What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-12 · 203 added, 134 removed, 608 unchanged (36% of the section changed)

44 unchanged sentences

Three Months Ended

Six Months Ended

Cost of revenue

3 unchanged sentences

Amortization of purchased intangible assets

Restructuring and acquisition related costs

Restructuring, acquisition, and related costs

Total operating expenses

13 unchanged sentences

Three Months Ended

Six Months Ended

Consolidated net income

14 unchanged sentences

Accumulated Other Comprehensive

Three Months Ended April 3, 2020

Three Months Ended July 3, 2020

Balance at April 3, 2020

Consolidated net income

Common shares issued under stock plans

Common shares withheld for taxes on vested stock awards

Share-based compensation

Other comprehensive income, net of tax

Balance at July 3, 2020

Six Months Ended July 3, 2020

Balance at December 31, 2019

4 unchanged sentences

Share-based compensation

Other comprehensive income (loss), net of tax

Balance at April 3, 2020

Three Months Ended March 29, 2019

Other comprehensive income, net of tax

Balance at July 3, 2020

Three Months Ended June 28, 2019

Balance at March 29, 2019

Consolidated net income

Common shares issued under stock plans

Common shares withheld for taxes on vested stock awards

Repurchases of common shares

Share-based compensation

Other comprehensive income, net of tax

Balance at June 28, 2019

Six Months Ended June 28, 2019

Balance at December 31, 2018

2 unchanged sentences

Common shares withheld for taxes on vested stock awards

Repurchases of common shares

Share-based compensation

Other comprehensive income (loss), net of tax

Balance at March 29, 2019

Other comprehensive income, net of tax

Balance at June 28, 2019

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

1 unchanged sentence

(In thousands of U.S.

Three Months Ended

Six Months Ended

Cash flows from operating activities:

7 unchanged sentences

Inventory acquisition fair value adjustments

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

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

effects from business acquisitions:

7 unchanged sentences

Cash flows from investing activities:

Payment of business acquisition purchase price held in escrow

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

Purchases of property, plant and equipment

3 unchanged sentences

Cash flows from financing activities:

Borrowings under revolving credit facilities

Repayments of term loan and revolving credit facilities

2 unchanged sentences

Repurchases of common shares

Payment of contingent consideration related to an acquisition

Payments of deferred and escrowed purchase price related to acquisitions

Other financing activities

1 unchanged sentence

Effect of exchange rates on cash and cash equivalents

Decrease in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of the period

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

Basis of Presentation

8 unchanged sentences

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.

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities 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 preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods.

Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which such revisions are deemed to be necessary.

The Company evaluates its estimates based on historical experience, current conditions, including estimated economic implications of the COVID-19 pandemic, and various other assumptions that it believes are reasonable under the circumstances.

The accounting estimates assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of 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.

While there was not a material change to the consolidated financial statements related to these estimates as of and for the three and six months ended July 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

Recent Accounting Pronouncements

27 unchanged sentences

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

The vast majority of the Company’s revenue is generated from the sale of distinct products.

Revenue is measured as the amount of consideration the Company expects to receive

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

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.

AS OF JULY 3, 2020

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 .

18 unchanged sentences

The standard warranty period for product sales is accounted for under the provisions of ASC 450, “Contingencies,” as the Company has the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability.

A provision for the estimated cost related to warranty is recorded to cost of revenue at the time revenue is recognized.

A provision for the estimated cost related to warranty is recorded as cost of revenue at the time revenue is recognized.

The Company’s estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions.

5 unchanged sentences

The Company does not disclose the value of the remaining performance obligation for contracts with an original expected length of one year or less.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

Contract Liabilities

1 unchanged sentence

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

$ 3.3 million and $ 3.6 million, res pectively, and are included in accrued expenses and other current liabilities and other liabilities in the accompanying consolidated balance sheets.

