Novanta Inc.
2019 Annual Report
Dear Fellow Shareholders,
Novanta performed well during 2019, despite facing challenges in the industrial capital spending markets. Our sales
to medical end markets grew at a double-digit pace, and our revenue from new products reached new record levels.
Full year reported revenue was $626 million, which represents year-over-year growth of 2%, and Organic Revenue
Growth(1) of approximately 1%. In this environment we focus heavily on our customers and what we can control.
Full year Adjusted EBITDA(1) was $121 million, and full year Adjusted Diluted Earnings Per Share(1) was $2.14, a
modest decline versus 2018, as we continued to invest in our innovation pipeline and emerging new customer and
market opportunities.
Novanta’s positioning is favorable with over half of our revenue in medical markets that are structurally growing.
We remain laser focused on growing faster than the market with proprietary motion, vision and photonics
capabilities in a diverse set of applications driven by secular industry 4.0, precision medicine and healthcare
productivity trends. We are investing heavily in innovation and commercial capabilities through business cycles to
enhance our proprietary technology position and long-term sustainable growth potential in secular growth
applications such as Robotic Surgery, Minimally Invasive Surgery, DNA Sequencing, Advanced Material
Processing and Precision Automation & Robotics.
In 2019, we saw excellent momentum and success in our efforts to introduce new innovations to our customers. On
the back of the innovation investments we’ve made, we feel our innovation pipeline is the strongest it’s ever been,
with significant opportunities in the growth applications mentioned above. In 2019, new product revenue grew 27%
year over year. Our vitality index (which measures revenue from new products launched in the last 4 years) was at
26% of sales, versus 22% in 2018, and mid-single digit percentages a few years ago. Design wins grew over 20% for
the year as our teams executed on the strong funnel of design win opportunities. We are seeing many customer
platform openings with opportunities to gain share on the back of our strong innovation pipeline.
Disciplined acquisitions are also an important element of our growth and capital deployment strategy. In 2019, we
closed three acquisitions, Ingenia, Med X Change, and ARGES. Each of these acquisitions meaningfully accelerates
our strategy to sell more content to our customers in the form of intelligent subsystems, which include an increased
software component. The engineering capabilities acquired via these acquisitions are tremendous, and we see strong
sales and technology synergies by applying these capabilities through the Novanta sales channels. Through these
acquisitions, combined with our own R&D investments, we expect to accelerate our innovation pipeline in a very
meaningful way with multiple products expected to hit the market over the next two years.
Our balance sheet is strong, giving us flexibility to act on future transactions. We remain very disciplined, and only
move forward when the strategic fit and financial returns are right. In evaluating acquisitions and growth
investments, we apply a rigorous capital allocation process using return on invested capital and cash on cash return
metrics, which we believe strongly correlate with shareholder returns.
In addition, at Novanta we believe that a healthy company culture is the ultimate competitive advantage in the face
of opportunity and adversity. This means trusting each other, being comfortable with constructive conflict for the
good of the company and holding each other accountable to deliver. Our version of a healthy performance culture is
the Novanta Way, which institutionalizes How We Work Together in Cohesive Teams, How We Behave and
Interact through our five Core Values and How We Execute through the Novanta Growth System. The Novanta
Growth System is a common way of working, a set of tools and processes vigorously applied to drive sustained
growth and operating performance. We feel that rigorously applying the Novanta Growth System will help us
achieve our goals in customer satisfaction, speed to market, gross margin expansion and inventory optimization.
In closing, I would like to thank our customers, our employees and our shareholders for their ongoing support. I am
honored and proud to work at this company and with its talented employees. I want to express my deepest gratitude
for their dedication and hard work to make Novanta a truly unique and successful company.
Yours truly,
Matthijs Glastra
Chief Executive Officer
April 20, 2020
(1) A non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures can be found beginning on page 114.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(State or other jurisdiction
of incorporation or organization)
125 Middlesex Turnpike
Bedford, Massachusetts, USA
(Address of principal executive offices)
98-0110412
(I.R.S. Employer
Identification No.)
01730
(Zip Code)
(781) 266-5700
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common shares, no par value
Trading Symbol(s)
NOVT
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☑ NO ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☑
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 (Section 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 ☑
The aggregate market value of the Registrant’s outstanding common shares held by non-affiliates of the Registrant, based on the closing price of the
common shares on the Nasdaq Global Select Market on the last business day of the Registrant’s most recently completed second fiscal quarter (June 28, 2019)
was $3,166,216,052. For purposes of this disclosure, common shares held by officers and directors of the Registrant and by persons who hold more than 10%
of the Registrant’s outstanding common shares have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily conclusive.
As of February 20, 2020, there were 35,091,195 shares of the Registrant’s common shares, no par value, issued and outstanding.
Portions of the Registrant’s Definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders scheduled to be held on May 14, 2020 to be
filed with the Securities and Exchange Commission are incorporated by reference in answers to Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
NOVANTA INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
Item No.
Page No.
PART I
Item 1.
Business ..........................................................................................................................................................................
Item 1A. Risk Factors.....................................................................................................................................................................
Item 1B. Unresolved Staff Comments ...........................................................................................................................................
Properties ........................................................................................................................................................................
Item 2.
Legal Proceedings ...........................................................................................................................................................
Item 3.
Mine Safety Disclosures .................................................................................................................................................
Item 4.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.....
Item 5.
Selected Financial Data...................................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .........................................................................................
Financial Statements and Supplementary Data...............................................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................................
Item 9A. Controls and Procedures .................................................................................................................................................
Item 9B. Other Information ...........................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance..............................................................................................
Item 11. Executive Compensation.................................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................
Item 13. Certain Relationships and Related Transactions, and Director Independence ...............................................................
Item 14. Principal Accounting Fees and Services .........................................................................................................................
PART III
Item 15. Exhibits, Financial Statement Schedules ........................................................................................................................
Item 16. Form 10-K Summary ......................................................................................................................................................
Signatures........................................................................................................................................................................................
PART IV
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26
26
26
27
29
31
47
49
107
107
107
108
108
108
108
108
108
111
112
As used in this report, the terms “we,” “us,” “our,” “Novanta,” “NOVT” and the “Company” mean Novanta Inc. and its
subsidiaries, unless the context indicates another meaning.
Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.
The following brand and trade names of the Company are used in this report: Cambridge Technology, Lincoln Laser, Synrad,
Laser Quantum, ARGES, WOM, NDS, NDSsi, Med X Change, Reach Technology, JADAK, ThingMagic, Photo Research, General
Scanning, Celera Motion, MicroE, Applimotion, Zettlex, Ingenia and Westwind.
Cautionary Note Regarding Forward Looking Statements
PART I
Except for historical information, the matters discussed in this Annual Report on Form 10-K are forward looking statements that
involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated
results to differ materially from those expressed or implied by such forward looking statements. The Company makes such forward
looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Actual
future results may vary materially from those projected, anticipated, or indicated in any forward-looking statements as a result of
various important factors, including those set forth in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”
Readers should also carefully review the risk factors described in the other documents that we file with the SEC from time to time. In
this Annual Report on Form 10-K, 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. Forward looking statements also include the assumptions
underlying or relating to any of the forward-looking statements. The forward looking statements contained in this Annual Report
include, but are not limited to, statements related 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 and expected costs
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. All forward
looking statements included in this document are based on information available to us on the date hereof. We will not undertake and
specifically decline any obligation to update any forward-looking statements, except as required under applicable law.
Item 1. Business
Overview
Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “Novanta”, “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. 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.
The Company was founded and initially incorporated in Massachusetts in 1968 as General Scanning, Inc. (“General Scanning”).
In 1999, General Scanning merged with Lumonics Inc. The post-merger entity, GSI Lumonics Inc., continued under the laws of the
Province of New Brunswick, Canada. In 2005, the Company changed its name to GSI Group Inc. Through a series of strategic
divestitures and acquisitions, the Company transformed from one that was more focused on the semiconductor industry to one that
primarily sells components and sub-systems to OEMs in the medical and advanced industrial markets. The Company changed its
name to Novanta Inc. in May 2016.
Strategy
Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:
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disciplined focus on our diversified business model of providing components and sub-systems 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;
1
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(cid:129)
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increasing our penetration of high growth advanced industrial applications, such as laser materials processing, robotics,
laser additive manufacturing, 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, 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;
expanding sales and marketing channels to reach new target customers;
improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean
manufacturing principles, strategic sourcing across our major production sites, and optimizing and limiting the growth of
our fixed cost base; and
attracting, retaining, and developing world-class talented and motivated employees.
Acquisitions
We continuously evaluate our business mix and financial performance. Since 2013, we have executed a series of acquisitions in
line with our strategy.
In July 2019, the Company acquired 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.
In June 2019, the Company acquired 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.
In April 2019, the Company acquired 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).
In May 2018, the Company acquired Zettlex Holdings Limited (“Zettlex”), a Cambridge, United Kingdom-based provider of
inductive encoder products that provide absolute and accurate positioning, even in extreme operating environments, to OEMs in the
medical and advanced industrial markets, for a total purchase price of £23.3 million ($32.0 million).
In July 2017, the Company acquired W.O.M. World of Medicine GmbH (“WOM”), a Berlin, Germany-based provider of
medical insufflators, pumps and related disposables to OEMs in the minimally invasive surgery market, for a total purchase price of
€118.1 million ($134.9 million).
In January 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum Limited
(“Laser Quantum”), a Manchester, United Kingdom-based provider of solid state lasers, ultrafast lasers, and optical light engines to
OEMs in the medical market, for a total purchase price of £25.5 million ($31.1 million). As a result of the acquisition of these
additional shares, the Company’s equity ownership percentage increased from approximately 41% to approximately 76%. In
September 2018, the Company acquired the remaining approximately 24% of the outstanding shares of Laser Quantum for a total
purchase price of $45.1 million.
In January 2017, the Company acquired ThingMagic, a Woburn, Massachusetts-based provider of ultra-high frequency (“UHF”)
radio frequency identification (“RFID”) modules and finished RFID readers to OEMs in the medical and advanced industrial markets,
for a total purchase price of $19.1 million.
In May 2016, the Company acquired Reach Technology Inc., a Fremont, California-based provider of embedded touch screen
technology solutions to OEMs in the medical and advanced industrial markets, for a total purchase price of $9.4 million.
In December 2015, the Company acquired all assets and certain liabilities of Skyetek Inc., a Denver, Colorado-based provider of
embedded and standalone RFID solutions for OEM customers in the medical and advanced industrial markets, for a total purchase
price of $2.8 million.
2
In November 2015, the Company acquired certain assets and liabilities of Lincoln Laser Company, a Phoenix, Arizona-based
provider of ultrafast precision polygon scanners and other optical scanning solutions for the medical and advanced industrial markets,
for a total purchase price of $12.1 million.
In February 2015, the Company acquired Applimotion Inc., a Loomis, California-based provider of advanced precision motor
and motion control technology to OEM customers in the medical and advanced industrial markets, for a total purchase price of $14.0
million.
In March 2014, the Company acquired JADAK LLC, JADAK Technologies Inc. and Advance Data Capture Corporation
(together, “JADAK”), a North Syracuse, New York-based provider of optical data collection and machine vision technologies to OEM
medical device manufacturers, for a total purchase price of $93.7 million.
In January 2013, the Company acquired NDS Surgical Imaging LLC, a San Jose, California-based company that designs,
manufactures, and markets high definition visualization solutions and imaging informatics products for the surgical and radiology
market segments, for a total purchase price of $75.4 million.
Divestitures and Product Rationalization
As part of our ongoing evaluation of our business mix and financial performance, we also review our business for potential
divestitures and product rationalizations. Since 2012, we have executed a series of divestitures and product rationalizations in line with
our strategy, and we may divest additional product lines that we do not consider to be core to our business in the future.
In January 2016, the Company discontinued its radiology products, sold under the Dome brand name and operated within the
Company’s Visualization Solutions product line.
In June 2015, the Company divested its 50% owned joint venture in India, Excel Laser Technology Private Limited, for net cash
proceeds of $0.2 million.
In April 2015, the Company completed the sale of its fiber laser business, operated under the JK Lasers brand name, for $29.6
million in cash.
In July 2014, the Company completed the sale of its Scientific Lasers business, operated under the Continuum and Quantronix
brand names, for $6.5 million in cash.
In May 2013, the Company sold its Semiconductor Systems business, operated under the GSI Group brand name, for $9.7
million in cash.
In October 2012, the Company sold its Laser Systems business, operated under the Control Laser and Baublys brand names, for
$6.6 million in cash.
Segments
Our Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and
assessing performance for the entire Company. We evaluate the performance of, and allocate resources to, our segments based on
revenue, gross profit and operating profit. Our reportable segments have been identified based on commonality and adjacency of
technologies, applications, and customers amongst our individual product lines.
Based upon the information provided to the CODM, we have determined that we have three reportable segments. The following
table shows the external revenues, gross profit margin and operating profit for each of the segments for the year ended December 31,
2019 (dollars in thousands):
Photonics
Vision
Precision Motion
Revenue
230,457
271,407
124,235
$
$
$
Gross Profit
Margin
45.9% $
38.8% $
42.9% $
Operating Profit
41,990
21,007
22,339
See Note 19 to Consolidated Financial Statements for additional financial information about our reportable segments.
3
Photonics
The Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam
delivery, CO2 laser, solid state laser, 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.
The Photonics segment is comprised of four product lines:
Product Lines
Laser Beam Delivery
Components
Key End Markets
Advanced Industrial and
Medical
Brand Names
Cambridge Technology
Laser Beam Delivery Solutions Advanced Industrial and
Medical
Cambridge Technology,
Synrad, Laser Quantum,
ARGES
CO2 Lasers
Advanced Industrial
Synrad
Solid State and Ultrafast
Lasers
Medical and Advanced
Industrial
Laser Quantum
4
Description
Galvanometer and polygon-based optical
scanning components. These products
provide precise control and delivery of laser
beams through motorized manipulation of
mirrors and optical elements and are
integrated by OEM manufacturers with their
controlling hardware and software.
Advanced industrial applications include
additive manufacturing, packaging
converting, laser marking, micromachining
and metrology. Medical applications include
optical coherence tomography imaging,
microscopy, and laser-based vision
correction.
Galvanometer and polygon based optical
scan heads that provide precise control and
delivery of laser beams through motorized
manipulation of mirrors and optical elements
in multi-axis scan heads, highly integrated
scanning subsystems, and controlling
hardware and software. Optical light engine
products that integrate lasers into light
engines with full beam parameter
control. Advanced industrial applications
include additive manufacturing, packaging
converting, laser marking, micromachining
and metrology. Medical applications include
DNA sequencing, optical coherence
tomography imaging, microscopy, super-
resolution imaging, and laser-based vision
correction.
Continuous and pulsed CO2 lasers with
power ranges from 5 to 400 watts.
Applications include coding, marking,
engraving, cutting and trimming of non-
metals, fine materials processing, additive
manufacturing, packaging converting, and
medical applications in dental and
dermatology.
Diode-pumped solid state lasers and ultrafast
lasers in the visible to near-infrared.
Applications include DNA sequencing,
microscopy, and super-resolution imaging.
Vision
The Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators,
pumps and related disposables; visualization solutions; wireless, recorder 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.
The Vision segment has nine product lines:
Product Lines
Medical Insufflators, Pumps
and Accessories
Key End Markets
Brand Names
Medical
WOM
Visualization Solutions
Medical
NDS, NDSsi
Video Processing, Streaming
and Capture
Medical
NDS, NDSsi,
Med X Change
Touch Panel Displays
Medical and Advanced
Industrial
Reach Technology
Machine Vision
Medical and Advanced
Industrial
JADAK
Radio Frequency Identification
(RFID)
Medical and Advanced
Industrial
JADAK, ThingMagic
Barcode Identification
Medical and Advanced
Industrial
Thermal Chart Recorders
Medical
JADAK
JADAK
Light and Color Measurement
Medical and Advanced
Industrial
Photo Research
Description
Insufflators, pumps, light sources and video
couplers, gamma probes and related
accessories and consumables for minimally
invasive surgery.
High definition, 4K and 4K 3D visualization
solutions for minimally invasive surgery and
robotic surgery.
Imaging management for visual information,
including real-time distribution,
documentation, control, recording, and
streaming for multiple imaging modalities
for surgical applications. High definition
wireless transmission of video signals to
replace video cables in minimally invasive
surgical equipment.
Embedded capacitive and resistive touch
panel technology that delivers high-
performance solutions.
Camera-based machine vision products and
solutions performing image analysis within
medical devices.
RFID technologies via High-Frequency (HF)
and Ultra-High Frequency (UHF) readers,
writers and antennas for applications such as
surgical part tracking and counterfeit
detection.
Embedded and handheld data collection
products for barcode identification.
Rugged thermal chart recorders for patient
monitoring, defibrillator equipment, blood
gas analyzers, and pulse oximeters.
Light and color measurement devices,
including spectroradiometers, photometers,
and color characterization software, used in
research and development and quality control
testing.
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, and air bearing spindles 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.
5
The Precision Motion segment includes six product lines:
Product Lines
Optical Encoders
Key End Markets
Advanced Industrial and
Medical
Brand Names
Celera Motion, MicroE
Inductive Encoders
Advanced Industrial and
Medical
Celera Motion, Zettlex
Precision Motors
Advanced Industrial and
Medical
Celera Motion,
Applimotion
Servo drives and motion
control solutions
Advanced Industrial and
Medical
Celera Motion,
Ingenia
Integrated Motion Control
Solutions
Advanced Industrial and
Medical
Celera Motion
Air Bearing Spindles
Advanced Industrial
Celera Motion,
Westwind
Description
Optical encoders for precision motion control
and sensing in semiconductor and electronics
manufacturing, industrial and medical
robotics, metrology, satellite
communications, medical devices, and
laboratory and diagnostics equipment.
Inductive encoders for precision motion
control and sensing in satellite
communications, surveillance, medical
devices, industrial and medical robotics,
autonomous vehicles, and laboratory and
diagnostics equipment.
Direct drive motor components for precision
motion control in semiconductor and
electronics manufacturing, industrial and
medical robotics, autonomous vehicles,
metrology, satellite communications,
surveillance, medical devices, and laboratory
and diagnostics equipment.
Precision motion servo drives and control
software used in industrial robotics, medical
robotics, autonomous vehicles, satellite
communications, and medical devices.
Integrated motion sub-assemblies.
Applications include precision motion
control in semiconductor and electronics
manufacturing, industrial and medical
robotics, autonomous vehicles, metrology,
satellite communications, surveillance,
medical devices, and laboratory and
diagnostics equipment.
High-speed and precision air bearings and air
bearing spindles. Applications include
printed circuit board (“PCB”) manufacturing,
automotive coating, semiconductor
manufacturing equipment, micro machining,
and power generation.
End Markets
We primarily operate in two end markets: the medical market and the advanced industrial market.
Medical Market
For the year ended December 31, 2019, the medical market accounted for approximately 55% of the Company’s revenue.
Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending,
growth rates of surgical procedures, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks,
changes in technology requirements, timing of OEM customers’ product development and new product launches, changes in customer
or patient preferences, and general demographic trends.
Advanced Industrial Market
For the year ended December 31, 2019, the advanced industrial market accounted for approximately 45% of the Company’s
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
6
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.
Working Capital Requirements
There are no special inventory stocking requirements or credit terms extended to customers that would have a material adverse
effect on our working capital.
Customers
We have a diverse group of customers that include companies that are global leaders in their industries. Many of our customers
participate in several market industries. No customer accounted for greater than 10% of our consolidated revenue during the years
ended December 31, 2019, 2018 or 2017.
Customers of our Photonics, Vision, and Precision Motion segments include a large number of OEM customers who integrate
our products into their systems for sale to end users. We also sell a very small portion of our products directly to end users. Our
customers include leaders in the medical and advanced industrial markets. A typical OEM customer will usually evaluate our products
and our ability to provide application knowledge and expertise, post-sales application support and services, supply chain management
over long durations, manufacturing capabilities, product quality, global presence, and product customization before deciding to
incorporate our products into their products or systems. Customers generally choose suppliers based on a number of factors, including
product performance, reliability, application support, price, breadth of the supplier’s product offerings, the financial condition of the
supplier, and the geographical coverage offered by the supplier. Once certain of our products have been designed into a given OEM
customer’s product or system, there are generally significant barriers to subsequent supplier changes until the end of the product or
system life cycle, especially in the medical market.
Seasonality
While our revenues are not highly seasonal on a consolidated basis, the revenues of some of our individual product lines are
impacted in the first quarter by the seasonal spending patterns of our customers due to their annual capital budgeting cycles.
Backlog
As of December 31, 2019 and 2018, our consolidated backlog was approximately $243.1 million and $234.4 million,
respectively. The majority of orders included in backlog represent open orders for products and services that, based on management’s
projections, have a reasonable probability of being delivered over the subsequent twelve-month period. Orders included in backlog
may be canceled or rescheduled by customers without significant penalty. Management believes that backlog is not a meaningful
indicator of future business prospects for any of our business segments due to the short lead time required on our products and the
ability of customers to reschedule or cancel orders. Therefore, backlog as of any particular date should not be relied upon as indicative
of our revenues for any future period.
Manufacturing
Manufacturing functions are performed internally when we choose to maintain control over critical portions of the production
process or for cost related reasons while some of the less critical portions are outsourced to third parties. To the extent it makes
financial sense, we will consider outsourcing additional portions of the production process.
Products offered by our Photonics segment are manufactured at facilities in Bedford, Massachusetts; Mukilteo, Washington;
Phoenix, Arizona; Wackersdorf, Germany; Taunton and Manchester, United Kingdom; and Suzhou, China. Products offered by our
Vision segment are manufactured at facilities in Syracuse and Rochester, New York; San Jose, California; Bradenton, Florida; and
Ludwigsstadt, Germany. Products offered by our Precision Motion segment are primarily manufactured at facilities in Bedford,
Massachusetts; Rocklin, California; Poole and Cambridge, United Kingdom; and Suzhou, China.
Many of our products are produced in manufacturing facilities certified under ISO 9001 certification, while the majority of our
products manufactured for the medical market are produced in factories under ISO 13485 certification. The manufacturing facilities
for our medical insufflators, pumps, cameras and accessories products are ISO 14001 certified. Certain visualization solutions, thermal
chart recorders, imaging informatics and medical insufflators, pumps, cameras and accessories products are manufactured under
current good manufacturing practices (cGMPs), which is a requirement of their medical device classification by the United States
Food and Drug Administration (the “FDA”). In addition, if these medical devices are classified as Class II devices, a 510(k) premarket
notification to the FDA and approval by the FDA is required.
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Marketing, Sales and Distribution
We sell our products globally, primarily through our direct sales force. Sales outside of the United States are largely based on a
direct sales force, but occasionally are sold through distributors, including manufacturers’ representatives, to either augment our
selling effort or serve a local market where we have no direct sales force. Our local sales, applications, and service teams and our
distributors work closely with our customers to ensure customer satisfaction with our products. We have sales and service centers
located in the United States, Europe and Asia.
To support our sales efforts, we maintain and continue to invest in a number of application centers around the world, where our
application experts work closely with customers on integrating and using our solutions in their equipment. We currently maintain
service and application centers in the United States, Europe and Asia.
Competition
The markets in which we compete are dynamic and highly competitive. While no single company competes with us across the
breadth of our product offerings, we face a fragmented competitive landscape, with competitors for particular product categories and
individual application areas. Our competitors range from large foreign and domestic organizations, which produce a comprehensive
array of goods and services and may have greater financial and other resources than we do, to small private firms, which produce a
limited number of goods or services for specialized market segments.
Competitors for our products are fragmented by particular product category, and the individual markets in which we operate are
highly competitive. Our major competitors by reportable segments include, among others:
Photonics: SCANLAB, Coherent, and Cobolt.
Vision: Barco, Omron Microscan, FSN Medical Technologies, and HID Global.
Precision Motion: Renishaw, HEIDENHAIN, Physik Instrument, and Allied Motion Technologies.
Competitive factors in our Photonics, Vision, and Precision Motion segments include product performance, price, quality and
reliability, features, compatibility of products with existing systems, technical support, product breadth, market presence and our
overall reputation. We believe that our products offer a number of competitive advantages, and the breadth of technologies we offer
give us deep market application knowledge to better serve our customers’ needs and distinguish us from our competitors. Ultimately,
our ability to deliver high-quality products timely when the customer needs them presents the biggest threat to our competitiveness.
Raw Materials, Components and Supplies
Each of our businesses uses a wide variety of raw materials, key components and parts that are generally available from
alternative sources of supply and in adequate quantities from domestic and foreign sources. In some instances, we design and/or re-
engineer the parts and components used in our products. For certain critical raw materials, key components and parts used in the
production of some of our principal products, we have identified only a limited number of suppliers or, in some instances, a single
source of supply. We also rely on a limited number of suppliers to manufacture subassemblies for some of our products.
For a further discussion of the importance and risks associated with our supply chain, see applicable risk factors under Item 1A
of this Annual Report on Form 10-K.
Patents and Intellectual Property
We rely upon a combination of copyrights, patents, trademarks, trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We hold a number of registered and pending patents in the United States and other countries. In addition,
we also have trademarks registered in the United States and other countries. We will continue to actively pursue applications for new
patents and trademarks as we deem appropriate. However, there can be no assurance that any other patents will be issued to us or that
such patents, if and when issued, will provide any protection or benefit to us.
Although we believe that our patents and pending patent applications are important, we rely upon several additional factors that
are essential to our business success, including: market position, technological innovation, know-how, application knowledge and
product performance. However, there can be no assurance that we will be able to sustain these advantages. Considering the diversified
nature of our businesses, we do not believe that any individual patent is material to our business as a whole.
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We also protect our proprietary rights by controlling access to our proprietary information and by maintaining confidentiality
agreements with our employees, consultants, and certain customers and suppliers. For a further discussion of the importance of risks
associated with our intellectual property rights, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.
Human Resources
As of December 31, 2019 and 2018, we employed 2,290 and 2,262 employees, respectively. We also utilize temporary and
contract personnel that are not included in these headcount numbers.
Government Regulation
Our current and contemplated activities and the products and processes that will result from such activities are subject to
substantial government regulations, both in the United States and internationally. Such rules and regulations are subject to change by
the governing agencies and we monitor those changes closely.
Environmental Regulations
Most of our production facilities are subject to various federal, state, local, and/or foreign environmental regulations related to
the use, storage, handling, and disposal of regulated materials, chemicals, and certain waste products.
We may face increasing complexity in our product designs and procurement operations due to the evolving nature of product
compliance standards. Those standards may impact the material composition of our products entering specific markets. Such
regulations went into effect in the European Union (“EU”) in 2006 (“The Restriction of Hazardous Substances Directive” (“RoHS”))
and in 2007 (“Registration, Evaluation, Authorisation and Restriction of Chemicals” (“REACH”)), and in China in 2007
(“Management Methods for Controlling Pollution Caused by Electronic Information Products Regulation” (“China-RoHS”)).
Our capital expenditures, earnings, and competitive position have not been, and are not expected to be, materially affected by
our compliance with federal, state, and local environmental provisions which have been enacted or adopted to regulate the distribution
of materials into the environment.
Medical Device Regulations
Certain products manufactured by us are integrated into systems by our customers that are subject to regulation by the FDA. We
must comply with certain quality control measurements in order for our products to be effectively used in our customers’ end
products. Non-compliance with quality control measurements could result in fines, penalties, and loss of business with our customers.
We are also subject to certain medical device regulations. Medical devices are subject to extensive and rigorous regulation by
the FDA and by other federal, state and local authorities. The Federal Food, Drug and Cosmetic Act (the “FDCA”) and related
regulations govern the conditions of safety, efficacy, clearance, approval, manufacturing, quality system requirements, labeling,
packaging, distribution, storage, recordkeeping, reporting, marketing, advertising, and promotion of products.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance
of a 510(k) premarket notification or approval of a premarket approval application (“PMA”). Under the FDCA, medical devices are
classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical
device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I includes devices
with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General
Controls for medical devices, which include compliance with the applicable portions of the Quality System Regulation (the “QSR”),
facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and
promotional materials. Class II devices are subject to the FDA’s General Controls and special controls as deemed necessary by the
FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, postmarket
surveillance, patient registries and FDA guidance documents. While most Class I devices are exempt from the 510(k) premarket
notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under
Section 510(k) of the FDCA, requesting permission to commercially distribute the device. The FDA’s permission to commercially
distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to
pose the greatest risks, such as life-sustaining, life-supporting or some implantable devices, or devices that have a new intended use, or
use advanced technology that is not substantially equivalent to that of a legally marketed device are placed in Class III, requiring
approval of a PMA. Some pre-amendment devices are unclassified, but are subject to the FDA’s premarket notification and clearance
process in order to be commercially distributed. In many cases, our customers are responsible for compliance with the FDA’s
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requirements applicable to medical devices. However, we also currently market certain Class II medical device products
independently that are subject to these requirements.
510(k) Marketing Clearance Pathway
To obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed
device is ‘‘substantially equivalent’’ to a predicate device already on the market. A predicate device is a legally marketed device that
is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for
which a PMA is not required, a device that has been reclassified from Class III to Class II or Class I, or a device that was found
substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from nine to twelve months,
but may take significantly longer. The FDA may require additional information, including clinical data, to make a determination
regarding substantial equivalence.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k)
clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously
cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA
requirements, or can request a risk-based classification determination for the device in accordance with the “de novo” process, which
is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending
on the modification, a de novo classification or PMA approval. The FDA requires each manufacturer to determine whether the
proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and
disagree with a manufacturer’s determination. Many minor modifications today are accomplished by a letter-to-file in which the
manufacturer documents the change in an internal letter-to-file. The letter-to-file is in lieu of submitting a new 510(k) to obtain
clearance for every change. The FDA can always review these letters-to-file in an inspection. If the FDA disagrees with a
manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified
device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant
regulatory fines or penalties.
Post-market Regulations
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These
include:
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establishment registration and device listing with the FDA;
QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing,
control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;
labeling and marketing regulations, which require that promotion is truthful, not misleading and fairly balanced, provides
adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for
unapproved or “off-label” uses and impose other restrictions on labeling;
FDA guidance on off-label dissemination of information and responding to unsolicited requests for information;
clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or
effectiveness or that would constitute a major change in intended use of one of the cleared devices;
medical device reporting regulations, which require that a manufacturer report to the FDA if a device that it markets may
have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it
markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections
and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the
FDCA that may present a risk to health;
requirements governing Unique Device Identifiers (UDI) on devices and also requiring the submission of certain
information about each device to the FDA’s Global Unique Device Identification Database (GUDID);
the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is
in violation of governing laws and regulations; and
post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the
public health or to provide additional safety and effectiveness data on the device.
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We may be subject to similar foreign laws that may include applicable post-marketing requirements such as safety surveillance.
Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the
facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging,
distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things,
maintenance of a device master file, device history file, and a complaints file. As a manufacturer, we are subject to periodic scheduled
or unscheduled inspections by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shut-down
of, or restrictions on, our manufacturing operations and the recall or seizure of our products, which would have a material adverse
effect on our business. The discovery of previously unknown problems with any of our products, including unanticipated adverse
events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its
clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the
product from the market or voluntary or mandatory device recalls.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with
applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the
following sanctions:
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warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
recalls, withdrawals, or administrative detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
withdrawing 510(k) clearances or PMA approvals that have already been granted;
refusal to grant export or import approvals for our products; or
criminal prosecution.
Other Healthcare Laws and Regulations
In the United States and other jurisdictions where we operate our business, there are healthcare laws and regulations that
constrain our business operations, including our sales, marketing and promotional activities, and that limit the kinds of arrangements
we may have with customers, physicians, healthcare entities and others in a position to purchase or recommend our products or other
products or services we may develop and commercialize. These laws include, without limitation: the federal Anti-Kickback Statute,
which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying
remuneration to induce, or in return for, either the referral of an individual or the purchase or recommendation of an item or service
for which payment may be made under any federal healthcare program; federal civil and criminal false claims laws and civil monetary
penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims
for payment to the federal government, including federal healthcare programs, that are false or fraudulent; the federal Health Insurance
Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes that prohibit, among other
things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their
implementing regulations, which imposes certain requirements on certain types of individuals and entities relating to the privacy,
security and transmission of individually identifiable health information; the federal Physician Payments Sunshine Act, which requires
certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or
the Children’s Health Insurance Program to annually report to the federal government information related to payments or other
transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and
their immediate family members; and state and foreign law equivalents of each of the above federal laws, which differ from each other
in significant ways and may not have the same effect, thus complicating compliance efforts. Violations of these laws may result in
substantial civil penalties, including treble damages, and criminal penalties, including imprisonment, fines, the curtailment or
restructuring of our operations, and exclusion from participation in governmental healthcare programs. For further information
regarding other healthcare laws and regulations that our operations are subject to, see “Item 1A. Risk Factors—Risks Relating to our
Business—Our business is indirectly subject to healthcare industry cost containment and healthcare reform measures that could result
in reduced sales of our products.”
Other Information
We maintain a website with the address https://www.novanta.com. We are not including the information contained on our
website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge through
our website (https://investors.novanta.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy and information statements, and amendments to these reports as soon as reasonably practicable after we
electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission (“SEC”). In addition,
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our reports and other information are filed with securities commissions or other similar authorities in Canada and are available over
the Internet at https://www.sedar.com.
