UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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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
Or
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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.
Novanta Inc.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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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 August 1, 2019, there were
NOVANTA INC.
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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ITEM 3. |
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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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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
NOVANTA INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars or shares)
(Unaudited)
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June 28, |
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December 31, |
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2019 |
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2018 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, net of allowance of $ |
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Inventories |
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Prepaid income taxes and income taxes receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease assets |
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— |
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Deferred tax assets |
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Other assets |
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Intangible assets, net |
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Goodwill |
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Total assets |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current portion of long-term debt |
$ |
— |
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$ |
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Accounts payable |
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Income taxes payable |
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Current portion of operating lease liabilities |
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— |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term debt |
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Operating lease liabilities |
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— |
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Deferred tax liabilities |
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Income taxes payable |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 15) |
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Stockholders’ equity: |
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Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders' equity |
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Total liabilities and stockholders’ equity |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
1
NOVANTA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars or shares, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 28, |
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June 29, |
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June 28, |
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June 29, |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Research and development and engineering |
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Selling, general and administrative |
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Amortization of purchased intangible assets |
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Restructuring and acquisition related costs |
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Total operating expenses |
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Operating income |
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Interest income (expense), net |
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Foreign exchange transaction gains (losses), net |
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( |
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Other income (expense), net |
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( |
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( |
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Income before income taxes |
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Income tax provision |
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Consolidated net income |
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Less: Net income attributable to noncontrolling interest |
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— |
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— |
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( |
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Net income attributable to Novanta Inc. |
$ |
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$ |
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$ |
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$ |
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Earnings per common share attributable to Novanta Inc. (Note 5): |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Weighted average common shares outstanding—basic |
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Weighted average common shares outstanding—diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
2
NOVANTA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 28, |
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June 29, |
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June 28, |
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June 29, |
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2019 |
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2018 |
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2019 |
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2018 |
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Consolidated net income |
$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments, net of tax (1) |
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( |
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( |
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( |
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Pension liability adjustments, net of tax (2) |
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Total other comprehensive income |
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( |
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( |
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( |
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Total consolidated comprehensive income |
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Less: Comprehensive income attributable to noncontrolling interest |
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— |
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( |
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— |
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( |
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Comprehensive income attributable to Novanta Inc. |
$ |
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$ |
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$ |
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$ |
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(1) |
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(2) |
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The accompanying notes are an integral part of these consolidated financial statements.
3
NOVANTA INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands of U.S. dollars or shares)
(Unaudited)
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Novanta Inc. Stockholders |
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Common Shares |
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Additional Paid-In |
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Accumulated |
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Accumulated Other Comprehensive |
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# of Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Total |
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Three Months Ended June 28, 2019 |
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Balance at March 29, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Common stock issued under stock plans |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for taxes on vested stock awards |
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( |
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— |
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( |
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— |
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— |
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( |
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Repurchases of common stock |
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( |
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— |
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( |
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— |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Balance at June 28, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Six Months Ended June 28, 2019 |
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Balance at December 31, 2018 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Common stock issued under stock plans |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for taxes on vested stock awards |
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( |
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— |
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( |
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— |
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— |
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( |
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Repurchases of common stock |
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( |
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— |
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( |
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— |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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Balance at June 28, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Three Months Ended June 29, 2018 |
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Balance at March 30, 2018 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Redeemable noncontrolling interest redemption value adjustment |
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— |
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— |
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— |
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— |
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Common stock issued under stock plans |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for taxes on vested stock awards |
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( |
) |
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— |
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( |
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— |
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— |
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( |
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Repurchase of common stock |
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( |
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— |
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( |
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— |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Balance at June 29, 2018 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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|
|
|
|
|
|
|
Six Months Ended June 29, 2018 |
|
|||||||||||||||||||||
|
Balance at December 31, 2017 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Redeemable noncontrolling interest redemption value adjustment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Common stock issued under stock plans |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Shares withheld for taxes on vested stock awards |
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Repurchase of common stock |
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Adoption of ASU 2016-16 |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance at June 29, 2018 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
NOVANTA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
|
|
Six Months Ended |
|
|||||
|
|
June 28, |
|
|
June 29, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Consolidated net income |
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Provision for inventory excess and obsolescence |
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
( |
) |
|
|
( |
) |
|
Inventory acquisition fair value adjustments |
|
|
|
|
|
— |
|
|
Other |
|
|
|
|
|
|
|
|
Changes in assets and liabilities which (used)/provided cash, excluding effects from business acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
( |
) |
|
|
|
|
|
Inventories |
|
( |
) |
|
|
( |
) |
|
Prepaid income taxes, income taxes receivable, prepaid expenses and other current assets |
|
( |
) |
|
|
( |
) |
|
Accounts payable, income taxes payable, accrued expenses and other current liabilities |
|
( |
) |
|
|
( |
) |
|
Other non-current assets and liabilities |
|
|
|
|
|
( |
) |
|
Cash provided by operating activities |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired and working capital adjustments |
|
( |
) |
|
|
( |
) |
|
Purchases of property, plant and equipment |
|
( |
) |
|
|
( |
) |
|
Other investing activities |
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
|
|
|
|
|
|
Repayments of term loan and revolving credit facility |
|
( |
) |
|
|
( |
) |
|
Payments of withholding taxes from stock-based awards |
|
( |
) |
|
|
( |
) |
|
Repurchases of common stock |
|
( |
) |
|
|
( |
) |
|
Acquisition of noncontrolling interest |
|
— |
|
|
|
( |
) |
|
Other financing activities |
|
( |
) |
|
|
( |
) |
|
Cash provided by (used in) financing activities |
|
( |
) |
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
|
|
|
|
|
( |
) |
|
Increase (decrease) in cash and cash equivalents |
|
( |
) |
|
|
|
|
|
Cash and cash equivalents, beginning of the period |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
$ |
|
|
|
$ |
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
$ |
|
|
|
$ |
|
|
|
Cash paid for income taxes |
$ |
|
|
|
$ |
|
|
|
Income tax refunds received |
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 28, 2019
(Unaudited)
1.
Novanta Inc. and its subsidiaries (collectively referred to as “Novanta”, the “Company”, “we”, “us”, “our”) is a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. Novanta combines deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to the customers’ demanding applications.
The accompanying unaudited interim consolidated financial statements have been prepared by the Company in United States (“U.S.”) dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.
The Company’s unaudited interim financial statements are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which they are deemed to be necessary. The Company evaluates its estimates based on historical experience, current conditions and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ significantly from those estimates.
6
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 |
|
Description |
|
Effective Date |
|
Effect on the Financial Statements or Other Significant Matters |
|
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” |
|
ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 should be applied either retrospectively or prospectively.
|
|
January 1, 2020. Early adoption is permitted. |
|
The Company adopted ASU 2018-15 on a prospective basis during the first quarter of 2019. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements. |
|
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” |
|
ASU 2018-02 allows an entity to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 shall be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the change in the U.S. federal corporate income tax rate under the Tax Reform Act is recognized. |
|
January 1, 2019. |
|
The Company adopted ASU 2018-02 during the first quarter of 2019. The adoption of ASU 2018-02 did not have a material impact on the Company’s consolidated financial statements. |
|
|
|
|
|
|
|
|
|
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” |
|
ASU 2016-02 requires a lessee to recognize on the balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases and to disclose key information about leasing arrangements. |
|
January 1, 2019. |
|
The Company adopted ASU 2016-02 during the first quarter of 2019 using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance. The adoption of ASU 2016-02 resulted in the recording of additional operating lease right-of-use (“ROU”) assets and operating lease liabilities of approximately $ |
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.
7
Performance Obligations
Substantially all of the Company’s revenue is recognized at a point in time, upon shipment, rather than over time.
At the request of its customers, the Company may perform professional services, generally for the maintenance and repair of products previously sold to those customers and for engineering services. Professional services are typically short in duration, mostly less than
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
Practical Expedients and Exemptions
The Company expenses incremental direct costs of obtaining a contract when incurred if the expected amortization period is one year or less. These costs are recorded within selling, general and administrative expenses in the consolidated statement of operations.
The Company does not adjust the promised amount of consideration for the effects of a financing component because the transfer of a promised good to a customer and the customer’s payment for that good are typically one year or less. The Company does not disclose the value of the remaining performance obligation for contracts with an original expected length of one year or less.
Contract Liabilities
Contract liabilities consist of deferred revenue and advance payments from customers, including amounts that are refundable. These contract liabilities are classified as either current or long-term liabilities in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of June 28, 2019 and December 31, 2018, contract liabilities were $
Disaggregated Revenue
See Note 17 for the Company’s disaggregation of revenue by segment, geography and end market.
