EPS of $0.89 for the nine months ended September 27, 2019 decreased $0.22 from the prior year period. The decrease was attributable to a decrease in operating income and the positive effect of a $1.8 million Laser Quantum nontaxable redeemable noncontrolling interest redemption value adjustment in the prior year that is not applicable in the current year.

Revenue

The following tables set forth external revenue by reportable segment for the periods noted (dollars in thousands):

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 27,

 

 

September 28,

 

 

Increase

 

 

Percentage

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

Change

 

Photonics

$

54,570

 

 

$

61,285

 

 

$

(6,715

)

 

 

(11.0

)%

Vision

 

69,923

 

 

 

62,113

 

 

 

7,810

 

 

 

12.6

%

Precision Motion

 

29,573

 

 

 

37,396

 

 

 

(7,823

)

 

 

(20.9

)%

Total

$

154,066

 

 

$

160,794

 

 

$

(6,728

)

 

 

(4.2

)%

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 27,

 

 

September 28,

 

 

Increase

 

 

Percentage

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

Change

 

Photonics

$

172,081

 

 

$

187,178

 

 

$

(15,097

)

 

 

(8.1

)%

Vision

 

201,754

 

 

 

172,145

 

 

 

29,609

 

 

 

17.2

%

Precision Motion

 

92,562

 

 

 

98,836

 

 

 

(6,274

)

 

 

(6.3

)%

Total

$

466,397

 

 

$

458,159

 

 

$

8,238

 

 

 

1.8

%

Photonics

Photonics segment revenue for the three months ended September 27, 2019 decreased by $6.7 million, or 11.0%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, and a decrease in revenue from our optical light engine products, partially offset by revenue from the ARGES acquisition in July 2019.

 

Photonics segment revenue for the nine months ended September 27, 2019 decreased by $15.1 million, or 8.1%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, and a decrease in revenue from our optical light engine products.

Vision

Vision segment revenue for the three months ended September 27, 2019 increased by $7.8 million, or 12.6%, versus the prior year period, primarily due to an increase in revenue from our minimally invasive surgery (“MIS”) products of $8.5 million as a result of increased demand in the medical market and the Med X Change acquisition in June 2019.

 

Vision segment revenue for the nine months ended September 27, 2019 increased by $29.6 million, or 17.2%, versus the prior year period primarily due to an increase in revenue from our MIS products of $29.8 million as a result of increased demand in the medical market.

36


 

Precision Motion

Precision Motion segment revenue for the three months ended September 27, 2019 decreased by $7.8 million, or 20.9%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by increased demand in the medical market and the Ingenia acquisition in April 2019.

 

Precision Motion segment revenue for the nine months ended September 27, 2019 decreased by $6.3 million, or 6.3%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by increased demand in the medical market and the acquisitions of Ingenia in April 2019 and Zettlex Holdings Limited (“Zettlex”) in May 2018.

Gross Profit and Gross Profit Margin

The following table sets forth the gross profit and gross profit margin for each of our reportable segments for the periods noted (dollars in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

25,289

 

 

$

29,218

 

 

$

79,911

 

 

$

89,510

 

Vision

 

26,922

 

 

 

24,160

 

 

 

78,106

 

 

 

64,322

 

Precision Motion

 

12,504

 

 

 

16,788

 

 

 

39,784

 

 

 

44,750

 

Unallocated Corporate and Shared Services

 

(661

)

 

 

(532

)

 

 

(1,676

)

 

 

(1,560

)

Total

$

64,054

 

 

$

69,634

 

 

$

196,125

 

 

$

197,022

 

Gross profit margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

 

46.3

%

 

 

47.7

%

 

 

46.4

%

 

 

47.8

%

Vision

 

38.5

%

 

 

38.9

%

 

 

38.7

%

 

 

37.4

%

Precision Motion

 

42.3

%

 

 

44.9

%

 

 

43.0

%

 

 

45.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

41.6

%

 

 

43.3

%

 

 

42.1

%

 

 

43.0

%

 

Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, headcount, inventory obsolescence and warranty expenses.