Item 1A. Risk Factors
The following risk factors could have a material adverse effect on our business, financial position, results of operations and cash
flows and could cause the market value of our common shares to fluctuate or decline. These risk factors may not include all of the
important factors that could affect our business or that could cause our future financial results to differ materially from historical or
expected results or cause the market price of our common shares to fluctuate or decline.
Risks Relating to our Business
Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions
on our customers’ businesses and levels of business activities.
A large portion of our product sales are dependent on our customers’ need for increased capacity, productivity and cost saving
initiatives, improved product quality and performance, and new investments. Weaknesses in our end markets could negatively impact
our revenue and gross margin and consequently have a material adverse effect on our business, financial condition and results of
operations. A severe and/or prolonged overall economic downturn or a negative or uncertain political climate could lead to
weaknesses in our end markets and adversely affect our customers’ financial condition and the timing or levels of business activity of
our customers and the industries we serve. In particular, diminished growth expectations, economic and political uncertainty in Europe
as Britain negotiates the terms of its withdrawal from the EU, and ongoing related negotiations, as well as political and economic
uncertainty in the U.S. adversely impacted our customers’ financial condition and ability to maintain product order levels, and have
reduced the demand for our products in 2019. Continued or worsening conditions in these or other markets could further reduce the
demand for our products or depress pricing for our products and have a material adverse effect on our results of operations. Changes
in global economic conditions could also shift demand for products or services for which we do not have competitive advantages. This
could negatively affect the amount of business that we are able to obtain. In addition, if we are unable to successfully anticipate
changes in economic and political conditions, we may be unable to effectively plan for and respond to those changes, and our business
could be negatively affected.
Our business depends significantly upon our customers’ capital expenditures, which are subject to cyclical market
fluctuations.
Certain sub-segments of the advanced industrial market that we serve, including the microelectronics and industrial capital
equipment markets, are cyclical and have historically experienced periods of oversupply, resulting in downturns in demand for capital
equipment in which many of our products are used. It is difficult to predict the timing, length and severity of these downturns and their
impact on our business. Further, our order levels or results of operations for a given period may not be indicative of order levels or
results of operations for subsequent periods. For the foreseeable future, our operations will continue to depend upon industries that are
subject to market cycles which, in turn, could adversely affect the market demand for our products.
We have experienced significant cyclical end market fluctuations in the past. For example, in 2019, our sales into the advanced
industrial end market declined as a result of a wide spread downturn in this end market that is continuing. We cannot predict when
slowdowns will recur or that the impact of such slowdowns will be more or less significant compared to historical fluctuations.
Our business success depends upon our ability to respond to fluctuations in product demand, but doing so may require us to
incur costs despite limited visibility toward future business declines.
During a period of increasing demand and rapid growth, we must be able to increase manufacturing capacity quickly. Our
inability to quickly increase production in response to a surge in demand could prompt customers to look for alternative sources of
supply or leave our customers without a supply, both of which events could harm our reputation and make it difficult for us to retain
our existing customers or to obtain new customers and have a material adverse effect on our business.
In periods of weak demand, we may be required to reduce costs while maintaining the ability to motivate and retain key
employees at the same time. Additionally, to remain competitive, we must continually invest in research and development, which may
inhibit our ability to reduce costs in a down cycle. Long product lead-times create a risk that we may purchase or manufacture
inventories of products that we are unable to sell.
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The success of our business depends on our ability to continuously innovate and to manage transitions to new product
innovations.
Technology requirements in our markets are constantly changing. We must continually introduce new products that meet
evolving customer needs. Our ability to grow depends on the successful development, introduction and market acceptance of new or
enhanced products that address our customers’ requirements. Developing new technology is a complex and uncertain process
requiring us to accurately anticipate technological and market trends and meet those trends with the right products. Additionally, this
requires that we manage the transition from older products to minimize disruption in customer ordering patterns, avoid excess
inventory and ensure adequate supplies of new products. Failure to develop new products, failed market acceptance of new products
or problems associated with new product transitions could harm our business.
We cannot predict how the market will react to new products introduced by us or to enhancements made to our existing
products. If any of our new or enhanced products contain defects or perceived defects or have reliability, quality or compatibility
problems or perceived problems, or if our competitors release similar products or enhancements at the same time that are more widely
accepted by our customers, our revenue and results of operations for one or more reporting periods could be adversely affected.
If we fail to introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth
targets.
Our research and development efforts may not lead to the successful introduction of products within the time frame that our
customers demand. Our competitors may introduce new or improved products, processes or technologies that make our current or
proposed products obsolete or less competitive. We may encounter delays or problems in connection with our research and
development efforts. Product development delays may result from numerous factors, including:
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changing product specifications and customer requirements;
inability to manufacture new products cost effectively;
difficulties in reallocating engineering resources and overcoming resource limitations;
changing market or competitive product requirements; and
unanticipated engineering complexities.
New products often take longer to develop, may have fewer features than originally considered desirable, and may have higher
costs than initially estimated. There may be difficulty in sourcing components for new products and delays in starting volume
production. New products may also not be commercially successful. Any of these adverse developments could lead to loss of market
share and inability to achieve our anticipated revenue growth targets.
Customer order timing and other factors beyond our control may cause our operating results to fluctuate from period to
period.
Changes in customer order timing and the existence of certain other factors beyond our control may cause our operating results
to fluctuate from period to period. Such factors include:
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fluctuations in our customers’ businesses;
timing and recognition of revenues from customer orders;
timing and market acceptance of new products or enhancements introduced by us or our competitors;
availability of parts from our suppliers and the manufacturing capacity of our subcontractors;
decisions by customers to reduce their purchases of our products;
changes in the prices of our products or of our competitors’ products; and
fluctuations in foreign currency exchange rates.
We received in the past, and may receive in the future, several large orders in one quarter from a customer and then receive no
orders from that customer in the next quarter. As a result, the timing of revenue recognition from customer orders can cause
significant fluctuations in our operating results from quarter to quarter. In addition, our sales are reactive to changes in our customers’
businesses. For instance, a customer that placed a large order in one period could subsequently experience a downturn in business and,
as a result, could cancel an order or reduce the amount of products it purchases from us in future periods.
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Delays in shipments near the end of a reporting period due to rescheduling or cancellation by customers or unexpected
production delays experienced by us may cause revenue in the period to decline significantly and may have a material adverse effect
on our operating results for that period.
In addition, we or our competitors may raise or lower prices of products in response to market demands or competitive
pressures. If we lower the prices of our products, or if our competitors lower the prices of their products such that demand for our
products weakens, our revenue for one or more quarters may decline and our operating results would be adversely affected.
As a result of these factors, our results of operations for any quarter are not necessarily indicative of results to be expected in
future periods.
If we experience a significant disruption in, or breach in security of, our information technology systems, our business may
be adversely affected.
We rely on information technology systems throughout the Company to manage orders, process shipments to customers,
manage inventory levels and maintain financial, customer and employee information. Like other global companies, we have
experienced threats to data and systems, including by perpetrators of random or targeted malicious cyberattacks, computer viruses,
malware, worms, bot attacks or other destructive or disruptive software and attempts to misappropriate customer information and
cause system failures and disruptions. Certain other events could also result in the disruption of our systems, including power outages,
catastrophes, hardware and software failures and other unforeseen events. If we were to experience a significant period of disruption
in information technology systems that involve our interactions with customers or suppliers, it could result in the loss of revenue and
customers as well as significant response and mitigation costs, which would adversely affect our business. In addition, security
breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential
information belonging to us or to our employees, partners, customers or suppliers, which could result in significant financial or
reputational damage to us, as well as litigation, regulatory enforcement action, or other liability risks that could lead to substantial
damages, fines, penalties and legal costs. We also expend substantial amounts to protect our information technology systems, and if
we were to experience a significant breach in security of our information technology systems, we may need to materially increase such
expenditures, which would adversely affect our results of operations.
Risks associated with data privacy issues, including evolving laws, regulations and associated compliance efforts, may
adversely impact our business and financial results.
Legislation in various countries around the world with regard to cybersecurity, privacy and data protection is rapidly expanding
and creating a complex compliance environment. We are subject to many privacy and data protection laws and regulations in the U.S.
and around the world, some of which place restrictions on our ability to process personal data across our business. In particular, the
General Data Protection Regulation (the “GDPR”), which became effective in May 2018, has caused more stringent data protection
requirements in the EU. The GDPR imposes onerous accountability obligations requiring data controllers and processors to maintain a
record of their data processing and implement policies as part of its mandated privacy governance framework. It also requires data
controllers to be transparent and disclose to data subjects how their personal information is to be used; imposes limitations on
retention of personal data; introduces mandatory data breach notification requirements; and sets higher standards for data controllers
to demonstrate that they have obtained valid consent for certain data processing activities. We are subject to the supervision of local
data protection authorities in those EU jurisdictions where we have business operations or are otherwise subject to the GDPR. Certain
breaches of the GDPR requirements could result in substantial fines, which can be up to four percent of worldwide revenue or 20
million Euros, whichever is greater. In addition to the foregoing, a breach of the GDPR could result in regulatory investigations,
reputational damage, orders to cease/change our use of data, enforcement notices, as well as potential civil claims, including class
action type litigation where individuals suffered harm. Similarly, California has enacted the California Consumer Privacy Act, or
CCPA, which took effect on January 1, 2020. The CCPA creates individual privacy rights for California consumers and increases the
privacy and security obligations of entities handling certain personal data. The CCPA provides for civil penalties for violations, as
well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our
compliance costs and potential liability. Many similar laws have been proposed at the federal level and in other states. Any liability
from our failure to comply with the requirements of these laws could adversely affect our financial condition and results of operations.
We have invested, and continue to invest, human and technology resources in our GDPR compliance efforts and our data
privacy compliance efforts in general. These compliance efforts may be time-intensive and costly. Despite those efforts, there is a risk
that we may be subject to fines and penalties, litigation and reputational harm if we fail to protect the privacy of third party data or to
comply with the GDPR or other applicable regimes.
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As we transact a portion of our sales, and maintain significant cash balances, in foreign currencies, changes in interest
rates, credit ratings or foreign currency rates could have a material adverse effect on our financial position, results of operations,
and cash flows.
A portion of our revenue is derived from our European and Asian operations and includes transactions in Euros, British Pounds
and Japanese Yen, while our products are mainly manufactured in the U. S., the U.K., Germany and China. In the event of a decline in
the value of the Euro, British Pounds or Japanese Yen, we would typically experience a decline in our revenues and profit margins. If
we increase the selling prices on our products sold in Europe and Asia in order to maintain profit margins and recover costs, we may
lose customer sales to lower cost competitors.
Additionally, balances maintained in foreign currencies create additional financial exposure to changing foreign currency rates.
If foreign currency rates were to change significantly, we could incur material losses. While we use foreign currency contracts and
other risk management techniques to hedge our foreign currency exposure, we cannot be certain that our efforts will be adequate to
protect us against significant foreign currency fluctuations or that such efforts will not expose us to additional exchange rate risks.
Our reliance on international operations in foreign countries subjects us to risks not typically faced by companies operating
exclusively in the U.S.
During the year ended December 31, 2019, approximately 59% of our revenues were from customers outside of the U.S. The
scope of our international operations subjects us to risks that could materially impact our results of operations, including:
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foreign exchange rate fluctuations;
increases in shipping costs;
longer customer payment cycles;
greater difficulty in collecting accounts receivable;
use of incompatible systems and equipment;
problems with staffing and managing foreign operations in diverse cultures;
trade tariffs;
trade barriers and export/import controls;
transportation delays and interruptions;
increased vulnerability to the theft of, and reduced protection for, intellectual property rights;
government currency control and restrictions, delays, penalties or required withholdings on repatriation of earnings;
compliance with foreign laws and regulations, including those that potentially conflict with other jurisdictions;
the impact of recessionary foreign economies; and
natural disasters, wars, health epidemics and acts of terrorism.
We also are subject to risks that our operations outside the U.S. could be conducted by our employees, contractors, service
providers, representatives or agents in ways that violate the Foreign Corrupt Practices Act or other similar anti-bribery laws. Any such
violations could have a negative impact on our business and could result in government investigations and/or injunctive, monetary or
other penalties. Moreover, our anti-bribery policy and procedures may be violated by third-party sales representatives or other agents
that help sell our products or provide other services. Such representatives or agents are not our employees and it may be more difficult
to oversee their conduct, which may increase the risk of violations of anti-bribery laws.
Our facilities or operations could be adversely affected by events outside of our control, such as health epidemics.
We may be impacted by health epidemics or other events outside of our control. For example, beginning in late 2019, a strain of
novel coronavirus surfaced in China. In January 2020, the World Health Organization declared the novel coronavirus outbreak a
“Public Health Emergency of International Concern,” prompting precautionary government-imposed travel restrictions and temporary
closures of business operations. We have manufacturing, sales, and service offices in China and has significant direct and indirect
customer exposure and supply chain exposure to the China market. Our facility in Suzhou, China was closed for a brief period of time
as a result of a local government mandate, before it reopened in February 2020. The business interruption has negatively impacted our
near-term results and may negatively impact our long-term results, depending on the length of the disruption. These disruptions have
come in the form of part shortages related to our supply chain, labor shortages, and disruptions in demand from our customers in and
outside of China, which will negatively affect our revenue and profitability. At this point in time, there is significant uncertainty
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relating to the extent of the impact of the novel coronavirus on our business and potential impacts on our business in the future.
Infections may become more widespread, including to other countries where we have operations, and factory closures and travel
restrictions may remain or worsen, all of which would worsen the negative impact on our business, financial condition and results of
operations.
Increased outsourcing of components manufacturing to manufacturers outside the U.S. leads to additional risks that could
negatively impact our business.
We are increasingly outsourcing the manufacture of subassemblies to suppliers based in China, Southeast Asia and elsewhere
overseas in order to reduce our manufacturing cost. However, economic, political or trade problems with foreign countries and public
health crises could substantially impact our ability to obtain critical parts needed in the timely manufacture of our products, or could
substantially increase the costs of these parts. Additionally, this practice increases our vulnerability to the theft of, and reduced
protection for, our intellectual property.
Increases in tariffs, trade restrictions or taxes on our products could have an adverse impact on our operations.
During the year ended December 31, 2019, approximately 59% of our revenues were from customers outside of the U.S. We
also manufacture certain of our products and purchase a portion of our raw materials and components from suppliers in China and
other foreign countries. The commerce we conduct in the international marketplace makes us subject to tariffs, trade restrictions and
other taxes when the raw materials or components we purchase, and the products we ship, cross international borders. Trade tensions
between the U.S. and China, as well as those between the U.S. and other countries have escalated in recent years. U.S. tariff
impositions against Chinese exports have been followed by retaliatory Chinese tariffs on U.S. exports to China. Certain of the raw
materials and components we purchase from China are or were subject to these tariffs, which has increased our manufacturing costs
and could make our products less competitive than those of our competitors whose inputs are not subject to these tariffs. Certain of our
finished products manufactured in the U.S. have been and may in the future be subject to retaliatory tariffs in China, which increases
our cost and makes our products less competitive than those of our competitors whose products are not subject to such retaliatory
tariffs. In addition, the U.S. administration previously threatened to impose tariffs on all products imported from China, which would
impact all of our products and supplies imported from China to the U.S.; and the Chinese government threatened to levy additional
retaliatory tariffs on U.S. manufactured goods. If these were to occur, we may not be able to mitigate the impacts of these tariffs, and
our business, results of operations and financial position would be materially adversely affected. Products we sell into certain other
foreign markets could also become subject to similar retaliatory tariffs, making our products uncompetitive to similar products not
subjected to such import tariffs. Although a temporary agreement has been reached between the U.S. and Chinese governments to
cease further escalation of trade tariffs, there is no guarantee that any of the existing tariffs will be repealed or reduced. Further
changes in U.S. trade policies, tariffs, taxes, export restrictions or other trade barriers, or restrictions on raw materials or components
may limit our ability to produce products, increase our manufacturing costs, decrease our profit margins, reduce the competitiveness
of our products, or inhibit our ability to sell products or purchase raw materials or components, which would have a material adverse
effect on our business, results of operations and financial condition.
The U.K.’s withdrawal from the EU and the actions of the current U.S. government may have a negative effect on global
economic conditions, financial markets and our business, which could reduce the price of our common shares.
We are a multinational company with worldwide operations, including business operations in the U.K., Germany and China.
Following a national referendum and enactment of legislation by the U.K. government, the U.K. withdrew from the European Union
on January 31, 2020 and entered into a transition period during which it will continue its ongoing and complex negotiations with the
European Union relating to the future trading relationship between the parties. Significant political and economic uncertainty remains
about whether the terms of the relationship will differ materially from the terms before the withdrawal, as well as about the possibility
that a so-called “no deal” separation will occur if negotiations are not completed by the end of the transition period. These
developments in turn may increase our costs and inhibit our sales of products, mobility of our personnel and our access to capital.
The policies of the current U.S. government regarding U.S. trade, tax and health care policies, among other things, have led to
substantial uncertainty in global financial markets. The current U.S. government has withdrawn the U.S. from the Trans-Pacific
Partnership trade agreement, has re-negotiated the North American Free Trade Agreement (“NAFTA”) and has made various
comments suggesting the possible re-negotiation of, or withdrawal from, other trade agreements, has imposed significant tariffs on
imports from China and other countries, and has suggested the potential imposition of other significant new import barriers. The
current U.S. government has also enacted comprehensive tax law reform and attempted to repeal the U.S. Patient Protection and
Affordable Care Act (the “PPACA”), and may continue to seek repeal of the PPACA. These developments and the lack of clarity
regarding future U.S. tax, trade and health care policies have created significant uncertainty that could have a material adverse effect
on global economic conditions and the stability of global financial markets. Any major changes in these policies could have a material
adverse effect on our business, financial condition and results of operations and reduce the price of our common shares. Because of
the global nature of our business, and our strategy to increase our sales to the medical market, our business may be particularly
impacted by any major changes in U.S. trade, tax and health care policies.
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Others may violate our intellectual property rights and cause us to incur significant costs to protect our rights.
Our future success depends in part upon our intellectual property rights, including patents, trade secrets, know-how and
continuing technological innovation. We do not have personnel dedicated to the oversight, organization and management of our
intellectual property. There can be no assurance that the steps we take to protect our intellectual property rights will be adequate to
prevent misappropriation or disclosure. It is possible that, despite our efforts, other parties may use, obtain or try to copy our
technology and products. There can be no assurance that other companies are not investigating or developing other technologies
similar to ours, that any patents will be issued from any application filed by us, or that, if patents are issued, the claims allowed will be
sufficient to deter or prohibit others from marketing similar products. In addition, our patents may be challenged, invalidated or
circumvented in a legal or administrative proceeding. Policing unauthorized use of our intellectual property rights is difficult and time
consuming and may involve initiating claims or litigation against third parties for infringement of our proprietary rights, which could
be costly and divert management resources.
Our efforts to protect our intellectual property rights against infringement may not be effective in some foreign countries where
we operate or sell our products. If we fail to adequately protect our intellectual property in these countries, we may lose significant
business to our competitors.
Our operating results would suffer if we are unable to successfully defend against infringement claims by third parties.
We have received in the past, and could receive in the future, notices from third parties alleging that our products infringe patent
or other proprietary rights. These allegations could result in significant costs and diversion of the attention of management. Adverse
consequences may also apply if we fail to avoid or successfully defend litigation for infringement or misappropriation of proprietary
rights of third parties. If a successful claim were brought against us and we were found to have infringed a third-party’s intellectual
property rights, we could be required to pay substantial amounts for damages or be enjoined from using the technology deemed to be
infringing, or from using, making or selling products deemed to be infringing, any of which could adversely affect our operating
results. If we have supplied infringing products to third parties, we may be obligated to indemnify these third parties for any damages
that they may be required to pay to the patent holder and for any losses that they may sustain as a result of the infringement.
We operate in highly competitive industries and, if we lose competitive advantages, our business would suffer adverse
consequences.
Some of our competition comes from established competitors that have greater financial, engineering, manufacturing and
marketing resources than we do. Our competitors will continue to improve the design and performance of their existing products and
introduce new products. It is possible that we may not successfully differentiate our current and proposed products from the products
of our competitors, or that the marketplace will not consider our products to be superior to competing products. To remain
competitive, we will be required to invest heavily in research and development, marketing and customer service and support.
However, we may not be able to make the necessary technological advances to maintain our competitive position and our products
may not receive market acceptance. These factors would cause us not to be able to compete successfully in the future. Increased
competition may also result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows
that are sufficient to maintain or expand our new product development programs.
Our results of operations will be adversely affected if we fail to successfully integrate future acquisitions or to grow the
acquired businesses.
As part of our business strategy, we expect to broaden our product and service offerings by acquiring businesses, technologies,
assets and product lines that, we believe, complement or expand our existing businesses. In recent years, we have made a number of
acquisitions, including the acquisitions of ARGES, Med X Change, Ingenia, Zettlex, WOM, Laser Quantum and ThingMagic, and we
expect to continue to make acquisitions in the future. We may fail to successfully identify appropriate acquisition candidates or
integrate acquired businesses, products, technologies or personnel into our businesses and, as a result, may fail to realize the synergies,
cost savings and other benefits expected from the acquisitions. If we are not able to successfully achieve these objectives, the
anticipated benefits of such acquisitions may not be realized fully or at all, and our results of operations could be adversely affected.
As a result of the number of recent and expected future acquisitions in a relatively short amount of time, these risks may be heightened
due to limited resources available to integrate these new businesses. Our acquisition activities may divert management’s attention
from our regular operations. Managing a larger and more geographically dispersed operation and product portfolio could also pose
challenges for our management team.
Further, our ability to maintain and increase profitability of acquired businesses will depend on our ability to manage and
control operating expenses and to generate and sustain increased levels of revenue. Our expectations to achieve more consistent and
predictable levels of revenue and to increase profitability as a result of any acquisition may not be realized. Such revenues and
profitability may even decline as we integrate operations into our businesses. If revenues of acquired businesses decline or grow more
slowly than we anticipate, or if their operating expenses are higher than we expect, we may not be able to sustain or increase their
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profitability, in which case our financial condition will suffer and our stock price could decline. In addition, through our acquisitions,
we may assume liabilities, losses or costs for which we are not indemnified or insured or for which our indemnity or insurance is
inadequate. Any such liabilities may have a material adverse effect on our financial position or results of operations.
If we do not attract and retain our key personnel, our ability to execute our business strategy will be limited.
Our success depends, to a significant extent, upon the continued service of our executive officers, key management and
technical personnel, particularly our experienced engineers, and upon our ability to continue to attract, retain, and motivate qualified
personnel. The competition for these employees is intense. The loss of the services of one or more of our key personnel could have a
material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for
engineers and other key personnel increase significantly or if we are unable to continue to attract qualified personnel.
Our success also depends on our ability to execute leadership succession plans. The inability to successfully transition key
management roles could have a material adverse effect on our operating results.
We have undertaken restructuring and realignment activities in the past, and we will continue to assess our operating
structure in the future. These actions may not improve our financial position, and may ultimately prove detrimental to our
operations and sales.
We have undertaken restructuring and realignment activities in the past, and we will continue to assess our operating structure in
the future. Our ability to reduce operating expenses is dependent upon the nature of the actions we take to reduce expenses and our
subsequent ability to implement those actions and realize expected cost savings. We may need to take additional restructuring actions,
such as eliminating or consolidating certain of our facilities or operations, reducing our headcount, or eliminating certain positions for
a variety of reasons, including deterioration in global economic conditions or significant declines in demand for our products. Failure
to successfully implement such restructuring activities could adversely affect our ability to meet customer demand for our products
and could increase the cost of production versus our projections, both of which could adversely impact our operating results. Further,
expenses and cost inefficiencies associated with our restructuring activities, including severance costs and the loss of trained
employees with knowledge of our business and operations, could exceed our expectations and negatively impact our financial results.
Product defects or problems with integrating our products with other vendors’ products used by our customers may seriously
harm our business and reputation.
We produce complex products that can contain latent defects or performance problems. This could happen to both existing and
new products. Such defects or performance problems could result in litigation against us and be detrimental to our business and
reputation.
In addition, customers frequently integrate our products with other vendors’ products. When problems occur in a combined
environment, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and
repair costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer
relationship issues, any of which could adversely affect our results of operations and financial condition.
Disruptions in the supply of certain key components and other goods from our suppliers, including limited or single source
suppliers, could have an adverse effect on the results of our business operations, and could damage our relationships with
customers.
The production of our products requires a wide variety of raw materials, key components and other goods that are generally
available from alternate sources of supply. However, certain critical raw materials, key components and other goods required for the
production of some of our principal products are available from limited or single source of supply. If a single source supplier decides
to stop producing a key component for us, or if the receipt of certain limited source or single source materials is otherwise delayed,
our relationship with customers may be harmed if such decisions or delays cause us to miss our scheduled shipment deadlines. Our
current or alternative sources may not be able to continue to meet all of our demands on a timely basis. If suppliers or subcontractors
experience difficulties or fail to meet our manufacturing requirements, our business would be harmed until we are able to secure
alternative sources, if any, on commercially reasonable terms. A prolonged inability to obtain certain raw materials, key components
or other goods is possible and could have a significant adverse effect on our business operations, damage our relationships with
customers, or even lead to permanent loss of customer orders.
In addition, certain of our businesses buy components, including limited or sole source items, from competitors of our other
businesses. This dynamic may adversely impact our relationship with these suppliers. For example, these suppliers could increase the
price of those components or reduce their supply of those components to us, which could have a significant adverse effect on our
business operations or lead to permanent loss of customer orders.
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If we fail to accurately forecast component and raw material requirements for our products, we could incur additional costs
and experience significant delays in shipments, which could have an adverse effect on the results of our business operations, and
could damage our relationships with customers.
We use rolling forecasts based on anticipated product orders to determine our production requirements. It is important that we
accurately predict both the demand for our products and the lead times required to obtain the necessary components and raw materials
to manufacture our products. Lead times for our components and raw materials vary significantly and depend on multiple factors,
including the specific supplier requirements, the size of the order, contract terms and current market demand. For substantial increases
in our sales levels of certain products, some of our suppliers may need significant lead time. If we overestimate our component and
raw material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and
raw material requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to customers.
Any of these occurrences could adversely affect our results of operations and damage our relationships with customers.
Production difficulties and product delivery delays or disruptions could have a material adverse effect on our business.
We assemble our products at our facilities in the U.S., the U.K., Germany and China. Each of our products is typically
manufactured in a single manufacturing location. If production activities at any of our manufacturing facilities were disrupted by a
natural disaster, health epidemic, and act of terrorism or otherwise, our operations would be negatively impacted until we could
establish alternative production and service operations. Significant production difficulties could be the result of:
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mistakes made while transferring manufacturing processes between locations;
changing process technologies;
ramping production;
installing new equipment at our manufacturing facilities;
implementing new information technology systems;
shortage of key components; and
loss of electricity or employees’ access to the manufacturing facilities due to man-made and natural disasters.
From time to time, we determine to consolidate certain of our manufacturing facilities, or otherwise move our production of
certain products to another facility. Moving complicated manufacturing facilities involves various risks, including the inability to
commence production within the cost and timeframe estimated, damage to equipment, inability to produce a high-quality product,
shipping delays, distraction to management and employees, and the inability to hire and retain a sufficient number of qualified
personnel. Failure to successfully move manufacturing facilities due to these and other unforeseen risks could adversely affect our
ability to meet customer demand, harm our relationships with customers, and adversely impact our results of operations and financial
position.
In addition, we may experience product delivery delays in the future. We ship a significant portion of our products to our
customers through independent package delivery and import/export companies. We also ship our products through national trucking
firms, overnight carrier services and local delivery practices. If one or more of the key package delivery or import/export providers
experience significant disruption in services or institutes a significant price increase, the delivery of our products could be disrupted or
delayed. Such events could cause us to incur increased shipping costs that could not be passed on to our customers, negatively
impacting our profitability and our relationships with customers.
We are subject to extensive and dynamic medical device regulation, 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.
Some of our products and the related sales and marketing development activities and manufacturing processes are subject to
extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (the “FDCA”), by comparable
agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDCA, medical devices must receive
FDA clearance or approval or an exemption from such clearance or approval before they can be commercially marketed in the U.S. In
the EU, we are required to comply with applicable medical device directives (including the Medical Devices Directive) and to obtain
CE Mark certification in order to market medical devices. The CE Mark is applied following approval from an independent notified
body or declaration of conformity. The process of obtaining marketing approval or clearance from the FDA or by comparable agencies
in foreign countries for new products, or with respect to enhancements or modifications to existing products, could:
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take a significant period of time;
require substantial resources;
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involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance;
require changes to products; and
result in limitations on the indicated uses of products.
In addition, exported devices are subject to the regulatory requirements of each country to which the device is exported. Some
countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Most countries outside
of the U.S. require that product approvals be renewed or recertified on a regular basis, generally every four to five years. The renewal
or recertification process requires that we evaluate any device changes and any new regulations or standards relevant to the device and
conduct appropriate testing to document continued compliance. Where renewal or recertification applications are required, they may
need to be renewed and/or approved in order for us to continue selling our products in those countries. There can be no assurance that
we will receive the required approvals for new products or modifications to existing products on a timely basis or that any approval
will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.
In addition, on April 5, 2017, the European Parliament passed the Medical Devices Regulation (the “MDR”) which repeals and
replaces the EU Medical Devices Directive. As the MDR becomes effective on May 25, 2020, new medical devices will have to meet
requirements of the MDR in order to be placed in the European market after the effective date. Devices holding a certificate from a
European Notified Body under the Medical Device Directive (93/42/EEC) have an additional grace period and may continue to be
placed on the market until May 26, 2024. Unlike directives, which must be implemented into the national laws of the EU member
states, the regulations are directly applicable (i.e., without the need for adoption of EU member state laws implementing them) in all
EU member states and are intended to eliminate current differences in the regulation of medical devices among EU member states.
The MDR, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework
across the European Economic Area (the “EEA”) for medical devices and in vitro diagnostic devices and ensure a high level of safety
and health while supporting innovation. The MDR will, however, only become applicable three years after publication. Once
applicable, the new regulations will, among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of
devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique
identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on
products available in the EU; and
strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an
additional check by experts before they are placed on the market.
We face uncertainties as the MDR is rolled out and enforced by the European Commission and EU competent authorities,
creating risks in several areas including the CE Marking process and data transparency in the upcoming years.
The FDA and other worldwide regulatory agencies actively monitor compliance with local laws and regulations through review
and inspection of design and manufacturing practices, recordkeeping, reporting of adverse events, labeling and promotional practices.
The FDA can ban certain medical devices; detain or seize adulterated or misbranded medical devices; order recall, repair, replacement
or refund of these devices; and require notification of healthcare professionals and others with regard to medical devices that present
unreasonable risks of substantial harm to the public health. The FDA can take action against a company that promotes "off-label" uses.
The FDA may also enjoin and restrain a company for certain violations of the FDCA and regulations pertaining to medical devices, or
initiate action for criminal prosecution of such violations. Any adverse regulatory action, depending on its magnitude, may restrict a
company from effectively marketing and selling its products, may limit a company's ability to obtain future premarket clearances or
approvals, and could results in a substantial modification to the company's business practices and operations. International sales of
medical devices manufactured in the U.S. that are not approved by the FDA for use in the U.S., or that are banned or deviate from
lawful performance standards, are subject to FDA export requirements.
Regulations regarding the development, manufacture and sale of medical devices are evolving and subject to future changes.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing
the regulation of medical devices. The FDA may also change its clearance and approval policies, adopt additional regulations or revise
existing regulations, or take other actions that may prevent or delay approval or clearance of our future products under development or
impact our ability to modify our currently cleared products on a timely basis. Over the last several years, the FDA has proposed
reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical data and a longer review
period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. In addition, FDA
regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our
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products. Any new statutes, regulations, or revisions or reinterpretations of existing regulations may impose additional costs, lengthen
regulatory review time for, or make it more difficult to obtain approval for, the manufacturing, marketing or distribution of our
products. Such changes could, among other things, require additional testing prior to obtaining clearance or approval, changes to
manufacturing methods, recall, replacement or discontinuance of our products, or require additional record keeping.
Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and
results of operations. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or
suspensions of regulatory clearances or approvals, seizures or recalls of products, physician advisories or other field actions, operating
restrictions and/or criminal prosecution. We may also initiate field actions as a result of a failure to strictly comply with our internal
quality policies. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or
recalls of products, physician advisories or other field actions, or the withdrawal of product approval by the FDA or by comparable
agencies in foreign countries could have a material adverse effect on our business, financial condition and results of operations.
Our products and operations are subject to various foreign and U.S. federal and state healthcare laws and regulations, which
could expose us to penalties.
Our products and our operations may be directly, or indirectly through our customers, subject to various foreign and U.S. federal
and state healthcare laws and regulations, including, without limitation, anti-kickback, false claims and privacy statutes. These laws
may restrict, among other things, the development, sale, marketing and distribution of our products. These laws include:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting,
receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or
recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and
Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment from
Medicare, Medicaid, or other third-party payors;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPPA, which created new federal criminal
statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating
to healthcare matters;
HIPAA as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its
implementing regulations, which imposes certain requirements relating to the privacy, security, and transmission of
individually identifiable health information;
the federal physician “Sunshine Act” requirements under PPACA, which requires manufacturers of drugs, devices,
biologics, and medical supplies to report annually to Centers for Medicare & Medicated Services (the “CMS”)
information related to payments and other transfers of value to physicians, other healthcare providers, and teaching
hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate
family members;
state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may
apply to items or services reimbursed by any third-party payors, including commercial insurers; state laws that require
device manufacturers to comply with the industry’s voluntary compliance guidelines and the applicable compliance
guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers
and other potential referral sources; state laws that require device manufacturers to report information related to payments
and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws
governing the privacy and security of health information in certain circumstances, many of which differ from each other
in significant ways, thus complicating compliance efforts.
