UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 30, 2018
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 |
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98-0110412 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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125 Middlesex Turnpike Bedford, Massachusetts, USA |
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01730 |
(Address of principal executive offices) |
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(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 |
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Accelerated filer |
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Non-accelerated filer |
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☐ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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Emerging growth company |
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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 May 4, 2018, there were 34,697,485 of the Registrant’s common shares, no par value, issued and outstanding.
TABLE OF CONTENTS
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ITEM 1. |
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ITEM 2. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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24 |
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ITEM 3. |
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34 |
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ITEM 4. |
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ITEM 1. |
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ITEM 1A. |
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ITEM 2. |
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ITEM 3. |
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ITEM 4. |
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ITEM 5. |
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ITEM 6. |
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38 |
NOVANTA INC.
(In thousands of U.S. dollars or shares)
(Unaudited)
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March 30, |
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December 31, |
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2018 |
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2017 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
111,127 |
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$ |
100,057 |
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Accounts receivable, net of allowance of $403 and $554, respectively |
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76,915 |
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81,482 |
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Inventories |
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98,812 |
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91,278 |
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Prepaid income taxes and income taxes receivable |
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2,955 |
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4,387 |
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Prepaid expenses and other current assets |
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8,266 |
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10,675 |
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Total current assets |
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298,075 |
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287,879 |
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Property, plant and equipment, net |
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61,591 |
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61,718 |
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Deferred tax assets |
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6,829 |
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7,052 |
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Other assets |
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1,615 |
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4,018 |
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Intangible assets, net |
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151,816 |
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155,048 |
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Goodwill |
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213,822 |
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210,988 |
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Total assets |
$ |
733,748 |
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$ |
726,703 |
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LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current portion of long-term debt |
$ |
9,123 |
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$ |
9,119 |
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Accounts payable |
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41,717 |
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39,793 |
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Income taxes payable |
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2,529 |
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5,942 |
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Accrued expenses and other current liabilities |
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38,242 |
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43,314 |
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Total current liabilities |
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91,611 |
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98,168 |
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Long-term debt |
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224,098 |
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225,500 |
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Deferred tax liabilities |
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26,060 |
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25,672 |
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Income taxes payable |
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3,935 |
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3,754 |
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Other liabilities |
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14,517 |
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15,141 |
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Total liabilities |
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360,221 |
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368,235 |
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Commitments and contingencies (Note 13) |
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Redeemable noncontrolling interest |
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54,916 |
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46,923 |
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Stockholders’ equity: |
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Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 34,685 and 34,595, respectively |
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423,856 |
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423,856 |
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Additional paid-in capital |
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32,550 |
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33,309 |
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Accumulated deficit |
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(123,470 |
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(127,740 |
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Accumulated other comprehensive loss |
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(14,325 |
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(17,880 |
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Total stockholders' equity |
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318,611 |
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311,545 |
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Total liabilities, noncontrolling interest and stockholders’ equity |
$ |
733,748 |
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$ |
726,703 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars or shares, except per share amounts)
(Unaudited)
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Three Months Ended |
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March 30, |
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March 31, |
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2018 |
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2017 |
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Revenue |
$ |
146,965 |
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$ |
108,974 |
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Cost of revenue |
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84,806 |
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62,880 |
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Gross profit |
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62,159 |
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46,094 |
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Operating expenses: |
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Research and development and engineering |
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11,989 |
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9,215 |
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Selling, general and administrative |
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29,220 |
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22,874 |
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Amortization of purchased intangible assets |
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3,698 |
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2,849 |
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Restructuring, acquisition and divestiture related costs |
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25 |
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817 |
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Total operating expenses |
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44,932 |
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35,755 |
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Operating income |
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17,227 |
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10,339 |
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Interest income (expense), net |
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(2,358 |
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(1,328 |
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Foreign exchange transaction gains (losses), net |
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(407 |
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(1 |
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Other income (expense), net |
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(41 |
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(31 |
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Gain on acquisition of business |
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— |
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26,409 |
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Income before income taxes |
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14,421 |
