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.:
(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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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 (§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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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
As of May 5, 2020, 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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April 3, |
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December 31, |
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2020 |
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2019 |
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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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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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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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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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April 3, |
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March 29, |
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2020 |
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2019 |
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Revenue |
$ |
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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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Other income (expense), net |
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Income before income taxes |
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Income tax provision (benefit) |
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Consolidated net income |
$ |
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$ |
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Earnings per common share (Note 5): |
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Basic |
$ |
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$ |
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Diluted |
$ |
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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 (LOSS)
(In thousands of U.S. dollars)
(Unaudited)
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Three Months Ended |
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April 3, |
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March 29, |
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2020 |
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2019 |
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Consolidated net income |
$ |
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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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Pension liability adjustments, net of tax (2) |
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Total other comprehensive income (loss) |
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Total consolidated comprehensive income (loss) |
$ |
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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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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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Loss |
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Total |
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Three Months Ended April 3, 2020 |
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Balance at December 31, 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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Consolidated net income |
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— |
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— |
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— |
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— |
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Common shares issued under stock plans |
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— |
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— |
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— |
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Common shares withheld for taxes on vested stock awards |
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— |
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— |
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— |
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Repurchases of common shares |
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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 (loss), 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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Balance at April 3, 2020 |
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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 March 29, 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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Consolidated net income |
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— |
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— |
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— |
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— |
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Common shares 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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Common shares withheld for taxes on vested stock awards |
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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 (loss), 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 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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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)
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Three Months Ended |
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April 3, |
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March 29, |
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2020 |
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2019 |
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Cash flows from operating activities: |
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Consolidated net income |
$ |
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$ |
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Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Provision for inventory excess and obsolescence |
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Share-based compensation |
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Deferred income taxes |
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( |
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( |
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Inventory acquisition fair value adjustments |
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— |
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Other |
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Changes in assets and liabilities which provided/(used) cash, excluding effects from business acquisitions: |
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Accounts receivable |
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Inventories |
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( |
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Prepaid income taxes, income taxes receivable, prepaid expenses and other current assets |
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( |
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( |
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Accounts payable, income taxes payable, accrued expenses and other current liabilities |
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( |
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( |
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Other non-current assets and liabilities |
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Cash provided by operating activities |
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Cash flows from investing activities: |
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Payment of business acquisition purchase price held in escrow |
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( |
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— |
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Purchases of property, plant and equipment |
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( |
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( |
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Payment of contingent consideration related to acquisition of technology assets |
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( |
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- |
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Other investing activities |
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— |
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Cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Repayments of term loan and revolving credit facilities |
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( |
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( |
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Payments of debt issuance costs |
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( |
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- |
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Payments of withholding taxes from share-based awards |
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( |
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( |
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Repurchases of common shares |
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( |
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— |
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Other financing activities |
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( |
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( |
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Cash used in financing activities |
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( |
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( |
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Effect of exchange rates on cash and cash equivalents |
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( |
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( |
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Decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents, beginning of the period |
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Cash and cash equivalents, end of the period |
$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
$ |
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$ |
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Cash paid for income taxes |
$ |
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$ |
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Income tax refunds received |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
5
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 3, 2020
(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 consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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, including estimated economic implications of the COVID-19 pandemic, and various other assumptions that it believes are reasonable under the circumstances. The accounting estimates assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of the goodwill and other long-lived assets. While there was not a material change to the consolidated financial statements related these estimates as of and for the three months ended April 3, 2020, the Company’s future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
6
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
Recent Accounting Pronouncements
The following table provides a brief description of recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):
|
Standard |
|
Description |
|
Effective Date |
|
Effect on the Financial Statements or Other Significant Matters |
|
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” |
|
ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles of Accounting Standards Codification (“ASC”) 740, including: (i) the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (ii) the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment (or vice-versa); and (iii) the exception for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies GAAP for other areas of ASC 740 by clarifying and amending the existing guidance.
|
|
January 1, 2021. Early adoption is permitted. |
|
The Company is currently evaluating the impact of ASU 2019-12 on its consolidated financial statements. |
|
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” |
|
ASU 2016-13 requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates.
|
|
January 1, 2020. |
|
The Company adopted ASU 2016-13 during the first quarter of 2020. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements. |
|
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting.” |
|
ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. |
|
Upon issuance. ASU 2020-04 is elective. |
|
The Company is currently evaluating the impact of ASU 2020-04 on its consolidated financial statements. |
|
|
|
|
|
|
|
|
2. Revenue
The Company recognizes revenue when control of promised goods or services is transferred to customers. The transfer of control generally occurs upon shipment when title and risk of loss pass to the customer. The vast majority of the Company’s revenue
7
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
is generated from the sale of distinct products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for such products, which is generally at contractually stated prices. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue.
Performance Obligations
Substantially all of the Company’s revenue is recognized at a point in time, upon shipment, rather than over time.
At the request of its customers, the Company may perform professional services, generally for the maintenance and repair of products previously sold to those customers and for engineering services. Professional services for the maintenance and repair of products are typically short in duration, mostly less than
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 the related revenue. As of April 3, 2020 and December 31, 2019, contract liabilities were
8
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
$
Disaggregated Revenue
See Note 16 for the Company’s disaggregation of revenue by segment, geography and end market.
3. Business Combinations
On
4. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss was as follows (in thousands):
|
|
Total Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Cumulative |
|
|
Pension |
|
|||
|
|
Comprehensive |
|
|
Translation |
|
|
Liability |
|
|||
|
|
Loss |
|
|
Adjustments |
|
|
Adjustments |
|
|||
|
Balance at December 31, 2019 |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss (1) |
|
|
|
|
|
— |
|
|
|
|
|
|
Balance at April 3, 2020 |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
(1) |
|
5. Earnings per Common Share
Basic earnings per common share is computed by dividing consolidated net income by the weighted average number of common shares outstanding during the period.
For diluted earnings per common share, the denominator includes the dilutive effect of outstanding common share equivalents. For the three months ended April 3, 2020 and March 29, 2019, respectively, weighted average shares outstanding for the diluted earnings per common share included the dilutive effect of outstanding restricted stock units, stock options, and total shareholder return performance-based restricted stock units, determined using the treasury stock method. The dilutive effects of market-based contingently issuable shares are included in the weighted average dilutive share calculation based on the number of shares, if any, that would be issuable as of the end of the reporting period assuming the end of the reporting period is also the end of the performance period. Dilutive effects of attainment-based contingently issuable shares granted to the former Laser Quantum Limited (“Laser Quantum”) noncontrolling interest shareholders, as well as the 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.