Efforts to ensure that our business operations comply with applicable healthcare laws may involve substantial costs. If our
operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be
subject to, without limitation, civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion
from participation in governmental healthcare programs, contractual damages, reputational harm, diminished profits and future
earnings and curtailment or restructuring of our operations. Further, defending against any such actions can be costly, time-consuming
and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such
actions that may be brought against us, our business may be impaired.
21
Our business is indirectly subject to healthcare industry cost containment and healthcare reform measures that could result
in reduced sales of our products.
Several of our customers rely on third party payors, such as government programs and private health insurance plans, to
reimburse some or all of the cost of the procedures in which our products are used. The continuing efforts of governments, insurance
companies and other payors of healthcare costs to contain or reduce those costs could lead to patients being unable to obtain approval
for payment from these third-party payors for procedures in which our products are used. If that occurs, sales of medical devices may
decline significantly and our customers may reduce or eliminate purchases of our products, or demand further price reductions. The
cost containment measures that healthcare payors are instituting, both in the U.S. and internationally, could reduce our revenues and
harm our operating results.
In addition, in the U.S. and other jurisdictions, there have been, and we expect there will continue to be, a number of legislative
and regulatory changes and proposed changes to reform healthcare systems. Various elements of healthcare reforms, such as
comparative effectiveness research, an independent payment advisory board, payment system reforms, including shared savings pilots,
and other provisions, could meaningfully change the way healthcare is developed and delivered and may have material adverse impact
on numerous aspects of our business, results of operations and financial condition.
Changes in government regulations related to our business or our products could reduce demand for our products or
increase our expenses.
We are subject to many governmental regulations, including, but not limited to, the laser radiation safety regulations of the
Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health, a branch of the
FDA, and certain health regulations related to the manufacture of products using beryllium, an element used in some of our products.
Among other things, these regulations require us to file annual reports, to maintain quality control and sales records, to perform
product testing, to distribute appropriate operating manuals, to conduct safety reviews, to incorporate design and operating features in
products sold to end-users, and to certify and label our products. Depending on the class of the product, various warning labels must
be affixed and certain protective devices must be installed.
We are also subject to regulatory oversight, including comparable enforcement mechanisms, in the markets we serve. We
compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as
environmental, health and safety and food and drug regulations. We develop, configure and market our products to meet customer
needs created by those regulations. Any significant changes could reduce demand for our products or increase our expenses, which in
turn could adversely affect our business, financial condition and results of operations.
Compliance or the failure to comply with current and future environmental regulations could result in significant costs.
Our operations are subject to a variety of federal, state, local and international environmental regulations relating to the use,
storage, discharge and disposal of hazardous chemicals used during our manufacturing process or the recycling of products we
manufacture. We are subject to regulations of the Environmental Protection Agency in the U.S. and comparable authorities in other
countries. If we fail to comply with any present or future regulations, we could be subject to regulatory fines.
Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect
on our business, results of operations or financial condition. It is difficult to anticipate how such regulations will be implemented and
enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. Certain regulations may
require us to redesign our products to ensure compliance with the applicable standards. These redesigns may adversely affect the
performance of our products, add greater testing lead-times for product introductions and reduce our profitability.
If we fail to implement new information technology systems successfully, our business could be adversely affected.
We rely on centralized information systems throughout the Company to keep financial records, process orders, manage
inventory, process shipments to customers, and operate other critical functions. We are in the process of upgrading our information
technology infrastructure, including implementing new enterprise resource planning (“ERP”) systems and other complementary
information technology systems. We have invested, and will continue to invest, significant capital and human resources in the
upgrades and new ERP systems. Any disruptions, delays or deficiencies in the transition, design and implementation of the upgrades
and new ERP systems, particularly any disruptions, delays or deficiencies that impact our operations, could have a material adverse
effect on our results of operations and cash flows.
We may experience difficulties as we transition to these new or upgraded systems and processes, including loss of data and the
ability to process customer orders, ship products, provide services and support to our customers, issue sales invoices, collect accounts
receivable, fulfill contractual obligations, satisfy internal and external financial reporting requirements in a timely manner, or
otherwise run our business. We may also experience decreases in productivity as our personnel implement these systems and become
familiar with the new systems. In addition, as we are dependent upon our ability to gather and promptly transmit accurate information
22
to key decision makers, our business, results of operations and financial condition may be materially and adversely affected if our
information technology infrastructure does not allow us to transmit accurate information, even for a short period of time. Furthermore,
the transition, design and implementation of upgrades and new ERP systems may be much more costly than we anticipated.
Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.
As of December 31, 2019, we had $440.9 million of net intangible assets, including goodwill, on our consolidated balance sheet.
Net intangible assets consist principally of goodwill, customer relationships, patents, trademarks, core technologies and technology
licenses. Goodwill and indefinite-lived intangible assets are tested for impairment at least on an annual basis. All other intangible
assets are evaluated for impairment should discrete events occur that call into question the recoverability of the intangible assets.
Adverse changes in our business, adverse changes in the assumptions used to determine the fair value of our reporting units, or
the failure to grow our businesses may result in an impairment of our intangible assets, which could adversely affect our results of
operations.
We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could
adversely affect our results of operations.
Customers with liquidity issues may lead to additional bad debt expense. There can be no assurance that our open credit
customers will pay the amounts they owe to us or that the reserves we maintain will be adequate to cover such credit exposures. In
addition, to the extent that turmoil in the credit markets or increases in interest rates make it more difficult for some customers to
obtain financing, their ability to pay may be adversely impacted. Our customers’ failure to pay and/or our failure to maintain sufficient
reserves could have a material adverse effect on our future cash flows and financial condition.
Our reliance upon third party distribution channels subjects us to credit, inventory, business concentration, and business
failure risks beyond our control.
We sell many of our products through resellers, distributors, and system integrators. As these third parties tend to have more
limited financial resources than OEM and end-user customers, they generally represent sources of increased credit risk. Any downturn
in the business of our resellers, distributors, and systems integrators would in turn harm our results of operations and financial
condition.
Our sales also depend upon the ability of our OEM customers to develop and sell systems that incorporate our products.
Adverse economic conditions, large inventory positions, limited marketing resources and other factors influencing these OEM
customers could have a substantial adverse effect on our financial results. We cannot assure investors that our OEM customers will
not experience financial or other difficulties that could adversely affect their operations and, in turn, adversely affect our results of
operations and financial condition.
Risks Relating to Taxes
Novanta Inc. may be subject to U.S. federal income taxation even though it is a non-U.S. corporation.
Novanta, Inc. is a holding company organized in Canada and is subject to Canadian tax laws. However, we are also subject to
U.S. tax rules and file U.S. federal income tax returns for our operations in the U.S. In addition, distributions or payments from
entities in one jurisdiction to entities in another jurisdiction may be subject to income and/or withholding taxes. We do not intend to
operate in a manner that will cause Novanta, Inc. to be treated as engaged in a U.S. trade or business or otherwise be subject to U.S.
federal income taxes on its income, but it generally will be subject to U.S. federal withholding tax on certain U.S.-sourced passive
income items, such as dividends, royalties and certain types of interest.
Our effective tax rate is subject to fluctuation, which could impact our financial position and earnings per share.
Our effective tax rate is subject to fluctuation as the effective income tax rate for each year is a function of (a) taxable income
levels in numerous tax jurisdictions, (b) our ability to utilize recognized deferred tax assets, (c) taxes, interest, and/or penalties
resulting from tax audits and, (d) credits and deductions as a percentage of total taxable income. From time to time, the U.S., foreign
and state governments make substantive changes to tax rules where significant judgment is required to determine the impact of such
changes on our provision for income taxes, which may result in increased costs. Further, such tax law changes may cause our effective
tax rate to fluctuate between periods.
Risks Relating to Our Common Shares and Our Capital Structure
23
We may require additional capital to adequately respond to business challenges or opportunities and repay or refinance our
existing indebtedness, but this capital may not be available on acceptable terms or at all.
We may require additional capital to adequately respond to future business challenges or opportunities, including, but not
limited to, the need to develop new products or enhance our existing products, maintaining or expanding research and development
projects, the need to build inventory or to invest other cash to support business growth, and opportunities to acquire complementary
businesses and technologies.
As of December 31, 2019, we had outstanding debt of $224.6 million under our amended and restated senior secured credit
agreement (the “Third Amended and Restated Credit Agreement”) and $226.6 million available to be drawn under the revolving credit
facility. If we are unable to satisfy the conditions in the Third Amended and Restated Credit Agreement or our needs exceed the
amounts available under the revolving credit facility, we may need to engage in equity or debt financings to obtain additional funds. If
we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer
significant dilution. Any new equity securities we issue could have rights, preferences and privileges superior to those of the holders
of our common shares. Further, our Third Amended and Restated Credit Agreement restricts our ability to obtain additional debt
financing from other sources. If we are unable to obtain adequate financing or obtain financing on terms satisfactory to us when we
need it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. In
addition, the terms of any additional equity or debt issuances may adversely affect the value and price of our common shares.
Our existing indebtedness could adversely affect our future business, financial condition and results of operations.
As of December 31, 2019, we had $224.6 million of outstanding debt. This level of debt could have significant consequences on
our future operations, including:
(cid:129)
(cid:129)
(cid:129)
reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts,
acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these
purposes;
limiting our flexibility in planning for or reacting to, and increasing our vulnerability to, changes in our business, changes
in the general economic environment, and market changes in the industries in which we operate; and
placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.
Any of these factors could have an adverse effect on our business, results of operations and financial condition.
In addition, as a global corporation, we have significant cash reserves held in foreign countries. Some of these balances may not
be immediately available to repay our debt.
Our Third Amended and Restated Credit Agreement contains covenants that limit our ability to engage in activities that may be
in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or
waived, could result in the acceleration of all of our borrowings thereunder.
The market price for our common shares may be volatile.
The market price of our common shares could be subject to wide fluctuations. These fluctuations could be caused by:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
quarterly variations in our results of operations;
changes in earnings estimates by analysts;
conditions in the markets we serve; or
general market, political or economic conditions.
In addition, the stock market has experienced extreme price and volume fluctuations in recent years. These fluctuations have had
a substantial effect on the market prices of many companies, often unrelated to the operating performance of the specific companies.
These market fluctuations could adversely affect the price of our common shares.
Risks Relating to Our Internal Controls
If we fail to maintain appropriate internal controls in the future, we may not be able to report our financial results
accurately, which may adversely affect our stock price and our business.
While our management and our independent registered public accounting firm concluded that our internal control over financial
reporting was effective as of December 31, 2019, it is possible that material weaknesses may be identified in the future.
24
If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and
we may be unable to meet our reporting obligations as a publicly traded company or to comply with the requirements of the SEC or
the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial statements, the imposition of sanctions, including
the inability of registered broker dealers to make a market in our common shares, or investigation by regulatory authorities. Any such
action or other negative results caused by our inability to meet our internal control and financial reporting requirements or to comply
with legal and regulatory requirements could adversely affect the trading price of our common shares and our business. Material
weaknesses in our internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost
of any financing we obtain.
As part of our growth strategy, we may make additional acquisitions of privately held businesses. Prior to becoming part of our
consolidated company, the acquired businesses would not be required to implement or maintain the disclosure controls and procedures
or internal control over financial reporting that are required of public companies. We are required to integrate the acquired businesses
into our consolidated company’s system of disclosure controls and procedures and internal control over financial reporting, but we
cannot provide assurance as to how long the integration process may take for our recently acquired businesses or any businesses that
we may acquire in the future. Additionally, we may need to improve our internal control or those of any business we acquire and may
be required to design enhanced processes and controls in order to make such improvements. This could result in significant costs to us
and could require us to divert substantial resources, including management time and attention, from other activities.
Item 1B. Unresolved Staff Comments
None.
25
Item 2. Properties
Our principal owned and leased properties as of December 31, 2019 are listed in the table below.
Location
Bedford, Massachusetts,
United States
Principal Use
Manufacturing, R&D, Marketing,
Sales and Administration
Current
Segment
Photonics, Precision
Motion & Corporate
Approximate
Square Feet
147,000
Owned/Leased
Leased; expires
in 2031
Ludwigsstadt, Germany
Manufacturing
Vision
105,000 Owned
Suzhou, People’s Republic of China
Manufacturing, R&D, Marketing,
Sales and Administration
Photonics, Vision &
Precision Motion
55,000
Berlin, Germany
R&D, Marketing, Sales and
Administration
Vision
51,000
Leased; expires
in 2023
Leased; expires
in 2026
Additional manufacturing, research and development, sales, service and logistics sites are located in California, Washington,
Florida, New York, Arizona and Oregon within the United States, and in Germany, United Kingdom, Czech Republic, Japan, China,
Spain and Italy. These additional facilities cover approximately 540,000 square feet, of which approximately 374,000 square feet are
leased and approximately 166,000 square feet are owned, and are used by our Photonics, Vision and Precision Motion segments.
We consider our facilities suitable and adequate for the purposes for which they are used and do not anticipate difficulty in
renewing existing leases as they expire or in finding alternative facilities. We believe all of our properties have been properly-
maintained.
Item 3. Legal Proceedings
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 4. Mine Safety Disclosures
Not applicable.
26
Item 5. Market for Registrant’s Common Shares, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market Information
The Company’s common shares, no par value, are traded on the Nasdaq Global Select Market under the symbol “NOVT”.
Holders
As of the close of business on February 20, 2020, there were approximately 37 holders of record of the Company’s common
shares. Since many of the common shares are registered in “nominee” or “street” names, the Company believes that the total number
of beneficial owners is considerably higher.
Dividend Policy
The Company has never declared or paid cash dividends on its common shares and does not anticipate paying any cash
dividends in the foreseeable future.
Purchases of Equity Securities by the Issuer and Affiliated Purchaser
In October 2018, the Company’s Board of Directors authorized a share repurchase plan (the “2018 Repurchase Plan”) for the
repurchase of up to an aggregate of $25.0 million of the Company’s common shares. The 2018 Repurchase Plan does not obligate the
Company to acquire any particular amount of our common shares. No time limit was set for the completion of the 2018 Repurchase
Plan, and the plan may be suspended or discontinued at any time. Since the adoption of the share repurchase plan, the Company
repurchased 119 thousand shares for an aggregate purchase price of $10.0 million at an average price of $83.71 per share.
In February 2020, the Company’s Board of Directors authorized a new share repurchase plan for the repurchase of up to an
aggregate of $50.0 million of the Company’s common shares (the “2020 Repurchase Plan”), following the completion of the 2018
Repurchase Plan. While the 2020 Repurchase Plan is intended to generally offset dilution from equity awards to the Company’s
employees and directors, the plan does not obligate the Company to acquire any particular amount of our common shares. No time
limit was set for the completion of the 2020 Repurchase Plan, and the plan may be suspended or discontinued at any time.
The following table sets forth certain information with respect to repurchases of the Company’s common shares under the 2018
Repurchase Plan for the periods indicated.
Period
September 28 - November 1, 2019
November 2 - November 29, 2019
November 30 - December 31, 2019
Total
Total Number of Shares
Purchased
Average Price Paid Per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Approximate Dollar
Value That May Yet Be
Purchased Under the
Plans or Programs
15,600 $
13,200 $
9,964 $
38,764
83.47
84.07
90.61
15,600 $
17,012,575
13,200 $
15,902,877
9,964 $
38,764
15,000,088
27
Performance Graph
The following graph compares the cumulative total return on the Company’s common shares with the cumulative total return on
the Nasdaq Composite Index and the Russell 2000 Index for the period from December 31, 2014 through December 31, 2019. The
comparison assumes an investment of $100 is made on December 31, 2014 in the Company’s common shares and in each of the
indices and, in the case of the indices, it also assumes reinvestment of all dividends. The performance shown is not necessarily
indicative of future performance.
Comparison of 5-Year Cumulative Total Return among Novanta Inc., Nasdaq Composite Index, and
Russell 2000 Index
600
500
400
s
r
a
l
l
o
D
300
200
100
-
2014
2015
2016
2017
2018
2019
Novanta Inc.
Nasdaq Composite
Russell 2000
Year
December 31,
2014
December 31,
2015
December 31,
2016
December 31,
2017
December 31,
2018
December 31,
2019
Novanta Inc.
Nasdaq Composite Index
Russell 2000 Index (1)
$
$
$
100.00 $
100.00 $
100.00 $
92.53 $
106.96 $
95.59 $
142.66 $
116.45 $
115.95 $
339.67 $
150.96 $
132.98 $
427.99 $
146.67 $
118.30 $
600.82
205.27
148.49
(1) Copyright © Russell Investments 2019. All rights reserved.
28
Item 6. Selected Financial Data
The selected financial data set forth below is not necessarily indicative of results of future operations, and should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the
consolidated financial statements and related notes thereto in Item 8 of this Annual Report on Form 10-K to fully understand factors
that may affect the comparability of the information presented below. The selected consolidated financial data in this section is not
intended to replace the consolidated financial statements.
The consolidated statement of operations data for the years ended December 31, 2019, 2018 and 2017 and the consolidated
balance sheet data as of December 31, 2019 and 2018 are derived from our audited consolidated financial statements included in this
Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2016 and 2015 and the
consolidated balance sheet data as of December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial
statements that are not included in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data:
Revenue
Gross profit
Operating expenses (2)
Operating income from continuing operations (2)
Income from continuing operations before income taxes
(3) (4)
Income tax provision
Income from continuing operations
Loss from discontinued operations, net of tax
Consolidated net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Novanta Inc.
Earnings per common share from continuing operations.
(5):
Basic
Diluted
Earnings per common share attributable to Novanta Inc.
(5):
Basic
Diluted
$
$
$
$
$
$
Weighted average common shares outstanding—basic
Weighted average common shares outstanding—diluted
Year Ended December 31,
2019
2018
2017 (1)
2016
2015
(In thousands, except per share data)
$
626,099
262,085
206,803
55,282
$
614,337
261,528
190,515
71,013
521,290
220,531
162,965
57,566
$
$
384,758
162,452
129,497
32,955
373,598
157,890
128,586
29,304
45,766
4,993
40,773
—
40,773
—
40,773
1.16
1.15
1.16
1.15
35,030
35,546
$
$
$
$
$
61,302
10,207
51,095
—
51,095
(1,986)
49,109
1.46
1.43
1.46
1.43
34,913
35,473
$
$
$
$
$
76,134
13,827
62,307
—
62,307
(2,256)
60,051
1.14
1.13
1.14
1.13
34,817
35,280
$
$
$
$
$
32,522
10,519
22,003
—
22,003
—
22,003
0.63
0.63
0.63
0.63
34,694
34,914
$
$
$
$
$
46,022
10,394
35,628
(13)
35,615
—
35,615
1.03
1.02
1.03
1.02
34,579
34,827
(1)
(2)
(3)
(4)
(5)
In 2017, the Company completed the acquisitions of WOM, Laser Quantum and ThingMagic businesses, which contributed a
total of $102.7 million in revenue for the year ended December 31, 2017. The operating results of these businesses have been
included in the consolidated statement of operations since their respective acquisition dates.
In 2018, the Company adopted Accounting Standards Update (“ASU”) 2017-07, “Compensation – Retirement Benefits (Topic
715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07
requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other
components of net periodic benefit cost and provides guidance on the presentation of the service component and the other
components of net periodic benefit cost in the statement of operations. Amounts prior to 2018 have been retrospectively revised
to conform with this presentation.
In 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum and recorded a
non-taxable gain of $26.4 million, representing the excess of the fair value of the Company’s previously-held equity interest in
Laser Quantum over its carrying value upon gaining control.
In 2015, the Company sold its JK Lasers business and recorded a gain on disposal of $19.6 million.
In the computation of earnings per common share attributable to Novanta Inc., net income attributable to Novanta Inc. included
$1.8 million and ($20.2) million of redeemable noncontrolling interest redemption value adjustment for the years ended
December 31, 2018 and 2017, respectively.
29
Consolidated Balance Sheet Data:
Cash and cash equivalents
Total assets (1)
Debt, current
Debt, long-term
Long-term liabilities, excluding debt (1)
Redeemable noncontrolling interest (3)
Total stockholders’ equity
December 31,
2019
2018
2017 (2)
2016
2015
(in thousands)
$
$
78,944
869,736
5,031
215,334
102,384
—
417,172
$
$
82,043
719,576
4,535
202,843
44,282
—
368,255
100,057
726,703
9,119
225,500
44,567
46,923
311,545
68,108
425,637
7,366
70,554
25,717
—
258,870
$
59,959
416,045
7,385
88,426
25,965
—
244,701
(1)
(2)
(3)
In 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” using the modified retrospective approach. 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. The Company reported operating lease
right-of-use (“ROU”) assets and operating lease liabilities of approximately $35.2 million and $39.2 million, respectively, as of
December 31, 2019.
In 2017, the Company completed the acquisitions of WOM, Laser Quantum and ThingMagic businesses. Total assets acquired
amounted to $284.4 million as of the acquisition date. The acquisitions were financed with borrowings under the revolving
credit facility in the aggregate amount of $176.8 million.
In 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum, which increased
our ownership position in Laser Quantum from approximately 41% to approximately 76%. The noncontrolling interest was
considered a redeemable equity instrument and was presented as temporary equity on the consolidated balance sheet at the
greater of the carrying value or the estimated redemption value of the noncontrolling interest. In 2018, the Company acquired
the remaining approximately 24% of the outstanding shares of Laser Quantum from the noncontrolling interest shareholders.
30
Item 7. 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 8 of this Annual Report on Form 10-K. 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 and expected costs of restructuring programs; ability to repay our indebtedness; our
intentions regarding the use of cash; expectations regarding legal and regulatory 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 as a result of various important factors, including those set forth in Item 1A of this Annual Report on Form 10-K under the
heading “Risk Factors.” 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 statements 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.
Business Overview
Novanta Inc. and its subsidiaries (collectively referred to as, the “Company”, “Novanta”, “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. 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.
End Markets
We primarily operate in two end markets: the medical market and the advanced industrial market.
Medical Market
For the year ended December 31, 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, growth rates of
surgical procedures, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, changes in
technology requirements, timing of OEM customers’ product development and new product launches, changes in customer or patient
preferences, and general demographic trends.
Advanced Industrial Market
For the year ended December 31, 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.
31
Strategy
Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:
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disciplined focus on our diversified business model of providing components and sub-systems 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:
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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,
laser additive manufacturing, 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, 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;
expanding sales and marketing channels to reach new target customers;
improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean
manufacturing principles, strategic sourcing across our major production sites, and optimizing and limiting the growth of
our fixed cost base; and
attracting, retaining, and developing world-class talented and motivated employees.
Significant Events and Updates
Third Amended and Restated Credit Agreement
On December 31, 2019, we entered into an amended and restated credit agreement (the “Third Amended and Restated Credit
Agreement”), which provides for an aggregate credit facility of $450.0 million, comprised of a $100.0 million U.S. dollar equivalent
euro-denominated (approximately €90.2 million) 5-year term loan facility and a $350.0 million 5-year revolving credit facility
(collectively, the “Senior Credit Facilities”). The Third Amended and Restated Credit Agreement amended and restated our previous
senior credit facilities that had a maturity date of May 19, 2021. The new Senior Credit Facilities will mature in December 2024 and
include an uncommitted “accordion” feature pursuant to which the commitments thereunder may be increased by an additional $200.0
million in aggregate, subject to the satisfaction of certain customary conditions.
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, 124,461 Novanta common shares issued at 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 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 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,
32
for a total purchase price of $21.9 million, net of working capital adjustments. The acquisition was financed with cash on hand and a
$21.0 million borrowing 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.
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 initial cash
purchase price was financed with cash on hand and borrowings under our revolving credit facility. The contingent consideration 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. 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.
2019 Restructuring
During the fourth quarter of 2018, we implemented a restructuring plan intended to realign operations, reduce costs, achieve
operational efficiencies and focus resources on growth initiatives. We incurred costs amounting to $7.5 million related to this
restructuring plan in 2019. We anticipate completing the 2019 restructuring program in the first quarter of 2020 and expect to incur
additional restructuring charges of $0.1 million to $0.2 million related to the 2019 restructuring program.
33
Overview of Financial Results
Total revenue for 2019 was $626.1 million, an increase of $11.8 million, or 1.9%, versus 2018. This increase was 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 acquisitions in 2018 and 2019 resulted in an increase in revenue of
$17.4 million, or 2.8%. In addition, foreign exchange rates adversely impacted our revenue by $9.8 million, or 1.6%, in 2019.
Operating income decreased $15.7 million from $71.0 million in 2018 to $55.3 million in 2019. This decrease was primarily
attributable to an increase in research and development and engineering (“R&D”) spending of $4.9 million, an increase in selling,
general and administrative (“SG&A”) expenses of $2.5 million and an increase in restructuring and acquisition related costs of $8.5
million.
Basic earnings per common share (“basic EPS”) of $1.16 in 2019 decreased $0.30 from the basic EPS of $1.46 in 2018. Diluted
earnings per common share (“diluted EPS”) of $1.15 in 2019 decreased $0.28 from the diluted EPS of $1.43 in 2018. The decreases
were primarily 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 2018 that is not applicable in 2019.
Specific components of our operating results for 2019, 2018 and 2017 are further discussed below.
Results of Operations
The following table sets forth our results of operations as a percentage of revenue for the years indicated:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development and engineering
Selling, general and administrative
Amortization of purchased intangible assets
Restructuring and acquisition related costs
Total operating expenses
Operating income
Interest income (expense), net
Foreign exchange transaction gains (losses), net
Other income (expense), net
Gain on acquisition of business
Income before income taxes
Income tax provision
Consolidated net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Novanta Inc.
Revenue
2019
2018
2017
100.0%
58.1
41.9
100.0%
57.4
42.6
100.0%
57.7
42.3
8.9
18.9
2.5
2.6
33.0
8.8
(1.4)
(0.1)
(0.0)
—
7.3
0.8
6.5
—
6.5%
8.3
18.9
2.5
1.3
31.0
11.6
(1.6)
0.0
(0.0)
—
10.0
1.7
8.3
(0.3)
8.0%
8.0
19.5
2.3
1.4
31.3
11.0
(1.4)
(0.1)
(0.0)
5.1
14.6
2.7
12.0
(0.4)
11.5%
The following table sets forth external revenue by reportable segment for 2019, 2018 and 2017 (dollars in thousands):
Photonics
Vision
Precision Motion
Total
2019
2018
2017
230,457
271,407
124,235
626,099
$
$
249,339
232,902
132,096
614,337
$
$
232,359
183,074
105,857
521,290
$
$
2019 vs. 2018
(7.6)%
16.5%
(6.0)%
1.9%
% Change
2018 vs. 2017
7.3%
27.2%
24.8%
17.8%
34
Photonics
Photonics segment revenue in 2019 decreased by $18.9 million, or 7.6%, versus 2018, primarily due to decreased demand in the
advanced industrial market related to reductions in global industrial manufacturing spending, and a decrease in revenue from our
optical light engine products, partially offset by $4.9 million of revenue from the acquisition of ARGES in July 2019.
Photonics segment revenue in 2018 increased by $17.0 million, or 7.3%, versus 2017, due to an increase in revenue across all of
our product lines. Revenue from our laser beam delivery products increased $13.1 million as a result of increased volumes in the
advanced industrial and medical markets.
Vision
Vision segment revenue in 2019 increased by $38.5 million, or 16.5%, versus 2018. The increase was primarily due to an
increase in revenue of $28.4 million from our minimally invasive surgery products as a result of new product introductions and
increased demand in the medical market and $5.4 million of revenue from the acquisition of Med X Change in June 2019.
Vision segment revenue in 2018 increased by $49.8 million, or 27.2%, versus 2017. The increase was primarily due to a $46.9
million increase in revenue as a result of full-year revenue from WOM being included in 2018 results.
Precision Motion
Precision Motion segment revenue in 2019 decreased by $7.9 million, or 6.0%, versus 2018. The decrease was primarily due to
decreased demand in the microelectronics and industrial market related to reductions in global 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.
Precision Motion segment revenue in 2018 increased by $26.2 million, or 24.8%, versus 2017. The increase was primarily due
to an increase in revenue across all of our product lines as a result of increased demand in the advanced industrial and medical markets
and the Zettlex acquisition in May 2018.
Gross Profit
The following table sets forth the gross profit and gross profit margin for each of our reportable segments for 2019, 2018 and
2017 (dollars in thousands):
2019
2018
2017
Gross profit:
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
$
$
Gross profit margin:
Photonics
Vision
Precision Motion
Total
$
105,845
105,228
53,326
(2,314)
$
262,085
$
117,109
87,198
59,477
(2,256)
$
261,528
45.9%
38.8%
42.9%
41.9%
47.0%
37.4%
45.0%
42.6%
106,117
69,249
46,564
(1,399)
220,531
45.7%
37.8%
44.0%
42.3%
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 2019 decreased $11.3 million, or 9.6%, versus 2018, primarily due to a decrease in revenue.
Photonics segment gross profit margin was 45.9% for 2019, compared with a gross profit margin of 47.0% for 2018. The decrease in
gross profit margin was primarily attributable to changes in product mix. Amortization of inventory fair value adjustments and
amortization of developed technologies increased $1.1 million, which resulted in a 0.5 percentage point decrease in gross profit
margin.
35
Photonics segment gross profit for 2018 increased $11.0 million, or 10.4%, versus 2017, due to an increase in revenue.
Photonics segment gross profit margin was 47.0% for 2018, compared with a gross profit margin of 45.7% for 2017. The increase in
gross profit margin was primarily attributable to changes in product mix, productivity improvements and reductions in cost of poor
quality. Amortization of inventory fair value adjustments and amortization of developed technologies also decreased $2.0 million,
which resulted in a 0.8 percentage point increase in gross profit margin.
Vision
Vision segment gross profit for 2019 increased $18.0 million, or 20.7%, versus 2018, primarily due to an increase in revenue.
Vision segment gross profit margin was 38.8% for 2019, compared with a gross profit margin of 37.4% for 2018. The increase in
gross profit margin was primarily attributable to increased utilization of our German facility and cost reductions in our optical data
collection products, partially offset by the cost of a redundant manufacturing facility in San Jose, California until the transfer of our
manufacturing activities was substantially completed at the end of 2019.
Vision segment gross profit for 2018 increased $17.9 million, or 25.9%, versus 2017, primarily due to full-year gross profit from
WOM being included in 2018 results. Vision segment gross profit margin was 37.4% for 2018, compared with a gross profit margin of
37.8% for 2017. The decrease in gross profit margin was primarily attributable to unfavorable product mix, partially offset by a net
decrease in amortization of inventory fair value adjustments and amortization of developed technologies of $1.9 million, which
resulted in a 0.8 percentage point increase in gross profit margin.
Precision Motion
Precision Motion segment gross profit for 2019 decreased $6.2 million, or 10.3%, versus 2018, primarily due to a decrease in
revenue and a decrease in gross profit margin. Precision Motion segment gross profit margin was 42.9% for 2019, compared with a
gross profit margin of 45.0% for 2018. 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 2018 increased $12.9 million, or 27.7%, versus 2017, primarily due to an increase in
revenue. Precision Motion segment gross profit margin was 45.0% for 2018, compared with a gross profit margin of 44.0% for 2017.
The increase in gross profit margin was primarily related to changes in product mix.
Operating Expenses
The following table sets forth operating expenses for 2019, 2018 and 2017 (dollars in thousands):
Research and development and engineering
Selling, general and administrative
Amortization of purchased intangible assets
Restructuring and acquisition related costs
Total
2019
55,965
118,407
15,857
16,574
206,803
$
$
2018
51,024
115,900
15,550
8,041
190,515
$
$
$
$
2017
2019 vs. 2018
2018 vs. 2017
% Change
41,673
101,654
12,096
7,542
162,965
9.7%
2.2%
2.0%
106.1%
8.5%
22.4%
14.0%
28.6%
6.6%
16.9%
Research and Development and Engineering Expenses
Research and development and engineering (“R&D”) expenses are primarily comprised of employee compensation and related
expenses and cost of materials for R&D projects.
R&D expenses were $56.0 million, or 8.9% of revenue, in 2019, versus $51.0 million, or 8.3% of revenue, in 2018. R&D
expenses increased in terms of total dollars and as a percentage of revenue primarily due to R&D expenses from acquisitions and
higher investments in R&D.
R&D expenses were $51.0 million, or 8.3% of revenue, in 2018, versus $41.7 million, or 8.0% of revenue, in 2017. R&D
expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher investments across the majority of
our product lines and acquisitions in 2017 and 2018.
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.
36
SG&A expenses were $118.4 million, or 18.9% of revenue, in 2019, versus $115.9 million, or 18.9% of revenue, in 2018.
SG&A expenses increased in terms of total dollars primarily due to SG&A expenses from acquisitions and higher professional
services spending, partially offset by lower variable compensation expense.
SG&A expenses were $115.9 million, or 18.9% of revenue, in 2018, versus $101.7 million, or 19.5% of revenue, in 2017.
