Item 1. Financial Statements
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 2, 2021
(Unaudited)
1. Basis of Presentation
Novanta Inc. and its subsidiaries (collectively referred to as “Novanta”, the “Company”, “we”, “us”, “our”) is a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. Novanta combines deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to the customers’ demanding applications.
The accompanying unaudited interim consolidated financial statements have been prepared by the Company in United States (“U.S.”) dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted. The interim consolidated financial statements and notes included in this report should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.
The Company’s unaudited interim consolidated 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 as of 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 such revisions are deemed to be necessary. The Company evaluates its estimates based on historical experience, current conditions, including estimated economic implications of the COVID-19 pandemic, and various other assumptions that it believes are reasonable under the circumstances. The accounting estimates assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of goodwill and other long-lived assets. While there was not a material change to the consolidated financial statements related to these estimates as of and for the three months ended April 2, 2021, the Company’s future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
6
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Recent Accounting Pronouncements
The following table provides a brief description of recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):
Standard
|
|
Description
|
|
Effective Date
|
|
Effect on the Financial Statements or Other Significant Matters
|
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
|
|
ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles of Accounting Standards Codification (“ASC”) 740, “Income Taxes”, including: (i) the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (ii) the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment (or vice-versa); and (iii) the exception for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies GAAP for other areas of ASC 740 by clarifying and amending the existing guidance.
|
|
January 1, 2021. Early adoption is permitted.
|
|
The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements
|
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.”
|
|
ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
|
|
Upon issuance. ASU 2020-04 is elective.
|
|
The Company does not expect the impact of ASU 2020-04 to be material to its consolidated financial statements.
|
2. Revenue
The Company recognizes revenue when control of promised goods or services is transferred to customers. The transfer of control generally occurs upon shipment when title and risk of loss pass to the customer. The vast majority of the Company’s revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for such products, which is generally at contractually stated prices. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue.
Performance Obligations
Substantially all of the Company’s revenue is recognized at a point in time, upon shipment, rather than over time.
At the request of its customers, the Company may perform professional services, generally for the maintenance and repair of products previously sold to those customers and for engineering services. Professional services for the maintenance and repair of products are typically short in duration, mostly less than one month, and generally involve a single distinct performance obligation.
7
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
The related revenue is recognized at a point in time when control transfers to the customer upon completion of professional services. The consideration expected to be received in exchange for such services is typically the contractually stated amount. Certain engineering services are longer in duration and the related revenue is recognized over time, as the Company has a right to consideration from a customer, based on the corresponding value to the customer from the Company’s performance completed to date. Professional services aggregate to less than 3% of the Company’s consolidated revenue.
The Company occasionally sells separately priced non-standard/extended warranty services or preventative maintenance plans with the sale of products. The transfer of control over the service plans is over time. The Company recognizes the related revenue ratably over the terms of the service plans. The transaction price of a contract is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using the expected cost plus a margin.
Shipping & Handling Costs
The Company accounts for shipping and handling activities that occur after the transfer of control over the related goods as fulfillment activities rather than performance obligations. The shipping and handling fees charged to customers are recognized as revenue and the related costs are recorded in cost of revenue at the time of transfer of control.
Warranties
The Company generally provides warranties for its products. The standard warranty period is typically 12 months to 24 months for the Photonics and Precision Motion segments and 12 months to 36 months for the Vision segment. The standard warranty period for product sales is accounted for under the provisions of ASC 450, “Contingencies,” as the Company has the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability. A provision for the estimated cost related to warranty is recorded as 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 liabilities in the consolidated balance sheet based on the timing of when the Company expects to recognize the related revenue. As of April 2, 2021 and December 31, 2020, contract liabilities were $5.6 million and $6.5 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 April 2, 2021 is primarily due to $2.8 million of revenue recognized during the period that was included in the contract liability balance at December 31, 2020, 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.
8
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
3. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss was as follows (in thousands):
|
Total Accumulated
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Cumulative
|
|
|
Pension
|
|
|
Comprehensive
|
|
|
Translation
|
|
|
Liability
|
|
|
Loss
|
|
|
Adjustments
|
|
|
Adjustments
|
|
Balance at December 31, 2020
|
$
|
(12,241
|
)
|
|
$
|
(2,296
|
)
|
|
$
|
(9,945
|
)
|
Other comprehensive income (loss)
|
|
(609
|
)
|
|
|
(489
|
)
|
|
|
(120
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
241
|
|
|
|
—
|
|
|
|
241
|
|
Balance at April 2, 2021
|
$
|
(12,609
|
)
|
|
$
|
(2,785
|
)
|
|
$
|
(9,824
|
)
|
The amounts reclassified from accumulated other comprehensive loss were included in other income (expense) in the consolidated statements of operations.
4. Earnings per Common Share
Basic earnings per common share is computed by dividing consolidated net income by the weighted average number of common shares outstanding during the period.
For diluted earnings per common share, the denominator includes the dilutive effect of outstanding common share equivalents. For the three months ended April 2, 2021 and April 3, 2020, respectively, weighted average shares outstanding for the diluted earnings per common share included the dilutive effect of outstanding restricted stock units, stock options, and total shareholder return performance-based restricted stock units, determined using the treasury stock method. The dilutive effects of market-based contingently issuable shares are included in the weighted average common share calculation based on the number of shares, if any, that would be issuable as of the end of the reporting period, assuming the end of the reporting period is also the end of the performance period. Dilutive effects of attainment-based contingently issuable shares granted to the former Laser Quantum Limited (“Laser Quantum”) noncontrolling interest shareholders, non-GAAP EPS performance-based restricted stock units and operating cash flow performance-based restricted stock units are included in the weighted average common share calculation when the performance targets have been achieved based on the cumulative achievement against the performance targets as of the end of each reporting period.