9
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per common share (amounts in thousands, except per share data):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020(1) |
|
|
2019(2) |
|
||
|
Numerators: |
|
|
|
|
|
|
|
|
Consolidated net income |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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: |
|
|
|
|
|
|
|
|
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.
10
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
Foreign Currency Contracts
The Company addresses market risks from changes in foreign currency exchange rates through a risk management program that includes the use of derivative financial instruments to mitigate certain balance sheet foreign currency transaction exposures. The Company uses foreign currency forward contracts as a part of its strategy to manage exposures related to foreign currency denominated monetary assets and liabilities. The fair value of these foreign currency forward contracts is reported either in other current assets or in other current liabilities as of the end of the period.
Contingent Considerations
On July 31, 2019, the Company acquired ARGES. Under the purchase and sale agreement for the ARGES acquisition, the former owner of ARGES is eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from August 2019 through December 2026. The undiscounted range of possible contingent consideration is
On April 16, 2019, the Company acquired Ingenia CAT, S.L. (“Ingenia”). Under the purchase and sale agreement for the Ingenia acquisition, the shareholders of Ingenia are eligible to receive contingent consideration based on the achievement of certain revenue targets by the Company from April 2019 through March 2022. The undiscounted range of possible contingent consideration is
On
11
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
Summary by Fair Value Hierarchy
The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of April 3, 2020 (in thousands):
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant Other |
|
||
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|||
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|||
|
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Current |
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Long-term |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 (in thousands):
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
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 considerations - Current |
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations - Long-term |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
Changes in the fair value of Level 3 contingent considerations during the three months ended April 3, 2020 were as follows (in thousands):
|
|
Contingent Considerations |
|
|
|
Balance at December 31, 2019 |
$ |
|
|
|
Payments |
|
( |
) |
|
Fair value adjustments |
|
— |
|
|
Effect of foreign exchange rates |
|
( |
) |
|
Balance at April 3, 2020 |
$ |
|
|
12
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
The following table provides qualitative information associated with the fair value measurement of the Company’s Level 3 liabilities:
|
Liability |
|
April 3, 2020 Fair Value (in thousands) |
|
Valuation Technique |
|
Unobservable Inputs |
|
Percentage Applied |
|
Contingent consideration (ARGES) |
|
$ |
|
Monte Carlo method |
|
Historical and projected revenues from August 2019 through December 2026 |
|
N/A |
|
|
|
|
|
|
|
Revenue volatility |
|
|
|
|
|
|
|
|
|
Cost of debt |
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (Ingenia) |
|
$ |
|
Monte Carlo method |
|
Historical and projected revenues from April 2019 through March 2022 |
|
N/A |
|
|
|
|
|
|
|
Revenue volatility |
|
|
|
|
|
|
|
|
|
Cost of debt |
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (Other) |
|
$ |
|
Discounted cash flow method |
|
Historical and projected revenues for fiscal years 2018 to 2021 |
|
N/A |
|
|
|
|
|
|
|
Revenue 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 transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset losses and gains on the underlying hedged exposures. Furthermore, the Company manages its exposures to counterparty risks on derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
As of April 3, 2020, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $
The Company recognized an aggregate net loss 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 for impairment annually as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist. The Company
13
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
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 three months ended April 3, 2020 (in thousands):
|
Balance at beginning of the period |
$ |
|
|
|
Net working capital adjustments from a prior-year acquisition |
|
|
|
|
Effect of foreign exchange rate changes |
|
( |
) |
|
Balance at end of the period |
$ |
|
|
Goodwill by reportable segment as of April 3, 2020 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, 2019 was as follows (in thousands):
|
|
Reportable Segment |
|
|
|
|
|
|||||||||
|
|
Photonics |
|
|
Vision |
|
|
Precision Motion |
|
|
Total |
|
||||
|
Goodwill |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accumulated impairment of goodwill |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Intangible Assets
Intangible assets as of April 3, 2020 and December 31, 2019, respectively, are summarized as follows (in thousands):
|
|
April 3, 2020 |
|
|
December 31, 2019 |
|
||||||||||||||||||
|
|
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 |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
Trademarks and trade names |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Amortizable intangible assets |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Non-amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
|
— |
|
|
|
13,027 |
|
|
|
|
|
|
|
— |
|
|
|
13,027 |
|
|
Totals |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
14
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
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 |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
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 April 3, 2020 was as follows (in thousands):
|
Year Ending December 31, |
|
Cost of Revenue |
|
|
Operating Expenses |
|
|
Total |
|
|||
|
2020 (remainder of year) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
April 3, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Raw materials |
$ |
|
|
|
$ |
|
|
|
Work-in-process |
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
Demo and consigned inventory |
|
|
|
|
|
|
|
|
Total inventories |
$ |
|
|
|
$ |
|
|
Accrued Expenses and Other Current Liabilities
|
|
April 3, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Accrued compensation and benefits |
$ |
|
|
|
$ |
|
|
|
Accrued warranty |
|
|
|
|
|
|
|
|
Contract liabilities, current portion |
|
|
|
|
|
|
|
|
Deferred purchase price for acquisitions |
|
|
|
|
|
|
|
|
Finance lease obligations |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
15
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
Accrued Warranty
|
|
Three Months Ended |
|
|||||
|
|
April 3, 2020 |
|
|
March 29, 2019 |
|
||
|
Balance at beginning of the period |
$ |
|
|
|
$ |
|
|
|
Provision charged to cost of revenue |
|
|
|
|
|
|
|
|
Use of provision |
|
( |
) |
|
|
( |
) |
|
Foreign currency exchange rate changes |
|
( |
) |
|
|
|
|
|
Balance at end of the period |
$ |
|
|
|
$ |
|
|
Other Long Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
April 3, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Finance lease obligations |
$ |
|
|
|
$ |
|
|
|
Accrued pension liabilities |
|
|
|
|
|
|
|
|
Accrued contingent considerations |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
10. Debt
Debt consisted of the following (in thousands):
|
|
April 3, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
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
On December 31, 2019, the Company entered into an amended and restated credit agreement (the “Third Amended and Restated Credit Agreement”) with existing lenders for an aggregate credit facility of $
On March 27, 2020, the Company entered into an amendment (the “First Amendment”) to the Third Amended and Restated Credit Agreement and exercised a portion of the uncommitted accordion feature. The First Amendment increased the revolving credit facility commitment under the Third Amended and Restated Credit Agreement by $
16
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
The outstanding principal balance under the term loan facility is payable in
The Company is required to satisfy certain financial and non-financial covenants under the Third Amended and Restated Credit Agreement. The Third Amended and Restated Credit Agreement also contains customary events of default. The Company was in compliance with these covenants as of April 3, 2020.