SG&A expenses increased in terms of total dollars primarily due to acquisitions in 2017 and 2018, and an increase in compensation as
a result of higher headcount and share-based compensation expense.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets is charged to our Photonics, Vision and Precision Motion segments. Amortization
of core technologies is included in cost of revenue in the consolidated statement of operations. Amortization of customer relationships,
trademarks, trade names, backlog and other intangibles are included in operating expenses in the consolidated statement of operations.
Amortization of purchased intangible assets, excluding the amortization of developed technologies that is included in cost of
revenue, was $15.9 million, or 2.5% of revenue, in 2019, versus $15.6 million, or 2.5% of revenue, in 2018. The increase in terms of
total dollars was the result of acquired intangible assets from acquisitions in 2018 and 2019.
Amortization of purchased intangible assets, excluding the amortization of developed technologies that is included in cost of
revenue, was $15.6 million, or 2.5% of revenue, in 2018, versus $12.1 million, or 2.3% of revenue, in 2017. The increase, in terms of
total dollars and as a percentage of revenue, was the result of acquired intangible assets from acquisitions in 2017 and 2018.
Restructuring and Acquisition Related Costs
Restructuring and acquisition related charges primarily relate to our restructuring programs, acquisition related costs incurred
for completed acquisitions, acquisition costs related to future potential acquisitions and failed acquisitions, and changes in fair value of
contingent considerations.
We recorded restructuring and acquisition related costs of $16.6 million in 2019, versus $8.0 million in 2018. The increase in
restructuring and acquisition related costs versus 2018 was primarily due to an increase in restructuring charges of $6.6 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 an
increase in professional services fees, partially offset by a decrease in costs recognized under earn-out agreements.
We recorded restructuring and acquisition related costs of $8.0 million in 2018, versus $7.5 million in 2017. The increase in
restructuring and acquisition related costs versus 2017 was primarily due to a $1.7 million increase in restructuring related charges as
a result of the 2018 and 2019 restructuring programs, partially offset by a decrease in acquisition related charges of $1.2 million
mostly attributable to an investment banking success fee related to the acquisition of WOM in 2017.
Operating Income (Loss) by Segment
The following table sets forth operating income (loss) by segment for 2019, 2018 and 2017 (in thousands):
Operating Income (Loss)
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
Photonics
2019
2018
2017
$
$
41,990 $
21,007
22,339
(30,054)
55,282 $
59,285 $
8,991
31,674
(28,937)
71,013 $
51,660
7,883
27,146
(29,123)
57,566
Photonics segment operating income was $42.0 million, or 18.2% of revenue, in 2019, versus $59.3 million, or 23.8% of
revenue, in 2018. The decrease in operating income was primarily due to a decrease in gross profit of $11.3 million, an increase in
R&D expenses of $2.1 million and restructuring related charges of $5.0 million associated with the 2019 restructuring program,
including a $2.2 million impairment of operating lease right-of-use asset.
Photonics segment operating income was $59.3 million, or 23.8% of revenue, in 2018, versus $51.7 million, or 22.2% of
revenue, in 2017. The increase in operating income was primarily due to an increase in gross profit of $11.0 million, partially offset by
37
an increase in R&D expenses and SG&A expenses of $3.7 million. Photonics segment operating income was favorably affected by a
$2.3 million decrease in amortization of inventory fair value adjustments and amortization of intangible assets.
Vision
Vision segment operating income was $21.0 million, or 7.7% of revenue, in 2019, versus $9.0 million, or 3.9% of revenue, in
2018. The increase in operating income was primarily due to an increase in gross profit of $18.0 million, partially offset by an increase
in R&D expenses of $1.6 million and SG&A expenses of $2.8 million. Vision segment operating income was negatively affected by a
$0.9 million net increase in amortization of inventory fair value adjustments and amortization of intangible assets.
Vision segment operating income was $9.0 million, or 3.9% of revenue, in 2018, versus $7.9 million, or 4.3% of revenue, in
2017. The increase in operating income in terms of total dollars was primarily due to an increase in gross profit, partially offset by the
inclusion of full-year operating expenses from WOM in 2018. Vision segment operating income was negatively affected by a $1.1
million net increase in amortization of inventory fair value adjustments and amortization of intangible assets.
Precision Motion
Precision Motion segment operating income was $22.3 million, or 18.0% of revenue, in 2019, versus $31.7 million, or 24.0% of
revenue, in 2018. The decrease in operating income was primarily due to a decrease in gross profit of $6.2 million, an increase in
R&D expenses of $1.3 million and SG&A expenses of $2.8 million, partially offset by a decrease in acquisition related earn-out costs
of $1.8 million associated with the Zettlex acquisition.
Precision Motion segment operating income was $31.7 million, or 24.0% of revenue, in 2018, versus $27.1 million, or 25.6% of
revenue, in 2017. The increase in operating income in terms of total dollars was primarily due to an increase in gross profit of $12.9
million, partially offset by an increase in R&D and SG&A expenses of $3.5 million and an increase in acquisition earn-out costs of
$4.0 million associated with the Zettlex acquisition.
Unallocated Corporate and Shared Services
Unallocated corporate and shared services costs primarily represent costs of corporate and shared SG&A functions and other
public company costs that are not allocated to the operating segments, including certain restructuring and most acquisition related
costs.
Unallocated corporate and shared services costs for 2019 increased by $1.1 million, or 3.9%, from 2018, primarily due to an
increase in restructuring and acquisition related costs of $3.8 million, partially offset by a decrease in SG&A expenses of $2.6 million
primarily related to lower variable compensation expense.
Unallocated corporate and shared services costs for 2018 decreased by $0.2 million, or 0.6%, from 2017.
Interest Income (Expense), Foreign Exchange Transaction Gains (Losses), and Other Income (Expense), Net
The following table sets forth interest income (expense), foreign exchange transaction gains (losses), and other income
(expense) for 2019, 2018 and 2017 (in thousands):
Interest income (expense), net
Foreign exchange transaction gains (losses), net
Other income (expense), net
Gain on acquisition of business
$
2019
2018
2017
(8,493) $
(780)
(243)
—
(9,814) $
147
(44)
—
(7,165)
(447)
(229)
26,409
Interest Income (Expense), Net
Net interest expense was $8.5 million in 2019 versus $9.8 million in 2018. 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 3.30% and 3.53% during 2019 and 2018, respectively. Included in
net interest expense was non-cash interest expense of approximately $1.1 million and $1.0 million in 2019 and 2018, respectively,
related to the amortization of deferred financing costs on our debt.
Net interest expense was $9.8 million in 2018 versus $7.2 million in 2017. The increase in net interest expense was primarily
due to an increase in average debt levels as a result of acquisitions in 2017 and 2018 and an increase in the weighted average interest
38
rate on our Senior Credit Facilities. The weighted average interest rate on our Senior Credit Facilities was 3.53% and 3.32% during
2018 and 2017, respectively. Included in net interest expense was non-cash interest expense of approximately $1.0 million and $0.8
million in 2018 and 2017, respectively, related to the amortization of deferred financing costs on our debt.
Foreign Exchange Transaction Gains (Losses), Net
Foreign exchange transaction gains (losses), net, were $0.8 million net losses in 2019 versus $0.1 million net gains in 2018
primarily due to changes in the value of the U.S. Dollar against the British Pound and Euro, and net realized gains from foreign
currency contracts.
Foreign exchange transaction gains (losses), net, were $0.1 million net gains in 2018 versus $0.4 million net losses in 2017
primarily due to changes in the value of the U.S. Dollar against the British Pound, Euro and Japanese Yen, and net realized gains from
foreign currency contracts.
Other Income (Expense), Net
Net other expense was nominal in both 2019 and 2018, respectively.
Net other expense was nominal in 2018 versus $0.2 million in 2017. The decrease in net other expense was primarily due to a
decrease in net periodic pension costs of our frozen U.K. defined benefit pension plan covering employees of a divested business.
Gain on Acquisition of Business
The gain on acquisition of business in 2017 was related to a nontaxable gain of $26.4 million recognized upon gaining control of
Laser Quantum in January 2017 as a result of acquiring an additional approximately 35% of its outstanding shares.
Income Tax Provision
We recorded a tax provision of $5.0 million in 2019, as compared to a tax provision of $10.2 million in 2018. The effective tax
rate for 2019 was 10.9% of income before income taxes, compared to an effective tax rate of 16.7% of income before income taxes for
2018. Our effective tax rate for 2019 differed from the Canadian statutory rate of 29.0% primarily due to the mix of income earned in
jurisdictions with varying tax rates, a $2.0 million U.K. patent box deduction, a $1.7 million benefit from share-based compensation,
$1.5 million of other tax credits, and $0.8 million of estimated deductions for Foreign Derived Intangible Income; offset by $0.3
million of non-deductible expenses recognized under earn-out agreements in connection with various acquisitions and $0.2 million of
non-deductible acquisition costs.
We recorded a tax provision of $10.2 million in 2018, as compared to a tax provision of $13.8 million in 2017. The effective tax
rate for 2018 was 16.7% of income before income taxes, compared to an effective tax rate of 18.2% of income before income taxes for
2017. Our effective tax rate in 2018 differed from the Canadian statutory rate of 29.0% primarily due to the mix of income earned in
jurisdictions with varying tax rates, including the benefit of the new 21% U.S. corporate income tax rate and $1.6 million of estimated
deductions for Foreign Derived Intangible Income, a $0.9 million benefit from share-based compensation, a $1.9 million U.K. patent
box deduction and $1.3 million of other tax credits; offset by $0.8 million of non-deductible expenses recognized under an earn-out
agreement in connection with the Zettlex acquisition.
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 Third 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 this
Annual Report on Form 10-K.
39
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. There is no assurance 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 December 31, 2019, $57.2 million of our $78.9 million cash and cash equivalents was held by our 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 Senior Credit Facilities. Approximately $189.6 million
of our outstanding borrowings under our Senior Credit Facilities (defined below) were 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 Plans
Our Board of Directors may approve share repurchase plans from time to time. Under these repurchase plans, shares may be
repurchased at our discretion based on ongoing assessment of the capital needs of the business, the market price of our common
shares, and general market conditions. Shares may also be repurchased through an accelerated share 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 shares to be repurchased when we would otherwise be prohibited from doing so
under insider trading laws. While the share repurchase plans are generally intended to offset dilution from equity awards granted to
our employees and directors, the plans do not obligate us to acquire any particular amount of common shares. No time limit is
typically set for the completion of the share repurchase plans, and the plans may be suspended or discontinued at any time. We expect
to fund share repurchases through cash on hand and cash generated from operations.
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 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 2019, we repurchased 119 thousand shares for an aggregate purchase
price of $10.0 million at an average price of $83.71 per share under the 2018 Repurchase Plan. We had $15.0 million available for
share repurchases under the 2018 Repurchase Plan as of December 31, 2019.
In February 2020, our Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the
repurchase of an additional $50.0 million worth of common shares. We expect that share repurchases will be made under the 2020
Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 after the 2018 Repurchase Plan is completed.
Senior Credit Facilities
In December 2019, we entered into the Third Amended and Restated Credit Agreement, consisting of a $100.0 million U.S.
dollar equivalent euro-denominated (approximately €90.2 million) 5-year term loan facility and a $350.0 million 5-year revolving
credit facility. The Senior Credit Facilities mature in December 2024. The term loan facility requires quarterly scheduled principal
repayments of approximately €1.1 million beginning in March 2020 with the remaining principal balance due upon maturity. We may
make additional principal payments at any time, which will reduce the next quarterly installment payment due. We may make
payments to pay down our revolving credit facility with cash on hand and cash generated from future operations at anytime until
maturity.
As of December 31, 2019, we had a €90.2 million euro-denominated term loan (approximately $101.2 million) and $123.4
million revolver borrowings outstanding under our Senior Credit Facilities. The borrowings outstanding under the Senior Credit
Facilities bear interest at rates based on (a) the Base Rate, as defined in the Third Amended and Restated Credit Agreement, plus a
margin ranging between 0.25% to 1.25% per annum, determined by reference to our consolidated leverage ratio, or (b) the
Eurocurrency Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 1.25% and
2.25% per annum, determined by reference to our consolidated leverage ratio. In addition, we are obligated to pay a commitment fee
on the unused portion of the revolving credit facility, ranging between 0.20% and 0.40% per annum, determined by reference to our
consolidated leverage ratio.
The Third Amended and Restated Credit Agreement contains various covenants that, we believe, are usual and customary for
this type of agreement, including a maximum allowed leverage ratio and a minimum required fixed charge coverage ratio (as defined
in the Third Amended and Restated Credit Agreement). The following table summarizes these financial covenants and our compliance
therewith as of December 31, 2019:
Maximum consolidated leverage ratio
Minimum consolidated fixed charge coverage ratio
40
Requirement
3.50
1.50
Actual
December 31, 2019
1.88
5.35
In addition, the Third Amended and Restated Credit Agreement contains various other customary representations, warranties
and covenants applicable to the Company and its subsidiaries, including: (i) limitations on certain payments; (ii) limitations on
fundamental changes involving the Company; (iii) limitations on the disposition of assets; and (iv) limitations on indebtedness,
investments, and liens.
Cash Flows
Cash and cash equivalents totaled $78.9 million at December 31, 2019, versus $82.0 million at December 31, 2018. The net
decrease in cash and cash equivalents is primarily attributable to debt repayments of $50.7 million, current year business acquisitions
of $53.1 million, capital expenditures of $10.7 million, and repurchases of common shares of $10.0 million. These cash outflows were
offset by cash provided by operating activities of $63.2 million and borrowings under our revolving credit facility of $66.8 million.
The following table summarizes our cash and cash equivalent balances, cash flows and unused borrowing capacity available
under our revolving credit facility for the years indicated (in thousands):
Cash and cash equivalents, end of year
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Unused borrowing capacity available under revolving credit facility, end of year
$
$
$
$
$
2019
2018
78,944 $
63,248 $
(63,844) $
(3,935) $
226,616 $
82,043 $
89,647 $
(45,590) $
(60,164) $
189,942 $
2017
100,057
63,378
(177,380)
143,330
175,547
Operating Cash Flows
Cash provided by operating activities was $63.2 million in 2019, versus $89.6 million in 2018. Cash provided by operating
activities in 2019 decreased from 2018 primarily due to increases in net working capital in 2019 which decreased cash provided by
operating activities by $27.4 million.
Cash provided by operating activities for 2019 was negatively impacted by an increase in our days sales outstanding which
increased from 51 days at December 31, 2018 to 54 days at December 31, 2019 primarily due to poor sales linearity, a decrease in our
outstanding payables and accrued expenses, excluding payables and accrued expenses assumed from acquisitions in 2019, and an
increase in inventories. Our inventory turnover ratio decreased from 3.4 at December 31, 2018 to 3.1 at December 31, 2019.
Cash provided by operating activities for 2018 was positively impacted by an increase in our days payables outstanding and an
increase in accrued expenses. The Company’s growth in revenue of $93.0 million and gross profit of $41.0 million increased our
outstanding trade receivables and inventories, which negatively impacted our cash provided by operating activities.
Cash provided by operating activities for 2017 was positively impacted by an increase in our outstanding payables and accrued
expenses. Cash provided by operating activities was negatively impacted by an increase in outstanding trade receivables and an
increase in inventories, excluding trade receivables and inventories acquired from acquisitions in 2017, and an increase in income tax
payments.
Investing Cash Flows
Cash used in investing activities was $63.8 million during 2019, primarily driven by the Ingenia and Med X Change acquisitions
and the initial cash 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). We also paid $10.7 million for capital expenditures during 2019.
Cash used in investing activities was $45.6 million during 2018, primarily related to $29.6 million in cash outflows (net of cash
acquired of $3.8 million) related to acquisitions in 2018 and $14.7 million for capital expenditures.
Cash used in investing activities was $177.4 million during 2017, primarily driven by our acquisitions of WOM, ThingMagic
and Laser Quantum. In connection with these acquisitions, we paid $185.0 million in cash considerations, which is reported in the
consolidated statement of cash flows as $168.3 million cash outflows from investing activities (net of cash acquired of $16.7 million
and working capital adjustments). We also paid $9.1 million for capital expenditures during 2017.
We have no material commitments to purchase property, plant and equipment as of December 31, 2019. We expect to use
approximately $18 million to $21 million in 2020 for capital expenditures related to investments in new property, plant and equipment
for our existing businesses.
41
Financing Cash Flows
Cash used in financing activities was $3.9 million during 2019, primarily due to $50.7 million repayment of term loan and
revolving credit facility, $6.9 million of payroll tax payments on share-based compensation awards, and $10.0 million of repurchases
of common shares, partially offset by $66.8 million of borrowings under our revolving credit facility used to fund cash considerations
paid for the Ingenia, Med X Change and ARGES acquisitions. We also paid $2.7 million for debt issuance costs as a result of the
Third Amended and Restated Credit Agreement entered into in December 2019.
Cash used in financing activities was $60.2 million during 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 contractual term loan payments, $65.4 million of
optional repayments of borrowings under our revolving credit facility, $3.6 million of payroll tax payments on share-based
compensation awards, and $5.9 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.
Cash provided by financing activities was $143.3 million during 2017, primarily due to $176.8 million of borrowings under our
revolving credit facility used to fund a portion of the cash considerations paid for the WOM, ThingMagic and Laser Quantum
acquisitions, partially offset by $7.9 million of contractual term loan payments, $19.0 million of optional repayments of borrowings
under our revolving credit facility, $2.5 million of contingent consideration payments, $2.1 million of payroll withholding tax
payments on share-based compensation awards, $0.4 million of repurchases of our common shares and $0.9 million of principal
payments under our finance lease obligations. We also paid $0.7 million for debt issuance costs as a result of the Third Amendment to
the Second Amended and Restated Credit Agreement entered into in August 2017.
In 2020, we are contractually required to pay $5.1 million in repayments under our term loan facility and $1.3 million in
principal payments under our finance lease obligations. In addition, we may pay down our term loan and revolving credit facility from
time to time with available cash generated from future operating activities.
Pension Plans
We maintain a defined benefit pension plan in the U.K. (the “U.K. Plan”). Our U.K. Plan was closed to new members in 1997
and stopped accruing additional pension benefits for existing members in 2003, thereby limiting our obligation to benefits earned
through that date. Benefits under this plan were based on the employees’ years of service and compensation as of the date the plan was
frozen, adjusted for inflation. On July 1, 2013, the Company provided a Guarantee (the “Guarantee”) in favor of the trustees of the
U.K. Plan with respect to all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or
severally and in any capacity whatsoever) under the U.K. Plan of Novanta Technologies UK Limited, a wholly owned subsidiary of
the Company.
Our funding policy is to fund the U.K. Plan based on actuarial methods as permitted by the Pensions Regulator in the U.K. The
results of funding valuations depend on both the funding deficit and the assumptions used (such as asset returns, discount rates,
mortality, retail price inflation and other market driven assumptions). Each assumption used represents one estimate of many possible
future outcomes. The final cost to us will be determined by events as they actually become known, including actual return on plan
assets and pension payments to plan participants. As of December 31, 2019, the projected benefit obligation under the U.K. Plan
exceeded the fair value of plan assets by $1.5 million. Based on the results of the most recent funding valuation, our annual
contributions are expected to be approximately $1.0 million in 2020 and will increase by 2.9% per year thereafter.
Off-Balance Sheet Arrangements, Contractual Obligations
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2019 and the effect that such obligations are
expected to have on our liquidity and cash flows in future years. We have excluded the future cash payments for unrecognized tax
benefits of $4.7 million, including interest and penalties, because we are uncertain if and when such amounts may be settled. These
unrecognized tax benefits are further explained in Note 15 to our Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K.
42
Contractual Obligations
Total
2020
Senior Credit Facilities (1)
Interest on Senior Credit Facilities (2)
Finance leases (3)
Operating leases (4)
Purchase commitments (5)
U.K. pension plan (6)
Deferred cash considerations (7)
Contingent considerations and earn-outs (8)
Total contractual obligations
$
$
224,552
25,169
18,247
53,416
75,761
1,473
28,873
23,605
451,096
$
$
5,073
5,293
1,738
6,157
74,097
985
28,873
3,813
126,029
$
2021 - 2022
(In thousands)
$
2023 - 2024
Thereafter
$
$
209,337
9,557
1,884
9,182
24
—
—
2,093
232,077
$
$
—
—
4,440
26,141
—
—
—
3,381
33,962
10,142
10,319
10,185
11,936
1,640
488
—
14,318
59,028
(1) As of December 31, 2019, a total of $101.2 million term loan and $123.4 million revolving credit facility were outstanding under
the Senior Credit Facilities. The term loan is payable in quarterly installments of approximately €1.1 million ($1.3 million)
beginning in March 2020 with the final installment of €68.7 million ($77.1 million) due upon maturity in December 2024.
Borrowings under the revolving credit facility are due at maturity in December 2024.
(2) For the purpose of this calculation, current interest rates on floating rate obligations (LIBOR plus applicable margin, as defined
in the Third Amended and Restated Credit Agreement) were used for the remainder contractual life of both the term loan and
outstanding borrowings under the revolving credit facility. Current commitment fee rate was used for the unused commitments
under the revolving credit facility as of December 31, 2019.
(3) Future minimum lease payments under finance leases include the exercise price of an option to purchase a facility for $8.4
million in Germany in 2021.
(4) These amounts primarily represent the gross amounts due for leased facilities. The amounts include payments due with respect to
both active operating facilities and idle facilities that have been vacated.
(5) Purchase commitments represent purchase obligations as of December 31, 2019.
(6) Amounts shown represent funding obligations equivalent to $1.0 million per year, increasing 2.9% through 2021, based on
annual funding contributions in effect as of December 31, 2019 to achieve fully funded status where the market value of plan
assets equals the projected benefit obligations. Future funding requirements will be subject to change as a result of future
changes in various actuarial assumptions and actual investment returns on plan assets.
(7) These amounts represent the deferred cash considerations for acquisitions in 2018 and 2019 that are expected to be paid in 2020.
(8) These amounts represent the estimated contingent consideration and earn-out payments accrued in the consolidated balance sheet
as of December 31, 2019 that are expected to be paid between 2020 and 2027. The undiscounted range of the possible contingent
consideration and earn-out payments is $3.8 million to $36.7 million.
Off-Balance Sheet Arrangements
Through December 31, 2019, we have not entered into any off-balance sheet arrangements or material transactions with
unconsolidated entities or other persons.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses for the reporting periods. On
an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, inventory
valuation, impairment assessment and valuation of goodwill, intangible assets and tangible long-lived assets, valuation of contingent
consideration obligations, accounting for income taxes, and accounting for loss contingencies. Actual results in the future could differ
significantly from our estimates.
We believe that the following critical accounting policies and estimates most significantly affect the portrayal of our financial
condition and results of operations and require the most difficult and subjective judgments.
Revenue Recognition. Beginning January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from
Contracts with Customers” (“ASU 2014-09” or “Topic 606”) using the modified retrospective method. Under Topic 606, an entity
recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. Revenue recognition for arrangements within the scope of
Topic 606 includes the following five steps: (i) identifying the contract(s) with a customer; (ii) identifying the performance obligations
in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the
contract; and (v) recognizing revenue when (or as) a performance obligation is satisfied.
43
We recognize revenue when control of promised goods or services is transferred to customers. This generally occurs upon
shipment when the title and risk of loss pass to the customer. The vast majority of our revenue is generated from the sale of distinct
products. Revenue is measured as the amount of consideration we expect 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.
Substantially all of our revenue is recognized at a point in time, upon shipment, rather than over time. At the request of our
customers, we 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 total less
than 3% of our 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.
We occasionally sell 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. We recognize 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.
We account 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.
We generally provide warranties for our products. The standard warranty period is typically 12 months to 24 months for our
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 we have 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. Our estimate of the costs to service warranty obligations is based on historical
experience and expectations of future conditions. To the extent our 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
entry recorded to cost of revenue.
We expense 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. We do
not adjust the promised amount of consideration for the effects of a financing component because the time period between the transfer
of a promised good to a customer and the customer’s payment for that good is typically one year or less.
Inventories. Inventories, which include materials and conversion costs, are stated at the lower of cost or net realizable value,
using the first-in, first-out method. Cost includes the cost of purchased materials, inbound freight charges, external and internal
processing and applicable labor and overhead costs. Net realizable value is the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal and transportation.
We regularly review inventory quantities on hand and, when necessary, record provisions for excess and obsolete inventory
based on either our forecasted product demand and production requirements or trailing historical usage of the product. If our sales do
not materialize as planned or at historical levels, we may have to increase our reserve for excess and obsolete inventory, which would
reduce our earnings. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold,
resulting in lower cost of revenue and higher income from operations than expected in that period.
Share-Based Compensation. We record expenses associated with share-based compensation awards to employees and directors
based on the fair value of awards as of the grant date. For share-based compensation awards that vest over time based on employment,
the associated expenses are recognized in the consolidated statement of operations ratably over the vesting period of the award, net of
estimated forfeitures.
We typically grant two types of performance-based 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”). For EPS-PSUs, share-based compensation expense is recognized ratably over the vesting period when it is
probable that specified performance targets are expected to be achieved based on management’s projections. Management’s
projections are revised, if necessary, in subsequent periods when underlying factors change the evaluation of the probability of
achieving the performance targets as well as the level of achievement. When the estimated achievement levels are adjusted at a later
date, a cumulative adjustment to the share-based compensation expense previously recognized would be required. Accordingly, share-
based compensation expense associated with EPS-PSUs may differ significantly from period to period based on changes to both the
44
probability and the level of achievement against performance targets. For TSR-PSUs, we recognize the related compensation expense
based on the fair value of the TSR-PSUs, which is determined using the Monte-Carlo simulation valuation model as of the date of
grant. The expense related to TSR-PSUs is recognized on a straight-line basis from the grant date to the end of the performance
period, which is generally three years, regardless of whether the target relative total stockholder return is achieved.
The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance
conditions stipulated in the grant agreement in a large number of simulated scenarios. Key assumptions for the Monte Carlo
simulation model include risk-free interest rate and expected stock price volatility of both the Company’s common shares and the
Russell 2000 index.
Valuation of Long-lived Assets. The purchase price we pay for acquired companies is allocated first to the identifiable assets
acquired and liabilities assumed at their fair value. Any excess purchase price is then allocated to goodwill. We make various
assumptions and estimates in order to assign fair value to acquired tangible and intangible assets and liabilities. Key assumptions
typically include revenue growth rates and projected cash flows, discount rates, royalty rates, technology obsolescence curves, and
customer attrition rates, among others. Actual cash flows may vary from forecasts used to value these assets at the time of the business
combination.
Our most significant identifiable intangible assets are customer relationships, acquired technologies, trademarks and trade
names. In addition to our review of the carrying value of each asset, the useful life assumption for each asset, including the
classification of certain intangible assets as “indefinite-lived,” are reviewed on a periodic basis to determine if changes in
circumstances warrant revisions to them. All definite-lived intangible assets are amortized over the periods in which their economic
benefits are expected to be realized.
Impairment analyses of goodwill and indefinite-lived intangible assets are conducted in accordance with ASC 350,
“Intangibles—Goodwill and Other.” We test our goodwill balances annually 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. Should the fair value of our
goodwill or indefinite-lived intangible assets decline because of reduced operating performance, market declines or other indicators of
impairment, or as a result of changes in the discount rate, charges for impairment loss may be necessary.
We evaluate our goodwill, intangible assets and other long-lived assets for impairment at the reporting unit level which is
generally at least one level below our reportable segments. We have the option of first performing a qualitative assessment to
determine whether it is necessary to perform the quantitative impairment test. In performing the qualitative assessment, we review
factors both specific to the reporting unit and to the Company as a whole, such as financial performance, macroeconomic conditions,
industry and market considerations, and the fair value of each reporting unit as of the last valuation date. If we elect this option and
believe, as a result of the qualitative assessment, that it is more likely than not that the carrying value of goodwill is not recoverable,
the quantitative impairment test is required; otherwise, no further testing is required.
Alternatively, we may elect to bypass the qualitative assessment and perform the quantitative impairment test instead. This
approach requires a comparison of the carrying value of each of our reporting units to the fair value of these reporting units. If the
carrying value of a reporting unit exceeds its fair value, an impairment charge is recorded for the difference. The fair value of a
reporting unit is estimated primarily using a discounted cash flow (“DCF”) method. The DCF approach requires that we forecast
future cash flows for each of the reporting units and discount the cash flow streams based on a weighted average cost of capital
(“WACC”) that is derived, in part, from comparable companies within similar industries. The DCF calculations also include a
terminal value calculation that is based upon an expected long-term growth rate for the applicable reporting unit. The carrying values
of each reporting unit include assets and liabilities which relate to the reporting unit’s operations. Additionally, reporting units that
benefit from corporate assets or liabilities are allocated a portion of those corporate assets and liabilities on a proportional basis.
We assess indefinite-lived intangible assets for impairment on an annual basis, and more frequently if impairment indicators are
identified. We also periodically reassess their continuing classification as indefinite-lived intangible assets. Impairment exists if the
fair value of the intangible asset is less than its carrying value. An impairment charge equal to the difference is recorded to reduce the
carrying value to its fair value.
We evaluate amortizable intangible assets and other long-lived assets for impairment in accordance with ASC 360-10-35-15,
“Impairment or Disposal of Long-Lived Assets,” whenever changes in events or circumstances indicate that the carrying values of the
reporting units may exceed the undiscounted cash flow forecasts attributable to the reporting units. If undiscounted cash flow forecasts
indicate that the carrying value of definite-lived intangible assets or other long-lived assets may not be recoverable, a fair value
assessment is performed. For intangible assets, fair value estimates are derived from discounted cash flow forecasts. For other long-
lived assets (primarily property, plant and equipment), fair value estimates are derived from the sources most appropriate for the
particular asset and have historically included such approaches as sales comparison approach and replacement cost approach. If fair
value is less than carrying value, an impairment charge equal to the difference is recorded. We also review the useful life and residual
45
value assumptions for definite-lived intangible assets and other long-lived assets on a periodic basis to determine if changes in
circumstances warrant revisions to them.
Factors which may trigger an impairment of our goodwill, intangible assets and other long-lived assets include the following:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
significant underperformance relative to historical or projected future operating results;
changes in our use of the acquired assets or the strategy for our overall business;
long-term negative industry or economic trends;
technological changes or developments;
changes in competition;
loss of key customers or personnel;
adverse judicial or legislative outcomes or political developments;
significant declines in our stock price for a sustained period of time; and
the decline of our market capitalization below net book value as of the end of any reporting period.
The occurrence of any of these events or any other unforeseeable events or circumstances that materially affect future operating
results or cash flows may cause an impairment that is material to our results of operations or financial position in the reporting period
in which it occurs or is identified.
The most recent annual goodwill and indefinite-lived intangible asset impairment test was performed as of the beginning of the
second quarter of 2019, using a qualitative assessment, noting no impairment. As of December 31, 2019, there were no indicators of
impairment of our long-lived assets.
We have a significant amount of goodwill, intangible assets and other long-lived assets. The following table shows the
breakdown of goodwill, intangible assets and property, plant and equipment by reportable segment as of December 31, 2019 (in
thousands):
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
Goodwill
Intangible
Assets, net
Property, Plant
& Equipment,
net
$
$
110,952
128,364
35,394
—
274,710
$
$
63,202
81,066
21,907
—
166,175
$
$
31,701
32,033
9,783
4,039
77,556
Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to
calculate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our
current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and liabilities, which are reported on our consolidated balance
sheet.
Judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are
many transactions and calculations where the ultimate outcome is uncertain. Although we believe our estimates are reasonable, no
assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical
income tax provisions and accruals. Such differences could have a material impact on our income tax provision and net income in the
period in which such determination is made.
We record a valuation allowance on our deferred tax assets when it is more likely than not that they will not be realized. We
have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation
allowance. In the event we determine that we are able to realize our deferred tax assets in the future in excess of their net recorded
amount, an adjustment to the valuation allowance for the deferred tax assets would be recorded and would increase our net income in
the period in which such determination is made. Likewise, should we determine that we will not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the valuation allowance for the deferred tax assets will be recorded and will reduce
our net income in the period such determination is made.
46
In conjunction with our ongoing review of our actual results and anticipated future earnings, we continuously reassess the
adequacy of the valuation allowance currently in place on our deferred tax assets. In 2019, we utilized valuation allowance of $0.5
million recorded on net operating losses and other timing items in certain tax jurisdictions due to taxable income generated in the
current year.
The amount of income taxes we pay is subject to audits by federal, state and foreign tax authorities, which may result in
proposed assessments. We believe that we have adequately provided for any reasonably foreseeable outcome related to these matters.
However, our future results may include favorable or unfavorable adjustments to our tax liabilities in the period that the assessments
are made or resolved, or when the statute of limitations for certain periods expires. As of December 31, 2019, the total amount of
gross unrecognized tax benefits was $4.9 million, of which $4.8 million would favorably affect our effective tax rate, if recognized.
Over the next twelve months, we may need to record up to $0.5 million of previously unrecognized tax benefits in the event of statute
of limitations closures.
Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes
over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon a
repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The amount of undistributed earnings of foreign
subsidiaries totaled $168.4 million as of December 31, 2019. The estimated unrecognized income and foreign withholding tax liability
on this temporary difference is approximately $0.2 million.
Loss Contingencies. We are subject to legal proceedings, lawsuits and other claims relating to product quality, labor, service
and other matters arising in the ordinary course of business. We review the status of each significant matter and assess our 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, we accrue 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 financial statement. As additional information becomes
available, we will reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such
revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.