The de crease in the contract liability balance during the three months ended April 3, 2020 is primarily due to $ 2.1 million of revenue recognized during the period that was included in the contract liability balance at December 31, 2019, partially offset by cash payments received in advance of satisfying performance obligations .

As of July 3, 2020 and December 31, 2019, contract liabilities were $ 4.6 million and $ 3.6 million, respectively, and are included in accrued expenses and other current liabilities and other liabilities in the accompanying consolidated balance sheets.

The increase in the contract liability balance during the six months ended July 3, 2020 is primarily due to cash payments received in advance of satisfying performance obligations, partially offset by $ 2.6 million of revenue recognized during the period that was included in the contract liability balance at December 31, 2019.

Disaggregated Revenue

1 unchanged sentence

Business Combinations

On July 31, 2019 , the Company acquired 100 % of the outstanding shares of ARGES GmbH (“ARGES”), a Wackersdorf, Germany-based manufacturer of innovative laser scanning subsystems used in industrial materials processing and medical applications, for a total purchase price of € 65.7 million ($ 73.2 million), including net working capital adjustments.

On July 31, 2019 , the Company acquired 100 % of the outstanding shares of ARGES GmbH (“ARGES”), a Wackersdorf, Germany-based supplier of innovative laser scanning subsystems used in industrial materials processing and medical applications, for a total purchase price of € 65.7 million ($ 73.2 million), including net working capital adjustments.

The purchase price consists of € 24.0 million ($ 26.7 million) cash paid at closing, 124 thousand Novanta common shares issued upon closing (with a fair market value of € 9.8 million, or $ 10.9 million, based on the closing market price of $ 87.58 per share on July 30, 2019), € 7.1 million ($ 7.9 million) estimated fair value of contingent consideration and € 24.8 million ($ 27.7 million) deferred cash consideration.

In connection with the Company’s initiatives to preserve cash during a prolonged economic downturn caused by the COVID-19 pandemic, the Company 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.

The Company is 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.

The Company paid the seller € 5.0 million in cash in June 2020 and expects to pay € 20.0 million in cash in December 2020.

The final purchase price allocation is as follows (in thousands):

Accounts receivable

Property, plant and equipment

Intangible assets

Total assets acquired

Accounts payable

Deferred tax liabilities

Other liabilities

Total liabilities assumed

Total assets acquired, net of liabilities assumed

cash acquired

Total purchase price, net of cash acquired

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

Accumulated Other Comprehensive Loss

5 unchanged sentences

Amounts reclassified from accumulated other comprehensive loss (1)

Balance at April 3, 2020

Balance at July 3, 2020

The amounts reclassified from accumulated other comprehensive loss were included in other income (expense) in the consolidated statements of operations.

2 unchanged sentences

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.

For the three and six months ended July 3, 2020 and June 28, 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 common share calculation based on the number of shares, if any, that would be issuable as of the end of the reporting period assuming the end of the reporting period is also the end of the performance period.

Dilutive effects of attainment-based contingently issuable shares granted to the former Laser Quantum Limited (“Laser Quantum”) noncontrolling interest shareholders, as well as the non-GAAP EPS performance-based restricted stock units will be included in the weighted average common share calculation when the performance targets have been achieved.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

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

Three Months Ended

Six Months Ended

Consolidated net income

5 unchanged sentences

Earnings per Common Share:

71,166 non-GAAP EPS performance-based restricted stock units granted to certain members of the executive management team and 213,219 shares of restricted stock issued to the former Laser Quantum non-controlling interest shareholders are considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of April 3, 2020.

45,252 non-GAAP EPS performance-based restricted stock units granted to certain members of the executive management team and 213,219 shares of restricted stock issued to the former Laser Quantum non-controlling interest shareholders were considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of March 29, 2019.

71 thousand non-GAAP EPS performance-based restricted stock units granted to certain members of the executive management team and 213 thousand shares of restricted stock issued to the former Laser Quantum non-controlling interest shareholders are considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of July 3, 2020.