Liens
The Company’s obligations under the Senior Credit Facilities are secured, on a senior basis, by a lien on substantially all of the assets of Novanta Inc.
Fair Value of Debt
As of April 3, 2020 and December 31, 2019, 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. Leases
Most leases held by the Company expire between
The following table summarizes the components of lease costs (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Operating lease cost |
$ |
|
|
|
$ |
|
|
|
Finance lease cost |
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
Variable lease cost |
|
|
|
|
|
|
|
|
Total lease cost |
$ |
|
|
|
$ |
|
|
17
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
The following table provides additional details of balance sheet information related to the Company’s leases (in thousands, except lease term and discount rate):
|
|
April 3, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
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 |
|
( |
) |
|
|
( |
) |
|
Finance lease assets included in property, plant and equipment, net |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
$ |
|
|
|
$ |
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Total finance lease liabilities |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
Finance leases |
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
|
|
|
Operating leases |
|
|
% |
|
|
|
% |
|
Finance leases |
|
|
% |
|
|
|
% |
The following table provides additional details of cash flow information related to the Company’s leases (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
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 |
$ |
|
|
|
$ |
|
|
|
Supplemental non-cash information: |
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
$ |
|
|
|
$ |
|
|
18
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
Future minimum lease payments under operating and finance leases expiring subsequent to April 3, 2020, 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 (1) |
|
||
|
2020 (remainder of year) |
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
|
|
|
|
|
|
Less: Interest |
|
( |
) |
|
|
( |
) |
|
Present value of lease liabilities |
$ |
|
|
|
$ |
|
|
|
|
(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 $
In February 2020, the Company’s Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $
As of April 3, 2020, the Company had $
Share-Based Compensation Expense
The table below summarizes share-based compensation expense recorded in the consolidated statements of operations (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Selling, general and administrative |
$ |
|
|
|
$ |
|
|
|
Research and development and engineering |
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
$ |
|
|
|
$ |
|
|
19
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
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 $
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 the 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 three months ended April 3, 2020:
|
|
Shares (In thousands) |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Unvested at December 31, 2019 |
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
$ |
|
|
|
Vested |
|
( |
) |
|
$ |
|
|
|
Forfeited |
|
— |
|
|
$ |
— |
|
|
Unvested at April 3, 2020 |
|
|
|
|
$ |
|
|
|
Expected to vest as of April 3, 2020 |
|
|
|
|
|
|
|
The total fair value of RSUs and DSUs that vested during the three months ended April 3, 2020 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 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 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
20
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
The table below summarizes the activities relating to the performance-based awards issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the three months ended April 3, 2020:
|
|
Shares (In thousands) |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Unvested at December 31, 2019 |
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
$ |
|
|
|
Performance adjustment (1) |
|
|
|
|
$ |
|
|
|
Vested |
|
( |
) |
|
$ |
|
|
|
Unvested at April 3, 2020 |
|
|
|
|
$ |
|
|
|
Expected to vest as of April 3, 2020 |
|
|
|
|
|
|
|
|
|
(1) |
|
|
The total fair value of PSUs that vested during the three months ended April 3, 2020 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:
|
|
Three Months Ended April 3, 2020 |
|
|
|
Grant-date stock price |
$ |
|
|
|
Expected volatility |
|
|
% |
|
Risk-free interest rate |
|
|
% |
|
Expected annual dividend yield |
|
|
|
|
Fair value |
$ |
|
|
Stock Options
The total intrinsic value of stock options exercised during the three months ended April 3, 2020, based on the difference between market price on the date of exercise and the date of grant, was $
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 (
21
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
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.
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in response to the COVID-19 pandemic. The CARES Act is an emergency economic stimulus package which, among other things, contains numerous provisions concerning income taxes. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.
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 |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
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 by reportable segment (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Photonics |
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
22
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
2018 Restructuring
During the second quarter of 2018, the Company initiated a program to integrate manufacturing operations as a result of acquisition activities. During the three months ended April 3, 2020, 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, 2019 |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Non-cash write-offs and other adjustments |
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
Balance at April 3, 2020 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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, 2019.
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-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which they are involved as a result of serving or having served in
23
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
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. 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, solid state laser, ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Vision
The Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless, recorder and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies; and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Precision Motion
The Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion control sub-assemblies, servo drives, air bearings, and air bearing spindles to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
24
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
Reportable Segment Financial Information
Revenue, gross profit, gross profit margin, operating income (loss), and depreciation and amortization expenses by reportable segment were as follows (in thousands, except percentage data):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Revenue |
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Gross Profit |
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Gross Profit Margin |
|
|
|
|
|
|
|
|
Photonics |
|
|
% |
|
|
|
% |
|
Vision |
|
|
% |
|
|
|
% |
|
Precision Motion |
|
|
% |
|
|
|
% |
|
Total |
|
|
% |
|
|
|
% |
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Depreciation and Amortization Expenses |
|
|
|
|
|
|
|
|
Photonics |
$ |
|
|
|
$ |
|
|
|
Vision |
|
|
|
|
|
|
|
|
Precision Motion |
|
|
|
|
|
|
|
|
Unallocated Corporate and Shared Services |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
25
NOVANTA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AS OF APRIL 3, 2020
(Unaudited)
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 |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
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 |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Medical |
|
|
% |
|
|
|
% |
|
Advanced Industrial |
|
|
% |
|
|
|
% |
|
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.
26
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 the anticipated impacts of the COVID-19 pandemic on our business, our financial results and our financial condition; 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, costs and timelines 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; risks associated with the COVID-19 pandemic and other events outside our control; 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; 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 or 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 regulations, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products; potential penalties for violating foreign, U.S. federal, and state healthcare laws and regulations; changes in governmental 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; 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; 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, 2019 under the heading “Risk Factors” as updated in Part 2, Item 1A of this Quarterly Report on Form 10-Q. 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.
27
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, solid state laser, ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Vision
Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless, recorder and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies, and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Precision Motion
Our Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion control sub-assemblies, servo drives, air bearings, and air bearing spindles to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
End Markets
We primarily operate in two end markets: the medical market and the advanced industrial market.
Medical Market
For the three months ended April 3, 2020, the medical market accounted for approximately 58% of our revenue. Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending, growth rates of surgical procedures, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, changes in technology requirements, timing of OEM customers’ product development and new product launches, changes in customer or patient preferences, and general demographic trends.