We expense legal fees as incurred.
Recent Accounting Pronouncements
See Note 2 to Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect our
operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and
financing activities. We address 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.
Foreign Currency Exchange Rate Risk and Sensitivity
We are exposed to changes in foreign currency exchange rates which could affect our operating results as well as our financial
position and cash flows. The foreign currencies to which we have the most significant exchange rate exposures are the Euro, British
Pound and Japanese Yen. The Company manages its foreign currency exposures on a consolidated basis, which allows the Company
to analyze exposures globally and take into account offsetting exposures in certain balances. The primary foreign currency
denominated transactions include revenue and expenses and the resulting accounts receivable and accounts payable balances reflected
on our consolidated balance sheet and with intercompany trading partners that are eliminated in consolidation.
In the ordinary course of business, we enter into foreign currency contracts for periods consistent with our committed exposures
to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. We do not enter into or hold
foreign currency derivative financial instruments for trading or speculative purposes, nor do we enter into derivative financial
instruments to hedge future cash flows or forecasted transactions. The intent of these economic hedges is to offset gains and losses on
the underlying exposures from these currencies with gains and losses resulting from the foreign currency contracts that hedge these
exposures.
We had foreign currency contracts with notional amounts totaling $12.4 million and a fair value of less than $0.1 million as of
December 31, 2019. A hypothetical 10% strengthening of the U.S. dollar against other currencies would result in an approximately
$0.1 million increase in the fair value of our foreign currency contracts as of December 31, 2019. By contrast, a hypothetical 10%
47
weakening of the U.S. dollar against other currencies would result in an approximately $0.1 million decrease in the fair value of our
foreign currency contracts as of December 31, 2019.
Interest Rates
Our exposure to market risk associated with changes in interest rates relates primarily to our debt obligations. We have $224.6
million of outstanding variable rate debt as of December 31, 2019. A 100 basis point increase in interest rates at December 31, 2019
would increase our annual pre-tax interest expense by approximately $2.2 million.
48
Item 8. Financial Statements and Supplementary Data
NOVANTA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP .........................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 ...................................................................................................
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 ..................................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017..............................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017 ..................................
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 .................................................
Notes to Consolidated Financial Statements.....................................................................................................................................
50
53
54
55
56
57
58
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Novanta Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Novanta Inc. and its subsidiaries (the “Company”) as of December
31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts for
leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's
Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
50
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Acquisitions of Med X Change, Inc., Ingenia-CAT, S.L., and ARGES GmbH – Valuation of Developed Technologies and Customer
Relationships Intangible Assets
As described in Notes 2 and 4 to the consolidated financial statements, the Company completed the acquisitions of Med X Change,
Inc., Ingenia-CAT, S.L., and ARGES GmbH in 2019 for purchase prices of $21.9 million, $16.2 million and $72.9 million,
respectively. The acquisition of Med X Change, Inc. resulted in $9.9 million of customer relationships intangible assets being
recorded, the acquisition of Ingenia-CAT, S.L. resulted in $9.3 million of developed technologies intangible assets being recorded,
and the acquisition of ARGES GmbH resulted in $11.8 million of customer relationships intangible assets and $11.4 million of
developed technologies intangible assets being recorded. Assets acquired and liabilities assumed have been recorded by management
at their estimated fair values as of the acquisition dates. The fair values of developed technologies for ARGES GmbH and Med X
Change, Inc. were valued using the relief from royalty method. The fair values of developed technologies for Ingenia-CAT, S.L. were
valued using the multi-period excess earnings method. The fair values of customer relationships were valued using the multi-period
excess earnings method. The process for estimating the fair values of identifiable intangible assets requires the use of significant
estimates and assumptions by management, including revenue growth rates, customer attrition rates royalty rates, discount rates and
projected future cash flows.
The principal considerations for our determination that performing procedures relating to the valuation of the developed technologies
and customer relationships intangible assets as a result of the acquisitions of Med X Change, Inc., Ingenia-CAT, S.L., and ARGES
GmbH is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to
the fair value measurements of developed technologies and customer relationships intangible assets acquired due to the significant
judgment by management when developing the estimates, (ii) significant audit effort was required in evaluating the significant
assumptions relating to the estimates, such as the revenue growth rates, customer attrition rates, and discount rates, and (iii) the audit
effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the
audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition
accounting, including controls over management’s valuation of the developed technologies and customer relationships intangible
assets and controls over the development of the assumptions related to the valuation of these intangible assets, including the revenue
growth rates, customer attrition rates, and discount rates. These procedures also included, among others, (i) reading the purchase
agreements, (ii) testing management’s process for estimating the fair value of the developed technologies and customer relationships
intangible assets, and (iii) testing management’s assumptions used to estimate the fair value of the developed technologies and
customer relationships intangible assets. Testing management’s process included evaluating the appropriateness of the valuation
methods, testing the completeness and accuracy of underlying data used in the relief from royalty and multi-period excess earnings
methods, and assessing the reasonableness of significant assumptions used by management, including the revenue growth rates,
customer attrition rates, and discount rates. Evaluating the reasonableness of the revenue growth rates, customer attrition rates, and
discount rates involved considering the past performance of the acquired businesses, as well as economic and industry forecasts.
Professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including
the discount rates. The discount rates were evaluated by considering the cost of capital of comparable businesses and other industry
factors.
Fair Value Measurements of the Contingent Consideration for ARGES GmbH and Ingenia-CAT, S.L. Acquisitions
As described in Notes 4 and 7 to the consolidated financial statements, the Company had $14.6 million of contingent consideration
liabilities as of December 31, 2019 related to the acquisitions of ARGES GmbH and Ingenia-CAT, S.L. The contingent consideration
payments will be payable annually based on the achievement of certain revenue targets by the Company from August 2019 through
December 2026 for ARGES GmbH and from April 2019 through March 2022 for Ingenia-CAT, S.L. As of the acquisition dates,
management determined the estimated fair value of contingent consideration liabilities using a Monte Carlo valuation method. The
51
following qualitative information was used by management to determine the fair value measurement of the contingent consideration
liabilities: historical and projected revenues, revenue volatilities, cost of debt, and the discount rates.
The principal considerations for our determination that performing procedures relating to valuation of contingent consideration
related to the ARGES GmbH and Ingenia-CAT, S.L. acquisitions is a critical audit matter are (i) there was significant judgment by
management when determining the estimated fair value, which in turn led to a high degree of auditor judgment, subjectivity and effort
in performing procedures and evaluating audit evidence relating to the Monte Carlo valuation method and assessing the significant
assumptions used by management, including the projected revenues, revenue volatilities, and the discount rates, and (ii) the audit
effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the
audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s fair
value measurements of the contingent consideration, including controls over management’s valuation method, significant assumptions
and data. These procedures also included, among others, (i) reading the purchase agreements, (ii) testing management’s process for
developing the fair value measurements of the contingent consideration, (iii) evaluating the appropriateness of the Monte Carlo
valuation method, (iv) testing the completeness and accuracy of underlying data used in the method, and (v) evaluating the significant
assumptions used by management, including the projected revenues, revenue volatilities, and discount rates. Evaluating the
assumptions related to projected revenues involved evaluating whether the assumptions used by management were reasonable
considering current and past performance of the acquired businesses, consistency with external market data, and whether these
assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge
were used to assist in the evaluation of the Company’s Monte Carlo valuation method and certain significant assumptions, including
revenue volatilities and discount rates.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2020
We have served as the Company’s auditor since 2013.
52
NOVANTA INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars or shares)
December 31,
2019
December 31,
2018
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net of allowance of $297 and $321, respectively
Inventories
Prepaid income taxes and income taxes receivable
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease assets
Deferred tax assets
Other assets
Intangible assets, net
Goodwill
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt
Accounts payable
Income taxes payable
Current portion of operating lease liabilities
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt
Operating lease liabilities
Deferred tax liabilities
Income taxes payable
Other liabilities
Total liabilities
Commitments and Contingencies (Note 17)
Stockholders’ Equity:
Common shares, no par value; Authorized shares: unlimited;
Issued and outstanding: 35,052 and 34,886, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
$
$
$
78,944
91,078
116,618
5,905
11,967
304,512
77,556
35,180
8,890
2,713
166,175
274,710
869,736
5,031
52,585
1,861
5,043
70,326
134,846
215,334
34,108
26,676
4,713
36,887
452,564
423,856
49,748
(38,319)
(18,113)
417,172
869,736
$
82,043
83,955
104,764
1,852
9,155
281,769
65,464
—
9,492
2,269
142,920
217,662
719,576
4,535
50,733
2,633
—
46,295
104,196
202,843
—
22,632
4,463
17,187
351,321
423,856
46,018
(79,092)
(22,527)
368,255
719,576
The accompanying notes are an integral part of these consolidated financial statements.
53
NOVANTA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars or shares, except per share amounts)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development and engineering
Selling, general and administrative
Amortization of purchased intangible assets
Restructuring and acquisition related costs
Total operating expenses
Operating income
Interest income (expense), net
Foreign exchange transaction gains (losses), net
Other income (expense), net
Gain on acquisition of business
Income before income taxes
Income tax provision
Consolidated net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Novanta Inc.
Earnings per common share attributable to Novanta Inc. (Note 9):
Basic
Diluted
Weighted average common shares outstanding—basic
Weighted average common shares outstanding—diluted
$
$
$
$
2019
Year Ended December 31,
2018
2017
$
626,099
364,014
262,085
$
614,337
352,809
261,528
55,965
118,407
15,857
16,574
206,803
55,282
(8,493)
(780)
(243)
—
45,766
4,993
40,773
—
40,773
1.16
1.15
35,030
35,546
$
$
$
51,024
115,900
15,550
8,041
190,515
71,013
(9,814)
147
(44)
—
61,302
10,207
51,095
(1,986)
49,109
1.46
1.43
34,913
35,473
$
$
$
$
521,290
300,759
220,531
41,673
101,654
12,096
7,542
162,965
57,566
(7,165)
(447)
(229)
26,409
76,134
13,827
62,307
(2,256)
60,051
1.14
1.13
34,817
35,280
The accompanying notes are an integral part of these consolidated financial statements.
54
NOVANTA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
Consolidated net income
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax (1)
Pension liability adjustments, net of tax (2)
Total other comprehensive income (loss)
Total consolidated comprehensive income
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Novanta Inc.
2019
Year Ended December 31,
2018
2017
$
40,773
$
51,095
$
62,307
3,267
1,147
4,414
45,187
—
45,187
$
(4,172)
(475)
(4,647)
46,448
(1,986)
44,462
$
8,909
926
9,835
72,142
(2,256)
69,886
$
(1)
(2)
The tax effect on this component of comprehensive income was $3, ($93) and ($94) in 2019, 2018 and 2017, respectively.
The tax effect on this component of comprehensive income was $267, ($153) and $277 in 2019, 2018 and 2017, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
55
NOVANTA INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands of U.S. dollars or shares)
Balance at December 31, 2016
Net income
Redeemable noncontrolling interest
redemption value adjustment
Common shares issued under stock plans
Common shares withheld for taxes on vested
stock awards
Repurchases of common shares
Share-based compensation
Other comprehensive income, net of tax
Balance at December 31, 2017
Net income
Redeemable noncontrolling interest
redemption value adjustment
Acquisition of noncontrolling interest
Common shares issued under stock plans
Common shares withheld for taxes on vested
stock awards
Repurchases of common shares
Share-based compensation
Adoption of ASU 2016-16
Other comprehensive loss, net of tax
Balance at December 31, 2018
Net income
Common shares issued for business
combination
Common shares issued under stock plans
Common shares withheld for taxes on vested
stock awards
Repurchases of common shares
Share-based compensation
Other comprehensive income, net of tax
Balance at December 31, 2019
Common Shares
# of Shares
Amount
Capital
Additional
Paid-In
Accumulated
Accumulated
Other
Comprehensive
34,458 $ 423,856 $
—
—
228
—
—
—
(77)
(14)
—
—
—
—
—
—
34,595 423,856
—
—
213
231
—
—
—
—
(64)
(89)
—
—
—
—
—
—
—
—
34,886 423,856
—
124
247
—
—
—
30,276 $
—
Deficit
(167,547) $
60,051
Loss
Total
(27,715) $ 258,870
60,051
—
—
—
(20,244)
—
—
—
(20,244)
—
(2,090)
(370)
5,493
—
33,309
—
—
14,401
—
(3,556)
(5,850)
7,714
—
—
46,018
—
10,900
425
—
—
—
—
(127,740)
49,109
1,781
—
—
—
—
—
(2,242)
—
(79,092)
40,773
—
—
—
9,835
(2,090)
(370)
5,493
9,835
(17,880) 311,545
49,109
—
—
—
—
1,781
14,401
—
(3,556)
—
(5,850)
—
7,714
—
(2,242)
—
(4,647)
(4,647)
(22,527) 368,255
40,773
—
—
—
—
—
10,900
425
(86)
(119)
—
—
—
—
—
—
35,052 $ 423,856 $
(6,935)
(10,000)
9,340
—
49,748 $
—
—
—
—
(38,319) $
—
—
—
4,414
(6,935)
(10,000)
9,340
4,414
(18,113) $ 417,172
The accompanying notes are an integral part of these consolidated financial statements.
56
NOVANTA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Cash flows from operating activities:
Consolidated net income
Adjustments to reconcile consolidated net income to
net cash provided by operating activities:
Depreciation and amortization
Provision for inventory excess and obsolescence
Share-based compensation
Deferred income taxes
Earnings from equity-method investment
Gain on acquisition of business
Loss on disposal of fixed assets
Contingent consideration adjustments
Inventory acquisition fair value adjustment
Non-cash interest expense
Other non-cash items
Changes in assets and liabilities which provided/(used) cash, excluding
effects from businesses acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Prepaid income taxes, income taxes receivable and income taxes payable
Accounts payable, accrued expenses and other current liabilities
Other non-current assets and liabilities
Cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Acquisition of businesses, net of cash acquired and working capital
adjustments
Acquisition of assets
Proceeds from sale of property, plant and equipment
Cash used in investing activities
Cash flows from financing activities:
Borrowings under revolving credit facilities
Repayments under term loan and revolving credit facilities
Payments of debt issuance costs
Payments of withholding taxes from share-based awards
Payments of contingent considerations
Repurchases of common shares
Acquisition of noncontrollling interest
Other financing activities
Cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Income tax refunds received
Supplemental disclosure of non-cash investing activity:
Accrual for capital expenditures
Year Ended December 31,
2018
2017
2019
$
40,773
$
51,095
$
62,307
38,280
3,188
9,340
(4,332)
—
—
756
100
1,270
1,055
259
(3,600)
(7,397)
(1,526)
(4,966)
(14,800)
4,848
63,248
37,052
1,898
7,714
(6,076)
—
—
106
—
—
955
(165)
(1,156)
(15,603)
1,350
(1,485)
14,888
(926)
89,647
30,758
1,421
5,493
(2,560)
(104)
(26,409)
36
425
4,754
825
283
(2,077)
(13,587)
(2,169)
(2,900)
9,611
(2,729)
63,378
(10,743)
(14,658)
(9,094)
(53,143)
—
42
(63,844)
66,792
(50,694)
(2,655)
(6,935)
—
(10,000)
—
(443)
(3,935)
1,432
(3,099)
82,043
78,944
8,389
14,260
767
$
$
$
$
(29,600)
(1,599)
267
(45,590)
55,253
(74,648)
—
(3,556)
—
(5,850)
(30,800)
(563)
(60,164)
(1,907)
(18,014)
100,057
82,043
8,924
20,323
3,011
$
$
$
$
(168,332)
—
46
(177,380)
176,769
(26,925)
(655)
(2,090)
(2,546)
(370)
—
(853)
143,330
2,621
31,949
68,108
100,057
5,832
21,121
337
638
$
1,187 $
1,601
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
57
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
1. Organization and 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.
Basis of Presentation
These consolidated financial statements have been prepared by the Company in United States (“U.S.”) dollars and in
accordance with accounting principles generally accepted in the U.S., applied on a consistent basis.
The consolidated financial statements include the accounts of Novanta Inc. and its subsidiaries. Intercompany accounts and
transactions have been eliminated.
Prior to January 10, 2017, the Company had an approximately 41% ownership interest in Laser Quantum Limited (“Laser
Quantum”), a privately held company located in the United Kingdom, which was accounted for under the equity method of
accounting. During the year ended December 31, 2017, the Company recognized income from its equity method investment
amounting to $0.1 million, which was included in other income (expense) in the accompanying consolidated statements of
operations.
On January 10, 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum.
As a result of this transaction, the Company’s ownership in Laser Quantum increased from approximately 41% to approximately
76%. Since January 10, 2017, Laser Quantum has been consolidated in the Company’s consolidated financial statements. On
September 27, 2018, the Company acquired the remaining approximately 24% of the outstanding shares of Laser Quantum for an
aggregate consideration of $45.1 million in cash and restricted stock.
2. Summary of Significant Accounting Policies
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.
Foreign Currency Translation
The financial statements of the Company and its subsidiaries outside the U.S. have been translated into U.S. dollars. Assets
and liabilities of foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect as of the
balance sheet date. Revenue and expenses are translated at the weighted average exchange rates for the period. Accordingly, gains
and losses resulting from translating foreign currency financial statements are reported as cumulative translation adjustments, a
separate component of other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction gains and losses
from transactions denominated in currencies other than the functional currencies are included in the accompanying consolidated
statements of operations.
Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of three months or less. These investments are carried
at cost, which approximates fair value.
58
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts based on the Company’s
best estimate of probable credit losses resulting from the inability of the Company’s customers to make required payments. The
Company determines the allowance based on a variety of factors, including the age of amounts outstanding relative to their
contractual due date, specific customer factors, and other known risks and economic trends. Charges related to the allowance for
doubtful accounts are included as selling, general and administrative expenses and are recorded in the period that the outstanding
receivables are determined to be uncollectible. Account balances are charged off against the allowance when the Company believes
it is certain that the receivable will not be recovered.
For the years ended December 31, 2019, 2018 and 2017, changes in the allowance for doubtful accounts were as follows (in
thousands):
Balance at beginning of year
Provision charged to selling, general and administrative expenses
Allowance resulting from acquisitions
Write-offs, net of recoveries of amounts previously reserved
Exchange rate changes
Balance at end of year
2019
2018
2017
$
$
321 $
33
120
(179)
2
297 $
554 $
66
—
(295)
(4)
321 $
565
283
52
(358)
12
554
Inventories
Inventories, which include materials and conversion costs, are stated at the lower of cost or net realizable value, using the
first-in, first-out method. Cost includes the cost of purchased materials, inbound freight charges, external and internal processing
and applicable labor and overhead costs. Net realizable value is the estimated selling price in the ordinary course of business, less
reasonably predictable costs of completion, disposal and transportation. The Company periodically reviews quantities of inventories
on hand and compares these amounts to the expected use of each product. The Company records a charge to cost of revenue for the
amount required to reduce the carrying value of inventory to the net realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, adjusted for any impairment, less accumulated depreciation. The Company
uses the straight-line method to calculate the depreciation of its property, plant and equipment over their estimated useful lives.
Estimated useful lives range from 3 to 30 years for buildings and building improvements and 3 to 10 years for machinery and
equipment. Leasehold improvements are depreciated over the lesser of their useful lives or the lease terms, including any renewal
period options that are reasonably assured of being exercised. Repairs and maintenance costs are expensed as incurred. Certain costs
to develop software for internal use are capitalized when the criteria under Accounting Standards Codification (“ASC”) 350-40,
“Internal-Use Software,” are met.
Goodwill, Intangible Assets and Long-Lived Assets
Goodwill represents the excess of the purchase price over the tangible assets, identifiable intangible assets and assumed
liabilities acquired in a business combination. Allocations of the purchase price are based upon a valuation of the fair value of assets
acquired and liabilities assumed as of the acquisition date. Goodwill and indefinite-lived intangibles are not amortized but are
assessed for impairment at least annually to ensure their current fair values exceed their carrying values.
The Company’s most significant intangible assets are customer relationships, patents and developed technologies, trademarks
and trade names. The fair values of intangible assets are based on valuations using an income approach, with estimates and
assumptions provided by management of the acquired companies and the Company. The process for estimating the fair values of
identifiable intangible assets requires the use of significant estimates and assumptions, including revenue growth rates, customer
attrition rates, royalty rates, discount rates and projected future cash flows. All definite-lived intangible assets are amortized over the
periods in which their economic benefits are expected to be realized. The Company reviews the useful life assumptions, including
the classification of certain intangible assets as “indefinite-lived,” on a periodic basis to determine if changes in circumstances
59
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
warrant revisions to them. Costs associated with patent and intellectual property applications, renewals or extensions are typically
expensed as incurred.
The Company evaluates its goodwill, intangible assets and other long-lived assets for impairment at the reporting unit level
which is at least one level below the reportable segments.
Impairment Charges
Impairment analyses of goodwill and indefinite-lived intangible assets are conducted in accordance with ASC 350,
“Intangibles —Goodwill and Other.” The Company performs its goodwill impairment test annually 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 has the option of first performing a qualitative assessment to determine whether it is necessary to perform the
quantitative impairment test. In performing the qualitative assessment, the Company reviews factors both specific to the reporting
unit and to the Company as a whole, such as financial performance, macroeconomic conditions, industry and market considerations,
and the fair value of each reporting unit at the last valuation date. If the Company elects this option and believes, as a result of the
qualitative assessment, that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, the
quantitative impairment test is required; otherwise, no further testing is required.
Alternatively, the Company may elect to bypass the qualitative assessment and perform the quantitative impairment test
instead. This approach requires a comparison of the carrying value of each of the Company’s reporting units to the estimated fair
value of these reporting units. The fair value of a reporting unit is estimated primarily using a discounted cash flow (“DCF”) method
with a weighted average cost of capital. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is
recorded for the difference.
The Company assesses indefinite-lived intangible assets for impairment on an annual basis as of the beginning of the second
quarter, and more frequently if indicators are present, or changes in circumstances suggest, that an impairment may exist. The
Company will also reassess the continuing classification of these intangible assets as indefinite-lived when circumstances change
such that the useful life may no longer be considered indefinite. The fair values of the Company’s indefinite-lived intangible assets
are determined using the relief from royalty method, based on forecasted revenues and estimated royalty rates. If the fair value of an
indefinite-lived intangible asset is less than its carrying value, an impairment charge is recorded for the difference between the
carrying value and the fair value of the impaired asset.
The carrying amounts of definite-lived long-lived assets are reviewed for impairment whenever changes in events or
circumstances indicate that their carrying values may not be recoverable. The recoverability of the carrying value is generally
determined by comparison of the asset group’s carrying value to its undiscounted future cash flows. When this test indicates a
potential for impairment, a fair value assessment is performed. Once an impairment is determined and measured, an impairment
charge is recorded for the difference between the carrying value and the fair value of the impaired asset.
Revenue Recognition
See Note 3 for the Company’s revenue recognition policy.
Leases
The Company leases certain equipment and facilities. The Company determines if an arrangement is a lease at inception.
Operating lease right-of-use assets are included in operating lease assets on the consolidated balance sheet. Operating lease
liabilities are included in current portion of operating lease liabilities and operating lease liabilities on the consolidated balance sheet
based on the timing of future lease payments. Finance lease assets are included in property, plant and equipment. Finance lease
liabilities are included in accrued expenses and other current liabilities and other liabilities on the consolidated balance sheet based
on the timing of future lease payments. Leases with an initial term of 12 months or less are not recognized on the balance sheet. The
Company recognizes lease expense on a straight-line basis over the lease term. Many of the Company’s lease arrangements 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.
60
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
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 future 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.
Research and Development and Engineering Costs
Research and development and engineering (“R&D”) expenses are primarily comprised of employee related expenses and
cost of materials for R&D projects. These costs are expensed as incurred.
Share-Based Compensation
The Company records the expense associated with share-based compensation awards to employees and directors based on the
fair value of awards as of the grant date. For share-based compensation awards that vest over time based on employment, the
associated expenses are recognized in the consolidated statements of operations ratably over the vesting period, net of estimated
forfeitures.
The Company also grants two types of performance-based awards to certain members of the executive management team:
non-GAAP earnings per share performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return
performance-based restricted stock units (“TSR-PSUs”). Share-based compensation expense associated with EPS-PSUs is
recognized ratably over the vesting period when it is probable that the performance targets are expected to be achieved based on
management’s projections. Management’s projections are revised, if necessary, in subsequent periods when underlying factors
change the evaluation of the probability of achieving the performance targets as well as the level of achievement. When the
estimated achievement levels are adjusted at a later date, a cumulative adjustment to the share-based compensation expense
previously recognized would be required. Accordingly, share-based compensation expense associated with EPS-PSUs may differ
significantly from period to period based on changes to both the probability and the level of achievement against performance
targets. Share-based compensation expense associated with TSR-PSUs is based on the fair value of the TSR-PSUs, determined
using the Monte-Carlo valuation model, as of the grant date and is recognized on a straight-line basis from the grant date to the end
of the performance period. Compensation expense will not be affected by the number of TSR-PSUs that will actually vest at the end
of the performance period.
Advertising Costs
Advertising costs are expensed to selling, general and administrative expenses as incurred and were not material for 2019,
2018 and 2017.
Restructuring and Acquisition Related Costs
The Company accounts for its restructuring activities in accordance with the provisions of ASC 420, “Exit or Disposal Cost
Obligations.” The Company makes assumptions related to the amounts of employee severance benefits and related costs, useful
lives and residual value of long-lived assets, and discount rates. Estimates and assumptions are based on the best information
available at the time the obligation is recognized. These estimates are reviewed and revised as facts and circumstances dictate.
Acquisition related costs incurred to effect a business combination, including finders’ fees, legal, valuation and other
professional or consulting fees, are expensed as incurred. Acquisition related costs also include expenses recognized under earn-out
agreements in connection with acquisitions.
Accounting for Income Taxes
The asset and liability method is used to account for income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of
future tax benefits, such as net operating loss carryforwards, to the extent that it is more likely than not that such benefits will be
realized. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary
61
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
differences are expected to be recovered or settled. A valuation allowance is established to reduce the deferred tax assets if it is
more likely than not that some or all of the related tax benefits will not be realized in the future. Valuation allowances are reassessed
periodically to determine whether it is more likely than not that the tax benefits will be realized in the future and if any existing
valuation allowance should be released.
The majority of the Company’s business activities are conducted through its subsidiaries outside of Canada. Earnings from
these subsidiaries are generally indefinitely reinvested in the local businesses. Further, local laws and regulations may also restrict
certain subsidiaries from paying dividends to their parents. Consequently, the Company generally does not accrue income taxes for
the repatriation of such earnings in accordance with ASC 740, “Income Taxes.” To the extent that there are excess accumulated
earnings that the Company intends to repatriate from any such subsidiaries, the Company recognizes deferred tax liabilities on such
foreign earnings.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based on the
evaluation of the facts, circumstances, and information available at each reporting date. For those tax positions with a greater than
50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant
information, the Company records a tax benefit. For those income tax positions that are not likely to be sustained, no tax benefit is
recognized in the consolidated financial statements. The Company recognizes interest and penalties related to uncertain tax
positions as part of the provision for income taxes.
Foreign Currency Contracts
The Company uses foreign currency contracts as a part of its strategy to limit its exposures related to foreign currency
denominated monetary assets and liabilities. The time duration of these foreign currency contracts approximates the underlying
foreign currency transaction exposures, generally less than three months. These contracts are not designated as cash flow, fair value
or net investment hedges. Changes in the fair value of these foreign currency contracts are recognized in income before income
taxes.
Recent Accounting Pronouncements
The following table provides a brief description of recent Accounting Standards Updates (“ASU”) issued by the Financial
Accounting Standards Board (“FASB”):
Effective Date
January 1, 2021. Early
adoption is permitted.
Effect on the Financial Statements or
Other Significant Matters
The Company is currently
evaluating the impact of ASU
2019-12 on its consolidated
financial statements.
Standard
In December 2019, the FASB
issued ASU 2019-12, “Income
Taxes (Topic 740):
Simplifying the Accounting
for Income Taxes.”
Description
ASU 2019-12 simplifies the
accounting for income taxes by
removing certain exceptions to the
general principles of ASC 740,
including (i) the exception to the
incremental approach for intraperiod
tax allocation when there is a loss
from continuing operations and
income or a gain from other items;
(ii) the exception to the requirement
to recognize a deferred tax liability
for equity method investments when a
foreign subsidiary becomes an equity
method investment (or vice-versa);
and (iii) the exception for calculating
income taxes in an interim period
when a year-to-date loss exceeds the
anticipated loss for the year. ASU
2019-12 also simplifies GAAP for
other areas of ASC 740 by clarifying
and amending the existing guidance.
62
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Standard
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.”
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.”
In June 2016, the FASB
issued ASU 2016-13,
“Financial Instruments –
Credit Losses (Topic 326):
Measurement of Credit Losses
on Financial Instruments.”
In February 2016, the FASB
issued ASU 2016-02, “Leases
(Topic 842).”
Description
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.
ASU 2018-02 allows an entity to
reclassify the income tax effects of
the U.S. Tax Cuts and Jobs Act (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.
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.
ASU 2016-02 requires a lessee to
recognize on the balance sheet a
liability to make lease payments and a
right-of-use (“ROU”) 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.
63
Effective Date
January 1, 2020. Early
adoption is permitted.
Effect on the Financial Statements or
Other Significant Matters
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.
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.
January 1, 2020. Early
adoption is permitted.
The Company does not expect the
adoption of ASU 2016-13 to have a
material impact on its consolidated
financial statements.
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 operating lease ROU
assets and operating lease liabilities
of approximately $35.3 million and
$36.5 million, respectively, as of
January 1, 2019. The adoption of
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Standard
Description
Effective Date
Effect on the Financial Statements or
Other Significant Matters
ASU 2016-02 did not have an
impact on the Company’s
accumulated deficit, consolidated
statement of operations, or
consolidated statement of cash
flows.
3. Revenue
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09
supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and requires entities to recognize
revenue in a way that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 during the first quarter of
2018 using the modified retrospective method. ASU 2014-09 has been applied to those contracts which had not been completed as
of January 1, 2018 and all new contracts entered into by the Company subsequent to January 1, 2018. The adoption of ASU 2014-09
did not have an impact on the Company’s Accumulated deficit.
The Company recognizes revenue when control of promised goods or services is transferred to the customer. 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
64
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
estimated warranty cost is recorded in 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.
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 time
period between the transfer of a promised good to a customer and the customer’s payment for that good is 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 the related revenue. As of December 31, 2019 and December 31, 2018, contract
liabilities were $3.6 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 decrease in the contract liability balance during the year
ended December 31, 2019 is primarily due to $4.1 million of revenue recognized during the year that was included in the contract
liability balance at December 31, 2018, partially offset by cash payments received in advance of satisfying performance obligations.
Disaggregated Revenue
See Note 19 for the Company’s disaggregation of revenue by segment, geography and end market.
4. Business Combinations
2019 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, 124,461 Novanta common shares issued at 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 initial cash purchase price was financed with borrowings under
the Company’s revolving credit facility. The contingent consideration 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 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
a $21.0 million borrowing 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
65
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
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) cash consideration and €5.8 million ($6.6 million) estimated fair value of contingent consideration.
The initial cash purchase price was financed with cash on hand and borrowings under the Company’s revolving credit facility. The
contingent consideration 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 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
expiration of the holdback agreement in October 2021. The addition of Ingenia enhances the Company’s strategic position in
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.
The acquisitions of ARGES, Med X Change and Ingenia have been accounted for as business combinations. Purchase price
allocation 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 dates. The fair values of intangible assets were based on valuation
techniques 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 revenue growth rates, customer attrition rates,
royalty rates, discount rates and projected future cash flows. The excess of the purchase price over the tangible assets, identifiable
intangible assets and assumed liabilities was recorded as goodwill.
ARGES
The total purchase price for ARGES was allocated as follows (in thousands):
Cash
Accounts receivable
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable
Deferred tax liabilities
Other liabilities
Total liabilities assumed
Total assets acquired, net of liabilities assumed
Less: cash acquired
Total purchase price, net of cash acquired
Less: contingent consideration
Less: issuance of common shares
Less: deferred cash consideration
Initial cash purchase price, net of cash acquired
$
$
Amount
3,159
1,430
7,129
14,095
24,713
43,045
2,244
95,815
2,598
7,081
13,207
22,886
72,929
3,159
69,770
7,870
10,900
27,442
23,558
66
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The purchase price allocation is preliminary pending final settlement of net working capital adjustment and the deferred
purchase price.
The fair value of intangible assets for ARGES is comprised of the following (dollar amounts in thousands):
Developed technologies
Customer relationships
Trademarks and trade names
Backlog
Total
Estimated Fair
Value
Weighted Average
Amortization
Period
$
$
11,355
11,800
1,225
333
24,713
15 years
15 years
10 years
5 months
Customer relationships and backlog for ARGES were valued using the multi-period excess earnings method. Developed
technology and trademarks and trade names for ARGES were valued using the relief-from-royalty method.