45 thousand non-GAAP EPS performance-based restricted stock units granted to certain members of the executive management team and 213 thousand shares of restricted stock issued to the former Laser Quantum non-controlling interest shareholders were considered contingently issuable shares and were excluded from the calculation of the denominator as the contingent conditions had not been met as of June 28, 2019.

Fair Value Measurements

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

Foreign Currency Contracts

8 unchanged sentences

The estimated fair value of the contingent consideration of € 7.1 million ($ 7.9 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date.

Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of operations in restructuring and acquisition related costs until the liability is fully settled.

There were no changes to the fair value of the contingent consideration during the three months ended April 3, 2020.

Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of operations in restructuring, acquisition, and related costs until the liability is fully settled.

There were no changes to the fair value of the contingent consideration during the six months ended July 3, 2020.

On April 16, 2019, the Company acquired Ingenia CAT, S.L.

3 unchanged sentences

The estimated fair value of the contingent consideration of € 5.8 million ($ 6.6 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date.

There were no changes to the fair value of the contingent consideration during the three months ended April 3, 2020.

In June 2020, the Company made the first installment payment of € 1.0 million ($ 1.1 million), which is included in cash flows from financing activities in the consolidated statement of cash flows for the six months ended July 3, 2020.

There were no changes to the fair value of the contingent consideration during the six months ended July 3, 2020.

On December 14, 2016 , the Company acquired certain video signal processing and management technologies used in medical visualization solutions.

4 unchanged sentences

Subsequent changes in the estimated fair value of this contingent liability are recorded as adjustments to the carrying value of the asset acquired and amortized over the remaining useful life of the underlying asset.

The Company made the first installment payment of $ 2.6 million in February 2020, which is included in cash flows from investing activities in the consolidated statement of cash flows for the three months ended April 3, 2020.

There were no other changes in the fair value of the contingent consideration during the three months ended April 3, 2020.

In February 2020, the Company made the first installment payment of € 2.4 million ($ 2.6 million), which is included in cash flows from investing activities in the consolidated statement of cash flows for the six months ended July 3, 2020.

There were no other changes in the fair value of the contingent consideration during the six months ended July 3, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

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):

The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of July 3, 2020 (in thousands):

Quoted Prices in

27 unchanged sentences

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):

Changes in the fair value of Level 3 contingent considerations during the six months ended July 3, 2020 were as follows (in thousands):

Contingent Considerations

Balance at December 31, 2019

Fair value adjustments

Effect of foreign exchange rates

Balance at April 3, 2020

Balance at July 3, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

The following table provides qu ali tative information associated with the fair value measurement of the Company’s Level 3 liabilities:

April 3, 2020

(in thousands)

23 unchanged sentences

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 $ 28.8 million and a net loss of $ 0.3 million, respectively.

As of July 3, 2020, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $ 26.7 million and a net gain of $ 0.1 million, respectively.

As of December 31, 2019, the aggregate notional amount and fair value of the Company’s foreign currency forward contracts was $ 12.4 million and a net loss of less than $ 0.1 million, respectively.

The Company recognized an aggregate net loss of $ 0.3 million and an aggregate net loss of $ 0.5 million for the three months ended April 3, 2020 and March 29, 2019, respectively.

The Company recognized an aggregate net gain of $ 0.7 million and $ 0.4 million for the three and six months ended July 3, 2020, respectively, and an aggregate net gain of $ 0.9 million and $ 0.4 million for the three and six months ended June 28, 2019, respectively.

These amounts were included in foreign exchange transaction gains (losses) in the consolidated statement of operations for all periods presented.

2 unchanged sentences

The Company tests its goodwill balances for impairment annually as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that an impairment may exist.

The Company performed the most recent annual goodwill and indefinite-lived intangible asset impairment test as of the beginning of the second quarter of 2020 and noted no impairment.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

performed the most recent annual goodwill and indefinite-lived intangible asset impairment test as of the beginning of the second quarter of 2019 and not ed no impairment.