Photonics

Photonics segment gross profit for the three months ended September 27, 2019 decreased $3.9 million, or 13.4%, versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 46.3% for the three months ended September 27, 2019, versus a gross profit margin of 47.7% for the prior year period. The decrease in gross profit margin was primarily attributable to an increase in amortization of inventory fair value adjustments and amortization of developed technology of $0.5 million, which resulted in a 0.9 percentage point decrease in gross profit margin.

 

Photonics segment gross profit for the nine months ended September 27, 2019 decreased $9.6 million, or 10.7%, versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 46.4% for the nine months ended September 27, 2019, versus gross profit margin of 47.8% for the prior year period. The decrease in gross profit margin was primarily attributable to unfavorable product mix, partially offset by savings from cost control initiatives.

Vision

Vision segment gross profit for the three months ended September 27, 2019 increased $2.8 million, or 11.4%, versus the prior year period, primarily due to an increase in revenue. Vision segment gross profit margin was 38.5% for the three months ended September 27, 2019, versus a gross profit margin of 38.9% for the prior year period. The decrease in gross profit margin was primarily attributable to an increase in amortization of inventory fair value adjustments and amortization of developed technology of $0.3 million, which resulted in a 0.4 percentage point decrease in gross profit margin.

 

Vision segment gross profit for the nine months ended September 27, 2019 increased $13.8 million, or 21.4%, versus the prior year period, primarily due to an increase in revenue. Vision segment gross profit margin was 38.7% for the nine months ended

37


 

September 27, 2019, versus a gross profit margin of 37.4% for the prior year period. The increase in gross profit margin was primarily attributable to changes in product mix.

Precision Motion

Precision Motion segment gross profit for the three months ended September 27, 2019 decreased $4.3 million, or 25.5%, versus the prior year period, primarily due to a decrease in revenue and a decrease in gross profit margin. Precision Motion segment gross profit margin was 42.3% for the three months ended September 27, 2019, versus a gross profit margin of 44.9% for the prior year period. The decrease in gross profit margin was primarily attributable to business volume reductions that could not be fully compensated by cost reduction initiatives.

 

Precision Motion segment gross profit for the nine months ended September 27, 2019 decreased $5.0 million, or 11.1%, versus the prior year period, primarily due to a decrease in revenue and a decrease in gross profit margin. Precision Motion segment gross profit margin was 43.0% for the nine months ended September 27, 2019, versus a gross profit margin of 45.3% for the prior year period. The decrease in gross profit margin was primarily attributable to business volume reductions that could not be fully compensated by cost reduction initiatives and an increase in amortization of inventory fair value adjustments and amortization of developed technology of $0.4 million, which resulted in a 0.4 percentage point decrease in gross profit margin.

Operating Expenses

The following table sets forth operating expenses for the periods noted (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development and engineering

$

13,811

 

 

$

13,204

 

 

$

41,196

 

 

$

37,744

 

Selling, general and administrative

 

27,926

 

 

 

29,147

 

 

 

88,977

 

 

 

87,598

 

Amortization of purchased intangible assets

 

3,970

 

 

 

3,947

 

 

 

11,740

 

 

 

11,538

 

Restructuring and acquisition related costs

 

5,546

 

 

 

2,341

 

 

 

11,913

 

 

 

4,805

 

Total

$

51,253

 

 

$

48,639

 

 

$

153,826

 

 

$

141,685

 

 

Research and Development and Engineering Expenses

R&D expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects. R&D expenses were $13.8 million, or 9.0% of revenue, during the three months ended September 27, 2019, versus $13.2 million, or 8.2% of revenue, during the prior year period. R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to R&D expenses from current year acquisitions.

 

R&D expenses were $41.2 million, or 8.8% of revenue, during the nine months ended September 27, 2019, versus $37.7 million, or 8.2% of revenue, during the prior year period. R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to R&D expenses from current year acquisitions and higher investments in R&D.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, and executive management functions. SG&A expenses were $27.9 million, or 18.1% of revenue, during the three months ended September 27, 2019, versus $29.1 million, or 18.1% of revenue, during the prior year period. SG&A expenses decreased in terms of total dollars primarily due to lower variable compensation expense.

 

SG&A expenses were $89.0 million, or 19.1% of revenue, during the nine months ended September 27, 2019, versus $87.6 million, or 19.1% of revenue, during the prior year period. SG&A expenses increased in terms of total dollars primarily due to SG&A expenses from current and prior year acquisitions.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $4.0 million, or 2.6% of revenue, during the three months ended September 27, 2019, versus $3.9 million, or 2.5% of revenue, during the prior year period.