The purchase price allocation resulted in $24.7 million of identifiable intangible assets and $43.0 million of goodwill. As the
ARGES acquisition was an acquisition of outstanding common shares, none of the resulting goodwill is expected to be deductible
for income 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) expected future benefits from advancing the
Company’s photonic-based product roadmap through the addition of R&D capabilities from ARGES; (ii) ARGES’s ability to grow
the business with existing and new customers, including leveraging the Company’s customer base; (iii) ARGES’s ability to grow
the business through new product introductions; and (iv) 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 $4.9 million and a loss before income taxes of $3.5 million for the year ended December 31, 2019. Loss
before income taxes for the year ended December 31, 2019 included amortization of inventory fair value adjustments and purchased
intangible assets of $2.2 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.
67
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Med X Change and Ingenia
The final purchase price for Med X Change and Ingenia is as follows (in thousands):
Amount
Cash
Accounts receivable
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable
Deferred tax liabilities
Other liabilities
Total liabilities assumed
Total assets acquired, net of liabilities assumed
Less: cash acquired
Total purchase price, net of cash acquired
Less: contingent consideration
Less: purchase price holdback
Net cash used for acquisition of businesses
$
$
1,000
1,739
2,372
496
22,376
13,388
601
41,972
604
2,399
910
3,913
38,059
1,000
37,059
6,569
905
29,585
The fair value of intangible assets for Med X Change and Ingenia is comprised of the following (dollar amounts in
thousands):
Estimated Fair Value
Weighted Average
Amortization
Developed technologies
Customer relationships
Trademarks and trade names
Backlog
Total
Med X Change
$
1,800 $
9,900
300
200
12,200 $
$
Ingenia
Period
9,272
565
339
—
10,176
10 years
15 years
9 years
7 months
Customer relationships and backlog for both Med X Change and Ingenia were valued using the multi-period excess earnings
method. Developed technology for Med X Change and Ingenia were valued using the relief from royalty and multi-period excess
earnings methods, respectively. Trademarks and trade names for both Med X Change and Ingenia were valued using the relief-from-
royalty method.
The Company recorded an aggregate fair value of $22.4 million of identifiable intangible assets from the Med X Change and
Ingenia acquisitions. 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 Company recorded $13.4 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 income tax purposes. Goodwill amounting to $7.2 million from the
Ingenia acquisition is not expected to be deductible for income tax purposes. The goodwill recorded represents the anticipated
incremental value of future cash flows potentially attributable to: (i) the ability of Med X Change and Ingenia to grow the business
with existing and new customers, including leveraging the Company’s customer base; (ii) their ability to grow the businesses
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.
68
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
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 $7.9 million and an income before income taxes of $0.6
million for the year ended December 31, 2019. Income before income taxes for the year ended December 31, 2019 included
amortization of inventory fair value adjustments and purchased intangible assets of $1.5 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.
2018 Acquisitions
During the year ended December 31, 2018, the Company acquired two businesses for total cash considerations of $33.5
million, including the acquisition of Zettlex Holdings Limited ("Zettlex"). The consolidated statement of operations includes the
operating results of the businesses from the dates of acquisition.
Zettlex
On May 1, 2018, the Company acquired 100% of the outstanding stock of Zettlex, a Cambridge, United Kingdom-based
provider of inductive encoder products that provide absolute and accurate positioning, even in extreme operating environments, to
OEMs in the medical and advanced industrial markets. The purchase price of £23.3 million ($32.0 million), net of working capital
adjustments, was financed with cash on hand and borrowings under the Company’s revolving credit facility.
The final purchase price allocation is as follows (in thousands):
Cash
Accounts receivable
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable
Accrued expenses and other liabilities
Deferred tax liabilities
Total liabilities assumed
Total assets acquired, net of liabilities assumed
Less: cash acquired
Total purchase price, net of cash acquired
Amount
3,776
2,237
928
2,590
14,585
11,790
145
36,051
509
1,035
2,481
4,025
32,026
3,776
28,250
$
$
The fair value of intangible assets is comprised of the following (dollar amounts in thousands):
Developed technologies
Customer relationships
Trademarks and trade names
Backlog
Total
69
Estimated Fair
Value
Weighted Average
Amortization
Period
$
$
3,027
9,494
550
1,514
14,585
10 years
15 years
10 years
1 year
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The purchase price allocation resulted in $14.6 million of identifiable intangible assets and $11.8 million of goodwill. As the
Zettlex acquisition was an acquisition of outstanding common shares, none of the resulting goodwill is deductible for income 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) Zettlex’s ability to grow its business with existing and new
customers, including leveraging the Company’s customer base; and (ii) cost improvements due to the integration of Zettlex
operations into the Company’s existing infrastructure.
The operating results of Zettlex were included in the Company’s results of operations beginning on May 1, 2018. Zettlex
contributed revenues of $8.3 million and a loss before income taxes of $1.8 million for the year ended December 31, 2018. Loss
before income taxes for the year ended December 31, 2018 included amortization of purchased intangible assets of $1.3 million and
compensation expense of $4.4 million recognized under earn-out agreements. Zettlex is included in the Company’s Precision
Motion reportable segment.
2017 Acquisitions
WOM
On July 3, 2017, the Company acquired 100% of the outstanding shares of W.O.M. World of Medicine GmbH (“WOM”), a
Berlin, Germany-based provider of medical insufflators, pumps, and related disposables for OEMs in the minimally invasive
surgery market, for a total purchase price of €118.1 million ($134.9 million). The acquisition was financed with a €118.0 million
($134.8 million) draw-down on the Company’s revolving credit facility.
The final purchase price allocation is as follows (in thousands):
Cash
Accounts receivable
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable
Other liabilities
Deferred tax liabilities
Total liabilities assumed
Total assets acquired, net of liabilities assumed
Less: cash acquired
Total purchase price, net of cash acquired
$
$
Amount
1,400
11,807
14,549
21,940
59,732
55,632
2,660
167,720
4,398
8,681
19,707
32,786
134,934
1,400
133,534
The fair value of intangible assets is comprised of the following (dollar amounts in thousands):
Developed technologies
Customer relationships
Trademarks and trade names
Backlog
Total
70
Estimated Fair
Value
Weighted Average
Amortization
Period
$
$
21,586
35,634
2,284
228
59,732
10 years
12 years
10 years
1 year
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The purchase price allocation resulted in $59.7 million of identifiable intangible assets and $55.6 million of goodwill. As the
WOM acquisition was an acquisition of outstanding common shares, none of the resulting goodwill is deductible for income 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 attributable to: (i) WOM’s ability to grow its business with existing and new customers,
including leveraging the Company’s customer base; and (ii) cost improvements due to expansion in scale.
The operating results of WOM were included in the Company’s results of operations beginning on July 3, 2017. WOM
contributed revenues of $49.4 million and a loss before income taxes of $1.2 million for the year ended December 31, 2017. Loss
before income taxes for the year ended December 31, 2017 included amortization of inventory fair value adjustments and
amortization of purchased intangible assets of $6.0 million. WOM is included in the Company’s Vision reportable segment.
Laser Quantum
On January 10, 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum, a
Manchester, United Kingdom-based provider of solid state continuous wave lasers, ultrafast lasers, and optical light engines to
OEMs in the medical market, for £25.5 million ($31.1 million) in cash consideration. The purchase price was financed with cash on
hand and a $30.0 million draw-down on the Company’s revolving credit facility. As a result of this transaction, the Company’s
ownership position in Laser Quantum increased from approximately 41% to approximately 76%.
In connection with the purchase price allocation, upon gaining control over Laser Quantum, the Company recognized a
nontaxable gain of $26.4 million in the consolidated statement of operations for the twelve months ended December 31, 2017. The
gain represented the excess of the fair value of the Company’s previously-held equity interest in Laser Quantum over its carrying
value upon gaining control.
The fair value of the approximately 41% equity interest previously held by the Company before the acquisition and the fair
value of the approximately 24% noncontrolling interest held by the remaining shareholders of Laser Quantum after the acquisition
were determined using a combination of the discounted cash flow method (an income approach), the guideline public company
method (a market approach), and the subject company transaction method (a market approach). The subject company transaction
method was based on the purchase price paid by the Company for the acquisition of the additional approximately 35% of the
outstanding shares, while giving consideration to the control and/or minority nature of the subject equity interests.
71
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The final purchase price allocation is as follows (in thousands):
Amount
$
Cash
Accounts receivable
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Other assets
Total fair value of assets
Accounts payable
Other liabilities
Deferred tax liabilities
Total fair value of liabilities
Total fair value of assets, net of fair value of liabilities
Less: fair value of equity interest previously held by Novanta
Less: fair value of noncontrolling interest
Total purchase price paid by Novanta
Less: cash acquired
Purchase price, net of cash acquired
$
The fair value of intangible assets is comprised of the following (dollar amounts in thousands):
15,343
2,739
6,264
2,286
38,955
31,168
717
97,472
796
2,068
7,337
10,201
87,271
34,637
21,582
31,052
15,343
15,709
Developed technologies
Customer relationships
Trademarks and trade names
Backlog
Total
Weighted Average
Estimated Fair
Amortization
Value
Period
$
$
15,501
19,990
1,964
1,500
38,955
15 years
15 years
15 years
9 months
The purchase price allocation resulted in $39.0 million of identifiable intangible assets and $31.2 million of goodwill. As the
Laser Quantum acquisition was an acquisition of outstanding common shares, none of the resulting goodwill is deductible for
income 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 flow potential attributable to: (i) Laser Quantum’s ability to grow its business with
existing and new customers, including leveraging the Company’s broader customer base; and (ii) cost improvements due to
expansion in scale.
The operating results of Laser Quantum were included in the Company’s results of operations beginning on January 10, 2017.
Laser Quantum contributed revenues of $44.7 million and income before income taxes of $11.3 million for the year ended
December 31, 2017. Income before income taxes for the year ended December 31, 2017 included $7.1 million of expenses
associated with the amortization of inventory fair value step-up and purchased intangible assets. Laser Quantum is included in the
Company’s Photonics reportable segment.
As part of the agreement to acquire the additional approximately 35% of the outstanding shares in January 2017, the
Company and the remaining shareholders of Laser Quantum entered into a call and put option agreement for the purchase and sale,
in 2020, of all the remaining Laser Quantum shares held by the remaining shareholders, subject to certain conditions. The purchase
72
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
price for the remaining shares would be based on the proportionate share of the noncontrolling interest in Laser Quantum’s cash on
hand as of December 31, 2019 and a multiple of Laser Quantum’s EBITDA for the twelve months ending December 31, 2019, as
defined in the call and put option agreement. As a result of the put option held by the remaining shareholders, the noncontrolling
interest was considered a redeemable equity instrument and was presented as temporary equity on the consolidated balance sheet.
The proportionate share of the net income from Laser Quantum attributable to the noncontrolling interest was reported as a
reduction to the consolidated net income in the Company’s consolidated statement of operations and an increase to the carrying
value of the redeemable noncontrolling interest on the consolidated balance sheet.
The Company reported the redeemable noncontrolling interest at the higher of (i) the carrying value without any redemption
value adjustments or (ii) the estimated redemption value as of the end of each reporting period. The estimated redemption value
was determined as of the end of the reporting period as if it were also the redemption date for the instrument. The resulting
adjustments were recorded in retained earnings in shareholders’ equity and did not affect net income attributable to Novanta Inc.
However, these adjustments were included in the determination of earnings per common share for the periods in which such
adjustments were required (See Note 9). The Company recorded a $1.8 million reduction and a $20.2 million addition to the
noncontrolling interest redemption value for the years ended December 31, 2018 and 2017, respectively.
On September 27, 2018, the Company acquired the remaining approximately 24% of the outstanding shares of Laser
Quantum for an aggregate consideration of $45.1 million, consisting of $30.7 million of cash and 213,219 shares of the Company’s
restricted stock. The restricted stock will become fully vested upon achievement of certain milestones included in the restricted
stock agreement. Restricted stock not otherwise vested as of December 31, 2025 will be subject to forfeiture. The acquisition was
accounted for as a transaction among shareholders. No gain or loss was recognized in the consolidated statements of operations for
the year ended December 31, 2018.
ThingMagic
On January 10, 2017, the Company acquired from Trimble Inc. certain assets and liabilities that constituted the business of
ThingMagic, a Woburn, Massachusetts-based provider of ultra-high frequency (“UHF”) radio frequency identification (“RFID”)
modules and finished RFID readers to OEMs in the medical and advanced industrial markets, for a total purchase price of $19.1
million. The acquisition was financed with cash on hand and a $12.0 million draw-down on the Company’s revolving credit facility.
The final purchase price allocation is as follows (in thousands):
Inventories
Intangible assets
Goodwill
Total assets acquired
Other liabilities
Total liabilities assumed
Total purchase price
Amount
1,832
7,423
9,929
19,184
95
95
19,089
$
$
The fair value of intangible assets is comprised of the following (dollar amounts in thousands):
Developed technologies
Customer relationships
Trademarks and trade names
Total
Weighted Average
Estimated Fair
Amortization
Value
Period
$
$
4,600
2,520
303
7,423
10 years
10 years
5 years
73
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The purchase price allocation resulted in $7.4 million of identifiable intangible assets and $9.9 million of goodwill. As the
ThingMagic acquisition was treated as an acquisition of assets for income tax purposes, the goodwill acquired is fully deductible for
income 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) ThingMagic’s ability to grow its business with
existing and new customers, including leveraging the Company’s customer base; (ii) cost synergies in combining the research and
development capabilities from ThingMagic with the existing RFID capabilities within Novanta; and (iii) cost improvements due to
the integration of ThingMagic operations into the Company’s existing infrastructure.
The operating results of ThingMagic were included in the Company’s results of operations beginning on January 10, 2017.
ThingMagic contributed revenues of $8.6 million and income before income taxes of $0.4 million for the year ended December 31,
2017. Income before income taxes for the year ended December 31, 2017 included amortization of inventory fair value adjustments
and amortization of purchased intangible assets of $1.5 million. ThingMagic is included in the Company’s Vision reportable
segment.
Unaudited Pro Forma Information
The unaudited pro forma information presented below includes the effects of business combination accounting resulting from
the acquisitions of WOM and Laser Quantum, including amortization of intangible assets, interest expense on borrowings in
connection with the acquisitions, and elimination of the gain from the Laser Quantum acquisition and income from the Company’s
previous equity method investment in Laser Quantum, and the related tax effects, as though the acquisitions had been consummated
as of January 1, 2016. The unaudited pro forma financial information is presented for comparative purposes only and is not
necessarily indicative of the results of operations that actually would have been achieved if the acquisitions had taken place on
January 1, 2017.
Revenue
Consolidated net income
Earnings per share attributable to Novanta Inc. - Basic (1)
Earnings per share attributable to Novanta Inc. - Diluted (1)
$
$
$
$
Year Ended December 31, 2017
562,818
39,630
0.49
0.49
(1)
The computation of pro forma earnings per share attributable to Novanta Inc. included a $20.2
million adjustment of redeemable noncontrolling interest to estimated redemption value for the
year ended December 31, 2017.
Pro forma earnings for the year ended December 31, 2017 were adjusted to exclude non-recurring items such as amortization
of inventory fair value adjustments of $4.4 million, acquisition related costs of $4.3 million, the gain on business acquisition of
$26.4 million and income from equity method investment of $0.1 million. Pro forma earnings for the year ended December 31, 2017
were adjusted to include an increase in amortization of intangible assets of $5.3 million and an increase in interest expense of $1.4
million associated with borrowings under the Company’s revolving credit facility used to fund the acquisitions.
Acquisition Costs
The Company recognized acquisition costs of $1.6 million, $1.1 million and $4.4 million in the years ended December 31,
2019, 2018 and 2017, respectively, related to the acquisitions that occurred during these years. These costs consisted of finders’
fees, legal, valuation and other professional or consulting fees. These amounts were included in restructuring and acquisition related
costs in the consolidated statements of operations.
74
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
5. Accumulated Other Comprehensive Loss
Comprehensive income (loss) is defined as net income (loss) and other changes in stockholders’ equity that do not represent
transactions with stockholders or in the Company’s stock. Changes in accumulated other comprehensive loss were as follows (in
thousands):
Total Accumulated
Other
Comprehensive
Loss
Cumulative
Translation
Adjustments
Pension
Liability
Adjustments
Balance at December 31, 2016
Other comprehensive income (loss)
Amounts reclassified from accumulated other comprehensive loss (1)
Balance at December 31, 2017
Other comprehensive income (loss)
Amounts reclassified from accumulated other comprehensive loss (1)
Balance at December 31, 2018
Other comprehensive income (loss)
Amounts reclassified from accumulated other comprehensive loss (1)
Balance at December 31, 2019
$
$
(27,715)
8,790
1,045
(17,880)
(5,473)
826
(22,527)
3,428
986
(18,113)
$
$
(17,222)
8,909
—
(8,313)
(4,172)
—
(12,485)
3,267
—
(9,218)
$
$
(10,493)
(119)
1,045
(9,567)
(1,301)
826
(10,042)
161
986
(8,895)
(1)
The amounts reclassified from accumulated other comprehensive loss were included in other income (expense) in the
consolidated statements of operations.
6. Goodwill, Intangible Assets and Impairment Charges
Goodwill
The following table summarizes changes in goodwill during the year ended December 31, 2019 (in thousands):
Balance at beginning of year
Goodwill acquired from acquisitions
Effect of foreign exchange rate changes
Balance at end of year
December 31,
2019
217,662
56,433
615
274,710
$
$
Goodwill by reportable segment as of December 31, 2019 was as follows (in thousands):
Goodwill
Accumulated impairment of goodwill
Total
Reportable Segment
Photonics
$
$
213,413
(102,461)
110,952
$
$
Vision
160,086
(31,722)
128,364
$
$
Precision
Motion
52,440
(17,046)
35,394
$
$
Total
425,939
(151,229)
274,710
Goodwill by reportable segment as of December 31, 2018 was as follows (in thousands):
Goodwill
Accumulated impairment of goodwill
Total
Reportable Segment
Photonics
$
$
168,955
(102,461)
66,494
$
$
Vision
155,017
(31,722)
123,295
$
$
Precision
Motion
44,919
(17,046)
27,873
$
$
Total
368,891
(151,229)
217,662
75
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Intangible Assets
Intangible assets as of December 31, 2019 and 2018, respectively, are summarized as follows (dollar amounts in thousands):
Amortizable intangible assets:
Patents and developed technologies
Customer relationships
Customer backlog
Trademarks and trade names
Amortizable intangible assets
Non-amortizable intangible assets:
Trade names
Total
Amortizable intangible assets:
Patents and developed technologies
Customer relationships
Customer backlog
Non-compete covenant
Trademarks and trade names
Amortizable intangible assets
Non-amortizable intangible assets:
Trade names
Total
December 31, 2019
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Weighted Average
Remaining Life
(Years)
$
$
$
159,217
161,807
2,316
17,871
341,211
$
(97,523)
(78,206)
(2,316)
(10,018)
(188,063)
61,694
83,601
—
7,853
153,148
13,027
354,238
—
$ (188,063)
$
13,027
166,175
9.5
11.9
—
8.6
10.7
December 31, 2018
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Weighted Average
Remaining Life
(Years)
$
$
134,034
139,097
1,738
2,514
15,915
293,298
$
(86,623)
(64,174)
(1,191)
(2,493)
(8,924)
(163,405)
47,411
74,923
547
21
6,991
129,893
13,027
306,325
—
$ (163,405)
$
13,027
142,920
$
9.0
11.7
0.4
0.1
9.1
10.5
Amortizable intangible assets included intangible assets of $1.2 million recognized in conjunction with the acquisition of
certain customer relationships in September 2018.
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):
Amortization expense – cost of revenue
Amortization expense – operating expenses
Total amortization expense
Year Ended December 31,
2018
2017
2019
$
$
10,588
15,857
26,445
$
$
10,060
15,550
25,610
$
$
8,824
12,096
20,920
76
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Estimated future amortization expense for each of the five succeeding years and thereafter is as follows (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Impairment Charges
Cost of
Revenue
Operating
Expenses
$
$
11,106
11,301
9,682
8,506
6,332
14,767
61,694
$
$
14,001
13,689
12,856
11,176
9,225
30,507
91,454
$
$
Total
25,107
24,990
22,538
19,682
15,557
45,274
153,148
The Company did not have any goodwill or indefinite-lived intangible asset impairment charges during 2019, 2018 or 2017.
7. Fair Value Measurements
ASC 820, “Fair Value Measurement,” 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.
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. Based on revenue performance as of December 31,
2019 and the most recent revenue projections for fiscal years 2020 to 2026, the fair value of the contingent consideration was
adjusted to €7.0 million ($7.9 million), which is reported as a long-term liability in other liabilities on the consolidated balance sheet
as of December 31, 2019.
77
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
On April 16, 2019, the Company acquired Ingenia. Under the purchase and sale agreement for the Ingenia acquisition, the
former 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 three annual installments from 2020 to
2022. The estimated fair value of the contingent consideration of €5.8 million ($6.6 million) as of the acquisition date 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. Based on revenue performance as of
December 31, 2019 and the most recent revenue projections for fiscal years 2020 to 2022, the fair value of the contingent
consideration was adjusted to €5.9 million ($6.7 million) as of December 31, 2019.
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 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 such targets are achieved, the
contingent consideration would be payable 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 asset. Based
on revenue performance as of December 31, 2019 and the most recent revenue projections for fiscal years 2020 and 2021, the fair
value of the contingent consideration was adjusted to $5.8 million as of December 31, 2019. The first payment of $2.6 million will
be due in the first quarter of 2020.
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, 2019 (in thousands):
Quoted Prices in
Active Markets for Significant Other Unobservable
Significant Other
Identical Assets
Observable Inputs
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
Assets
Cash equivalents
Prepaid expenses and other current assets:
Foreign currency forward contracts
Liabilities
Accrued expenses and other current liabilities:
Contingent considerations - Current
Foreign currency forward contracts
Other liabilities:
Contingent considerations - Long-term
$
$
$
$
9,262 $
9,262 $
— $
50
9,312
3,813
99
$
$
16,504
20,416
$
—
9,262
—
—
—
—
$
$
$
50
50
—
99
—
99
$
$
$
—
—
—
3,813
—
16,504
20,317
78
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
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
Active Markets for Significant Other Unobservable
Significant Other
Identical Assets
Observable Inputs
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
Assets
Cash equivalents
Prepaid expenses and other current assets:
Foreign currency forward contracts
Liabilities
Accrued expenses and other current liabilities:
Foreign currency forward contracts
Other liabilities:
Contingent considerations - Long-term
$
$
$
$
4,288 $
4,288 $
15
4,303
$
—
4,288
$
182
$
3,376
3,558
$
—
$
—
—
$
— $
15
15
$
182
$
—
182
$
—
—
—
—
3,376
3,376
During the years ended December 31, 2019 and 2018, there were no transfers between fair value levels.
Changes in the fair value of Level 3 contingent considerations for the year ended December 31, 2019 were as follows (in
thousands):
Balance at December 31, 2018
Acquisition of ARGES
Acquisition of Ingenia
Fair value adjustments
Effect of foreign exchange rates
Balance at December 31, 2019
Contingent
Considerations
3,376
7,870
6,569
2,489
13
20,317
$
$
79
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The following table provides qualitative information associated with the fair value measurement of the Company’s Level 3
liabilities:
Liability
Contingent
consideration
(ARGES)
December 31, 2019
Fair Value
(in thousands)
$7,899
Valuation Technique
Monte Carlo
method
Contingent
consideration (Ingenia)
$6,653
Monte Carlo
method
Unobservable Inputs
Historical and projected revenues
from July 2019 through
December 2026
Revenue volatility
Cost of debt
Discount rate
Historical and projected revenues
from April 2019 through March
2022
Revenue volatility
Cost of debt
Discount rate
Contingent
consideration (Other)
$5,765
Discounted cash
flow method
Historical and projected revenues
for fiscal years 2018 to 2021
Discount rate
Percentage
Applied
N/A
36.0%
1.4%
7.3%
N/A
36.0%
0.9%
15.3%
N/A
22.8%
See Note 11 for a discussion of the estimated fair value of the Company’s outstanding debt and Note 14 for a discussion of the
estimated fair value of the Company’s pension plan assets.
8. 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 exposure to counterparty risks on derivative
instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding
positions.
As of December 31, 2019, the notional amount and fair value of the Company’s foreign currency forward contracts was $12.4
million and a net loss of less than $0.1 million, respectively. As of December 31, 2018, the 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.
For the years ended December 31, 2019, 2018 and 2017, the Company recognized aggregate net gains of $0.8 million, $1.5
million and $0.2 million, respectively, from the settlement of foreign currency forward contracts, which were included in foreign
exchange transaction gains (losses) in the consolidated statements of operations.
9. 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, if any, by the weighted average number of common shares outstanding during
the year. Prior to the acquisition of the remaining noncontrolling interest in Laser Quantum in September 2018, 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 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. However, for both basic and diluted
80
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
earnings per common share, such redemption value adjustments were included in the calculation of the numerator for 2018 and
2017.
For diluted earnings per common share, the denominator includes the dilutive effects of outstanding restricted stock units,
stock options, total shareholder return performance-based restricted stock units and certain 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 assuming the end of the reporting period is also the end of the performance period. The dilutive
effects of attainment-based contingently issuable shares granted to the former Laser Quantum noncontrolling interest shareholders
and non-GAAP EPS performance-based restricted stock units are included in the weighted average dilutive share calculation after
the performance targets have been achieved.
The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share
amounts):
Numerators:
Consolidated net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Novanta Inc.
Redeemable noncontrolling interest redemption value adjustment
Net income attributable to Novanta Inc. after adjustment for
redeemable noncontrolling interest redemption value
Denominators:
Weighted average common shares outstanding— basic
Dilutive potential common shares
Weighted average common shares outstanding— diluted
Antidilutive potential common shares excluded from above
Earnings per Common Share Attributable to Novanta Inc.:
Basic
Diluted
$
$
$
$
2019(1)
Year Ended December 31,
2018(2)
2017(3)
$
40,773
—
40,773
—
$
51,095
(1,986)
49,109
1,781
62,307
(2,256)
60,051
(20,244)
40,773
$
50,890
$
39,807
35,030
516
35,546
41
34,913
560
35,473
4
1.16
1.15
$
$
1.46
1.43
$
$
34,817
463
35,280
—
1.14
1.13
(1)
(2)
(3)
For the year ended December 31, 2019, 46 non-GAAP EPS performance-based restricted stock units granted to certain
members of the executive management team and 213 shares of restricted stock issued to Laser Quantum former non-
controlling interest shareholders are considered contingently issuable shares and were excluded from the calculation of the
denominator as the contingent conditions had not been met as of December 31, 2019.
For the year ended December 31, 2018, 54 non-GAAP EPS performance-based restricted stock units granted to certain
members of the executive management team and 213 shares of restricted stock issued to Laser Quantum former non-
controlling interest shareholders were considered contingently issuable shares and were excluded from the calculation of the
denominator as the contingent conditions had not been met as of December 31, 2018.
For the year ended December 31, 2017, 59 non-GAAP EPS performance-based restricted stock units granted to certain
members of the executive management team were excluded from the calculation of the denominator as the contingent
conditions had not been met as of December 31, 2017.
81
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
10. Supplementary Balance Sheet Information
The following tables provide the details of selected balance sheet items as of the dates indicated (in thousands):
Inventories
Raw materials
Work-in-process
Finished goods
Demo and consigned inventory
Total inventories
Property, Plant and Equipment, Net
Cost:
Land, buildings and improvements
Machinery and equipment
Total cost
Accumulated depreciation
Property, plant and equipment, net
December 31,
2019
2018
76,268
15,096
23,431
1,823
116,618
$
$
69,008
15,982
17,337
2,437
104,764
December 31,
2019
2018
67,376
87,471
154,847
(77,291)
77,556
$
$
56,068
77,918
133,986
(68,522)
65,464
$
$
$
$
The Company capitalized software development costs of $0.2 million, $1.1 million and $2.0 million in 2019, 2018 and 2017,
respectively, in accordance with the guidance in ASC 350-40, “Internal-Use Software.”
The following table summarizes depreciation expense on property, plant and equipment, including demo units and assets
under finance leases (in thousands):
Depreciation expense
Accrued Expenses and Other Current Liabilities
Year Ended December 31,
2018
2017
2019
$
11,835
$
11,442
$
9,838
The following table summarizes accrued expenses and other current liabilities as of the dates indicated (in thousands):
Accrued compensation and benefits
Accrued warranty
Contract liabilities, current portion
Deferred purchase price for acquisitions
Other
Total
December 31,
2019
2018
$
$
15,359
5,756
3,219
27,735
18,257
70,326
$
$
24,545
4,510
4,165
—
13,075
46,295
82
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Accrued Warranty
The following table summarizes changes in accrued warranty for the periods indicated (in thousands):
Year Ended December 31,
2018
2017
2019
Balance at beginning of year
Provision charged to cost of revenue
Warranty liabilities acquired from acquisitions
Use of provision
Foreign currency exchange rate changes
Balance at end of year
$
$
$
4,510
2,360
142
(1,282)
26
5,756
$
$
4,835
3,111
—
(3,341)
(95)
$
4,510
3,142
3,169
1,307
(2,857)
74
4,835
Other Long Term Liabilities
The following table summarizes other long term liabilities as of the dates indicated (in thousands):
Finance lease obligations
Accrued pension liabilities
Accrued contingent considerations
Other
Total
11. Debt
Debt consisted of the following (in thousands):
Senior Credit Facilities – term loan
Less: unamortized debt issuance costs
Total current portion of long-term debt
Senior Credit Facilities – term loan
Senior Credit Facilities – revolving credit facility
Less: unamortized debt issuance costs
Total long-term debt
$
$
$
December 31,
2019
2018
14,845
1,473
16,504
4,065
36,887
$
$
7,275
3,758
3,376
2,778
17,187
December 31,
2019
2018
5,073 $
(42)
5,031
96,095
123,384
(4,145)
215,334
4,600
(65)
4,535
69,925
135,058
(2,140)
202,843
Total Senior Credit Facilities
$
220,365 $
207,378
Senior Credit Facilities
On December 31, 2019, the Company entered into an amended and restated credit agreement (the “Third Amended and
Restated Credit Agreement”) with existing lenders for an aggregate credit facility of $450.0 million, consisting of a $100.0 million
U.S. dollar equivalent euro-denominated (approximately €90.2 million) 5-year term loan facility and a $350.0 million 5-year
revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in December 2024. The
Third Amended and Restated Credit Agreement amended and restated the Second Amended and Restated Credit Agreement dated
as of May 19, 2016.
The borrowings outstanding under the Senior Credit Facilities bear interest at rates based on (a) the Base Rate, as defined in
the Third Amended and Restated Credit Agreement, plus a margin ranging between 0.25% to 1.25% per annum, determined by
reference to the Company’s consolidated leverage ratio, or (b) the Eurocurrency Rate, as defined in the Third Amended and
Restated Credit Agreement, plus a margin ranging between 1.25% and 2.25% per annum, determined by reference to the
83
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Company’s consolidated leverage ratio. In addition, the Company is obligated to pay a commitment fee on the unused portion of the
revolving credit facility, ranging between 0.20% and 0.40% per annum, determined by reference to the Company’s consolidated
leverage ratio.
The Third Amended and Restated Credit Agreement contains various customary representations, warranties and covenants
applicable to the Company and its subsidiaries, including, among others: (i) limitations on restricted payments, including dividend
payments and stock repurchases, provided that the Company and its subsidiaries may repurchase their equity interests so long as,
immediately after giving effect to the repurchase, the Company’s consolidated leverage ratio is no more than 3.25:1.00, with a step
up to 3.75:1.00 for four consecutive quarters following an acquisition with an aggregate consideration greater than or equal to $50.0
million, and the satisfaction of other customary conditions; (ii) limitations on fundamental changes involving the Company and its
subsidiaries; (iii) limitations on the disposition of assets; and (iv) limitations on indebtedness, investments, and liens. The Third
Amended and Restated Credit Agreement also requires the Company to satisfy certain financial covenants, such as maintaining a
minimum consolidated fixed charge coverage ratio of 1.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The
maximum consolidated leverage ratio will increase to 4.00:1.00 for four consecutive quarters following an acquisition with an
aggregate consideration greater than or equal to $50.0 million.
As of December 31, 2019, the outstanding principal under the Company’s term loan facility is scheduled to be repaid as
follows (in thousands):
2020
2021
2022
2023
2024
Total debt repayments
Principal Amount
5,073
$
5,071
5,071
5,071
80,882
101,168
$
The outstanding principal balance under the term loan facility is payable in quarterly installments of €1.1 million beginning in
March 2020, with the remaining due upon maturity. The Company may make additional principal payments at any time, which will
reduce the next quarterly installment payment due. Borrowings under the revolving credit facility may be repaid at anytime through
December 2024. The Company may be required to prepay outstanding loans under the Third Amended and Restated Credit
Agreement with the net proceeds of certain asset dispositions and incurrences of certain debt. At the election of the Company, and
so long as no default shall have occurred, the Company may reinvest all, or any portion of, the net proceeds from such asset
dispositions or incurrences of debt within a year.
As of December 31, 2019, the Company had $226.6 million available to be drawn under the revolving credit facility.
Excluding commitment fees, the weighted average interest rate for the Senior Credit Facilities was approximately 2.34% as of
December 31, 2019. The commitment fee rate for the unused commitments under the revolving credit facility was approximately
0.30% as of December 31, 2019.
