novt-10q_20170929.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 29, 2017

Or

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

For the transition period from                      to                      

Commission File No. 001-35083

 

Novanta Inc.

(Exact name of registrant as specified in its charter)

 

 

New Brunswick, Canada

 

98-0110412

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

125 Middlesex Turnpike

Bedford, Massachusetts, USA

 

01730

(Address of principal executive offices)

 

(Zip Code)

(781) 266-5700

(Registrant’s telephone number, including area code)

 

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 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

As of October 27, 2017, there were 34,592,138 of the Registrant’s common shares, no par value, issued and outstanding.

 

 


 

 

 

NOVANTA INC.

TABLE OF CONTENTS

 

Item No.

 

  

Page
No.

 

 

PART I — FINANCIAL INFORMATION

  

1

 

 

 

ITEM 1.

  

FINANCIAL STATEMENTS

  

1

 

 

 

 

  

CONSOLIDATED BALANCE SHEETS (unaudited)

  

1

 

 

 

 

  

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

  

2

 

 

 

 

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

  

3

 

 

 

 

  

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

  

4

 

 

 

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

  

5

 

 

 

ITEM 2.

  

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

  

27

 

 

 

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

40

 

 

 

ITEM 4.

  

CONTROLS AND PROCEDURES

  

40

 

 

PART II — OTHER INFORMATION

  

41

 

 

 

ITEM 1.

  

LEGAL PROCEEDINGS

  

41

 

 

 

ITEM 1A.

  

RISK FACTORS

  

41

 

 

 

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  

41

 

 

 

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

  

41

 

 

 

ITEM 4.

  

MINE SAFETY DISCLOSURES

  

41

 

 

 

ITEM 5.

  

OTHER INFORMATION

  

41

 

 

 

ITEM 6.

  

EXHIBITS

  

42

 

 

SIGNATURES

  

44

 

 

 

 


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NOVANTA INC.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

 

September 29,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

92,149

 

 

$

68,108

 

Accounts receivable, net of allowance of $782 and $565, respectively

 

83,008

 

 

 

63,769

 

Inventories

 

88,861

 

 

 

59,745

 

Prepaid income taxes and income taxes receivable

 

8,107

 

 

 

2,058

 

Prepaid expenses and other current assets

 

8,253

 

 

 

5,570

 

Total current assets

 

280,378

 

 

 

199,250

 

Property, plant and equipment, net

 

60,244

 

 

 

35,421

 

Deferred tax assets

 

11,772

 

 

 

8,593

 

Other assets

 

4,256

 

 

 

12,502

 

Intangible assets, net

 

157,938

 

 

 

61,743

 

Goodwill

 

207,720

 

 

 

108,128

 

Total assets

$

722,308

 

 

$

425,637

 

LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

$

9,115

 

 

$

7,366

 

Accounts payable

 

39,666

 

 

 

32,213

 

Income taxes payable

 

6,086

 

 

 

3,969

 

Accrued expenses and other current liabilities

 

40,940

 

 

 

26,948

 

Total current liabilities

 

95,807

 

 

 

70,496

 

Long-term debt

 

234,188

 

 

 

70,554

 

Deferred tax liabilities

 

27,106

 

 

 

1,294

 

Income taxes payable

 

4,154

 

 

 

5,710

 

Other liabilities

 

15,068

 

 

 

18,713

 

Total liabilities

 

376,323

 

 

 

166,767

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

36,838

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

   Issued and outstanding: 34,583 and 34,458, respectively

 

423,856

 

 

 

423,856

 

Additional paid-in capital

 

32,283

 

 

 

30,276

 

Accumulated deficit

 

(127,660

)

 

 

(167,547

)

Accumulated other comprehensive loss

 

(19,332

)

 

 

(27,715

)

Total stockholders' equity

 

309,147

 

 

 

258,870

 

Total liabilities, noncontrolling interest and stockholders’ equity

$

722,308

 

 

$

425,637

 

 

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

 

 

 

1


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

$

146,296

 

 

$

97,829

 

 

$

374,372

 

 

$

285,879

 

Cost of revenue

 

87,589

 

 

 

56,617

 

 

 

216,082

 

 

 

166,279

 

Gross profit

 

58,707

 

 

 

41,212

 

 

 

158,290

 

 

 

119,600

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development and engineering

 

11,659

 

 

 

7,961

 

 

 

29,878

 

 

 

24,029

 

Selling, general and administrative

 

27,724

 

