10-K 1 novt-10k_20161231.htm 10-K novt-10k_20161231.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2016

Or

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. 001-35083

 

Novanta Inc.

(Exact name of registrant as specified in its charter)

 

 

New Brunswick, Canada

 

98-0110412

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

125 Middlesex Turnpike

 

01730

Bedford, Massachusetts, USA

 

(Zip Code)

(Address of principal executive offices)

 

 

(781) 266-5700

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

 

Name of Exchange on Which Registered

 

Common Shares, no par value

 

The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes      No  

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 

 

Smaller reporting company 

                         (Do not check if a smaller reporting company)

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

The aggregate market value of the Registrant’s outstanding common shares held by non-affiliates of the Registrant, based on the closing price of the common shares on the NASDAQ Global Select Market on the last business day of the Registrant’s most recently completed second fiscal quarter (July 1, 2016) was $479,741,621. For purposes of this disclosure, common shares held by officers and directors of the Registrant and by persons who hold more than 10% of the Registrant’s outstanding common shares have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive.

As of February 21, 2017, there were 34,459,387 of the Registrant’s common shares, no par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders scheduled to be held on May 10, 2017 to be filed with the Securities and Exchange Commission are incorporated by reference in answer to Part III of this Annual Report on Form 10-K.

 

 

 

 

 


NOVANTA INC.

FORM 10-K

YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS

 

Item No.

 

 

  

Page No.

 

PART I

Item 1.

 

Business

  

1

Item 1A.

 

Risk Factors

  

10

Item 1B.

 

Unresolved Staff Comments

  

21

Item 2.

 

Properties

  

21

Item 3.

 

Legal Proceedings

  

22

Item 4.

 

Mine Safety Disclosures

  

22

 

PART II

Item 5.

 

Market for Registrant’s Common Shares, Related Stockholders Matters and Issuer Purchases of Equity Securities

  

23

Item 6.

 

Selected Financial Data

  

24

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

26

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  

43

Item 8.

 

Financial Statements and Supplementary Data

  

44

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

92

Item 9A.

 

Controls and Procedures

  

92

Item 9B.

 

Other Information

  

93

 

PART III

Item 10.

 

Directors, Executive Officers and Corporate Governance

  

94

Item 11.

 

Executive Compensation

  

94

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

94

Item 13.

 

Certain Relationships and Related Transactions, and Directors Independence

  

94

Item 14.

 

Principal Accounting Fees and Services

  

94

 

PART IV

Item 15.

 

Exhibits and Financial Statement Schedules

  

95

Item 16.

 

Form 10-K Summary

  

97

Signatures

  

98

As used in this report, the terms “we,” “us,” “our,” “Novanta,” “NOVT” and the “Company” mean Novanta Inc. and its subsidiaries, unless the context indicates another meaning.

Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.

The following brand and trade names of Novanta Inc. are used in this report: MicroE, Celera Motion, Westwind, Synrad, Cambridge Technology, ExoTec Precision, General Scanning, Photo Research, JADAK, NDS, NDSsi, Applimotion, Lincoln Laser, Skyetek and Reach Technology.

 

 


PART I

Cautionary Note Regarding Forward Looking Statements

Except for historical information, the matters discussed in this Annual Report on Form 10-K are forward looking statements that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward looking statements. The Company makes such forward looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Actual future results may vary materially from those projected, anticipated, or indicated in any forward looking statements as a result of various important factors, including those set forth in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” Readers should also carefully review the risk factors described in the other documents that we file with the SEC from time to time. In this Annual Report on Form 10-K, 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. Forward looking statements also include the assumptions underlying or relating to any of the forward looking statements. The forward looking statements contained in this Annual Report include, but are not limited to, statements related to: our belief that the Purchasing Managers Index (PMI) may provide an indication of the impact of general economic conditions on our sales into the advanced industrial end market; 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 dispositions and anticipated benefits from acquisitions; anticipated use of currency hedges; 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. All forward looking statements included in this document are based on information available to us on the date hereof. We will not undertake and specifically decline any obligation to update any forward looking statements, except as required under applicable law.

 

Item 1. Business

Overview

Novanta Inc. and its subsidiaries (collectively referred to as “Novanta”, the “Company”, “we”, “us”, “our”) design, develop, manufacture and sell precision photonic and motion control components and subsystems to Original Equipment Manufacturers (“OEMs”) in the medical and advanced industrial markets. We combine deep expertise at the intersection of photonics and motion 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. We deliver highly engineered photonics, vision and precision motion solutions to customers around the world.

Novanta Inc. was founded and initially incorporated in Massachusetts in 1968 as General Scanning, Inc. (“General Scanning”). In 1999, General Scanning merged with Lumonics Inc. The post-merger entity, GSI Lumonics Inc., continued under the laws of the Province of New Brunswick, Canada. In 2005, the Company changed its name to GSI Group Inc. Through a series of strategic divestitures and acquisitions between 2008 and 2015, the Company transformed from a focus on the semiconductor industry to primarily selling components and sub-systems to OEMs in the medical and advanced industrial markets. The Company changed its name to Novanta Inc. in May 2016.

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 mission-critical 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;

1


 

increasing our penetration of high growth advanced industrial applications, such as laser materials processing, robotics, automation and metrology, by working closely with OEM customers to launch application specific products that closely match the requirements of each application;

 

broadening our portfolio of enabling proprietary technologies and capabilities through increased investment in new product development, expanded sales and marketing channels to reach target customers, and investments in application development to further penetrate existing customers, while expanding the applicability of our solutions to new markets;

 

broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications, including increasing our recurring revenue streams such as services, spare parts and consumables;

 

improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean manufacturing principles and strategic sourcing across our major production sites; and

 

attracting, retaining, and developing world-class talented and motivated employees.

Acquisitions

In January 2017, the Company acquired approximately 35% of the outstanding shares of Laser Quantum Limited (“Laser Quantum”), a Manchester, United Kingdom-based provider of solid state continuous wave lasers, femtosecond lasers, and optical light engines to OEMs in the medical market, for a total purchase price of £25.5 million ($31.8 million in U.S. dollars). As a result of the acquisition of these additional shares, the Company’s equity ownership percentage increased from approximately 41% to approximately 76% and the future financial results of Laser Quantum will be consolidated in the Company’s consolidated financial statements.

Also in January 2017, the Company acquired ThingMagic, a Woburn, Massachusetts-based provider of ultra high frequency (“UHF”) radio frequency identification (“RFID”) modules and finished RFID readers to OEMs in the medical and advanced industrial markets, for a total purchase price of $19.2 million, subject to customary working capital adjustments.

In May 2016, the Company acquired Reach Technology Inc., a Fremont, California-based provider of embedded touch screen technology solutions to OEMs in the medical and advanced industrial markets, for a total purchase price of $9.4 million.

In December 2015, the Company acquired all assets and certain liabilities of Skyetek Inc., a Denver, Colorado-based provider of embedded and standalone RFID solutions for OEM customers in the medical and advanced industrial markets, for a total purchase price of $2.8 million.

In November 2015, the Company acquired certain assets and liabilities of Lincoln Laser Company, a Phoenix, Arizona-based provider of ultrafast precision polygon scanners and other optical scanning solutions for the medical and advanced industrial markets, for a total purchase price of $12.1 million.

In February 2015, the Company acquired Applimotion Inc., a Loomis, California-based provider of advanced precision motor and motion control technology to OEM customers in the medical and advanced industrial markets, for a total purchase price of $14.0 million.

In March 2014, the Company acquired JADAK LLC, JADAK Technologies Inc. and Advance Data Capture Corporation (together, “JADAK”), a North Syracuse, New York-based provider of optical data collection and machine vision technologies to OEM medical device manufacturers, for a total purchase price of $93.7 million.

In January 2013, the Company acquired NDS Surgical Imaging LLC (“NDS”), a San Jose, California-based company that designs, manufactures, and markets high definition visualization solutions and imaging informatics products for the surgical, radiology and patient monitoring market segments, for a total final purchase price of $75.4 million.

Divestitures and Product Rationalization

We continuously evaluate our business mix and financial performance. Since 2011, we have executed a series of divestitures in line with our strategy.

In January 2016, the Company discontinued its radiology products, sold under the Dome brand name and operated within the Company’s Visualization Solutions product line. Total revenue from these products was approximately $1.4 million, $9.4 million and $11.5 million in 2016, 2015, and 2014, respectively.

2


In June 2015, the Company finalized an agreement to divest its 50% owned joint venture in India, Excel Laser Technology Private Limited, for net cash proceeds of $0.2 million.

In April 2015, the Company completed the sale of its fiber laser business, operated under the JK Lasers brand name, for $29.6 million in cash.

In July 2014, the Company completed the sale of the Scientific Lasers business, operated under the Continuum and Quantronix brand names, for $6.5 million in cash.

In May 2013, the Company sold the Semiconductor Systems business, operated under the GSI Group brand name, for $9.7 million in cash.

In October 2012, the Company divested the Lasers Systems business, operated under the Control Laser and Baublys brand names, for $6.6 million in cash.

Segments

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 following table shows the external revenues, gross profit margin and operating profit for each of the segments for the year ended December 31, 2016 (dollars in thousands):

 

 

Revenue

 

 

Gross Profit Margin

 

 

Operating Profit

 

Photonics

$

174,158

 

 

 

44.0

%

 

$

34,825

 

Vision

$

122,250

 

 

 

38.6

%

 

$

(1,277

)

Precision Motion

$

88,350

 

 

 

45.3

%

 

$

21,101

 

 

See Note 16 to Consolidated Financial Statements for additional financial information about our reportable segments.

Photonics

The Photonics segment (formerly known as Laser Products) designs, manufactures and markets photonics-based solutions, including CO2 laser sources, and laser scanning and laser beam delivery products, to customers worldwide. The segment serves highly demanding photonics-based applications such as industrial material processing, metrology, medical and life science imaging, 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.

3


The Photonics segment is comprised of three product lines:

 

Product Line

  

Key End Market

  

Brand Names

  

Description

Laser Beam Delivery Components

  

Advanced Industrial and Medical  

  

Cambridge Technology, Lincoln Laser & ExoTec Precision

  

Galvanometer and polygon-based optical scanning components. These products provide precise control and delivery of laser beams through motorized manipulation of mirrors and optical elements and are integrated by OEM manufacturers with their controlling hardware and software. Applications include material processing (such as laser marking, laser machining and laser drilling), scanning microscopy, laser-based vision correction, optical coherence tomography imaging, high resolution printing, holographic imaging and storage, metrology, and 2D or 3D imaging.

Laser Beam Delivery Solutions

 

Advanced Industrial and Medical  

 

Cambridge Technology, Lincoln Laser & Synrad

 

Galvanometer and polygon based optical scan heads. These products provide precise control and delivery of laser beams through motorized manipulation of mirrors and optical elements in two and three-axis scan heads, scanning subsystems, and controlling hardware and software. Applications include material processing (such as laser marking, laser coding, laser engraving, laser machining and laser drilling), scanning microscopy, laser-based vision correction, optical coherence tomography imaging, high resolution printing, holographic imaging and storage, metrology, and 2D or 3D imaging. Laser processing heads are used for laser cutting and welding as well as for brazing in the advanced industrial market.

 CO2 Lasers

  

Advanced Industrial

  

 Synrad

  

Both continuous and pulsed CO2 lasers with power ranges from 5 to 400 watts. Applications include coding, marking, engraving, cutting and trimming of metals and non-metals, fine materials processing, additive manufacturing, packaging converting, and medical applications in dental and dermatology.