8
3. Business Combinations
Med X Change
On June 5, 2019, the Company acquired
Ingenia
On April 16, 2019, the Company acquired
Allocation of Purchase Price
The acquisitions of Med X Change and Ingenia have been accounted for as business combinations. The allocation of the purchase price is based upon a valuation of assets acquired and liabilities assumed. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions developed by management. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information obtained with regards to facts and circumstances that existed as of the acquisition date. The purchase price allocation is preliminary as the Company is in the process of collecting additional information for the valuation of intangible assets, contingent consideration and unrecognized tax benefits.
9
Based upon a preliminary valuation, the total purchase price for Med X Change and Ingenia was allocated as follows (in thousands):
|
|
Purchase Price |
|
|
|
|
Allocation |
|
|
|
Cash |
$ |
|
|
|
Accounts receivable |
|
|
|
|
Inventories |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Goodwill |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable |
|
|
|
|
Deferred tax liabilities |
|
|
|
|
Other liabilities |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Total assets acquired, net of liabilities assumed |
|
|
|
|
Less: cash acquired |
|
|
|
|
Total purchase price, net of cash acquired |
|
|
|
|
Less: contingent consideration |
|
|
|
|
Less: purchase price holdback |
|
|
|
|
Less: working capital adjustment |
|
|
|
|
Net cash used for acquisition of businesses |
$ |
|
|
The fair value of intangible assets for Med X Change and Ingenia is comprised of the following (dollar amounts in thousands):
|
|
|
|
|
|
Weighted Average |
|
|
Estimated Fair |
|
|
Amortization |
|
|
|
Value |
|
|
Period |
|
|
Developed technologies |
$ |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
Trademarks and trade names |
|
|
|
|
|
|
Backlog |
|
|
|
|
|
|
Total |
$ |
|
|
|
|
The Company recorded an aggregate of $
The operating results of Med X Change and Ingenia were included in the Company’s results of operations beginning on the respective acquisition dates. These acquisitions contributed revenues of $
The pro forma financial information reflecting the operating results of Med X Change and Ingenia, as if they had been acquired as of January 1, 2018, would not differ materially from the operating results of the Company as reported for the year ended December 31, 2018.
Acquisition Costs
Acquisition costs are included in restructuring and acquisition related costs in the consolidated statements of operations. Acquisition costs for Ingenia and Med X Change were $
10
4. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) was as follows (in thousands):
|
|
Total Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Cumulative |
|
|
Pension |
|
|||
|
|
Comprehensive |
|
|
Translation |
|
|
Liability |
|
|||
|
|
Income (Loss) |
|
|
Adjustments |
|
|
Adjustments |
|
|||
|
Balance at December 31, 2018 |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss) (1) |
|
|
|
|
|
— |
|
|
|
|
|
|
Balance at June 28, 2019 |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
(1) |
|
5. Earnings per Common Share
Basic earnings per common share is computed by dividing net income attributable to Novanta Inc., after redeemable noncontrolling interest redemption value adjustment, by the weighted average number of common shares outstanding during the period. The Company recognized changes in the redeemable noncontrolling interest redemption value by adjusting the carrying amount of the redeemable noncontrolling interest as of the end of the applicable period to the higher of: (i) the estimated redemption value assuming the end of the period was also the redemption date or (ii) the carrying value without any redemption value adjustments. Such adjustments were recorded in retained earnings in stockholders’ equity instead of net income attributable to Novanta Inc. For both basic and diluted earnings per common share, such redemption value adjustments were included in the calculation of the numerator.
For diluted earnings per common share, the denominator also includes the dilutive effect of outstanding common share equivalents. For the three and six months ended June 28, 2019 and June 29, 2018, respectively, weighted average shares outstanding for the diluted earnings per share included the dilutive effect of outstanding restricted stock units, stock options, total shareholder return performance-based restricted stock units and the 2017 non-GAAP EPS performance-based restricted stock units, determined using the treasury stock method. The dilutive effects of market-based contingently issuable shares are included in the weighted average dilutive share calculation based on the number of shares, if any, that would be issuable as of the end of the reporting period. Dilutive effects of attainment-based contingently issuable shares granted to the former Laser Quantum noncontrolling interest shareholders, as well as the 2018 and 2019 non-GAAP EPS performance-based restricted stock units will be included in the weighted average dilutive share calculation when the performance targets have been achieved.
11
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 |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019(1) |
|
|
2018(2) |
|
|
2019(1) |
|
|
2018(2) |
|
||||
|
Numerators: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Less: Net income attributable to noncontrolling interest |
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net income attributable to Novanta Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest redemption value adjustment |
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
Net income attributable to Novanta Inc. after adjustment for redeemable noncontrolling interest redemption value |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding— basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding— diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive potential common shares excluded from above |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share Attributable to Novanta Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Diluted |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
|
|
(2) |
|
6. Fair Value Measurements
ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:
|
|
• |
Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access |
|
|
• |
Level 2: Observable inputs other than those described in Level 1 |
|
|
• |
Level 3: Unobservable inputs |
Current Assets and Liabilities
The Company’s cash equivalents are highly liquid investments with original maturities of three months or less, which represent an asset the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.
12
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 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 from April 2019 through March 2022. The undiscounted range of possible contingent consideration is
On
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 June 28, 2019 (in thousands):
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant Other |
|
||
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|||
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|||
|
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Current |
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Long-term |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
13
The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 (in thousands):
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant Other |
|
||
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|||
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|||
|
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - Long-term |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
Changes in the fair value of Level 3 contingent consideration during the six months ended June 28, 2019 were as follows (in thousands):
|
|
Contingent Consideration |
|
|
|
Balance at December 31, 2018 |
$ |
|
|
|
Acquisition of Ingenia |
|
|
|
|
Fair value adjustments |
|
|
|
|
Effect of foreign exchange rates |
|
|
|
|
Balance at June 28, 2019 |
$ |
|
|
The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 liabilities:
|
Liability |
|
June 28, 2019 Fair Value (in thousands) |
|
Valuation Technique |
|
Unobservable Inputs |
|
Percentage Applied |
|
Contingent consideration (Ingenia) |
|
$ |
|
Monte Carlo method |
|
Historical and projected revenues from April 2019 through March 2022 |
|
N/A |
|
|
|
|
|
|
|
Revenue volatility |
|
|
|
|
|
|
|
|
|
Cost of debt |
|
|
|
|
|
|
|
|
|
Revenue discount rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (Other) |
|
$ |
|
Discounted cash flow method |
|
Historical and projected revenues for fiscal years 2018 to 2021 |
|
N/A |
|
|
|
|
|
|
|
Discount rate |
|
|
Increases or decreases in the unobservable inputs noted above would result in a higher or lower fair value measurement.
See Note 10 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.
7.