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35,388 |
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Income tax provision |
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1,584 |
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1,114 |
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Consolidated net income |
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12,837 |
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34,274 |
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Less: Net income attributable to noncontrolling interest |
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(926 |
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(22 |
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Net income attributable to Novanta Inc. |
$ |
11,911 |
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$ |
34,252 |
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Earnings per common share attributable to Novanta Inc. (Note 4): |
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Basic |
$ |
0.19 |
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$ |
0.99 |
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Diluted |
$ |
0.18 |
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$ |
0.98 |
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Weighted average common shares outstanding—basic |
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34,887 |
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34,765 |
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Weighted average common shares outstanding—diluted |
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35,428 |
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35,125 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
(Unaudited)
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Three Months Ended |
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March 30, |
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March 31, |
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2018 |
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2017 |
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Consolidated net income |
$ |
12,837 |
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$ |
34,274 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments, net of tax (1) |
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3,671 |
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1,440 |
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Pension liability adjustments, net of tax (2) |
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(116 |
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205 |
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Total other comprehensive income |
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3,555 |
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1,645 |
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Total consolidated comprehensive income |
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16,392 |
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35,919 |
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Less: Comprehensive income attributable to noncontrolling interest |
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(926 |
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(22 |
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Comprehensive income attributable to Novanta Inc. |
$ |
15,466 |
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$ |
35,897 |
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(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 3 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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
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Three Months Ended |
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March 30, |
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March 31, |
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2018 |
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2017 |
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Cash flows from operating activities: |
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Consolidated net income |
$ |
12,837 |
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$ |
34,274 |
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Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
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Depreciation and amortization |
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9,067 |
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6,482 |
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Provision for inventory excess and obsolescence |
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810 |
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549 |
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Share-based compensation |
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2,044 |
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1,469 |
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Deferred income taxes |
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235 |
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(1,607 |
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Earnings from equity-method investment |
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— |
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(104 |
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Gain on acquisition of business |
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— |
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(26,409 |
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Inventory acquisition fair value adjustment |
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— |
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1,035 |
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Other |
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94 |
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509 |
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Changes in assets and liabilities which (used)/provided cash, excluding effects from businesses acquired: |
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Accounts receivable |
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5,421 |
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(3,690 |
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Inventories |
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(7,423 |
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(4,414 |
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Prepaid income taxes, income taxes receivable, prepaid expenses and other current assets |
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3,918 |
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(462 |
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Accounts payable, income taxes payable, accrued expenses and other current liabilities |
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(6,357 |
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4,851 |
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Other non-current assets and liabilities |
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(237 |
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277 |
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Cash provided by operating activities |
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20,409 |
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12,760 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(2,933 |
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(1,760 |
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Acquisition of businesses, net of cash acquired |
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— |
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(34,896 |
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Other investing activities |
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52 |
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— |
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Cash used in investing activities |
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(2,881 |
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(36,656 |
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Cash flows from financing activities: |
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Borrowings under revolving credit facility |
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— |
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42,000 |
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Repayments of long-term debt and revolving credit facility |
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(5,300 |
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(1,875 |
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Payments of contingent considerations |
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— |
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(2,398 |
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Repurchase of common stock |
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— |
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(370 |
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Payments of withholding taxes from stock-based awards |
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(2,804 |
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(1,669 |
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Capital lease payments |
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(142 |
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(215 |
) |
Other financing activities |
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(74 |
) |
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— |
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Cash provided by (used in) financing activities |
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(8,320 |
) |
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35,473 |
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Effect of exchange rates on cash and cash equivalents |
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1,862 |
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|
329 |
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Increase in cash and cash equivalents |
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11,070 |
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11,906 |
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Cash and cash equivalents, beginning of period |
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100,057 |
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|
68,108 |
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Cash and cash equivalents, end of period |
$ |
111,127 |
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$ |
80,014 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
$ |
2,142 |
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$ |
781 |
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Cash paid for income taxes |
$ |
3,896 |
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$ |
1,819 |
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Income tax refunds received |
$ |
507 |
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$ |
23 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 30, 2018
(Unaudited)
1. Basis of Presentation
Novanta Inc. and its subsidiaries (collectively referred to as “Novanta”, the “Company”, “we”, “us”, “our”) is a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. 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 Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers’ demanding applications.