Vision

The Vision segment (formerly known as Vision Technologies) designs, manufactures and markets a wide range of medical grade technologies, including visualization solutions, imaging informatics products, optical data collection and machine vision technologies, RFID technologies, thermal printers, light and color measurement instrumentation, and embedded touch screen solutions, 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.

4


The Vision segment has nine product lines:

 

Product Line

  

Key End Market

  

Brand Names

  

Description

Visualization Solutions

  

Medical

  

NDS, NDSsi

  

High definition visualization solutions for minimally invasive surgery and patient monitoring applications.

Video Processing

  

Medical

  

 NDS, NDSsi

  

Imaging management for visual information, including real-time distribution, documentation, control, and streaming for multiple imaging modalities for surgical applications.

Wireless OR Solutions

  

Medical

  

 NDS, NDSsi

  

High definition wireless transmission of video signals to replace video cables in minimally invasive surgical equipment.

Touch Panel Displays

 

Medical and Advanced Industrial

 

Reach Technology

 

Embedded capacitive and resistive touch panel technology that delivers high-performance solutions.

 Machine Vision

  

Medical and Advanced Industrial

  

 JADAK

  

Camera-based machine vision products and solutions performing image analysis within medical devices.

 Radio Frequency Identification (RFID)

  

Medical and Advanced Industrial

  

 JADAK, Skyetek

  

RFID technologies via High-Frequency (HF) and Ultra-High Frequency (UHF) readers, writers and antennas, for applications such as surgical part tracking and counterfeit detection.

 Barcode Scanning

 

Medical and Advanced Industrial

  

 JADAK

  

Embedded and handheld data collection products for barcode scanning.

 Thermal Chart Recorders

  

Medical

  

 JADAK

  

Rugged thermal chart recorders for patient monitoring, defibrillator equipment, blood gas analyzers, and pulse oximeters.

 Light and Color Measurement

  

Advanced Industrial and Medical

  

 Photo Research

  

 Light and color measurement devices, including spectroradiometers, photometers, and color characterization software, used in research and development and quality control testing.

Precision Motion

The Precision Motion segment designs, manufactures and markets optical encoders, precision motor and motion control technology, air bearing spindles and precision machined components to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

5


The Precision Motion segment includes four product lines:

 

Product Line

  

Key End Market

  

Brand Names

  

Description

Optical Encoders

  

Advanced Industrial and Medical

  

Celera Motion, MicroE

  

Precision optical encoders from core product brand, MicroE. Applications include motion control of equipment and instruments used in the semiconductor and electronics manufacturing, industrial and medical robotics, metrology, satellite communications, medical devices, and laboratory and diagnostics equipment.

Precision Motors

  

Advanced Industrial and Medical

  

Celera Motion, Applimotion

  

Precision direct drive motor components from core product brand, Applimotion.  Applications include motion control of equipment and instruments used in the semiconductor and electronics manufacturing, industrial and medical robotics, autonomous vehicles, metrology, satellite communications, surveillance, medical devices, and laboratory and diagnostics equipment.

Integrated Motion Control Solutions

  

Advanced Industrial and Medical

  

Celera Motion

  

Precision integrated motion control solutions.  Applications include motion control of equipment and instruments used in the semiconductor and electronics manufacturing, industrial and medical robotics, autonomous vehicles, metrology, satellite communications, surveillance, medical devices, and laboratory and diagnostics equipment.

 Air Bearing Spindles

  

 Advanced Industrial

  

Westwind

  

 High-speed and precision air bearing spindles used in the PCB manufacturing, automotive coating, semiconductor manufacturing equipment, micro machining and power generation markets.

End Markets

We primarily operate in two end markets: the advanced industrial market and the medical market.

Advanced Industrial Market

For the year ended December 31, 2016, the advanced industrial market accounted for approximately 60% of the Company’s revenue.  Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, the financial condition of our customers, changes in regulatory requirements and laws, and general economic conditions. We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market.

Medical Market

For the year ended December 31, 2016, the medical market accounted for approximately 40% of the Company’s revenue.  Our revenue from products sold to the medical market is generally affected by hospital and other health care provider capital spending, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, trends in surgical procedures, changes in technology requirements, changes in customer or patient preferences, and general demographic trends.

6


Customers

We have a diverse group of customers that include companies that are global leaders in their industries. Many of our customers participate in several market industries. No customer accounted for greater than 10% of our consolidated revenue during the years ended December 31, 2016, 2015 or 2014.

Customers of our Photonics, Vision, and Precision Motion segments include a large number of original equipment manufacturers who integrate our products into their systems for sale to end users. We also sell directly to end users. Our customers include leaders in the medical and advanced industrial markets. A typical OEM customer will usually evaluate our products and our ability to provide application knowledge and expertise, post-sales application support and services, supply chain management over long durations, manufacturing capabilities, product quality, global presence, and product customization before deciding to incorporate our products into their products or systems. Customers generally choose suppliers based on a number of factors, including product performance, reliability, application support, price, breadth of the supplier’s product offerings, the financial condition of the supplier, and the geographical coverage offered by the supplier. Once certain of our products have been designed into a given OEM customer’s product or system, there are generally significant barriers to subsequent supplier changes, especially in the medical market.

Seasonality

While our revenues are not highly seasonal on a consolidated basis, the revenues of some of our individual product lines, particularly our visualization solutions, imaging informatics, and thermal printer products, are impacted by seasonality due to hospital budgeting cycles.

Backlog

As of December 31, 2016 and 2015, our consolidated backlog was approximately $115.0 million and $96.8 million, respectively. The majority of orders included in backlog represent open orders for products and services that, based on management’s projections, have a reasonable probability of being delivered over the subsequent twelve month period. Orders included in backlog may be canceled or rescheduled by customers without significant penalty. Management believes that backlog is not a meaningful indicator of future business prospects for any of our business segments due to the short lead time required on our products and the ability of customers to reschedule or cancel orders. Therefore, backlog as of any particular date should not be relied upon as indicative of our revenues for any future period.

Manufacturing

Manufacturing functions are performed internally when management chooses to maintain control over critical portions of the production process or for cost related reasons while some of the less critical portions are outsourced to third parties. To the extent it makes financial sense, we will consider outsourcing additional portions of the production process.

Products offered by our Photonics segment are manufactured at facilities in Bedford, Massachusetts; Mukilteo, Washington; Phoenix, Arizona; Taunton, United Kingdom; and Suzhou, China. Products offered by our Vision segment are manufactured at facilities in Syracuse, New York and San Jose, California. Products offered by our Precision Motion segment are primarily manufactured at facilities in Bedford, Massachusetts; Loomis, California; Poole, United Kingdom; and Suzhou, China.

Many of our products are manufactured under ISO 9001 certification, while the majority of our products manufactured for the medical market are manufactured under ISO 13485 certification. Certain visualization solutions, thermal printers and imaging informatics products are manufactured under current good manufacturing practices (CGMPs), which is a requirement of their medical device classification by the U.S. Food and Drug Administration (the “FDA”). In addition, certain visualization solutions, thermal printers and imaging informatics products are manufactured under section 510(k) of the FDA.

7


Research and Development and Engineering

We incur research and development and engineering expenses as part of our ongoing operations. We are strongly committed to research and development for core technology programs directed at creating new products, product enhancements, increasing our addressable market, and new applications for existing products. We are also committed to funding research into future market opportunities. Our markets have experienced rapid technological changes and product innovations. We believe that continued timely development of new products and product enhancements to serve existing and new markets is necessary for us to remain competitive. Research and development and engineering expenses were $32.0 million, or 8.3% of revenue, for the year ended December 31, 2016, compared to $31.0 million, or 8.3% of revenue, for the year ended December 31, 2015 and $29.0 million, or 7.9% of revenue, for the year ended December 31, 2014.

Marketing, Sales and Distribution

We sell our products globally, primarily through our direct sales force. Sales to foreign jurisdictions are largely based on a direct sales force, but occasionally are sold through distributors, including manufacturers’ representatives, to either augment our selling effort or address a local market where we have no direct sales force. Our local sales, applications, and service teams and our distributors work closely with our customers to ensure customer satisfaction with our products. We have sales and service centers located in North America, Europe, China, and Japan.

To support our sales efforts we maintain and continue to invest in a number of application centers around the world, where our application experts work closely with customers on integrating and using our solutions in their equipment. The applications span a wide range, with teams residing in several facilities in the United States, Europe and Asia.

Competition

The markets in which we compete are dynamic and highly competitive. Due to the wide range of our products, we face many different types of competition and competitors. This affects our ability to sell our products and the prices at which these products are sold. Our competitors range from large foreign and domestic organizations, which produce a comprehensive array of goods and services and may have greater financial and other resources than we do, to small firms producing a limited number of goods or services for specialized market segments.

Competitive factors in our Photonics, Vision, and Precision Motion segments include product performance, price, quality and reliability, features, compatibility of products with existing systems, technical support, product breadth, market presence, on-time delivery and our overall reputation. We believe that our products offer a number of competitive advantages. However, some of our competitors are substantially larger and have greater financial and other resources.

Raw Materials, Components and Supplies

Each of our businesses uses a wide variety of raw materials, key components and parts that are generally available from alternative sources of supply and in adequate quantities from domestic and foreign sources. In some instances, we design and/or re-engineer the parts and components used in our products. For certain critical raw materials, key components and parts used in the production of some of our principal products, we have identified only a limited number of suppliers or, in some instances, a single source of supply. We also rely on a limited number of independent contractors to manufacture subassemblies for some of our products.

For a further discussion of the importance and risks associated with our supply chain, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.

Patents and Intellectual Property

We rely upon a combination of copyrights, patents, trademarks, trade secret laws and restrictions on disclosure to protect our intellectual property rights. We hold a number of registered and pending patents in the United States and other countries. In addition, we also have trademarks registered in the United States and foreign countries. We will continue to actively pursue applications for new patents and trademarks as we deem appropriate. However, there can be no assurance that any other patents will be issued to us or that such patents, if and when issued, will provide any protection or benefit to us.

Although we believe that our patents and pending patent applications are important, we rely upon several additional factors that are essential to our business success, including: market position, technological innovation, know-how, application knowledge and product performance. Considering the diversified nature of our businesses, we do not believe that any individual patent is material to our business as a whole. However, there can be no assurance that we will be able to sustain these advantages.

8


We also protect our proprietary rights by controlling access to our proprietary information and by maintaining confidentiality agreements with our employees, consultants, and certain customers and suppliers. For a further discussion of the importance of risks associated with our intellectual property rights, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.

Human Resources

As of December 31, 2016 and 2015, we employed 1,269 and 1,262 employees, respectively. We also employ temporary and contract personnel that are not included in the headcount numbers.

Geographic Information

We are a multinational company with approximately 60% of our 2016 revenue outside the United States and approximately 17% of our net property, plant and equipment outside the United States as of December 31, 2016. Geographic information is discussed in Note 16 to the Consolidated Financial Statements. For a further discussion of the risks associated with our foreign operations, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.

Government Regulation

Our current and contemplated activities and the products and processes that will result from such activities are subject to substantial government regulations, both in the United States and internationally. Most of our production facilities are subject to various federal, state, local, and/or foreign environmental regulations, related to the use, storage, handling, and disposals of regulated materials, chemicals, and certain waste products. Such rules are subject to change by the governing agencies and we monitor those changes closely. We expect all operations to meet the legal and regulatory environmental requirements. Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by federal and state laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials.

We may face the potential of increasing complexity in our product designs and procurement operations due to the evolving nature of product compliance standards. Those standards may impact the material composition of our products entering specific markets. Such regulations went into effect in the European Union (“EU”) in 2006 (“The Restriction of Hazardous Substances Directive” (“RoHS”)) and in 2007 (“Registration, Evaluation, Authorisation and Restriction of Chemicals” (“REACH”)), and in China in 2007 (“Management Methods for Controlling Pollution Caused by Electronic Information Products Regulation” (“China-RoHS”)).