Advanced Industrial Market
For the three months ended April 3, 2020, the advanced industrial market accounted for approximately 42% 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
28
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.
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, laser additive manufacturing, automation and metrology, by working closely with OEM customers to launch application specific products that closely match the requirements of each application; |
|
|
• |
broadening our portfolio of enabling proprietary technologies and capabilities through increased investment in new product development, and investments in application development to further penetrate existing customers, while expanding the applicability of our solutions to new markets; |
|
|
• |
broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications, including increasing our recurring revenue streams such as services, spare parts and consumables; |
|
|
• |
expanding sales and marketing channels to reach new target customers; |
|
|
• |
improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean manufacturing principles, strategic sourcing across our major production sites; and optimizing and limiting the growth of our fixed cost base; and |
|
|
• |
attracting, retaining, and developing world-class talented and motivated employees. |
Significant Events and Updates
Amendment to Third Amended and Restated Credit Agreement
On March 27, 2020, we entered into an amendment (the “First Amendment”) to the third amended and restated credit agreement, dated as of December 31, 2019 (the “Third Amended and Restated Credit Agreement”). The First Amendment exercised a portion of the $200 million uncommitted accordion feature under the Third Amended and Restated Credit Agreement and increased the revolving credit facility commitment by $145 million, from $350 million to $495 million, and reset the uncommitted accordion feature to $200 million for potential future expansion.
Impact of COVID-19 on our Business
Our Employees
In response to the COVID-19 pandemic, we have taken proactive, aggressive action to protect the health and safety of our employees. We established steering committees at both the corporate level and at each of our facilities to provide leadership for and manage our COVID-19 risk mitigation actions and countermeasures. We enacted rigorous safety measures in all of our facilities, including implementing social distancing protocols, requiring working from home for those employees that do not need to be physically present on the manufacturing floor or onsite to perform their work, suspending travel, spreading work over more shifts, implementing temperature checks at the entrances to our facilities, frequently disinfecting our workspaces and providing masks to those employees who must be physically present. We instituted frequent, often daily, employee communications, providing guidance and updates to our employees with regard to COVID-19 safety procedures and status. We expect to continue these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business. We have incurred and expect to
29
continue to incur additional costs to protect the health of our employees. We may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees.
We are committed to retaining and supporting our employees during this pandemic. To retain our employees, we issued to substantially all of our employees a special one-time restricted stock unit grant in April 2020 totaling $14.4 million in aggregate, which will vest in February 2021. For the majority of our on-site production staff, we will also be providing special cash incentive bonuses during the pandemic for keeping our factories open and running. In addition to retention, these actions were implemented to create an ownership mindset and focus among all employees for the duration of the crisis and through the expected recovery, while maintaining the Company’s talent and capabilities.
We are also committed to providing non-monetary support to our communities. For example, we donated 10,000 facemasks to a local hospital in the U.S.
Executive Compensation
The Compensation Committee of our Board of Directors approved the 2020 compensation plans for our executive officers and a Section 16 officer (collectively, the “Officers”) in February 2020. To support our business during the COVID-19 pandemic, the Officers agreed to waive their 2020 merit and promotional increases, eliminate their 2020 cash bonuses, and take two weeks of unpaid time-off. Further, the Officers will not receive the one-time special restricted stock unit grant issued to the rest of the employees. These actions will result in an aggregate amount of $1.6 million (approximately 50%) reduction in the 2020 cash compensation, assuming bonuses were paid at target, for these Officers previously approved by the Compensation Committee in February 2020.
Our Customers
The outbreak has significantly increased economic and demand uncertainty. We believe that a portion of recent customer orders may be attributable to customers increasing their inventory levels to reduce their exposure to risks of future supply disruptions, which could be an offset to future demand for our products. We anticipate that the spread of COVID-19 will cause a prolonged global economic slowdown, and it is possible that it may cause a severe global recession. In the event of a recession, overall demand for our products could decline and our business would be adversely affected.
Our Facilities
Because of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the spread of the virus, such as travel bans and restrictions, limits on social gatherings, quarantines, shelter-in-place orders, and business shutdowns. We have important manufacturing operations in the U.S., the U.K., Germany, and China, all of which have been affected by the COVID-19 pandemic. As of the date of this filing, our manufacturing facilities around the world are in operation. While governmental measures may be modified or extended, we expect that our manufacturing facilities will remain operational. In connection with the COVID-19 pandemic, we have experienced limited absenteeism from those employees who are required to be on-site to perform their jobs.
Our Supply Chain
We have experienced limited disruption to our supply chain as a result of the COVID-19 pandemic to date. Certain of our suppliers have faced difficulties maintaining operations in light of government-ordered restrictions, shelter-in-place mandates, and other factors. We regularly monitor the financial health and manufacturing output of companies in our supply chain. Hardship on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause further disruption in our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations. To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic, we are identifying alternative suppliers, sourcing raw materials from different supplier locations, and taking other actions to ensure our supply of raw materials. Although we are mitigating potential supply interruptions from the COVID-19 pandemic, if certain suppliers cannot produce a key component for us, or if the receipt of certain materials is otherwise delayed, we may miss our scheduled shipment deadlines and our relationship with customers may be harmed. Additionally, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, may result in higher costs and delays, both on obtaining raw materials and shipping finished goods to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers.
30
Our Liquidity
With respect to liquidity, we are evaluating and taking actions to reduce costs and cash expenditures across the Company. These actions include reducing hiring activities, restricting travel, adjusting employee compensation by eliminating fiscal year 2020 cash bonuses and base salary increases, implementing an unpaid time-off program for substantially all of our non-production workforce, limiting discretionary spending, reducing or deferring spending on capital investment projects, deferring certain U.S. payroll tax payments for the remainder of 2020 in accordance with relief provisions under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), deferring lease payments on certain facilities and temporarily suspending repurchases under our share repurchase plans.
As of April 3, 2020, we had cash and cash equivalents of $73.7 million and available borrowing capacity under our revolving credit facility of $374.9 million. We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on our business. Based on our analysis, we believe our existing balances of cash and cash equivalents, anticipated cash flows from our operating activities, and available borrowing capacity under our revolving credit facility will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. Additionally, we believe we will remain in compliance with our debt covenants for the next twelve months.
In connection with our initiatives to preserve cash from a prolonged economic downturn caused by the COVID-19 pandemic, we reached an agreement with the former owner of ARGES in April 2020 to postpone a portion of the deferred cash consideration. We are now expected to pay the seller €5.0 million ($5.4 million) in cash in June 2020 and €20.0 million ($21.7 million) in cash in December 2020.