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
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Numerators:
|
|
|
|
|
|
|
|
Consolidated net income
|
$
|
11,310
|
|
|
$
|
11,947
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding— basic
|
|
35,279
|
|
|
|
35,152
|
|
Dilutive potential common shares
|
|
510
|
|
|
|
409
|
|
Weighted average common shares outstanding— diluted
|
|
35,789
|
|
|
|
35,561
|
|
Antidilutive potential common shares excluded from above
|
|
27
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.32
|
|
|
$
|
0.34
|
|
Diluted
|
$
|
0.32
|
|
|
$
|
0.34
|
|
For the three months ended April 2, 2021, 46 thousand non-GAAP EPS performance-based restricted stock units and 37 thousand operating cash flow performance-based restricted stock units granted to certain members of the executive management team, and 213 thousand shares of restricted stock issued to the former Laser Quantum non-controlling interest shareholders are
9
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of April 2, 2021.
For the three months ended April 3, 2020, 71 thousand non-GAAP EPS performance-based restricted stock units granted to certain members of the executive management team and 213 thousand shares of restricted stock issued to the former Laser Quantum non-controlling interest shareholders were considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of April 3, 2020.
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
|
Current Assets and Liabilities
The Company’s cash equivalents are highly liquid investments with original maturities of three months or less, which represent an asset the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.
Foreign Currency Contracts
The Company addresses market risks from changes in foreign currency exchange rates through a risk management program that includes the use of derivative financial instruments to mitigate certain balance sheet foreign currency transaction exposures. The Company uses foreign currency forward contracts as a part of its strategy to manage exposures related to foreign currency denominated monetary assets and liabilities. The fair value of these foreign currency forward contracts is reported either in other current assets or in other current liabilities as of the end of the period.
Contingent Considerations
On July 31, 2019, the Company acquired ARGES GmbH (“ARGES”). Under the purchase and sale agreement for the ARGES acquisition, the former owner of ARGES is eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from August 2019 through December 2026. The undiscounted range of possible contingent consideration is zero to €10.0 million ($11.1 million). If the revenue targets are achieved, the contingent consideration would be payable annually with the first payment due in the first quarter of 2021. The estimated fair value of the contingent consideration of €7.1 million ($7.9 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of operations in restructuring, acquisition, and related costs until the liability is fully settled. In March 2021, the Company made the first installment payment of €0.4 million ($0.4 million), which is included in cash flows from financing activities in the consolidated statement of cash flows for the three months ended April 2, 2021. There were no other changes in the fair value of the contingent consideration during the three months ended April 2, 2021.
On April 16, 2019, the Company acquired Ingenia CAT, S.L. (“Ingenia”). Under the purchase and sale agreement for the Ingenia acquisition, the shareholders of Ingenia are eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from April 2019 through March 2022. The undiscounted range of possible contingent consideration is zero to €8.0 million ($9.0 million). If the revenue targets are achieved, the contingent consideration would be payable in cash in three annual installments from 2020 to 2022. The estimated fair value of the contingent consideration of €5.8 million ($6.6 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of
10
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
operations in restructuring, acquisition, and related costs until the liability is fully settled. Based on the revenue performance as of April 2, 2021 and the most recent revenue projections for fiscal years 2021 and 2022, the fair value of the contingent consideration was adjusted to €2.4 million ($2.9 million) as of April 2, 2021. The Company made the first installment payment of €1.0 million ($1.1 million) during the three months ended July 3, 2020. The Company is expected to make a second installment payment of €1.3 million ($1.5 million) during the three months ended July 2, 2021.
On December 14, 2016, the Company acquired certain video signal processing and management technologies used in medical visualization solutions. Under the purchase and sale agreement, the former owners are eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from 2018 to 2021 from products utilizing the acquired technologies. The undiscounted range of possible contingent consideration is zero to €5.5 million ($6.6 million). If the revenue targets are achieved, the contingent consideration would be payable in cash in four installments from 2019 to 2022. As the acquired assets did not meet the definition of a business, the fair value of the contingent consideration is recognized when probable and estimable and is capitalized as part of the cost of the acquired assets. Subsequent changes in the estimated fair value of this contingent liability are recorded as adjustments to the carrying value of the assets acquired and amortized over the remaining useful life of the underlying assets. The Company made the first installment payment of €2.4 million ($2.6 million) during the three months ended April 3, 2020. In February 2021, the Company made the second installment payment of €1.8 million ($2.2 million), which is included in cash flows from investing activities in the consolidated statement of cash flows for the three months ended April 2, 2021. There were no other changes in the fair value of the contingent consideration during the three months ended April 2, 2021.
Summary by Fair Value Hierarchy
The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of April 2, 2021 (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
|
$
|
18,079
|
|
|
$
|
18,079
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
$
|
18,087
|
|
|
$
|
18,079
|
|
|
$
|
8
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Current
|
$
|
3,711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,711
|
|
Foreign currency forward contracts
|
|
66
|
|
|
|
—
|
|
|
|
66
|
|
|
|
—
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Long-term
|
|
4,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,999
|
|
|
$
|
8,776
|
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
8,710
|
|
11
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 (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
|
$
|
11,047
|
|
|
$
|
11,047
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
27
|
|
|
|
—
|
|
|
|
27
|
|
|
|
—
|
|
|
$
|
11,074
|
|
|
$
|
11,047
|
|
|
$
|
27
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Current
|
$
|
4,280
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,280
|
|
Foreign currency forward contracts
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Long-term
|
|
7,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,276
|
|
|
$
|
11,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,556
|
|
Changes in the fair value of Level 3 contingent considerations during the three months ended April 2, 2021 were as follows (in thousands):
|
Contingent Considerations
|
|
Balance at December 31, 2020
|
$
|
11,556
|
|
Payments
|
|
(2,635
|
)
|
Fair value adjustments
|
|
126
|
|
Effect of foreign exchange rates
|
|
(337
|
)
|
Balance at April 2, 2021
|
$
|
8,710
|
|
The following table provides qualitative information associated with the fair value measurement of the Company’s Level 3 liabilities:
|
|
|
|
|
|
|
|
|
|
Liability
|
|
April 2, 2021
Fair Value
(in thousands)
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Percentage Applied
|
|
Contingent consideration (ARGES)
|
|
$4,439
|
|
Monte Carlo method
|
|
Historical and projected revenues from August 2019 through December 2026
|
|
N/A
|
|
|
|
|
|
|
|
Revenue volatility
|
|
21.0%
|
|
|
|
|
|
|
|
Cost of debt
|
|
2.6%
|
|
|
|
|
|
|
|
Discount rate
|
|
3.7%
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (Ingenia)
|
|
$2,872
|
|
Monte Carlo method
|
|
Historical and projected revenues from April 2019 through March 2022
|
|
N/A
|
|
|
|
|
|
|
|
Revenue volatility
|
|
38.5%
|
|
|
|
|
|
|
|
Cost of debt
|
|
3.1%
|
|
|
|
|
|
|
Discount rate
|
|
9.6%
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (Other)
|
|
$1,399
|
|
Discounted cash flow method
|
|
Historical and projected revenues for fiscal years 2018 to 2021
|
|
N/A
|
|
|
|
|
|
|
|
Revenue discount rate
|
|
22.8%
|
|
Increases or decreases in the unobservable inputs noted above would result in a higher or lower fair value measurement.