Our capital expenditures, earnings, and competitive position have not been, and are not expected to be materially affected by our compliance with federal, state, and local environmental provisions which have been enacted or adopted to regulate the distribution of materials into the environment.

United States Food and Drug Administration

Certain products manufactured by us are integrated into systems by our customers that are subject to certain regulations administered by the United States Food and Drug Administration. We must comply with certain quality control measurements in order for our products to be effectively used in our customers’ end products. Non-compliance with quality control measurements could result in loss of business with our customers, fines and penalties.

We are subject to certain medical device regulations. Medical devices are subject to extensive and rigorous regulation by the Food and Drug Administration and by other federal, state and local authorities. The Federal Food, Drug and Cosmetic Act and related regulations govern the conditions of safety, efficacy, clearance, approval, manufacturing, quality system requirements, labeling, packaging, distribution, storage, record keeping, reporting, marketing, advertising, and promotion of products. Non-compliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal by the government to grant premarket clearance or approval of products, withdrawal of clearances and approvals, and criminal prosecution.

Other Information

We maintain a website with the address www.novanta.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission (“SEC”). In addition, our reports and other information are filed with securities commissions or other similar authorities in Canada, and are available over the Internet at www.sedar.com.

 

 

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Item 1A. Risk Factors

The following risk factors could have a material adverse effect on our business, financial position, results of operations and cash flows and could cause the market value of our common shares to fluctuate or decline. These risk factors may not include all of the important factors that could affect our business or that could cause our future financial results to differ materially from historic or expected results or cause the market price of our common shares to fluctuate or decline.

Risks Relating to our Business

Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our customers’ businesses and levels of business activities.

A large portion of our product sales are dependent on the need for increased capacity, productivity and cost saving initiatives, improved product quality and performance, and new investments by our customers. Weaknesses in our end markets could negatively impact our revenue and gross margin and consequently have a material adverse effect on our business, financial condition and results of operations. Moreover, a severe and/or prolonged overall economic downturn or a negative or uncertain political climate could adversely affect our customers’ financial condition and the timing or levels of business activity of our customers and the industries we serve. In particular, reduced growth expectations in China, the uncertain European financial situation, and political and economic uncertainty in the United States as a result of the new U.S. presidential administration could have an impact on our customers’ financial condition and ability to maintain product orders in the future. This may reduce the demand for our products or depress pricing for our products and have a material adverse effect on our results of operations. Changes in global economic conditions could also shift demand to products or services for which we do not have competitive advantages. This could negatively affect the amount of business that we are able to obtain. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected.

Our business depends significantly upon our customers’ capital expenditures, which are subject to cyclical market fluctuations.

Certain sub-segments of the advanced industrial market we serve, including the microelectronics and industrial capital equipment markets, are cyclical and have historically experienced periods of oversupply, resulting in downturns in demand for capital equipment in which many of our products are used. The timing, length and severity of these cycles and their impact on our business are difficult to predict. Further, our order levels or results of operations for a given period may not be indicative of order levels or results of operations for subsequent periods. For the foreseeable future, our operations will continue to depend upon industries that are subject to market cycles which, in turn, could adversely affect the market demand for our products.

We experienced significant cyclical end market fluctuations in the past. We cannot predict when slowdowns will recur or that the impact of such slowdowns will be more or less significant compared to historical fluctuations.

Our business success depends upon our ability to respond to fluctuations in product demand, but doing so may require us to incur costs despite limited visibility toward future business declines.

In periods of weak demand, we may be required to reduce costs while maintaining the ability to motivate and retain key employees at the same time. Additionally, to remain competitive, we must continually invest in research and development, which may inhibit our ability to reduce costs in a down cycle. Long product lead-times create a risk that we may purchase or manufacture inventories of products that we are unable to sell.

During a period of increasing demand and rapid growth, we must be able to increase manufacturing capacity quickly. Our inability to quickly increase production in response to a surge in demand could prompt customers to look for alternative sources of supply or leave our customers without a supply, both of which events could harm our reputation and make it difficult for us to retain our existing customers or to obtain new customers.

The success of our business depends on our ability to continuously innovate and to manage transition to new product innovations.

Technology requirements in our markets are constantly advancing. We must continually introduce new products that meet evolving customer needs. Our ability to grow depends on the successful development, introduction and market acceptance of new or enhanced products that address our customers’ requirements. Developing new technology is a complex and uncertain process requiring us to accurately anticipate technological and market trends and meet those trends with responsive products. Additionally, this requires that we manage the transition from older products to minimize disruption in customer ordering patterns, avoid excess inventory and ensure adequate supplies of new products. Failure to develop new products, failed market acceptance of new products or problems associated with new product transitions could harm our business.

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If we fail to introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth targets.

Our research and development efforts may not lead to the successful introduction of products within the time frame that our customers demand. Our competitors may introduce new or improved products, processes or technologies that make our current or proposed products obsolete or less competitive. We may encounter delays or problems in connection with our research and development efforts. Product development delays may result from numerous factors, including:

 

changing product specifications and customer requirements;

 

inability to manufacture new products cost effectively;

 

difficulties in reallocating engineering resources and overcoming resource limitations;

 

changing market or competitive product requirements; and

 

unanticipated engineering complexities.

New products often take longer to develop, may have fewer features than originally considered desirable, and have higher costs than initially estimated. There may be difficulty in sourcing components for new products and delays in starting volume production. New products may also not be commercially successful. Any of these adverse developments could harm our business and our results of operations.

Customer order timing and other factors beyond our control may cause our operating results to fluctuate from period to period.

Changes in customer order timing and the existence of certain other factors beyond our control may cause our operating results to fluctuate from period to period. Such factors include:

 

fluctuations in our customers’ businesses;

 

timing and recognition of revenues from customer orders;

 

timing and market acceptance of new products or enhancements introduced by us or our competitors;

 

availability of parts from our suppliers and the manufacturing capacity of our subcontractors;

 

decisions by customers to reduce their purchases of our products;

 

changes in the prices of our products or of our competitors’ products; and

 

fluctuations in foreign currency exchange rates.

We may receive several large orders in one quarter from a customer and then receive no orders from that customer in the next quarter. As a result, the timing of revenue recognition from customer orders can cause significant fluctuations in our operating results from quarter to quarter. In addition, our sales are reactive to changes in our customers’ businesses. For instance, a customer that placed a large order in one period could subsequently experience a downturn in business and, as a result, could cancel an order or reduce the amount of products it purchases from us in future periods.

A delay in a shipment near the end of a reporting period due to rescheduling or cancellation by customers or unexpected production delays experienced by us may cause revenue in the period to decline significantly and may have a material adverse effect on our operations for that period.

We cannot predict how the market will react to new products introduced by us or to enhancements made to our existing products. If any of our new or enhanced products contain defects or perceived defects or have reliability, quality or compatibility problems or perceived problems, or if our competitors release similar products or enhancements at the same time that are more widely accepted by our customers, our revenue and results of operations for one or more reporting periods could be adversely affected.

In addition, we or our competitors may raise or lower the prices of products in response to market demands or competitive pressures. If we lower the prices of our products, or if our competitors lower the prices of their products such that demand for our products weakens, our revenue for one or more quarters may decline and our operating results would be adversely affected.  Changes in foreign currency exchange rates can also cause significant fluctuations in our results of operations from quarter to quarter.

As a result of these factors, our results of operations for any quarter are not necessarily indicative of results to be expected in future periods.

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If we experience a significant disruption in, or breach in security of, our information technology systems, our business may be adversely affected.

We rely on information technology systems throughout the Company to manage orders, process shipments to customers, manage inventory levels and maintain financial information. Certain events could result in the disruption of our systems, including power outages, computer attacks by hackers, viruses, catastrophes, hardware and software failures and other unforeseen events. If we were to experience a significant period of disruption in information technology systems that involve our interactions with customers or suppliers, it could result in the loss of revenue and customers and significant incremental costs, which could adversely affect our business. In addition, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in significant financial or reputational damage to us.

As we transact a portion of our sales, and maintain significant cash balances, in foreign currencies, changes in interest rates, credit ratings or foreign currency rates could have a material adverse effect on our financial position, results of operations, and cash flows.

A portion of our revenue is derived from our European and Asian operations and includes transactions in Euros, British Pounds and Japanese Yen, while our products are mainly manufactured in the United States, United Kingdom and China. In the event of a decline in the value of the Euro, Japanese Yen or British Pound, we would typically experience a decline in our revenues and profit margins. If we increase the selling prices on our products sold in Europe and Japan in order to maintain profit margins and recover costs, we may lose customer sales to lower cost competitors.

Additionally, balances maintained in foreign currencies create additional financial exposure to changing foreign currency rates. If foreign currency rates were to change rapidly, we could incur material losses.

Our reliance on international operations in foreign countries subjects us to risks not typically faced by companies operating exclusively in the United States.

During the year ended December 31, 2016, approximately 60% of our revenues were derived from operations and customers outside of the United States. The scope of our international operations subjects us to risks which could materially impact our results of operations, including:

 

foreign exchange rate fluctuations;

 

increases in shipping costs;

 

longer customer payment cycles;

 

greater difficulty in collecting accounts receivable;

 

use of incompatible systems and equipment;

 

problems with staffing and managing foreign operations in diverse cultures;

 

protective tariffs;

 

trade barriers and export/import controls;

 

transportation delays and interruptions;

 

increased vulnerability to the theft of, and reduced protection for, intellectual property rights;

 

government currency control and restrictions, delays, penalties or required withholdings on repatriation of earnings;

 

the impact of recessionary foreign economies; and

 

acts of terrorism.

The new U.S. presidential administration has withdrawn the United States from the Trans-Pacific Partnership trade agreement and has made various comments suggesting the possible re-negotiation of or withdrawal from other trade agreements and the potential imposition of new import barriers. We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation or exportation of our products or supplies or gauge the effect that new barriers would have on our financial position or results of operations.

We also are subject to risks that our operations outside the United States could be conducted by our employees, contractors, service providers, representatives or agents in ways that violate the Foreign Corrupt Practices Act or other similar anti-bribery laws. Any such violations could have a negative impact on our business and could result in government investigations and/or injunctive, monetary or

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other penalties. Moreover, we face additional risks that our anti-bribery policy and procedures may be violated by third-party sales representatives or other agents that help sell our products or provide other services, because such representatives or agents are not our employees and it may be more difficult to oversee their conduct.

Increased outsourcing of components manufacturing to manufacturers outside the United States leads to additional risks which could negatively impact our business.

We are increasingly outsourcing the manufacture of subassemblies to suppliers based in China and elsewhere overseas in order to reduce our manufacturing cost. However, economic, political or trade problems with foreign countries could substantially impact our ability to obtain critical parts needed in the timely manufacture of our products, or could substantially increase the costs of these parts. Additionally, this practice increases our vulnerability to the theft of, and reduced protection for, our intellectual property.

Our global operations are subject to extensive and complex import and export rules that vary among the legal jurisdictions in which we operate. Failure to comply with these rules could result in substantial penalties.

Due to the international scope of our operations, we are subject to a complex system of import and export related laws and regulations, including U.S. export control and customs regulations and customs regulations of other countries. These regulations are complex and vary among the legal jurisdictions in which we operate. Any alleged or actual failure to comply with such regulations may subject us to government scrutiny, investigation and civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States. Any of these penalties could have a material impact on our financial position, results of operations and cash flows.