38


 

 

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $11.7 million, or 2.5% of revenue, during the nine months ended September 27, 2019, versus $11.5 million, or 2.5% of revenue, during the prior year period.

Restructuring and Acquisition Related Costs

We recorded restructuring and acquisition related costs of $5.5 million during the three months ended September 27, 2019, versus $2.3 million during the prior year period. The increase in restructuring and acquisition related costs versus the prior year period was primarily due to an increase in restructuring charges of $1.3 million as a result of the 2018 and 2019 restructuring programs and an increase in acquisition related costs of $1.9 million primarily related to professional services fees for acquisitions.

We recorded restructuring and acquisition related costs of $11.9 million during the nine months ended September 27, 2019, versus $4.8 million during the prior year period. The increase in restructuring and acquisition related costs versus the prior year period was primarily due to an increase in restructuring charges of $3.7 million as a result of the 2018 and 2019 restructuring programs and an increase in acquisition related costs of $3.4 million primarily related to professional services fees for acquisitions.

Operating Income (Loss) by Segment

The following table sets forth operating income (loss) by segment for the periods noted (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

10,661

 

 

$

14,595

 

 

$

34,637

 

 

$

46,102

 

Vision

 

5,830

 

 

 

5,380

 

 

 

14,602

 

 

 

6,246

 

Precision Motion

 

5,221

 

 

 

8,818

 

 

 

16,839

 

 

 

25,037

 

Unallocated Corporate and Shared Services

 

(8,911

)

 

 

(7,798

)

 

 

(23,779

)

 

 

(22,048

)

Total

$

12,801

 

 

$

20,995

 

 

$

42,299

 

 

$

55,337

 

 

Photonics

Photonics segment operating income was $10.7 million, or 19.5% of revenue, during the three months ended September 27, 2019, versus $14.6 million, or 23.8% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $3.9 million.

 

Photonics segment operating income was $34.6 million, or 20.1% of revenue, during the nine months ended September 27, 2019, versus $46.1 million, or 24.6% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $9.6 million and an increase in restructuring related charges of $2.0 million associated with the 2019 restructuring program.

Vision

Vision segment operating income was $5.8 million, or 8.3% of revenue, during the three months ended September 27, 2019, versus $5.4 million, or 8.7% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $2.8 million, partially offset by an increase in R&D and SG&A expenses of $1.3 million and an increase in restructuring related charges of $0.6 million associated with the 2018 and 2019 restructuring programs.

 

Vision segment operating income was $14.6 million, or 7.2% of revenue, during the nine months ended September 27, 2019, versus $6.2 million, or 3.6% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $13.8 million, partially offset by an increase in R&D and SG&A expenses of $3.6 million and an increase in restructuring and acquisition related costs of $1.4 million associated with the 2018 and 2019 restructuring programs and professional services fees for acquisitions.

39


 

Precision Motion

Precision Motion segment operating income was $5.2 million, or 17.7% of revenue, during the three months ended September 27, 2019, versus $8.8 million, or 23.6% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $4.3 million, partially offset by a $1.2 million decrease in amortization of purchased intangible assets and acquisition related costs.

 

Precision Motion segment operating income was $16.8 million, or 18.2% of revenue, during the nine months ended September 27, 2019, versus $25.0 million, or 25.3% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $5.0 million and an increase in R&D and SG&A expenses of $3.3 million.

Unallocated Corporate and Shared Services

Unallocated corporate and shared services costs primarily represent costs of corporate and shared services functions that are not allocated to the operating segments, including certain restructuring and most acquisition related costs. These costs for the three months ended September 27, 2019 increased by $1.1 million versus the prior year period primarily due to an increase in restructuring and acquisition related costs of $2.6 million, partially offset by a decrease in SG&A expenses of $1.6 million.

 

Unallocated corporate and shared services costs for the nine months ended September 27, 2019 increased by $1.7 million versus the prior year period primarily due to an increase in restructuring and acquisition related costs of $4.1 million, partially offset by a decrease in SG&A expenses of $2.4 million.