The following table summarizes changes in goodwill during the three months ended April 3, 2020 (in thousands):

AS OF JULY 3, 2020

The following table summarizes changes in goodwill during the six months ended July 3, 2020 (in thousands):

Balance at beginning of the period

2 unchanged sentences

Balance at end of the period

Goodwill by reportable segment as of April 3, 2020 was as follows (in thousands):

Goodwill by reportable segment as of July 3, 2020 was as follows (in thousands):

Reportable Segment

4 unchanged sentences

Intangible Assets

Intangible assets as of April 3, 2020 and December 31, 2019, respectively, are summarized as follows (in thousands):

April 3, 2020

Intangible assets as of July 3, 2020 and December 31, 2019, respectively, are summarized as follows (in thousands):

December 31, 2019

9 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

All definite-lived intangible assets are amortized either on a straight-line basis or an economic benefit basis over their remaining estimated useful life.

3 unchanged sentences

Three Months Ended

Six Months Ended

Amortization expense – cost of revenue

1 unchanged sentence

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):

Estimated amortization expense for each of the five succeeding years and thereafter as of July 3, 2020 was as follows (in thousands):

Year Ending December 31,

15 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

Accrued Warranty

Three Months Ended

April 3, 2020

March 29, 2019

Six Months Ended

Balance at beginning of the period

Provision charged to cost of revenue

Warranty liabilities from acquisitions

Use of provision

21 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

The outstanding principal balance under the term loan facility is payable in quarterly installments of € 1.1 million beginning in March 2020, with the remaining balance due upon maturity.

1 unchanged sentence

Borrowings under the revolving credit facility may be repaid at any time through December 2024 .

The Company repaid € 1.1 million ($ 1.2 million) of its term loan during the three months ended April 3, 2020.

The Company repaid € 2.3 million ($ 2.5 million) of its term loan during the six months ended July 3, 2020.

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.

The Company was in compliance with these covenants as of July 3, 2020.

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.

As of July 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.

8 unchanged sentences

Three Months Ended

Six Months Ended

Operating lease cost

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

AS OF JULY 3, 2020

The following table provides additional details of balance sheet information related to the Company’s leases (in thousands, except lease term and discount rate):

18 unchanged sentences

The following table provides additional details of cash flow information related to the Company’s leases (in thousands):

Three Months Ended

Six Months Ended

Cash paid for amounts included in lease liabilities:

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

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):

AS OF JULY 3, 2020

Future minimum lease payments under operating and finance leases expiring subsequent to July 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,

8 unchanged sentences

In October 2018, the Company’s Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $ 25.0 million worth of the Company’s common shares.

During the three months ended April 3, 2020, the Company 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.

In February 2020, the Company’s Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $ 50.0 million worth of common shares.

As of April 3, 2020, the Company had $ 59.5 million under the 2018 and 2020 share repurchase plans available for future share repurchases.

In an effort to preserve cash in light of the economic slowdown caused by the COVID-19 pandemic, the Company has temporarily suspended repurchases under the share repurchase plans.

During the six months ended July 3, 2020, the Company 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.

As of July 3, 2020, the Company had $ 59.5 million available under the 2018 and 2020 share repurchase plans for future share repurchases.

In an effort to preserve cash in light of the economic slowdown caused by the COVID-19 pandemic, the Company has temporarily suspended repurchases under the share repurchase plans since April 2020.

Share-Based Compensation Expense

1 unchanged sentence

Three Months Ended

Six Months Ended

Selling, general and administrative

1 unchanged sentence

Cost of revenue

Restructuring, acquisition, and related costs

Total share-based compensation expense

Share-based compensation reported in selling, general and administrative expenses included expenses related to restricted stock units and deferred stock units granted to the members of the Company’s Board of Directors of $ 1.0 million and $ 0.9 million during the six months ended July 3, 2020 and June 28, 2019, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

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 $ 0.9 million and $ 0.8 million during the three months ended April 3, 2020 and March 29, 2019, respectively.