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
14
transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset losses and gains on the underlying hedged exposures. Furthermore, the Company manages its exposures to counterparty risks on derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
The Company uses forward contracts as a part of its strategy to limit its exposures related to monetary assets and liabilities denominated in currencies other than the functional currencies of the Company and its subsidiaries. These forward contracts are not 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 June 28, 2019, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $
The Company recognized an aggregate net gain of $
8. Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The Company tests its goodwill balances annually for impairment as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist. The Company performed the most recent annual goodwill and indefinite-lived intangible asset impairment test as of the beginning of the second quarter of 2019 and noted
The following table summarizes changes in goodwill during the six months ended June 28, 2019 (in thousands):
|
Balance at beginning of the period |
$ |
|
|
|
Goodwill acquired from acquisitions |
|
|
|
|
Effect of foreign exchange rate changes |
|
( |
) |
|
Balance at end of the period |
$ |
|
|
Goodwill by reportable segment as of June 28, 2019 was as follows (in thousands):
|
|
Reportable Segment |
|
|
|
|
|
|||||||||
|
|
Photonics |
|
|
Vision |
|
|
Precision Motion |
|
|
Total |
|
||||
|
Goodwill |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accumulated impairment of goodwill |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Goodwill by reportable segment as of December 31, 2018 was as follows (in thousands):
|
|
Reportable Segment |
|
|
|
|
|
|||||||||
|
|
Photonics |
|
|
Vision |
|
|
Precision Motion |
|
|
Total |
|
||||
|
Goodwill |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accumulated impairment of goodwill |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
15
Intangible Assets
Intangible assets as of June 28, 2019 and December 31, 2018, respectively, are summarized as follows (in thousands):
|
|
June 28, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
||||||
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technologies |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Customer backlog |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Non-compete covenant |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Trademarks and trade names |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Amortizable intangible assets |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Non-amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
|
— |
|
|
|
13,027 |
|
|
|
|
|
|
|
— |
|
|
|
13,027 |
|
|
Totals |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
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.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Amortization expense – cost of revenue |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Amortization expense – operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Estimated amortization expense for each of the five succeeding years and thereafter as of June 28, 2019 was as follows (in thousands):
|
Year Ending December 31, |
|
Cost of Revenue |
|
|
Operating Expenses |
|
|
Total |
|
|||
|
2019 (remainder of year) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
9. Supplementary Balance Sheet Information
The following tables provide the details of selected balance sheet items as of the periods indicated (in thousands):
Inventories
|
|
June 28, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Raw materials |
$ |
|
|
|
$ |
|
|
|
Work-in-process |
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
Demo and consigned inventory |
|
|
|
|
|
|
|
|
Total inventories |
$ |
|
|
|
$ |
|
|
16
Accrued Expenses and Other Current Liabilities
|
|
June 28, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Accrued compensation and benefits |
$ |
|
|
|
$ |
|
|
|
Accrued warranty |
|
|
|
|
|
|
|
|
Contract liabilities, current portion |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
Accrued Warranty
|
|
Six Months Ended |
|
|||||
|
|
June 28, 2019 |
|
|
June 29, 2018 |
|
||
|
Balance at beginning of the period |
$ |
|
|
|
$ |
|
|
|
Provision charged to cost of revenue |
|
|
|
|
|
|
|
|
Warranty liabilities from acquisitions |
|
|
|
|
|
— |
|
|
Use of provision |
|
( |
) |
|
|
( |
) |
|
Foreign currency exchange rate changes |
|
( |
) |
|
|
( |
) |
|
Balance at end of the period |
$ |
|
|
|
$ |
|
|
Other Long Term Liabilities
|
|
June 28, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Finance lease obligations |
$ |
|
|
|
$ |
|
|
|
Accrued pension liabilities |
|
|
|
|
|
|
|
|
Accrued contingent considerations |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
10. Debt
Debt consisted of the following (in thousands):
|
|
June 28, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Senior Credit Facilities – term loan |
$ |
— |
|
|
$ |
|
|
|
Less: unamortized debt issuance costs |
|
— |
|
|
|
( |
) |
|
Total current portion of long-term debt |
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facilities – term loan |
$ |
|
|
|
$ |
|
|
|
Senior Credit Facilities – revolving credit facility |
|
|
|
|
|
|
|
|
Less: unamortized debt issuance costs |
|
( |
) |
|
|
( |
) |
|
Total long-term debt |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Credit Facilities |
$ |
|
|
|
$ |
|
|
Senior Credit Facilities
In August 2017, the Company entered into an amendment (the “Third Amendment”) to the second amended and restated credit agreement, dated as of May 19, 2016 (the “Second Amended and Restated Credit Agreement”). The Third Amendment increased the revolving credit facility under the Second Amended and Restated Credit Agreement by $
17
Amendment increased the term loan balance from $
In February 2018, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Second Amended and Restated Credit Agreement.
The Company is required to satisfy certain financial and non-financial covenants under the Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement also contains customary events of default. The Company was in compliance with these covenants as of June 28, 2019.
Liens
The Company’s obligations under the Senior Credit Facilities are secured, on a senior basis, by a lien on substantially all of the assets of Novanta Inc., Novanta Corporation, NDS Surgical Imaging LLC, Novanta Europe GmbH, Novanta UK Investments Holding Limited and Novanta Technologies UK Limited. The Second Amended and Restated Credit Agreement also contains customary events of default.
Fair Value of Debt
As of June 28, 2019 and December 31, 2018, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of similar maturities. The fair value of the Company’s debt is classified as Level 2 under the fair value hierarchy.
11.
The Company leases certain equipment and facilities. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Many of these leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common-area maintenance or other property management costs). The Company accounts for lease and non-lease components separately. Leases with an initial term of 12 months or less are not recognized on the balance sheet.
Most leases held by the Company expire between
Most leases held by the Company do not provide an implicit rate. The Company uses its incremental borrowing rate for the same jurisdiction and term as the associated lease based on the information available at the lease commencement date to determine the present value of the lease payments. The Company used the incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. The Company has a centrally managed treasury function; therefore, the Company applies a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment.
18
The following table summarizes the components of lease costs (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
June 28, |
|
|
June 28, |
|
||
|
|
2019 |
|
|
2019 |
|
||
|
Operating lease cost |
$ |
|
|
|
$ |
|
|
|
Finance lease cost |
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
Variable lease cost |
|
|
|
|
|
|
|
|
Total lease cost |
$ |
|
|
|
$ |
|
|
The following table provides the details of balance sheet information related to leases (in thousands, except lease term and discount rate):
|
|
June 28, |
|
|
|
|
2019 |
|
|
|
Operating leases |
|
|
|
|
Operating lease right-of-use assets |
$ |
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities |
$ |
|
|
|
Operating lease liabilities |
|
|
|
|
Total operating lease liabilities |
$ |
|
|
|
|
|
|
|
|
Finance leases |
|
|
|
|
Property, plant and equipment, gross |
$ |
|
|
|
Accumulated depreciation |
|
( |
) |
|
Property, plant and equipment, net |
$ |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
$ |
|
|
|
Other liabilities |
|
|
|
|
Total finance lease liabilities |
$ |
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
Operating leases |
|
10.8 |
|
|
Finance leases |
|
9.8 |
|
|
Weighted-average discount rate |
|
|
|
|
Operating leases |
|
|
% |
|
Finance leases |
|
|
% |
The following table provides the details of cash flow information related to leases (in thousands):
|
|
Six Months Ended |
|
|
|
|
June 28, |
|
|
|
|
2019 |
|
|
|
Cash paid for amounts included in lease liabilities |
|
|
|
|
Operating cash flows from finance leases |
$ |
|
|
|
Operating cash flows from operating leases |
$ |
|
|
|
Financing cash flows from finance leases |
$ |
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
$ |
|
|
19
Future minimum lease payments under operating and finance leases expiring subsequent to June 28, 2019, including operating leases associated with facilities that have been vacated as a result of the Company’s restructuring actions, are summarized as follows (in thousands):
|
Year Ending December 31, |
Operating Lease |
|
|
Finance Lease |
|
||
|
2019 (remainder of year) |
$ |
|
|
|
$ |
|
|
|
2020 |
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
|
|
|
|
|
|
Less: Interest |
|
( |
) |
|
|
( |
) |
|
Present value of lease liabilities |
$ |
|
|
|
$ |
|
|
Future minimum lease payments under operating and capital leases expiring subsequent to December 31, 2018 under Accounting Standard Codification Topic 840, “Leases”, including operating leases associated with facilities that have been vacated as a result of the Company’s restructuring actions, are summarized as follows (in thousands):
|
Year Ending December 31, |
Operating Lease (1) |
|
|
Capital Lease |
|
||
|
2019 |
$ |
|
|
|
$ |
|
|
|
2020 |
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
Total minimum lease payments |
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
|
12. Common Shares and Share-Based Compensation
Common Share Repurchases
In October 2018, the Company’s Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $
Share-Based Compensation Expense
The table below summarizes share-based compensation expense recorded in the consolidated statements of operations (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Selling, general and administrative |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Research and development and engineering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Share-based compensation reported in selling, general and administrative expenses included expenses related to restricted stock units and deferred stock units granted to the members of the Company’s Board of Directors of $
20
deferred stock units granted to the members of the Company’s Board of Directors of $
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
Deferred stock units (“DSUs”) are granted to the members of the Company’s Board of Directors. Compensation expense associated with DSUs is recognized in full on the date of grant, as the DSUs are fully vested and non-forfeitable upon grant. There were
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 six months ended June 28, 2019:
|
|
Shares (In thousands) |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Unvested at December 31, 2018 |
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
$ |
|
|
|
Vested |
|
( |
) |
|
$ |
|
|
|
Forfeited |
|
( |
) |
|
$ |
|
|
|
Unvested at June 28, 2019 |
|
|
|
|
$ |
|
|
|
Expected to vest as of June 28, 2019 |
|
|
|
|
|
|
|
The total fair value of RSUs and DSUs that vested during the six months ended June 28, 2019 was $
Performance Stock Units
The Company granted two types of performance-based stock awards to certain members of the executive management team: non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”). Both types of performance-based restricted stock units generally cliff vest on the first day following the end of the three-year performance period.