Other Income and Expense Items

The following table sets forth other income and expense items for the periods noted (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest income (expense), net

$

(2,153

)

 

$

(2,396

)

 

$

(6,357

)

 

$

(7,315

)

Foreign exchange transaction gains (losses), net

 

387

 

 

 

66

 

 

 

455

 

 

 

(164

)

Other income (expense), net

 

(48

)

 

 

(44

)

 

 

(186

)

 

 

(131

)

 

Interest Income (Expense), Net

Net interest expense was $2.2 million for the three months ended September 27, 2019, versus $2.4 million in the prior year period. The decrease in net interest expense was primarily due to a decrease in average debt levels and a decrease in the weighted average interest rate on our senior credit facilities. The weighted average interest rate on our senior credit facilities was 3.13% during the three months ended September 27, 2019, versus 3.49% during the three months ended September 28, 2018.

 

Net interest expense was $6.4 million for the nine months ended September 27, 2019, versus $7.3 million in the prior year period. The decrease in net interest expense was primarily due to a decrease in average debt levels and a decrease in the weighted average interest rate on our senior credit facilities. The weighted average interest rate on our senior credit facilities was 3.46% during the nine months ended September 27, 2019, versus 3.55% during the nine months ended September 28, 2018.

Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses) were $0.4 million net gains for the three months ended September 27, 2019, versus less than $0.1 million net gains in the prior year period. The increase in net gains was due to changes in the value of the U.S. Dollar against the British Pound and Euro and realized gains from foreign currency contracts.

 

Foreign exchange transaction gains (losses) were $0.5 million net gains for the nine months ended September 27, 2019, versus $0.2 million net losses in the prior year period, primarily due to changes in the value of the U.S. Dollar against the British Pound and Euro and unrealized gains from foreign currency contracts.

Other Income (Expense), Net

Net other expense was nominal for both the three and nine months ended September 27, 2019, respectively, and the three and nine months ended September 28, 2018, respectively.

40


 

Income Taxes

Our effective tax rate for the three months ended September 27, 2019 was 18.8%, versus 19.5% for the prior year period. Our effective tax rate of 18.8% for the three months ended September 27, 2019 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions and other tax credits.

 

Our effective tax rate for the nine months ended September 27, 2019 was 12.9%, versus 17.3% for the prior year period. Our effective tax rate of 12.9% for the nine months ended September 27, 2019 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions, other tax credits, and windfall tax benefits upon vesting of certain share-based compensation awards during the period.

 

 

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of our debt and related interest expense. Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. We believe our future operating cash flows will be sufficient to meet our future operating and capital expenditure cash needs for the foreseeable future, including at least the next 12 months. The availability of borrowing capacity under our revolving credit facility provides another potential source of liquidity for acquisitions. We may seek to raise additional capital, which could be in the form of bonds, convertible debt or equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Second Amended and Restated Credit Agreement.

Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long term capital with satisfactory terms. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, availability of borrowings under our revolving credit facility, and market changes in general. See “Risks Relating to Our Common Shares and Our Capital Structure” included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. We cannot assure you that applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary.

As of September 27, 2019, $37.1 million of our $61.4 million cash and cash equivalents was held by subsidiaries outside of Canada and the United States. Generally, our intent is to use cash held in these foreign subsidiaries to fund our local operations or acquisitions by those local subsidiaries and to pay down borrowings under our revolving credit facility. Approximately 74.6% of our outstanding borrowings under our senior credit facilities was held in our subsidiaries outside of Canada and the United States. Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries.

Share Repurchase Plan

In October 2018, our Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $25.0 million worth of our common shares. Share repurchases have been made under the 2018 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934. During the nine months ended September 27, 2019, we repurchased 81 thousand shares for an aggregate purchase price of $6.7 million at an average price of $82.83 per share under the 2018 Repurchase Plan. We had $18.3 million available for share repurchases under the 2018 Repurchase Plan as of September 27, 2019.

Under the 2018 Repurchase Plan, shares may be repurchased from time to time, at our discretion, based on our ongoing assessment of the capital needs of the business, the market price of our common stock, and general market conditions. Shares may also be repurchased through an accelerated stock purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common stock to be repurchased when we would otherwise be prohibited from doing so under insider trading laws. The 2018 Repurchase Plan does not obligate us to repurchase any particular amount of our common stock. No time limit was set for the completion of the 2018 Repurchase Plan, and the plan may be suspended or discontinued at any time. We expect to fund the share repurchases through cash on hand and future cash generated from operations.