The results of the United Kingdom’s referendum on withdrawal from the European Union and the recent U.S. presidential election may have a negative effect on global economic conditions, financial markets and our business, which could reduce the price of our common shares.

We are a multinational company with worldwide operations, including business operations and investments in the United Kingdom, Europe and China. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. Although the referendum was advisory, the United Kingdom government has indicated that it intends to commence the withdrawal process in the near future. The terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates the withdrawal process. The referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, and has given rise to calls for the governments of other European Union member states to consider withdrawal. If the United Kingdom and the European Union are unable to negotiate acceptable withdrawal terms or if other European Union member states pursue withdrawal, barrier-free access between the United Kingdom and other European Union member states or among the European economic area overall could be diminished or eliminated.  These developments in turn may inhibit our sales of products, mobility of our personnel, and our access to capital.

The result of the recent presidential election in the United States has introduced greater uncertainty regarding U.S. trade, tax and health care policies, among other things. The new U.S. presidential administration has withdrawn the United States from the Trans-Pacific Partnership trade agreement and has made various comments suggesting the possible re-negotiation of or withdrawal from other trade agreements and the potential imposition of new import barriers. The new presidential administration and U.S. Congress have also called for comprehensive tax law reform, which may result in disallowance of tax deductions for imported merchandise, disallowance of tax deductions for interest or changes in foreign income taxation for U.S.-based multinationals or income taxation for multinationals that are organized in countries other than the United States. The new presidential administration and U.S. Congress have also called for the repeal of the U.S. Patient Protection and Affordable Care Act (the “PPACA”). These developments and the lack of clarity regarding future U.S. tax, trade and health care policies have created significant uncertainty that could have a material adverse effect on global economic conditions and the stability of global financial markets. Any major changes in these policies could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common shares. Because of the global nature of our business, and our strategy to increase our sales to the medical market, our business may be particularly impacted by any major changes in U.S. trade, tax and health care policies.

Others may violate our intellectual property rights and cause us to incur significant costs to protect our rights.

Our future success depends in part upon our intellectual property rights, including trade secrets, know-how and continuing technological innovation. We do not have personnel dedicated to the oversight, organization and management of our intellectual property. There can be no assurance that the steps we take to protect our intellectual property rights will be adequate to prevent misappropriation or disclosure. It is possible that, despite our efforts, other parties may use, obtain or try to copy our technology and products. There can be no assurance that other companies are not investigating or developing other technologies that are similar to ours, that any patents will be issued from any application filed by us or that, if patents are issued, the claims allowed will be sufficient to deter or prohibit others from marketing similar products. In addition, our patents may be challenged, invalidated or circumvented in

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a legal or administrative proceeding. Policing unauthorized use of our intellectual property rights is difficult and time consuming and may involve initiating claims or litigation against third parties for infringement of our proprietary rights, which could be costly.

Our efforts to protect our intellectual property rights against infringement may not be effective in some foreign countries where we operate or sell our products. If we fail to adequately protect our intellectual property in these countries, we may lose significant business to our competitors.

Our operating results would suffer if we are unable to successfully defend against claims of infringement by third parties.

We have received in the past, and could receive in the future, notices from third parties alleging that our products infringe patent or other proprietary rights. These allegations could result in significant costs and diversion of the attention of management. In the event that any third party makes a valid claim against us or our customers and a license is not available to us on commercially reasonable terms, our operating results would be adversely affected. Adverse consequences may also apply if we fail to avoid litigation for infringement or misappropriation of proprietary rights of third parties. If a successful claim were brought against us and we are found to have infringed a third-party’s intellectual property rights, we could be required to pay substantial amounts for damages or be enjoined from using the technology deemed to be infringing, or from using, making or selling products deemed to be infringing. If we have supplied infringing products to third parties, we may be obligated to indemnify these third parties for any damages that they may be required to pay to the patent holder and for any losses that they may sustain as a result of the infringement.

We operate in highly competitive industries and, if we lose competitive advantages, our business would suffer adverse consequences.

Some of our competition comes from established competitors that have greater financial, engineering, manufacturing and marketing resources than we do. Our competitors will continue to improve the design and performance of their existing products and introduce new products. It is possible that we may not successfully differentiate our current and proposed products from the products of our competitors, or that the marketplace will not consider our products to be superior to competing products. To remain competitive, we will be required to invest heavily in research and development, marketing and customer service and support. However, we may not be able to make the necessary technological advances to maintain our competitive position and our products may not receive market acceptance. These factors would cause us not to be able to compete successfully in the future. Increased competition may also result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development of new products.

Our results of operations will be adversely affected if we fail to successfully integrate future acquisitions into our business or to grow the acquired businesses.

As part of our business strategy, we expect to broaden our product and service offerings by acquiring businesses, technologies, assets and product lines that, we believe, complement or expand our existing businesses. In recent years, we have made a number of acquisitions, and we expect to continue to make acquisitions in the future. We may fail to successfully integrate acquisitions into our business and, as a result, may fail to realize the synergies, cost savings and other benefits expected from acquisitions. If we are not able to successfully achieve these objectives, the anticipated benefits of such acquisitions may not be realized fully or at all, and our results of operations could be adversely affected. As a result of the number of recent and expected future acquisitions in a relatively short amount of time, these risks may be heightened due to our management team’s limited resources available to integrate these new businesses.

Further, our ability to maintain and increase profitability of an acquired business will depend on our ability to manage and control operating expenses and to generate and sustain increased levels of revenue. Our expectations to achieve more consistent and predictable levels of revenue and to increase profitability as a result of any acquisition may not be realized. Such revenues and profitability may even decline as we integrate operations into our business. If revenues of acquired businesses grow more slowly than we anticipate or decline, or if their operating expenses are higher than we expect, we may not be able to sustain or increase their profitability, in which case our financial condition will suffer and our stock price could decline. For example, reductions in orders by a customer within our Visualization Solutions product line have caused our revenues in that business in 2014, 2015 and 2016 to be lower than we had expected when we acquired the business. Moreover, our acquisition activities may divert management’s attention from our regular operations.  Managing a larger and more geographically dispersed operation and product portfolio could also pose challenges for our management team. In addition, through our acquisitions, we may assume liabilities, losses or costs for which we are not indemnified or insured or for which our indemnity or insurance is inadequate. Any such liabilities may have a material adverse effect on our financial position or results of operations.

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Our business strategy may include making strategic divestitures. There can be no assurance that any divestitures will provide business benefit.

Our business strategy includes divesting certain non-core businesses. We sold certain assets and liabilities of our Laser Systems businesses in October 2012, our Semiconductor Systems business in May 2013, our Scientific Lasers business in July 2014, and our JK Lasers business in April 2015. There may be additional sales of other non-core businesses in the future. The divestiture of an existing business could reduce our future profits and operating cash flows and make our financial results more volatile. A divestiture could also cause a decline in the price of our common shares and increased reliance on other elements of our core business operations. If we do not successfully manage the risks associated with a divestiture, our business, financial condition, and results of operations could be adversely affected. In addition, there could be other negative unforeseen effects from a divestiture. We also may not find suitable purchasers for our non-core businesses and may continue to pay operating costs associated with these businesses. Failed attempts to divest non-core businesses may distract management’s attention from other business activities, erode employee morale and customers’ confidence, and harm our business.

If we do not attract and retain our key personnel, our ability to execute our business strategy will be limited.

Our success depends, to a significant extent, upon the continued service of our executive officers, key management and technical personnel, particularly our experienced engineers, and upon our ability to continue to attract, retain, and motivate qualified personnel. The competition for these employees is intense. The loss of the services of one or more of our key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for engineers and other key personnel increase significantly or if we are unable to continue to attract qualified personnel.

Our success also depends on our ability to execute leadership succession plans. The inability to successfully transition key management roles could have a material adverse effect on our operating results.

We have undertaken restructuring and realignment activities in the past, and we will continue to assess our operating structure in the future. These actions may not improve our financial position, and may ultimately prove detrimental to our operations and sales.

We have undertaken restructuring and realignment activities in the past, and we will continue to assess our operating structure in the future. Our ability to reduce operating expenses is dependent upon the nature of the actions we take to reduce expenses and our subsequent ability to implement those actions and realize expected cost savings. We may need to take additional restructuring actions, such as eliminating or consolidating certain of our facilities, reducing our headcount, or eliminating certain positions for a variety of reasons, including deterioration in global economic conditions or significant declines in demand for our products. Failure to successfully implement such restructuring activities could adversely affect our ability to meet customer demand for our products and could increase the cost of production versus our projections, both of which could adversely impact our operating results. Further, expenses and cost inefficiencies associated with our restructuring activities, including severance costs and the loss of trained employees with knowledge of our business and operations, could exceed our expectations and negatively impact our financial results. The elimination or consolidation of operations could also result in restructuring charges that would adversely affect our results of operations and financial condition.

Product defects or problems with integrating our products with other vendors’ products may seriously harm our business and reputation.

We produce complex products that can contain latent defects or performance problems. This could happen to both existing and new products. Such defects or performance problems could be detrimental to our business and reputation.

In addition, customers frequently integrate our products with other vendors’ products. When problems occur in a combined environment, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer relationship issues.

Disruptions in the supply of certain key components and other goods from our suppliers, including limited or single source suppliers, could have an adverse effect on the results of our business operations, and could damage our relationships with customers.

The production of our products requires a wide variety of raw materials, key components and other goods that are generally available from alternate sources of supply. However, certain critical raw materials, key components and other goods required for the production and sale of some of our principal products are available from limited or single sources of supply. If the receipt of certain limited source or single source materials is delayed, our relationship with customers may be harmed if such delays cause us to miss our scheduled shipment deadlines. Our current or alternative sources may not be able to continue to meet all of our demands on a

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timely basis. If suppliers or subcontractors experience difficulties or fail to meet any of our manufacturing requirements, our business would be harmed until we are able to secure alternative sources, if any, on commercially reasonable terms. A prolonged inability to obtain certain raw materials, key components or other goods is possible and could have a significant adverse effect on our business operations, damage our relationships with customers, or even lead to permanent loss of customer orders.

In addition, certain of our businesses buy components, including limited or sole source items, from competitors of our other businesses. This dynamic may adversely impact our relationship with these suppliers. For example, these suppliers could increase the price of those components or reduce their supply of those components to us, which could have a significant adverse effect on our business operations or lead to permanent loss of customer orders.

Production difficulties and product delivery delays or disruptions could have a material adverse effect on our business.

We assemble our products at our facilities in the United States, the United Kingdom and China. Each of our products is typically manufactured in a single manufacturing location. If production activities at any of our manufacturing facilities were disrupted by a natural disaster or otherwise, our operations would be negatively impacted until we could establish alternative production and service operations. Significant production difficulties could be the result of:

 

mistakes made while transferring manufacturing processes between locations;

 

changing process technologies;

 

ramping production;

 

installing new equipment at our manufacturing facilities;

 

implementing new information technology systems;

 

shortage of key components; and

 

loss of electricity or employees’ access to the manufacturing facilities due to natural disasters.

In addition, we may experience product delivery delays in the future. We ship a significant portion of our products to our customers through independent package delivery and import/export companies. We also ship our products through national trucking firms, overnight carrier services and local delivery practices. If one or more of the package delivery or import/export providers experience significant disruption in services or institutes a significant price increase, the delivery of our products could be disrupted or delayed. Such events could cause us to incur increased shipping costs that could not be passed on to our customers, negatively impacting our profitability and our relationships with customers.

We are subject to regulations by various federal, state and foreign agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture of products and the shipping of our products.

Certain medical devices that we manufacture are subject to regulations by the U.S. Food and Drug Administration and similar international agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution. If we fail to comply with such regulations, we may have to recall products and cease their manufacture and distribution, which would increase our costs and reduce our revenues.