The number of common shares to be issued upon settlement following vesting of the EPS-PSUs is determined based on the Company’s cumulative non-GAAP EPS over a three-year performance period against the performance targets established by the Company’s Board of Directors at the time of grant and will be in the range of
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
21
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 six months ended June 28, 2019:
|
|
Shares (In thousands) |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Unvested at December 31, 2018 |
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
$ |
|
|
|
Performance adjustment (1) |
|
|
|
|
$ |
|
|
|
Vested |
|
( |
) |
|
$ |
|
|
|
Forfeited |
|
— |
|
|
$ |
— |
|
|
Unvested at June 28, 2019 |
|
|
|
|
$ |
|
|
|
Expected to vest as of June 28, 2019 |
|
|
|
|
|
|
|
|
|
(1) |
|
|
The total fair value of PSUs that vested during the six months ended June 28, 2019 was $
The fair value of the TSR-PSUs at the date of grant was estimated using the Monte-Carlo valuation model with the following assumptions:
|
|
Six Months Ended June 28, 2019 |
|
|
|
Grant-date stock price |
$ |
|
|
|
Expected volatility |
|
|
% |
|
Risk-free interest rate |
|
|
% |
|
Expected annual dividend yield |
|
|
|
|
Fair value |
$ |
|
|
13. Income Taxes
The Company determines its estimated annual effective tax rate at the end of each interim period based on full-year forecasted pre-tax income and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period with the cumulative effect of any changes in the estimated annual effective tax rate being recorded in the fiscal quarter in which the change is determined. The tax effect of significant unusual items is reflected in the period in which they occur. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of
The Company’s effective tax rate of
The Company’s effective tax rate of
The Company’s effective tax rate of
22
The Company’s effective tax rate of
The Company maintains a valuation allowance on some of its deferred tax assets in certain jurisdictions. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.
14. Restructuring and Acquisition Related Costs
The following table summarizes restructuring and acquisition related costs in the accompanying consolidated statements of operations (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
2019 restructuring |
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
2018 restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and related charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and acquisition related costs |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2019 Restructuring
The following table summarizes restructuring costs associated with the 2019 restructuring program for each reportable segment and unallocated corporate and shared services costs (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
June 28, |
|
|
June 28, |
|
||
|
|
2019 |
|
|
2019 |
|
||
|
Photonics |
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
23
2018 Restructuring
During the second quarter of 2018, the Company initiated a program to integrate manufacturing operations as a result of recent acquisition activities. During the three and six months ended June 28, 2019, the Company recorded $
Rollforward of Accrued Expenses Related to Restructuring
The following table summarizes the accrual activities, by component, related to the Company’s restructuring plans recorded in the accompanying consolidated balance sheets (in thousands):
|
|
Total |
|
|
Severance |
|
|
Facility |
|
|
Other |
|
||||
|
Balance at December 31, 2018 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Reclassification of reserves (a) |
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Non-cash write-offs and other adjustments |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
Balance at June 28, 2019 |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
(a) |
Accrual related to exited facilities was reclassified to operating lease liabilities upon adoption of ASU 2016-02. |
Acquisition and Related Charges
Acquisition related costs in connection with business combinations, including finders’ fees, legal, valuation, and other professional or consulting fees, totaled $
15. Commitments and Contingencies
Purchase Commitments
There have been no material changes to the Company’s purchase commitments since December 31, 2018.
Legal Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company reviews the status of each significant matter and assesses the potential financial exposure on a quarterly basis. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available as of the date of the consolidated balance sheet. As additional information becomes available, the Company reassesses the potential liability related to any pending claims and litigations and may revise its estimates. The Company does not believe that the outcome of these claims will have a material adverse effect on its consolidated financial statements but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect on the consolidated financial statements.
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-
24
laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. Certain of the Company’s officers and directors are also a party to indemnification agreements with the Company. These indemnification agreements provide, among other things, that the director and officer shall be indemnified to the fullest extent permitted by applicable law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such officer or director in connection with any proceeding by reason of his or her relationship with the Company. In addition, the indemnification agreements provide for the advancement of expenses incurred by such director or officer in connection with any proceeding covered by the indemnification agreement, subject to the conditions set forth therein and to the extent such advancement is not prohibited by law. The indemnification agreements also set out the procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims for which indemnification is sought, the procedures for enforcement of indemnification rights, the limitations on and exclusions from indemnification, and the minimum levels of directors’ and officers’ liability insurance to be maintained by the Company.
16. Related Party Transactions
As of March 29, 2019, certain members of the Company’s board of directors served on the board of directors or as an advisor of companies that are customers of the Company. All contracts with these related parties were executed at arm’s length in the ordinary course of business. As of the beginning of the second quarter of 2019, these customers were no longer considered to be related parties.
The aggregate revenue from these customers was $
17. Segment Information
Reportable Segments
The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and assessing performance for the entire Company. The Company evaluates the performance of, and allocates resources to, its segments based on revenue, gross profit and operating profit. The Company’s reportable segments have been identified based on commonality and adjacency of technologies, applications and customers amongst the Company’s individual product lines. The Company determined that disclosing revenue by specific product was impracticable due to the highly customized and extensive portfolio of technologies offered to customers.
Based upon the information provided to the CODM, the Company has determined that it operates in
Photonics
The Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, continuous wave and ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Vision
The Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless imaging and operating room integration technologies; 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, air bearing spindles and precision machined components to customers worldwide.
25
The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Reportable Segment Financial Information
Revenue, gross profit, gross profit margin, operating income (loss), and depreciation and amortization expenses by reportable segment were as follows (in thousands, except percentage data):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Gross Profit Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Vision |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Precision Motion |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Depreciation and Amortization Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
26
Revenue by Geography
The Company aggregates geographic revenue based on the customer location where products are shipped. Revenue from these customers was as follows (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
United States |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rest of Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rest of Asia-Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Advanced Industrial |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Medical |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
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.
18. Subsequent Events
On
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report on Form 10-Q. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to, our belief that the Purchasing Managers Index (“PMI”) may provide an indication of the impact of general economic conditions on our sales into the advanced industrial end market; our strategy; anticipated financial performance; expected liquidity and capitalization; drivers of revenue growth and our growth expectations in various markets; management’s plans and objectives for future operations, expenditures and product development and investments in research and development; business prospects; potential of future product releases and expansion of our product and service offerings; anticipated revenue performance; industry trends; market conditions; our competitive positions; changes in economic and political conditions; changes in accounting principles; changes in actual or assumed tax liabilities; expectations regarding tax exposures; anticipated reinvestment of future earnings and dividend policy; anticipated expenditures in regard to the Company’s benefit plans; future acquisitions, integration and anticipated benefits from acquisitions and dispositions; anticipated economic benefits and expected costs of restructuring programs; ability to repay our indebtedness; our intentions regarding the use of cash; expectations regarding legal and regulatory environmental requirements and our compliance thereto; and other statements that are not historical facts. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following: economic and political conditions and the effects of these conditions on our customers’ businesses and level of business activities; our significant dependence upon our customers’ capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate and successfully commercialize our innovations; failure to introduce new products in a timely manner; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our information technology systems; our failure to comply with data privacy regulations; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; our increased use of outsourcing in foreign countries; risks associated with increased outsourcing of components manufacturing; our exposure to increased tariffs, trade restrictions or taxes on our products; our failure to comply with local import and export regulations in the jurisdictions in which we operate; negative effects on global economic conditions, financial markets and our business as a result of the United Kingdom’s impending withdrawal from the European Union and the actions of the current U.S. government, including its policies on trade tariffs and reactions from other countries to any new tariffs imposed by the U.S.; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors’ products; disruptions in the supply of certain key components and other goods from our suppliers; our failure to accurately forecast component and raw material requirements leading to excess inventories or delays in the delivery of our products; production difficulties and product delivery delays or disruptions; our exposure to medical device regulation, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products; potential for penalties violating foreign, U.S. federal, and state healthcare laws and regulations; changes in governmental regulations affecting our business or products; our compliance, or failure to comply, with environmental regulations; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; tax audits by tax authorities; changes in tax laws, and fluctuations in our effective tax rates; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; our existing indebtedness limiting our ability to engage in certain activities; volatility in the market price for our common shares; provisions of our corporate documents that may delay or prevent a change in control; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company’s operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the heading “Risk Factors.” In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements, except as required under applicable law.
28
Accounting Period
The interim financial statements of Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “our”) are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.
Business Overview
We are a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. We combine deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables us to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers' demanding applications.
Reportable Segments
We operate in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities consist of the following:
Photonics
Our Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, continuous wave and ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Vision
Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless imaging and operating room integration technologies; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies, and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Precision Motion
Our Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motors, motion control sub-assemblies, servo drives, air bearings, air bearing spindles and precision machined components to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
End Markets
We primarily operate in two end markets: the advanced industrial market and the medical market.