41


 

Second Amended and Restated Credit Agreement

In May 2016, we entered into the second amended and restated senior secured credit agreement (the “Second Amended and Restated Credit Agreement”), consisting of a $75.0 million, 5-year term loan facility and a $225.0 million, 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in May 2021. In August 2017, we entered into a third amendment (the “Third Amendment”) to the Second Amended and Restated Credit Agreement. The Third Amendment increased the borrowing limit under the revolving credit facility commitment from $225 million to $325 million and reset the accordion feature to $125 million for future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million.

In February 2018, we entered into a fourth amendment (the “Fourth Amendment”) to the Second Amended and Restated Credit Agreement. The Fourth Amendment increased the maximum consolidated leverage ratio from 3.00 to 3.50, increased the maximum consolidated leverage ratio for permitted acquisitions and stock repurchases from 2.50 to 3.00, increased the maximum consolidated leverage ratio for a designated acquisition from 3.00 to 3.50, and increased the maximum consolidated leverage ratio for four consecutive quarters following a designated acquisition from 3.50 to 4.00. The Fourth Amendment also made certain other technical changes to the Second Amended and Restated Credit Agreement.

As of September 27, 2019, we had term loans of $56.1 million and revolving loans of $172.8 million outstanding under the Second Amended and Restated Credit Agreement.

The Second Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum leverage ratio and a minimum fixed charge coverage ratio (as defined in the Second Amended and Restated Credit Agreement). The following table summarizes these financial covenants and our compliance therewith as of September 27, 2019:

 

 

Requirement

 

 

Actual

 

Maximum consolidated leverage ratio

 

3.50

 

 

 

1.84

 

Minimum consolidated fixed charge coverage ratio

 

1.50

 

 

 

5.41

 

Cash Flows for the Nine Months Ended September 27, 2019 and September 28, 2018

The following table summarizes our cash flows, cash and cash equivalents, and unused and available funds under our revolving credit facility for the periods indicated (in thousands):

 

 

Nine Months Ended

 

 

September 27,

 

 

September 28,

 

 

2019

 

 

2018

 

Net cash provided by operating activities

$

27,843

 

 

$

67,720

 

Net cash used in investing activities

$

(61,052

)

 

$

(42,257

)

Net cash provided by (used in) financing activities

$

12,379

 

 

$

(12,274

)

 

 

September 27,

 

 

December 31,

 

 

2019

 

 

2018

 

Cash and cash equivalents

$

61,405

 

 

$

82,043

 

Unused and available funds under revolving credit facility

$

152,153

 

 

$

189,942

 

Operating Cash Flows

Cash provided by operating activities was $27.8 million for the nine months ended September 27, 2019, versus $67.7 million for the prior year period. Cash provided by operating activities for the nine months ended September 27, 2019 decreased from the prior year period primarily due to increases in the net working capital in the nine months ended September 27, 2019 which decreased cash provided by operating activities by $39.9 million.

Cash provided by operating activities for the nine months ended September 27, 2019 was negatively impacted by an increase in our days sales outstanding which increased from 51 days at December 31, 2018 to 59 days at September 27, 2019 primarily due to poor sales linearity, a decrease in our days payables outstanding which decreased from 52 days at December 31, 2018 to 48 days at September 27, 2019 and an increase in inventories. Our inventory turnover ratio decreased from 3.4 at December 31, 2018 to 3.2 at September 27, 2019. During the nine months ended September 27, 2019, we paid the first milestone payment under the earn-out

42


 

agreement for the Zettlex acquisition amounting to $3.9 million and paid the 2018 annual employee bonuses, both of which had been accrued for as of December 31, 2018.

Cash provided by operating activities for the nine months ended September 28, 2018 was positively impacted by an increase in our days payables outstanding, which increased from 43 days at December 31, 2017 to 48 days at September 28, 2018, and an increase in accrued expenses. The Company’s growth in revenue of $83.8 million and gross profit of $38.7 million compared to the nine months ended September 29, 2017 increased our outstanding trade receivables and inventories, which negatively impacted our cash provided by operating activities. During the nine months ended September 28, 2018, we paid $2.8 million as the final contingent consideration payment for our acquisition of Applimotion Inc., which had been accrued for as of December 31, 2017.