The accompanying unaudited interim consolidated financial statements have been prepared by the Company 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 accounting principles generally accepted in the U.S. 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, 2017. 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. 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.
5
Recent Accounting Pronouncements
The following table provides a brief description of recent Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):
Standard |
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Description |
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Effective Date |
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Effect on the Financial Statements or Other Significant Matters |
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” |
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ASU 2018-05 allows SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the income tax effects of the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”). Companies have up to one year from the enactment of the Tax Reform Act (the “measurement period”) to obtain, prepare, and analyze the information that is needed in order to complete the accounting under Accounting Standards Codification (“ASC”) Topic 740. Any provisional amounts or adjustments to provisional amounts during the measurement period should be included in income from continuing operations as an adjustment to tax provision (benefit) in the reporting period in which the amounts are determined. |
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January 1, 2018. |
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The Company adopted ASU 2018-05 during the first quarter of 2018. See Note 11. |
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In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718).” |
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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 should be applied prospectively to an award modified on or after the adoption date. |
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January 1, 2018. Early adoption is permitted. |
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The Company adopted ASU 2017-09 during the first quarter of 2018. The adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated financial statements. |
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6
7
2. Revenue
The Company recognizes revenue when control of promised goods or services is transferred to customers. The transfer of control generally occurs upon shipment, which is 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 their 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 engineering services. Professional services are short in duration, typically less than one month, and total less than 3% of the Company’s revenue. Revenue is typically recognized at a point in time when control transfers to the customer upon completion of professional services requested under the contract. These services generally involve a single distinct performance obligation. The consideration expected to be received in exchange for such service is normally the contractually stated amount.
8
The Company occasionally sells separately priced non-standard/extended warranty services or preventative maintenance plans with the sale of products. The transfer of the control for the service plans is over time. The Company recognizes the related revenue ratably over the term of the service plan. The transaction price of the contract is allocated to each performance obligation based on their relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost plus margin.
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.
Accounts Receivable
Credit is extended based upon an evaluation of the customer's financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is 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. Standard payment terms are typically 30 days after shipment but vary by the type and geographic location of our customers.
Warranties
The Company generally provides warranties for its products. The standard warranty period is typically 12 months to 24 months for the Photonics and Precision Motion segments and 12 months to 36 months for the Vision segment. The standard warranty period for product sales is accounted for under the provisions of ASC 450, “Contingencies,” as the Company has the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. A provision for the estimated cost related to warranty is recorded to cost of revenue at the time revenue is recognized. The Company’s estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that the Company’s experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liability are recorded at that time, with an offsetting adjustment to cost of revenue.
Practical Expedients and Exemptions
The Company expenses incremental direct costs of obtaining a contract when incurred if the expected amortization period is one year or less. These costs are recorded within selling, general and administrative expenses in the consolidated statement of operations.
The Company does not adjust the promised amount of consideration for the effects of a financing component because the transfer of a promised good to a customer and the customer’s payment for that good are typically one year or less.
The Company does not disclose the value of the remaining performance obligation for contracts with an original expected length of one year or less.
Contract Liabilities
Contract liabilities consist of deferred revenue and advance payments from customers, including amounts that are refundable. These contract liabilities are classified as either current or long-term in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of March 30, 2018 and January 1, 2018 (the date of adoption of Topic 606), contract liabilities were $5.3 million and $5.4 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 three months ended March 30, 2018 is primarily due to $1.7 million of revenue recognized during the period that was included in the contract liability balance at the date of adoption, partially offset by cash payments received in advance of satisfying performance obligations.
Disaggregated Revenue
See Note 15 for the Company’s disaggregation of revenue by segment, geography and end market.