Advanced Industrial Market
For the three and six months ended June 28, 2019, the advanced industrial market accounted for approximately 45% of our revenue. Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, the financial condition of our customers, changes in regulatory requirements and laws, and general economic conditions. We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market.
Medical Market
For the three and six months ended June 28, 2019, the medical market accounted for approximately 55% of our revenue. Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending,
29
changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, trends in surgical procedures, changes in technology requirements, changes in customer or patient preferences, and general demographic trends.
Strategy
Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:
|
|
• |
disciplined focus on our diversified business model of providing functionality to long life-cycle OEM customer platforms in attractive medical and advanced industrial niche markets; |
|
|
• |
improving our business mix to increase medical sales as a percentage of total revenue by: |
|
|
- |
introducing new products aimed at attractive medical applications, such as minimally invasive and robotic surgery, ophthalmology, patient monitoring, drug delivery, clinical laboratory testing and life science equipment; |
|
|
- |
deepening our key account management relationships with and driving cross selling of our product offerings to leading medical equipment manufacturers; and |
|
|
- |
pursuing complementary medical technology acquisitions; |
|
|
• |
increasing our penetration of high growth advanced industrial applications, such as laser materials processing, robotics, automation and metrology, by working closely with OEM customers to launch application specific products that closely match the requirements of each application; |
|
|
• |
broadening our portfolio of enabling proprietary technologies and capabilities through increased investment in new product development, expanded sales and marketing channels to reach target customers, and investments in application development to further penetrate existing customers, while expanding the applicability of our solutions to new markets; |
|
|
• |
broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications, including increasing our recurring revenue streams such as services, spare parts and consumables; |
|
|
• |
improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean manufacturing principles and strategic sourcing across our major production sites; and |
|
|
• |
attracting, retaining, and developing world-class talented and motivated employees. |
Significant Events and Updates
Acquisition of Med X Change, Inc.
On June 5, 2019, we acquired 100% of the outstanding stock of Med X Change, Inc. (“Med X Change”), a Bradenton, Florida-based provider of medical grade, high definition and 4K video recording and documentation solutions to OEMs in the medical market, for a total purchase price of $21.8 million, subject to customary working capital adjustments. The acquisition was financed with cash on hand and a $21.0 million draw-down on our revolving credit facility. We expect that the addition of Med X Change will complement and expand the technology capabilities within our Vision reportable segment to provide our medical OEM customers with more integrated operating room solutions.
Acquisition of Ingenia-CAT, S.L.
On April 16, 2019, we acquired 100% of the outstanding stock of Ingenia-CAT, S.L. (“Ingenia”), a Barcelona, Spain-based provider of high-performance servo drives and control software to OEMs in the medical and advanced industrial markets. The purchase price of €14.3 million ($16.2 million), subject to customary working capital adjustments, was financed with cash on hand and borrowings under our revolving credit facility. The purchase price includes €8.5 million ($9.6 million) of cash paid for the acquisition and €5.8 million ($6.6 million) in estimated fair value of contingent consideration payable upon the achievement of certain revenue targets from April 2019 through March 2022. We expect that the addition of Ingenia will enhance our strategic position in precision motion control industry by enabling us to offer a broader range of motion control technologies and integrated solutions. Ingenia is included in our Precision Motion reportable segment.
30
Results of Operations for the Three and Six Months Ended June 28, 2019 Compared with the Three and Six Months Ended June 29, 2018
The following table sets forth our unaudited results of operations as a percentage of revenue for the periods indicated:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Revenue |
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of revenue |
|
57.6 |
|
|
|
56.6 |
|
|
|
57.7 |
|
|
|
57.2 |
|
|
Gross profit |
|
42.4 |
|
|
|
43.4 |
|
|
|
42.3 |
|
|
|
42.8 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development and engineering |
|
8.6 |
|
|
|
8.3 |
|
|
|
8.8 |
|
|
|
8.3 |
|
|
Selling, general and administrative |
|
18.8 |
|
|
|
19.4 |
|
|
|
19.5 |
|
|
|
19.7 |
|
|
Amortization of purchased intangible assets |
|
2.4 |
|
|
|
2.6 |
|
|
|
2.5 |
|
|
|
2.6 |
|
|
Restructuring and acquisition related costs |
|
2.8 |
|
|
|
1.6 |
|
|
|
2.0 |
|
|
|
0.8 |
|
|
Total operating expenses |
|
32.7 |
|
|
|
32.0 |
|
|
|
32.8 |
|
|
|
31.3 |
|
|
Operating income |
|
9.7 |
|
|
|
11.4 |
|
|
|
9.4 |
|
|
|
11.5 |
|
|
Interest income (expense), net |
|
(1.4 |
) |
|
|
(1.7 |
) |
|
|
(1.3 |
) |
|
|
(1.7 |
) |
|
Foreign exchange transaction gains (losses), net |
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
(0.1 |
) |
|
Other income (expense), net |
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
Income before income taxes |
|
8.3 |
|
|
|
9.8 |
|
|
|
8.1 |
|
|
|
9.8 |
|
|
Income tax provision |
|
1.6 |
|
|
|
2.0 |
|
|
|
0.8 |
|
|
|
1.6 |
|
|
Consolidated net income |
|
6.7 |
|
|
|
7.7 |
|
|
|
7.2 |
|
|
|
8.2 |
|
|
Less: Net income attributable to noncontrolling interest |
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.5 |
) |
|
Net income attributable to Novanta Inc. |
|
6.7 |
% |
|
|
7.3 |
% |
|
|
7.2 |
% |
|
|
7.7 |
% |
Overview of Financial Results
Total revenue for the three months ended June 28, 2019 increased $4.7 million, or 3.2%, versus the prior year period. The effect of our current and prior year acquisitions resulted in an increase in revenue of $1.7 million, or 1.2%. In addition, foreign currency exchange rates adversely impacted our revenue by $3.0 million, or 2.0%, for the three months ended June 28, 2019.
Total revenue for the six months ended June 28, 2019 increased $15.0 million, or 5.0%, versus the prior year period. The effect of our current and prior year acquisitions resulted in an increase in revenue of $5.6 million, or 1.9%. In addition, foreign currency exchange rates adversely impacted our revenue by $7.0 million, or 2.4%, for the six months ended June 28, 2019.
Operating income decreased $2.0 million from $17.1 million for the three months ended June 29, 2018 to $15.1 million for the three months ended June 28, 2019. This decrease was primarily attributable to lower gross profit margin and a $1.9 million increase in restructuring and acquisition related costs.
Operating income decreased $4.8 million from $34.3 million for six months ended June 29, 2018 to $29.5 million for the six months ended June 28, 2019. This decrease was primarily attributable to higher investments in research and development and engineering (“R&D”) spending and a $3.9 million increase in restructuring and acquisition related costs.
Diluted earnings per share (“Diluted EPS”) of $0.29 for the three months ended June 28, 2019 decreased $0.03 from the prior year period. The decrease was attributable to an increase in restructuring and acquisition related costs of $1.9 million.
Diluted EPS of $0.64 for the six months ended June 28, 2019 increased $0.14 from the prior year period. The increase was attributable to the negative effect of a $5.1 million Laser Quantum nontaxable redeemable noncontrolling interest redemption value adjustment in the prior year that is not applicable in the current year.
31
Revenue
The following tables set forth external revenue by reportable segment for the periods noted (dollars in thousands):
|
|
Three Months Ended |
|
|||||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
Increase |
|
|
Percentage |
|
||||
|
|
2019 |
|
|
2018 |
|
|
(Decrease) |
|
|
Change |
|
||||
|
Photonics |
$ |
58,286 |
|
|
$ |
64,062 |
|
|
$ |
(5,776 |
) |
|
|
(9.0 |
)% |
|
Vision |
|
65,895 |
|
|
|
53,823 |
|
|
|
12,072 |
|
|
|
22.4 |
% |
|
Precision Motion |
|
30,964 |
|
|
|
32,515 |
|
|
|
(1,551 |
) |
|
|
(4.8 |
)% |
|
Total |
$ |
155,145 |
|
|
$ |
150,400 |
|
|
$ |
4,745 |
|
|
|
3.2 |
% |
|
|
Six Months Ended |
|
|||||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
Increase |
|
|
Percentage |
|
||||
|
|
2019 |
|
|
2018 |
|
|
(Decrease) |
|
|
Change |
|
||||
|
Photonics |
$ |
117,511 |
|
|
$ |
125,893 |
|
|
$ |
(8,382 |
) |
|
|
(6.7 |
)% |
|
Vision |
|
131,831 |
|
|
|
110,032 |
|
|
|
21,799 |
|
|
|
19.8 |
% |
|
Precision Motion |
|
62,989 |
|
|
|
61,440 |
|
|
|
1,549 |
|
|
|
2.5 |
% |
|
Total |
$ |
312,331 |
|
|
$ |
297,365 |
|
|
$ |
14,966 |
|
|
|
5.0 |
% |
Photonics
Photonics segment revenue for the three months ended June 28, 2019 decreased by $5.8 million, or 9.0%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, and a decrease in revenue from our optical light engine products.