Results of Operations for the Three Months Ended April 3, 2020 Compared with the Three Months Ended March 29, 2019
The following table sets forth our unaudited results of operations as a percentage of revenue for the periods indicated:
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Revenue |
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of revenue |
|
58.5 |
|
|
|
57.8 |
|
|
Gross profit |
|
41.5 |
|
|
|
42.2 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development and engineering |
|
9.9 |
|
|
|
8.9 |
|
|
Selling, general and administrative |
|
19.8 |
|
|
|
20.3 |
|
|
Amortization of purchased intangible assets |
|
2.2 |
|
|
|
2.5 |
|
|
Restructuring and acquisition related costs |
|
1.1 |
|
|
|
1.3 |
|
|
Total operating expenses |
|
33.0 |
|
|
|
33.0 |
|
|
Operating income |
|
8.5 |
|
|
|
9.2 |
|
|
Interest income (expense), net |
|
(1.1 |
) |
|
|
(1.3 |
) |
|
Foreign exchange transaction gains (losses), net |
|
0.2 |
|
|
|
0.0 |
|
|
Other income (expense), net |
|
0.1 |
|
|
|
(0.0 |
) |
|
Income before income taxes |
|
7.7 |
|
|
|
7.8 |
|
|
Income tax provision (benefit) |
|
(0.0 |
) |
|
|
0.0 |
|
|
Consolidated net income |
|
7.7 |
% |
|
|
7.8 |
% |
Overview of Financial Results
Total revenue of $155.5 million for the three months ended April 3, 2020 decreased $1.7 million, or 1.1%, from the prior year period primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by revenue growth in our medical market. The effect of our prior year acquisitions resulted in an increase in revenue of $6.6 million, or 4.2%. In addition, foreign currency exchange rates adversely impacted our revenue by $1.5 million, or 1%, for the three months ended April 3, 2020.
Operating income of $13.3 million for the three months ended April 3, 2020 decreased $1.1 million, or 7.9%, from the prior year period. This decrease was primarily attributable to a decrease in gross profit of $1.8 million as a result of lower revenue, offset by decreases in amortization expense and restructuring and acquisition related costs.
31
Basic earnings per common share (“Basic EPS”) of $0.34 for the three months ended April 3, 2020 decreased $0.01 from the prior year period. Diluted earnings per common share (“Diluted EPS”) of $0.34 for the three months ended April 3, 2020 decreased $0.01 from the prior year period. The decrease was primarily attributable to a decrease in operating income.
Revenue
The following table sets forth external revenue by reportable segment for the periods noted (dollars in thousands):
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|||||
|
|
April 3, |
|
|
March 29, |
|
|
Increase |
|
|
Percentage |
|
||||
|
|
2020 |
|
|
2019 |
|
|
(Decrease) |
|
|
Change |
|
||||
|
Photonics |
$ |
55,140 |
|
|
$ |
59,225 |
|
|
$ |
(4,085 |
) |
|
|
(6.9 |
)% |
|
Vision |
|
69,008 |
|
|
|
65,936 |
|
|
|
3,072 |
|
|
|
4.7 |
% |
|
Precision Motion |
|
31,320 |
|
|
|
32,025 |
|
|
|
(705 |
) |
|
|
(2.2 |
)% |
|
Total |
$ |
155,468 |
|
|
$ |
157,186 |
|
|
$ |
(1,718 |
) |
|
|
(1.1 |
)% |
Photonics
Photonics segment revenue for the three months ended April 3, 2020 decreased by $4.1 million, or 6.9%, 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, partially offset by revenue of $3.2 million from the ARGES acquisition in July 2019.
Vision
Vision segment revenue for the three months ended April 3, 2020 increased by $3.1 million, or 4.7%, versus the prior year period, primarily due to an increase in revenue of $2.7 million as a result of the Med X Change acquisition in June 2019.
Precision Motion
Precision Motion segment revenue for the three months ended April 3, 2020 decreased by $0.7 million, or 2.2%, 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 the Ingenia CAT, S.L. (“Ingenia”) acquisition in April 2019.
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 |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Gross profit: |
|
|
|
|
|
|
|
|
Photonics |
$ |
24,661 |
|
|
$ |
27,314 |
|
|
Vision |
|
26,575 |
|
|
|
25,973 |
|
|
Precision Motion |
|
13,908 |
|
|
|
13,521 |
|
|
Unallocated Corporate and Shared Services |
|
(699 |
) |
|
|
(519 |
) |
|
Total |
$ |
64,445 |
|
|
$ |
66,289 |
|
|
Gross profit margin: |
|
|
|
|
|
|
|
|
Photonics |
|
44.7 |
% |
|
|
46.1 |
% |
|
Vision |
|
38.5 |
% |
|
|
39.4 |
% |
|
Precision Motion |
|
44.4 |
% |
|
|
42.2 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
41.5 |
% |
|
|
42.2 |
% |
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.
32
Photonics
Photonics segment gross profit for the three months ended April 3, 2020 decreased $2.7 million, or 9.7%, versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 44.7% for the three months ended April 3, 2020, versus a gross profit margin of 46.1% for the prior year period. The decrease in gross profit margin was primarily attributable to product mix and operational inefficiencies.
Vision
Vision segment gross profit for the three months ended April 3, 2020 increased $0.6 million, or 2.3%, versus the prior year period, primarily due to an increase in revenue. Vision segment gross profit margin was 38.5% for the three months ended April 3, 2020, versus a gross profit margin of 39.4% for the prior year period. The decrease in gross profit margin was primarily attributable to product mix.
Precision Motion
Precision Motion segment gross profit for the three months ended April 3, 2020 increased $0.4 million, or 2.9%, versus the prior year period, primarily due an increase in gross profit margin. Precision Motion segment gross profit margin was 44.4% for the three months ended April 3, 2020, versus a gross profit margin of 42.2% for the prior year period. The increase in gross profit margin was primarily attributable to product mix and operational improvements.
Operating Expenses
The following table sets forth operating expenses for the periods noted (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Research and development and engineering |
$ |
15,334 |
|
|
$ |
13,997 |
|
|
Selling, general and administrative |
|
30,755 |
|
|
|
31,847 |
|
|
Amortization of purchased intangible assets |
|
3,445 |
|
|
|
3,998 |
|
|
Restructuring and acquisition related costs |
|
1,661 |
|
|
|
2,054 |
|
|
Total |
$ |
51,195 |
|
|
$ |
51,896 |
|
Research and Development and Engineering Expenses
Research and Development and Engineering (“R&D”) expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects. R&D expenses were $15.3 million, or 9.9% of revenue, during the three months ended April 3, 2020, versus $14.0 million, or 8.9% 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 R&D expenses from prior year acquisitions.