9
3. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) was as follows (in thousands):
|
Total Accumulated |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Cumulative |
|
|
Pension |
|
|||
|
Comprehensive |
|
|
Translation |
|
|
Liability |
|
|||
|
Income (Loss) |
|
|
Adjustments |
|
|
Adjustments |
|
|||
Balance at December 31, 2017 |
$ |
(17,880 |
) |
|
$ |
(8,313 |
) |
|
$ |
(9,567 |
) |
Other comprehensive income (loss) |
|
3,309 |
|
|
|
3,671 |
|
|
|
(362 |
) |
Amounts reclassified from accumulated other comprehensive income (loss) (1) |
|
246 |
|
|
|
— |
|
|
|
246 |
|
Balance at March 30, 2018 |
$ |
(14,325 |
) |
|
$ |
(4,642 |
) |
|
$ |
(9,683 |
) |
|
(1) |
The amounts reclassified from other comprehensive income (loss) were included in other income (expense), net in the consolidated statements of operations. |
4. Earnings per Common Share
Earnings 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 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 per common share, such redemption value adjustments are included in the calculation of the numerator. For diluted earnings per common share, the denominator also includes the dilutive effect of outstanding restricted stock units, stock options, non-GAAP EPS performance-based restricted stock units and total shareholder return performance-based 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 per common share (amounts in thousands, except per share data):
|
Three Months Ended |
|
|||||
|
March 30, |
|
|
March 31, |
|
||
|
2018 |
|
|
2017 |
|
||
Numerators: |
|
|
|
|
|
|
|
Consolidated net income |
$ |
12,837 |
|
|
$ |
34,274 |
|
Less: Net income attributable to noncontrolling interest |
|
(926 |
) |
|
|
(22 |
) |
Net income attributable to Novanta Inc. |
|
11,911 |
|
|
|
34,252 |
|
Less: Adjustment of redeemable noncontrolling interest to estimated redemption value (see Note 14) |
|
(5,399 |
) |
|
|
— |
|
Net income attributable to Novanta Inc. after adjustment of redeemable noncontrolling interest to estimated redemption value |
$ |
6,512 |
|
|
$ |
34,252 |
|
|
|
|
|
|
|
|
|
Denominators: |
|
|
|
|
|
|
|
Weighted average common shares outstanding— basic |
|
34,887 |
|
|
|
34,765 |
|
Dilutive potential common shares |
|
541 |
|
|
|
360 |
|
Weighted average common shares outstanding— diluted |
|
35,428 |
|
|
|
35,125 |
|
Antidilutive common shares excluded from above |
|
12 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Earnings per Common Share Attributable to Novanta Inc.: |
|
|
|
|
|
|
|
Basic |
$ |
0.19 |
|
|
$ |
0.99 |
|
Diluted |
$ |
0.18 |
|
|
$ |
0.98 |
|
10
5. Fair Value Measurements
ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:
|
• |
Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access. |
|
• |
Level 2: Observable inputs other than those described in Level 1. |
|
• |
Level 3: Unobservable inputs. |
Cash Equivalents
The Company’s cash equivalents are highly liquid investments with original maturities of three months or less, which represent the only 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 Consideration
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 from 2018 to 2021. 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 cash in four installments from 2019 to 2022. As the acquired assets did not meet the definition of a business, the fair value of the contingent consideration is recognized when probable and estimable and is capitalized as part of the cost of the acquired assets. In December 2017, the Company recorded an estimated fair value of $1.3 million in contingent consideration, which is reported as a long-term liability in other liabilities on the consolidated balance sheet as of December 31, 2017. There were no subsequent changes to the fair value of the contingent consideration as of March 30, 2018.
On February 19, 2015, the Company acquired Applimotion Inc. (“Applimotion”). Under the purchase and sale agreement for the Applimotion acquisition, the shareholders of Applimotion were eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal years 2015 to 2017. If such targets were achieved, the contingent consideration would be payable in cash in two installments in 2017 and 2018, respectively. The estimated fair value of the contingent consideration of $1.0 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. As a result of Applimotion’s fiscal year 2015 and 2016 revenue results, $1.2 million in contingent consideration was paid in the first quarter of 2017. Based on Applimotion’s fiscal year 2016 and 2017 revenue results, the fair value for the remaining contingent consideration was adjusted to $2.8 million as of December 31, 2017. The Company paid $2.8 million as the final Applimotion contingent consideration payment in January 2018.
11
The following table summarizes the fair values of the Company’s financial assets and liabilities as of March 30, 2018 (in thousands):
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant Other |
|
||
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|||
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|||
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
2,725 |
|
|
$ |
2,725 |
|
|
$ |
— |
|
|
$ |
— |
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
27 |
|
|
|
— |
|
|
|
27 |
|
|
|
— |
|
|
$ |
2,752 |
|
|
$ |
2,725 |
|
|
$ |
27 |
|
|
$ |
— |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
$ |
180 |
|
|
$ |
— |
|
|
$ |
180 |
|
|
$ |
— |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Long-term |
|
1,304 |
|
|
|
— |
|
|
|
— |
|
|
|
1,304 |
|
|
$ |
1,484 |
|
|
$ |
— |
|
|
$ |
180 |
|
|
$ |
1,304 |
|
The following table summarizes the fair values of the Company’s financial assets and liabilities as of December 31, 2017 (in thousands):
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant Other |
|
||
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|||
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|||
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
2,665 |
|
|
$ |
2,665 |
|
|
$ |
— |
|
|
$ |
— |
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
150 |
|
|
|
— |
|
|
|
150 |
|
|
|
— |
|
|
$ |
2,815 |
|
|
$ |
2,665 |
|
|
$ |
150 |
|
|
$ |
— |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Current |
$ |
2,800 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,800 |
|
Foreign currency forward contracts (1) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Long-term |
|
1,304 |
|
|
|
— |
|
|
|
— |
|
|
|
1,304 |
|
|
$ |
4,104 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,104 |
|
|
(1) |
The unrealized loss from foreign currency forward contracts was nominal as of December 31, 2017. |
Changes in the fair value of Level 3 contingent consideration during the three months ended March 30, 2018 were as follows (in thousands):
|
Contingent Consideration |
|
|
Balance at December 31, 2017 |
$ |
4,104 |
|
Payments |
|
(2,800 |
) |
Balance at March 30, 2018 |
$ |
1,304 |
|
As of March 30, 2018, the significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration were projected revenues and a discount rate. Increases or decreases in the unobservable inputs would result in a higher or lower fair value measurement.
See Note 9 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.
12
6. 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.
Beginning in September 2017, the Company commenced a foreign currency hedging program through the use of forward contracts as a part of its strategy to limit its exposures related to monetary assets and liabilities denominated in currencies other than the functional currency of the Company and its subsidiaries. These forward contracts are not designated as cash flow, fair value or net investment hedges. All changes in the fair value of these forward contracts are recognized in income before income taxes.
As of March 30, 2018, the aggregate notional amount of the Company’s foreign currency forward contracts was $27.5 million and the related fair value was a net loss of $0.2 million.
For the three months ended March 30, 2018, the Company recognized an aggregate net gain of $0.7 million, which is included in foreign exchange transaction gains (losses) in the consolidated statement of operations.
7. Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The Company tests its goodwill balances annually for impairment as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The Company performed the most recent annual goodwill and indefinite-lived intangible asset impairment test as of the beginning of the second quarter of 2017 using a Step 0 assessment, noting no impairment.