Photonics segment revenue for the six months ended June 28, 2019 decreased by $8.4 million, or 6.7%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, and a decrease in revenue from our optical light engine products.
Vision
Vision segment revenue for the three months ended June 28, 2019 increased by $12.1 million, or 22.4%, versus the prior year period, primarily due to an increase in revenue from our minimally invasive surgery (“MIS”) products of $12.3 million as a result of increased demand in the medical market.
Vision segment revenue for the six months ended June 28, 2019 increased by $21.8 million, or 19.8%, versus the prior year period primarily due to an increase in revenue from our MIS products of $21.4 million as a result of increased demand in the medical market.
Precision Motion
Precision Motion segment revenue for the three months ended June 28, 2019 decreased by $1.6 million, or 4.8%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by increased demand in the medical market.
Precision Motion segment revenue for the six months ended June 28, 2019 increased by $1.5 million, or 2.5%, versus the prior year period, primarily due to increased demand in the medical market and the Zettlex acquisition in May 2018, partially offset by decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending.
32
Gross Profit and Gross Profit Margin
The following table sets forth the gross profit and gross profit margin for each of our reportable segments for the periods noted (dollars in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
$ |
27,308 |
|
|
$ |
30,737 |
|
|
$ |
54,622 |
|
|
$ |
60,292 |
|
|
Vision |
|
25,211 |
|
|
|
20,441 |
|
|
|
51,184 |
|
|
|
40,162 |
|
|
Precision Motion |
|
13,759 |
|
|
|
14,702 |
|
|
|
27,280 |
|
|
|
27,962 |
|
|
Unallocated Corporate and Shared Services |
|
(496 |
) |
|
|
(651 |
) |
|
|
(1,015 |
) |
|
|
(1,028 |
) |
|
Total |
$ |
65,782 |
|
|
$ |
65,229 |
|
|
$ |
132,071 |
|
|
$ |
127,388 |
|
|
Gross profit margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
|
46.9 |
% |
|
|
48.0 |
% |
|
|
46.5 |
% |
|
|
47.9 |
% |
|
Vision |
|
38.3 |
% |
|
|
38.0 |
% |
|
|
38.8 |
% |
|
|
36.5 |
% |
|
Precision Motion |
|
44.4 |
% |
|
|
45.2 |
% |
|
|
43.3 |
% |
|
|
45.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
42.4 |
% |
|
|
43.4 |
% |
|
|
42.3 |
% |
|
|
42.8 |
% |
Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, headcount, inventory obsolescence and warranty expenses.
Photonics
Photonics segment gross profit for the three months ended June 28, 2019 decreased $3.4 million, or 11.2%, versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 46.9% for the three months ended June 28, 2019, versus a gross profit margin of 48.0% for the prior year period. The decrease in gross profit margin was primarily attributable to unfavorable product mix.
Photonics segment gross profit for the six months ended June 28, 2019 decreased $5.7 million, or 9.4%, versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 46.5% for the six months ended June 28, 2019, versus gross profit margin of 47.9% for the prior year period. The decrease in gross profit margin was primarily attributable to unfavorable product mix.
Vision
Vision segment gross profit for the three months ended June 28, 2019 increased $4.8 million, or 23.3%, versus the prior year period, primarily due to an increase in revenue. Vision segment gross profit margin was 38.3% for the three months ended June 28, 2019, versus a gross profit margin of 38.0% for the prior year period.
Vision segment gross profit for the six months ended June 28, 2019 increased $11.0 million, or 27.4%, versus the prior year period, primarily due to an increase in revenue. Vision segment gross profit margin was 38.8% for the six months ended June 28, 2019, versus a gross profit margin of 36.5% for the prior year period. The increase in gross profit margin was primarily attributable to changes in product mix.
Precision Motion
Precision Motion segment gross profit for the three months ended June 28, 2019 decreased $0.9 million, or 6.4%, versus the prior year period, primarily due to a decrease in revenue. Precision Motion segment gross profit margin was 44.4% for the three months ended June 28, 2019, versus a gross profit margin of 45.2% for the prior year period. The decrease in gross profit margin was primarily attributable to an increase in amortization of inventory fair value adjustments and amortization of developed technology of $0.2 million, which resulted in a 0.7 percentage point decrease in gross profit margin.
Precision Motion segment gross profit for the six months ended June 28, 2019 decreased $0.7 million, or 2.4%, versus the prior year period, primarily due to a decrease in gross profit margin. Precision Motion segment gross profit margin was 43.3% for the six
33
months ended June 28, 2019, versus a gross profit margin of 45.5% for the prior year period. The decrease in gross profit margin was primarily attributable to unfavorable product mix.
Operating Expenses
The following table sets forth operating expenses for the periods noted (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Research and development and engineering |
$ |
13,388 |
|
|
$ |
12,551 |
|
|
$ |
27,385 |
|
|
$ |
24,540 |
|
|
Selling, general and administrative |
|
29,204 |
|
|
|
29,231 |
|
|
|
61,051 |
|
|
|
58,451 |
|
|
Amortization of purchased intangible assets |
|
3,772 |
|
|
|
3,893 |
|
|
|
7,770 |
|
|
|
7,591 |
|
|
Restructuring and acquisition related costs |
|
4,313 |
|
|
|
2,439 |
|
|
|
6,367 |
|
|
|
2,464 |
|
|
Total |
$ |
50,677 |
|
|
$ |
48,114 |
|
|
$ |
102,573 |
|
|
$ |
93,046 |
|
Research and Development and Engineering Expenses
R&D expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects. R&D expenses were $13.4 million, or 8.6% of revenue, during the three months ended June 28, 2019, versus $12.6 million, or 8.3% of revenue, during the prior year period. R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher investments across the majority of our product lines.
R&D expenses were $27.4 million, or 8.8% of revenue, during the six months ended June 28, 2019, versus $24.5 million, or 8.3% of revenue, during the prior year period. R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher investments across the majority of our product lines.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, and executive management functions. SG&A expenses were $29.2 million, or 18.8% of revenue, during the three months ended June 28, 2019, versus $29.2 million, or 19.4% of revenue, during the prior year period.
SG&A expenses were $61.1 million, or 19.5% of revenue, during the six months ended June 28, 2019, versus $58.5 million, or 19.7% of revenue, during the prior year period. SG&A expenses increased in terms of total dollars primarily due to an increase in stock-based compensation expense and professional services costs.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $3.8 million, or 2.4% of revenue, during the three months ended June 28, 2019, versus $3.9 million, or 2.6% of revenue, during the prior year period.
Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $7.8 million, or 2.5% of revenue, during the six months ended June 28, 2019, versus $7.6 million, or 2.6% of revenue, during the prior year period.
Restructuring and Acquisition Related Costs
We recorded restructuring and acquisition related costs of $4.3 million during the three months ended June 28, 2019, versus $2.4 million during the prior year period. The increase in restructuring and acquisition related costs versus the prior year period was primarily due to an increase in restructuring charges of $1.1 million as a result of the 2018 and 2019 restructuring programs and an increase in acquisition related costs of $0.7 million primarily related to professional services fees for acquisitions and earn-out costs associated with the Zettlex acquisition in May 2018.
We recorded restructuring and acquisition related costs of $6.4 million during the six months ended June 28, 2019, versus $2.5 million during the prior year period. The increase in restructuring and acquisition related costs versus the prior year period was primarily due to an increase in restructuring charges of $2.4 million as a result of the 2019 restructuring program and an increase in
34
acquisition related costs of $1.5 million primarily related to professional services fees for acquisitions and earn-out costs associated with the Zettlex acquisition in May 2018.