 

 

20,972

 

 

 

74,666

 

 

 

62,357

 

Amortization of purchased intangible assets

 

3,217

 

 

 

2,066

 

 

 

9,413

 

 

 

6,153

 

Restructuring, acquisition and divestiture related costs (gain)

 

3,834

 

 

 

(835

)

 

 

6,232

 

 

 

5,828

 

Total operating expenses

 

46,434

 

 

 

30,164

 

 

 

120,189

 

 

 

98,367

 

Operating income from continuing operations

 

12,273

 

 

 

11,048

 

 

 

38,101

 

 

 

21,233

 

Interest income (expense), net

 

(2,111

)

 

 

(1,081

)

 

 

(4,874

)

 

 

(3,471

)

Foreign exchange transaction gains (losses), net

 

(661

)

 

 

188

 

 

 

(176

)

 

 

978

 

Other income (expense), net

 

(4

)

 

 

686

 

 

 

104

 

 

 

1,699

 

Gain on acquisition of business

 

 

 

 

 

 

 

26,409

 

 

 

 

Income from continuing operations before income taxes

 

9,497

 

 

 

10,841

 

 

 

59,564

 

 

 

20,439

 

Income tax provision

 

1,131

 

 

 

3,371

 

 

 

6,934

 

 

 

6,192

 

Income from continuing operations

 

8,366

 

 

 

7,470

 

 

 

52,630

 

 

 

14,247

 

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

8,366

 

 

 

7,470

 

 

 

52,630

 

 

 

14,247

 

Less: Net income attributable to noncontrolling interest

 

(834

)

 

 

 

 

 

(1,444

)

 

 

 

Net income attributable to Novanta Inc.

$

7,532

 

 

$

7,470

 

 

$

51,186

 

 

$

14,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share from continuing operations (Note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.00

)

 

$

0.22

 

 

$

1.15

 

 

$

0.41

 

Diluted

$

(0.00

)

 

$

0.21

 

 

$

1.13

 

 

$

0.41

 

Loss per common share from discontinued operations (Note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

 

 

$

 

 

$

 

 

$

 

Diluted

$

 

 

$

 

 

$

 

 

$

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.00

)

 

$

0.22

 

 

$

1.15

 

 

$

0.41

 

Diluted

$

(0.00

)

 

$

0.21

 

 

$

1.13

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

 

34,833

 

 

 

34,677

 

 

 

34,809

 

 

 

34,689

 

Weighted average common shares outstanding—diluted

 

34,833

 

 

 

34,928

 

 

 

35,235

 

 

 

34,889

 

 

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

 

 

 

2


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands of U.S. dollars)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Consolidated net income

$

8,366

 

 

$

7,470

 

 

$

52,630

 

 

$

14,247

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax (1)

 

3,311

 

 

 

(563

)

 

 

8,340

 

 

 

(3,413

)

Pension liability adjustments, net of tax (2)

 

(45

)

 

 

338

 

 

 

43

 

 

 

1,633

 

Total other comprehensive income (loss)

 

3,266

 

 

 

(225

)

 

 

8,383

 

 

 

(1,780

)

Total consolidated comprehensive income (loss)

 

11,632

 

 

 

7,245

 

 

 

61,013

 

 

 

12,467

 

Less: Comprehensive income attributable to noncontrolling interest

 

(834

)

 

 

 

 

 

(1,444

)

 

 

 

Comprehensive income (loss) attributable to Novanta Inc.

$

10,798

 

 

$

7,245

 

 

$

59,569

 

 

$

12,467

 

 

(1) 

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

(2) 

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

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

 

 

 

3


 

NOVANTA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

 

 

Nine Months Ended

 

 

September 29,

 

 

September 30,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Consolidated net income

$

52,630

 

 

$

14,247

 

Less: Loss from discontinued operations, net of tax

 

 

 

 

 

Income from continuing operations

 

52,630

 

 

 

14,247

 

Adjustments to reconcile income from continuing operations to

   net cash provided by operating activities of continuing operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

22,440

 

 

 

15,317

 

Provision for inventory excess and obsolescence

 

1,837

 

 

 

2,387

 

Share-based compensation

 

4,223

 

 

 

3,385

 

Deferred income taxes

 

(2,913

)

 

 

162

 

Earnings from equity-method investment

 

(104

)

 

 

(1,698

)

Gain on sale of fixed assets

 

21

 

 

 

(1,736

)

