10-Q

(Former name, former address and former fiscal year, if changed since last report)

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. Yes ☒ No ☐

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). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 1, 2023, there were 35,805,586 of the Registrant’s common shares, no par value, issued and outstanding.

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

1. Basis of Presentation

Novanta Inc. (“Novanta” or the “Company”) 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 precision medicine and manufacturing, medical solutions, and robotics and automation 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, 2022. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

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

During the first quarter of 2023, the Company changed the names of its reportable segments from “Photonics” to “Precision Medicine and Manufacturing”, from “Vision” to “Medical Solutions”, and from “Precision Motion” to “Robotics and Automation”, respectively. The segment name changes did not result in any change to the compositions of the Company's segments and therefore did not result in any change to historical results.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates and assumptions are reviewed on an on-going basis and the effects of revisions are reflected in the period in which such revisions are deemed to be necessary. The Company evaluates its estimates based on historical experience, current conditions, and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ significantly from these estimates.

Recent Accounting Pronouncements

None

2. Revenue

The Company recognizes revenue when control of promised goods or services is transferred to customers. The transfer of control generally occurs upon shipment when title and risk of loss pass to the customer. The vast majority of the Company’s revenue is generated from the sale of distinct products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for such products, which is generally at contractually stated prices. Sales taxes and value added taxes collected concurrently with revenue generating activities are excluded from revenue.

Performance Obligations

Substantially all of the Company’s revenue is recognized at a point in time, upon shipment, rather than over time.

At the request of its customers, the Company may perform professional services, generally for the maintenance and repair of products previously sold to those customers and for engineering services. Professional services for the maintenance and repair of

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2023

(Unaudited)

products are typically short in duration, mostly less than one month, and generally involve a single distinct performance obligation. The related revenue is recognized at a point in time when control transfers to the customer upon completion of professional services. The consideration expected to be received in exchange for such services is typically the contractually stated amount. Certain engineering services are longer in duration and the related revenue is recognized over time. As the Company’s right to payment from a customer is based on the value of engineering services performed, the Company recognizes revenue based on the corresponding value to the customer from the Company’s performance completed to date. Revenue from engineering services aggregated to less than 3% of the Company’s consolidated revenue during the three months ended March 31, 2023 and April 1, 2022.

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. Shipping and handling fees charged to customers are recognized as revenue and the related costs are recorded in cost of revenue at the time of transfer of control.

Warranties

The standard warranty periods for the Company’s products are typically 12 months to 36 months. The Company recognizes estimated liabilities associated with standard warranty periods for its products in accordance with the provisions of ASC 450, “Contingencies,” as the Company has the ability to ascertain the likelihood of the liabilities and can reasonably estimate the amount of the liabilities. A provision for the estimated cost related to standard warranties is recorded as cost of revenue at the time revenue is recognized. The Company’s estimate of the costs to service the warranty obligations is based on historical experience and expectations of future conditions. To the extent that the Company’s experience in warranty claims or costs associated with servicing those claims differ from the original estimates, revisions to the estimated warranty liabilities are recorded at that time, with offsetting adjustments to cost of revenue.

Practical Expedients and Exemptions

The Company expenses incremental direct costs of obtaining a contract when incurred because the expected amortization period is typically 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 March 31, 2023 and December 31, 2022, contract liabilities were $7.2 million and $8.4 million, respectively, and are included in accrued expenses and other current liabilities and other liabilities in the accompanying consolidated balance sheets. The decrease in the contract liability balance during the three months ended March 31, 2023 is primarily due to $4.1 million of revenue recognized during the period that was included in the contract liability balance as of December 31, 2022, partially offset by cash payments received in advance of satisfying performance obligations.

Disaggregated Revenue

See Note 15 for the Company’s disaggregation of revenue by segment, geography and end market.

3. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss were as follows (in thousands):


	Total Accumulated
	Other			Cumulative			Pension
	Comprehensive			Translation			Liability
	Loss			Adjustments			Adjustments
Balance at December 31, 2022	$	(32,009	)	$	(24,427	)	$	(7,582	)
Other comprehensive income (loss)		5,046			5,230			(184	)
Amounts reclassified from accumulated other comprehensive loss		255			—			255
Balance at March 31, 2023	$	(26,708	)	$	(19,197	)	$	(7,511	)

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

4. Earnings per Common Share

Basic earnings per common share is computed by dividing consolidated net income by the weighted average number of common shares outstanding during the period.

For diluted earnings per common share, the denominator includes the dilutive effect of outstanding common share equivalents. The dilutive effects of outstanding common share equivalents, including outstanding service-based restricted stock units, stock options and performance-based restricted stock units, are 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. The dilutive effects of attainment-based contingently issuable shares are included in the weighted average common share calculation only when the performance targets have been achieved based on the cumulative achievement against the performance targets as of the end of the reporting period.

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


	Three Months Ended
	March 31,		April 1,
	2023		2022
Numerators:
Consolidated net income	$	18,265	$	18,820

Denominators:


New Brunswick, Canada		98-0110412
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

125 Middlesex Turnpike, Bedford, Massachusetts, USA		01730
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, no par value	NOVT	The Nasdaq Global Select Market


Item No.		Page No.