AS OF JULY 3, 2020

Restricted Stock Units and Deferred Stock Units

4 unchanged sentences

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 192 thousand and 187 thousand DSUs outstanding as of April 3, 2020 and December 31, 2019, respectively, which were included in the calculation of weighted average basic shares outstanding for the respective periods.

The table below summarizes activities relating to RSUs and DSUs issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the three months ended April 3, 2020:

There were 162 thousand and 187 thousand DSUs outstanding as of July 3, 2020 and December 31, 2019, respectively, which were included in the calculation of weighted average basic shares outstanding for the respective periods.

The table below summarizes activities relating to RSUs and DSUs issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the six months ended July 3, 2020:

(In thousands)

2 unchanged sentences

Unvested at December 31, 2019

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 $ 9.0 million based on the market price of the underlying shares on the date of vesting.

Unvested at July 3, 2020

Expected to vest as of July 3, 2020

The total fair value of RSUs and DSUs that vested during the six months ended July 3, 2020 was $ 9.4 million based on the market price of the underlying shares on the date of vesting.

Performance Stock Units

The Company granted two types of performance-based stock awards to certain members of the executive management team:

The Company typically grants two types of performance-based stock awards to certain members of the executive management team:

non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”).

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

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:

AS OF JULY 3, 2020

(In thousands)

3 unchanged sentences

Performance adjustment (2)

Unvested at April 3, 2020

Expected to vest as of April 3, 2020

Unvested at July 3, 2020

Expected to vest as of July 3, 2020

The unvested PSUs are shown in this table at target, except for the number of shares vested, which reflects the number of shares earned and expected to vest.

As of July 3, 2020, the maximum number of PSUs available to be earned was approximately 284 thousand shares.

The amount shown represents performance adjustment for performance-based awards granted on February 28, 2017.

These units vested at 200 % during the three months ended April 3, 2020 based on the achievement of cumulative Non-GAAP EPS and applicable relative TSR performance conditions during the performance period of fiscal years 2017 through 2019.

The total fair value of PSUs that vested during the three months ended April 3, 2020 was $ 10.8 million based on the market price of the underlying shares on the date of vesting.

These units vested at 200 % during the six months ended July 3, 2020 based on the achievement of cumulative Non-GAAP EPS and applicable relative TSR performance conditions during the performance period of fiscal years 2017 through 2019.

The total fair value of PSUs that vested during the six months ended July 3, 2020 was $ 10.8 million based on the market price of the underlying shares on the date of vesting.

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

Six Months Ended

Grant-date stock price

3 unchanged sentences

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 $ 1.0 million.

The total intrinsic value of stock options exercised during the six months ended July 3, 2020, based on the difference between market price on the date of exercise and the date of grant, was $ 1.0 million.

The total amount of cash received from the exercise of these stock options was $ 0.2 million.

There were 60 thousand fully-vested stock options outstanding as of April 3, 2020.

No stock options were granted during the three months ended April 3, 2020.

No stock options were granted during the six months ended July 3, 2020.

There were 60 thousand fully-vested stock options outstanding as of July 3, 2020.

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.

2 unchanged sentences

Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 29.0 % in the determination of the estimated annual effective tax rate.

The Company’s effective tax rate of ( 0.3 )% for the three months ended April 3, 2020 differs from the Canadian statutory tax rate of 29.0 % primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions and other tax credits and windfall tax benefits upon vesting of certain share-based compensation awards during the period.

For the three months ended April 3, 2020, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 19.8 % on the Company’s effective tax rate.

The Company maintains a valuation allowance on balances of certain U.S.

state net operating losses and certain non-U.S.

tax attributes that the Company has determined that it is more likely than not that they will not be realized.

A valuation allowance is

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

The Company’s 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 share-based compensation awards during the period.

For the three months ended March 29, 2019, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 19.3 % on the Company’s effective tax rate.

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.

AS OF JULY 3, 2020

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.

I n conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.