In recent years, the medical industry has undergone significant changes in order to reduce healthcare costs. This includes cuts in Medicare, consolidation of healthcare distribution companies and collective purchasing arrangements by office-based healthcare practitioners. Foreign and domestic governments have also undertaken efforts to control healthcare costs through legislation and regulation. In March 2010, President Obama signed into law health care reform legislation in the form of the PPACA. Many of the impacts of the PPACA will not be known until those regulations are enacted over the next several years. Moreover, the new U.S. presidential administration and U.S. Congress have called for the repeal of some or all of the PPACA, which has created additional uncertainty in the health care industry. The implementation, or any modification or repeal, of health care reform and medical cost containment measures in the U.S. and in foreign countries in which we operate could:

 

change the price that we might establish for our products, which may result in lower product revenues to us;

 

change requirements related to safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of our products to market, which could affect our costs of doing business, or otherwise adversely affect the market for our products; and

 

create new laws, regulations and judicial decisions affecting pricing or marketing practices.

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Changes in governmental regulation of our business or our products could reduce demand for our products or increase our expenses.

We are subject to many governmental regulations, including but not limited to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health, a branch of the U.S. Food and Drug Administration, and certain health regulations related to the manufacture of products using beryllium, an element used in some of our products. Among other things, these regulations require us to file annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to conduct safety reviews, to incorporate design and operating features in products sold to end-users and to certify and label our products. Depending on the class of the product, various warning labels must be affixed and certain protective devices must be installed.

We are also subject to regulatory oversight, including comparable enforcement remedies, in the markets we serve. We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety and food and drug regulations. We develop, configure and market our products to meet customer needs created by those regulations. Any significant changes in these regulations could reduce demand for our products or increase our expenses, which in turn could adversely affect our business, financial condition, results of operations and cash flows.

Conflict minerals regulations could limit the supply and increase the cost of certain metals used in manufacturing our products.

In August 2012, the Securities and Exchange Commission adopted rules requiring disclosures by public companies concerning tin, tantalum, tungsten and gold (collectively known as “conflict minerals”) that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rules require companies to perform due diligence, and disclose and report whether or not such minerals originated from the Democratic Republic of Congo or any of the adjoining countries. There are, and will be, costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to processes or sources of supply as a consequence of such verification activities. As our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.

Our operations are subject to a variety of federal, state, local and international environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process or the recycling of products we manufacture. We are subject to the federal regulation of the Environmental Protection Agency in the United States and comparable authorities in other countries. If we fail to comply with any present or future regulations, we could be subject to regulatory fines.

Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition. It is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. Certain regulations may require us to re-design our products to ensure compliance with the applicable standards. These redesigns may adversely affect the performance of our products, add greater testing lead-times for product introductions and reduce our profitability.

If we fail to implement new information technology systems successfully, our business could be adversely affected.

We rely on centralized information systems throughout the Company to keep financial records, process orders, manage inventory, process shipments to customers, and operate other critical functions. We are in the process of upgrading our information technology infrastructure, including implementing new enterprise resource planning (ERP) systems and other complementary information technology systems. We have invested, and will continue to invest, significant capital and human resources in the upgrades and new ERP systems. Any disruptions, delays or deficiencies in the transition, design and implementation of the upgrades and new ERP systems, particularly any disruptions, delays or deficiencies that impact our operations, could have a material adverse effect on our results of operations and cash flows.

We may experience difficulties as we transition to these new upgraded systems and processes, including loss of data and the ability to process customer orders, ship products, provide services and support to our customers, issue sales invoices, collect accounts receivable, fulfill contractual obligations, satisfy internal and external financial reporting requirements in a timely manner, or otherwise run our business. We may also experience decreases in productivity as our personnel implement these systems and become familiar with the new systems. In addition, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations and financial condition may be materially and adversely affected if our information technology infrastructure does not allow us to transmit accurate information, even for a short period of time. Furthermore, the transition, design and implementation of upgrades and new ERP systems may be much more costly than we anticipated.

17


Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.

As of December 31, 2016, our total assets included $169.9 million of net intangible assets, including goodwill. Net intangible assets consist principally of goodwill, customer relationships, patents, trademarks, core technologies and technology licenses. Goodwill and indefinite-lived intangible assets are tested for impairment at least on an annual basis. All other intangible assets are evaluated for impairment should discrete events occur that call into question the recoverability of the intangible assets.

Adverse changes in our business, adverse changes in the assumptions used to determine the fair value of our reporting units, or the failure to grow our businesses may result in an impairment of our intangible assets, which could adversely affect our results of operations. For example, the Company recorded a non-cash impairment charge of $41.4 million in the consolidated financial statements for the year ended December 31, 2014 as a result of lower expectations for revenue and operating profit from our NDS business.

We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could adversely affect our results of operations.

Customers with liquidity issues may lead to additional bad debt expense. There can be no assurance that our open credit customers will pay the amounts they owe to us or that the reserves we maintain will be adequate to cover such credit exposures. In addition, to the extent that turmoil in the credit markets makes it more difficult for some customers to obtain financing, their ability to pay may be adversely impacted. Our customers’ failure to pay and/or our failure to maintain sufficient reserves could have a material adverse effect on our future cash flows and financial condition.

Our reliance upon third party distribution channels subjects us to credit, inventory, business concentration, and business failure risks beyond our control.

We sell many of our products through resellers, distributors, and system integrators. As these third parties tend to have more limited financial resources than OEM and end-user customers, they generally represent sources of increased credit risk. Any downturn in the business of our resellers, distributors, and systems integrators would in turn harm our results of operations and financial condition.

Our sales also depend upon the ability of our OEM customers to develop and sell systems that incorporate our products. Adverse economic conditions, large inventory positions, limited marketing resources and other factors influencing these OEM customers could have a substantial adverse effect on our financial results. We cannot assure investors that our OEM customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, adversely affect our results of operations and financial condition.

Risks Relating to Taxes

Tax audits by tax authorities could adversely affect future results.

We are subject to regular examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our financial condition, net income and earnings per share.

Our effective tax rate is subject to fluctuation, which could impact our financial position and earnings per share.

Our effective tax rate is subject to fluctuation as the effective income tax rate for each year is a function of (a) taxable income levels in numerous tax jurisdictions, (b) our ability to utilize recognized deferred tax assets, (c) taxes, interest, or penalties resulting from tax audits and, (d) credits and deductions as a percentage of total taxable income. From time to time, the United States, foreign and state governments make substantive changes to tax rules where significant judgment is required to determine the impact of such changes on our provision for income taxes. Further, such tax law changes may cause our effective tax rate to fluctuate between periods.

We may be subject to U.S. federal income taxation even though Novanta Inc. is a non-U.S. corporation.

Novanta, Inc. is a holding company organized in Canada and is subject to Canadian tax laws. However, we are subject to U.S. tax rules and file U.S. federal income tax returns for our operations in the United States. In addition, distributions or payments from entities in one jurisdiction to entities in another jurisdiction may be subject to withholding taxes. We do not intend to operate in a manner that will cause Novanta, Inc. to be treated as engaged in a U.S. trade or business or otherwise be subject to U.S. federal

18


income taxes on its income, but it generally will be subject to U.S. federal withholding tax on certain U.S.-sourced passive income items, such as dividends and certain types of interest.

Risks Relating to Our Common Shares and Our Capital Structure

We may require additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, and this capital may not be available on acceptable terms or at all.

We may require additional capital to adequately respond to future business challenges or opportunities, including, but not limited to, the need to develop new products or enhance our existing products, maintaining or expanding research and development projects, the need to build inventory or to invest other cash to support business growth, and opportunities to acquire complementary businesses and technologies.

As of December 31, 2016, we had outstanding debt of $81.3 million under the amended and restated senior secured credit agreement (the “Second Amended and Restated Credit Agreement”) and $215.0 million available to be drawn under the revolving credit facility. If we are unable to satisfy the conditions in the Second Amended and Restated Credit Agreement or our needs exceed the amounts available under the revolving credit facility, we may need to engage in equity or debt financings to obtain additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution. Any new equity securities we issue could have rights, preferences and privileges superior to those of the holders of our common shares. Further, our Second Amended and Restated Credit Agreement restricts our ability to obtain additional debt financing from other sources. If we are unable to obtain adequate financing or obtain financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. In addition, the terms of any additional equity or debt issuances may adversely affect the value and price of our common shares.

Global credit conditions have varied widely over the last several years and could continue to vary significantly in the future. Although these conditions have not affected our current plans, adverse credit conditions in the future could have a negative impact on our ability to execute on future strategic activities.

Our existing indebtedness could adversely affect our future business, financial condition and results of operations.

As of December 31, 2016, we had $81.3 million of outstanding debt. This level of debt could have significant consequences on our future operations, including:

 

reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

limiting our flexibility in planning for or reacting to, and increasing our vulnerability to, changes in our business, market changes in the industries in which we operate and the general economy; and

 

placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations.

In addition, our Amended and Restated Credit Agreement contains covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our borrowings thereunder.

The market price for our common shares may be volatile.

The market price of our common shares could be subject to wide fluctuations. These fluctuations could be caused by:

 

quarterly variations in our results of operations;

 

changes in earnings estimates by analysts;

 

conditions in the markets we serve; or

 

general market or economic conditions.

In addition, the stock market has experienced extreme price and volume fluctuations in recent years. These fluctuations have had a substantial effect on the market prices of many companies, often unrelated to the operating performance of the specific companies. These market fluctuations could adversely affect the price of our common shares.

19


We may not have access to the cash flow and other assets of our subsidiaries that may be needed to service our indebtedness and fund our operations.

Although much of our business is conducted through our subsidiaries, none of our subsidiaries are obligated to make funds available to us. Local laws and regulations and/or the terms of our indebtedness may restrict certain of our subsidiaries from paying dividends and otherwise transferring assets to us. We cannot assure you that applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary. Therefore, our ability to make payments on our indebtedness and fund our operations may be adversely affected if our subsidiaries cannot distribute funds to us.

Certain significant shareholders could have substantial influence over our Board of Directors and our outstanding common shares, which could limit our other shareholders’ ability to influence the outcome of key transactions.

Our largest shareholders and their respective affiliates, in the aggregate, beneficially own a substantial amount of our outstanding common shares. As a result, these shareholders may be able to influence matters requiring approval by our shareholders, including the election of directors and the approval of mergers, or other extraordinary transactions. One of these shareholders also serves on our Board of Directors and therefore could have a substantial influence over our Board of Directors. These significant shareholders may have interests that differ from other shareholders and may vote in a way that may be adverse to the interests of other shareholders.

Certain provisions of our articles of incorporation may delay or prevent a change in control of the Company.

Our corporate documents and our existence as a corporation under the laws of New Brunswick subject us to provisions of Canadian law that may enable our Board of Directors to resist a change in control of the Company. These provisions include:

 

limitations on persons authorized to call a special meeting of shareholders;

 

the ability to issue an unlimited number of common shares; and

 

advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of shareholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of the Company. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors of their choosing and cause us to take other corporate actions that shareholders desire. In addition, New Brunswick law provides that cumulative voting is mandatory in director elections which can result in stockholders holding less than a majority of shares being able to elect persons to the Board of Directors and prevent a majority stockholder from controlling the election of all of the directors.

Risks Relating to Our Internal Controls

If we fail to maintain appropriate internal controls in the future, we may not be able to report our financial results accurately, which may adversely affect our stock price and our business.

While our management and our independent registered public accounting firm concluded that our internal control over financial reporting was effective as of December 31, 2016, it is possible that material weaknesses may be identified in the future.