12
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
See Note 9 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.
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 exposures to counterparty risks on derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
As of April 2, 2021, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $23.6 million and a net loss of less than $0.1 million, respectively. As of December 31, 2020, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $28.5 million and a net gain of less than $0.1 million, respectively.
The Company recognized an aggregate net gain of $0.7 million and an aggregate net loss of $0.3 million for the three months ended April 2, 2021 and April 3, 2020, respectively. These amounts were included in foreign exchange transaction gains (losses) in the consolidated statement of operations for all periods presented.
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 for impairment annually as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist. The Company performed the most recent annual goodwill and indefinite-lived intangible asset impairment test as of the beginning of the second quarter of 2020 and noted no impairment.
The following table summarizes changes in goodwill during the three months ended April 2, 2021 (in thousands):
Balance at beginning of the period
|
$
|
285,980
|
|
Effect of foreign exchange rate changes
|
|
(4,366
|
)
|
Balance at end of the period
|
$
|
281,614
|
|
Goodwill by reportable segment as of April 2, 2021 was as follows (in thousands):
|
Reportable Segment
|
|
|
|
|
|
|
Photonics
|
|
|
Vision
|
|
|
Precision
Motion
|
|
|
Total
|
|
Goodwill
|
$
|
216,908
|
|
|
$
|
162,634
|
|
|
$
|
53,301
|
|
|
$
|
432,843
|
|
Accumulated impairment of goodwill
|
|
(102,461
|
)
|
|
|
(31,722
|
)
|
|
|
(17,046
|
)
|
|
|
(151,229
|
)
|
Total
|
$
|
114,447
|
|
|
$
|
130,912
|
|
|
$
|
36,255
|
|
|
$
|
281,614
|
|
Goodwill by reportable segment as of December 31, 2020 was as follows (in thousands):
|
Reportable Segment
|
|
|
|
|
|
|
Photonics
|
|
|
Vision
|
|
|
Precision
Motion
|
|
|
Total
|
|
Goodwill
|
$
|
218,517
|
|
|
$
|
165,195
|
|
|
$
|
53,497
|
|
|
$
|
437,209
|
|
Accumulated impairment of goodwill
|
|
(102,461
|
)
|
|
|
(31,722
|
)
|
|
|
(17,046
|
)
|
|
|
(151,229
|
)
|
Total
|
$
|
116,056
|
|
|
$
|
133,473
|
|
|
$
|
36,451
|
|
|
$
|
285,980
|
|
13
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Intangible Assets
Intangible assets as of April 2, 2021 and December 31, 2020, respectively, are summarized as follows (in thousands):
|
April 2, 2021
|
|
|
December 31, 2020
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technologies
|
$
|
162,773
|
|
|
$
|
(112,979
|
)
|
|
$
|
49,794
|
|
|
$
|
164,430
|
|
|
$
|
(110,572
|
)
|
|
$
|
53,858
|
|
Customer relationships
|
|
165,528
|
|
|
|
(95,722
|
)
|
|
|
69,806
|
|
|
|
167,429
|
|
|
|
(92,892
|
)
|
|
|
74,537
|
|
Trademarks and trade names
|
|
18,239
|
|
|
|
(11,512
|
)
|
|
|
6,727
|
|
|
|
18,367
|
|
|
|
(11,268
|
)
|
|
|
7,099
|
|
Amortizable intangible assets
|
|
346,540
|
|
|
|
(220,213
|
)
|
|
|
126,327
|
|
|
|
350,226
|
|
|
|
(214,732
|
)
|
|
|
135,494
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
13,027
|
|
|
|
—
|
|
|
|
13,027
|
|
|
|
13,027
|
|
|
|
—
|
|
|
|
13,027
|
|
Totals
|
$
|
359,567
|
|
|
$
|
(220,213
|
)
|
|
$
|
139,354
|
|
|
$
|
363,253
|
|
|
$
|
(214,732
|
)
|
|
$
|
148,521
|
|
All definite-lived intangible assets are amortized either on a straight-line basis or an economic benefit basis over their remaining estimated useful life. Amortization expense for patents and developed technologies is included in cost of revenue in the accompanying consolidated statements of operations. Amortization expense for customer relationships and definite-lived trademarks, trade names and other intangibles is included in operating expenses in the accompanying consolidated statements of operations. Amortization expense was as follows (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Amortization expense – cost of revenue
|
$
|
2,977
|
|
|
$
|
2,734
|
|
Amortization expense – operating expenses
|
|
3,575
|
|
|
|
3,445
|
|
Total amortization expense
|
$
|
6,552
|
|
|
$
|
6,179
|
|
Estimated amortization expense for each of the five succeeding years and thereafter as of April 2, 2021 was as follows (in thousands):
Year Ending December 31,
|
|
Cost of Revenue
|
|
|
Operating
Expenses
|
|
|
Total
|
|
2021 (remainder of year)
|
|
$
|
8,809
|
|
|
$
|
10,602
|
|
|
$
|