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 $30.8 million, or 19.8% of revenue, during the three months ended April 3, 2020, versus $31.8 million, or 20.3% of revenue, during the prior year period. SG&A expenses decreased in terms of total dollars and as a percentage of revenue primarily due to lower variable compensation as we eliminated 2020 annual bonuses.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $3.4 million, or 2.2% of revenue, during the three months ended April 3, 2020, versus $4.0 million, or 2.5% of revenue, during the prior year period.
33
Restructuring and Acquisition Related Costs
We recorded restructuring and acquisition related costs of $1.7 million during the three months ended April 3, 2020, versus $2.1 million during the prior year period. The decrease in restructuring and acquisition related costs versus the prior year period was primarily due to a decrease in restructuring charges of $0.6 million as a result of the 2018 and 2019 restructuring programs, partially offset by an increase in acquisition related costs of $0.2 million primarily related to expenses under an earn-out agreement 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 |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
Photonics |
$ |
8,915 |
|
|
$ |
12,310 |
|
|
Vision |
|
5,634 |
|
|
|
4,557 |
|
|
Precision Motion |
|
6,538 |
|
|
|
5,635 |
|
|
Unallocated Corporate and Shared Services |
|
(7,837 |
) |
|
|
(8,109 |
) |
|
Total |
$ |
13,250 |
|
|
$ |
14,393 |
|
Photonics
Photonics segment operating income was $8.9 million, or 16.2% of revenue, during the three months ended April 3, 2020, versus $12.3 million, or 20.8% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $2.7 million and an increase in R&D spending of $1.2 million primarily due to R&D expenses from a prior year acquisition, offset by a decrease in amortization of purchased intangible assets of $0.4 million.
Vision
Vision segment operating income was $5.6 million, or 8.2% of revenue, during the three months ended April 3, 2020, versus $4.6 million, or 6.9% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $0.6 million, a decrease of SG&A expenses of $0.6 million, and a decrease in restructuring related charges of $0.3 million, partially offset by an increase in R&D expenses of $0.3 million.
Precision Motion
Precision Motion segment operating income was $6.5 million, or 20.9% of revenue, during the three months ended April 3, 2020, versus $5.6 million, or 17.6% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $0.4 million and decrease in SG&A expenses of $0.4 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 April 3, 2020 decreased by $0.3 million versus the prior year period.
Other Income and Expense Items
The following table sets forth other income and expense items for the periods noted (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Interest income (expense), net |
$ |
(1,678 |
) |
|
$ |
(2,044 |
) |
|
Foreign exchange transaction gains (losses), net |
|
254 |
|
|
|
41 |
|
|
Other income (expense), net |
|
83 |
|
|
|
(68 |
) |
34
Interest Income (Expense), Net
Net interest expense was $1.7 million for the three months ended April 3, 2020, versus $2.0 million in the prior year period. The decrease in net interest expense was primarily due to a decrease in the weighted average interest rate on our senior credit facilities. The weighted average interest rate on our senior credit facilities was 2.39% during the three months ended April 3, 2020, versus 3.78% during the three months ended March 29, 2019. As of April 3, 2020, our outstanding borrowings under the Third Amended and Restated Credit Agreement were denominated in Euro, British Pound, and U.S Dollars totaling $168.2 million, $13.6 million, and $35.0 million, respectively.
Foreign Exchange Transaction Gains (Losses), Net
Foreign exchange transaction gains (losses) were $0.3 million net gains for the three months ended April 3, 2020, versus less than $0.1 million net gains in the prior year period. The increase in net gains was due to changes in the value of the U.S. Dollar against the British Pound and Euro and realized gains from foreign currency contracts.
Other Income (Expense), Net
Net other expense was nominal for the three months ended April 3, 2020 and the three months ended March 29, 2019.
Income Taxes Provision (Benefit)
Our effective tax rate for the three months ended April 3, 2020 was a benefit of (0.3)% versus a provision of 0.6% for the prior year period. Our effective tax rate of (0.3)% for the three months ended April 3, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K. patent box deductions and other tax credits, and windfall tax benefits upon vesting of certain stock-based compensation awards during the period. For the three months ended April 3, 2020, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 19.8% on our effective tax rate.
Our effective tax rate of 0.6% for the three months ended March 29, 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. For the three months ended March 29, 2019, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 19.3% on our effective tax rate.
On March 27, 2020, the U.S. federal government enacted the CARES Act in response to the COVID-19 pandemic. The CARES Act is an emergency economic stimulus package which, among other things, contains numerous provisions concerning income taxes. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.
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 payments. Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. We believe our future operating cash flows will be sufficient to meet our future operating and capital expenditure cash needs for the foreseeable future, including at least the next 12 months. The availability of borrowing capacity under our revolving credit facility provides another potential source of liquidity for acquisitions. We may seek to raise additional capital, which could be in the form of bonds, convertible debt or equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Third Amended and Restated Credit Agreement. There is no assurance that such capital will be available on reasonable terms or at all.
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, risks associated with events outside our control, such as the economic consequences of the COVID-19 pandemic, 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, 2019.
35
Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. There is no assurance that the 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 April 3, 2020, $55.8 million of our $73.7 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 Senior Credit Facilities (defined below). Approximately $181.8 million of our outstanding term loan and revolver borrowings under our Senior Credit Facilities were held in our subsidiaries outside of Canada and the United States. Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries.
In connection with our initiatives to preserve cash from a prolonged economic downturn caused by the COVID-19 pandemic, we reached an agreement with the former owner of ARGES in April 2020 to settle net working capital adjustments and to postpone a portion of the deferred cash consideration. We are now expected to pay the seller €5.0 million ($5.4 million) in cash in June 2020 and €20.0 million ($21.7 million) in cash in December 2020. We also expect to defer certain U.S. payroll tax payments for the remainder of 2020 in accordance with relief provisions under the CARES Act.
In addition, with respect to the COVID-19 pandemic impact on liquidity, we are evaluating and taking actions to reduce costs and cash expenditures across the Company. These include reducing hiring activities, restricting travel, adjusting employee compensation by eliminating fiscal year 2020 cash bonuses and base salary increases, implementing an unpaid time-off program for substantially all of our non-production workforce, limiting discretionary spending, reducing or deferring spending on capital investment projects, and deferrals lease payments on certain facilities.