If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a publicly traded company or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial statements, the imposition of sanctions, including the inability of registered broker dealers to make a market in our common shares, or investigation by regulatory authorities. Any such action or other negative results caused by our inability to meet our reporting requirements or to comply with legal and regulatory requirements or by disclosure of an accounting, reporting or control issue could adversely affect the trading price of our securities and our business. Material weaknesses in our internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain.

As part of our growth strategy, we may make additional acquisitions of privately held businesses. Prior to becoming part of our consolidated company, the acquired business would not be required to implement or maintain the disclosure controls and procedures or internal control over financial reporting that are required of public companies. We are required to integrate the acquired businesses into our consolidated company’s system of disclosure controls and procedures and internal control over financial reporting, but we cannot provide assurance as to how long the integration process may take for our recently acquired businesses or any businesses that we may acquire in the future. Additionally, we may need to improve our internal control or those of any business we acquire and may be required to design enhanced processes and controls in order to make such improvements. This could result in significant costs to us and could require us to divert substantial resources, including management time, from other activities.

 

20


 

Item 1B. Unresolved Staff Comments

None.

 

 

Item 2. Properties

The principal owned and leased properties of the Company and its subsidiaries as of December 31, 2016 are listed in the table below.

 

Location

  

Principal Use

  

Current
Segment
(a)

  

Approximate
Square Feet

  

Owned/Leased

Bedford, Massachusetts, USA

  

Manufacturing, R&D, Marketing, Sales and Administration

  

1,3,4

  

147,000

  

Leased; expires in 2019

 

San Jose, California, USA

  

 

Manufacturing, R&D, Marketing, Sales and Administration

  

 

2

  

 

73,000

  

 

Leased; expires in 2019

 

Mukilteo, Washington, USA

  

 

Manufacturing, R&D, Marketing, Sales and Administration

  

 

1

  

 

63,000

  

 

Owned

 

North Syracuse, New York, USA

  

 

Manufacturing, R&D, Marketing, Sales and Administration

  

 

2

  

 

55,000

  

 

Leased; expires in 2029

 

Suzhou, People’s Republic of China

  

 

Manufacturing, R&D, Marketing, Sales and Administration 

  

 

1,2,3

  

 

55,000

  

 

Leased; expires in 2018

 

Poole, United Kingdom

  

 

Manufacturing, R&D, Marketing, Sales and Administration

  

 

3

  

 

51,000

  

 

Building owned; land leased through 2078

 

Phoenix, Arizona, USA

 

Manufacturing, R&D, Marketing, Sales and Administration

 

 

1

 

 

31,000

 

 

Owned

 

Taunton, United Kingdom 

  

 

Manufacturing, R&D, Marketing and Sales

  

 

1

  

 

19,000

  

 

Leased; expires in 2017

 

Loomis, California, USA 

  

 

Manufacturing, R&D, Marketing, Sales and Administration

  

 

3

  

 

23,000

  

 

Leased; expires in 2018

 

a)

The facilities house product lines that belong to the following segments:

1

— Photonics Segment

2

— Vision Segment

3

— Precision Motion Segment

4

— Corporate

A portion of our leased facility in San Jose, California is currently underutilized. As of December 31, 2016, the Company had exited approximately 22,000 square feet of this facility.

Additional research and development, sales, service and logistics sites are located in Arizona, California, Colorado, and Oregon (United States); Munich, Germany; Breda, the Netherlands; Brno, Czech Republic; Tokyo, Japan; Beijing and Shenzhen, China; and Milan, Italy. These additional offices are leased facilities occupying approximately 60,000 square feet in the aggregate, and are related to our Photonics, Vision and Precision Motion segments. In June 2016, the Company exited the leased facility in Zevenhuizen, the Netherlands totaling 18,300 square feet and needs to continue to pay for the leased facility until November 2017.

In connection with the sale of our Scientific Lasers business, we assigned to the buyer the lease for a facility in California, where the Scientific Lasers business operated. The buyer assumed all of our rights and obligations under the original lease, including the duty to pay the rent for the remainder term of the lease. So long as the buyer performs its obligations as the tenant, as required by the Asset and Equity Purchase Agreement for its acquisition of the Scientific Lasers business, the Company has no responsibilities for the lease. Should the buyer cease performance under the lease, however, the landlord could still pursue the Company as the original tenant until February 28, 2019, the end of the lease term. The Company has indemnification rights against the buyer under the Asset and Equity Purchase Agreement for such buyer’s default.

21


Laser Quantum, in which the Company holds approximately 76% equity ownership through the acquisition of approximately 35% of additional equity interest in January 2017, is headquartered in Manchester, United Kingdom. Additional facilities are located in the United States and Germany. The aggregate amount of space currently occupied by Laser Quantum is approximately 36,000 square feet.

 

Item 3. 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 4. Mine Safety Disclosures

Not applicable.

 

 

 

22


PART II

 

 

Item 5. Market for Registrant’s Common Shares, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common shares, no par value, are traded on the NASDAQ Global Select Market. Prior to May 12, 2016, the Company’s shares were traded under the symbol “GSIG”. Since May 12, 2016, the Company’s shares have traded under the symbol “NOVT”. The following table sets forth the high and low prices of the Company’s common shares during the periods indicated.

 

 

2016

 

 

2015

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

$

14.16

 

 

$

11.73

 

 

$

14.47

 

 

$

12.27

 

Second Quarter

$

16.00

 

 

$

13.90

 

 

$

15.75

 

 

$

13.15

 

Third Quarter

$

17.39

 

 

$

15.02

 

 

$

15.05

 

 

$

12.08

 

Fourth Quarter

$

21.40

 

 

$

16.80

 

 

$

14.59

 

 

$

12.81

 

 

Holders

As of the close of business on February 21, 2017, there were approximately 36 holders of record of the Company’s common shares. Since many of the common shares are registered in “nominee” or “street” names, the Company believes that the total number of beneficial owners is considerably higher.

Dividend Policy

The Company has never declared or paid cash dividends on its common shares and does not anticipate paying any cash dividends in the foreseeable future.

Purchases of Equity Securities by the Issuer and Affiliated Purchaser

In October 2013, the Company’s Board of Directors authorized a share repurchase plan for the repurchase of up to an aggregate of $10.0 million of the Company’s common stock. The share repurchase plan does not obligate the Company to acquire any particular amount of our common stock. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.

Since the adoption of the share repurchase plan, the Company repurchased 282 thousand shares of our common stock for an aggregate purchase price of $3.8 million at an average price of $13.43 per share.  No repurchases occurred during the quarter ended December 31, 2016. The Company had $6.2 million available for share repurchases under the authorized share repurchase plan as of December 31, 2016.

23


Performance Graph

The following graph compares the cumulative total return to stockholders for the Company’s common shares for the period from December 31, 2011 through December 31, 2016 with the NASDAQ Composite Index and the Russell 2000 Index. The comparison assumes an investment of $100 is made on December 31, 2011 in the Company’s common shares and in each of the indices and, in the case of the indices, it also assumes reinvestment of all dividends. The performance shown is not necessarily indicative of future performance.

 

 

December 31, 2011

 

 

December 31, 2012

 

 

December 31, 2013

 

 

December 31, 2014

 

 

December 31, 2015

 

 

December 31, 2016

 

Novanta Inc.

$

100.00

 

 

$

84.65

 

 

$

109.87

 

 

$

143.89

 

 

$

133.14

 

 

$

205.28

 

NASDAQ Composite Index

$

100.00

 

 

$

117.45

 

 

$

164.57

 

 

$

188.84

 

 

$

201.98

 

 

$

219.89

 

Russell 2000 Index (1)

$

100.00

 

 

$

116.35

 

 

$

161.52

 

 

$

169.43

 

 

$

161.95

 

 

$

196.45

 

 

(1)

Copyright © Russell Investments 2016. All rights reserved.

 

 

Item 6. Selected Financial Data

The selected financial data set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the consolidated financial statements and related notes thereto in Item 8 of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The selected consolidated financial data in this section is not intended to replace the consolidated financial statements.

24


The consolidated statements of operations data for the years ended December 31, 2016, 2015 and 2014 and the consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014, 2013 and 2012 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

 

 

Year Ended December 31,

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

(In thousands, except per share data)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

384,758

 

 

$

373,598

 

 

$

364,706

 

 

$

316,910

 

 

$

243,796

 

Gross profit

 

162,452

 

 

 

157,890

 

 

 

150,167

 

 

 

132,227

 

 

 

105,518

 

Operating expenses (1)

 

129,889

 

 

 

128,957

 

 

 

166,973

 

 

 

112,781

 

 

 

85,256

 

Operating income (loss) from continuing operations (1)

 

32,563

 

 

 

28,933

 

 

 

(16,806

)

 

 

19,446

 

 

 

20,262

 

Income (loss) from continuing operations before income taxes (1) (2)

 

32,522

 

 

 

46,022

 

 

 

(17,915

)

 

 

16,177

 

 

 

16,702

 

Income tax provision (benefit) (3)

 

10,519

 

 

 

10,394

 

 

 

(1,006

)

 

 

6,200

 

 

 

(11,595

)

Income (loss) from continuing operations

 

22,003

 

 

 

35,628

 

 

 

(16,909

)

 

 

9,977

 

 

 

28,297

 

Loss from discontinued operations, net of tax

 

 

 

 

(13

)

 

 

(5,607

)

 

 

(2,054

)

 

 

(10,974

)

Gain (loss) on disposal of discontinued operations, net of tax (4)

 

 

 

 

 

 

 

(1,726

)

 

 

(592

)

 

 

2,255

 

Consolidated net income (loss)

 

22,003

 

 

 

35,615

 

 

 

(24,242

)

 

 

7,331

 

 

 

19,578

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

(10

)

 

 

(22

)

 

 

(40

)

Net income (loss) attributable to Novanta Inc.

$

22,003

 

 

$

35,615

 

 

$

(24,252

)

 

$

7,309

 

 

$

19,538

 

Earnings (loss) per common share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.63

 

 

$

1.03

 

 

$

(0.49

)

 

$

0.29

 

 

$

0.84

 

Diluted

$

0.63

 

 

$

1.02

 

 

$

(0.49

)

 

$

0.29

 

 

$

0.84

 

Loss per common share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

 

 

$

(0.00

)

 

$

(0.21

)

 

$

(0.08

)

 

$

(0.26

)

Diluted

$

 

 

$

(0.00

)

 

$

(0.21

)

 

$

(0.08

)

 

$

(0.26

)

Earnings (loss) per common share attributable to Novanta Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.63

 

 

$

1.03

 

 

$

(0.70

)

 

$

0.21

 

 

$

0.58

 

Diluted

$

0.63

 

 

$

1.02

 

 

$

(0.70

)

 

$

0.21

 

 

$

0.58

 

Weighted average common shares outstanding—basic

 

34,694

 

 

 

34,579

 

 

 

34,352

 

 

 

34,073

 

 

 

33,775

 

Weighted average common shares outstanding—diluted

 

34,914

 

 

 

34,827

 

 

 

34,352

 

 

 

34,396

 

 

 

33,936

 

 

(1)

The Company recorded an impairment charge of $41.4 million in 2014 related to goodwill ($19.6 million) and intangible assets ($21.8 million) of our NDS business acquired in January 2013.

(2)

The Company sold its JK Lasers business in 2015 and recorded a gain on disposal of $19.6 million.

(3)

The Company released $15.3 million of valuation allowance on deferred tax assets in 2012 based on the conclusion that it was more likely than not that its deferred tax assets in the U.S. and U.K. would be realized in the future.