Guarantees
The Senior Credit Facilities is guaranteed by Novanta Inc., Novanta Corporation, NDS Surgical Imaging LLC, Med X
Change, Inc., Novanta Medical Technologies Corp., Novanta Europe GmbH, Novanta UK Investments Holding Limited and
Novanta Technologies UK Limited (collectively, “Guarantors”). Each Guarantor, jointly and severally, unconditionally guarantees
the due and punctual payment of the principal, interest and fees under the Senior Credit Facilities, when due and payable, whether at
maturity, by required prepayment, by acceleration or otherwise. In addition, Guarantors guarantee the due and punctual payment,
fees and interest on the overdue principal of the Senior Credit Facilities and the due and punctual performance of all obligations of
the Company in accordance with the terms of the Third Amended and Restated Credit Agreement. Furthermore, each Guarantor,
jointly and severally, unconditionally guarantees that in the event of any extension, renewal, amendment, refinancing or
modification of any of the Senior Credit Facilities, amounts due will be promptly paid in full when due in accordance with the terms
of the extension or renewal, at stated maturity, by acceleration or otherwise.
The obligations of each Guarantor are limited to the maximum amount, after giving effect to all other contingent and fixed
liabilities or any collections from, or payments made by or on behalf of, any other Guarantor. Each Guarantor that makes a payment
84
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
or distribution under a Guarantee is entitled to a contribution from each other Guarantor of its pro rata share based on the adjusted
net assets of each Guarantor. If at any time any payment of any of the obligations of the Guarantors is rescinded or must otherwise
be returned upon the insolvency, bankruptcy or reorganization of the Company, a Guarantor or otherwise, the Guarantees will
continue to be effective or be reinstated, as the case may be, as though such payment had not been made.
Each Guarantor may be released from its obligations under its respective Guarantee and its obligations under the Third
Amended and Restated Credit Agreement upon the occurrence of certain events, including, but not limited to: (i) the Guarantor
ceasing to be a subsidiary; or (ii) payment in full of the principal and accrued and unpaid interest on the Senior Credit Facilities and
all other obligations.
The maximum potential amount of future payments the Guarantors could be required to make under the Guarantee is the
principal amount of the Senior Credit Facilities plus all accrued and unpaid interest thereon. However, as of December 31, 2019, the
Guarantors were not expected to be required to perform under the Guarantee.
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. The Third Amended and Restated Credit Agreement also contains customary events of default.
Deferred Financing Costs
In connection with the execution of the Third Amended and Restated Credit Agreement, the Company capitalized an
additional $3.0 million of deferred financing costs. The Company allocated these costs between the term loan and the revolving
credit facility based on the maximum borrowing capacity and amortizes the costs on a straight-line basis over the term of the Senior
Credit Facilities. Previously unamortized deferred financing costs will continue to be amortized. Non-cash interest expense related
to the amortization of the deferred financing costs was $1.1 million, $1.0 million and $0.8 million in 2019, 2018 and 2017,
respectively. Unamortized deferred financing costs are presented as a reduction to the debt balances on the consolidated balance
sheets.
Fair Value of Debt
As of December 31, 2019 and 2018, the outstanding balance of the Company’s debt approximated its fair value based on
current rates available to the Company for debt of the same maturities. The fair value of the Company’s debt is classified as Level 2
under the fair value hierarchy.
12. Leases
Most leases held by the Company expire between 2020 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.
85
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The following table summarizes the components of lease costs during 2019 (in thousands):
Operating lease cost
Finance lease cost
Amortization of right-of-use assets
Interest on lease liabilities
Variable lease cost
Total lease cost
$
$
Year Ended
December 31, 2019
7,638
831
430
1,329
10,228
During 2018 and 2017, the Company recorded operating lease expense of $7.4 million and $5.5 million, respectively.
The following table provides the details of balance sheet information related to leases as of December 31, 2019 (in thousands,
except lease term and discount rate):
Operating leases
Operating lease right-of-use assets
Current portion of operating lease liabilities
Operating lease liabilities
Total operating lease liabilities
Finance leases
Property, plant and equipment, gross
Accumulated depreciation
$
$
$
$
Finance lease assets included in property, plant and equipment, net
$
Accrued expenses and other current liabilities
Other liabilities
Total finance lease liabilities
$
$
Weighted-average remaining lease term (in years)
Operating leases
Finance leases
Weighted-average discount rate
Operating leases
Finance leases
December 31,
2019
35,180
5,043
34,108
39,151
19,748
(4,649)
15,099
1,307
14,845
16,152
10.2
4.7
5.60%
3.09%
The following table provides a summary of leased properties under finance leases by major classes as of December 31, 2018:
Land, buildings and improvements
Machinery and equipment
Total gross assets under finance leases
Accumulated depreciation on assets under finance leases
Assets under finance leases included in property, plant and equipment,
net
$
$
December 31,
2018
9,133
4,404
13,537
6,901
6,636
86
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The following table provides the details of cash flow information related to leases for the year ended December 31, 2019 (in
thousands):
Cash paid for amounts included in lease liabilities:
Operating cash flows from finance leases
Operating cash flows from operating leases
Financing cash flows from finance leases
Supplemental non-cash information:
Right-of-use assets obtained in exchange for new operating lease
liabilities
Right-of-use assets obtained in exchange for new finance lease
liabilities
Year Ended
December 31, 2019
$
$
$
$
$
430
7,768
868
7,723
9,209
Future minimum lease payments under operating and finance leases expiring subsequent to December 31, 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,
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: interest
Present value of lease liabilities
$
Operating Leases Finance Leases(1)
1,738
$
9,278
907
930
954
4,440
18,247
(14,265) (2,095)
16,152
6,157
6,485
5,451
4,762
4,420
26,141
53,416
39,151 $
$
(1)
Future minimum lease payments under finance leases include the exercise price of an
option to purchase a facility in Germany in 2021.
13. Common Shares and Share-Based Compensation
Capital Shares
The authorized capital of the Company consists of an unlimited number of common shares without nominal or par value.
Holders of common shares are entitled to one vote per share. Holders of common shares are entitled to receive dividends, if and
when declared by the Board of Directors, and to share ratably in the Company’s assets legally available for distribution to
shareholders in the event of liquidation. Holders of common shares have no redemption or conversion rights.
87
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Common Share Repurchases
The Company’s Board of Directors may approve share repurchase plans from time to time. Under these repurchase plans,
shares may be repurchased 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. Shares may also be repurchased through an
accelerated share 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 shares to be
repurchased when the Company would otherwise be prohibited from doing so under insider trading laws. While the share
repurchase plans are generally intended to offset dilution from equity awards granted to the Company’s employees and directors, the
plans do not obligate the Company to acquire any particular amount of common shares. No time limit is typically set for the
completion of the share repurchase plans, and the plans may be suspended or discontinued at any time. The Company expects to
fund share repurchases through cash on hand and cash generated from operations.
In October 2013, the Company’s Board of Directors approved a share repurchase plan (the “2013 Repurchase Plan”)
authorizing the repurchase of $10.0 million worth of common shares. During 2018, the Company repurchased 89 thousand shares in
the open market for an aggregate purchase price of $5.9 million at an average price of $65.43 per share. During 2017, the Company
repurchased 14 thousand shares in the open market for an aggregate purchase price of $0.4 million at an average price of $26.41 per
share. As of December 31, 2018, the Company had repurchased an aggregate of 385 thousand shares for an aggregate purchase
price of $10.0 million at an average price of $25.97 per share. As of December 31, 2018, the Company had completed the 2013
Repurchase Plan.
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 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 2019, the Company repurchased 119 thousand
shares for an aggregate purchase price of $10.0 million at an average price of $83.71 per share under the 2018 Repurchase Plan. The
Company had $15.0 million available for share repurchases under the 2018 Repurchase Plan as of December 31, 2019.
In February 2020, the Company’s Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”)
authorizing the repurchase of an additional $50.0 million worth of common shares. The Company expects that share repurchases
will be made under the 2020 Repurchase Plan after the 2018 Repurchase Plan is completed.
2010 Incentive Award Plan
In November 2010, the Company’s shareholders approved the 2010 Incentive Award Plan under which the Company may
grant share-based compensation awards to employees, consultants and directors. In May 2014, the Company’s shareholders
approved the amended and restated 2010 Incentive Award Plan and, in July 2016, the Company approved a further amended and
restated 2010 Incentive Award Plan (as amended, the “Amended and Restated 2010 Incentive Plan”). The maximum number of
shares which can be issued pursuant to the Amended and Restated 2010 Incentive Plan is 4,398,613, subject to adjustment as set
forth in the Amended and Restated 2010 Incentive Plan. The Amended and Restated 2010 Incentive Plan provides for the grant of
incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, deferred stock,
deferred stock units, dividend equivalents, performance awards and stock payments (collectively referred to as “Awards”). The
Amended and Restated 2010 Incentive Plan provides for specific limits on the number of shares with respect to Awards that may be
granted to any person during any calendar year and the amount of cash that can be paid with respect to Awards to any one person
during any calendar year. The Amended and Restated 2010 Incentive Plan will expire and no further Awards may be granted after
April 9, 2024. As of December 31, 2019, there were 840,889 shares available for future awards under the Amended and Restated
2010 Incentive Plan.
Shares subject to Awards that have expired, forfeited or settled in cash, or repurchased by the Company at the same price paid
by the awardee may be added back to the number of shares available for grant under the Amended and Restated 2010 Incentive Plan
and may be granted as new Awards. Notwithstanding the foregoing, the following shares will not be added back to the number of
shares available for grant: (a) shares that are used to pay the exercise price for an option, (b) shares tendered or withheld to pay
taxes with respect to any Award (other than options and stock appreciation rights) to the extent they exceed the number of shares
with a fair market value equal to the tax liability based on minimum withholding rates, (c) shares tendered or withheld to pay taxes
with respect to options and stock appreciation rights, (d) shares subject to a stock appreciation right that are not issued in connection
with the stock settlement of the stock appreciation right on exercise thereof, and (e) shares purchased on the open market with the
88
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
cash proceeds from the exercise of options. Shares issued to satisfy Awards under the Amended and Restated 2010 Incentive Plan
may be previously authorized but unissued shares, treasury shares or shares repurchased on the open market.
Share-Based Compensation Expense
The table below summarizes share-based compensation expense recorded in operating income (in thousands):
Selling, general and administrative
Research and development and engineering
Cost of revenue
Restructuring and acquisition related costs
Total share-based compensation expense
Year Ended December 31,
2018
2017
2019
$
$
8,361
497
482
—
9,340
$
$
6,997
438
211
68
7,714
$
$
5,065
221
207
—
5,493
The expense recorded during each of the years ended December 31, 2019, 2018 and 2017 included $0.9 million, $0.5 million
and $0.5 million, respectively, related to restricted stock units and deferred stock units granted to the members of the Company’s
Board of Directors pursuant to the Company’s Amended and Restated 2010 Incentive Plan.
As of December 31, 2019, the Company’s outstanding equity awards for which compensation expense will be recognized in
the future consisted of time-based restricted stock units and performance stock units granted under the Amended and Restated 2010
Incentive Plan. The Company expects to record an aggregate share-based compensation expense of $15.5 million, net of estimated
forfeitures, over a weighted average period of 1.12 years subsequent to December 31, 2019, for all outstanding equity awards as of
December 31, 2019.
Restricted Stock Units and Deferred Stock Units
The Company’s restricted stock units (“RSUs”) have generally been issued to employees with vesting periods ranging from
three years 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 actual experience.
Deferred stock units (“DSUs”) are granted to the members of the Company’s Board of Directors. The compensation expense
associated with the DSUs is recognized in full on the respective date of grant, as DSUs are fully vested and non-forfeitable upon
grant. There were 187 thousand and 179 thousand DSUs outstanding as of December 31, 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 during 2019 relating to restricted and deferred stock units issued and outstanding under
the Amended and Restated 2010 Incentive Plan:
Unvested at December 31, 2018
Granted
Vested
Forfeited
Unvested at December 31, 2019
Expected to vest as of December 31, 2019
Restricted
Weighted
and Deferred
Average Grant
Stock Units
Date Fair Value
(In thousands)
26.98
$
529
77.37
$
139
27.98
(172) $
49.20
(43) $
39.74
$
453
38.35
$
431
Weighted Average
Remaining Vesting
Period (in years)
Aggregate
Intrinsic
Value (1)
(In thousands)
1.38 years $
1.38 years $
40,057
38,079
(1)
The aggregate intrinsic value is calculated based on the fair value of $88.44 per share of the Company’s
common stock on December 31, 2019 due to the fact that the restricted stock units carry a $0 purchase price.
The total fair value of restricted stock units and deferred stock units that vested in 2019, based on the market price of the
underlying shares on the day of vesting, was $13.4 million.
89
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Performance Stock Units
The Company typically grants 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 a 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 the three-year performance period against the target 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 common 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 stock compared to the Russell 2000 Index over the 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 activities during 2019 relating to performance-based stock awards issued and outstanding under
the Company’s Amended and Restated 2010 Incentive Plan:
Unvested at December 31, 2018
Granted
Performance adjustment (3)
Vested
Forfeited
Unvested at December 31, 2019
Expected to vest as of December 31, 2019
Performance
Stock Units (1)
(in thousands)
137
47
29
(58)
(3)
152
269
Weighted
Average Grant
Date Fair Value
37.28
$
92.14
$
14.13
$
14.13
$
79.26
$
57.95
$
43.50
$
Weighted Average
Remaining Vesting
Period (in years)
Aggregate
Intrinsic
Value (2)
(in thousands)
0.92 years $
0.92 years $
13,477
23,769
(1)
(2)
(3)
The unvested PSUs are shown in this table at target, except for the number of shares vested, which reflects the
number of shares earned and expected to be issued. As of December 31, 2019, the maximum number of PSUs
available to be earned was approximately 305 thousand.
The aggregate intrinsic value is calculated based on the fair value of $88.44 per share of the Company’s common
stock on December 31, 2019 due to the fact that the performance stock units carry a $0 purchase price.
The amount shown represents performance adjustments for performance-based awards granted on March 30,
2016. These units vested at 200% during 2019 based on the achievement of cumulative Non-GAAP EPS during
the performance period of fiscal years 2016 through 2018.
90
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The total fair value of PSUs that vested in 2019, based on the market price of the underlying shares on the date of vesting, was
$5.0 million.
The fair value of the TSR-PSUs at the date of grant was estimated using the Monte-Carlo valuation model with the following
assumptions:
Grant-date stock price
Expected volatility
Risk-free interest rate
Expected annual dividend yield
Weighted average fair value
Year Ended December 31, 2019
$
$
77.23
32.54%
2.46%
—
108.58
Stock Options
On March 30, 2016, the Company granted 193 thousand stock options to certain members of the executive management team
to purchase common shares of the Company at a price equal to the closing market price of the Company’s common shares on the
date of grant. The stock options vested ratably on the anniversary date of the grant date over a three-year period and expire on the
tenth anniversary of the grant date. The fair value of these stock options was estimated using the Black-Scholes valuation model.
Key input assumptions used to estimate the fair value of stock options included the expected option term, the expected volatility of
the Company’s common stock over the expected term of the options, the risk-free interest rate, and the expected dividend yield. The
Company recognized the compensation expense of stock options on a straight-line basis in the consolidated statement of operations
over the vesting period. No stock options were granted during 2019.
The following table shows stock options that were outstanding, exercisable and expected to vest as of December 31, 2019 and
the related weighted average exercise price, weighted average remaining contractual term and aggregate intrinsic value:
Stock options outstanding
Stock options exercisable
Number of
Shares
(In thousands)
Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value (1)
(In
thousands)
73 $
73 $
14.13
14.13
6.25 $
6.25 $
5,407
5,407
(1)
The aggregate intrinsic value is calculated as the difference between the closing market price of $88.44 per
share of the Company’s common stock on December 31, 2019 and the exercise price of the stock options.
The total intrinsic value of stock options exercised in 2019, based on the difference between the 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. The Company did not record any income tax deductions from the stock options exercised in 2019 as these were non-
qualified stock options.
14. Employee Benefit Plans
Defined Contribution Plans
The Company has defined contribution employee retirement savings plans in the U.S., the U.K. and Japan. The Company
matches the contributions of participating employees on the basis of percentages specified in each plan. The Company’s matching
contributions to the plans were $4.4 million, $3.9 million and $3.1 million for the years ended December 31, 2019, 2018 and 2017,
respectively.
Defined Benefit Plan
The Company maintains a frozen defined benefit pension plan in the U.K. (the “U.K. Plan”). The U.K. Plan was closed to
new membership in 1997 and stopped accruing additional pension benefits for existing members in 2003. Benefits under the U.K.
91
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Plan were based on the participants’ years of service and compensation as of the date the plan was frozen in 2003, adjusted for
inflation. The Company continues to fund the plan in accordance with the pension regulations in the U.K.
The net periodic pension cost is included in other income (expense) in the consolidated statements of operations and consisted
of the following components (in thousands):
Components of the net periodic pension cost:
Interest cost
Expected return on plan assets
Amortization of actuarial losses
Amortization of prior service cost
Net periodic pension cost
Year Ended December 31,
2019
2018
2017
$
$
$
971
(1,671)
957
29
286 $
$
939
(1,717)
826
—
48 $
991
(1,665)
1,045
—
371
The actuarial assumptions used to compute the net periodic pension cost for the years ended December 31, 2019, 2018 and
2017, respectively, were as follows:
Weighted-average discount rate
Weighted-average long-term rate of return on plan assets
Year Ended December 31,
2019
2018
2017
2.7%
5.1%
2.4%
4.8%
2.6%
5.2%
The actuarial assumptions used to compute the benefit obligations as of December 31, 2019 and 2018, respectively, were as
follows:
Weighted-average discount rate
Rate of inflation
December 31,
2019
2018
1.9%
2.5%
2.7%
2.8%
92
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The discount rates used are derived from (AA) corporate bonds that have maturities approximating the terms of the pension
obligations under the U.K. Plan. In estimating the expected return on plan assets, the Company considered the historical
performance of the major asset classes held by the U.K. Plan and current forecasts of future rates of return for these asset classes.
The following table provides a reconciliation of benefit obligations and plan assets of the U.K. Plan (in thousands):
Change in benefit obligation:
Projected benefit obligation at beginning of year
Interest cost
Actuarial (gains) losses
Benefits paid
Prior service cost (1)
Foreign currency exchange rate changes
Projected benefit obligation at end of year
Accumulated benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Foreign currency exchange rate changes
Fair value of plan assets at end of year
Funded status at end of year
Amounts included in accumulated other comprehensive loss not yet recognized in net
periodic pension cost:
Net actuarial losses at beginning of year
Net actuarial gains (losses) during the year
Prior service cost arising during the year (1)
Amounts reclassified from accumulated other comprehensive income to income before
income taxes
Foreign currency exchange rate changes
Net actuarial losses
Amounts expected to be amortized from accumulated other comprehensive loss into net
periodic pension cost over the next fiscal year consists of:
Net actuarial losses
Prior service cost
December 31,
2019
2018
36,882 $
971
3,005
(1,696)
—
1,294
40,456 $
40,456 $
33,124 $
5,410
894
(1,696)
1,251
38,983 $
(1,473) $
40,329
939
(1,718)
(1,301)
754
(2,121)
36,882
36,882
36,476
(1,083)
941
(1,301)
(1,909)
33,124
(3,758)
(11,120) $
734
—
(10,493)
(1,083)
(754)
986
(306)
(9,706) $
826
384
(11,120)
706 $
30
959
29
$
$
$
$
$
$
$
$
$
(1) On October 26, 2018, the High Court of Justice in the U.K. ruled that the Guaranteed Minimum Pensions
(“GMPs”) provided by pension schemes need to equalize lifetime GMP benefits between genders. In order to
meet the requirements set out by the High Court, the Company recorded an estimate of $0.8 million additional
benefit obligations based on the existing plan participants, the date the U.K. Plan was allowed to stop accruing
additional benefits, the pension plan rules and the approach taken to equalize the benefits. The additional benefit
obligations will be amortized and recognized as part of net periodic pension cost in the consolidated statement of
operations over the average remaining life expectancy of the plan participants.
93
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The funded status of the U.K. Plan is included in other long term liabilities in the accompanying consolidated balance sheets.
The following table reflects the total expected benefit payments to plan participants and have been estimated based on the
same assumptions used to measure the Company’s benefit obligations as of December 31, 2019 (in thousands):
2020
2021
2022
2023
2024
2025-2026
Total
Amount
1,104
1,181
1,038
1,137
1,502
8,612
14,574
$
$
In the U.K., funding valuations are conducted every three years in order to determine the future level of contributions. Based
on the results of the most recent valuation, the Company’s annual contributions will be approximately $1.0 million in 2020 and will
increase by 2.9% per year thereafter.
Fair Value of Plan Assets
The trustees of the U.K. Plan have the fiduciary responsibilities to manage the plan assets in consultation with the Company.
The overall objective is to invest plan assets in a portfolio of diversified assets, primarily through the use of institutional collective
funds, to achieve balanced growth through a combination of investments in equities for long-term growth and investments in debt
instruments that match a portion of the expected future benefit payments and to maintain adequate liquidity to make pension
payments to pensioners.
The following table summarizes the fair values of Plan assets by asset category as of December 31, 2019 (in thousands):
Asset Category
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant Other
Unobservable
Inputs
(Level 3)
Not
Subject to
Leveling
Mutual Funds:
Balanced (1)
Fixed income (2)
Cash
Total
$
$
28,831 $
10,042
110
38,983 $
— $
—
110
110 $
— $
—
—
— $
— $
—
—
— $
28,831
10,042
—
38,873
(1)
(2)
This class comprises a diversified portfolio of global investments which seeks a balanced return between capital
growth and fixed income and is allocated on a weighted average basis as follows: equities (32%), bonds (42%),
other assets (19%) and cash (7%).
This class comprises a diversified portfolio of global investments which seeks fixed income growth and is
allocated on a weighted average basis as follows: bonds (92%), other assets (5%) and cash (3%).
94
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
The following table summarizes the fair values of Plan assets by asset category as of December 31, 2018 (in thousands):
Asset Category
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant Other
Unobservable
Inputs
(Level 3)
Not
Subject to
Leveling
Mutual Funds:
Balanced (1)
Fixed income (2)
Cash
Total
$ 24,564 $
8,451
109
$ 33,124 $
— $
—
109
109 $
— $
—
—
— $
— $
—
—
— $
24,564
8,451
—
33,015
(1)
(2)
This class comprises a diversified portfolio of global investments which seeks a balanced return between capital
growth and fixed income and is allocated on a weighted average basis as follows: equities (42%), bonds (19%),
other assets (38%) and cash (1%).
This class comprises a diversified portfolio of global investments which seeks long-term capital growth and is
allocated on a weighted average basis as follows: bonds (86%) and cash (14%).
15. Income Taxes
Components of the Company’s income (loss) before income taxes are as follows (in thousands):
Income (loss) before income taxes:
Canada
U.S.
Other
Total
Year Ended December 31,
2019
2018
2017
$
$
78 $
25,577
20,111
45,766 $
(796) $
39,356
22,742
61,302 $
(2,036)
37,327
40,843
76,134
Components of the Company’s income tax provision (benefit) are as follows (in thousands):
Current
Canada
U.S.
Other
Deferred
Canada
U.S.
Other
Total
Year Ended December 31,
2019
2018
2017
$
$
100 $
1,109
8,116
9,325
—
703
(5,035)
(4,332)
4,993 $
75 $
8,095
8,113
16,283
—
(2,272)
(3,804)
(6,076)
10,207 $
146
9,434
6,807
16,387
—
2,396
(4,956)
(2,560)
13,827
The Company is incorporated in Canada and therefore uses the Canadian statutory rate for income tax disclosure. The
reconciliation of the statutory Canadian tax rate to the effective tax rate related to income before income taxes is as follows (in
thousands, except percentage data):
95
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Statutory Canadian tax rate
Expected income tax provision at Canadian statutory tax
rate
International tax rate differences
U.S. state income taxes, net of federal benefits
Withholding and other taxes
Permanent differences and other
Section 199 deduction
Foreign-derived intangible income
Tax credits
Statutory tax rate changes
Uncertain tax positions
Change in valuation allowance
Acquisition contingent consideration adjustments
Transaction costs
Provision to return differences
Windfall benefit from share-based compensation
Gain on Laser Quantum acquisition
U.K. patent box
Reported income tax provision
Effective tax rate
$
$
Year Ended December 31,
2019
2018
2017
29.00%
29.00%
29.00%
13,272
$
(3,346)
386
364
443
—
(787)
(1,457)
35
310
(482)
287
247
(516)
(1,717)
—
(2,046)
$
4,993
10.9%
17,778
$
(4,474)
831
550
1,015
—
(1,628)
(1,250)
(285)
190
(262)
833
172
(385)
(931)
—
(1,947)
$
10,207
16.7%
22,079
(2,038)
674
484
1,582
(1,148)
—
(984)
2,823
(1,607)
(354)
149
1,011
225
(837)
(6,586)
(1,646)
13,827
18.2%
Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items
and operating loss and tax credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s
deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows (in thousands):
Deferred tax assets:
Losses
Operating lease liabilities
Compensation related deductions
Inventories
Tax credits
Restructuring related liabilities
Warranty
Other
Total deferred tax assets
Valuation allowance on deferred tax assets
Net deferred tax assets
Deferred tax liabilities:
Depreciation
Amortization
Unrealized currency gains/losses
Operating lease right-of-use assets
Total deferred tax liabilities
Net deferred income tax assets (liabilities)
96
December 31,
2019
2018
$
$
$
$
$
9,484 $
8,386
3,932
4,543
2,785
324
772
146
30,372
(12,302)
18,070 $
(1,338) $
(26,310)
(194)
(8,014)
(35,856) $
(17,786) $
9,385
—
4,780
4,170
2,785
202
35
885
22,242
(12,884)
9,358
(1,867)
(20,258)
(373)
—
(22,498)
(13,140)
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
In determining its income tax provisions, the Company calculated deferred tax assets and liabilities for each separate
jurisdiction. The Company then considered a number of factors, including positive and negative evidence related to the realization
of its deferred tax assets, to determine whether a valuation allowance should be recognized with respect to its deferred tax assets.
In 2019, the Company utilized valuation allowance of $0.5 million recorded on net operating losses and other timing items in
certain tax jurisdictions due to taxable income generated in the current year. In 2018, the Company recorded an additional $0.4
million valuation allowance associated with an increase in deferred tax assets in Canada. In 2018, the Company utilized valuation
allowance of $0.3 million recorded on net operating losses and other timing items in certain tax jurisdictions due to taxable income
generated during the year.
Valuation allowance continues to be provided on the remaining balances of certain U.S. state net operating losses and certain
foreign tax attributes that the Company has determined that it is more likely than not that they will not be realized. In conjunction
with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the
possibility of releasing the valuation allowance currently in place on its deferred tax assets.
As of December 31, 2019, the Company had net operating loss carryforwards of $3.8 million (tax effected) available to reduce
future taxable income. Of this amount, approximately $0.3 million relates to the U.S. and expires through 2037; and $3.5 million
relates to Canada and expires starting in 2033. In addition, the Company had capital loss carryforwards of $5.7 million, which had a
full valuation allowance. Of this amount, $5.2 million and $0.5 million related to Canada and the U.K, respectively.
As of December 31, 2018, the Company had net operating loss carryforwards of $3.7 million (tax effected) available to reduce
future taxable income. Of this amount, approximately $0.7 million relates to the U.S. and expires through 2037; and $3.0 million
relates to Canada and expires starting in 2033. In addition, the Company had capital loss carryforwards of $5.7 million, which had a
full valuation allowance. Of this amount, $5.2 million and $0.5 million related to Canada and the U.K, respectively.
As of December 31, 2019, the Company had tax credit carryforwards of approximately $2.8 million available to reduce
income taxes in future years. Approximately $0.9 million relates to the U.S. state tax credits, of which $0.8 million will expire
through 2034 and $0.1 million can be carried forward indefinitely. The remaining $1.9 million tax credit carryforwards were related
to Canada, of which $1.2 million expires through 2022 and $0.7 million can be carried forward indefinitely.
As of December 31, 2018, the Company had tax credit carryforwards of approximately $2.8 million available to reduce
income taxes in future years. Approximately $0.9 million relates to the U.S. state tax credits, of which $0.8 million will expire
through 2033 and $0.1 million can be carried forward indefinitely. The remaining $1.9 million tax credit carryforwards were related
to Canada, of which $1.2 million expires through 2022 and $0.7 million can be carried forward indefinitely.
Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes
over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon
a repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The amount of undistributed earnings of foreign
subsidiaries totaled $168.4 million as of December 31, 2019. The estimated unrecognized income tax and foreign withholding tax
liability on this temporary difference is approximately $0.2 million.
As of December 31, 2019, the Company’s total amount of gross unrecognized tax benefits was $4.9 million, of which $4.8
million would favorably affect the effective tax rate if benefited. Over the next twelve months, the Company may need to record up
to $0.5 million of previously unrecognized tax benefits due to statute of limitations closures. The Company believes there are no
jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial
position or cash flows. Furthermore, the Company believes that it has adequately provided for all significant income tax
uncertainties.
97
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
As of December 31, 2018, the Company’s total amount of gross unrecognized tax benefits was $4.7 million, of which $3.6
million would favorably affect the effective tax rate if benefited.
The reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):
Balance at December 31, 2016
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions to tax positions of prior years
Reductions to tax positions resulting from a lapse of the applicable
statute of limitations
Settlements with tax authorities
Balance at December 31, 2017
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions to tax positions of prior years
Reductions to tax positions resulting from a lapse of the applicable
statute of limitations
Settlements with tax authorities
Balance at December 31, 2018
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions to tax positions of prior years
Reductions to tax positions resulting from a lapse of the applicable
statute of limitations
Settlements with tax authorities
Balance at December 31, 2019
$
$
4,962
991
496
(28)
(1,577)
(755)
4,089
394
655
(69)
(239)
(105)
4,725
727
5
(31)
(497)
—
4,929
The Company recognizes interest and penalties related to uncertain tax positions in income tax provision. As of December
31, 2019 and 2018, the Company had approximately $0.5 million and $0.5 million, respectively, of accrued interest and penalties
related to uncertain tax positions. During the years ended December 31, 2019, 2018 and 2017, the Company recognized less than
$0.1 million of expense for an increase in interest and penalties related to uncertain tax positions.
The Company files income tax returns in Canada, the U.S., and various foreign jurisdictions. Generally, the Company is no
longer subject to U.S. or foreign income tax examinations, including transfer pricing tax audits, by tax authorities for the years
before 2010.
The Company’s income tax returns may be reviewed by tax authorities in the following countries for the following periods
under the appropriate statute of limitations:
United States
Canada
United Kingdom
Germany
The Netherlands
China
Japan
2016 - Present
2016 - Present
2018 - Present
2015 - Present
2013 - Present
2010 - Present
2014 - Present
98
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
16. Restructuring and Acquisition Related Costs
The following table summarizes restructuring and acquisition related costs recorded in the accompanying consolidated
statements of operations (in thousands):
2019
Year Ended December 31,
2018
2017
2019 restructuring
2018 restructuring
2016 restructuring
2011 restructuring
Total restructuring related charges
Acquisition and related charges
Total restructuring and acquisition related costs
$
$
$
7,463 $
1,177
—
—
8,640
7,934
16,574
$
$
378 $
1,647
—
—
2,025
6,016
8,041
$
$
—
—
332
14
346
7,196
7,542
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. In 2019, the Company recorded $3.8 million in severance
and related costs, $2.6 million in impairment of operating lease right-of-use assets and $1.1 million in impairment of long-lived
assets in connection with the 2019 restructuring plan. The Company anticipates completing the 2019 restructuring program in the
first quarter of 2020 and expects to incur additional restructuring charges of $0.1 million to $0.2 million related to the 2019
restructuring program in the next twelve months.
The following table summarizes restructuring costs associated with the 2019 restructuring program by reportable segment (in
thousands):
Year Ended
December 31, 2019
December 31, 2018
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared
Services
Total
$
$
4,983 $
1,422
590
468
7,463 $
Cumulative Costs as of
December 31, 2019
4,983
1,746
590
522
7,841
— $
324
—
54
378 $
99
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
2018 Restructuring
During the second quarter of 2018, the Company initiated a program to integrate manufacturing operations as a result of
acquisition activities. In 2019, the Company recorded $1.2 million in severance and related costs in connection with the 2018
restructuring plan. The Company anticipates completing the 2018 restructuring program during the first quarter of 2020 and expects
to incur additional restructuring charges of $0.1 million to $0.2 million related to the 2018 restructuring program.
The following table summarizes restructuring costs associated with the 2018 restructuring program by reportable segment (in
thousands):
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared
Services
Total
$
$
Year Ended
December 31, 2019
December 31, 2018
— $
1,177
—
—
1,177 $
— $
1,579
—
68
1,647 $
Cumulative Costs as of
December 31, 2019
—
2,756
—
68
2,824
2016 Restructuring
During the third quarter of 2015, the Company initiated the 2016 restructuring program, which included consolidating certain
manufacturing operations to optimize facility footprint and better utilize resources, and reducing redundant costs due to productivity
cost savings and business volume reductions. As of December 31, 2017, the Company incurred cumulative costs related to this
restructuring plan totaling $6.5 million, net of the gain on the sale of the Chatsworth, California facility. The plan was completed in
2017.