Investing Cash Flows

Cash used in investing activities was $61.1 million for the nine months ended September 27, 2019, primarily driven by the Ingenia and Med X Change acquisitions and the initial purchase price for the ARGES acquisition. In connection with these acquisitions, we paid $53.1 million cash considerations (net of cash acquired of $4.2 million) during the nine months ended September 27, 2019. We also paid $8.0 million for capital expenditures during the nine months ended September 27, 2019.

Cash used in investing activities was $42.3 million for the nine months ended September 28, 2018, primarily related to $29.6 million cash outflows (net of cash acquired of $3.8 million) related to 2018 acquisitions, $1.2 million in cash paid to acquire customer relationship assets, and $11.6 million in capital expenditures.

Financing Cash Flows

Cash provided by financing activities was $12.4 million for the nine months ended September 27, 2019, primarily due to $66.8 million of borrowings under our revolving credit facility used to fund the Ingenia, Med X Change and ARGES acquisitions, partially offset by $40.8 million in repayments of our term loan and revolving credit facility, $6.8 million of payroll tax payments upon vesting of share-based compensation awards, and $6.7 million of repurchases of common shares.

Cash used in financing activities was $12.3 million for the nine months ended September 28, 2018, primarily due to $30.8 million of cash consideration paid for the acquisition of the remaining equity interest in Laser Quantum, $9.2 million of term loan payments, $19.9 million of optional repayments of borrowings under our revolving credit facility, $3.5 million of payroll tax payments upon vesting of share-based compensation awards, $3.8 million of repurchases of  common shares, partially offset by $55.3 million of borrowings under our revolving credit facility used to fund a portion of the cash consideration paid for the acquisition of Zettlex and the remaining equity interest in Laser Quantum.

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

Our contractual obligations primarily consist of the principal and interest associated with our debt, finance leases, purchase commitments and pension obligations. Such contractual obligations are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Excluding the contractual obligations related to current year acquisitions, through September 27, 2019, we have not entered into any other material new or modified contractual obligations since the end of the fiscal year ended December 31, 2018.

 


43


 

The following table summarizes contractual obligations at September 27, 2019 related to current year acquisitions (in thousands):

 

Contractual Obligations

 

Total

 

 

2019

(remainder of year)

 

 

2020 - 2021

 

 

2022 - 2023

 

 

Thereafter

 

Finance leases (1)

 

$

9,098

 

 

$

185

 

 

$

8,913

 

 

$

 

 

$

 

Purchase commitments (2)

 

 

2,242

 

 

 

1,878

 

 

 

364

 

 

 

 

 

 

 

Contingent considerations (3)

 

 

14,106

 

 

 

 

 

 

5,298

 

 

 

4,452

 

 

 

4,356

 

Deferred cash considerations (4)

 

 

28,036

 

 

 

 

 

 

28,036

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

53,482

 

 

$

2,063

 

 

$

42,611

 

 

$

4,452

 

 

$

4,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Future minimum lease payments under finance lease include the expected price to purchase a facility in Germany during the year ending December 31, 2020.

 

(2) Purchase commitments represent unconditional purchase obligations for current year acquisitions as of September 27, 2019.

 

(3) These amounts represent the estimated contingent consideration payments for current year acquisitions accrued in the consolidated balance sheet as of September 27, 2019 that are expected to be paid between 2020 and 2027. The undiscounted range of the possible contingent consideration payments is zero to 18.0 million ($20.2 million).

 

(4) These amounts represent the deferred cash considerations for current year acquisitions that are expected to be paid in 2020.

 

Off-Balance Sheet Arrangements

Through September 27, 2019, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.

Critical Accounting Policies and Estimates

The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our consolidated financial statements presented in this periodic report on Form 10-Q are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Except for the adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02” or “Topic 842”), through September 27, 2019, there have been no material changes to our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Recent Accounting Pronouncements

See Note 1 to Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk exposures are foreign currency exchange rate fluctuations and interest rate sensitivity. During the three months ended September 27, 2019, there have been no material changes to the information included under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934 (the “Exchange Act”), our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 27, 2019, the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 27, 2019.