Operating Income (Loss) by Segment
The following table sets forth operating income (loss) by segment for the periods noted (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photonics |
$ |
11,666 |
|
|
$ |
16,184 |
|
|
$ |
23,976 |
|
|
$ |
31,507 |
|
|
Vision |
|
4,215 |
|
|
|
391 |
|
|
|
8,772 |
|
|
|
866 |
|
|
Precision Motion |
|
5,983 |
|
|
|
7,612 |
|
|
|
11,618 |
|
|
|
16,219 |
|
|
Unallocated Corporate and Shared Services |
|
(6,759 |
) |
|
|
(7,072 |
) |
|
|
(14,868 |
) |
|
|
(14,250 |
) |
|
Total |
$ |
15,105 |
|
|
$ |
17,115 |
|
|
$ |
29,498 |
|
|
$ |
34,342 |
|
Photonics
Photonics segment operating income was $11.7 million, or 20.0% of revenue, during the three months ended June 28, 2019, versus $16.2 million, or 25.3% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $3.4 million and an increase in restructuring related charges of $1.4 million associated with the 2019 restructuring program.
Photonics segment operating income was $24.0 million, or 20.4% of revenue, during the six months ended June 28, 2019, versus $31.5 million, or 25.0% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $5.7 million and an increase in restructuring related charges of $1.5 million associated with the 2019 restructuring program.
Vision
Vision segment operating income was $4.2 million, or 6.4% of revenue, during the three months ended June 28, 2019, versus $0.4 million, or 0.7% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $4.8 million, partially offset by an increase in SG&A expenses of $1.0 million.
Vision segment operating income was $8.8 million, or 6.7% of revenue, during the six months ended June 28, 2019, versus $0.9 million, or 0.8% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $11.0 million, partially offset by an increase in R&D and SG&A expenses of $2.3 million.
Precision Motion
Precision Motion segment operating income was $6.0 million, or 19.3% of revenue, during the three months ended June 28, 2019, versus $7.6 million, or 23.4% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $0.9 million and an increase in SG&A expenses of $0.6 million.
Precision Motion segment operating income was $11.6 million, or 18.4% of revenue, during the six months ended June 28, 2019, versus $16.2 million, or 26.4% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $0.7 million and an increase in operating expenses of $3.9 million.
Unallocated Corporate and Shared Services
Unallocated corporate and shared services costs primarily represent costs of corporate and shared services functions that are not allocated to the operating segments, including certain restructuring and most acquisition related costs. These costs for the three months ended June 28, 2019 decreased by $0.3 million versus the prior year period.
Unallocated corporate and shared services costs for the six months ended June 28, 2019 increased by $0.6 million versus the prior year period primarily due to an increase in restructuring and acquisition related costs of $1.5 million, partially offset by a decrease in SG&A expenses of $0.8 million.
35
Other Income and Expense Items
The following table sets forth other income and expense items for the periods noted (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 28, |
|
|
June 29, |
|
|
June 28, |
|
|
June 29, |
|
||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Interest income (expense), net |
$ |
(2,160 |
) |
|
$ |
(2,561 |
) |
|
$ |
(4,204 |
) |
|
$ |
(4,919 |
) |
|
Foreign exchange transaction gains (losses), net |
|
27 |
|
|
|
177 |
|
|
|
68 |
|
|
|
(230 |
) |
|
Other income (expense), net |
|
(70 |
) |
|
|
(46 |
) |
|
|
(138 |
) |
|
|
(87 |
) |
Interest Income (Expense), Net
Net interest expense was $2.2 million for the three months ended June 28, 2019, versus $2.6 million in the prior year period. The decrease in net interest expense was primarily due to a decrease in average debt levels. The weighted average interest rate on our senior credit facilities was 3.51% during the three months ended June 28, 2019, versus 3.68% during the three months ended June 29, 2018.
Net interest expense was $4.2 million for the six months ended June 28, 2019, versus $4.9 million in the prior year period. The decrease in net interest expense was primarily due to a decrease in average debt levels, partially offset by an increase in the weighted average interest rate on our senior credit facilities. The weighted average interest rate on our senior credit facilities was 3.64% during the six months ended June 28, 2019, versus 3.58% during the six months ended June 29, 2018.
Foreign Exchange Transaction Gains (Losses), Net
Foreign exchange transaction gains (losses) were less than $0.1 million net gains for the three months ended June 28, 2019, versus $0.2 million net gains in the prior year period. The decrease in net gains was due to changes in the value of the U.S. Dollar against the British Pound and Euro, partially offset by realized gains from foreign currency contracts.
Foreign exchange transaction gains (losses) were less than $0.1 million net gains for the six months ended June 28, 2019, versus $0.2 million net losses in the prior year period, primarily due to changes in the value of the U.S. Dollar against the British Pound and Euro.
Other Income (Expense), Net
Net other expense was nominal for both the three and six months ended June 28, 2019, respectively, and the three and six months ended June 29, 2018, respectively.
Income Taxes
Our effective tax rate for the three months ended June 28, 2019 was 19.5%, versus 20.8% for the prior year period. Our effective tax rate of 19.5% for the three months ended June 28, 2019 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, and U.K. patent box deductions and other tax credits.
Our effective tax rate for the six months ended June 28, 2019 was 10.3%, versus 16.0% for the prior year period. Our effective tax rate of 10.3% for the six months ended June 28, 2019 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions and other tax credits, and windfall tax benefits upon vesting of certain stock-based compensation awards during the period.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of our debt and related interest expense. Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. We believe our future operating cash flows will be sufficient to meet our future operating and capital expenditure cash needs for the foreseeable future, including at least the next 12 months. The availability of borrowing capacity under our revolving
36
credit facility provides another potential source of liquidity for acquisitions. We may seek to raise additional capital, which could be in the form of bonds, convertible debt or equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Second Amended and Restated Credit Agreement.
Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long term capital with satisfactory terms. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, availability of borrowings under our revolving credit facility, and market changes in general. See “Risks Relating to Our Common Shares and Our Capital Structure” included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. We cannot assure you that applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary.
As of June 28, 2019, $42.0 million of our $66.1 million cash and cash equivalents was held by subsidiaries outside of Canada and the United States. Generally, our intent is to use cash held in these foreign subsidiaries to fund our local operations or acquisitions by those local subsidiaries and to pay down borrowings under our revolving credit facility. Approximately 64.7% of our outstanding borrowings under our senior credit facilities was held in our subsidiaries outside of Canada and the United States. Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries.
Share Repurchase Plan
In October 2018, our Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $25.0 million worth of our common shares. Share repurchases have been made under the 2018 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934. During the six months ended June 28, 2019, we repurchased 39 thousand shares for an aggregate purchase price of $3.3 million at an average price of $84.75 per share under the 2018 Repurchase Plan. We had $21.7 million available for share repurchases under the 2018 Repurchase Plan as of June 28, 2019.
Under the 2018 Repurchase Plan, shares may be repurchased from time to time, at our discretion, based on our ongoing assessment of the capital needs of the business, the market price of our common stock, and general market conditions. Shares may also be repurchased through an accelerated stock purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common stock to be purchased when we would otherwise be prohibited from doing so under insider trading laws. The 2018 Repurchase Plan does not obligate us to acquire any particular amount of our common stock. No time limit was set for the completion of the 2018 Repurchase Plan, and the plan may be suspended or discontinued at any time. We expect to fund the share repurchases through cash on hand and future cash generated from operations.
Second Amended and Restated Credit Agreement
In May 2016, we entered into the second amended and restated senior secured credit agreement (the “Second Amended and Restated Credit Agreement”), consisting of a $75.0 million, 5-year term loan facility and a $225.0 million, 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in May 2021. In August 2017, we entered into a third amendment (the “Third Amendment”) to the Second Amended and Restated Credit Agreement. The Third Amendment increased the borrowing limit under the revolving credit facility commitment from $225 million to $325 million and reset the accordion feature to $125 million for future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million.
In February 2018, we entered into a fourth amendment (the “Fourth Amendment”) to the Second Amended and Restated Credit Agreement. The Fourth Amendment increased the maximum consolidated leverage ratio from 3.00 to 3.50, increased the maximum consolidated leverage ratio for permitted acquisitions and stock repurchases from 2.50 to 3.00, increased the maximum consolidated leverage ratio for a designated acquisition from 3.00 to 3.50, and increased the maximum consolidated leverage ratio for four consecutive quarters following a designated acquisition from 3.50 to 4.00. The Fourth Amendment also made certain other technical changes to the Second Amended and Restated Credit Agreement.
As of June 28, 2019, we had term loans of $58.4 million and revolving loans of $157.8 million outstanding under the Second Amended and Restated Credit Agreement.
