NOVANTA INC (Form: 10-Q, Received: 11/01/2017 16:34:51)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 29, 2017

☐	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 Bedford, Massachusetts, USA		01730
(Address of principal executive offices)		(Zip Code)

(781) 266-5700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

As of October 27, 2017, there were 34,592,138 of the Registrant’s common shares, no par value, issued and outstanding.

NOVANTA INC.

TABLE OF CONTENTS

Item No.		Page No.

PART I — FINANCIAL INFORMATION		1

ITEM 1.	FINANCIAL STATEMENTS	1

	CONSOLIDATED BALANCE SHEETS (unaudited)	1

	CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)	2

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)	3

	CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)	4

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40

ITEM 4.	CONTROLS AND PROCEDURES	40

PART II — OTHER INFORMATION		41

ITEM 1.	LEGAL PROCEEDINGS	41

ITEM 1A.	RISK FACTORS	41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41

ITEM 4.	MINE SAFETY DISCLOSURES	41

ITEM 5.	OTHER INFORMATION	41

ITEM 6.	EXHIBITS	42

SIGNATURES		44

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NOVANTA INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars or shares)

(Unaudited)

	September 29,			December 31,
	2017			2016
ASSETS
Current assets
Cash and cash equivalents	$	92,149		$	68,108
Accounts receivable, net of allowance of $782 and $565, respectively		83,008			63,769
Inventories		88,861			59,745
Prepaid income taxes and income taxes receivable		8,107			2,058
Prepaid expenses and other current assets		8,253			5,570
Total current assets		280,378			199,250
Property, plant and equipment, net		60,244			35,421
Deferred tax assets		11,772			8,593
Other assets		4,256			12,502
Intangible assets, net		157,938			61,743
Goodwill		207,720			108,128
Total assets	$	722,308		$	425,637
LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	9,115		$	7,366
Accounts payable		39,666			32,213
Income taxes payable		6,086			3,969
Accrued expenses and other current liabilities		40,940			26,948
Total current liabilities		95,807			70,496
Long-term debt		234,188			70,554
Deferred tax liabilities		27,106			1,294
Income taxes payable		4,154			5,710
Other liabilities		15,068			18,713
Total liabilities		376,323			166,767
Commitments and contingencies (Note 13)
Redeemable noncontrolling interest		36,838			—
Stockholders’ equity:
Common shares, no par value; Authorized shares: unlimited; Issued and outstanding: 34,583 and 34,458, respectively		423,856			423,856
Additional paid-in capital		32,283			30,276
Accumulated deficit		(127,660	)		(167,547	)
Accumulated other comprehensive loss		(19,332	)		(27,715	)
Total stockholders' equity		309,147			258,870
Total liabilities, noncontrolling interest and stockholders’ equity	$	722,308		$	425,637

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

NOVANTA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars or shares, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Revenue	$	146,296		$	97,829		$	374,372		$	285,879
Cost of revenue		87,589			56,617			216,082			166,279
Gross profit		58,707			41,212			158,290			119,600
Operating expenses:
Research and development and engineering		11,659			7,961			29,878			24,029
Selling, general and administrative		27,724			20,972			74,666			62,357
Amortization of purchased intangible assets		3,217			2,066			9,413			6,153
Restructuring, acquisition and divestiture related costs (gain)		3,834			(835	)		6,232			5,828
Total operating expenses		46,434			30,164			120,189			98,367
Operating income from continuing operations		12,273			11,048			38,101			21,233
Interest income (expense), net		(2,111	)		(1,081	)		(4,874	)		(3,471	)
Foreign exchange transaction gains (losses), net		(661	)		188			(176	)		978
Other income (expense), net		(4	)		686			104			1,699
Gain on acquisition of business		—			—			26,409			—
Income from continuing operations before income taxes		9,497			10,841			59,564			20,439
Income tax provision		1,131			3,371			6,934			6,192
Income from continuing operations		8,366			7,470			52,630			14,247
Loss from discontinued operations, net of tax		—			—			—			—
Consolidated net income		8,366			7,470			52,630			14,247
Less: Net income attributable to noncontrolling interest		(834	)		—			(1,444	)		—
Net income attributable to Novanta Inc.	$	7,532		$	7,470		$	51,186		$	14,247

Earnings (loss) per common share from continuing operations (Note 5):
Basic	$	(0.00	)	$	0.22		$	1.15		$	0.41
Diluted	$	(0.00	)	$	0.21		$	1.13		$	0.41
Loss per common share from discontinued operations (Note 5):
Basic	$	—		$	—		$	—		$	—
Diluted	$	—		$	—		$	—		$	—
Earnings (loss) per common share attributable to Novanta Inc. (Note 5):
Basic	$	(0.00	)	$	0.22		$	1.15		$	0.41
Diluted	$	(0.00	)	$	0.21		$	1.13		$	0.41

Weighted average common shares outstanding—basic		34,833			34,677			34,809			34,689
Weighted average common shares outstanding—diluted		34,833			34,928			35,235			34,889

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

NOVANTA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands of U.S. dollars)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Consolidated net income	$	8,366		$	7,470		$	52,630		$	14,247
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax (1)		3,311			(563	)		8,340			(3,413	)
Pension liability adjustments, net of tax (2)		(45	)		338			43			1,633
Total other comprehensive income (loss)		3,266			(225	)		8,383			(1,780	)
Total consolidated comprehensive income (loss)		11,632			7,245			61,013			12,467
Less: Comprehensive income attributable to noncontrolling interest		(834	)		—			(1,444	)		—
Comprehensive income (loss) attributable to Novanta Inc.	$	10,798		$	7,245		$	59,569		$	12,467

(1)	The tax effect on this component of comprehensive income was nominal for all periods presented.

(2)	The tax effect on this component of comprehensive income was nominal for all periods presented. See Note 4 for the total amount of pension liability adjustments reclassified out of accumulated other comprehensive income (loss).

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

NOVANTA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

	Nine Months Ended
	September 29,			September 30,
	2017			2016
Cash flows from operating activities:
Consolidated net income	$	52,630		$	14,247
Less: Loss from discontinued operations, net of tax		—			—
Income from continuing operations		52,630			14,247
Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization		22,440			15,317
Provision for inventory excess and obsolescence		1,837			2,387
Share-based compensation		4,223			3,385
Deferred income taxes		(2,913	)		162
Earnings from equity-method investment		(104	)		(1,698	)
Gain on sale of fixed assets		21			(1,736	)
Dividend from equity-method investment		—			2,341
Gain on acquisition of business		(26,409	)		—
Inventory acquisition fair value adjustment		4,754			173
Contingent consideration adjustments		425			1,427
Other		851			1,417
Changes in assets and liabilities which (used)/provided cash, excluding effects from businesses purchased or classified as discontinued operations:
Accounts receivable		(3,859	)		(3,683	)
Inventories		(11,806	)		(1,470	)
Prepaid income taxes, income taxes receivable, prepaid expenses and other current assets		(5,806	)		(3,594	)
Accounts payable, income taxes payable, accrued expenses and other current liabilities		5,975			6,110
Other non-current assets and liabilities		(972	)		(78	)
Cash provided by operating activities of continuing operations		41,287			34,707
Cash provided by operating activities of discontinued operations		—			—
Cash provided by operating activities		41,287			34,707
Cash flows from investing activities:
Purchases of property, plant and equipment		(6,502	)		(7,005	)
Acquisition of businesses, net of cash acquired and working capital adjustments		(168,332	)		(8,952	)
Proceeds from the sale of property, plant and equipment		44			7,037
Cash used in investing activities of continuing operations		(174,790	)		(8,920	)
Cash provided by investing activities of discontinued operations		—			1,498
Cash used in investing activities		(174,790	)		(7,422	)
Cash flows from financing activities:
Borrowings under revolving credit facility		176,769			—
Repayments of long-term debt and revolving credit facility		(15,625	)		(14,375	)
Payments for debt issuance costs		(638	)		(2,496	)
Payments of contingent considerations		(2,546	)		—
Repurchase of common stock		(370	)		(1,634	)
Payments of withholding taxes from stock-based awards		(1,846	)		(1,719	)
Capital lease payments		(646	)		(905	)
Other financing activities		—			(1	)
Cash provided by (used in) financing activities of continuing operations		155,098			(21,130	)
Cash provided by (used in) financing activities of discontinued operations		—			—
Cash provided by (used in) financing activities		155,098			(21,130	)
Effect of exchange rates on cash and cash equivalents		2,446			(1,375	)
Increase in cash and cash equivalents		24,041			4,780
Cash and cash equivalents, beginning of period		68,108			59,959
Cash and cash equivalents, end of period	$	92,149		$	64,739
Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,512		$	2,167
Cash paid for income taxes	$	18,053		$	10,870
Income tax refunds received	$	185		$	359

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

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 29, 2017

(Unaudited)

1. Basis of Presentation

Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “Novanta”, “we”, “us”, “our”) is a global supplier of core technology solutions that give healthcare and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. Novanta combines deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to customers' demanding applications.

The accompanying unaudited interim consolidated financial statements have been prepared in U.S. dollars and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, these interim consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the interim periods presented. The results for interim periods are not necessarily indicative of results to be expected for the full year or for any future periods.

Prior to January 10, 2017, the Company had an approximately 41% ownership interest in Laser Quantum Limited (“Laser Quantum”), a privately held company located in the United Kingdom, which was accounted for under the equity method of accounting. On January 10, 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum. As a result of this transaction, the Company’s ownership position in Laser Quantum increased from approximately 41% to approximately 76%. Since January 10, 2017, Laser Quantum has been consolidated in the Company’s consolidated financial statements.

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

Use of Estimates

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

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Recent Accounting Pronouncements

Share-Based Compensation

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-09, “Compensation – Stock Compensation (Topic 718),” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 requires that an entity account for the effects of a modification unless (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 will become effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.

Presentation of Net Periodic Pension Cost

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on the presentation of the service component and the other components of net benefit cost in the statement of operations. The new standard is effective for public companies for annual periods beginning after December 15, 2017. The Company expects to adopt the new standard in the first quarter of 2018 and expects to report its net periodic pension cost related to its frozen U.K. pension plan, consisting of interest cost, expected return on plan assets and amortization of actuarial gains (losses) only, in Other income (expense) in the consolidated statement of operations upon adoption.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the accounting for goodwill impairment. The amendment in ASU 2017-04 removes Step-two of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 will become effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.

Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard further clarifies the classification in the cash flow statement of the following items: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ASU 2016-15 should be applied using a retrospective transition method for each period presented. The Company adopted ASU 2016-15 during the first quarter of 2017. The adoption of ASU 2016-15 resulted in ($2.5) million of payments of contingent considerations being reported as cash used in financing activities on the Company’s consolidated statements of cash flows for the nine months ended September 29, 2017.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which provides comprehensive lease accounting guidance. The standard requires entities to recognize lease assets and liabilities on the balance sheet and to disclose key information about leasing arrangements. ASU 2016-02 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of this

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

guida nce and an appropriate implementation strategy. While the Company’s evaluation of this guidance is in the early stages, the Company currently expects adoption of this guidance to have an impact on its consolidated balance sheet.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides guidance for revenue recognition. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 would be effective for annual and interim reporting periods beginning after December 15, 2016 and did not allow early adoption. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 by one year to December 15, 2017, with the option of early adoption as of the original effective date. The amendment in ASU 2015-14 resulted in ASU 2014-09 becoming effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption of Topic 606, an entity may apply the new guidance either retrospectively to each prior reporting period presented (the “full retrospective method”) or retrospectively only to customer contracts not yet completed as of the date of adoption with the cumulative effect of initially applying the standard recognized in beginning retained earnings at the date of the initial application (the “modified retrospective method”).

The Company will adopt the new standard as of January 1, 2018 and has conducted various activities to prepare for the adoption of the new standard. The Company surveyed cross-functional leaders to identify potential revenue streams that could be impacted by Topic 606 and identified certain revenue streams that could be impacted. The Company also reviewed a representative sample of individual customer contracts related to these various revenue streams to determine if the guidance under Topic 606 is expected to have a material impact on revenue recognition.

The Company’s work to date indicates that only a limited number of contracts with customers may require a change in the way revenues are recognized. The Company is still in the process of determining the expected quantitative impact that the adoption of Topic 606 will have on its consolidated financial statements.

The Company concluded that it will adopt the new standard using the modified retrospective method. In addition, the Company will elect to apply certain practical expedients allowed under the guidance. First, the Company does not intend to adjust the promised amount of consideration for the effects of a financing component as the transfer of a promised good to a customer and the customer’s payment for that good are typically expected to be one year or less. Second, the Company will exclude from its transaction price any amounts collected from customers for all sales or other similar taxes, which is consistent with the Company’s current practice. Third, the Company will elect to account for shipping and handling activities that occur after the transfer of control over the related goods as fulfillment activities rather than performance obligations.

2. Business Combinations

WOM

On July 3, 2017, the Company acquired 100% of the outstanding shares of W.O.M. World of Medicine GmbH (“WOM”), a Berlin, Germany-based provider of medical insufflators, pumps, and related disposables for OEMs in the minimally invasive surgical market, for a total purchase price of €118.1 million ($134.9 million), net of working capital adjustments. The acquisition was financed with a €118.0 million ($134.7 million) draw-down on the Company’s revolving credit facility. The Company expects that the addition of WOM will help the Company to better serve customers in minimally invasive surgery applications with a broader range of product offerings. WOM is included in the Company’s Vision reportable segment.

The acquisition of WOM has been accounted for as a business combination. The allocation of the purchase price is based upon a valuation of assets acquired and liabilities assumed. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of WOM and the Company. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information obtained with regard to facts and circumstances that existed as of the acquisition date. The purchase price allocation is preliminary as the Company is in the process of collecting additional information for the valuation of inventory, property and equipment, intangible assets, accrued liabilities and unrecognized tax benefits.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Based upon a preliminary valuation, the total purchase price allocation is as follows (in thousands):

	Purchase Price
	Allocation
Cash	$	1,400
Accounts receivable		11,807
Inventories		14,549
Property and equipment		21,940
Intangible assets		59,732
Goodwill		53,775
Other assets		2,660
Total assets acquired		165,863
Accounts payable		4,398
Other liabilities		8,276
Deferred tax liabilities		18,255
Total liabilities assumed		30,929
Total assets acquired, net of liabilities assumed		134,934
Less: cash acquired		1,400
Total purchase price, net of cash acquired	$	133,534

The fair value of intangible assets is comprised of the following (dollar amounts in thousands):

			Weighted Average
	Estimated Fair		Amortization
	Value		Period
Developed technologies	$	21,586	10 years
Customer relationships		34,949	12 years
Trademarks and trade names		2,284	10 years
Backlog		913	1 year
Total	$	59,732

The purchase price allocation resulted in $59.7 million of identifiable intangible assets and $53.8 million of goodwill. As the WOM acquisition is an acquisition of outstanding common shares, none of the resulting goodwill is deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flows potentially attributable to: (i) WOM’s ability to grow its business with existing and new customers, including leveraging the Company’s customer base; and (ii) cost improvements due to expansion in scale.

The operating results of WOM were included in the Company’s results of operations beginning on July 3, 2017. WOM contributed revenues of $24.8 million and an operating loss from continuing operations before income taxes of $1.6 million for the nine months ended September 29, 2017. Operating loss from continuing operations before income taxes for the nine months ended September 29, 2017 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $4.9 million.

ThingMagic

On January 10, 2017, the Company acquired from Trimble Inc. certain assets and liabilities that constituted the business of 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 $19.1 million, net of working capital adjustments. The acquisition was financed with cash on hand and a $12.0 million draw-down on the Company’s revolving credit facility. The Company expects that the addition of ThingMagic will broaden its portfolio of RFID

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

solutions, while providing the resources to address the growing need for improvements in workflow solutions, patient safety, anti-counterfeiting, and asset tracking in a medical environment. ThingMagic is included in the Company’s Vision repor table segment.

The acquisition of ThingMagic has been accounted for as a business combination. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of ThingMagic and the Company. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information obtained with regards to facts and circumstances that existed as of the acquisition date.

Based upon a preliminary valuation, the total purchase price was allocated as follows (in thousands):

	Purchase Price
	Allocation
Inventories	$	1,832
Intangible assets		7,423
Goodwill		9,929
Total assets acquired		19,184

Other liabilities		95
Total liabilities assumed		95
Total purchase price	$	19,089

The fair value of intangible assets is comprised of the following (dollar amounts in thousands):

			Weighted Average
	Estimated Fair		Amortization
	Value		Period
Developed technologies	$	4,600	10 years
Customer relationships		2,520	10 years
Trademarks and trade names		303	5 years
Total	$	7,423

The purchase price allocation resulted in $7.4 million of identifiable intangible assets and $9.9 million of goodwill. As the ThingMagic acquisition is treated as an acquisition of assets for income tax purposes, the goodwill acquired is expected to be fully deductible. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flows potentially attributable to: (i) ThingMagic’s ability to grow its business with existing and new customers, including leveraging the Company’s customer base; (ii) cost synergies in combining the research and development capabilities from ThingMagic with the existing RFID capabilities within Novanta; and (iii) cost improvements due to the integration of ThingMagic operations into the Company’s existing infrastructure.

The operating results of ThingMagic were included in the Company’s results of operations beginning on January 10, 2017. ThingMagic contributed revenues of $6.5 million and operating income from continuing operations before income taxes of $0.1 million for the nine months ended September 29, 2017. Operating income from continuing operations before income taxes for the nine months ended September 29, 2017 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $1.2 million.

The pro forma financial information reflecting the operating results of ThingMagic, as if it had been acquired as of January 1, 2016, would not differ materially from the operating results of the Company as reported for the year ended December 31, 2016.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Laser Quantum Limited

On January 10, 2017, the Company acquired an additional approximately 35% of the outstanding shares of 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 £25.5 million ($31.1 million) in cash consideration. The purchase price was financed with cash on hand and a $30.0 million draw-down on the Company’s revolving credit facility. As a result of this transaction, the Company’s ownership position in Laser Quantum increased from approximately 41% to approximately 76%. By establishing control through a majority equity ownership, the Company expects to broaden its technology capability in photonics solutions for medical applications, particularly within the growing DNA sequencing market, while providing key enabling photonics-based technologies for instrumentation and life science applications such as biomedical imaging, cell sorting, and ophthalmology. Laser Quantum is included in the Company’s Photonics reportable segment.

As part of this transaction, the Company and the remaining shareholders of Laser Quantum entered into a call and put option agreement for the purchase and sale, in 2020, of all remaining Laser Quantum shares held by the other shareholders, subject to certain conditions. The purchase price for the remaining shares will be based on the proportionate share of the noncontrolling interest (“NCI”) in Laser Quantum’s cash on hand as of December 31, 2019 and a multiple of Laser Quantum’s EBITDA for the twelve months ending December 31, 2019, as defined in the call and put option agreement.

In connection with the purchase price allocation, upon gaining control over Laser Quantum, the Company recognized a nontaxable gain of $26.4 million in the consolidated statement of operations for the nine months ended September 29, 2017. The gain represented the excess of the fair value of the Company’s previously-held equity interest in Laser Quantum over its carrying value upon gaining control.

The fair value of the approximately 41% equity interest previously held by the Company before the acquisition and the fair value of the approximately 24% NCI held by the remaining shareholders of Laser Quantum after the acquisition were determined using a combination of the discounted cash flow method (an income approach), the guideline public company method (a market approach), and the subject company transaction method (a market approach). The subject company transaction method was based on the purchase price paid by the Company for the acquisition of the additional approximately 35% of the outstanding shares, while giving consideration to the control and/or minority nature of the subject equity interests.

The acquisition of Laser Quantum has been accounted for as a business combination. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of Laser Quantum and the Company. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information to be obtained with regards to facts and circumstances that existed as of the acquisition date.

Based upon a preliminary valuation, the total purchase price was allocated as follows (in thousands):

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

	Purchase Price
	Allocation
Cash	$	15,343
Accounts receivable		2,739
Inventories		6,264
Property and equipment		2,286
Intangible assets		38,955
Goodwill		31,041
Other assets		717
Total fair value of assets		97,345

Accounts payable		796
Other liabilities		2,068
Deferred tax liabilities		7,210
Total fair value of liabilities		10,074
Total fair value of assets, net of fair value of liabilities		87,271
Less: fair value of equity interest previously held by Novanta		34,637
Less: fair value of noncontrolling interest		21,582
Total purchase price paid by Novanta		31,052
Less: cash acquired		15,343
Purchase price, net of cash acquired	$	15,709

The fair value of intangible assets is comprised of the following (dollar amounts in thousands):

			Weighted Average
	Estimated Fair		Amortization
	Value		Period
Developed technologies	$	15,501	15 years
Customer relationships		19,990	15 years
Trademarks and trade names		1,964	15 years
Backlog		1,500	9 months
Total	$	38,955

The purchase price allocation resulted in $39.0 million of identifiable intangible assets and $31.0 million of goodwill. As the Laser Quantum acquisition is an acquisition of outstanding common shares, none of the resulting goodwill is deductible for tax purposes. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which anticipated economic benefits from such assets are expected to be realized. The goodwill recorded represents the anticipated incremental value of future cash flow potential attributable to: (i) Laser Quantum’s ability to grow its business with existing and new customers, including leveraging the Company’s broader customer base; and (ii) cost improvements due to expansion in scale.

The operating results of Laser Quantum were included in the Company’s results of operations beginning on January 10, 2017. Laser Quantum contributed revenues of $32.3 million and income from continuing operations before income taxes of $7.0 million for the nine months ended September 29, 2017. Operating income from continuing operations before income taxes for the nine months ended September 29, 2017 included $5.8 million of expenses associated with the amortization of inventory fair value step-up and purchased intangible assets.

Unaudited Pro Forma Information

The pro forma information for all periods presented below includes the effects of business combination accounting resulting from the acquisitions of WOM and Laser Quantum, including amortization of inventory fair value adjustments, amortization of intangible assets, interest expense on borrowings in connection with the acquisition, elimination of the gain from business acquisition and income from equity method investment, and the related tax effects as though the acquisitions had been consummated as of

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Janu ary 1, 2016. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisitions had taken place on January 1, 2016.

	Three Months Ended				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
	2017		2016		2017		2016
Revenue	$	146,296	$	124,925	$	415,900	$	361,701
Income from continuing operations	$	12,727	$	8,241	$	32,038	$	12,804
Earnings per common share attributable to Novanta Inc. - Basic	$	0.12	$	0.24	$	0.55	$	0.36
Earnings per common share attributable to Novanta Inc. - Diluted	$	0.12	$	0.24	$	0.55	$	0.36

Acquisition Costs

Acquisition-related costs are included in restructuring, acquisition and divestiture related costs in the consolidated statements of operations. Acquisition-related costs for WOM, ThingMagic and Laser Quantum are as follows (in thousands):

	Three Months Ended		Nine Months Ended
	September 29,		September 29,
	2017		2017
ThingMagic	$	—	$	149
Laser Quantum	$	—	$	264
WOM	$	3,359	$	4,351

3. Discontinued Operations and Divestitures

In July 2014, the Company completed the sale of certain assets and liabilities of its Scientific Lasers business for approximately $6.5 million in cash, net of working capital adjustments. In accordance with the purchase and sale agreement, $1.5 million of the sales proceeds was held in escrow until January 2016. In January 2016, the $1.5 million escrow was released to the Company in full and is reported as cash flow from investing activities of discontinued operations.

4. Accumulated Other Comprehensive Income (Loss)

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

	Total accumulated
	other			Foreign currency
	comprehensive			translation			Pension
	income (loss)			adjustments			liabilities
Balance at December 31, 2016	$	(27,715	)	$	(17,222	)	$	(10,493	)
Other comprehensive income (loss)		7,509			8,340			(831	)
Amounts reclassified from other comprehensive income (loss) ⁽¹⁾		874			—			874
Balance at September 29, 2017	$	(19,332	)	$	(8,882	)	$	(10,450	)

(1)

The amounts reclassified from other comprehensive income (loss) were included in selling, general and administrative expenses in the consolidated statements of operations.

5. Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed by dividing net income attributable to Novanta Inc. after adjustment of redeemable noncontrolling interest to estimated redemption value by the weighted average number of common shares outstanding

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

during t he period. The Company recognizes changes in the redeemable noncontrolling interest redemption value by adjusting the carrying amount of the redeemable noncontrolling interest as of the end of the period to the higher of: (i) the estimated redemption value assuming the end of the period is also the redemption date or (ii) the carrying value without any redemption value adjustments. Such adjustments are recorded in retained earnings in stockholders’ equity instead of net income attributable to Novanta Inc. F or both basic and diluted earnings (loss) per common share, such redemption value adjustments are included in the calculation of the numerator. For diluted earnings (loss) per common share, the denominator also includes the dilutive effect of outstanding r estricted stock units, stock options and total shareholder return performance restricted stock units determined using the treasury stock method. Dilutive effects of contingently issuable shares are included in the weighted average dilutive share calculatio n using the treasury stock method when the contingencies have been resolved. For periods in which net losses are generated, the dilutive potential common shares are excluded from the calculation of diluted earnings per common share as the effect would be a nti-dilutive.

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

	Three Months Ended					Nine Months Ended
	September 29,			September 30,		September 29,			September 30,
	2017			2016		2017			2016
Numerators:
Income from continuing operations	$	8,366		$	7,470	$	52,630		$	14,247
Less: Net income attributable to noncontrolling interest		(834	)		—		(1,444	)		—
Net income attributable to Novanta Inc.		7,532			7,470		51,186			14,247
Less: Adjustment of redeemable noncontrolling interest to estimated redemption value (see Note 14)		(7,585	)		—		(11,303	)		—
Net income (loss) attributable to Novanta Inc. after adjustment of redeemable noncontrolling interest to estimated redemption value	$	(53	)	$	7,470	$	39,883		$	14,247

Denominators:
Weighted average common shares outstanding— basic		34,833			34,677		34,809			34,689
Dilutive potential common shares ⁽¹⁾		—			251		426			200
Weighted average common shares outstanding— diluted		34,833			34,928		35,235			34,889
Antidilutive common shares excluded from above		—			144		—			112

Basic Earnings (Loss) per Common Share:
Basic earnings (loss) per common share attributable to Novanta Inc.	$	(0.00	)	$	0.22	$	1.15		$	0.41

Diluted Earnings (Loss) per Common Share:
Diluted earnings (loss) per common share attributable to Novanta Inc.	$	(0.00	)	$	0.21	$	1.13		$	0.41

(1)

Due to the Company’s net loss position after adjustment of redeemable noncontrolling interest to estimated redemption value for the three months ended September 29, 2017, all potentially dilutive shares are excluded from the calculation of the denominator as their effect would have been anti-dilutive.

Common Share Repurchases

During the nine months ended September 29, 2017, the Company repurchased 14 thousand of its common shares in the open market for an aggregate purchase price of $0.4 million at an average price of $26.41 per share.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

6. Fair Value Measurements

ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

•

Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access.

•

Level 2: Observable inputs other than those described in Level 1.

•

Level 3: Unobservable inputs.

The Company’s cash equivalents are investments in money market accounts, which represent the only asset the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable and accrued expenses and other current liabilities (excluding contingent considerations) approximate their carrying values because of their short-term nature.

Contingent consideration

On December 18, 2015, the Company acquired all assets and certain liabilities of Skyetek Inc. (“Skyetek”). Under the purchase and sale agreement for the Skyetek acquisition, the owners of Skyetek were eligible to receive contingent consideration based on the achievement of certain sales order commitment targets from October 2015 through June 2017. The undiscounted range of possible contingent consideration was zero to $0.3 million. If such targets were achieved, the contingent consideration would be payable in 2017. The Company recognized an estimated fair value of $0.2 million as part of the purchase price as of the acquisition date. Based on the actual sales order commitments through June 2017, the Company paid $0.1 million as the final Skyetek contingent consideration during the three months ended September 29, 2017.

On November 11, 2015, the Company acquired Lincoln Laser Company (“Lincoln Laser”). Under the purchase and sale agreement for the Lincoln Laser acquisition, the shareholders of Lincoln Laser were eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal year 2016. The estimated fair value of the contingent consideration of $2.3 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Based on Lincoln Laser’s fiscal year 2016 revenue results, the fair value of the contingent consideration for Lincoln Laser was adjusted to $1.4 million as of December 31, 2016. The Company paid $1.4 million as final settlement of the contingent consideration in the first quarter of 2017.

On February 19, 2015, the Company acquired Applimotion Inc. (“Applimotion”). Under the purchase and sale agreement for the Applimotion acquisition, the shareholders of Applimotion are eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal years 2015 to 2017. The undiscounted range of contingent considerations is zero to $4.0 million. If such targets are achieved, the contingent consideration will be payable in cash in two installments in 2017 and 2018, respectively. The estimated fair value of the contingent consideration of $1.0 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of this contingent liability are recorded in the consolidated statement of operations in restructuring, acquisition and divestiture related costs until the liability is fully settled. Under the Monte Carlo valuation method, the fair value of the contingent consideration for Applimotion was $3.6 million as of December 31, 2016. Based on Applimotion’s revenue performance for 2015 and 2016, the Company paid $1.2 million in contingent consideration in the first quarter of 2017. Based on the strong revenue performance year to date and projections for the remainder of 2017, the Company adjusted the fair value for the remaining contingent consideration to $2.8 million, which is reported as a current liability in accrued expenses and other current liabilities on the consolidated balance sheet as of September 29, 2017. The second installment of the contingent consideration will be payable in the first quarter of 2018.

The following table summarizes the fair values of the Company’s financial assets and liabilities as of September 29, 2017 (in thousands):

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

			Quoted Prices in				Significant Other
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	3,141	$	3,141	$	—	$	—
Liabilities
Contingent consideration - Current	$	2,800	$	—	$	—	$	2,800
Contingent consideration - Long-term		—		—		—		—
	$	2,800	$	—	$	—	$	2,800

The following table summarizes the fair values of the Company’s financial assets and liabilities as of December 31, 2016 (in thousands):

			Quoted Prices in				Significant Other
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	9,569	$	9,569	$	—	$	—
Liabilities
Contingent consideration - Current	$	2,775	$	—	$	—	$	2,775
Contingent consideration - Long-term		2,381		—		—		2,381
	$	5,156	$	—	$	—	$	5,156

Changes in the fair value of Level 3 contingent consideration during the nine months ended September 29, 2017 were as follows (in thousands):

	Contingent Consideration
Balance at December 31, 2016	$	5,156
Payment to Applimotion		(1,200	)
Payment to Lincoln Laser		(1,433	)
Payment to Skyetek		(148	)
Fair value adjustments (1)		425
Balance at September 29, 2017	$	2,800

(1)

In the nine months ended September 29, 2017, the fair value of the contingent consideration in connection with the acquisition of Applimotion was increased by $0.4 million due to increased actual and projected revenue performance.

See Note 9 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.

7. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded when the consideration for a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The Company tests its goodwill balances annually for impairment as of the beginning of the second quarter or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The Company performed its annual goodwill impairment test as of the beginning of the second quarter of 2017 and noted no impairment of goodwill.

The following table summarizes changes in goodwill during the nine months ended September 29, 2017 (in thousands):

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Balance at beginning of the period	$	108,128
Goodwill acquired from Laser Quantum acquisition		31,041
Goodwill acquired from ThingMagic acquisition		9,929
Goodwill acquired from WOM acquisition		53,775
Effect of foreign exchange rate changes		4,847
Balance at end of the period	$	207,720

Goodwill by reportable segment as of September 29, 2017 was as follows (in thousands):

	Reportable Segment
	Photonics			Vision			Precision Motion			Total
Goodwill	$	170,450		$	154,536		$	33,963		$	358,949
Accumulated impairment of goodwill		(102,461	)		(31,722	)		(17,046	)		(151,229	)
Total	$	67,989		$	122,814		$	16,917		$	207,720

Goodwill by reportable segment as of December 31, 2016 was as follows (in thousands):

	Reportable Segment
	Photonics			Vision			Precision Motion			Total
Goodwill	$	136,278		$	89,116		$	33,963		$	259,357
Accumulated impairment of goodwill		(102,461	)		(31,722	)		(17,046	)		(151,229	)
Total	$	33,817		$	57,394		$	16,917		$	108,128

Intangible Assets

Intangible assets as of September 29, 2017 and December 31, 2016, respectively, are summarized as follows (in thousands):

	September 29, 2017							December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Patents and developed technologies	$	129,059	$	(74,456	)	$	54,603	$	84,742	$	(67,902	)	$	16,840
Customer relationships		130,311		(49,765	)		80,546		69,554		(42,934	)		26,620
Customer backlog		3,216		(2,273	)		943		622		(540	)		82
Non-compete covenant		2,514		(1,821	)		693		2,514		(1,419	)		1,095
Trademarks and trade names		15,644		(7,518	)		8,126		10,709		(6,630	)		4,079
Amortizable intangible assets		280,744		(135,833	)		144,911		168,141		(119,425	)		48,716
Non-amortizable intangible assets:
Trade names		13,027		—			13,027		13,027		—			13,027
Totals	$	293,771	$	(135,833	)	$	157,938	$	181,168	$	(119,425	)	$	61,743

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

All definite-lived intangible ass ets are amortized either on a straight-line basis or an economic benefit basis over their remaining useful life. Amortization expense for customer relationships and definite-lived trademarks, trade names and other intangibles is included in operating expen ses in the accompanying consolidated statements of operations. Amortization expense for patents and developed technologies is included in cost of revenue in the accompanying consolidated statements of operations. Amortization expense is as follows (in thou sands):

	Three Months Ended				Nine Months Ended
	September 29, 2017		September 30, 2016		September 29, 2017		September 30, 2016
Amortization expense – cost of revenue	$	2,741	$	994	$	6,078	$	3,163
Amortization expense – operating expenses		3,217		2,066		9,413		6,153
Total amortization expense	$	5,958	$	3,060	$	15,491	$	9,316

Estimated amortization expense for each of the five succeeding years and thereafter as of September 29, 2017 was as follows (in thousands):

Year Ending December 31,	Cost of Revenue		Operating Expenses		Total
2017 (remainder of year)	$	2,755	$	2,697	$	5,452
2018		9,331		16,591		25,922
2019		8,474		14,625		23,099
2020		7,585		11,922		19,507
2021		6,703		10,708		17,411
Thereafter		19,755		33,765		53,520
Total	$	54,603	$	90,308	$	144,911

8. Supplementary Balance Sheet Information

The following tables provide the details of selected balance sheet items as of the periods indicated (in thousands):

Inventories

	September 29,		December 31,
	2017		2016
Raw materials	$	55,418	$	39,822
Work-in-process		13,272		8,012
Finished goods		16,634		9,511
Demo and consigned inventory		3,537		2,400
Total inventories	$	88,861	$	59,745

Accrued Expenses and Other Current Liabilities

	September 29,		December 31,
	2017		2016
Accrued compensation and benefits	$	16,631	$	9,647
Accrued warranty		4,773		3,142
Accrued restructuring		575		1,371
Accrued professional services		1,854		1,237
Accrued contingent considerations		2,800		2,775
Customer deposits		3,294		1,164
Other		11,013		7,612
Total	$	40,940	$	26,948

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Accrued Warranty

	Nine Months Ended
	September 29, 2017			September 30, 2016
Balance at beginning of the period	$	3,142		$	3,335
Provision charged to cost of revenue		2,084			1,050
Acquisition related warranty accrual		1,307			—
Use of provision		(1,818	)		(1,060	)
Foreign currency exchange rate changes		58			(25	)
Balance at end of period	$	4,773		$	3,300

Other Long Term Liabilities

	September 29,		December 31,
	2017		2016
Capital lease obligations	$	7,794	$	8,111
Accrued pension liabilities		5,256		5,957
Accrued contingent considerations		—		2,381
Other		2,018		2,264
Total	$	15,068	$	18,713

9. Debt

Debt consisted of the following (in thousands):

	September 29,			December 31,
	2017			2016
Senior Credit Facilities – term loan	$	9,200		$	7,500
Less: unamortized debt issuance costs		(85	)		(134	)
Total current portion of long-term debt	$	9,115		$	7,366

Senior Credit Facilities – term loan	$	81,425		$	63,750
Senior Credit Facilities – revolving credit facility		156,069			10,000
Less: unamortized debt issuance costs		(3,306	)		(3,196	)
Total long-term debt	$	234,188		$	70,554

Total Senior Credit Facilities	$	243,303		$	77,920

Senior Credit Facilities

In August 2017, the Company entered into an amendment (the “Third Amendment”) to the second amended and restated credit agreement, dated as of May 19, 2016 (the “Second Amended and Restated Credit Agreement”). The Third Amendment increased the revolving credit facility under the Second Amended and Restated Credit Agreement by $100 million, from $225 million to $325 million, and reset the uncommitted accordion feature to $125 million for potential future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million. Under the Third Amendment, the Company is required to pay quarterly scheduled principal repayments of $2.3 million beginning in October 2017, with the final installment of $56.1 million due upon maturity in May 2021. Quarterly installments due in the next twelve months under the term loan amount to $9.2 million and are classified as a current liability on the consolidated balance sheet. The increase in the amount outstanding under the Company’s revolving credit facility in the nine months ended September 29, 2017 was related to additional borrowings to fund the WOM, Laser Quantum and ThingMagic acquisitions.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

The Company incurred $0.7 million in financing costs related to the Third Amendment. These costs are presented as a reduction to the debt balances on the consolidated balance sheet and will be amortized over the term of the Second Amended and Restated Credit Agreement.

The Company is required to satisfy certain financial and non-financial covenants under the Second Amended and Restated Credit Agreement. The Company was in compliance with these covenants as of September 27, 2017.

Liens

The Company’s obligations under the Senior Credit Facilities are secured on a senior basis by a lien on substantially all of the assets of the Company and certain U.S., U.K. and German subsidiaries as defined in the Second Amended and Restated Credit Agreement and guaranteed by the Company and these subsidiaries. The Second Amended and Restated Credit Agreement also contains customary events of default.

Fair Value of Debt

As of September 29, 2017 and December 31, 2016, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of the same maturity. The fair value of the Company’s debt is classified as Level 2 under the fair value hierarchy.

10. Share-based Compensation

The table below summarizes share-based compensation expense recorded in income from continuing operations in the consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
	2017		2016		2017		2016
Selling, general and administrative	$	1,336	$	914	$	3,911	$	3,112
Research and development and engineering		59		18		156		82
Cost of revenue		41		56		156		191
Total share-based compensation expense	$	1,436	$	988	$	4,223	$	3,385

Share-based compensation reported in selling, general and administrative expenses during each of the nine-month periods ended September 29, 2017 and September 30, 2016, respectively, included $0.5 million of expense related to deferred stock units granted to the members of the Company’s Board of Directors.

Service-based Restricted Stock Units and Deferred Stock Units

The Company’s restricted stock units (“RSUs”) have been issued with vesting periods of three, four, and five years and vest based solely on service conditions. Accordingly, the Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company reduces the compensation expense by an estimated forfeiture rate which is based on anticipated forfeitures and actual experience.

Deferred stock units (“DSUs”) are granted solely to the members of the Company’s Board of Directors, and have been issued as fully vested and non-forfeitable awards upon grant. The compensation expense associated with the DSUs is recognized in full on the respective date of grant.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

The table below summarizes activities relating to RSUs and DSUs issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the nine months ended September 29, 2017:

	Shares (In thousands)			Weighted Average Grant Date Fair Value
Unvested at December 31, 2016		635		$	13.97
Granted		242		$	25.04
Vested		(206	)	$	14.09
Forfeited		(25	)	$	16.33
Unvested at September 29, 2017		646		$	17.99
Expected to vest as of September 29, 2017		616

The total fair value of RSUs and DSUs that vested during the nine months ended September 29, 2017 was $5.2 million based on the market price of the underlying stock on the date of vesting.

Performance-based Awards

The Company granted two types of performance-based awards to certain members of the executive management team: non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”). Both types of performance-based restricted stock units generally cliff vest on the first day following the end of the three-year performance period.

The number of common shares to be issued upon settlement following vesting of the EPS-PSUs is determined based on the Company’s cumulative non-GAAP EPS over the three-year performance period against the target established by the Company’s Board of Directors at the time of grant and will be in the range of zero to 200% of the target number of shares. The Company recognizes the related compensation expense ratably over the performance period based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is performed quarterly and the cumulative effect of a change in the estimated compensation expense, if any, is recognized in the consolidated statement of operations in the period in which such determination is made.

The number of shares to be issued upon settlement following vesting of the TSR-PSUs is determined based on the relative market performance of the Company’s common stock compared to the Russell 2000 Index over the three-year performance period using a payout formula established by the Company’s Board of Directors at the time of grant and will be in the range of zero to 200% of the target number of shares. The Company recognizes the related compensation expense based on the fair value of the TSR-PSUs, determined using the Monte-Carlo valuation model as of the date of grant, on a straight-line basis from the grant date to the end of the three-year performance period. Compensation expense will not be affected by the number of TSR-PSUs that will actually vest at the end of the three-year performance period.

The table below summarizes the activities relating to the performance-based awards issued and outstanding under the Company’s Amended and Restated 2010 Incentive Plan during the nine months ended September 29, 2017:

	Shares (In thousands)		Weighted Average Grant Date Fair Value
Unvested at December 31, 2016		29	$	14.13
Granted		60	$	28.80
Vested		—	$	—
Forfeited		—	$	—
Unvested at September 29, 2017		89	$	24.00

The fair value of the TSR-PSUs at the date of grant was estimated using the Monte-Carlo valuation model with the following assumptions:

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

	Nine Months Ended September 29, 2017
Grant-date stock price	$	24.30
Expected volatility		28.6	%
Risk-free interest rate		1.44	%
Expected annual dividend yield		—
Weighted average fair value	$	33.31

Stock Options

The fair value of stock options is estimated using the Black-Scholes valuation model. Key input assumptions include the expected option term, the expected volatility of the common stock over the expected term of the options, the risk-free interest rate, and the expected dividend yield. Compensation expense related to stock options is recognized in the consolidated statement of operations on a straight-line basis over the vesting period. No stock options were granted during the nine months ended September 29, 2017.

11. Income Taxes

The Company determines its estimated annual effective tax rate at the end of each interim period based on full-year forecasted pre-tax income and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period with the cumulative effect of any changes in the estimated annual effective tax rate being recorded in the fiscal quarter in which the change is determined. The tax effect of significant unusual items is reflected in the period in which they occur. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 29.0% in the determination of the estimated annual effective tax rate.

The Company’s effective tax rate on income from continuing operations of 11.9% for the three months ended September 29, 2017 differs from the Canadian statutory tax rate of 29.0% due to the mix of income earned in jurisdictions with varying tax rates, losses in jurisdictions with a full valuation allowance, recognition of net tax benefits associated with uncertain tax positions upon expiration of statute of limitations and conclusion of income tax audits, and other discrete items for the period.

The Company’s effective tax rate on income from continuing operations of 11.6% for the nine months ended September 29, 2017 differs from the Canadian statutory tax rate of 29.0% due to the mix of income earned in jurisdictions with varying tax rates, losses in jurisdictions with a full valuation allowance, the impact associated with establishing control over Laser Quantum upon the acquisition of an additional approximately 35% of Laser Quantum’s outstanding shares, recognition of net tax benefits associated with uncertain tax positions upon expiration of statute of limitations and conclusion of income tax audits, and other discrete items for the period. The Company reported a nontaxable gain of $26.4 million on its previously-held Laser Quantum equity interest and wrote off $1.5 million of Laser Quantum related deferred tax liability, which had a combined 13.7% favorable impact on the effective tax rate for the nine months ended September 29, 2017.

The Company’s effective tax rate on income from continuing operations of 31.1% for the three months ended September 30, 2016 differed from the Canadian statutory rate of 28.5% primarily due to the mix of income earned in jurisdictions with varying tax rates and losses in jurisdictions with a full valuation allowance.

The Company’s effective tax rate on income from continuing operations of 30.3% for the nine months ended September 30, 2016 differed from the Canadian statutory rate of 28.5% primarily due to the mix of income earned in jurisdictions with varying tax rates, losses in jurisdictions with a full valuation allowance, and the impact of other discrete items for the period. The Company received a tax free cash dividend of $2.3 million from Laser Quantum, which had a 1.9% favorable impact on the effective tax rate for the nine months ended September 30, 2016.

The Company maintains a valuation allowance on some of its deferred tax assets in certain jurisdictions. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

12. Restructuring, Acquisition and Divestiture Related Costs

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

	Three Months Ended					Nine Months Ended
	September 29,		September 30,			September 29,		September 30,
	2017		2016			2017		2016
2016 restructuring	$	—	$	(1,621	)	$	186	$	2,955
2011 restructuring		—		—			14		108
Total restructuring and divestiture charges		—		(1,621	)		200		3,063
Acquisition and related charges		3,834		786			6,032		2,765
Total restructuring, acquisition and divestiture related costs (gain)	$	3,834	$	(835	)	$	6,232	$	5,828

2016 Restructuring

During the third quarter of 2015, the Company initiated the 2016 restructuring program, which included consolidating certain of its manufacturing operations to optimize its facility footprint and better utilize resources, costs associated with discontinuing its radiology product line and reducing redundant costs due to productivity cost savings and business volume reductions. The Company substantially completed the 2016 restructuring program during the second quarter of 2016. As of September 29, 2017, the Company incurred cumulative costs related to this restructuring plan totaling $6.4 million. The Company expects to incur additional restructuring charges of $0.2 million to $0.3 million related to the 2016 restructuring plan.

The following table summarizes restructuring costs for each segment and unallocated corporate and shared services related to the 2016 restructuring plan (in thousands):

	Three Months Ended					Nine Months Ended
	September 29,		September 30,			September 29,		September 30,
	2017		2016			2017		2016
Photonics	$	—	$	45		$	—	$	813
Vision		—		(1,728	)		185		1,730
Precision Motion		—		—			—		106
Unallocated Corporate and Shared Services		—		62			1		306
Total	$	—	$	(1,621	)	$	186	$	2,955

2011 Restructuring

In November 2011, the Company announced a strategic initiative (“2011 restructuring”), which aimed to consolidate operations to reduce the Company’s cost structure and improve operational efficiency. As part of this initiative, the Company eliminated facilities through the consolidation of certain manufacturing, sales and distribution facilities and the exit of Semiconductor Systems and Laser Systems businesses. The Company substantially completed the 2011 restructuring program by the end of 2013. In March 2016, the Company sold its previously exited Laser Systems facility located in Orlando, Florida for cash at the net carrying value of $3.5 million. In December 2016, the lease agreement for the Company’s previously exited laser scanner business facility was terminated.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Rollforward of Accrued Expenses Related to Restructuring

The following table summarizes the accrual activities, by component, related to the Company’s restructuring plans recorded in the accompanying consolidated balance sheets (in thousands):

	Total			Severance			Facility			Depreciation		Other
Balance at December 31, 2016	$	1,736		$	611		$	1,111		$	—	$	14
Restructuring charges		200			185			—			—		15
Cash payments		(1,068	)		(652	)		(399	)		—		(17	)
Non-cash write-offs and other adjustments		(62	)		(65	)		11			—		(8	)
Balance at September 29, 2017	$	806		$	79		$	723		$	—	$	4

Acquisition and Related Charges

Acquisition related costs in connection with business combinations, including finders’ fees, legal, valuation, and other professional or consulting fees, totaled $3.8 million and $6.0 million for the three and nine months ended September 29, 2017, respectively, and $0.8 million and $2.8 million for the three and nine months ended September 30, 2016, respectively. The majority of acquisition related costs for the three and nine months ended September 29, 2017 were included in Unallocated Corporate and Shared Services costs.

13. Commitments and Contingencies

Leases

The Company leases certain equipment and facilities under operating and capital lease agreements. Excluding the operating and capital leases acquired as part of the WOM acquisition, there have been no material changes to the Company’s leases through September 29, 2017 from those discussed in Note 15 to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Future minimum lease payments under the existing operating and capital leases for WOM are as follows (in thousands):

Year Ending December 31,	Operating Lease		Capital Lease ⁽¹⁾
2017 (remainder of year)	$	573	$	40
2018		2,250		130
2019		2,150		90
2020		2,128		75
2021		2,005		—
Thereafter		7,207		—
Total minimum lease payments	$	16,313	$	335

(1)

Capital lease payments include interest payments of less than $0.1 million.

Purchase Commitments

Excluding WOM’s purchase commitments, there have been no material changes to the Company’s purchase commitments since December 31, 2016. As of September 29, 2017, WOM had unconditional commitments primarily for inventory purchases of $20.5 million. These purchase commitments are expected to be incurred as follows: $13.3 million in the remainder of 2017, and $7.2 million in 2018.

Legal Contingencies

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 consolidated financial statements but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon its consolidated financial statements.

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

Guarantees and Indemnifications

In the normal course of its operations, the Company executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business dispositions, sale of assets, sale of products and operating leases. Additionally, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. Certain of the officers and directors are also a party to indemnification agreements with the Company. These indemnification agreements provide, among other things, that the director and officer shall be indemnified to the fullest extent permitted by applicable law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such officer or director in connection with any proceeding by reason of his or her relationship with the Company. In addition, the indemnification agreements provide for the advancement of expenses incurred by such director or officer in connection with any proceeding covered by the indemnification agreement, subject to the conditions set forth therein and to the extent such advancement is not prohibited by law. The indemnification agreements also set out the procedures for determining entitlement to indemnification, the requirements relating to notice and defense of claims for which indemnification is sought, the procedures for enforcement of indemnification rights, the limitations on and exclusions from indemnification, and the minimum levels of directors’ and officers’ liability insurance to be maintained by the Company.

14. Redeemable Noncontrolling Interest

As a result of the Company’s acquisition of additional outstanding shares of Laser Quantum from the remaining shareholders on January 10, 2017, the Company increased its ownership position in Laser Quantum from approximately 41% to approximately 76% and began to consolidate the operating results of Laser Quantum in the consolidated financial statements. As part of the purchase agreement, the Company and the remaining equity holders entered into a call and put option agreement for the purchase and sale, in 2020, of all remaining Laser Quantum shares held by the remaining shareholders, subject to certain conditions. The purchase price for the remaining shares will be based on the proportionate share of the noncontrolling interest in Laser Quantum’s cash on hand as of December 31, 2019 and a multiple of Laser Quantum’s EBITDA for the twelve months ending December 31, 2019, as defined in the call and put option agreement. As a result of the put option held by the remaining shareholders, the noncontrolling interest is considered a redeemable equity instrument and is presented as temporary equity on the consolidated balance sheet. The proportionate share of the net income from Laser Quantum attributable to the noncontrolling interest has been reported as a reduction to the consolidated net income in the Company’s consolidated statements of operations and an increase to the carrying value of the redeemable noncontrolling interest.

The initial value of the noncontrolling interest of £17.7 million ($21.6 million) was measured at fair value at the date of the acquisition. The value of the noncontrolling interest was determined using a combination of the discounted cash flow method (an income approach), the guideline public company method (a market approach), and the subject company transaction method (a market approach). The Company carries the redeemable noncontrolling interest at the higher of (i) the carrying value without any redemption value adjustments or (ii) the estimated redemption value as of the end of the reporting period. The estimated redemption value is determined as of the end of the reporting period as if it were also the redemption date for the instrument. The resulting adjustments are recorded in retained earnings in shareholders’ equity and do not affect net income attributable to Novanta Inc.

During the nine months ended September 29, 2017, the Company increased the carrying amount of the redeemable noncontrolling interest by $11.3 million to reflect the estimated redemption value as of September 29, 2017. The following table presents the reconciliation of changes in the Company’s noncontrolling interest (in thousands):

	Redeemable noncontrolling interests
Balance as of December 31, 2016	$	—
Acquisition of noncontrolling interest		21,582
Net income attributable to noncontrolling interest		1,444
Adjustment of redeemable noncontrolling interest to estimated redemption value ⁽¹⁾		11,303
Foreign currency translation		2,509
Balance as of September 29, 2017	$	36,838

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

(1)

Adjustment of the carrying value of redeemable noncontrolling interest to the estimated redemption value was recognized in retained earnings instead of the consolidated statement of operations but was included in the computation of earnings per share attributable to Novanta Inc. (see Note 5.)

15. Segment Information

The Company evaluates the performance of, and allocates resources to, its segments based on revenue, gross profit and operating profit. The Company’s reportable segments have been identified based on commonality and adjacency of technologies, applications and customers amongst the Company’s individual product lines.

The Company operates in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities are described below.

Photonics

The Photonics segment designs, manufactures and markets photonics-based solutions, including CO2 lasers, continuous wave and femtosecond lasers, optical light engines, 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, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Vision

The Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; surgical displays and operating room integration technologies; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal printers; spectrometry technologies, and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Precision Motion

The Precision Motion segment designs, manufactures and markets optical 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.

Reportable Segment Financial Information

Revenue, gross profit, gross profit margin, operating income (loss) from continuing operations, and depreciation and amortization by reportable segments are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
	2017		2016		2017		2016
Revenue
Photonics	$	61,882	$	43,425	$	170,503	$	129,907
Vision		58,150		31,601		124,943		88,768
Precision Motion		26,264		22,803		78,926		67,204
Total	$	146,296	$	97,829	$	374,372	$	285,879

NOVANTA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AS OF SEPTEMBER 29, 2017

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Gross Profit
Photonics	$	28,966		$	18,603		$	77,423		$	57,461
Vision		19,792			12,343			47,378			32,446
Precision Motion		10,291			10,592			34,558			30,757
Unallocated Corporate and Shared Services		(342	)		(326	)		(1,069	)		(1,064	)
Total	$	58,707		$	41,212		$	158,290		$	119,600

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Gross Profit Margin
Photonics		46.8	%		42.8	%		45.4	%		44.2	%
Vision		34.0	%		39.1	%		37.9	%		36.6	%
Precision Motion		39.2	%		46.5	%		43.8	%		45.8	%
Total		40.1	%		42.1	%		42.3	%		41.8	%

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Operating Income (Loss) from Continuing Operations
Photonics	$	15,233		$	8,185		$	35,746		$	24,704
Vision		846			2,307			4,893			(4,164	)
Precision Motion		5,493			6,195			20,238			16,608
Unallocated Corporate and Shared Services		(9,299	)		(5,639	)		(22,776	)		(15,915	)
Total	$	12,273		$	11,048		$	38,101		$	21,233

	Three Months Ended				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
	2017		2016		2017		2016
Depreciation and Amortization
Photonics	$	3,666	$	1,820	$	10,693	$	5,123
Vision		4,362		2,460		9,276		7,861
Precision Motion		588		603		1,746		1,845
Unallocated Corporate and Shared Services		248		281		725		1,104
Total	$	8,864	$	5,164	$	22,440	$	15,933

Is i

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report on Form 10-Q. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to, our belief that the Purchasing Managers Index (PMI) may provide an indication of the impact of general economic conditions on our sales into the advanced industrial end market; our strategy; anticipated financial performance; expected liquidity and capitalization; drivers of revenue growth; management’s plans and objectives for future operations, expenditures and product development and investments in research and development; expectations regarding our acquisitions of WOM, Laser Quantum and ThingMagic; business prospects; potential of future product releases; anticipated revenue performance; changes in accounting principles and changes in actual or assumed tax liabilities; and expectations regarding tax exposure. 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 for many reasons, including, but not limited to, the following: the PMI not providing a good indication of the impact of general economic conditions on our sales into the advanced industrial end market in any particular period or at all; economic and political conditions and the effects of these conditions on our customers’ businesses and level of business activities; negative effect on global economic conditions, financial markets and our business as a result of the United Kingdom’s impending withdrawal from the European Union and the 2016 U.S. presidential election; our significant dependence upon our customers’ capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate and successfully commercialize our innovations; failure to introduce new products in a timely manner; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our information technology systems; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; our increased use of outsourcing in foreign countries; our failure to comply with local import and export regulations in the jurisdictions in which we operate; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business or grow acquired businesses; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors’ products; disruptions in the supply of certain key components and other goods from our suppliers; production difficulties and product delivery delays or disruptions; our compliance, or our failure to comply, with various federal, state and foreign regulations; changes in governmental regulation of our business or products; effects of compliance with conflict minerals regulations; our compliance, or failure to comply, with environmental regulations; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; changes in tax laws, and fluctuations in our effective tax rates; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; volatility in the market price for our common shares; our ability to access cash and other assets of our subsidiaries; the influence of certain significant shareholders over our business; provisions of our articles of incorporation delaying or preventing a change in control; our significant existing indebtedness limiting our ability to engage in certain activities; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company’s operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 under the heading “Risk Factors.” In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements, except as required under applicable law.

Accounting Period

The interim financial statements of Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “our”) are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31.

Business Overview

We are a global supplier of core technology solutions that give healthcare and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. We combine deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables Novanta to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers' demanding applications. The driving force behind our growth is our team of innovative professionals who share a commitment to innovation and customer success.

Reportable Segments

We operate in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities consist of the following:

Photonics

Vision

Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; surgical displays and operating room integration technologies; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal printers; spectrometry technologies, and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.

Precision Motion

Our Precision Motion segment designs, manufactures and markets optical 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.

End Markets

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

Advanced Industrial Market

For the three and nine months ended September 29, 2017, the advanced industrial market accounted for approximately 50% and 55% of our revenue, respectively. Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, the financial condition of our customers, changes in regulatory requirements and laws, and general economic conditions. We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market.

Medical Market

For the three and nine months ended September 29, 2017, the medical market accounted for approximately 50% and 45% of our revenue, respectively. 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 customers or patient preferences, and general demographic trends.

Strategy

Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including:

•

disciplined focus on our diversified business model of providing 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;

•

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

Third Amendment to Second Amended and Restated Credit Agreement

On August 1, 2017, we entered into an amendment (the “Third Amendment”) to the second amended and restated credit agreement, dated as of May 19, 2016 (the “Second Amended and Restated Credit Agreement”). The Third Amendment increased the revolving credit facility commitment under the Second Amended and Restated Credit Agreement by $100 million, from $225 million to $325 million, and reset the uncommitted accordion feature to $125 million for potential future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million.

Acquisition of W.O.M. World of Medicine

On July 3, 2017, we acquired 100% of the outstanding stock of W.O.M. World of Medicine GmbH (“WOM”), a Berlin, Germany-based provider of medical insufflators, pumps and related disposables for OEMs in the minimally invasive surgical market, for a total purchase price of €118.1 million ($134.9 million), net of working capital adjustments. The acquisition was financed with a €118.0 million ($134.7 million) draw-down on our revolving credit facility. We expect that the addition of WOM will help to better serve our customers in minimally invasive surgery applications with a broader range of product offerings. WOM is included in our Vision reportable segment.

Acquisition of Laser Quantum Limited

On January 10, 2017, we acquired an additional 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. Cash paid for the acquisition was £25.5 million ($31.1 million) and was financed with cash on hand and a $30.0 million draw-down on our revolving credit facility. In addition, we entered into a call and put option agreement with the remaining equity holders for the purchase and sale in 2020 of all remaining Laser Quantum shares held by the remaining equity holders, subject to certain conditions. The purchase price for the remaining shares will be based on the proportionate share of the noncontrolling interest in Laser Quantum’s cash on hand as of December 31, 2019 and a multiple of Laser Quantum’s EBITDA for the twelve months ending December 31, 2019, as defined in the call and put option agreement. As a result of this transaction, our ownership position in Laser Quantum increased from approximately 41% to approximately 76%. The financial results of Laser Quantum were previously accounted for under the equity method of accounting. As a result of the acquisition of the

additional shares, the financial results of Laser Quantum have been consolidated in our consolidated financial statements since January 2017. In connection with the purchase price allocation under the business combination rules, we recognized a nontaxable gain of $26.4 mill ion during the three months ended March 31, 2017, representing the excess fair value of our previously-held equity interest in Laser Quantum over its carrying value. By establishing control through a majority equity ownership, we expect to broaden our tech nology capability in photonics solutions for medical applications, particularly within the growing DNA sequencing market, while providing key enabling photonics-based technologies for instrumentation and life science applications such as biomedical imaging , cell sorting, and ophthalmology. Laser Quantum is included in our Photonics reportable segment.

Acquisition of ThingMagic

On January 10, 2017, we acquired ThingMagic, a Woburn, Massachusetts-based provider of ultra-high frequency (“UHF”) RFID modules and finished RFID readers to OEMs in the medical and advanced industrial markets, for a total purchase price of $19.1 million, net of working capital adjustments. The acquisition was financed with cash on hand and a $12.0 million draw-down on our revolving credit facility. We expect that the addition of ThingMagic will broaden our portfolio of RFID solutions, while providing the resources to address the growing need for improvements in workflow solutions, patient safety, anti-counterfeiting, and asset tracking in a medical environment. ThingMagic is included in our Vision reportable segment.

Results of Operations for the Three and Nine Months Ended September 29, 2017 Compared with the Three and Nine Months Ended September 30, 2016

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

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		59.9			57.9			57.7			58.2
Gross profit		40.1			42.1			42.3			41.8
Operating expenses:
Research and development and engineering		8.0			8.1			8.0			8.4
Selling, general and administrative		19.0			21.4			19.9			21.8
Amortization of purchased intangible assets		2.2			2.1			2.5			2.2
Restructuring, acquisition and divestiture related costs		2.6			(0.9	)		1.7			2.0
Total operating expenses		31.7			30.8			32.1			34.4
Operating income from continuing operations		8.4			11.3			10.2			7.4
Interest income (expense), net		(1.4	)		(1.1	)		(1.3	)		(1.2	)
Foreign exchange transaction gains (losses), net		(0.5	)		0.2			(0.0	)		0.3
Other income (expense), net		(0.0	)		0.7			0.0			0.6
Gain on acquisition of business		—			—			7.1			—
Income from continuing operations before income taxes		6.5			11.1			15.9			7.1
Income tax provision		0.8			3.4			1.9			2.2
Income from continuing operations		5.7			7.6			14.1			5.0
Loss from discontinued operations, net of tax		—			—			—			—
Consolidated net income		5.7			7.6			14.1			5.0
Less: Net income attributable to noncontrolling interest		(0.6	)		—			(0.4	)		—
Net income attributable to Novanta Inc.		5.1	%		7.6	%		13.7	%		5.0	%

Overview of Financial Results

Total revenue for the three months ended September 29, 2017 increased $48.5 million, or 49.5%, versus the prior year. The net effect of our current and prior year acquisitions resulted in an increase in revenue of $40.8 million, or 41.7%. In addition, foreign currency exchange rates adversely impacted our revenue by $0.3 million, or 0.3%, for the three months ended September 29, 2017.

Total revenue for the nine months ended September 29, 2017 increased $88.5 million, or 31.0%, versus the prior year. The net effect of our current and prior year acquisitions and prior year decision to discontinue our radiology products resulted in an increase in

revenue of $66.8 million, or 23.3%. In addition, foreign currency exchange rates adversely impacted our revenue by $2.7 million, or 0.9%, for the nine months ended September 29, 2017.

Operating income from continuing operations increased $1.2 million from $11.0 million for the three months ended September 30, 2016 to $12.3 million for the three months ended September 29, 2017. This increase was primarily attributable to an increase in gross profit of $17.5 million as a result of higher revenue, partially offset by an increase in operating expenses of $16.3 million, primarily due to current year and prior year acquisitions.

Operating income from continuing operations increased $16.9 million from $21.2 million for the nine months ended September 30, 2016 to $38.1 million for the nine months ended September 29, 2017. This increase was primarily attributable to an increase in gross profit of $38.7 million as a result of higher revenue, partially offset by an increase in operating expenses of $21.8 million, primarily due to current year and prior year acquisitions.

Diluted earnings per share (“Diluted EPS”) from continuing operations decreased $0.21 from an earnings per share of $0.21 during the three months ended September 30, 2016 to a loss per share from continuing operations of $(0.00) for the three months ended September 29, 2017. Diluted EPS from continuing operations for the three months ended September 29, 2017 was negatively impacted by the $7.6 million Laser Quantum redeemable noncontrolling interest redemption value adjustment. This nontaxable redemption value adjustment was recorded as a reduction to retained earnings in stockholders’ equity instead of net income in the consolidated statement of operations. However, it was included in the earnings per share calculation as a reduction to net income attributable to Novanta Inc., which resulted in a $0.22 reduction to both Basic and Diluted EPS. (See Note 5 to the accompanying Consolidated Financial Statements.)

Diluted EPS from continuing operations of $1.13 for the nine months ended September 29, 2017 increased $0.72 from the prior year. This increase was primarily attributable to higher operating income from continuing operations and a $26.4 million gain on acquisition of the additional approximately 35% of Laser Quantum equity interest in January 2017, partially offset by the adjustment of Laser Quantum redeemable noncontrolling interest to the estimated redemption value as of September 29, 2017. Diluted EPS from continuing operations for the nine months ended September 29, 2017 was negatively impacted by the $11.3 million redeemable noncontrolling interest redemption value adjustment. This nontaxable redemption value adjustment was recorded as a reduction to retained earnings in stockholders’ equity instead of net income in the consolidated statement of operations. However, it was included in the earnings per share calculation as a reduction to net income attributable to Novanta Inc., which resulted in a $0.32 reduction to both Basic and Diluted EPS. (See Note 5 to the accompanying Consolidated Financial Statements.)

Revenue

The following table sets forth external revenue by reportable segment for the periods noted (dollars in thousands):

	Three Months Ended
	September 29,		September 30,		Increase		Percentage
	2017		2016		(Decrease)		Change
Photonics	$	61,882	$	43,425	$	18,457		42.5	%
Vision		58,150		31,601		26,549		84.0	%
Precision Motion		26,264		22,803		3,461		15.2	%
Total	$	146,296	$	97,829	$	48,467		49.5	%

	Nine Months Ended
	September 29,		September 30,		Increase		Percentage
	2017		2016		(Decrease)		Change
Photonics	$	170,503	$	129,907	$	40,596		31.2	%
Vision		124,943		88,768		36,175		40.8	%
Precision Motion		78,926		67,204		11,722		17.4	%
Total	$	374,372	$	285,879	$	88,493		31.0	%

Photonics

Photonics segment revenue for the three months ended September 29, 2017 increased by $18.5 million, or 42.5%, versus the prior year primarily as a result of the Laser Quantum acquisition, which increased segment revenues by $13.6 million, and an increase in revenue of our laser beam delivery products of $4.6 million as a result of increased volumes in the advanced industrial and medical markets.

Photonics segment revenue for the nine months ended September 29, 2017 increased by $40.6 million, or 31.2%, versus the prior year primarily as a result of the Laser Quantum acquisition, which increased segment revenues by $32.3 million, and an increase in revenue of our laser beam deliver y products and our CO2 lasers products of $8.4 million as a result of increased volumes in the advanced industrial and medical markets.

Vision

Vision segment revenue for the three months ended September 29, 2017 increased by $26.5 million, or 84.0%, versus the prior year. The increase was primarily due to a $27.1 million increase in revenue as a result of the WOM and ThingMagic acquisitions.

Vision segment revenue for the nine months ended September 29, 2017 increased by $36.2 million, or 40.8%, versus the prior year. The increase was primarily due to a $31.9 million increase in revenue as a result of the WOM, ThingMagic and Reach acquisitions. This increase was partially offset by a decline in revenue of $1.3 million attributable to our decision to discontinue our radiology products in January 2016.

Precision Motion

Precision Motion segment revenue for the three months ended September 29, 2017 increased by $3.5 million, or 15.2%, versus the prior year primarily due to an increase in revenue of our Celera Motion products and air bearing spindles products as a result of increased demand in the advanced industrial and medical markets.

Precision Motion segment revenue for the nine months ended September 29, 2017 increased by $11.7 million, or 17.4%, versus the prior year primarily due to an increase in revenue of our Celera Motion products and air bearing spindles products as a result of increased demand in the advanced industrial and medical markets.

Gross Profit and Gross Profit Margin

The following table sets forth the gross profit and gross profit margin for each of our reportable segments for the periods noted (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Gross profit:
Photonics	$	28,966		$	18,603		$	77,423		$	57,461
Vision		19,792			12,343			47,378			32,446
Precision Motion		10,291			10,592			34,558			30,757
Unallocated Corporate and Shared Services		(342	)		(326	)		(1,069	)		(1,064	)
Total	$	58,707		$	41,212		$	158,290		$	119,600
Gross profit margin:
Photonics		46.8	%		42.8	%		45.4	%		44.2	%
Vision		34.0	%		39.1	%		37.9	%		36.6	%
Precision Motion		39.2	%		46.5	%		43.8	%		45.8	%

Total		40.1	%		42.1	%		42.3	%		41.8	%

Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, headcount, inventory obsolescence and warranty expenses.

Photonics

Photonics segment gross profit for the three months ended September 29, 2017 increased $10.4 million, or 55.7%, versus the prior year, primarily due to an increase in revenue as a result of the Laser Quantum acquisition, which increased gross profit by $7.5 million. Photonics segment gross profit margin was 46.8% for the three months ended September 29, 2017, versus a gross profit margin of 42.8% for the prior year. The increase in gross profit margin was primarily attributable to changes in product mix and temporary manufacturing inefficiencies in the prior year resulting from the implementation of an enterprise resource planning (“ERP”) system of our laser beam delivery product line during the three months ended September 30, 2016.

Photonics segment gross profit for the nine months ended September 29, 2017 increased $20.0 million, or 34.7%, versus the prior year, primarily due to an increase in revenue as a result of the Laser Quantum acquisition, whic h increased gross profit by $16.5 million. Photonics segment gross profit margin was 45.4% for the nine months ended September 29, 2017, versus a gross profit margin of 44.2% for the prior year. The increase in gross profit margin was primarily attributabl e to changes in product mix.

Vision

Vision segment gross profit for the three months ended September 29, 2017 increased $7.4 million, or 60.3%, versus the prior year. The increase was primarily attributable to an increase in revenue from the WOM and ThingMagic acquisitions, which increased gross profit by $7.1 million. Vision segment gross profit margin was 34.0% for the three months ended September 29, 2017, versus a gross profit margin of 39.1% for the prior year. The decrease in gross profit margin was primarily attributable to an increase in amortization of inventory fair value adjustments and amortization of developed technology of $4.7 million, which resulted in an 8.1 percentage point decrease in gross profit margin, partially offset by changes in product mix.

Vision segment gross profit for the nine months ended September 29, 2017 increased $14.9 million, or 46.0%, versus the prior year. The increase was primarily attributable to an increase in revenue from the WOM, ThingMagic and Reach acquisitions, which increased gross profit by $9.1 million, and the discontinuation of our radiology products in January 2016. Vision segment gross profit margin was 37.9% for the nine months ended September 29, 2017, versus a gross profit margin of 36.6% for the prior year. The increase in gross profit margin was primarily attributable to changes in product mix, cost savings from prior year restructuring activities, and a $1.6 million charge in the prior year related to the discontinuation of our radiology products, which had a 2.7 percentage point unfavorable impact on gross profit margin for the nine months ended September 30, 2016. Gross profit margin in the nine months ended September 29, 2017 was negatively impacted by an increase in amortization of inventory fair value adjustments and amortization of developed technology of $5.0 million, which resulted in a 4.0 percentage point decrease in gross profit margin.

Precision Motion

Precision Motion segment gross profit for the three months ended September 29, 2017 decreased $0.3 million, or 2.8%, versus the prior year. Precision Motion segment gross profit margin was 39.2% for the three months ended September 29, 2017, versus a gross profit margin of 46.5% for the prior year. The decrease in gross profit margin was attributable to temporary supply chain transition challenges, which led to production inefficiencies and quality impacts.

Precision Motion segment gross profit for the nine months ended September 29, 2017 increased $3.8 million, or 12.4%, versus the prior year. The increase was primarily attributable to an increase in revenue. Precision Motion segment gross profit margin was 43.8% for the nine months ended September 29, 2017, versus a gross profit margin of 45.8% for the prior year. The decrease in gross profit margin was attributable to temporary supply chain transition challenges, which led to production inefficiencies and quality impacts.

Operating Expenses

The following table sets forth operating expenses for the periods noted (in thousands):

	Three Months Ended					Nine Months Ended
	September 29,		September 30,			September 29,		September 30,
	2017		2016			2017		2016
Research and development and engineering	$	11,659	$	7,961		$	29,878	$	24,029
Selling, general and administrative		27,724		20,972			74,666		62,357
Amortization of purchased intangible assets		3,217		2,066			9,413		6,153
Restructuring, acquisition and divestiture related costs		3,834		(835	)		6,232		5,828
Total	$	46,434	$	30,164		$	120,189	$	98,367

Research and Development and Engineering Expenses

Research and development and engineering (“R&D”) expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects. R&D expenses were $11.7 million, or 8.0% of revenue, during the three months ended September 29, 2017, versus $8.0 million, or 8.1% of revenue, during the prior year. R&D expenses increased in terms of total dollars primarily due to R&D expenses from current year acquisitions.

R&D expenses were $29.9 million, or 8.0% of revenue, during the nine months ended September 30, 2017, versus $24.0 million, or 8.4% of revenue, during the prior year. R&D expenses increased in terms of total dollars primarily due to R&D expenses from current and prior year acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, and executive management functions. SG&A expenses were $27.7 million, or 19.0% of revenue, during the three months ended September 29, 2017, versus $21.0 million, or 21.4% of revenue, during the prior year. SG&A expenses increased in terms of total dollars primarily due to current year acquisitions and higher variable compensation associated with the Company’s financial performance. These increases were partially offset by former CEO transition costs of $1.3 million incurred in the three months ended September 30, 2016 that were not incurred in the comparable period in 2017.

SG&A expenses were $74.7 million, or 19.9% of revenue, during the nine months ended September 30, 2017, versus $62.4 million, or 21.8% of revenue, during the prior year. SG&A expenses increased in terms of total dollars primarily due to current and prior year acquisitions and higher variable compensation associated with the Company’s financial performance. These increases were partially offset by former CEO transition costs of $1.3 million incurred in the nine months ended September 30, 2016 that were not incurred in the comparable period in 2017.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $3.2 million, or 2.2% of revenue, during the three months ended September 29, 2017, versus $2.1 million, or 2.1% of revenue, during the prior year. The increase, in terms of total dollars and as a percentage of revenue, was the result of more acquired intangible assets from current year acquisitions.

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $9.4 million, or 2.5% of revenue, during the nine months ended September 30, 2017, versus $6.2 million, or 2.2% of revenue, during the prior year. The increase, in terms of total dollars and as a percentage of revenue, was the result of more acquired intangible assets from current and prior year acquisitions.

Restructuring, Acquisition and Divestiture Related Costs (Gain)

We recorded restructuring, acquisition and divestiture related costs (gain) of $3.8 million during the three months ended September 29, 2017, versus a gain of $0.8 million during the prior year. The increase in restructuring, acquisition and divestiture related costs versus the prior year was primarily due to an increase in acquisition related charges of $3.0 million mostly related to an investment banking success fee related to the acquisition of WOM. Restructuring, acquisition and divestiture related costs (gain) for the three months ended September 30, 2016, included a $1.6 million gain from the sale of our facility in Chatsworth, California.

We recorded restructuring, acquisition and divestiture related costs of $6.2 million during the nine months ended September 30, 2017, versus $5.8 million during the prior year. The increase in restructuring, acquisition and divestiture related costs versus the prior year was primarily due to an increase in acquisition related charges, partially offset by a decrease in restructuring related charges as a result of the 2016 restructuring program which was substantially completed in the prior year.

Operating Income from Continuing Operations by Segment

The following table sets forth operating income from continuing operations by segment for the periods noted (in thousands):

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Operating Income (Loss) from Continuing Operations:
Photonics	$	15,233		$	8,185		$	35,746		$	24,704
Vision		846			2,307			4,893			(4,164	)
Precision Motion		5,493			6,195			20,238			16,608
Unallocated Corporate and Shared Services		(9,299	)		(5,639	)		(22,776	)		(15,915	)
Total	$	12,273		$	11,048		$	38,101		$	21,233

Photonics

Photonics operating income from continuing operations was $15.2 million, or 24.6% of revenue, during the three months ended September 29, 2017, versus $8.2 million, or 18.8% of revenue, during the prior year. The increase in operating income from continuing operations was primarily due to an increase in gross profit of $10.4 million, partially offset by increases in operating expenses, related to the current year acquisition. Photonics operating income from continuing operations for the three months ended September 29, 2017 was negatively affected by a $1.8 million increase in amortization of intangible assets.

Photonics operating income from continuing operations was $35.7 million, or 21.0% of revenue, during the nine months ended September 29, 2017, versus $24.7 million, or 19.0% of revenue, during the prior year. The increase in operating income from continuing operations was primarily due to an increase in gross profit of $20.0 million, partially offset by increases in operating expenses, related to the current year acquisition. Photonics operating income from continuing operations for the nine months ended September 29, 2017 was negatively affected by a $5.9 million increase in amortization of inventory fair value adjustments and amortization of intangible assets.

Vision

Vision operating income from continuing operations was $0.8 million, or 1.5% of revenue, during the three months ended September 29, 2017, versus $2.3 million, or 7.3% of revenue, during the prior year. Vision operating income from continuing operations for the three months ended September 29, 2017 was negatively affected by $6.7 million in amortization of inventory fair value adjustments and amortization of intangible assets, versus $1.9 million in amortization of inventory fair value adjustments and amortization of intangible assets during the prior year.

Vision operating income from continuing operations was $4.9 million, or 3.9% of revenue, during the nine months ended September 29, 2017, versus an operating loss of $4.2 million, or (4.7%) of revenue, during the prior year. The increase in operating income from continuing operations was primarily due to an increase in gross profit of $14.9 million and a decrease in restructuring charges of $3.2 million primarily related to our 2016 restructuring program, which was substantially completed in the prior year, partially offset by increases in other operating expenses related to current year acquisitions. Vision operating income from continuing operations for the nine months ended September 29, 2017 was negatively affected by $10.7 million in amortization of inventory fair value adjustments and amortization of intangible assets, versus $5.7 million in amortization of inventory fair value adjustments and amortization of intangible assets during the prior year. Vision operating income from continuing operations for the nine months ended September 30, 2016 was positively affected by a $1.6 million gain from the sale of our facility in Chatsworth, California.

Precision Motion

Precision Motion operating income from continuing operations was $5.5 million, or 20.9% of revenue, during the three months ended September 29, 2017, versus $6.2 million, or 27.2% of revenue, during the prior year. The decrease in operating income from continuing operations was primarily due to a decrease in gross profit of $0.3 million.

Precision Motion operating income from continuing operations was $20.2 million, or 25.6% of revenue, during the nine months ended September 29, 2017, versus $16.6 million, or 24.7% of revenue, during the prior year. The increase in operating income from continuing operations was primarily due to an increase in gross profit of $3.8 million.

Unallocated Corporate and Shared Services

Unallocated corporate and shared services costs primarily represent costs of corporate and shared services functions that are not allocated to the operating segments, including certain restructuring and most acquisition related costs. These costs for the three months ended September 29, 2017 increased by $3.7 million versus the prior year primarily due to an increase in restructuring and acquisition related costs of $2.6 million. These costs for the nine months ended September 29, 2017 increased by $6.9 million versus the prior year primarily due to an increase in restructuring and acquisition related costs of $3.3 million and an increase in SG&A expenses of $3.6 million as a result of higher variable compensation associated with the Company’s financial performance and an increase in professional services costs.

Other Income and Expense Items

The following table sets forth other income and expense items for the periods noted (in thousands):

	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
	2017			2016			2017			2016
Interest income (expense), net	$	(2,111	)	$	(1,081	)	$	(4,874	)	$	(3,471	)
Foreign exchange transaction gains (losses), net		(661	)		188			(176	)		978
Other income (expense), net		(4	)		686			104			1,699
Gain on acquisition of business		—			—			26,409			—

Interest Income (Expense), Net

Net interest expense was $2.1 million for the three months ended September 29, 2017, versus $1.1 million in the prior year. The increase in net interest expense from the prior year was primarily due to an increase in average debt levels as a result of current year acquisitions. The weighted average interest rate on our senior credit facilities was 3.10% during the three months ended September 29, 2017, versus 3.52% during the three months ended September 30, 2016.

Net interest expense was $4.9 million for the nine months ended September 29, 2017, versus $3.5 million in the prior year. The increase in net interest expense from the prior year was primarily due to an increase in average debt levels as a result of current year acquisitions. The weighted average interest rate on our senior credit facilities was 3.41% during the nine months ended September 29, 2017, versus 3.49% during the nine months ended September 30, 2016.

Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses), net, were $0.7 million net losses for the three months ended September 29, 2017, versus $0.2 million net gains for the prior year. The decrease was due to changes in the value of the U.S. Dollar against the British Pound, Euro and Japanese Yen.

Foreign exchange transaction gains (losses), net, were $0.2 million net losses for the nine months ended September 29, 2017, versus $1.0 million net gains for the prior year. The decrease was due to changes in the value of the U.S. Dollar against the British Pound, Euro and Japanese Yen.

Other Income (Expense), Net

Other income was nominal and $0.1 million for the three and nine months ended September 29, 2017, respectively, versus $0.7 and $1.7 million for the three and nine months ended September 30, 2016, respectively. The decrease in other income was primarily due to earnings from our equity-method investment in Laser Quantum reported in other income (expense) in the prior year. In January 2017, the Company acquired an additional approximately 35% of the outstanding shares of Laser Quantum. As a result of this acquisition, earnings from Laser Quantum are consolidated in the Company’s consolidated financial statements for the three and nine months ended September 29, 2017.

Gain on Acquisition of Business

The gain on acquisition of business during the nine months ended September 29, 2017 was related to a nontaxable gain of $26.4 million recognized as a result of the Laser Quantum acquisition in January 2017.

Income Taxes

The effective tax rate for the three months ended September 29, 2017 was 11.9%, versus 31.1% for the prior year. Our effective tax rate on income from continuing operations of 11.9% for the three months ended September 29, 2017 differs from the Canadian statutory rate of 29.0% due to the mix of income earned in jurisdictions with varying tax rates, losses in jurisdictions with a full valuation allowance, recognition of net tax benefits associated with uncertain tax positions upon expiration of statute of limitations and conclusion of income tax audits, and other discrete items for the period.

The effective tax rate for the nine months ended September 29, 2017 was 11.6%, versus 30.3% for the prior year. Our effective tax rate on income from continuing operations of 11.6% for the nine months ended September 29, 2017 differs from the Canadian statutory rate of 29.0% due to the mix of income earned in jurisdictions with varying tax rates, losses in jurisdictions with a full

valuation allowance, the impact associated with establishing co ntrol over Laser Quantum upon the acquisition of an additional 35% of Laser Quantum’s outstanding shares, recognition of net tax benefits associated with uncertain tax positions upon expiration of statute of limitations and conclusion of income tax audits, and other discrete items for the period. We reported a nontaxable gain of $26.4 million on our previously-held Laser Quantum equity interest and wrote off $1.5 million of Laser Quantum related deferred tax liability, which had a combined 13.7% favorable i mpact on our effective tax rate for the nine months ended September 29, 2017 .

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of our debt and related interest payments. Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. We believe our future operating cash flows will be sufficient to meet our future operating and capital expenditure cash needs for the foreseeable future, including at least the next 12 months. The availability of borrowings under our revolving credit facility provides an additional potential source of liquidity for acquisitions. In addition, we may seek to raise additional capital, which could be in the form of bonds, convertible debt or equity, to fund major business development activities or other future investing cash requirements, subject to approval by the lenders in the Second Amended and Restated Credit Agreement.

Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long term capital with satisfactory terms. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, and market changes in general. See “Risks Relating to Our Common Shares and Our Capital Structure” included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. We cannot assure you that applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary.

In October 2013, the Company’s Board of Directors authorized a share repurchase plan under which the Company may repurchase outstanding shares of the Company’s common stock up to an aggregate amount of $10.0 million. The shares may be repurchased from time to time, at the Company’s discretion, based on ongoing assessment of the capital needs of the business, the market price of the Company’s common stock, and general market conditions. Shares may also be repurchased through an accelerated stock purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common stock to be purchased when the Company would otherwise be prohibited from doing so under insider trading laws. The share repurchase plan does not obligate the Company to acquire any particular amount of 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. The Company expects to fund share repurchases through cash on hand and future cash flows from operations. As of December 31, 2016, the Company had repurchased 282 thousand shares for an aggregate purchase price of $3.8 million at an average price of $13.43 per share. During the nine months ended September 29, 2017, the Company repurchased 14 thousand shares in the open market for an aggregate purchase price of $0.4 million at an average price of $26.41 per share.

As of September 29, 2017, $67.0 million of our $92.1 million cash and cash equivalents was held by subsidiaries outside of Canada and the United States. Generally, our intent is to use cash held in these foreign subsidiaries to fund our local operations or acquisitions by those local subsidiaries and to pay down borrowings under our revolving credit facility. Approximately 58.4% of our outstanding borrowings under our Senior Credit Facilities (defined below) was held in our subsidiaries outside of Canada and the United States. In certain instances, we have identified excess cash for which we may repatriate and we have established deferred tax liabilities for the expected tax cost. Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries.

Second Amended and Restated Credit Agreement

In May 2016, we entered into the second amended and restated senior secured credit agreement (the “Second Amended and Restated Credit Agreement”), consisting of a $75.0 million, 5-year term loan facility and a $225.0 million, 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in May 2021. In August 2017, we entered into a third amendment (the “Third amendment”) to the Second Amended and Restated Credit Agreement. The Third Amendment increased the revolving credit facility commitment by $100 million from $225 million to $325 million and reset the accordion feature

to $125 million for future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million.

As of September 29, 2017, we had term loans of $90.6 million and revolving loans of $156.1 million outstanding under the Second Amended and Restated Credit Agreement.

The Second Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum allowed leverage ratio, and a minimum required fixed charge coverage ratio (as defined in the Second Amended and Restated Credit Agreement). The following table summarizes these financial covenant requirements and our compliance as of September 29, 2017:

	Requirement		Actual
Maximum consolidated leverage ratio		3.00		2.35
Minimum consolidated fixed charge coverage ratio		1.50		5.56

Cash Flows for the Nine Months Ended September 29, 2017 and September 30, 2016

The following table summarizes our cash flows from continuing operations, cash and cash equivalent balances and unused and available funds under our revolving credit facility for the periods indicated (in thousands):

	Nine Months Ended
	September 29, 2017			September 30, 2016
Net cash provided by operating activities of continuing operations	$	41,287		$	34,707
Net cash used in investing activities of continuing operations	$	(174,790	)	$	(8,920	)
Net cash provided by (used in) financing activities of continuing operations	$	155,098		$	(21,130	)

September 29,

2017

December 31,

2016

Cash and cash equivalents

92,149

68,108

Unused and available funds under revolving credit facility

168,931

215,000

Our cash flows for the nine months ended September 29, 2017 were not affected by the $11.3 million redemption value adjustment to the carrying value of Laser Quantum redeemable noncontrolling interest because it was non-cash and was not reported in our consolidated statement of operations.

Operating Cash Flows

Cash provided by operating activities of continuing operations was $41.3 million for the nine months ended September 29, 2017, versus $34.7 million for the prior year. Cash provided by operating activities of continuing operations for the nine months ended September 30, 2017 increased from the prior year primarily due to the increase in income from continuing operations.

Cash provided by operating activities of continuing operations for the nine months ended September 29, 2017 was positively impacted by an increase in our outstanding payables and accrued expenses. Cash provided by operating activities of continuing operations was negatively impacted by an increase in outstanding trade receivables and an increase in inventories, excluding trade receivables and inventories acquired from current year acquisitions, and an increase in income tax payments.

Cash provided by operating activities of continuing operations for the nine months ended September 30, 2016 was positively impacted by an increase in our days payables outstanding which increased from 41 days at December 31, 2015 to 45 days at September 30, 2016 and by a decrease in inventories, excluding inventories acquired from the Reach acquisition, as our inventory turnover ratio increased from 3.6 at December 31, 2015 to 3.8 at September 30, 2016.

Investing Cash Flows

Cash used in investing activities of continuing operations was $174.8 million for the nine months ended September 29, 2017, primarily driven by our acquisitions of WOM, ThingMagic and Laser Quantum. In connection with these acquisitions, we paid $185.0 million in cash considerations, which is reported in the consolidated statement of cash flows as $168.3 million cash outflows from investing activities (net of cash acquired of $16.7 million and working capital adjustments) for the nine months ended September 29, 2017. We also paid $6.5 million for capital expenditures during the nine months ended September 29, 2017.

Cash used in investing activities of continuing operations was $8.9 million for the nine months ended September 30, 2016, primarily related to $9.4 million cash consideration paid for the Reach acqui sition in May 2016 and $7.0 million in capital expenditures, partially offset by $3.6 million in net cash consideration received from the sale of our Orlando, Florida facility in March 2016, $3.4 million in net cash consideration received from the sale of our Chatsworth, California facility in August 2016, and $0.4 million proceeds received from the finalization of the Lincoln Laser acquisition working capital adjustments.

Cash provided by investing activities of discontinued operations for the nine months ended September 30, 2016 was related to $1.5 million cash proceeds released from the escrow for our Scientific Lasers divestiture.

Financing Cash Flows

Cash provided by financing activities of continuing operations was $155.1 million for the nine months ended September 29, 2017, primarily due to $176.8 million of borrowings under our revolving credit facility used to fund a portion of the cash considerations paid for the WOM, ThingMagic and Laser Quantum acquisitions, partially offset by $5.6 million of contractual term loan payments, $10.0 million of optional repayments of borrowings under our revolving credit facility, $2.5 million of contingent consideration payments, $1.8 million of payroll tax payments on stock-based compensation awards, $0.4 million of repurchase of the Company’s common shares and $0.6 million of principal payments under our capital lease obligations. We also paid $0.6 million for debt issuance costs as a result of the Third Amendment to the Second Amended and Restated Credit Agreement entered into in August 2017.

Cash used in financing activities of continuing operations was $21.1 million for the nine months ended September 30, 2016, consisting of $5.6 million of contractual term loan payments, $8.8 million of optional repayments of borrowings under our revolving credit facility, $1.7 million of payroll tax payments on stock-based compensation awards, $1.6 million for the repurchase of the Company’s common shares, and $0.9 million of principal payments under our capital lease obligations. We also paid $2.5 million for debt issuance costs as a result of the Second Amended and Restated Credit Agreement signed in May 2016.

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

Our contractual obligations primarily consist of the principal and interest associated with our debt, operating and capital leases, purchase commitments and pension obligations. Such contractual obligations are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Excluding leases and purchase commitments in the ordinary course of business acquired as a result of the WOM acquisition and the signing of the Third Amendment to the Second Amended and Restated Credit Agreement, through September 29, 2017, we have not entered into any other material new or modified contractual obligations since the end of the fiscal year ended December 31, 2016.

In August 2017, we entered into the Third Amendment to the Second Amended and Restated Credit Agreement. The Third Amendment increased the revolving credit facility commitment under the Second Amended and Restated Credit Agreement by $100 million from $225 million to $325 million and reset the accordion feature to $125 million for future expansion. Additionally, the Third Amendment increased the term loan balance from $65.6 million to $90.6 million.

The following table summarizes contractual obligations at September 29, 2017 related to the Senior Credit Facilities and WOM (in thousands):

Contractual Obligations	Total		2017 (remainder of year)		2018 - 2019		2020 - 2021		Thereafter
Senior Credit Facilities ⁽¹⁾	$	246,694	$	2,300	$	18,400	$	225,994	$	—
Interest on Senior Credit Facilities ⁽²⁾		22,403		1,690		12,834		7,879		—
Capital leases		335		40		220		75		—
Operating leases ⁽³⁾		16,313		573		4,400		4,133		7,207
Purchase commitments ⁽⁴⁾		20,517		13,295		7,222		—		—
Total contractual cash obligations	$	306,262	$	17,898	$	43,076	$	238,081	$	7,207

(1)

As of September 29, 2017, a total of $90.6 million of term loan debt and $156.1 million of revolving credit facility borrowings were outstanding under the Senior Credit Facilities. The term loan is payable in quarterly installments of $2.3 million beginning in October 2017, with the remaining amount due upon maturity in May 2021. The revolving credit facility is due upon maturity in May 2021.

(2)	For the purpose of this calculation, current interest rates on floating rate obligation (LIBOR plus applicable margin, as defined in the Second Amended and Restated Credit Agreement) were used for the remaining contractual life of the term loan.

(3)	These amounts primarily represent the gross amounts due for facilities that are leased by WOM.

(4)	Purchase commitments represent WOM’s unconditional purchase obligations as of September 29, 2017.

Off-Balance Sheet Arrangements

Through September 29, 2017, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.

Critical Accounting Policies and Estimates

The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our consolidated financial statements presented in this periodic report on Form 10-Q are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes to our critical accounting policies through September 29, 2017 from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recent Accounting Pronouncements

See Note 1 to Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk exposures are foreign currency exchange rate fluctuations and interest rate sensitivity. During the three months ended September 29, 2017, there have been no material changes to the information included under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934 (the “Exchange Act”), our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 29, 2017, the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 29, 2017.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 29, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

P ART II—OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company does not believe that the outcome of these claims will have a material adverse effect upon its financial condition or results of operations but there can be no assurance that any such claims, or any similar claims, would not have a material adverse effect upon its financial condition or results of operations.

Item 1A. Risk Factors

The Company’s risk factors are described in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes in the risks affecting the Company since the filing of such Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

I tem 6. Exhibits

List of Exhibits

See the Company’s SEC filings on Edgar at: http://www.sec.gov/ for all Exhibits.

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed/

Furnished
Herewith

2.1

Agreement on the Sale and Transfer of all Shares in W.O.M. World of Medicine GmbH, dated June 6, 2017, between Novanta Europe GmbH, Novanta Inc., and Aton GmbH.

8-K

001-35083

2.1

06/09/17

3.1

Certificate and Articles of Continuance of the Registrant, dated March 22, 1999.

S-3

333-202597

3.1

03/09/15

3.2

By-Laws of the Registrant, as amended

10-Q

000-25705

3.2

04/13/10

3.3

Articles of Reorganization of the Registrant, dated July 23, 2010.

8-K

000-25705

3.1

07/23/10

3.4

Articles of Amendment of the Registrant, dated December 29, 2010.

S-3

333-202597

3.2

03/09/15

3.5

Articles of Amendment of the Registrant, dated May 11, 2016.

8-K

001-35083

10.1

05/12/16

10.1

Third Amendment, dated August 1, 2017, to Second Amended and Restated Credit Agreement (dated as of May 19, 2016) by and among Novanta Inc., Novanta Corporation, Novanta UK Investments Holding Limited, Novanta Europe GmbH, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto.

8-K

001-35083

10.1

08/03/17

10.2†

Novanta Inc. Form of Indemnification Agreement.

10.3†

Novanta Corporation Form of Indemnification Agreement.

31.1

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document.

101.DEF

XBRL Definition Linkbase Document.

101.LAB

XBRL Labels Linkbase Document.

101.PRE

XBRL Presentation Linkbase Document.

† This exhibit constitutes a management contract, compensatory plan, or arrangement.

* Filed herewith

** Furnished herewith

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at September 29, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the three and nine months ended September 29, 2017 and September 30, 2016, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 29, 2017 and September 30, 2016, (iv) Consolidated Statements of Cash Flows for the nine months ended September 29, 2017 and September 30, 2016, and (v) Notes to Consolidated Financial Statements.

S IGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Novanta Inc. (Registrant)

Name	Title	Date

/s/ Matthijs Glastra	Director, Chief Executive Officer	November 1, 2017
Matthijs Glastra

/s/ Robert J. Buckley	Chief Financial Officer	November 1, 2017
Robert J. Buckley

Exhibit 10.2

NOVANTA INC.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (this “ Agreement ”) is dated as of ___________, 2017 and is between Novanta Inc., a corporation organized under the laws of the province of New Brunswick (the “ Company ”), and ____________ (“ Indemnitee ”).

RECITALS

A.	Indemnitee’s service to the Company substantially benefits the Company.

B.	Individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequate protection through insurance or indemnification against the risks of claims and actions against them arising out of such service.

C.	Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance as adequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer of the Company without additional protection.

In order to induce Indemnitee to continue to provide services to the Company, the Company’s board of directors has determined that it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law.

This Agreement is a supplement to and in furtherance of the indemnification provided in the Company’s bylaws, and any resolutions adopted pursuant thereto, and this Agreement shall not be deemed a substitute therefor, nor shall this Agreement be deemed to limit, diminish or abrogate any rights of Indemnitee thereunder.

The parties therefore agree as follows:

1. Definitions .

(a) A “ Change in Control ” shall be deemed to occur upon the earliest to occur after the Effective Date (as defined in that certain Employment Agreement by and between the Company and Indemnitee dated as of ____________) of any of the following events:

(i) Acquisition of Stock by Third Party . Any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company’s then outstanding securities;

(ii) Change in Board Composition . During any period of two consecutive years (not including any period prior to the Effective Date), individuals who

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at the beginning of such period constitute the Company’s board of directors, and any new directors (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 1(a)(i) , 1(a)(iii) or 1(a)(iv) ) whose election by the board of directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Company’s board of directors;

(iii) Corporate Transactions . The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;

(iv) Liquidation . The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; and

(v) Other Events . Any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), whether or not the Company is then subject to such reporting requirement.

For purposes of this Section 1(a) , the following terms shall have the following meanings:

(1) “ Person ” shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided , however , that “ Person ” shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(2) “ Beneficial Owner ” shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided , however , that “ Beneficial Owner ” shall exclude any Person otherwise becoming a Beneficial Owner by reason of (i) the stockholders of the Company approving a merger of the Company with another entity or (ii) the Company’s board of directors approving a sale of securities by the Company to such Person.

(b) “ Corporate Status ” describes the status of a person who is or was a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise.

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(c) “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(d) “ Enterprise ” means the Company and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary.

(e) “ Expenses ” include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees and costs of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond or other appeal bond or their equivalent, and (ii) for purposes of Section 12(d) , Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(f) “ Independent Counsel ” means a law firm, or a partner or member of a law firm, that is experienced in matters of corporation law and neither at the time such status is determined is, nor in the five years prior to such time has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than as Independent Counsel with respect to matters concerning Indemnitee under this Agreement, or other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “ Independent Counsel ” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(g) “ NBBCA ” means the New Brunswick Business Corporations Act.

(h) “ Proceeding ” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, including any appeal therefrom and including without limitation any such Proceeding pending as of the date of this Agreement, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact that Indemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as a director or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise, in each case whether or not

-3-

serving in such capacity at the time any liability or Expense is incurred for which indemnification or advancement of expenses can be provided under this Agreement.

(i) References to “ other enterprises ” shall include employee benefit plans; references to “ fines ” shall include any excise taxes assessed on a person with respect to any employee benefit plan; references to “ serving at the request of the Company ” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “ not opposed to the best interests of the Company ” as referred to in this Agreement.

2. Indemnity in Third-Party Proceedings . The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 2 , Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted honestly and in good faith with a view to the best interests of the Company, and in the case of a criminal or administrative Proceeding that is enforced by a monetary penalty, that person had reasonable grounds for believing that that person’s conduct was lawful.

3. Indemnity in Proceedings by or in the Right of the Company . The Company shall, with the leave of the court, indemnify Indemnitee to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor, provided that the person acted honestly and in good faith with a view to the best interests of the Company, and in the case of a criminal or administrative Proceeding that is enforced by a monetary penalty, that person had reasonable grounds for believing that that person’s conduct was lawful. In respect to any indemnifiable event pursuant to this Section 3 , the Company shall take all necessary action to petition the appropriate court to indemnify the Indemnitee and each Indemnitee shall have the right to participate as a party in such action directly or through his or her counsel; provided , however , the Company shall not be required to advocate any particular position in such action if the Company’s Board of Directors shall have determined that doing so would constitute a breach of the fiduciary duties of directors.

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Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with (a) each successfully resolved claim, issue or matter and (b) any claim, issue or matter related to any such successfully resolved claim, issuer or matter. For purposes of this section, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

5. Indemnification for Expenses of a Witness . To the extent that Indemnitee is, by reason of his or her Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified to the extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

6. Additional Indemnification .

(a) Notwithstanding any limitation in Sections 2 , 3 or 4 , the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with the Proceeding or any claim, issue or matter therein.

(b) For purposes of Section 6(a) , the meaning of the phrase “ to the fullest extent permitted by applicable law ” shall include, but not be limited to:

(i) the fullest extent permitted by the provision of the NBBCA that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the NBBCA; and

(ii) the fullest extent authorized or permitted by any amendments to or replacements of the NBBCA adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.

7. Exclusions . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any Proceeding (or any part of any Proceeding):

(a) for which payment has actually been made to or on behalf of Indemnitee under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid;

(b) for an accounting or disgorgement of profits pursuant to Section 16(b) of the Exchange Act, or similar provisions of federal, state or local statutory law or common law, if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);

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such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act);

(d) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents or other indemnitees, unless (i) the Company’s board of directors authorized the Proceeding (or the relevant part of the Proceeding) prior to its initiation, (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, (iii) indemnification is otherwise authorized in Section 12(d) or (iv) indemnification is otherwise required by applicable law; or

(e) if prohibited by applicable law.

8. Advances of Expenses . The Company shall advance the Expenses incurred by Indemnitee in connection with any Proceeding, and such advancement shall be made as soon as reasonably practicable, but in any event no later than 60 days, after the receipt by the Company of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured and interest free. Indemnitee hereby undertakes to repay any advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. Prior to, and as a prerequisite to, any advancement of Expenses pursuant to this Section 8 , the Company may require the Indemnitee to post a bond or provide similar assurance of Indemnitee’s ability to repay any such advanced Expenses to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 8 shall not apply to the extent advancement is prohibited by law and shall not apply to any Proceeding for which indemnity is not permitted under this Agreement, but shall apply to any Proceeding referenced in Section 7(b) or 7(c) prior to a determination that Indemnitee is not entitled to be indemnified by the Company.

9. Procedures for Notification and Defense of Claim .

(a) Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses as soon as reasonably practicable following the receipt by Indemnitee of notice thereof. The written notification to the Company shall include, in reasonable detail, a description of the nature of the Proceeding and the facts underlying the Proceeding. The failure by Indemnitee to notify the Company will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights.

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procedures set forth in the applicable policies. The Company shall thereafter take all commercially reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

(c) In the event the Company may be obligated to make any indemnity in connection with a Proceeding, the Company shall be entitled to assume the defense of such Proceeding with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee for any fees or expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding. Notwithstanding the Company’s assumption of the defense of any such Proceeding, the Company shall be obligated to pay the fees and expenses of Indemnitee’s counsel to the extent (i) the employment of counsel by Indemnitee is authorized by the Company, (ii) counsel for the Company or Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense such that Indemnitee needs to be separately represented, (iii) the fees and expenses are non-duplicative and reasonably incurred in connection with Indemnitee’s role in the Proceeding despite the Company’s assumption of the defense, (iv) the Company is not financially or legally able to perform its indemnification obligations or (v) the Company shall not have retained, or shall not continue to retain, such counsel to defend such Proceeding. The Company shall have the right to conduct such defense as it sees fit in its sole discretion. Regardless of any provision in this Agreement, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s personal expense. The Company shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Company.

(d) Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonably appropriate.

(e) The Company shall not be liable to indemnify Indemnitee for any settlement of any Proceeding (or any part thereof) without the Company’s prior written consent, which shall not be unreasonably withheld.

(f) The Company shall have the right to settle any Proceeding (or any part thereof) without the consent of Indemnitee.

10. Procedures upon Application for Indemnification .

(a) To obtain indemnification, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee. Any delay in providing the request will not relieve the Company from its obligations under this Agreement, except to the extent such failure is prejudicial.

(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a) , a determination with respect to Indemnitee’s entitlement thereto pursuant to and in accordance with the terms hereof shall be made in the specific case (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Company’s board of directors,

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a copy of which shall be delivered to Indemnitee or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Company’s board of directors, by the stockholders of the Company. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company, to the extent permitted by applicable law.

(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 10(b) , the Independent Counsel shall be selected as provided in this Section 10(c) . If a Change in Control shall not have occurred, the Independent Counsel shall be selected by a majority of a quorum of the Company’s Disinterested Directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Company’s board of directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within ten days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after the later of (i) submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereof and (ii) the final disposition of the Proceeding, the parties have not agreed upon an Independent Counsel, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 10(b) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 12(a) of this Agreement, the Independent Counsel shall be discharged and

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relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

(d) The Company agrees to pay the reasonable fees and expenses of any Independent Counsel and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

11. Presumptions and Effect of Certain Proceedings .

(a) In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption in connection with the making by such person, persons or entity of any determination contrary to that presumption.

(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.

(c) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith to the extent Indemnitee relied in good faith on (i) the records or books of account of the Enterprise, including financial statements, (ii) information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, (iii) the advice of legal counsel for the Enterprise or its board of directors or counsel selected by any committee of the board of directors or (iv) information or records given or reports made to the Enterprise by an independent certified public accountant, an appraiser, investment banker or other expert selected with reasonable care by the Enterprise or its board of directors or any committee of the board of directors. The provisions of this Section 11(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.

(d) Neither the knowledge, actions nor failure to act of any other director, officer, agent or employee of the Enterprise shall be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

12. Remedies of Indemnitee .

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pursuant to Section 10 of this Agreement within 90 days after the later of the receipt by the Company of the request for indemnification or the final disposition of the Proceeding, (iv) payment of indemnification pursuant to this Agreement is not made (A) within ten days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect to indemnification pursuant to Sections 4 , 5 and 12(d) of this Agreement, within 30 days after receipt by the Company of a written request therefor, or (v) the Company or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of his or her entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration with respect to his or her entitlement to such indemnification or advancement of Expenses, to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a) ; provided , however , that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 4 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration in accordance with this Agreement.

(b) Neither (i) the failure of the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders that Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has or has not met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, or arbitration, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 12 , the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(c) To the fullest extent not prohibited by law, the Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. If a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12 , absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statements not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

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(d) To the extent not prohibited by law, the Company shall indemnify Indemnitee against all Expenses that are incurred by Indemnitee in connection with any action for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company to the extent Indemnitee is successful in such action, and, if requested by Indemnitee, shall (as soon as reasonably practicable, but in any event no later than 60 days, after receipt by the Company of a written request therefor) advance such Expenses to Indemnitee, subject to the provisions of Section 8 .

(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall be required to be made prior to the final disposition of the Proceeding.

13. Contribution . To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amounts incurred by Indemnitee, whether for Expenses, judgments, fines or amounts paid or to be paid in settlement, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the events and transactions giving rise to such Proceeding; and (ii) the relative fault of Indemnitee and the Company (and its other directors, officers, employees and agents) in connection with such events and transactions.

14. Non-exclusivity . The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. To the extent that a change in law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company’s bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change, subject to the restrictions expressly set forth herein or therein. Except as expressly set forth herein, no right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. Except as expressly set forth herein, the assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

15. Intentionally Omitted .

16. No Duplication of Payments . The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received payment for such amounts under any insurance policy, contract, agreement or otherwise.

17. Insurance . The Company shall maintain an insurance policy or policies providing directors and officers liability insurance covering the Indemnitee in a form that is not less favorable

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to the Indemnitee than the insurance policy or policies in effect for directors and officers liability insurance on the date of this Agreement, including the policy limits, self-insured retentions, attribution rules, exclusions and riders to such policies. If such comparable insurance is not commercially available, the Company shall maintain insurance policy or policies providing directors and officers liability insurance that is as substantially similar as commercially available; provided , however , Indemnitee shall be covered by such policy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position. The Company will not amend, replace, terminate or rescind any directors and officers liability insurance covering Indemnitee without giving Indemnitee thirty (30) days advance written notice of such event. The Company will pay all premiums relating to such policies on or prior to the due dates therefor.

18. Subrogation . In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

19. Services to the Company . Indemnitee agrees to serve as a director or officer of the Company or, at the request of the Company, as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation or is removed from such position. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries or any Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may be otherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of the Company, the Company’s bylaws or the NBBCA. No such document shall be subject to any oral modification thereof.

20. Duration . This Agreement shall continue until and terminate upon the later of (a) ten years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of any other Enterprise, as applicable; or (b) one year after the final termination of any Proceeding, including any appeal, then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement relating thereto.

21. Successors . This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators.

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22. Severability . Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order or other applicable law, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

23. Enforcement . The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.

24. Entire Agreement . This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided , however , that this Agreement is a supplement to and in furtherance of the Company’s bylaws and applicable law.

25. Modification and Waiver . No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by the parties hereto. No amendment, alteration or repeal of this Agreement shall adversely affect any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. No waiver of any of the provisions of this Agreement shall constitute or be deemed a waiver of any other provision of this Agreement nor shall any waiver constitute a continuing waiver.

26. Notices . All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand, messenger or courier service addressed:

(a) if to Indemnitee, to Indemnitee’s address, facsimile number or electronic mail address as shown on the signature page of this Agreement or in the Company’s records, as may be updated in accordance with the provisions hereof; or

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not constitute notice) to each of James C. Gorton, Esq., Latham & Watkins LLP, 885 Third Avenue, New York, New York 10022 and Ron Honig, Vice President, Global Legal Affairs, Novanta Inc., 125 Middlesex Turnpike, Bedford, MA 01730.

Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (or if sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with the courier), (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent via facsimile, upon confirmation of facsimile transfer or, if sent via electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day.

27. Applicable Law . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the internal laws of the Province of New Brunswick and the laws of Canada applicable therein, without regard to its conflict of laws rules.

28. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

29. Captions . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

( Signature page follows )

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The parties are signing this Indemnification Agreement as of the date stated in the introductory sentence.


	NOVANTA INC.
	By:
		Name: Title:


	INDEMNITEE

	Residence Address:

exhibit 10.3

NOVANTA CORPORATION

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (this “ Agreement ”) is dated as of ___________, 2017 and is between Novanta Corporation, a corporation organized under the laws of the state of Michigan (the “ Company ”), and ____________ (“ Indemnitee ”).

RECITALS

A.	Indemnitee’s service to the Company will substantially benefit the Company.

B.	Individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequate protection through insurance or indemnification against the risks of claims and actions against them arising out of such service.

C.	Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance as adequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer of the Company without additional protection.

In order to induce Indemnitee to provide services to the Company, the Company’s board of directors has determined that it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law.

The parties therefore agree as follows:

1. Definitions .

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(ii) Change in Board Composition . During any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Company’s board of directors, and any new directors (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 1(a)(i) , 1(a)(iii) or 1(a)(iv) ) whose election by the board of directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Company’s board of directors;

For purposes of this Section 1(a) , the following terms shall have the following meanings:

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(c) “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(d) “ Enterprise ” means the Company, any direct and indirect subsidiaries and branches of the Company, any direct or indirect subsidiary of Novanta Inc., and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary.

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Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(g) “ MBCA ” means the Michigan Business Corporations Act.

(h) “ Proceeding ” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, including any appeal therefrom and including without limitation any such Proceeding pending as of the date of this Agreement, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact that Indemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as a director or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of the Company or any other Enterprise, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification or advancement of expenses can be provided under this Agreement.

2. Indemnity in Third-Party Proceedings . The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 2 , Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted honestly and in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company or its stockholders, and in the case of a criminal Proceeding, that person had no reasonable cause to believe his conduct was unlawful.

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3. Indemnity in Proceedings by or in the Right of the Company . The Company shall indemnify Indemnitee to the fullest extent permitted by applicable law against all Expenses and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor, provided that the person acted honestly and in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company or its stockholders. Indemnification shall not be made under this Section 3 in respect of any claim, issue or matter as to which the Indemnitee has been found liable to the Company, except to the extent permitted by applicable law.

4. Indemnification for Expenses of a Party Who is Wholly or Partly Successful . To the extent that Indemnitee is a party to or a participant in and is successful (on the merits or otherwise) in defense of any Proceeding or any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith and in connection with any Proceeding or claim brought to enforce the indemnification provided by this Section 4 . To the extent permitted by applicable law, if Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, in defense of one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with (a) each successfully resolved claim, issue or matter and (b) any claim, issue or matter related to any such successfully resolved claim, issuer or matter. For purposes of this section, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

6. Additional Indemnification .

(b) For purposes of Section 6(a) , the meaning of the phrase “ to the fullest extent permitted by applicable law ” shall include, but not be limited to:

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(i) the fullest extent permitted by the provision of the MBCA that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the MBCA; and

(ii) the fullest extent authorized or permitted by any amendments to or replacements of the MBCA adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.

(c) for any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act(including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act);

(e) if prohibited by applicable law.

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invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured and interest free. Indemnitee hereby undertakes to repay any advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. Advances shall be made without regard to Indemnitee’s ultimate ability to repay the Expenses and without regard to Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement. This Section 8 shall not apply to the extent advancement is prohibited by law and shall not apply to any Proceeding for which indemnity is not permitted under this Agreement, but shall apply to any Proceeding referenced in Section 7(b) or 7(c) prior to a determination that Indemnitee is not entitled to be indemnified by the Company.

9. Procedures for Notification and Defense of Claim .

(b) If, at the time of the receipt of a notice of a Proceeding pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of the Proceeding to the insurers in accordance with the procedures set forth in the applicable policies. The Company shall thereafter take all commercially reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

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counsel to the extent (i) the employment of counsel by Indemnitee is authorized by the Company, (ii) counsel for the Company or Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense such that Indemnitee needs to be separately represented, (iii) the fees and expenses are non-duplicative and reasonably incurred in connection with Indemnitee’s role in the Proceeding despite the Company’s assumption of the defense, (iv) the Company is not financially or legally able to perform its indemnification obligations or (v) the Company shall not have retained, or shall not continue to retain, such counsel to defend such Proceeding. The Company shall have the right to conduct such defense as it sees fit in its sole discretion. Regardless of any provision in this Agreement, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s personal expense. The Company shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Company.

(d) Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonably appropriate.

(f) The Company shall have the right to settle any Proceeding (or any part thereof) without the consent of Indemnitee.

10. Procedures upon Application for Indemnification .

(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a) , a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto pursuant to and in accordance with the terms hereof shall be made in the specific case (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of

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directors, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Company’s board of directors, by the stockholders of the Company. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company, to the extent permitted by applicable law.

(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 10(b) , the Independent Counsel shall be selected as provided in this Section 10(c) . The Independent Counsel shall be selected by a majority of a quorum of the Company’s Disinterested Directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. Indemnitee may, within ten days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after the later of (i) submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereof and (ii) the final disposition of the Proceeding, the parties have not agreed upon an Independent Counsel, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so

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resolved or the person so appointed shall act as Independent Counsel under Section 10(b) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 12(a) of this Agreement, the Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

11. Presumptions and Effect of Certain Proceedings .

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way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.

12. Remedies of Indemnitee .

(a) Subject to Section 12(e) , in the event that (i) a determination is made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 or 12(d) of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 10 of this Agreement within 90 days after the later of the receipt by the Company of the request for indemnification or the final disposition of the Proceeding, (iv) payment of indemnification pursuant to this Agreement is not made (A) within ten days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect to indemnification pursuant to Sections 4 , 5 and 12(d) of this Agreement, within 30 days after receipt by the Company of a written request therefor, or (v) the Company or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of his or her entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration with respect to his or her entitlement to such indemnification or advancement of Expenses, to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a) ; provided , however , that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 4 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration in accordance with this Agreement.

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Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders that Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has or has not met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, or arbitration, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 12 , the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall be required to be made prior to the final disposition of the Proceeding.

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15. Intentionally Omitted .

17. Insurance . To the extent that the Company maintains an insurance policy or policies providing directors and officers liability insurance, Indemnitee shall be covered by such policy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position. The Company will not amend, replace, terminate or rescind any directors’ and officers’ liability insurance covering Indemnitee without giving Indemnitee thirty (30) days advance written notice of such event. The Company will pay all premiums relating to such policies on or prior to the due dates therefor.

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19. Services to the Company . Indemnitee agrees to serve as a director or officer of the Company or, at the request of the Company, as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation or is removed from such position. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries or any Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may be otherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of the Company, the Company’s bylaws or the MBCA. No such document shall be subject to any oral modification thereof.

20. Duration . This Agreement shall continue until and terminate upon the later of (a) ten years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or as a director, officer, partner, trustee, employee or agent of any other Enterprise, as applicable; or (b) one year after the final termination of any Proceeding, including any appeal, then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement relating thereto.

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(b) if to the Company, to the attention of the Chief Executive Officer or Chief Financial Officer of the Company at 125 Middlesex Turnpike, Bedford, MA 01730, or at such other current address as the Company shall have furnished to Indemnitee, with a copy (which shall not constitute notice) to each of James C. Gorton, Esq., Latham & Watkins LLP, 885 Third Avenue, New York, New York 10022 and Ron Honig, Vice President, Global Legal Affairs, Novanta Inc., 125 Middlesex Turnpike, Bedford, MA 01730.

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normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day.

27. Applicable Law . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Michigan, without regard to its conflict of laws rules.

29. Captions . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

( Signature page follows )

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The parties are signing this Indemnification Agreement as of the date stated in the introductory sentence.


	NOVANTA CORPORATION
	By:
		Name: Title:


	INDEMNITEE

	Residence Address:

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Matthijs Glastra, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Novanta Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 1, 2017

/s/ Matthijs Glastra

Matthijs Glastra

Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Robert J. Buckley, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Novanta Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 1, 2017

/s/ Robert J. Buckley

Robert J. Buckley

Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Novanta Inc. (the “Company”) on Form 10-Q for the period ended September 29, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthijs Glastra, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Matthijs Glastra

Matthijs Glastra

Chief Executive Officer

November 1, 2017

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Novanta Inc. (the “Company”) on Form 10-Q for the period ended September 29, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Buckley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert J. Buckley

Robert J. Buckley

Chief Financial Officer

November 1, 2017