44


 

Changes in Internal Control over Financial Reporting

There has been no change to our internal control over financial reporting during the fiscal quarter ended September 27, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

45


 

PART II—OTHER INFORMATION

 

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon its financial condition or results of operations but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon its financial condition or results of operations.

 

Item 1A. Risk Factors

The Company’s risk factors are described in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no material changes in the risks affecting the Company since the filing of such Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth certain information with respect to repurchases of the Company’s common stock during the three months ended September 27, 2019.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)(2)

 

 

Approximate Dollar Value That May Yet Be Purchased Under the Plans or Programs(1)

 

July 1 - August 2, 2019

 

 

13,700

 

 

$

88.06

 

 

 

13,700

 

 

$

20,454,319

 

August 3 - August 30, 2019

 

 

14,600

 

 

$

74.65

 

 

 

14,600

 

 

$

19,364,416

 

August 31 - September 27, 2019

 

 

13,000

 

 

$

80.56

 

 

 

13,000

 

 

$

18,317,079

 

Total

 

 

41,300

 

 

 

 

 

 

 

41,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) In October 2018, the Company's Board of Directors approved a share repurchase plan ("the 2018 Repurchase Plan") authorizing the repurchase of up to an aggregate of $25.0 million of the Company's common shares. The share repurchase plan was announced in the quarterly report for the period ended September 28, 2018 filed on November 6, 2018. The shares may be repurchased from time to time, at the Company's discretion, based on ongoing assessment of the capital needs of the business, the market price of the Company's common shares, and general market conditions. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

 

(2) The Company has repurchased 80,700 shares of its common shares pursuant to the 2018 Repurchase Plan since its adoption.

 

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

46


 

Item 6. Exhibits

List of Exhibits

See the Company’s SEC filings on Edgar at: http://www.sec.gov/ for all Exhibits.

 

 

  

 

  

Incorporated by Reference

Exhibit

Number

  

Exhibit Description

  

Form

  

File No.

  

Exhibit

  

Filing

Date

  

Filed/

Furnished
Herewith

 

 

 

 

 

 

 

3.1

  

Certificate and Articles of Continuance of the Registrant, dated March 22, 1999

  

S-3

 

333-202597

 

3.1

 

03/09/15

 

 

 

 

 

 

 

 

 

3.2

  

By-Laws of the Registrant, as amended

  

10-Q

 

000-25705

 

3.2

 

04/13/10

 

 

 

 

 

 

 

 

 

3.3

  

Articles of Reorganization of the Registrant, dated July 23, 2010

  

8-K

 

000-25705

 

3.1

 

07/23/10

 

 

 

 

 

 

 

 

 

3.4

  

Articles of Amendment of the Registrant, dated December 29, 2010

  

S-3

 

333-202597

 

3.2

 

03/09/15

 

 

 

 

 

 

 

 

 

3.5

 

Articles of Amendment of the Registrant, dated May 11, 2016

 

8-K

 

001-35083

 

10.1

 

05/12/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

  

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

31.2

  

Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

32.1

  

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

 

**

 

 

 

 

 

 

 

32.2

  

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

 

**

 

 

 

 

 

 

 

101.INS

  

Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

 

 

 

101.SCH

  

Inline XBRL Taxonomy Extension Schema Document

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

101.CAL

  

Inline XBRL Taxonomy Extension Calculation Linkbase Document

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

101.DEF

  

Inline XBRL Taxonomy Extension Definition Linkbase Document

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

101.LAB

  

Inline XBRL Taxonomy Extension Label Linkbase Document

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

101.PRE

  

Inline XBRL Taxonomy Extension Presentation Linkbase Document

  

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

104

  

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

  

 

 

 

 

 

 

 

 

*

 

* Filed herewith

** Furnished herewith

47


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Novanta Inc. (Registrant)

 

Name

  

Title

 

Date

 

 

 

 

 

/s/ Matthijs Glastra

  

Director, Chief Executive Officer

 

November 5, 2019

Matthijs Glastra

  

 

 

 

 

 

 

/s/ Robert J. Buckley

  

Chief Financial Officer

 

November 5, 2019

Robert J. Buckley

  

 

 

 

 

 

 

48