The following table summarizes changes in goodwill during the three months ended March 30, 2018 (in thousands):
Balance at beginning of the period |
$ |
210,988 |
|
Effect of foreign exchange rate changes |
|
2,834 |
|
Balance at end of the period |
$ |
213,822 |
|
Goodwill by reportable segment as of March 30, 2018 was as follows (in thousands):
|
Reportable Segment |
|
|
|
|
|
|||||||||
|
Photonics |
|
|
Vision |
|
|
Precision Motion |
|
|
Total |
|
||||
Goodwill |
$ |
172,137 |
|
|
$ |
158,951 |
|
|
$ |
33,963 |
|
|
$ |
365,051 |
|
Accumulated impairment of goodwill |
|
(102,461 |
) |
|
|
(31,722 |
) |
|
|
(17,046 |
) |
|
|
(151,229 |
) |
Total |
$ |
69,676 |
|
|
$ |
127,229 |
|
|
$ |
16,917 |
|
|
$ |
213,822 |
|
Goodwill by reportable segment as of December 31, 2017 was as follows (in thousands):
|
Reportable Segment |
|
|
|
|
|
|||||||||
|
Photonics |
|
|
Vision |
|
|
Precision Motion |
|
|
Total |
|
||||
Goodwill |
$ |
170,818 |
|
|
$ |
157,436 |
|
|
$ |
33,963 |
|
|
$ |
362,217 |
|
Accumulated impairment of goodwill |
|
(102,461 |
) |
|
|
(31,722 |
) |
|
|
(17,046 |
) |
|
|
(151,229 |
) |
Total |
$ |
68,357 |
|
|
$ |
125,714 |
|
|
$ |
16,917 |
|
|
$ |
210,988 |
|
13
Intangible assets as of March 30, 2018 and December 31, 2017, respectively, are summarized as follows (in thousands):
|
March 30, 2018 |
|
|
December 31, 2017 |
|
||||||||||||||||||
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
||||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technologies |
$ |
132,319 |
|
|
$ |
(80,121 |
) |
|
$ |
52,198 |
|
|
$ |
130,890 |
|
|
$ |
(77,295 |
) |
|
$ |
53,595 |
|
Customer relationships |
|
133,707 |
|
|
|
(55,408 |
) |
|
|
78,299 |
|
|
|
131,809 |
|
|
|
(52,015 |
) |
|
|
79,794 |
|
Customer backlog |
|
2,594 |
|
|
|
(2,409 |
) |
|
|
185 |
|
|
|
2,524 |
|
|
|
(2,284 |
) |
|
|
240 |
|
Non-compete covenant |
|
2,514 |
|
|
|
(2,090 |
) |
|
|
424 |
|
|
|
2,514 |
|
|
|
(1,956 |
) |
|
|
558 |
|
Trademarks and trade names |
|
15,909 |
|
|
|
(8,226 |
) |
|
|
7,683 |
|
|
|
15,708 |
|
|
|
(7,874 |
) |
|
|
7,834 |
|
Amortizable intangible assets |
|
287,043 |
|
|
|
(148,254 |
) |
|
|
138,789 |
|
|
|
283,445 |
|
|
|
(141,424 |
) |
|
|
142,021 |
|
Non-amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
13,027 |
|
|
|
— |
|
|
|
13,027 |
|
|
|
13,027 |
|
|
|
— |
|
|
|
13,027 |
|
Totals |
$ |
300,070 |
|
|
$ |
(148,254 |
) |
|
$ |
151,816 |
|
|
$ |
296,472 |
|
|
$ |
(141,424 |
) |
|
$ |
155,048 |
|
All definite-lived intangible assets are amortized either on a straight-line basis or an economic benefit basis over their remaining useful lives. Amortization expense for patents and developed technologies is included in cost of revenue in the accompanying consolidated statements of operations. Amortization expense for customer relationships and definite-lived trademarks, trade names and other intangibles is included in operating expenses in the accompanying consolidated statements of operations. Amortization expense was as follows (in thousands):
|
Three Months Ended |
|
|||||
|
March 30, |
|
|
March 31, |
|
||
|
2018 |
|
|
2017 |
|
||
Amortization expense – cost of revenue |
$ |
2,480 |
|
|
$ |
1,641 |
|
Amortization expense – operating expenses |
|
3,698 |
|
|
|
2,849 |
|
Total amortization expense |
$ |
6,178 |
|
|
$ |
4,490 |
|
Estimated amortization expense for each of the five succeeding years and thereafter as of March 30, 2018 was as follows (in thousands):
Year Ending December 31, |
|
Cost of Revenue |
|
|
Operating Expenses |
|
|
Total |
|
|||
2018 (remainder of year) |
|
$ |
7,457 |
|
|
$ |
11,114 |
|
|
$ |
18,571 |
|
2019 |
|
|
9,057 |
|
|
|
13,767 |
|
|
|
22,824 |
|
2020 |
|
|
8,137 |
|
|
|
11,290 |
|
|
|
19,427 |
|
2021 |
|
|
7,224 |
|
|
|
10,465 |
|
|
|
17,689 |
|
2022 |
|
|
5,791 |
|
|
|
8,778 |
|
|
|
14,569 |
|
Thereafter |
|
|
14,532 |
|
|
|