Senior Credit Facilities
In December 2019, we entered into the Third Amended and Restated Credit Agreement, consisting of a $100.0 million U.S. dollar equivalent euro-denominated 5-year term loan facility (approximately €90.2 million) and a $350.0 million 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in December 2024 and included an uncommitted “accordion” feature pursuant to which the commitments under the revolving credit facility may be increased by an additional $200.0 million in aggregate, subject to certain customary conditions. The term loan facility requires quarterly scheduled principal repayments of approximately €1.1 million beginning in March 2020 with the remaining principal balance due upon maturity. We may make additional principal payments at any time, which will reduce the next quarterly installment payment due. We may make payments to pay down our revolving credit facility with cash on hand and cash generated from future operations at any time.
On March 27, 2020, we entered into an amendment (the “First Amendment”) to the Third Amended and Restated Credit Agreement and exercised a portion of the uncommitted accordion feature. The First Amendment increased the revolving credit facility commitment under the Third Amended and Restated Credit Agreement by $145.0 million, from $350.0 million to $495.0 million, and reset the uncommitted accordion feature to $200.0 million for potential future expansion.
As of April 3, 2020, we had a €89.0 million euro-denominated term loan (approximately $96.7 million) and $120.1 million revolver borrowings outstanding under our Senior Credit Facilities. The borrowings outstanding under the Senior Credit Facilities bear interest at rates based on (a) the Base Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 0.25% to 1.25% per annum, determined by reference to our consolidated leverage ratio, or (b) the Eurocurrency Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 1.25% and 2.25% per annum, determined by reference to our consolidated leverage ratio. In addition, we are obligated to pay a commitment fee on the unused portion of the revolving credit facility, ranging between 0.20% and 0.40% per annum, determined by reference to our consolidated leverage ratio.
The Third Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum leverage ratio and a minimum fixed charge coverage ratio (as defined in the Third Amended and Restated Credit Agreement). The following table summarizes these financial covenants and our compliance therewith as of April 3, 2020:
|
|
Requirement |
|
|
Actual |
|
||
|
Maximum consolidated leverage ratio |
|
3.50 |
|
|
|
1.83 |
|
|
Minimum consolidated fixed charge coverage ratio |
|
1.50 |
|
|
|
6.14 |
|
36
Share Repurchase Plans
Our Board of Directors may approve share repurchase plans from time to time. Under these repurchase plans, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of the business, the market price of our common shares, and general market conditions. Shares may also be repurchased through an accelerated share purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common shares to be repurchased when we would otherwise be prohibited from doing so under insider trading laws. While the share repurchase plans are generally intended to offset dilution from equity awards granted to our employees and directors, the plans do not obligate us to acquire any particular amount of common shares. No time limit is typically set for the completion of the share repurchase plans, and the plans may be suspended or discontinued at any time. We expect to fund share repurchases through cash on hand and cash generated from operations.
In October 2018, our Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $25.0 million worth of common shares. Share repurchases have been made under the 2018 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934. During the three months ended April 3, 2020, we repurchased 65 thousand shares for an aggregate purchase price of $5.5 million at an average price of $84.55 per share under the 2018 Repurchase Plan. We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of April 3, 2020.
In February 2020, our Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $50.0 million worth of common shares. We expect that share repurchases will be made under the 2020 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 after the 2018 Repurchase Plan is completed. No shares have been repurchased under the 2020 Repurchase Plan to date.
In an effort to preserve cash in light of the economic slowdown caused by the COVID-19 pandemic, we have temporarily suspended repurchases under our share repurchase plans.
Cash Flows for the Three Months Ended April 3, 2020 and March 29, 2019
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):
|
|
Three Months Ended |
|
|||||
|
|
April 3, |
|
|
March 29, |
|
||
|
|
2020 |
|
|
2019 |
|
||
|
Net cash provided by operating activities |
$ |
17,755 |
|
|
$ |
5,457 |
|
|
Net cash used in investing activities |
$ |
(5,101 |
) |
|
$ |
(2,405 |
) |
|
Net cash used in financing activities |
$ |
(16,045 |
) |
|
$ |
(10,630 |
) |
|
|
April 3, |
|
|
December 31, |
|
||||||
|
|
2020 |
|
|
2019 |
|
||||||
|
Cash and cash equivalents |
$ |
73,701 |
|
|
$ |
78,944 |
|
||||
|
Unused and available funds under revolving credit facility |
$ |
374,888 |
|
|
$ |
226,616 |
|
||||
Operating Cash Flows
Cash provided by operating activities was $17.8 million for the three months ended April 3, 2020, versus $5.5 million for the prior year period. Cash provided by operating activities for the three months ended April 3, 2020 increased from the prior year period primarily due to working capital improvements resulting in an increase in cash flows from accounts receivable and inventories.
Cash provided by operating activities for the three months ended April 3, 2020 was positively impacted by an increase in our inventory turnover ratio from 3.1 at December 31, 2019 to 3.2 at April 3, 2020 and a decrease in accounts receivable, offset by a decrease in our days payables outstanding which decreased from 53 days at December 31, 2019 to 50 days at April 3, 2020. During the three months ended April 3, 2020, we paid the 2019 annual employee bonuses which had been accrued for as of December 31, 2019.
Cash provided by operating activities for the three months ended March 29, 2019 was negatively impacted by the timing of sales and inventory purchases in the three months ended March 29, 2019, compared to the three months ended December 31, 2018. During the three months ended March 29, 2019, we paid the first milestone payment under the earn-out agreement for the Zettlex acquisition amounting to $3.9 million and paid the 2018 annual employee bonuses, both of which had been accrued for as of December 31, 2018.
37
Investing Cash Flows
Cash used in investing activities was $5.1 million for the three months ended April 3, 2020, related to capital expenditures of $2.3 million and a payment for intangible assets of $2.6 million related to our 2016 asset acquisition of video signal processing and management technologies.
Cash used in investing activities was $2.4 million for the three months ended March 29, 2019, primarily related to capital expenditures.
We have no material commitments to purchase property, plant, and equipment as of April 3, 2020. We expect to use approximately $6 million to $8 million in 2020 for capital expenditures related to investments in new property, plant and equipment.
Financing Cash Flows
Cash used in financing activities was $16.0 million for the three months ended April 3, 2020, primarily due to $1.3 million of term loan repayments, $1.3 million of fees paid in connection with the First Amendment to our Third Amended and Restated Credit Agreement, $7.8 million of payroll tax payments on share-based compensation awards, and $5.5 million of repurchases of common shares.