PART I — FINANCIAL INFORMATION		1

ITEM 1.	FINANCIAL STATEMENTS	1

	CONSOLIDATED BALANCE SHEETS (unaudited)	1

	CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)	2

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)	3

	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)	4

	CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)	5

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)	6

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35

ITEM 4.	CONTROLS AND PROCEDURES	35

PART II — OTHER INFORMATION		36

ITEM 1.	LEGAL PROCEEDINGS	36

ITEM 1A.	RISK FACTORS	36

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	36

ITEM 4.	MINE SAFETY DISCLOSURES	37

ITEM 5.	OTHER INFORMATION	37

ITEM 6.	EXHIBITS	38

SIGNATURES		39


	March 31,			December 31,
	2023			2022
ASSETS
Current assets
Cash and cash equivalents	$	82,676		$	100,105
Accounts receivable, net of allowance of $1,174 and $995, respectively		141,472			137,697
Inventories		166,671			167,997
Prepaid income taxes and income taxes receivable		1,669			1,508
Prepaid expenses and other current assets		12,305			13,212
Total current assets		404,793			420,519
Property, plant and equipment, net		103,967			103,186
Operating lease assets		41,964			43,317
Deferred tax assets		18,201			15,113
Other assets		5,542			4,414
Intangible assets, net		168,828			175,766
Goodwill		482,520			478,897
Total assets	$	1,225,815		$	1,241,212
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	4,904		$	4,800
Accounts payable		66,009			75,225
Income taxes payable		14,479			13,660
Current portion of operating lease liabilities		7,657			7,793
Accrued expenses and other current liabilities		49,304			63,044
Total current liabilities		142,353			164,522
Long-term debt		418,535			430,662
Operating lease liabilities		39,578			40,808
Deferred tax liabilities		16,977			17,194
Income taxes payable		4,516			4,355
Other liabilities		5,839			6,085
Total liabilities		627,798			663,626
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred shares, no par value; Authorized shares: 7,000; No shares issued and outstanding		—			—
Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 35,802 and 35,711, respectively		423,856			423,856
Additional paid-in capital		52,020			55,155
Retained earnings		148,849			130,584
Accumulated other comprehensive loss		(26,708	)		(32,009	)
Total stockholders' equity		598,017			577,586
Total liabilities and stockholders’ equity	$	1,225,815		$	1,241,212


	Three Months Ended
	March 31,			April 1,
	2023			2022
Revenue	$	219,126		$	204,216
Cost of revenue		121,498			113,940
Gross profit		97,628			90,276
Operating expenses:
Research and development and engineering		22,828			20,929
Selling, general and administrative		40,923			39,352
Amortization of purchased intangible assets		5,089			7,342
Restructuring, acquisition, and related costs		2,476			(1,630	)
Total operating expenses		71,316			65,993
Operating income		26,312			24,283
Interest income (expense), net		(6,332	)		(3,109	)
Foreign exchange transaction gains (losses), net		(77	)		69
Other income (expense), net		(166	)		(545	)
Income before income taxes		19,737			20,698
Income tax provision (benefit)		1,472			1,878
Consolidated net income	$	18,265		$	18,820

Earnings per common share (Note 4):
Basic	$	0.51		$	0.53
Diluted	$	0.51		$	0.53

Weighted average common shares outstanding—basic		35,810			35,538
Weighted average common shares outstanding—diluted		35,999			35,781


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐


	Common Shares					Additional Paid-In			Retained		Accumulated Other
	# of Shares			Amount		Capital			Earnings		Comprehensive Loss			Total

	Three Months Ended March 31, 2023
Balance at December 31, 2022		35,711		$	423,856	$	55,155		$	130,584	$	(32,009	)	$	577,586
Consolidated net income		—			—		—			18,265		—			18,265
Common shares issued under stock plans		155			—		—			—		—			—
Common shares withheld for taxes on vested stock awards		(64	)		—		(9,601	)		—		—			(9,601	)
Share-based compensation		—			—		6,466			—		—			6,466
Other comprehensive income (loss), net of tax		—					—			—		5,301			5,301
Balance at March 31, 2023		35,802		$	423,856	$	52,020		$	148,849	$	(26,708	)	$	598,017

	Three Months Ended April 1, 2022
Balance at December 31, 2021		35,601		$	423,856	$	53,768		$	56,533	$	(12,866	)	$	521,291
Consolidated net income		—			—		—			18,820		—			18,820
Common shares issued under stock plans		134			—		—			—		—			—
Common shares withheld for taxes on vested stock awards		(51	)		—		(7,733	)		—		—			(7,733	)
Share-based compensation		—			—		6,774			—		—			6,774
Other comprehensive income (loss), net of tax		—			—		—			—		(4,459	)		(4,459	)
Balance at April 1, 2022		35,684		$	423,856	$	52,809		$	75,353	$	(17,325	)	$	534,693