19,411
|
|
2022
|
|
|
10,065
|
|
|
|
13,282
|
|
|
|
23,347
|
|
2023
|
|
|
8,848
|
|
|
|
11,547
|
|
|
|
20,395
|
|
2024
|
|
|
6,613
|
|
|
|
9,540
|
|
|
|
16,153
|
|
2025
|
|
|
5,175
|
|
|
|
7,934
|
|
|
|
13,109
|
|
Thereafter
|
|
|
10,284
|
|
|
|
23,628
|
|
|
|
33,912
|
|
Total
|
|
$
|
49,794
|
|
|
$
|
76,533
|
|
|
$
|
126,327
|
|
14
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
8. Supplementary Balance Sheet Information
The following tables provide the details of selected balance sheet items as of the periods indicated (in thousands):
Inventories
|
April 2,
|
|
|
December 31,
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
$
|
52,752
|
|
|
$
|
55,657
|
|
Work-in-process
|
|
15,406
|
|
|
|
15,487
|
|
Finished goods
|
|
20,442
|
|
|
|
20,234
|
|
Demo and consigned inventory
|
|
1,344
|
|
|
|
1,359
|
|
Total inventories
|
$
|
89,944
|
|
|
$
|
92,737
|
|
Accrued Expenses and Other Current Liabilities
|
April 2,
|
|
|
December 31,
|
|
|
2021
|
|
|
2020
|
|
Accrued compensation and benefits
|
$
|
16,399
|
|
|
$
|
12,510
|
|
Accrued warranty
|
|
4,514
|
|
|
|
4,919
|
|
Contract liabilities, current portion
|
|
5,292
|
|
|
|
6,173
|
|
Finance lease obligations
|
|
574
|
|
|
|
9,720
|
|
Accrued earn-out and contingent considerations
|
|
11,094
|
|
|
|
10,796
|
|
Other
|
|
10,788
|
|
|
|
9,662
|
|
Total
|
$
|
48,661
|
|
|
$
|
53,780
|
|
Accrued Warranty
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of the period
|
$
|
4,919
|
|
|
$
|
5,756
|
|
Provision charged to cost of revenue
|
|
324
|
|
|
|
496
|
|
Use of provision
|
|
(690
|
)
|
|
|
(535
|
)
|
Foreign currency exchange rate changes
|
|
(39
|
)
|
|
|
(102
|
)
|
Balance at end of the period
|
$
|
4,514
|
|
|
$
|
5,615
|
|
Other Long Term Liabilities
|
|
|
|
|
|
|
|
|
April 2,
|
|
|
December 31,
|
|
|
2021
|
|
|
2020
|
|
Finance lease obligations
|
$
|
5,760
|
|
|
$
|
5,908
|
|
Accrued pension liabilities
|
|
1,132
|
|
|
|
1,511
|
|
Accrued contingent considerations
|
|
4,999
|
|
|
|
7,276
|
|
Other
|
|
2,445
|
|
|
|
2,471
|
|
Total
|
$
|
14,336
|
|
|
$
|
17,166
|
|
15
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
9. Debt
Debt consisted of the following (in thousands):
|
April 2,
|
|
|
December 31,
|
|
|
2021
|
|
|
2020
|
|
Senior Credit Facilities – term loan
|
$
|
5,308
|
|
|
$
|
5,545
|
|
Less: unamortized debt issuance costs
|
|
(35
|
)
|
|
|
(37
|
)
|
Total current portion of long-term debt
|
$
|
5,273
|
|
|
$
|
5,508
|
|
|
|
|
|
|
|
|
|
Senior Credit Facilities – term loan
|
$
|
93,940
|
|
|
$
|
99,534
|
|
Senior Credit Facilities – revolving credit facility
|
|
96,300
|
|
|
|
99,761
|
|
Less: unamortized debt issuance costs
|
|
(4,095
|
)
|
|
|
(4,368
|
)
|
Total long-term debt
|
$
|
186,145
|
|
|
$
|
194,927
|
|
|
|
|
|
|
|
|
|
Total Senior Credit Facilities
|
$
|
191,418
|
|
|
$
|
200,435
|
|
Senior Credit Facilities
On December 31, 2019, the Company entered into an amended and restated credit agreement (the “Third Amended and Restated Credit Agreement”) with existing lenders for an aggregate credit facility of $450.0 million, consisting of a $100.0 million U.S. dollar equivalent euro-denominated (approximately €90.2 million) 5-year term loan facility and a $350.0 million 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in December 2024 and includes an uncommitted “accordion” feature pursuant to which the commitments under the revolving credit facility may be increased by an additional $200.0 million in aggregate, subject to certain customary conditions.
On March 27, 2020, the Company entered into an amendment (the “First Amendment”) to the Third Amended and Restated Credit Agreement and exercised a portion of the uncommitted accordion feature. The First Amendment increased the revolving credit facility commitment under the Third Amended and Restated Credit Agreement by $145.0 million, from $350.0 million to $495.0 million and reset the uncommitted accordion feature to $200.0 million for potential future expansion.
The outstanding principal balance under the term loan facility is payable in quarterly installments of €1.1 million beginning in March 2020, with the remaining balance due upon maturity. The Company may make additional principal payments at any time, which will reduce the next quarterly installment payment due. Borrowings under the revolving credit facility may be repaid at any time through December 2024. The Company repaid €1.1 million ($1.3 million) of its term loan during the three months ended April 2, 2021.