Cash used in financing activities was $10.6 million for the three months ended March 29, 2019, primarily due to $4.6 million of term loan repayments, $5.9 million of payroll tax payments on stock-based compensation awards, and $0.1 million of principal payments under our finance lease obligations.
Off-Balance Sheet Arrangements, Contractual Obligations
Contractual Obligations
Our contractual obligations primarily consist of the principal and interest associated with our Senior Credit Facilities, operating and finance leases, purchase commitments, pension obligations, deferred cash considerations associated with acquisitions, contingent considerations and earn-outs. 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, 2019. As of April 3, 2020, other than the First Amendment to the Third Amended and Restated Credit Agreement, we have not entered into any other material new or modified contractual obligations since the end of the fiscal year ended December 31, 2019.
Off-Balance Sheet Arrangements
Through April 3, 2020, 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, 2019. There have been no material changes to our critical accounting policies and estimates through April 3, 2020 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
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 April 3, 2020, 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, 2019.
38
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 April 3, 2020, 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 April 3, 2020.
Changes in Internal Control over Financial Reporting
There has been no change to our internal control over financial reporting during the fiscal quarter ended April 3, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Due to the COVID-19 pandemic, a significant portion of our employees are now working from home, while also under shelter-in-place orders or other restrictions. Established business continuity plans were activated in order to mitigate the impact to our control environment, operating procedures, data and internal controls. The design of our processes and controls allow for remote execution with accessibility to secure data. These changes have not materially affected, and we do not believe are 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, 2019. Except as set forth below, there have been no material changes in our risk factors included in our Annual Report.
To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.
The COVID-19 pandemic has adversely impacted and is expected to further adversely impact our business and results of operations.
In December 2019, a strain of novel coronavirus disease, COVID-19, was identified in Wuhan, China. This virus has been declared a pandemic and has spread across the world, including throughout the United States, Europe and Asia. The outbreak and government measures taken in response have also had a significant adverse impact, both direct and indirect, on our businesses and the economy. We have experienced weakened demand from certain customers in the advanced industrial and medical end-markets, which has adversely affected and is expected to continue to adversely affect our revenues. For example, healthcare providers have deferred elective medical procedures in order to focus on combatting the pandemic, which has significantly reduced demand for certain of our medical products. Certain other customers are delaying their research and development programs, which has negatively affected the demand for some of our products. If these trends continue, our revenues will continue to be negatively impacted.
We have also faced difficulty sourcing some materials and components necessary to fulfill production requirements and meeting scheduled shipments due to shipping and transportation disruptions. If these disruptions were to worsen, our ability to manufacture our products or meet our customers’ schedules may be adversely affected and our business would be harmed. Even if we are able to find alternate sources of supply for such materials or components, they may cost more or be of lower quality, which could affect our profitability, financial condition and business. While the impact of the pandemic on our manufacturing capabilities has been limited to date, there can be no assurance that our ability to manufacture our products will not be disrupted in the future, due to sickness of employees, mandatory stay-at-home orders, travel restrictions, supply interruptions or other potential disruptions. We have also faced and may face in the future limitations on our employee resources as a results of various causes, including stay-at-home orders from local governments, mandatory furloughs for one week per quarter for substantially all non-manufacturing employees, sickness of employees or their families, or the desire of employees to avoid contact with large groups of people. The pandemic has also diverted management resources and the prolonged work-from-home arrangements have created business continuity and increased cybersecurity risks.
The COVID-19 pandemic continues to rapidly evolve. The extent to which the outbreak impacts our business, liquidity and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the continued geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States, the European Union, China and other countries, the duration and extent of business closures or business disruptions and the effectiveness of actions taken to contain and treat the disease. If we or our customers experience prolonged shutdowns or other business disruptions beyond current expectations, our ability to conduct our business in the manner and within planned timelines could be materially adversely impacted, and our business and financial results may continue to be adversely affected.
Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets, which has adversely impacted and may continue to adversely impact our stock price and our ability to access capital markets.
40
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 April 3, 2020.
|
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) |
|
||||
|
January 1 - January 31, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
- |
|
|
$ |
15,000,088 |
|
|
February 1 - February 28, 2020 |
|
|
22,200 |
|
|
$ |
94.31 |
|
|
|
22,200 |
|
|
$ |
62,906,358 |
|
|
February 29 - April 3, 2020 |
|
|
42,848 |
|
|
$ |
79.50 |
|
|
|
42,848 |
|
|
$ |
59,500,104 |
|
|
Total |
|
|
65,048 |
|
|
|
|
|
|
|
65,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. In February 2020, our Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $50.0 million worth of common shares. 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 programs, and the programs may be suspended or discontinued at any time. In an effort to preserve cash in light of the economic slowdown caused by the COVID-19 pandemic, the Company has temporarily suspended the share repurchase plans. |
|
|||||||||||||||
|
(2) The Company has repurchased 184,512 shares of its common shares pursuant to the 2018 Repurchase Plan since its adoption. During the three months ended April 3, 2020, no shares were repurchased under the 2020 Repurchase Plan. |
|
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
41
Item 6. 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 |
|
|
|
|
|
|
|
|
|
|
* |
|||
|
|
|
|
|
|
|
|
||||||||
|
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 |
|
8-K |
|
000-25705 |
|
3.1 |
|
12/29/10 |
|
|
||
|
|
|
|
|
|
|
|
||||||||
|
3.5 |
|
|
8-K |
|
001-35083 |
|
10.1 |
|
05/12/16 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
10.1 |
|
First Amendment to Third Amended and Restated Credit Agreement, dated March 27, 2020 |
|
8-K |
|
001-35083 |
|
10.1 |
|
03/31/20 |
|
|
||
|
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 |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
||||||||
|
32.1 |
|
|
|
|
|
|
|
|
|
|
** |
|||
|
|
|
|
|
|
|
|
||||||||
|
32.2 |
|
|
|
|
|
|
|
|
|
|
** |
|||
|
|
|
|
|
|
|
|
||||||||
|
101.INS |
|
Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
||||||||||||
|
|
|
|
|
|
|
|
||||||||
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
||||||||
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
||||||||
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
||||||||
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
||||||||
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
|
|
|
* |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
|
|
|
|
|
* |
||
* Filed herewith
** Furnished herewith
42
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)
|
Name |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/ Matthijs Glastra |
|
Director, Chief Executive Officer |
|
May 12, 2020 |
|
Matthijs Glastra |
|
|
|
|
|
|
|
|
||
|
/s/ Robert J. Buckley |
|
Chief Financial Officer |
|
May 12, 2020 |
|
Robert J. Buckley |
|
|
|
|
43