(4)

The Company sold its Scientific Lasers business in 2014, Semiconductor Systems business in 2013 and Laser Systems business in 2012 and recorded a (loss) gain on disposal, net of tax, of ($1.7) million, ($0.6) million and $2.3 million, respectively.

 

 

December 31,

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

68,108

 

 

$

59,959

 

 

$

51,146

 

 

$

60,980

 

 

$

65,788

 

Total assets (1)

 

425,637

 

 

 

416,045

 

 

 

396,294

 

 

 

375,916

 

 

 

333,711

 

Debt, current (1)

 

7,366

 

 

 

7,385

 

 

 

7,345

 

 

 

7,306

 

 

 

7,270

 

Debt, long-term (1)

 

70,554

 

 

 

88,426

 

 

 

105,030

 

 

 

61,303

 

 

 

38,982

 

Long-term liabilities, excluding debt

 

25,717

 

 

 

25,965

 

 

 

25,951

 

 

 

10,917

 

 

 

11,308

 

Total Novanta Inc. stockholders’ equity

 

258,870

 

 

 

244,701

 

 

 

210,825

 

 

 

241,984

 

 

 

227,809

 

 

(1)

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires debt issuance related costs to be presented in the balance sheet as a direct reduction to the carrying amount of the associated debt liability. The Company adopted the provisions of ASU 2015-03 during 2015. Amounts prior to 2015 have been revised to conform to the current year presentation.

 

25


Item 7. 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 8 of this Annual Report on Form 10-K. 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, 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 in general; 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 and dispositions and anticipated benefits from acquisitions; anticipated use of currency hedges; 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. These forward looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various important factors, including those set forth in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” 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.

Business Overview

Novanta Inc. and its subsidiaries (collectively referred to as “Novanta”, the “Company”, “we”, “us”, “our”) design, develop, manufacture and sell precision photonic and motion control components and subsystems to Original Equipment Manufacturers (“OEMs”) in the medical and advanced industrial markets. We combine deep expertise at the intersection of photonics and motion 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. We deliver highly engineered photonics, vision and precision motion solutions to customers around the world.  

End Markets

We primarily operate in two end markets: the advanced industrial market and the medical market.

Advanced Industrial Market

For the year ended December 31, 2016, the advanced industrial market accounted for approximately 60% of the Company’s revenue.  Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, the financial condition of our customers, changes in regulatory requirements and laws, and general economic conditions. We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market.

Medical Market

For the year ended December 31, 2016, the medical market accounted for approximately 40% of the Company’s revenue.  Our revenue from products sold to the medical market is generally affected by hospital and other health care provider capital spending, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, trends in surgical procedures, changes in technology requirements, changes in customer or patient preferences, and general demographic trends.

26


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 mission-critical 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 the leading medical equipment manufacturers; and

 

-

pursuing complementary medical technology acquisitions;

 

increasing our penetration of high growth advanced industrial applications, such as laser materials processing, robotics, automation and metrology, by working closely with OEM customers to launch application specific products that closely match the requirements of each application;

 

broadening our portfolio of enabling proprietary technologies and capabilities through increased investment in new product development, expanded sales and marketing channels to reach target customers, and investments in application development to further penetrate existing customers, while expanding the applicability of our solutions to new markets;

 

broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications, including increasing our recurring revenue streams such as services, spare parts and consumables;

 

improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean manufacturing principles and strategic sourcing across our major production sites; and

 

attracting, retaining, and developing world-class talented and motivated employees.

Significant Events and Updates

Acquisition of Laser Quantum Limited

On January 10, 2017, the Company acquired approximately 35% of the outstanding shares of Laser Quantum Limited (“Laser Quantum”), a Manchester, United Kingdom-based provider of solid state continuous wave lasers, femtosecond lasers, and optical light engines to OEMs in the medical market, for a total purchase price of £25.5 million ($31.8 million). The acquisition was financed with cash on hand and a $30.0 million draw-down on our revolving credit facility. In addition, the Company and the minority equity holders entered into a call and put option for the purchase and sale of all remaining Laser Quantum shares held by the minority equity holders in 2020, subject to certain conditions. The purchase price for the remaining shares will be based on a multiple of Laser Quantum EBITDA for the twelve months ending December 31, 2019, as defined in the call and put option agreement. As a result of this transaction, the Company’s ownership position in Laser Quantum increased from approximately 41% to approximately 76%. As of December 31, 2016, the financial results of Laser Quantum were accounted for under the equity method of accounting. As a result of the acquisition of the additional shares, the future financial results of Laser Quantum will be consolidated in the Company’s consolidated financial statements. In connection with the purchase price allocation under the business combination rules, the Company expects to recognize a pre-tax gain of $25 million to $28 million during the first quarter of 2017, representing the excess fair value of our previously held equity interest in Laser Quantum over its carrying value. Laser Quantum will be included in our Photonics reportable segment.

Acquisition of ThingMagic

On January 10, 2017, the Company acquired ThingMagic, a Woburn, Massachusetts-based provider of ultra high frequency (“UHF”) radio frequency identification (“RFID”) modules and finished RFID readers to OEMs in the medical and advanced industrial markets, for a total purchase price of $19.2 million, subject to customary working capital adjustments. The acquisition was financed with cash on hand and a $12.0 million draw-down on our revolving credit facility. ThingMagic will be included in our Vision reportable segment.

Acquisition of Intangible Assets

On December 14, 2016, the Company acquired certain video processing and video management technologies used in medical visualization solutions, for a total purchase price of $4.0 million. The acquisition is accounted for as an acquisition of selective assets

27


because the acquired assets do not meet the definition of a business. These developed technology assets are part of our Vision reportable segment.  

Acquisition of Reach Technology

On May 24, 2016, the Company acquired 100% of the outstanding stock of Reach Technology Inc. (“Reach”), a Fremont, California-based provider of embedded touch screen technology solutions for OEMs in the medical and advanced industrial markets, for a total purchase price of $9.4 million, net of working capital adjustments. Reach specializes in technologies that deliver high-performance touch screen solutions for OEMs with a focus on medical applications. The acquisition expands the range of human interface solutions to enhance our value proposition with medical OEM customers. Reach is included in our Vision reportable segment.  

Second Amended and Restated Senior Credit Facility

On May 19, 2016, we entered into the Second Amended and Restated Credit Agreement, which matures on May 19, 2021 and provides for an aggregated credit facility of $300.0 million, comprised of a $75.0 million, 5-year term loan facility and a $225.0 million, 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Second Amended and Restated Credit Agreement amended and restated our previous senior credit facility that had a maturity date of December 27, 2017 and provided for an aggregated credit facility of $225.0 million, comprised of a $50.0 million, 5-year term loan facility and a $175.0 million, 5-year revolving credit facility. The Senior Credit Facilities may be increased by an additional uncommitted $125.0 million in the aggregate, subject to the satisfaction of certain customary covenants.

2016 Restructuring

During the third quarter of 2015, the Company initiated the 2016 restructuring program, which included consolidating certain of our manufacturing operations to optimize our facility footprint and better utilize resources, costs associated with discontinuing our radiology product line and reducing redundant costs due to productivity cost savings and business volume reductions. We substantially completed the 2016 restructuring program during the second quarter of 2016, incurring costs amounting to $3.0 million during the year ended December 31, 2016. The Company expects to incur additional restructuring charges of $0.2 million to $0.3 million related to the 2016 restructuring plan in the next twelve months.

 

28


Overview of Financial Results

Total revenue for 2016 was $384.8 million, an increase of $11.2 million, or 3.0%, versus the prior year. The net effect of our acquisition and divestiture activities resulted in an increase in revenue of $0.7 million, or 0.1%. Foreign exchange rates adversely impacted our revenue by $1.7 million, or 0.5%, during the year ended December 31, 2016.

Operating income from continuing operations increased $3.6 million from $28.9 million in 2015 to $32.5 million in 2016. This increase was primarily attributable to an increase in gross profit of $4.6 million as a result of higher revenue, partially offset by an increase in research and development and engineering (“R&D”) expenses and amortization of purchased intangible assets of $1.6 million primarily due to current year and prior year acquisitions.

Diluted earnings per share (“EPS”) from continuing operations of $0.63 in 2016 decreased $0.39 from an EPS of $1.02 in 2015. This decrease was primarily attributable to lower other income as a result of the $19.6 million gain recognized from the JK Lasers divestiture in the prior year, partially offset by an increase in operating income from continuing operations and foreign currency gains in the current year versus foreign currency losses in the prior year.

The specific components of our operating results for 2016, 2015 and 2014 are further discussed below.

Results of Operations

The following table sets forth our results of operations as a percentage of revenue for the years indicated:

 

  

2016

 

 

2015

 

 

2014

 

Revenue

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

57.8

 

 

 

57.7

 

 

 

58.8

 

Gross profit

 

42.2

 

 

 

42.3

 

 

 

41.2

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development and engineering

 

8.3

 

 

 

8.3

 

 

 

7.9

 

Selling, general and administrative

 

21.2

 

 

 

22.0

 

 

 

23.1

 

Amortization of purchased intangible assets

 

2.1

 

 

 

2.0

 

 

 

2.8

 

Restructuring, acquisition and divestiture related costs

 

2.1

 

 

 

2.2

 

 

 

0.5

 

Impairment of goodwill and intangible assets

 

 

 

 

 

 

 

11.4

 

Total operating expenses

 

33.8

 

 

 

34.5

 

 

 

45.8

 

Operating income (loss) from continuing operations

 

8.5

 

 

 

7.7

 

 

 

(4.6

)

Interest income (expense), net

 

(1.2

)

 

 

(1.4

)

 

 

(1.4

)

Foreign exchange transaction gains (losses), net

 

0.6

 

 

 

(0.0

)

 

 

0.4

 

Other income (expense), net

 

0.6

 

 

 

0.7

 

 

 

0.7

 

Gain on disposal of business

 

 

 

 

5.3

 

 

 

 

Income (loss) from continuing operations before income taxes

 

8.5

 

 

 

12.3

 

 

 

(4.9

)

Income tax provision (benefit)

 

2.7

 

 

 

2.8

 

 

 

(0.3

)

Income (loss) from continuing operations

 

5.7

 

 

 

9.5

 

 

 

(4.6

)

Loss from discontinued operations, net of tax

 

 

 

 

(0.0

)

 

 

(1.5

)

Loss on disposal of discontinued operations, net of tax

 

 

 

 

 

 

 

(0.4

)

Consolidated net income (loss)

 

5.7

 

 

 

9.5

 

 

 

(6.6

)

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

Net income (loss) attributable to Novanta Inc.

 

5.7

%

 

 

9.5

%

 

 

(6.6

)%

Revenue

The following table sets forth external revenue by reportable segment for 2016, 2015 and 2014 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

2016

 

 

2015

 

 

2014

 

 

2016 vs. 2015

 

 

2015 vs. 2014

 

Photonics

$

174,158

 

 

$

168,331

 

 

$

177,726

 

 

 

3.5

%

 

 

(5.3

)%

Vision

 

122,250

 

 

 

124,725

 

 

 

122,187

 

 

 

-2.0

%

 

 

2.1

%

Precision Motion

 

88,350

 

 

 

80,542

 

 

 

64,793

 

 

 

9.7

%

 

 

24.3

%

Total

$

384,758

 

 

$

373,598

 

 

$

364,706

 

 

 

3.0

%

 

 

2.4

%

 

29


Photonics

Photonics segment revenue in 2016 increased by $5.8 million, or 3.5%, versus 2015, as a result of an increase in revenue of our laser beam delivery products of $10.1 million primarily attributable to the Lincoln Laser acquisition in November 2015, partially offset by a decrease of $5.7 million in JK Lasers products as a result of the JK Lasers divestiture in April 2015.