The Company is required to satisfy certain financial and non-financial covenants under the Third Amended and Restated Credit Agreement. The Third Amended and Restated Credit Agreement also contains customary events of default. The Company was in compliance with these covenants as of April 2, 2021.
Liens
The Company’s obligations under the Senior Credit Facilities are secured, on a senior basis, by a lien on substantially all of the assets of Novanta Inc.
Fair Value of Debt
As of April 2, 2021 and December 31, 2020, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of similar maturities. The fair value of the Company’s debt is classified as Level 2 under the fair value hierarchy.
16
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
10. Leases
Most leases held by the Company expire between 2021 and 2034. In the U.K., where longer lease terms are more common, the Company has a land lease that extends through 2078. Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years, and options to terminate the leases within one year. The exercise of lease renewal or termination options is at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in the Company’s right-of-use assets and operating lease liabilities as they are not reasonably certain of being exercised. The Company regularly evaluates the renewal options and includes the renewal periods in the lease term when they are reasonably certain of being exercised. The depreciable lives of the right-of-use assets and leasehold improvements are limited to the expected lease terms.
The following table summarizes the components of lease costs (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Operating lease cost
|
$
|
1,831
|
|
|
$
|
2,037
|
|
Finance lease cost
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
150
|
|
|
|
248
|
|
Interest on lease liabilities
|
|
87
|
|
|
|
110
|
|
Variable lease cost
|
|
235
|
|
|
|
379
|
|
Total lease cost
|
$
|
2,303
|
|
|
$
|
2,774
|
|
The following table provides additional details of balance sheet information related to the Company’s leases (in thousands, except lease term and discount rate):
|
April 2,
|
|
|
December 31,
|
|
|
2021
|
|
|
2020
|
|
Operating leases
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
31,642
|
|
|
$
|
34,444
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
$
|
5,895
|
|
|
$
|
6,188
|
|
Operating lease liabilities
|
|
30,934
|
|
|
|
32,802
|
|
Total operating lease liabilities
|
$
|
36,829
|
|
|
$
|
38,990
|
|
|
|
|
|
|
|
|
|
Finance leases
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
$
|
9,583
|
|
|
$
|
19,819
|
|
Accumulated depreciation
|
|
(4,617
|
)
|
|
|
(4,934
|
)
|
Finance lease assets included in property, plant and equipment, net
|
$
|
4,966
|
|
|
$
|
14,885
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
574
|
|
|
$
|
9,720
|
|
Other liabilities
|
|
5,760
|
|
|
|
5,908
|
|
Total finance lease liabilities
|
$
|
6,334
|
|
|
$
|
15,628
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
|
|
|
Operating leases
|
|
9.4
|
|
|
|
9.3
|
|
Finance leases
|
|
8.3
|
|
|
|
3.5
|
|
Weighted-average discount rate
|
|
|
|
|
|
|
|
Operating leases
|
|
5.49
|
%
|
|
|
5.50
|
%
|
Finance leases
|
5.54
|
%
|
|
|
3.00
|
%
|
17
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
The following table provides additional details of cash flow information related to the Company’s leases (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Cash paid for amounts included in lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from finance leases
|
$
|
87
|
|
|
$
|
110
|
|
Operating cash flows from operating leases
|
$
|
1,348
|
|
|
$
|
2,258
|
|
Financing cash flows from finance leases
|
$
|
8,883
|
|
|
$
|
369
|
|
Supplemental non-cash information:
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
155
|
|
|
$
|
1,331
|
|
During the three months ended April 2, 2021, the Company paid $8.7 million upon the exercise of an option to purchase a building under a finance lease agreement in Germany. The cash payment is presented as a cash outflow from financing activities in the consolidated statement of cash flows.
Future minimum lease payments under operating and finance leases expiring subsequent to April 2, 2021, including operating leases associated with facilities that have been vacated as a result of the Company’s restructuring actions, are summarized as follows (in thousands):
Year Ending December 31,
|
Operating Leases
|
|
|
Finance Leases
|
|
2021 (remainder of year)
|
$
|
5,650
|
|
|
$
|
680
|
|
2022
|
|
6,706
|
|
|
|
907
|
|
2023
|
|
5,370
|
|
|
|
930
|
|
2024
|
|
4,583
|
|
|
|
954
|
|
2025
|
|
4,571
|
|
|
|
954
|
|
Thereafter
|
|
22,037
|
|
|
|
3,486
|
|
Total minimum lease payments
|
|
48,917
|
|
|
|
7,911
|
|
Less: Interest
|
|
(12,088
|
)
|
|
|
(1,577
|
)
|
Present value of lease liabilities
|
$
|
36,829
|
|
|
$
|
6,334
|
|
11. Common Shares and Share-Based Compensation
Common Share Repurchases
In October 2018, the Company’s Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $25.0 million worth of the Company’s common shares. In February 2020, the Company’s Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $50.0 million worth of the Company’s common shares. As of April 2, 2021, the Company had $59.5 million available for future share repurchases under the 2018 and 2020 Share Repurchase Plans.
18
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Share-Based Compensation Expense
The table below summarizes share-based compensation expense recorded in the consolidated statements of operations (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Selling, general and administrative
|
$
|
4,929
|
|
|
$
|
2,798
|
|
Research and development and engineering
|
|
727
|
|
|
|
193
|
|
Cost of revenue
|
|
988
|
|
|
|
208
|
|
Total share-based compensation expense
|
$
|
6,644
|
|
|
$
|
3,199
|
|
Share-based compensation expense reported in selling, general and administrative expenses included expenses related to restricted stock units and deferred stock units granted to the members of the Company’s Board of Directors of $1.1 million and $0.9 million during the three months ended April 2, 2021 and April 3, 2020, respectively.
Restricted Stock Units and Deferred Stock Units
The Company’s restricted stock units (“RSUs”) have generally been issued with vesting periods ranging from zero to five years and vest based solely on service conditions. Accordingly, the Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company reduces the compensation expense by an estimated forfeiture rate which is based on anticipated forfeitures and historical forfeiture experience.
Deferred stock units (“DSUs”) are granted to the members of the Company’s Board of Directors. Compensation expense associated with the DSUs is recognized in full on the date of grant, as the DSUs are fully vested and non-forfeitable upon grant. There were 171 thousand and 162 thousand DSUs outstanding as of April 2, 2021 and December 31, 2020, respectively, which were included in the calculation of weighted average basic shares outstanding for the respective periods.
The table below summarizes activities relating to RSUs and DSUs issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the three months ended April 2, 2021:
|
Shares
(In thousands)
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested at December 31, 2020
|
|
625
|
|
|
$
|
58.79
|
|
Granted
|
|
91
|
|
|
$
|
130.76
|
|
Vested
|
|
(283
|
)
|
|
$
|
75.06
|
|
Forfeited
|
|
(4
|
)
|
|
$
|
88.18
|
|
Unvested at April 2, 2021
|
|
429
|
|
|
$
|
63.05
|
|
Expected to vest as of April 2, 2021
|
|
405
|
|
|
|
|
|
The total fair value of RSUs and DSUs that vested during the three months ended April 2, 2021 was $39.9 million based on the market price of the underlying shares on the date of vesting.
Performance Stock Units
The Company typically grants two types of performance-based stock awards to certain members of the executive management team: non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”). Both types of performance-based restricted stock units generally cliff vest on the first day following the end of the three-year performance period.
The number of common shares to be issued upon settlement following vesting of the EPS-PSUs is determined based on the Company’s cumulative non-GAAP EPS over a three-year performance period against the performance targets established by the Company’s Board of Directors at the time of grant and will be in the range of zero to 200% of the target number of shares. The
19
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Company recognizes compensation expense ratably over the performance period based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is performed quarterly and the cumulative effect of a change in the estimated compensation expense, if any, is recognized in the consolidated statement of operations in the period in which such determination is made.
The number of shares to be issued upon settlement following vesting of the TSR-PSUs is determined based on the relative market performance of the Company’s common shares compared to the Russell 2000 Index over a three-year performance period using a payout formula established by the Company’s Board of Directors at the time of grant and will be in the range of zero to 200% of the target number of shares. The Company recognizes the related compensation expense based on the fair value of the TSR-PSUs, determined using the Monte Carlo valuation model as of the grant date, on a straight-line basis from the grant date to the end of the three-year performance period. Compensation expense will not be affected by the number of TSR-PSUs that will actually vest at the end of the three-year performance period.
In February 2021, the Company granted operating cash flow performance-based restricted stock units (“OCF-PSUs”) to certain members of the executive management team. Upon completion of the requisite service periods, the OCF-PSUs will vest in two tranches if the Company achieves the cumulative operating cash flow performance target for fiscal years 2021 through 2023 as approved by the Company’s Compensation Committee as of the date of grant. The first fifty percent of the OCF-PSU grant will vest at the end of the four-year service period from the date of grant and the remaining fifty percent of the OCF-PSU grant will vest at the end of the five-year service period from the date of grant. The Company recognizes compensation expense ratably over the requisite service period based on the expectation that 100 percent of the OCF-PSUs are deemed probable of vesting. This probability assessment is performed quarterly and the cumulative effect of a change in the estimated compensation expense, if any, is recognized in the consolidated statement of operations in the period in which such determination is made.
The table below summarizes the activities relating to the performance-based awards issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the three months ended April 2, 2021:
|
Shares
(In thousands)
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Unvested at December 31, 2020
|
|
142
|
|
|
$
|
88.99
|
|
Granted
|
|
67
|
|
|
$
|
150.89
|
|
Performance adjustment
|
|
28
|
|
|
$
|
67.72
|
|
Vested
|
|
(75
|
)
|
|
$
|
64.25
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
Unvested at April 2, 2021
|
|
162
|
|
|
$
|
122.26
|
|
Expected to vest as of April 2, 2021
|
|
136
|
|
|
|
|
|
The unvested PSUs are shown at target in the table above. As of April 2, 2021, the maximum number of shares to be earned under these PSU grants was approximately 286 thousand shares.
The performance adjustment shares and vested shares shown in the table above are for performance-based awards granted on February 22, 2018. These awards vested at 160% of target number of shares during the three months ended April 2, 2021 based on the achievement of cumulative Non-GAAP EPS and applicable relative TSR performance conditions during the performance period of fiscal years 2018 through 2020.
The total fair value of PSUs that vested during the three months ended April 2, 2021 was $9.3 million based on the market price of the underlying shares on the date of vesting.
20
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
The fair value of the TSR-PSUs at the date of grant was estimated using the Monte Carlo valuation model with the following assumptions:
|
Three Months Ended April 2, 2021
|
|
Grant-date stock price
|
$
|
138.23
|
|
Expected volatility
|
|
42.44
|
%
|
Risk-free interest rate
|
|
0.22
|
%
|
Expected annual dividend yield
|
|
—
|
|
Fair value
|
$
|
166.64
|
|
Stock Options
No stock options were granted during the three months ended April 2, 2021. There were 60 thousand fully-vested stock options outstanding as of April 2, 2021.
12. Income Taxes
The Company determines its estimated annual effective tax rate at the end of each interim period based on full-year forecasted pre-tax income and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period with the cumulative effect of any changes in the estimated annual effective tax rate being recorded in the fiscal quarter in which the change is determined. The tax effect of significant unusual items is reflected in the period in which they occur. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 29.0% in the determination of the estimated annual effective tax rate.
The Company maintains a valuation allowance on balances of certain U.S. state net operating losses and certain non-U.S. tax attributes that the Company has determined are more likely than not to be realized. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.
The Company’s effective tax rate of (20.8)% for the three months ended April 2, 2021 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions, other tax credits, and windfall tax benefits upon vesting of certain share-based compensation awards during the period. For the three months ended April 2, 2021, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 35.9% on the Company’s effective tax rate.