Dividend from equity-method investment

 

 

 

 

2,341

 

Gain on acquisition of business

 

(26,409

)

 

 

 

Inventory acquisition fair value adjustment

 

4,754

 

 

 

173

 

Contingent consideration adjustments

 

425

 

 

 

1,427

 

Other

 

851

 

 

 

1,417

 

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

   effects from businesses purchased or classified as discontinued operations:

 

 

 

 

 

 

 

Accounts receivable

 

(3,859

)

 

 

(3,683

)

Inventories

 

(11,806

)

 

 

(1,470

)

Prepaid income taxes, income taxes receivable, prepaid expenses and other current assets

 

(5,806

)

 

 

(3,594

)

Accounts payable, income taxes payable, accrued expenses and other current liabilities

 

5,975

 

 

 

6,110

 

Other non-current assets and liabilities

 

(972

)

 

 

(78

)

Cash provided by operating activities of continuing operations

 

41,287

 

 

 

34,707

 

Cash provided by operating activities of discontinued operations

 

 

 

 

 

Cash provided by operating activities

 

41,287

 

 

 

34,707

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(6,502

)

 

 

(7,005

)

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

 

(168,332

)

 

 

(8,952

)

Proceeds from the sale of property, plant and equipment

 

44

 

 

 

7,037

 

Cash used in investing activities of continuing operations

 

(174,790

)

 

 

(8,920

)

Cash provided by investing activities of discontinued operations

 

 

 

 

1,498

 

Cash used in investing activities

 

(174,790

)

 

 

(7,422

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

176,769

 

 

 

 

Repayments of long-term debt and revolving credit facility

 

(15,625

)

 

 

(14,375

)

Payments for debt issuance costs

 

(638

)

 

 

(2,496

)

Payments of contingent considerations

 

(2,546

)

 

 

 

Repurchase of common stock

 

(370

)

 

 

(1,634

)

Payments of withholding taxes from stock-based awards

 

(1,846

)

 

 

(1,719

)

Capital lease payments

 

(646

)

 

 

(905

)

Other financing activities

 

 

 

 

(1

)

Cash provided by (used in) financing activities of continuing operations

 

155,098

 

 

 

(21,130

)

Cash provided by (used in) financing activities of discontinued operations

 

 

 

 

 

Cash provided by (used in) financing activities

 

155,098

 

 

 

(21,130

)

Effect of exchange rates on cash and cash equivalents

 

2,446

 

 

 

(1,375

)

Increase in cash and cash equivalents

 

24,041

 

 

 

4,780

 

Cash and cash equivalents, beginning of period

 

68,108

 

 

 

59,959

 

Cash and cash equivalents, end of period

$

92,149

 

 

$

64,739

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

3,512

 

 

$

2,167

 

Cash paid for income taxes

$

18,053

 

 

$

10,870

 

Income tax refunds received

$

185

 

 

$

359

 

 

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

 

 

4


 

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

1. Basis of Presentation

Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “Novanta”, “we”, “us”, “our”) is a global supplier of core technology solutions that give healthcare 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 customers' demanding applications.

The accompanying unaudited interim consolidated financial statements have been prepared in U.S. dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

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. 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 position 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.

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

Use of Estimates

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

5


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

Recent Accounting Pronouncements

Share-Based Compensation

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-09, “Compensation – Stock Compensation (Topic 718),” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 requires that an entity account for the effects of a modification unless (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 will become effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.

Presentation of Net Periodic Pension Cost

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on the presentation of the service component and the other components of net benefit cost in the statement of operations. The new standard is effective for public companies for annual periods beginning after December 15, 2017. The Company expects to adopt the new standard in the first quarter of 2018 and expects to report its net periodic pension cost related to its frozen U.K. pension plan, consisting of interest cost, expected return on plan assets and amortization of actuarial gains (losses) only, in Other income (expense) in the consolidated statement of operations upon adoption.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the accounting for goodwill impairment. The amendment in ASU 2017-04 removes Step-two of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 will become effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.

Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard further clarifies the classification in the cash flow statement of the following items: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ASU 2016-15 should be applied using a retrospective transition method for each period presented. The Company adopted ASU 2016-15 during the first quarter of 2017. The adoption of ASU 2016-15 resulted in ($2.5) million of payments of contingent considerations being reported as cash used in financing activities on the Company’s consolidated statements of cash flows for the nine months ended September 29, 2017.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which provides comprehensive lease accounting guidance. The standard requires entities to recognize lease assets and liabilities on the balance sheet and to disclose key information about leasing arrangements. ASU 2016-02 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of this

6


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

guidance and an appropriate implementation strategy. While the Company’s evaluation of this guidance is in the early stages, the Company currently expects adoption of this guidance to have an impact on its consolidated balance sheet.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides guidance for revenue recognition. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, “Revenue Recognition (Topic 605),” 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. ASU 2014-09 would be effective for annual and interim reporting periods beginning after December 15, 2016 and did not allow early adoption. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 by one year to December 15, 2017, with the option of early adoption as of the original effective date. The amendment in ASU 2015-14 resulted in ASU 2014-09 becoming effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption of Topic 606, an entity may apply the new guidance either retrospectively to each prior reporting period presented (the “full retrospective method”) or retrospectively only to customer contracts not yet completed as of the date of adoption with the cumulative effect of initially applying the standard recognized in beginning retained earnings at the date of the initial application (the “modified retrospective method”).

The Company will adopt the new standard as of January 1, 2018 and has conducted various activities to prepare for the adoption of the new standard. The Company surveyed cross-functional leaders to identify potential revenue streams that could be impacted by Topic 606 and identified certain revenue streams that could be impacted.  The Company also reviewed a representative sample of individual customer contracts related to these various revenue streams to determine if the guidance under Topic 606 is expected to have a material impact on revenue recognition.

The Company’s work to date indicates that only a limited number of contracts with customers may require a change in the way revenues are recognized. The Company is still in the process of determining the expected quantitative impact that the adoption of Topic 606 will have on its consolidated financial statements.

The Company concluded that it will adopt the new standard using the modified retrospective method. In addition, the Company will elect to apply certain practical expedients allowed under the guidance. First, the Company does not intend to adjust the promised amount of consideration for the effects of a financing component as the transfer of a promised good to a customer and the customer’s payment for that good are typically expected to be one year or less. Second, the Company will exclude from its transaction price any amounts collected from customers for all sales or other similar taxes, which is consistent with the Company’s current practice. Third, the Company will elect to account for shipping and handling activities that occur after the transfer of control over the related goods as fulfillment activities rather than performance obligations.

 

2. Business Combinations

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 surgical market, for a total purchase price of €118.1 million ($134.9 million), net of working capital adjustments. The acquisition was financed with a €118.0 million ($134.7 million) draw-down on the Company’s revolving credit facility. The Company expects that the addition of WOM will help the Company to better serve customers in minimally invasive surgery applications with a broader range of product offerings. WOM is included in the Company’s Vision reportable segment.

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

7


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

Based upon a preliminary valuation, the total purchase price allocation is as follows (in thousands):

 

Purchase Price

 

 

Allocation

 

Cash

$

1,400

 

Accounts receivable

 

11,807

 

Inventories

 

14,549

 

Property and equipment

 

21,940

 

Intangible assets

 

59,732

 

Goodwill

 

53,775

 

Other assets

 

2,660

 

Total assets acquired

 

165,863

 

Accounts payable

 

4,398

 

Other liabilities

 

8,276

 

Deferred tax liabilities

 

18,255

 

Total liabilities assumed

 

30,929

 

Total assets acquired, net of liabilities assumed

 

134,934

 

Less: cash acquired

 

1,400

 

Total purchase price, net of cash acquired

$

133,534

 

 

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

 

  

 

 

 

 

Weighted Average

 

Estimated Fair

 

 

Amortization

 

Value

 

 

Period

Developed technologies

$

21,586

 

 

10 years

Customer relationships

 

34,949

 

 

12 years

Trademarks and trade names

 

2,284

 

 

10 years

Backlog

 

913

 

 

1 year

Total

$

59,732

 

 

 

 

The purchase price allocation resulted in $59.7 million of identifiable intangible assets and $53.8 million of goodwill. As the WOM acquisition is an acquisition of outstanding common shares, none of the resulting goodwill is deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flows potentially attributable to: (i) 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 $24.8 million and an operating loss from continuing operations before income taxes of $1.6 million for the nine months ended September 29, 2017. Operating loss from continuing operations before income taxes for the nine months ended September 29, 2017 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $4.9 million.

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, net of working capital adjustments. The acquisition was financed with cash on hand and a $12.0 million draw-down on the Company’s revolving credit facility. The Company expects that the addition of ThingMagic will broaden its portfolio of RFID

8


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

solutions, while providing the resources to address the growing need for improvements in workflow solutions, patient safety, anti-counterfeiting, and asset tracking in a medical environment. ThingMagic is included in the Company’s Vision reportable segment.