For the three and six months ended July 3, 2020, the Company recognized a tax benefit of $ 1.3 million due to the release of a portion of a valuation allowance on deferred tax assets which the Company believes will more likely than not be realized.

The Company’s effective tax rate of 0.3 % for the three months ended July 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 a release of a portion of the valuation allowance.

For the three months ended July 3, 2020, the valuation allowance release had a benefit of 11.4 % on the Company’s effective tax rate.

The Company’s effective tax rate of ( 0 %) for the six months ended July 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, windfall tax benefits upon vesting of certain stock-based compensation awards during the period, and a release of a portion of the valuation allowance.

For the six months ended July 3, 2020, the windfall tax benefits upon vesting of certain share-based compensation awards and the valuation allowance release had a benefit of 11.2 % and 5.7 %, respectively, on the Company’s effective tax rate.

The Company’s effective tax rate of 19.5 % for the three months ended June 28, 2019 differs from the Canadian statutory tax rate of 29.0 % primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, and U.K.

patent box deductions and other tax credits.

The Company’s effective tax rate of 10.3 % for the six months ended June 28, 2019 differs from the Canadian statutory tax rate of 29.0 % primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions and other tax credits, and windfall tax benefits upon vesting of certain stock-based compensation awards during the period.

For the six months ended June 28, 2019, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 10.6 % on the Company’s effective tax rate.

On March 27, 2020, the U.S.

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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.

Restructuring and Acquisition Related Costs

The following table summarizes restructuring and acquisition related costs in the accompanying consolidated statements of operations (in thousands):

The CARES Act will not have a material impact on the Company’s income taxes or related disclosures.

Restructuring, Acquisition, and Related Costs

The following table summarizes restructuring, acquisition, and related costs in the accompanying consolidated statements of operations (in thousands):

Three Months Ended

Six Months Ended

2019 restructuring

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Acquisition and related charges

Total restructuring and acquisition related costs

Total restructuring, acquisition, and related costs

2019 Restructuring

During the fourth quarter of 2018, the Company implemented a restructuring plan intended to realign operations, reduce costs, achieve operational efficiencies and focus resources on growth initiatives.

During the three months ended April 3, 2020, the Company recorded $ 0.1 million in severance and related costs, $ 0.2 million in facility related costs, and other costs of $ 0.2 million in connection with the 2019 restructuring plan.

As of April 3, 2020, the Company incurred cumulative costs related to this restructuring plan totaling $ 8.4 million.

The 2019 restructuring program was substantially completed in the first quarter of 2020 .

During the six months ended July 3, 2020, the Company recorded $ 0.1 million in severance and related costs, $ 0.2 million in facility related costs, and other costs of $ 0.3 million in connection with the 2019 restructuring plan.

As of July 3, 2020, the Company incurred cumulative costs

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

related to this restructuring plan totaling $ 8.4 million.

T he 2019 restructuring program was substantially completed in the first quarter of 2020 .

The following table summarizes restructuring costs associated with the 2019 restructuring program by reportable segment (in thousands):

Three Months Ended

Six Months Ended

Precision Motion

Unallocated Corporate and Shared Services

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

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 $ 0.1 million in severance and related costs in connection with the 2018 restructuring plan.

During the second quarter of 2018, the Company initiated a program to integrate manufacturing operations as a result of acquisition activities (the “2018 restructuring plan”).

During the six months ended July 3, 2020, the Company recorded $ 0.8 million in severance and other costs in connection with the 2018 restructuring plan.

These costs were reported in the Vision reportable segment.

As of April 3, 2020, the Company incurred cumulative costs related to this restructuring plan totaling $ 2.9 million.

The 2018 restructuring program was substantially completed in the first quarter of 2020.

As of July 3, 2020, the Company incurred cumulative costs related to this restructuring plan totaling $ 3.6 million.

The 2018 restructuring program has been substantially completed.