37
The Second Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum leverage ratio and a minimum fixed charge coverage ratio (as defined in the Second Amended and Restated Credit Agreement). The following table summarizes these financial covenants and our compliance therewith as of June 28, 2019:
|
|
Requirement |
|
|
Actual |
|
||
|
Maximum consolidated leverage ratio |
|
3.50 |
|
|
|
1.72 |
|
|
Minimum consolidated fixed charge coverage ratio |
|
1.50 |
|
|
|
5.52 |
|
Cash Flows for the Six Months Ended June 28, 2019 and June 29, 2018
The following table summarizes our cash flows, cash and cash equivalents, and unused and available funds under our revolving credit facility for the periods indicated (in thousands):
|
|
Six Months Ended |
|
|||||
|
|
June 28, |
|
|
June 29, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Net cash provided by operating activities |
$ |
20,853 |
|
|
$ |
40,365 |
|
|
Net cash used in investing activities |
$ |
(34,444 |
) |
|
$ |
(34,632 |
) |
|
Net cash provided by (used in) financing activities |
$ |
(2,798 |
) |
|
$ |
2,712 |
|
|
|
June 28, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
Cash and cash equivalents |
$ |
66,093 |
|
|
$ |
82,043 |
|
|
Unused and available funds under revolving credit facility |
$ |
167,180 |
|
|
$ |
189,942 |
|
Operating Cash Flows
Cash provided by operating activities was $20.9 million for the six months ended June 28, 2019, versus $40.4 million for the prior year period. Cash provided by operating activities for the six months ended June 28, 2019 decreased from the prior year period primarily due to increases in the net working capital in the six months ended June 28, 2019 which decreased cash provided by operating activities by $25.9 million.
Cash provided by operating activities for the six months ended June 28, 2019 was negatively impacted by an increase in our days sales outstanding which increased from 51 days at December 31, 2018 to 52 days at June 28, 2019, a decrease in our days payables outstanding which decreased from 52 days at December 31, 2018 to 51 days at June 28, 2019 and an increase in inventories, as our inventory turnover ratio decreased from 3.4 at December 31, 2018 to 3.2 at June 28, 2019. During the six months ended June 28, 2019, we paid the first milestone payment under the Zettlex earn-out agreement amounting to $3.9 million and paid the 2018 annual employee bonuses, both of which had been accrued for as of December 31, 2018.
Cash provided by operating activities for the six months ended June 29, 2018 was positively impacted by a decrease in our days sales outstanding which decreased from 51 days at December 31, 2017 to 46 days at June 29, 2018 and by an increase in our days payables outstanding which increased from 43 days at December 31, 2017 to 45 days at June 29, 2018. Cash provided by operating activities was negatively impacted by an increase in inventories, as our inventory turnover ratio decreased from 3.7 at December 31, 2017 to 3.5 at June 29, 2018, a decrease in accrued expenses and an increase in income tax payments. During the six months ended June 29, 2018, we paid $2.8 million as the final Applimotion contingent consideration payment which had been accrued for as of December 31, 2017.
Investing Cash Flows
Cash used in investing activities was $34.4 million for the six months ended June 28, 2019, primarily driven by the Ingenia and Med X Change acquisitions. In connection with these acquisitions, we paid $28.9 million cash considerations (net of cash acquired of $1.0 million) during the six months ended June 28, 2019. We also paid $5.6 million for capital expenditures during the six months ended June 28, 2019.
Cash used in investing activities was $34.6 million for the six months ended June 29, 2018, primarily related to $27.4 million cash outflows (net of cash acquired of $3.8 million) related to the Zettlex acquisition in May 2018 and $7.3 million in capital expenditures.
38
Financing Cash Flows
Cash used in financing activities was $2.8 million for the six months ended June 28, 2019, primarily due to $16.1 million of term loan payments, $6.7 million of payroll tax payments upon vesting of stock-based compensation awards, and $3.3 million of repurchases of common stock, partially offset by $23.6 million of borrowings under our revolving credit facility used to fund the Ingenia and Med X Change acquisitions.
Cash provided by financing activities was $2.7 million for the six months ended June 29, 2018, primarily due to $30.3 million of borrowings under our revolving credit facility used to fund the Zettlex acquisition, partially offset by $4.6 million of contractual term loan payments, $17.2 million of optional repayments of borrowings under our revolving credit facility, $3.4 million of payroll tax payments upon vesting of stock-based compensation awards, and $1.9 million of repurchases of common stock.
Off-Balance Sheet Arrangements, Contractual Obligations
Contractual Obligations
Our contractual obligations primarily consist of the principal and interest associated with our debt, operating and finance leases, purchase commitments and pension obligations. Such contractual obligations are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Off-Balance Sheet Arrangements
Through June 28, 2019, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.
Critical Accounting Policies and Estimates
The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our consolidated financial statements presented in this periodic report on Form 10-Q are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Except for the adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02” or “Topic 842”), through June 28, 2019, there have been no material changes to our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Recent Accounting Pronouncements
See Note 1 to Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposures are foreign currency exchange rate fluctuations and interest rate sensitivity. During the three months ended June 28, 2019, there have been no material changes to the information included under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934 (the “Exchange Act”), our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 28, 2019, the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 28, 2019.
Changes in Internal Control over Financial Reporting
There has been no change to our internal control over financial reporting during the fiscal quarter ended June 28, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
39
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon its financial condition or results of operations but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon its financial condition or results of operations.
Item 1A. Risk Factors
The Company’s risk factors are described in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no material changes in the risks affecting the Company since the filing of such Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth certain information with respect to repurchases of the Company’s common stock during the three months ended June 28, 2019.
|
ISSUER PURCHASES OF EQUITY SECURITIES |
|
||||||||||||||||
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)(2) |
|
|
Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs(1) |
|
|||||
|
April 1 - May 3, 2019 |
|
|
13,300 |
|
|
$ |
86.56 |
|
|
|
13,300 |
|
|
$ |
23,848,710 |
|
|
|
May 4 - May 31, 2019 |
|
|
13,900 |
|
|
$ |
82.23 |
|
|
|
13,900 |
|
|
$ |
22,705,772 |
|
|
|
June 1 - June 28, 2019 |
|
|
12,200 |
|
|
$ |
85.65 |
|
|
|
12,200 |
|
|
$ |
21,660,781 |
|
|
|
Total |
|
|
39,400 |
|
|
|
|
|
|
|
39,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. |
In October 2018, the Company's Board of Directors approved a share repurchase plan ("the 2018 Repurchase Plan") authorizing the repurchase of up to an aggregate of $25.0 million of the Company's common shares. The share repurchase plan was announced in the quarterly report for the period ended September 28, 2018 filed on November 6, 2018. The shares may be repurchased from time to time, at the Company's discretion, based on ongoing assessment of the capital needs of the business, the market price of the Company's common shares, and general market conditions. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time. |
|
|||||||||||||||
|
2. |
The Company has repurchased 39,400 shares of its common shares pursuant to the 2018 Repurchase Plan since its adoption. |
|
|||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
40
Item 6. Exhibits
List of Exhibits
See the Company’s SEC filings on Edgar at: http://www.sec.gov/ for all Exhibits.
|
|
|
|
|
Incorporated by Reference |
||||||||||
|
Exhibit Number |
|
Exhibit Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing Date |
|
Filed/ Furnished |
||
|
|
|
|
|
|
|
|
||||||||
|
3.1 |
|
Certificate and Articles of Continuance of the Registrant, dated March 22, 1999. |
|
S-3 |
|
333-202597 |
|
3.1 |
|
03/09/15 |
|
|
||
|
|
|
|
|
|
|
|
||||||||
|
3.2 |
|
|
10-Q |
|
000-25705 |
|
3.2 |
|
04/13/10 |
|
|
|||
|
|
|
|
|
|
|
|
||||||||
|
3.3 |
|
Articles of Reorganization of the Registrant, dated July 23, 2010. |
|
8-K |
|
000-25705 |
|
3.1 |
|
07/23/10 |
|
|
||
|
|
|
|
|
|
|
|
||||||||
|
3.4 |
|
Articles of Amendment of the Registrant, dated December 29, 2010. |
|
S-3 |
|
333-202597 |
|
3.2 |
|
03/09/15 |
|
|
||
|
|
|
|
|
|
|
|
||||||||
|
3.5 |
|
Articles of Amendment of the Registrant, dated May 11, 2016. |
|
8-K |
|
001-35083 |
|
10.1 |
|
05/12/16 |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
31.1 |
|
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
||||||||
|
31.2 |
|
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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** |
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32.2 |
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** |
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101.INS |
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Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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* Filed herewith
** Furnished herewith
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Novanta Inc. (Registrant)
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Name |
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Title |
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Date |
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/s/ Matthijs Glastra |
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Director, Chief Executive Officer |
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August 6, 2019 |
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Matthijs Glastra |
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/s/ Robert J. Buckley |
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Chief Financial Officer |
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August 6, 2019 |
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Robert J. Buckley |
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42