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

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

 

 

Purchase Price

 

 

Allocation

 

Inventories

$

1,832

 

Intangible assets

 

7,423

 

Goodwill

 

9,929

 

Total assets acquired

 

19,184

 

 

 

 

 

Other liabilities

 

95

 

Total liabilities assumed

 

95

 

Total purchase price

$

19,089

 

 

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

 

 

 

 

 

 

Weighted Average

 

Estimated Fair

 

 

Amortization

 

Value

 

 

Period

Developed technologies

$

4,600

 

 

10 years

Customer relationships

 

2,520

 

 

10 years

Trademarks and trade names

 

303

 

 

5 years

Total

$

7,423

 

 

 

 

The purchase price allocation resulted in $7.4 million of identifiable intangible assets and $9.9 million of goodwill. As the ThingMagic acquisition is treated as an acquisition of assets for income tax purposes, the goodwill acquired is expected to be fully deductible. 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 $6.5 million and operating income from continuing operations before income taxes of $0.1 million for the nine months ended September 29, 2017. Operating income from continuing operations before income taxes for the nine months ended September 29, 2017 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $1.2 million.

The pro forma financial information reflecting the operating results of ThingMagic, as if it had been acquired as of January 1, 2016, would not differ materially from the operating results of the Company as reported for the year ended December 31, 2016.

9


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

Laser Quantum Limited

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, femtosecond 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%. By establishing control through a majority equity ownership, the Company expects to broaden its technology capability in photonics solutions for medical applications, particularly within the growing DNA sequencing market, while providing key enabling photonics-based technologies for instrumentation and life science applications such as biomedical imaging, cell sorting, and ophthalmology. Laser Quantum is included in the Company’s Photonics reportable segment.

As part of this transaction, 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 remaining Laser Quantum shares held by the other shareholders, subject to certain conditions. The purchase price for the remaining shares will be based on the proportionate share of the noncontrolling interest (“NCI”) 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.

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 nine months ended September 29, 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% NCI 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.

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

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

 

10


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

 

Purchase Price

 

 

Allocation

 

Cash

$

15,343

 

Accounts receivable

 

2,739

 

Inventories

 

6,264

 

Property and equipment

 

2,286

 

Intangible assets

 

38,955

 

Goodwill

 

31,041

 

Other assets

 

717

 

Total fair value of assets

 

97,345

 

 

 

 

 

Accounts payable

 

796

 

Other liabilities

 

2,068

 

Deferred tax liabilities

 

7,210

 

Total fair value of liabilities

 

10,074

 

Total fair value of assets, net of fair value of liabilities

 

87,271

 

Less: fair value of equity interest previously held by Novanta

 

34,637

 

Less: fair value of noncontrolling interest

 

21,582

 

Total purchase price paid by Novanta

 

31,052

 

Less: cash acquired

 

15,343

 

Purchase price, net of cash acquired

$

15,709

 

 

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

 

 

 

 

 

 

Weighted Average

 

Estimated Fair

 

 

Amortization

 

Value

 

 

Period

Developed technologies

$

15,501

 

 

15 years

Customer relationships

 

19,990

 

 

15 years

Trademarks and trade names

 

1,964

 

 

15 years

Backlog

 

1,500

 

 

9 months

Total

$

38,955

 

 

 

 

The purchase price allocation resulted in $39.0 million of identifiable intangible assets and $31.0 million of goodwill. As the Laser Quantum acquisition is an acquisition of outstanding common shares, none of the resulting goodwill is deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash 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 $32.3 million and income from continuing operations before income taxes of $7.0 million for the nine months ended September 29, 2017. Operating income from continuing operations before income taxes for the nine months ended September 29, 2017 included $5.8 million of expenses associated with the amortization of inventory fair value step-up and purchased intangible assets.

Unaudited Pro Forma Information

The pro forma information for all periods presented below includes the effects of business combination accounting resulting from the acquisitions of WOM and Laser Quantum, including amortization of inventory fair value adjustments, amortization of intangible assets, interest expense on borrowings in connection with the acquisition, elimination of the gain from business acquisition and income from equity method investment, and the related tax effects as though the acquisitions had been consummated as of

11


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

January 1, 2016. The 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, 2016.