The Company’s effective tax rate of (0.3)% for the three months ended April 3, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions and other tax credits and windfall tax benefits upon vesting of certain share-based compensation awards during the period. For the three months ended April 3, 2020, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 19.8% on the Company’s effective tax rate.
21
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
13. Restructuring, Acquisition, and Related Costs
The following table summarizes restructuring, acquisition, and related costs in the accompanying consolidated statements of operations (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
2020 restructuring
|
$
|
1,338
|
|
|
$
|
—
|
|
2019 restructuring
|
|
208
|
|
|
|
569
|
|
2018 restructuring
|
|
—
|
|
|
|
86
|
|
Total restructuring charges
|
|
1,546
|
|
|
|
655
|
|
Acquisition and related charges
|
|
2,185
|
|
|
|
1,006
|
|
Total restructuring, acquisition, and related costs
|
$
|
3,731
|
|
|
$
|
1,661
|
|
2020 Restructuring
As a result of the Company’s ongoing evaluations and efforts to reduce its operating costs, while improving efficiency and effectiveness, the Company initiated the 2020 restructuring program in the third quarter of 2020. This program is focused on reducing operating complexity in the Company, including reducing infrastructure costs and streamlining the Company’s operating model to better serve its customers. In addition, the program will be focused on cost reduction actions that improve gross margins for the overall company. During the three months ended April 2, 2021, the Company recorded $1.3 million in severance and other costs in connection with the 2020 restructuring program. As of April 2, 2021, the Company had incurred cumulative costs related to this restructuring plan totaling $4.1 million. The Company anticipates substantially completing the 2020 restructuring program in the fourth quarter of 2021 and expects to incur additional restructuring charges of $6.0 million to $7.0 million related to the 2020 restructuring program in the next twelve months.
The following table summarizes restructuring costs associated with the 2020 restructuring program by reportable segment (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Photonics
|
$
|
295
|
|
|
$
|
—
|
|
Vision
|
|
422
|
|
|
|
—
|
|
Precision Motion
|
|
621
|
|
|
|
—
|
|
Unallocated Corporate and Shared Services
|
|
—
|
|
|
|
—
|
|
Total
|
$
|
1,338
|
|
|
$
|
—
|
|
2019 Restructuring
During the fourth quarter of 2018, the Company implemented a restructuring plan intended to realign operations, reduce costs, achieve operational efficiencies and focus resources on growth initiatives (the “2019 restructuring plan”). During the three months ended April 2, 2021, the Company recorded $0.2 million in severance and related costs in connection with the 2019 restructuring plan. These costs were reported in the Vision reportable segment. As of April 2, 2021, the Company incurred cumulative costs related to this restructuring plan totaling $9.0 million. The 2019 restructuring program was completed in the first quarter of 2021.
2018 Restructuring
During the second quarter of 2018, the Company initiated a program to integrate manufacturing operations as a result of acquisition activities (the “2018 restructuring plan”). The Company did not incur any costs related to the 2018 restructuring plan during the three months ended April 2, 2021. As of April 2, 2021, the Company incurred cumulative costs related to this restructuring plan totaling $3.6 million. The 2018 restructuring program was completed in 2020.
22
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Rollforward of Accrued Expenses Related to Restructuring
The following table summarizes the accrual activities, by component, related to the Company’s restructuring plans recorded in the accompanying consolidated balance sheets (in thousands):
|
Total
|
|
|
Severance
|
|
|
Facility
|
|
|
Other
|
|
Balance at December 31, 2020
|
$
|
1,800
|
|
|
$
|
1,681
|
|
|
$
|
116
|
|
|
$
|
3
|
|
Restructuring charges
|
|
1,546
|
|
|
|
1,061
|
|
|
|
382
|
|
|
|
103
|
|
Cash payments
|
|
(638
|
)
|
|
|
(490
|
)
|
|
|
(45
|
)
|
|
|
(103
|
)
|
Non-cash charges and other adjustments
|
|
(201
|
)
|
|
|
12
|
|
|
|
(213
|
)
|
|
|
—
|
|
Balance at April 2, 2021
|
$
|
2,507
|
|
|
$
|
2,264
|
|
|
$
|
240
|
|
|
$
|
3
|
|
Acquisition and Related Charges
Acquisition costs in connection with business combinations, including finders’ fees, legal, valuation, and other professional or consulting fees, totaled $0.2 million and $0.1 million for the three months ended April 2, 2021 and April 3, 2020, respectively. During the three months ended April 2, 2021, the Company incurred $0.9 million in legal costs related to a dispute involving a company that was acquired in 2019. Acquisition and related costs recognized under earn-out agreements in connection with acquisitions totaled $1.0 million and $0.9 million for the three months ended April 2, 2021 and April 3, 2020, respectively. The majority of acquisition and related costs for the three months ended April 2, 2021 were included in the Company’s Precision Motion and Vision reportable segments. The majority of acquisition and related costs for the three months ended April 3, 2020 were included in the Company’s Precision Motion and Unallocated Corporate and Shared Services reportable segments.
14. Commitments and Contingencies
Purchase Commitments
There have been no material changes to the Company’s purchase commitments since December 31, 2020.
Legal Contingencies
In April 2020, the Company received notification of an arbitration demand filed with the American Arbitration Association against a business acquired by the Company in June 2019. The arbitration demand was filed by a contract counterparty to a joint product development agreement entered into by the business before Novanta acquired it. The arbitration demand alleges breach of contract and other claims arising out of allegations that the business failed to engage in required marketing activities for the product developed under the joint product development agreement. The claimant is seeking compensatory and punitive damages, lost profits and other relief. The Company believes that the claims are without merit and no amount has been accrued for in the consolidated financial statements.
The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. The Company reviews the status of each significant matter and assesses the potential financial exposure on a quarterly basis. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available as of the date of the consolidated balance sheet. As additional information becomes available, the Company reassesses the potential liability related to any pending claims and litigations and may revise its estimates. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. The Company does not believe that the outcome of these claims will have a material adverse effect on its consolidated financial statements but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect on the consolidated financial statements.
23
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Guarantees and Indemnifications
In the normal course of its operations, the Company executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business dispositions, sale of assets, sale of products and operating leases. Additionally, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which they are involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. Certain of the Company’s officers and directors are also a party to indemnification agreements with the Company. These indemnification agreements provide, among other things, that the director and officer shall be indemnified to the fullest extent permitted by applicable law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such officer or director in connection with any proceeding by reason of his or her relationship with the Company. In addition, the indemnification agreements provide for the advancement of expenses incurred by such director or officer in connection with any proceeding covered by the indemnification agreement, subject to the conditions set forth therein and to the extent such advancement is not prohibited by law. The indemnification agreements also set out the procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims for which indemnification is sought, the procedures for enforcement of indemnification rights, the limitations on and exclusions from indemnification, and the minimum levels of directors’ and officers’ liability insurance to be maintained by the Company.
15. Segment Information
Reportable Segments
The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and assessing performance for the entire Company. The Company evaluates the performance of, and allocates resources to, its segments based on revenue, gross profit and operating profit. The Company’s reportable segments have been identified based on commonality and adjacency of technologies, applications and customers amongst the Company’s individual product lines. The Company determined that disclosing revenue by specific product was impracticable due to the highly customized and extensive portfolio of technologies offered to customers.
Based upon the information provided to the CODM, the Company has determined that it operates in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities consist of the following:
Photonics
The Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, solid state laser, ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Vision
The Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless, recorder and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies; and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Precision Motion
The Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion control sub-assemblies, servo drives, air bearings, and air bearing spindles to customers worldwide. The vast majority of the
24
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Reportable Segment Financial Information
Revenue, gross profit, gross profit margin, operating income (loss), and depreciation and amortization expenses by reportable segment were as follows (in thousands, except percentage data):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
Revenue
|
2021
|
|
|
2020
|
|
Photonics
|
$
|
58,493
|
|
|
$
|
55,140
|
|
Vision
|
|
67,636
|
|
|
|
69,008
|
|
Precision Motion
|
|
36,455
|
|
|
|
31,320
|
|
Total
|
$
|
162,584
|
|
|
$
|
155,468
|
|
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
Gross Profit
|
2021
|
|
|
2020
|
|
Photonics
|
$
|
28,109
|
|
|
$
|
24,661
|
|
Vision
|
|
26,926
|
|
|
|
26,575
|
|
Precision Motion
|
|
16,077
|
|
|
|
13,908
|
|
Unallocated Corporate and Shared Services
|
|
(2,372
|
)
|
|
|
(699
|
)
|
Total
|
$
|
68,740
|
|
|
$
|
64,445
|
|
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
Gross Profit Margin
|
2021
|
|
|
2020
|
|
Photonics
|
|
48.1
|
%
|
|
|
44.7
|
%
|
Vision
|
|
39.8
|
%
|
|
|
38.5
|
%
|
Precision Motion
|
|
44.1
|
%
|
|
|
44.4
|
%
|
Total
|
|
42.3
|
%
|
|
|
41.5
|
%
|
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
Operating Income (Loss)
|
2021
|
|
|
2020
|
|
Photonics
|
$
|
12,395
|
|
|
$
|
8,915
|
|
Vision
|
|
3,366
|
|
|
|
5,634
|
|
Precision Motion
|
|
7,446
|
|
|
|
6,538
|
|
Unallocated Corporate and Shared Services
|
|
(12,108
|
)
|
|
|
(7,837
|
)
|
Total
|
$
|
11,099
|
|
|
$
|
13,250
|
|
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
Depreciation and Amortization Expenses
|
2021
|
|
|
2020
|
|
Photonics
|
$
|
2,898
|
|
|
$
|
2,649
|
|
Vision
|
|
5,275
|
|
|
|
5,277
|
|
Precision Motion
|
|
1,607
|
|
|
|
1,353
|
|
Unallocated Corporate and Shared Services
|
|
69
|
|
|
|
51
|
|
Total
|
$
|
9,849
|
|
|
$
|
9,330
|
|
25
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 2, 2021
(Unaudited)
Revenue by Geography
The Company aggregates geographic revenue based on the customer location where products are shipped to. Revenue from these customers was as follows (in thousands):
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
United States
|
$
|
59,230
|
|
|
$
|
59,205
|
|
Germany
|
|
22,363
|
|
|
|
23,233
|
|
Rest of Europe
|
|
35,575
|
|
|
|
33,085
|
|
China
|
|
22,551
|
|
|
|
15,404
|
|
Rest of Asia-Pacific
|
|
20,747
|
|
|
|
21,700
|
|
Other
|
|
2,118
|
|
|
|
2,841
|
|
Total
|
$
|
162,584
|
|
|
$
|
155,468
|
|
The majority of revenue from our Photonics, Vision and Precision Motion segments is generated from sales to customers within the United States and Europe. Each segment also generates revenue across the other geographies, with no significant concentration of any segment’s remaining revenue.
Revenue by End Market
The Company primarily operates in two end markets: the medical market and advanced industrial market. Revenue by end market was approximately as follows:
|
Three Months Ended
|
|
|
April 2,
|
|
|
April 3,
|
|
|
2021
|
|
|
2020
|
|
Medical
|
|
55
|
%
|
|
|
58
|
%
|
Advanced Industrial
|
|
45
|
%
|
|
|
42
|
%
|
Total
|
|
100
|
%
|
|
|
100
|
%
|
The majority of revenue from the Photonics and Precision Motion segments is generated from sales to customers in the advanced industrial market. The majority of revenue from the Vision segment is generated from sales to customers in the medical market.
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