Photonics segment revenue in 2015 decreased by $9.4 million, or 5.3%, versus 2014, as a result of the JK Lasers divestiture, which reduced segment revenues by $16.7 million, partially offset by an increase in revenue of our laser beam delivery products and CO2 lasers products due to an increase in demand in the advanced industrial market and certain medical applications and the Lincoln Laser acquisition.

Vision

Vision segment revenue in 2016 decreased by $2.5 million, or 2.0%, versus 2015. The decrease was primarily due to a $13.4 million decline in our visualization solutions revenue attributable to our decision to discontinue our radiology products, which accounted for a $7.9 million decrease in revenue, and lower demand for our surgical products, and a $2.6 million decline in our thermal printers products revenue. These were partially offset by an increase in revenue from our optical data collection products of $8.1 million and an increase in revenue as a result of the acquisition of Reach of $5.6 million.

Vision segment revenue in 2015 increased by $2.5 million, or 2.1%, versus 2014. The increase was primarily due to revenue from our optical data collection business being included in reported revenue in the prior year only following the JADAK acquisition in March 2014 and increases in revenue from our thermal printers and light and color measurement products, partially offset by a decline in our visualization solutions revenue as a result of our radiology products and customer qualification cycles.

Precision Motion

Precision Motion segment revenue in 2016 increased by $7.8 million, or 9.7%, versus 2015. The increase was principally driven by an increase in revenue of our motor components products of $6.9 million as a result of increased demand in the advanced industrial and medical markets.

Precision Motion segment revenue in 2015 increased by $15.7 million, or 24.3%, versus 2014. This increase was principally driven by an increase in revenue of $14.0 million as a result of the Applimotion acquisition and increased revenue of our optical encoders products as a result of increased customer volumes in both the medical and advanced industrial markets, partially offset by a $4.2 million decline in revenue of our air bearing spindles products due to lower demand from the printed circuit board industry.

Gross Profit

The following table sets forth the gross profit and gross profit margin for each of our reportable segments for 2016, 2015 and 2014 (dollars in thousands):

 

  

2016

 

 

2015

 

 

2014

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

Photonics

$

76,696

 

 

$

73,602

 

 

$

74,224

 

Vision

 

47,181

 

 

 

48,966

 

 

 

48,678

 

Precision Motion

 

40,044

 

 

 

36,709

 

 

 

28,333

 

Unallocated Corporate and Shared Services

 

(1,469

)

 

 

(1,387

)

 

 

(1,068

)

Total

$

162,452

 

 

$

157,890

 

 

$

150,167

 

Gross profit margin:

 

 

 

 

 

 

 

 

 

 

 

Photonics

 

44.0

%

 

 

43.7

%

 

 

41.8

%

Vision

 

38.6

%

 

 

39.3

%

 

 

39.8

%

Precision Motion

 

45.3

%

 

 

45.6

%

 

 

43.7

%

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

42.2

%

 

 

42.3

%

 

 

41.2

%

 

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.

30


Photonics

Photonics segment gross profit for 2016 increased $3.1 million, or 4.2%, versus 2015, primarily due to an increase in revenue and an increase in gross profit margin. Photonics segment gross profit margin was 44.0% for 2016, compared with a gross profit margin of 43.7% for 2015. Gross margin improvements from continuous improvement productivity initiatives were mostly offset by lower margins from the Lincoln Laser acquisition which was included in the operating results for the full year in 2016 versus only two months in 2015.

Photonics segment gross profit for 2015 decreased $0.6 million, or 0.8%, versus 2014, primarily due to a decline in revenue as a result of the JK Lasers divestiture, which decreased gross profit by $4.9 million, partially offset by revenue growth in our laser beam delivery products and CO2 laser products and an increase in gross profit margin. Photonics segment gross profit margin was 43.7% for 2015, compared with a gross profit margin of 41.8% for 2014. The increase in gross profit margin was primarily attributable to the JK Lasers divestiture, which accounted for 1.3 percentage point of the 1.9 percentage point increase. The remaining increase in gross profit margin was driven by increases in volume in our laser beam delivery and CO2 laser products, product mix, and continuous improvement productivity initiatives.

Vision

Vision segment gross profit for 2016 decreased $1.8 million, or 3.6%, versus 2015. The decrease was primarily attributable to a decline in revenue and a $1.6 million charge related to the discontinuation of our radiology products. Vision segment gross profit margin was 38.6% for 2016, compared with a gross profit margin of 39.3% for 2015. The decrease was primarily attributable to costs associated with discontinuing our radiology products, which resulted in a 1.3 percentage point decrease in gross profit margin.

Vision segment gross profit for 2015 increased $0.3 million, or 0.6%, versus 2014. The increase was primarily attributable to a decline in intangible asset amortization expense, partially offset by product mix. Vision segment gross profit margin was 39.3% for 2015, compared with a gross profit margin of 39.8% for 2014. The 0.5 percentage point decrease in gross profit margin was primarily attributable to product mix, offset by lower intangible asset amortization expense.  Included in gross profit for 2015 was amortization of developed technologies of $2.2 million. Included in gross profit for 2014 was amortization of developed technologies and amortization of inventory fair value step-ups of $3.7 million.

Precision Motion

Precision Motion segment gross profit for 2016 increased $3.3 million, or 9.1%, versus 2015, primarily due to an increase in revenue. Precision Motion segment gross profit margin was 45.3% for 2016, compared with a gross profit margin of 45.6% for 2015. The slight decrease in gross margin was attributable to product mix as a result of stronger growth from lower margin products.

Precision Motion segment gross profit for 2015 increased $8.4 million, or 29.6%, versus 2014, primarily due to an increase in revenue and gross profit margin. Precision Motion segment gross profit margin was 45.6% for 2015, compared with a gross profit margin of 43.7% for 2014. The 1.9 percentage point increase in gross profit margin was primarily attributable to an increase in volumes, product mix and continuous improvement productivity initiatives.

Operating Expenses

The following table sets forth operating expenses for 2016, 2015 and 2014 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

2016

 

 

2015

 

 

2014

 

 

2016 vs. 2015

 

 

2015 vs. 2014

 

Research and development and engineering

$

32,002

 

 

$

31,043

 

 

$

28,954

 

 

 

3.1

%

 

 

7.2

%

Selling, general and administrative

 

81,691

 

 

 

82,049

 

 

 

84,380

 

 

 

(0.4

)%

 

 

(2.8

)%

Amortization of purchased intangible assets

 

8,251

 

 

 

7,611

 

 

 

10,262

 

 

 

8.4

%

 

 

(25.8

)%

Restructuring, acquisition and divestiture related costs

 

7,945

 

 

 

8,254

 

 

 

1,935

 

 

 

(3.7

)%

 

 

326.6

%

Impairment of goodwill and intangible assets

 

 

 

 

 

 

 

41,442

 

 

N/A

 

 

N/A

 

Total

$

129,889

 

 

$

128,957

 

 

$

166,973

 

 

 

0.7

%

 

 

(22.8

)%

 

Research and Development and Engineering Expenses

R&D expenses are primarily comprised of employee compensation and related expenses and cost of materials for R&D projects.

R&D expenses were $32.0 million, or 8.3% of revenue, in 2016, versus $31.0 million, or 8.3% of revenue, in 2015. R&D expenses increased in terms of total dollars primarily due to increased R&D expenses from acquisitions, partially offset by decreased costs as a result of the JK Lasers divestiture.

31


R&D expenses were $31.0 million, or 8.3% of revenue, in 2015, versus $29.0 million, or 7.9% of revenue, in 2014. R&D expenses increased in terms of total dollars and as a percentage of revenue, primarily due to acquisitions, partially offset by the JK Lasers divestiture.

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.

SG&A expenses were $81.7 million, or 21.2% of revenue, in 2016, versus $82.0 million, or 22.0% of revenue, in 2015. SG&A expenses decreased in terms of total dollars and as a percentage of revenue primarily due to a $3.7 million decrease in costs from our visualization solutions business as a result prior year restructuring programs and the discontinuation of our radiology products and a $1.1 million decrease in costs as a result of the JK Lasers divestiture, partially offset by a $2.5 million increase in costs from acquisitions in 2016 and 2015 and $1.3 million of CEO transition costs.

SG&A expenses were $82.0 million, or 22.0% of revenue, in 2015, versus $84.4 million, or 23.1% of revenue, in 2014. SG&A expenses decreased in terms of total dollars and as a percentage of revenue primarily due to the JK Lasers divestiture and lower compensation expense, partially offset by increases from acquisitions in 2015 and the JADAK acquisition in March 2014 being included for the full year in 2015.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets is charged to our Photonics, Vision and Precision Motion segments. Amortization of core technologies is included in cost of revenue in the consolidated statement of operations. Amortization of customer relationships, trademarks, backlog and other intangibles are included in operating expenses in the consolidated statement of operations.

Amortization of purchased intangible assets, excluding the amortization for developed technologies that is included in cost of revenue, was $8.3 million, or 2.1% of revenue, in 2016, versus $7.6 million, or 2.0% of revenue, in 2015. The increase, in terms of total dollars and as a percentage of revenue, was related to the increase in amortization of acquired intangible assets from acquisitions in 2016 and 2015.

Amortization of purchased intangible assets, excluding the amortization for developed technologies that is included in cost of revenue, was $7.6 million, or 2.0% of revenue, in 2015, versus $10.3 million, or 2.8% of revenue, in 2014. The decrease, in terms of total dollars and as a percentage of revenue, was related to a decrease in amortization of acquired intangible assets from acquisitions in 2014.

Restructuring, Acquisition and Divestiture Related Costs

Restructuring, acquisition and divestiture related charges primarily relate to our restructuring programs, acquisition costs incurred for completed acquisitions, acquisition costs related to future potential acquisitions and failed acquisitions, and changes in fair value of contingent considerations. Divestiture costs primarily related to the JK Lasers divestiture in April 2015.

The Company recorded restructuring, acquisition and divestiture related costs of $7.9 million in 2016, versus $8.3 million in 2015. The decrease in restructuring, acquisition and divestiture related costs versus 2015 was primarily due to a $2.9 million decrease in restructuring related charges and a $1.1 million decrease in divestiture related costs as a result of the JK Lasers divestiture in 2015, partially offset by an increase in acquisition related charges of $3.6 million. Restructuring related charges in 2016 were offset by a $1.6 million gain on the sale of our Chatsworth, California facility. Acquisition related costs in 2016 were primarily related to $2.5 million in professional fees in connection with acquisitions and costs of $2.5 million related to transition services and changes in the fair value of contingent considerations related to prior year acquisitions.

The Company recorded restructuring, acquisition and divestiture related costs of $8.3 million in 2015, versus $1.9 million in 2014. The increase in restructuring, acquisition and divestiture related costs is primarily due to the increase in costs related to restructuring programs in 2015. The Company recorded restructuring costs of $5.8 million primarily related to our restructuring programs and divestiture costs related to the JK Lasers divestiture of $1.1 million. The Company recognized acquisition related costs of $1.3 million in 2015, which included expenses of $1.9 million related to acquisitions in 2015, partially offset by a $0.6 million reversal of accruals for earn-out agreements in connection with the 2014 JADAK acquisition. Acquisition related costs were $1.5 million during 2014.

Impairment of Goodwill and Intangible Assets

The Company recorded a non-cash impairment charge of $41.4 million in the consolidated financial statements in 2014 as a result of lower expectations for revenue and operating profit from our NDS business.

32


Operating Income (Loss) by Segment

The following table sets forth operating income by segment for 2016, 2015 and 2014 (in thousands):