The following table summarizes restructuring costs associated with the 2016 restructuring program by reportable segment (in
thousands):
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
$
$
Year Ended
December 31, 2017
Cumulative Costs as of
December 31, 2017
— $
331
—
1
332 $
868
4,393
939
329
6,529
100
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Rollforward of Accrued Expenses Related to Restructuring
The following table summarizes the accrual activities, by component, related to the Company’s restructuring charges recorded
in the accompanying consolidated balance sheets (in thousands):
Total
Severance
Facility
Other (1)
Balance at December 31, 2017
$
806
$
39
$
763
$
Restructuring charges
Cash payments
Non-cash write-offs and other adjustments
Balance at December 31, 2018
Restructuring charges
Cash payments
Reclassification of reserves (2)
Non-cash write-offs and other adjustments (3)
Balance at December 31, 2019
2,025
(1,490)
(65)
1,276
8,640
(3,507)
(388)
(3,948)
2,073
$
1,862
(962)
(63)
876
4,065
(2,803)
—
(150)
1,988
$
—
(373)
(2)
388
3,798
—
(388)
(3,798)
—
$
$
4
163
(155)
—
12
777
(704)
—
—
85
(1) Other restructuring charges mainly related to consulting fees and relocation costs.
(2) Accruals related to facilities exited prior to January 1, 2019 were reclassified to operating lease liabilities upon adoption of
ASU 2016-02.
(3) Non-cash write-offs included impairment of operating lease right-of-use assets amounting to $2.6 million associated with the
cessation of use of certain leased facilities.
The Company expects to make $2.0 million in cash payments related to these restructuring plans during the twelve months
ending December 31, 2020.
Acquisition and Related Charges
Acquisition related costs incurred in connection with business combinations, primarily including finders’ fees, legal, valuation
and other professional or consulting fees, totaled $5.3 million, $1.4 million, and $6.8 million during 2019, 2018, and 2017,
respectively. Acquisition related costs recognized under earn-out agreements in connection with acquisitions totaled $2.6 million,
$4.6 million, and $0.4 million during 2019, 2018, and 2017, respectively. The majority of acquisition related costs for 2019 were
included in the Company’s Precision Motion and Unallocated Corporate and Shared Services reportable segments.
17. Commitments and Contingencies
Purchase Commitments
As of December 31, 2019, the Company had purchase commitments primarily for inventory purchases of $75.8 million. These
purchase commitments are expected to be incurred as follows: $74.2 million in 2020, $0.8 million in 2021 and $0.8 million in 2022.
Legal Proceedings
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 litigation and may revise its estimates. The Company does not
believe that the outcome of these claims will have a material adverse effect upon 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 upon its consolidated financial
statements.
101
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
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 he or she is 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.
On July 1, 2013, the Company provided a Guarantee (the “Guarantee”) in favor of the trustees of the U.K. Plan with respect
to all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally and in any
capacity whatsoever) of Novanta Technologies UK Limited, a wholly owned subsidiary of Novanta Inc.
Credit Risks and Other Uncertainties
The Company maintains financial instruments such as cash and cash equivalents and trade receivables. From time to time,
certain of these instruments may subject the Company to concentrations of credit risk whereby one institution may hold a significant
portion of the cash and cash equivalents, or one customer may represent a large portion of the accounts receivable balances.
There was no significant concentration of credit risk related to the Company’s position in trade accounts receivable as no
individual customer represented 10% or more of the Company’s outstanding accounts receivable at December 31, 2019 and 2018.
Credit risk with respect to trade accounts receivables is generally minimized because of the diversification of the Company’s
operations, as well as its large customer base and its geographic dispersion.
Certain of the components and materials included in the Company’s products are currently obtained from single source
suppliers. There can be no assurance that a disruption of the supply of such components and materials would not create substantial
manufacturing delays and additional cost to the Company.
The Company’s operations involve a number of other risks and uncertainties including, but not limited to, the effects of
general economic conditions, rapidly changing technologies, and international operations.
18. 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 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 and $40.0 million in the three months ended March 29, 2019
and the twelve months ended December 31, 2018, respectively. There was $0.6 million in accounts receivable due from these
customers as of December 31, 2018. There were no material transactions with related parties in 2017.
19. 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
102
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
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 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, solid state laser, 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, recorder 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
The Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion
control sub-assemblies, servo drives, air bearings, and air bearing spindles 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, operating income (loss), depreciation and amortization expenses, accounts receivable and inventories
by reportable segments were as follows (in thousands):
Revenue
Photonics
Vision
Precision Motion
Total
Gross Profit
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
103
Year Ended December 31,
2018
2017
2019
230,457
271,407
124,235
626,099
$
$
249,339
232,902
132,096
614,337
$
$
232,359
183,074
105,857
521,290
Year Ended December 31,
2018
2017
2019
105,845
105,228
53,326
(2,314)
262,085
$
$
117,109
87,198
59,477
(2,256)
261,528
$
$
106,117
69,249
46,564
(1,399)
220,531
$
$
$
$
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Operating Income (Loss)
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
Depreciation and Amortization Expenses
Photonics
Vision
Precision Motion
Unallocated Corporate and Shared Services
Total
Accounts Receivable
Photonics
Vision
Precision Motion
Total accounts receivable
Inventories
Photonics
Vision
Precision Motion
Total inventories
Total segment assets
Total Assets
Total segment assets
Cash and cash equivalents
Prepaid income taxes and income taxes receivable
Prepaid expenses and other current assets
Property, plant and equipment, net
Operating lease assets
Deferred tax assets
Other assets
Intangible assets, net
Goodwill
Total
$
$
$
$
$
$
$
$
$
Year Ended December 31,
2018
2017
2019
41,990
21,007
22,339
(30,054)
55,282
$
$
59,285
8,991
31,674
(28,937)
71,013
$
$
51,660
7,883
27,146
(29,123)
57,566
Year Ended December 31,
2018
2017
2019
12,139
21,161
4,712
268
38,280
$
$
12,042
20,657
3,627
726
37,052
$
$
13,806
13,590
2,308
1,054
30,758
December 31,
2019
2018
31,046 $
43,941
16,091
91,078 $
45,227 $
50,074
21,317
116,618 $
207,696 $
31,536
34,414
18,005
83,955
41,623
42,498
20,643
104,764
188,719
December 31,
2019
2018
$
$
207,696 $
78,944
5,905
11,967
77,556
35,180
8,890
2,713
166,175
274,710
869,736 $
188,719
82,043
1,852
9,155
65,464
—
9,492
2,269
142,920
217,662
719,576
104
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AS OF DECEMBER 31, 2019
Geographic Information
The Company aggregates geographic revenue based on the customer location where products are shipped. Revenue from
these customers is summarized as follows (in thousands, except percentage data):
United States
Germany
Rest of Europe
China
Rest of Asia-Pacific
Other
Total
2019
Year Ended December 31,
2018
2017
Revenue
% of Total
Revenue
% of Total
Revenue
% of Total
$
$
254,279
82,032
129,643
59,512
89,588
11,045
626,099
40.6% $
13.1
20.7
9.5
14.3
1.8
100.0% $
242,243
88,027
105,608
66,414
104,300
7,745
614,337
39.4% $
14.3
17.2
10.8
17.0
1.3
100.0% $
220,583
68,003
81,001
56,128
84,727
10,848
521,290
42.3%
13.0
15.5
10.8
16.3
2.1
100.0%
Long-lived assets consist of property, plant and equipment, net, and are aggregated based on the location of the assets. A
summary of these long-lived assets is as follows (in thousands):
United States
Germany
Rest of Europe
China
Rest of Asia-Pacific
Total
December 31,
2019
2018
$
$
28,750 $
32,376
14,303
2,029
98
77,556 $
32,029
17,777
13,919
1,636
103
65,464
Revenue by End Market
The Company primarily operates in two end markets: the medical market and the advanced industrial market. Revenue by end
market was approximately as follows:
Medical
Advanced Industrial
Total
Year Ended December 31,
2019
2018
2017
55%
45%
100%
50%
50%
100%
50%
50%
100%
The majority of the revenue from the Photonics and Precision Motion segments is generated from sales to customers in the
advanced industrial market. The majority of the revenue from the Vision segment is generated from sales to customers in the
medical market.
Significant Customers
No customer accounted for greater than 10% of the Company’s revenue during the years ended December 31, 2019, 2018 or
2017.
105
Supplementary Information
(Unaudited)
The Company’s interim financial statements are prepared on a quarterly basis 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.
The following tables reflect the Company’s unaudited condensed consolidated statements of operations for each of the quarterly
periods in 2019 and 2018 (in thousands except per share data):
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development and engineering
Selling, general and administrative
Amortization of purchased intangible assets
Restructuring and acquisition related costs
Total operating expenses
Operating income
Interest income (expense), foreign exchange transaction
gains (losses) and other income (expense), net
Income before income taxes
Income tax provision
Consolidated net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Novanta Inc.
Earnings per common share attributable to Novanta Inc.
Basic
Diluted
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development and engineering
Selling, general and administrative
Amortization of purchased intangible assets
Restructuring and acquisition related costs
Total operating expenses
Operating income
Interest income (expense), foreign exchange transaction
gains (losses) and other income (expense), net
Income before income taxes
Income tax provision
Consolidated net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Novanta Inc.
Earnings per common share attributable to Novanta Inc.
Basic
Diluted
Three Months Ended
December 31,
September 27,
June 28,
March 29,
$
2019
159,702 $
93,742
65,960
2019
154,066 $
90,012
64,054
2019
155,145 $
89,363
65,782
2019
157,186
90,897
66,289
14,769
29,430
4,117
4,661
52,977
12,983
(3,428)
9,555
338
9,217
—
9,217 $
13,811
27,926
3,970
5,546
51,253
12,801
(1,814)
10,987
2,064
8,923
—
8,923 $
13,388
29,204
3,772
4,313
50,677
15,105
(2,203)
12,902
2,522
10,380
—
10,380 $
13,997
31,847
3,998
2,054
51,896
14,393
(2,071)
12,322
69
12,253
—
12,253
0.26 $
0.26 $
0.25 $
0.25 $
0.30 $
0.29 $
0.35
0.35
$
$
$
Three Months Ended
December 31,
September 28,
June 29,
March 30,
$
2018
156,178 $
91,672
64,506
2018
160,794 $
91,160
69,634
2018
150,400 $
85,171
65,229
2018
146,965
84,806
62,159
13,280
28,302
4,012
3,236
48,830
15,676
(2,101)
13,575
1,931
11,644
—
11,644 $
13,204
29,147
3,947
2,341
48,639
20,995
(2,374)
18,621
3,632
14,989
(435)
14,554 $
12,551
29,231
3,893
2,439
48,114
17,115
(2,430)
14,685
3,060
11,625
(625)
11,000 $
11,989
29,220
3,698
25
44,932
17,227
(2,806)
14,421
1,584
12,837
(926)
11,911
0.33 $
0.33 $
0.61 $
0.60 $
0.32 $
0.32 $
0.19
0.18
$
$
$
106
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The required certifications of our Chief Executive Officer and Chief Financial Officer are included in Exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our
disclosure controls and procedures, management’s report on internal control over financial reporting and changes in internal control
over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this Item 9A for a
more complete understanding of the matters covered by the certifications.
Evaluation of Disclosure Controls and Procedures as of December 31, 2019
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Changes in Internal Control Over Financial Reporting
There has been no change to our internal control over financial reporting during the fiscal quarter ended December 31, 2019 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance
with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
(cid:129)
(cid:129)
(cid:129)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making
their assessment, our management utilized the criteria set forth in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on our evaluation under the framework in
Internal Control—Integrated Framework, issued by COSO in 2013, our management concluded that our internal control over
financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is contained in Item 8
of this Annual Report on Form 10-K.
Item 9B. Other Information
None.
107
Certain information required by Part III is omitted from this Annual Report on Form 10-K and is incorporated herein by
reference to the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
All of the Company’s directors, officers and employees must act in accordance with the Code of Ethics and Business Conduct,
which has been adopted by the Company’s Board of Directors. A copy of the Code of Ethics and Business Conduct is available on the
Company’s website at https://www.novanta.com in the “About Us” section. (This website address is not intended to function as a
hyperlink, and the information contained in our website is not intended to be a part of this filing). The Company will provide to any
person without charge, upon request, a copy of the Code of Ethics and Business Conduct. Such a request should be made in writing
and addressed to Novanta Inc., Attention: Investor Relations, 125 Middlesex Turnpike, Bedford, MA 01730, United States. The
Company intends to satisfy the disclosure requirement under Nasdaq rules regarding waivers or under Item 5.05 of Form 8-K
regarding disclosure of an amendment to, or waiver from, a provision of this Code of Ethics and Business Conduct with respect to its
principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar
functions, by posting such information on the Company’s website at https://www.novanta.com in the “About Us” section, unless a
Form 8-K is otherwise required by law or applicable listing rules.
The remainder of the response to this item is contained in the Proxy Statement for the Company’s Annual Meeting of
Shareholders scheduled to be held on May 14, 2020 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required to be disclosed by this item is contained in the Proxy Statement for the Company’s Annual Meeting of
Shareholders scheduled to be held on May 14, 2020 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required to be disclosed by this item is contained in the Proxy Statement for the Company’s Annual Meeting of
Shareholders scheduled to be held on May 14, 2020 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be disclosed by this item is contained in the Proxy Statement for the Company’s Annual Meeting of
Shareholders scheduled to be held on May 14, 2020 and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required to be disclosed by this item is contained in the Proxy Statement for the Company’s Annual Meeting of
Shareholders scheduled to be held on May 14, 2020 and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
1. List of Financial Statements
PART IV
The financial statements required by this item are listed in Item 8, “Financial Statements and Supplementary Data” herein.
2. List of Financial Statement Schedules
All schedules are omitted because they are not applicable or not required or the required information is shown in the
consolidated financial statements or notes thereto.
108
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
3. List of Exhibits
Exhibit
Number
Exhibit Description
Securities Purchase Agreement dated January 15, 2013, between
NDSSI Holdings, LLC, NDS Surgical Imaging, Inc., GSI Group
Inc. and GSI Group Limited UK
Equity Purchase Agreement dated February 18, 2014, between
JADAK, LLC, JADAK Technologies, Inc., Advanced Data
Capture Corporation, GSI Group Inc. and GSI Group Corporation
Asset and Equity Purchase Agreement, dated June 24, 2014, by
and among GSI Group Inc., Excel Technology, Inc., Continuum
Electro-Optics, Inc., GSI Europe GmbH, GSI Group France
S.A.S., GSI Group Japan Corporation and Amplitude Laser, Inc.
and Amplitude Technologies, S.A. (The registrant hereby agrees
to furnish a copy of any omitted schedule to the Commission
upon request.)
Incorporated by Reference
Form File No.
Exhibit
Filing Date
Filed/
Furnished
Herewith
8-K
001-35083
2.1 1/15/2013
8-K
001-35083
10.1
2/18/2014
8-K
001-35083
2.1
7/21/2014
Purchase Agreement, dated April 15, 2015, by and among GSI
Group Limited, GSI Group Corporation, GSI Group Europe
GmbH, GSI Group Japan Corporation, GSI Group Precision
Technologies (Suzhou) Co., LTD., GSI Group Inc., JKL Newco
Limited, and SPI Lasers UK Limited, SPI Lasers LLC, SPI
Lasers (Shanghai) Co., Ltd. and Trumpf Corporation. (The
registrant hereby agrees to furnish a copy of any omitted schedule
to the Commission upon request.)
8-K
001-35083
10.1
4/20/2015
Agreement on the Sale and Transfer of all Shares in W.O.M.
World of Medicine GmbH, dated June 6, 2017, between Novanta
Europe GmbH, Novanta Inc., and Aton GmbH
8-K
001-35083
2.1
6/9/2017
Certificate and Articles of Continuance of the Registrant, dated
March 22, 1999
S-3
333-202597
3.1
3/9/2015
By-Laws of the Registrant, as amended
10-Q
000-25705
3.2
4/13/2010
Articles of Reorganization of the Registrant, dated July 23, 2010 8-K
000-25705
3.1
7/23/2010
Articles of Amendment of the Registrant, dated December 29,
2010
S-3
333-202597
3.2
3/9/2015
Articles of Amendment of the Registrant, dated May 11, 2016
8-K
001-35083
10.1
5/12/2016
Specimen Stock Certificate
10-K
001-35083
4.1
2/28/2018
Form of Indenture, between the Registrant and Wilmington Trust,
National Association
S-3
333-229912
4.3
2/27/2019
Description of Common Shares
*
10.1†
Novanta Inc. 2010 Incentive Award Plan (Amended and Restated
Effective July 27, 2016)
10-Q
001-35083
10.1 08/02/2016
10.2†
Form of Deferred Stock Unit Award Agreement
10-K
001-35083
10.59
3/30/2011
10.3†
Restricted Stock Unit Inducement Award Grant Notice
S-8
333-194557
99.1
3/14/2014
10.4†
Form of Stock Option Grant Notice and Stock Option Agreement 10-Q
001-35083
10.2
8/2/2016
10.5†
Form of U.S. Restricted Stock Unit Award Agreement
10-Q
001-35083
10.2
5/16/2011
109
10.6†
10.7
10.8†
10.9†
10.10
10.11
10.12†
10.13†
10.14†
Offer Letter, dated June 8, 2011, between GSI Group Inc. and
Peter Chang
10-Q
001-35083
10.1 11/10/2011
Amended and Restated Lease, dated May 1, 2012, by and
between GSI Group Inc. and 125 Middlesex Turnpike, LLC
Form of Performance Stock Unit Award Grant Notice and
Performance Stock Unit Award Agreement
8-K
001-35083
10.1
5/4/2012
10-Q
001-35083
10.3
8/2/2016
Severance Agreement, dated as of August 15, 2012, between GSI
Group Inc. and Peter Chang
10-Q
001-35083
10.7
11/7/2012
Third Amended and Restated Credit Agreement, dated as of
December 31, 2019, by and among Novanta Corporation,
Novanta Inc., Novanta UK Investments Holding Limited,
Novanta Europe GmbH, Bank of America, N.A., as
Administrative Agent, Swing Line Lender, L/C Issuer and lender,
BofA Securities, Inc., as Joint Lead Arranger, JP Morgan Chase
Bank, N.A., as Joint Lead Arranger, Co-Syndication Agent and
lender, Wells Fargo Securities LLC, as Joint Lead Arranger,
Wells Fargo Bank, National Association, as Co-Syndication
Agent and lender, Silicon Valley Bank, as Co-Documentation
Agent and lender, TD Bank, N.A., as Co-Documentation Agent
and lender, Bank of Montreal, as Co-Documentation Agent and
lender, and HSBC Bank USA, N.A and HSBC Bank UK., as
lenders
8-K
001-35083
10.1
1/3/2020
Lease Agreement, dated as of May 31, 2013, by and between
JADAK, LLC and Hancock Part Development, LLC
10-Q
001-35083
10.3
5/6/2014
Amended and Restated Employment Agreement, dated April 21,
2017, between Novanta Inc. and Matthijs Glastra
8-K
001-35083
10.1 4/24/2017
Amended and Restated Employment Agreement, dated April 21,
2017, between Novanta Inc. and Robert Buckley
8-K
001-35083
10.2 4/24/2017
Employment Agreement, dated April 21, 2017, between Novanta
Inc. and Brian Young
8-K
001-35083
10.3 4/24/2017
10.15†
Form of New Restricted Stock Unit Award Agreement
10-Q
001-35083
10.1
5/8/2017
10.16†
10.17†
10.18†
10.19
Form of New Performance Stock Unit Award Grant Notice and
Performance Stock Unit Award Agreement
10-Q
001-35083
10.2
5/8/2017
Form of Indemnification Agreement, by and between Novanta
Inc. and certain officers and directors
10-Q 001-35083
10.2
11/1/2017
Form of Indemnification Agreement, by and between Novanta
Corporation and certain officers and directors
10-Q 001-35083
10.3
11/1/2017
First Amendment, dated May 7, 2018, to Amended and Restated
Lease (dated as of May 1, 2012) by and between Novanta
Corporation and 125 Middlesex Turnpike, LLC
10-Q
001-35083
10.2
5/8/2018
10.20†
Novanta Inc. Non-Employee Director Compensation Policy
10-Q
001-35083
10.1 11/6/2018
10.21†
Form of Director Restricted Stock Unit Award Grant Notice and
Restricted Stock Unit Award Agreement
10-Q
001-35083
10.2 11/6/2018
21.1
23.1
31.1
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Chief Executive Officer Certifications pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
110
*
*
*
31.2
32.1
32.2
Chief Financial Officer Certifications pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
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
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).
This exhibit constitutes a management contract, compensatory plan, or arrangement.
Filed herewith
Furnished herewith
Item 16. Form 10-K Summary
None.
*
*
*
*
*
*
111
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 26, 2020
Novanta Inc.
By: /s/ Matthijs Glastra
Matthijs Glastra
Chief Executive Officer
112
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Novanta Inc. (Registrant)
Name
Title
Date
/s/ Matthijs Glastra
Matthijs Glastra
/s/ Robert J. Buckley
Robert J. Buckley
/s/ Peter L. Chang
Peter L. Chang
/s/ Stephen W. Bershad
Stephen W. Bershad
/s/ Brian D. King
Brian D. King
/s/ Ira J. Lamel
Ira J. Lamel
/s/ Dominic A. Romeo
Dominic A. Romeo
/s/ Thomas N. Secor
Thomas N. Secor
/s/ Lonny J. Carpenter
Lonny J. Carpenter
/s/ Deborah DiSanzo
Deborah DiSanzo
Director, Chief Executive Officer
February 26, 2020
Chief Financial Officer
February 26, 2020
Chief Accounting Officer and Corporate Controller
February 26, 2020
Chairman of the Board of Directors
February 26, 2020
Director
Director
Director
Director
Director
Director
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
113
FACTORS AFFECTING FUTURE PERFORMANCE
Certain statements in this Annual Report are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on
current expectations and assumptions that are subject to risks and uncertainties. All statements contained in this Annual Report that do not relate to matters of historical
fact should be considered forward looking statements, and are generally identified by words such as “expect,” “intend,” “anticipate,” “believe,” “future,” “could,”
“estimate,” “should,” “plan,” “aim,” and other similar expressions, including statements regarding our expectations for growth, innovation pipeline, our markets and
market positioning, impacts from acquisitions and future financial results and financial position. These forward looking statements are neither promises nor guarantees
but involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements. 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 activity; 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; risks associated with events outside our control, such as health epidemics,
including COVID-19; 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 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 businesses; 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 interruptions and delays in the delivery of
our products to customers; production difficulties and product delivery delays or disruptions; our exposure to medical device regulation, 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 regulation of our
businesses or products; our 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; 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;
our failure to maintain appropriate internal controls in the future; and the important factors described in Item 1A of the Annual Report on Form 10-K for the year ended
December 31, 2019 included in this Annual Report and in the Company’s filings with the Securities and Exchange Commission (the “SEC”) made after the date of the
Annual Report on Form 10-K. Such statements are based on management’s beliefs and assumptions and on information currently available to the Company’s management.
The Company disclaims any obligation to update any forward looking statements as a result of developments occurring after the date of this document except as required
by law.
FORM 10-K
This Annual Report to Shareholders includes a copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, excluding exhibits, as filed with
the SEC and available through our website at https://www.novanta.com. We will, upon written request and payment of an appropriate processing fee, provide our
shareholders with copies of the exhibits to our Annual Report on Form 10-K. Please address your request to Novanta Inc., 125 Middlesex Turnpike, Bedford, MA 01730,
Attention: Investor Relations.
_______________________________________________________________________________________________________________________________________
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
This Annual Report contains the non-GAAP financial measures of Adjusted EBITDA, Organic Revenue Growth and Adjusted Diluted EPS. A tabular reconciliation of
these non-GAAP financial measures to the most comparable GAAP measures are set forth below.
Adjusted EBITDA (Non-GAAP): (1)
(in thousands of U.S. dollars)
Consolidated Net Income (GAAP)
Interest (income) expense, net
Income tax provision
Depreciation and amortization
Share-based compensation
Restructuring, acquisition and divestiture related costs
Acquisition fair value adjustments
Other, net
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA Margin (non-GAAP)
(1)
Year Ended December 31,
2019
(Unaudited)
2018
(Unaudited)
$
$
40,773 $
8,493
4,993
38,280
9,340
16,574
1,270
1,023
120,746 $
19.3%
51,095
9,814
10,207
37,052
7,647
8,041
—
(103)
123,753
20.1%
The Company defines Adjusted EBITDA as the consolidated net income before deducting interest (income) expense, income taxes, depreciation, amortization, non-cash share-based compensation,
restructuring, acquisition and divestiture related costs, acquisition fair value adjustments, other non-operating income (expense) items, including foreign exchange gains (losses), and net periodic
pension costs of the Company’s frozen U.K. defined benefit pension plan. The Company defines Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of Revenue. The Company
believes Adjusted EBITDA and Adjusted EBITDA Margin provide useful and supplementary information to investors regarding the operating results of the Company because of the significant
changes that have occurred outside of the Company’s day-to-day business in accordance with the execution of the Company’s strategy. This strategy includes streamlining the Company’s existing
operations through site and functional consolidations, strategic divestitures and product line closures, expanding the Company’s business through significant internal investments, and broadening
the Company’s product and service offerings through acquisition of innovative and complementary technologies and solutions. The financial impact of certain elements of these activities,
particularly acquisitions, divestitures, and site and functional restructurings, is often large relative to the Company’s overall financial performance and can adversely affect the comparability of
its operating results and investors’ ability to analyze the business from period to period. Adjusted EBITDA is used by management to evaluate operating performance, communicate financial
results to the Board of Directors, benchmark results against historical performance and the performance of peers, and evaluate investment opportunities, including acquisitions and divestitures. In
addition, Adjusted EBITDA is used as one of the performance metrics to determine bonus payments for senior management and employees. Accordingly, the Company believes that these non-
GAAP measures provide greater transparency and insight into management’s method of analysis. In evaluating Adjusted EBITDA, you should be aware that, in the future, the Company may incur
expenses that are the same as, or similar to, some of the adjustments listed above.
114
Year Ended December 31, 2019
Compared to
Year Ended December 31, 2018
(Unaudited)
1.9%
2.8%
1.6%
0.7%
Organic Revenue Growth (Non-GAAP): (1)
Reported Revenue Growth (GAAP)
Less: Change attributable to acquisitions
Plus: Change due to foreign currency
Organic Revenue Growth (non-GAAP)
(1)
The Company defines the term “Organic Revenue” as revenue excluding the impact from business acquisitions, divestitures, product line discontinuations, and the effect of foreign currency
translation. The Company uses the related term “Organic Revenue Growth” to refer to the financial performance metric of comparing current period Organic Revenue with the reported revenue
of the corresponding period in the prior year. The Company believes that this non-GAAP measure, when taken together with our GAAP financial measures, allows the Company and its
investors to better measure the Company’s performance and evaluate long-term performance trends. Organic Revenue Growth also facilitates easier comparisons of the Company’s performance
with prior and future periods and relative comparisons to its peers. The Company excludes the effect of foreign currency translation from these measures because foreign currency translation is
subject to volatility and can obscure underlying business trends. The Company excludes the effect of acquisitions and divestitures because these activities can vary dramatically between
reporting periods and between the Company and its peers, which the Company believes makes comparisons of long-term performance trends difficult for management and investors. Organic
Revenue Growth is also used as a performance metric to determine bonus payments for senior management and employees.
Adjusted Diluted EPS (Non-GAAP): (1)
(in thousands of U.S. dollars except for per share amounts)
Net income attributable to Novanta Inc. (GAAP)
Less: Redeemable noncontrolling interest redemption value adjustment
Net income attributable to Novanta Inc. after adjustment for redeemable noncontrolling interest redemption value
Diluted EPS (GAAP)
Redeemable noncontrolling interest redemption value adjustment (2)
Net income attributable to Novanta Inc.
Non-GAAP adjustments:
Amortization of intangible assets (3)
Restructuring, acquisition, and divestiture related costs (4)
Foreign exchange transaction (gains) losses, net (5)
Acquisition fair value adjustment (3)
Total Non-GAAP adjustments before income taxes
Tax effect of non-GAAP adjustments (6)
Non-GAAP tax adjustments (6)
Adjusted net income attributable to Novanta Inc. (non-GAAP)
Adjusted Diluted EPS (non-GAAP)
Weighted-average shares outstanding - Diluted
Year Ended December 31,
2019
(Unaudited)
2018
(Unaudited)
$
$
$
$
$
$
40,773 $
—
40,773 $
1.15 $
—
40,773 $
26,445
16,574
780
1,270
45,069
(8,950)
(805)
76,087 $
2.14 $
35,546
49,109
(1,781)
50,890
1.43
(1,781)
49,109
25,610
8,041
(147)
—
33,504
(5,946)
(377)
76,290
2.15
35,473
(1)
The Company believes Adjusted Diluted EPS provides useful and supplementary information to investors regarding the operating performance of the Company because Adjusted Diluted EPS is
used by management to evaluate operating performance, communicate financial results to the Board of Directors, and benchmark results against historical performance and the performance of
peers. The Company also uses Adjusted Diluted EPS as a measurement for performance shares issued to certain executives. Accordingly, the Company believes this non-GAAP measure provides
greater transparency and insight into management’s method of analysis. In evaluating Adjusted Diluted EPS, you should be aware that in the future the Company may incur expenses that are the
same as, or similar to, some of the adjustments listed above.
(2) Adjustments for the redeemable noncontrolling interest value are excluded from the calculation of Adjusted Diluted EPS because (i) the adjustment is unusual; (ii) the amount is noncash; (iii) the
amount does not represent a measure of earnings and is excluded from the determination of net income attributable to Novanta Inc.; and (iv) the Company believes that investors may benefit from
an understanding of the Company’s operating results without giving effect to this adjustment.
(3) Amortization of acquired intangible assets and acquisition fair value adjustments are excluded from Adjusted Diluted EPS because (i) these amounts are non-cash; (ii) the Company cannot
(4)
influence the timing and amount of future expense recognition; and (iii) excluding such expenses provides investors and management better visibility into the components of operating costs.
These amounts relate to the Company’s restructuring programs, business acquisitions, divestitures and related activities. Such expenses are excluded from the calculation of Adjusted Diluted EPS
due to the significant changes that have occurred outside of the Company’s day-to-day business as a result of the execution of the Company’s strategy. The financial impact of certain elements
of these activities, particularly acquisitions, divestures, and site and functional restructurings, is often large relative to the Company’s overall financial performance and can adversely affect the
comparability of its operating results and investors’ ability to analyze the business from period to period.
(5) Beginning in 2019, the Company also excluded foreign exchange transaction gains (losses) as the Company cannot fully influence the timing and amount of foreign currency transaction gains
(6)
(losses). Non-GAAP Adjusted Diluted EPS for the prior year has been updated to conform with this presentation.
The Company excluded significant discrete income tax expenses (benefits) related to releases of valuation allowances, benefits or expenses associated with the completion of tax audits, effects of
changes in tax laws, effects of acquisition related tax planning actions on our effective tax rate, and the income tax effect of non-GAAP adjustments above.
Non-GAAP financial measures should not be considered as substitutes for, or superior to, measures of financial performance prepared in accordance with GAAP. They
are limited in value because they exclude charges that have a material effect on the Company’s reported results and, therefore, should not be relied upon as the sole
financial measures to evaluate the Company’s financial results. The non-GAAP financial measures are meant to supplement, and to be viewed in conjunction with, GAAP
financial measures.
115
CORPORATE INFORMATION
EXECUTIVE OFFICERS
Matthijs Glastra
Chief Executive Officer and Director
Robert J. Buckley
Chief Financial Officer
Brian S. Young
Chief Human Resources Officer
BOARD OF DIRECTORS
Stephen W. Bershad
Chairman of the Board, Novanta Inc.
Lonny J. Carpenter
Former Group President, Stryker Corporation
Deborah DiSanzo
Former General Manager, IBM Watson Health
Matthijs Glastra
Chief Executive Officer, Novanta Inc.
Brian D. King
Former President and Chief Executive Officer,
Viant Medical, LLC
Ira J. Lamel
Former Executive Vice President and Chief Financial
Officer, The Hain Celestial Group, Inc.
Dominic A. Romeo
Former Senior Vice President and Chief Financial Officer,
Thor Industries, Inc.
Thomas N. Secor
Managing Director, Morningside Heights Capital,
an investment firm
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Novanta Inc.
125 Middlesex Turnpike
Bedford, MA 01730
U.S.A.
Phone: 1-781-266-5700
Fax: 1-781-266-5114
WEBSITE
https://www.novanta.com
ANNUAL & SPECIAL MEETING
Tuesday, May 26, 2020 at 3:00 p.m. (ET) at
Novanta Inc. Headquarters,
125 Middles Turnpike
Bedford, MA 01730
Virtually at:
www.virtualshareholdermeeting.com/NOVT2020
An Annual Report, a Management Proxy Circular and a
form of Proxy will be furnished to each shareholder as of the
record date of April 15, 2020.
AUDITORS
PricewaterhouseCoopers LLP
101 Seaport Boulevard
Boston, MA 02210
TRANSFER AGENT
Computershare Investor Services
100 University Ave.
8th Floor, North Tower
Toronto, Ontario, M5J 2Y1, Canada
Phone: 1-800-564-6253 or 514-982-7555
Fax: 1-888-453-0330
service@computershare.com
STOCK EXCHANGE
Novanta Inc.’s common shares are listed and traded on the
Nasdaq Global Select Market under the ticker symbol
“NOVT”.
Novanta Inc.
125 Middlesex Turnpike
Bedford, Massachusetts 01730
Phone: 781‐266‐5700
www.novanta.com