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

$

146,296

 

 

$

124,925

 

 

$

415,900

 

 

$

361,701

 

Income from continuing operations

$

12,727

 

 

$

8,241

 

 

$

32,038

 

 

$

12,804

 

Earnings per common share attributable to Novanta Inc. - Basic

$

0.12

 

 

$

0.24

 

 

$

0.55

 

 

$

0.36

 

Earnings per common share attributable to Novanta Inc. - Diluted

$

0.12

 

 

$

0.24

 

 

$

0.55

 

 

$

0.36

 

 

Acquisition Costs

Acquisition-related costs are included in restructuring, acquisition and divestiture related costs in the consolidated statements of operations. Acquisition-related costs for WOM, ThingMagic and Laser Quantum are as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

September 29,

 

 

2017

 

 

2017

 

ThingMagic

$

 

 

$

149

 

Laser Quantum

$

 

 

$

264

 

WOM

$

3,359

 

 

$

4,351

 

 

 

 

3. Discontinued Operations and Divestitures

In July 2014, the Company completed the sale of certain assets and liabilities of its Scientific Lasers business for approximately $6.5 million in cash, net of working capital adjustments.  In accordance with the purchase and sale agreement, $1.5 million of the sales proceeds was held in escrow until January 2016. In January 2016, the $1.5 million escrow was released to the Company in full and is reported as cash flow from investing activities of discontinued operations.

 

 

4. Accumulated Other Comprehensive Income (Loss)

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

 

 

Total accumulated

 

 

 

 

 

 

 

 

 

 

other

 

 

Foreign currency

 

 

 

 

 

 

comprehensive

 

 

translation

 

 

Pension

 

 

income (loss)

 

 

adjustments

 

 

liabilities

 

Balance at December 31, 2016

$

(27,715

)

 

$

(17,222

)

 

$

(10,493

)

Other comprehensive income (loss)

 

7,509

 

 

 

8,340

 

 

 

(831

)

Amounts reclassified from other comprehensive

   income (loss) (1)

 

874

 

 

 

 

 

 

874

 

Balance at September 29, 2017

$

(19,332

)

 

$

(8,882

)

 

$

(10,450

)

 

 

(1)

The amounts reclassified from other comprehensive income (loss) were included in selling, general and administrative expenses in the consolidated statements of operations.

 

 

5. Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed by dividing net income attributable to Novanta Inc. after adjustment of redeemable noncontrolling interest to estimated redemption value by the weighted average number of common shares outstanding

12


NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

 

during the period. The Company recognizes 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 is also the redemption date or (ii) the carrying value without any redemption value adjustments. Such adjustments are recorded in retained earnings in stockholders’ equity instead of net income attributable to Novanta Inc. For both basic and diluted earnings (loss) per common share, such redemption value adjustments are included in the calculation of the numerator. For diluted earnings (loss) per common share, the denominator also includes the dilutive effect of outstanding restricted stock units, stock options and total shareholder return performance restricted stock units determined using the treasury stock method. Dilutive effects of contingently issuable shares are included in the weighted average dilutive share calculation using the treasury stock method when the contingencies have been resolved. For periods in which net losses are generated, the dilutive potential common shares are excluded from the calculation of diluted earnings per common share as the effect would be anti-dilutive.

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

8,366

 

 

$

7,470

 

 

$

52,630

 

 

$

14,247

 

Less: Net income attributable to noncontrolling interest

 

(834

)

 

 

 

 

 

(1,444

)

 

 

 

Net income attributable to Novanta Inc.

 

7,532

 

 

 

7,470

 

 

 

51,186

 

 

 

14,247

 

Less: Adjustment of redeemable noncontrolling interest to estimated redemption value (see Note 14)

 

(7,585

)

 

 

 

 

 

(11,303

)

 

 

 

Net income (loss) attributable to Novanta Inc. after adjustment of redeemable noncontrolling interest to estimated redemption value

$

(53

)

 

$

7,470

 

 

$

39,883

 

 

$

14,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding— basic

 

34,833

 

 

 

34,677

 

 

 

34,809

 

 

 

34,689

 

Dilutive potential common shares (1)

 

 

 

 

251

 

 

 

426

 

 

 

200

 

Weighted average common shares outstanding— diluted

 

34,833

 

 

 

34,928

 

 

 

35,235

 

 

 

34,889

 

Antidilutive common shares excluded from above

 

 

 

 

144

 

 

 

 

 

 

112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share attributable to Novanta Inc.