Rollforward of Accrued Expenses Related to Restructuring

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Cash payments

Non-cash write-offs and other adjustments

Balance at April 3, 2020

Non-cash charges and other adjustments

Balance at July 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 $ 0.1 million and $ 0.3 million for the three months ended April 3, 2020 and March 29, 2019, respectively.

Acquisition related costs recognized under earn-out agreements in connection with acquisitions totaled $ 0.9 million and $ 0.5 million for the three months ended April 3, 2020 and March 29, 2019, respectively.

The majority of acquisition related costs for the three months ended April 3, 2020 and March 29, 2019 were included in the Company’s Precision Motion and Unallocated Corporate and Shared Services reportable segments.

Acquisition costs in connection with business combinations, including finders’ fees, legal, valuation, and other professional or consulting fees, totaled less than $ 0.1 million and $ 0.1 million for the three and six months ended July 3, 2020, respectively, and $ 1.4 million and $ 1.6 million for the three and six months ended June 28, 2019, respectively.

During the three and six months ended July 3, 2020, we incurred $ 0.6 million in legal costs related to an arbitration demand in connection with a pre-acquisition contract dispute from a 2019 acquisition.

Acquisition and related costs recognized under earn-out agreements in connection with acquisitions totaled $ 0.9 million and $ 1.8 million for the three and six months ended July 3, 2020, respectively, and $ 0.8 million and $ 1.4 million for the three and six months ended June 28, 2019, respectively.

The majority of acquisition and related costs for the three and six months ended July 3, 2020 were included in the Company’s Precision Motion and Vision reportable segments.

The majority of acquisition and related costs for the three and six months ended June 28, 2019 were included in the Company’s Precision Motion and Unallocated Corporate and Shared Services reportable segments.

Commitments and Contingencies

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There have been no material changes to the Company’s purchase commitments since December 31, 2019.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

Legal Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business.

In April 2020, the Company received notification of an arbitration demand filed with the American Arbitration Association against a business acquired by the Company in June 2019.

The arbitration demand was filed by a contract counterparty to a joint product development agreement entered into by the business before Novanta acquired it.

The arbitration demand alleges breach of contract and other claims arising out of allegations that the business failed to engage in required marketing activities for the product developed under the joint product development agreement.

The claimant is seeking compensatory and punitive damages, lost profits and other relief.

The Company believes that the claims are without merit and no amount has been accrued for in the consolidated financial statements.

The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business.

The Company reviews the status of each significant matter and assesses the potential financial exposure on a quarterly basis.

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As additional information becomes available, the Company reassesses the potential liability related to any pending claims and litigations and may revise its estimates.

When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made.

Legal fees are expensed as incurred.

The Company does not believe that the outcome of these claims will have a material adverse effect on its consolidated financial statements but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect on the consolidated financial statements.

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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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

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.

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The Company determined that disclosing revenue by specific product was impracticable due to the highly customized and extensive portfolio of technologies offered to customers.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

Based upon the information provided to the CODM, the Company has determined that it operates in three reportable segments:

19 unchanged sentences

The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

Reportable Segment Financial Information

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Three Months Ended

Six Months Ended

Precision Motion

Three Months Ended

Six Months Ended

Precision Motion

Unallocated Corporate and Shared Services

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

Three Months Ended

Six Months Ended

Gross Profit Margin

1 unchanged sentence

Three Months Ended

Six Months Ended

Operating Income (Loss)

2 unchanged sentences

Three Months Ended

Six Months Ended

Depreciation and Amortization Expenses

1 unchanged sentence

Unallocated Corporate and Shared Services

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF APRIL 3, 2020

R evenue by Geography

Revenue by Geography

The Company aggregates geographic revenue based on the customer location where products are shipped.

1 unchanged sentence

Three Months Ended

Six Months Ended

United States

1 unchanged sentence

Rest of Asia-Pacific

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF JULY 3, 2020

The majority of revenue from our Photonics , Vision and Precision Motion segments is generated from sales to customers within the United States and Europe.

5 unchanged sentences

Three Months Ended

Six Months Ended

Advanced Industrial

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements