What changed in NOVANTA INC's 10-K — 2022 vs 2023

Recent Developments Acquisition of Motion Solutions On January 2, 2024, we completed the acquisition of Motion Solutions Parent Corp. (“Motion Solutions”), an Irvine, California-based provider of highly engineered integrated solutions, specializing in proprietary precision motion and advanced motion control solutions, for a total purchase price of $192.2 million in cash, subject to customary closing and net working capital adjustments.

Motion Solutions acquisition will be included in our Medical Solutions reportable segment. Business Environment Inflationary Pressures In 2023, we continued to experience higher than normal inflation of raw materials and component prices and labor costs.

We have generally been able to offset increases in these costs through various productivity cost reduction initiatives, as well as increasing our selling prices to pass through some of these higher costs to our customers. However, our ability to raise our selling prices depends on market conditions and competitive dynamics.

Given the timing of our actions compared to the timing of these inflationary pressures, there may be periods during which we are unable to fully recover the increases in our costs. Additionally, the inflationary pressures have given rise to significant increases in interest rates as various governments used monetary policy to contain and reduce inflation.

As a result, our weighted average interest rate increased from approximately 5.1% as of December 31, 2022 to approximately 6.2% as of December 31, 2023. Geopolitical Conflicts In February 2022, Russian forces invaded Ukraine.

In response, the U.S., the European Union (“EU”), and several other countries imposed economic and trade sanctions and other restrictions (collectively, “global sanctions”) targeting Russia and Belarus. Russia then imposed retaliatory economic measures against the U.S., the EU, and several other countries. Our historical sales to Russia were not material.

We also do not have any assets, employees or third-party contractors in Russia or Ukraine. However, the duration of the conflict and further sanctions could have further impact on the global economy and inflation. In early October 2023, Israel declared war on Hamas after the Palestinian militant group launched a surprise cross-border raid in Israel.

We are monitoring the social, political and economic environment in Israel and in the region for any impact on our businesses. Our historical sales to Israel were around 1% of our total sales. We do not have any assets, employees, or third-party contractors in Israel.

Due to the uncertainty around the duration of the conflict, future impacts are unknown to our businesses. 2 Acquisitions We continuously evaluate our business mix and financial performance and have executed a series of acquisitions in line with our strategy.

The following table summarizes significant acquisitions since 2014: Company Year of Acquisition Total Purchase Price (in millions) Motion Solutions Parent Corp. 2024 $ 192.2 MPH Medical Devices S.R.O. 2022 $ 22.6 ATI Industrial Automation, Inc. 2021 $ 223.9 Schneider Electric Motion USA, Inc. 2021 $ 118.6 ARGES GmbH 2019 $ 73.2 Zettlex Holdings Limited 2018 $ 32.0 Laser Quantum Limited (24%) (1) 2018 $ 45.1 Laser Quantum Limited (35%) 2017 $ 31.1 W.O.M.

World of Medicine GmbH 2017 $ 134.9 JADAK LLC 2014 $ 94.8 (1) After the acquisition of the remaining (approximately 24%) noncontrolling interests of Laser Quantum Limited (“Laser Quantum”) in September 2018, we owned 100% of the outstanding equity of Laser Quantum.

Segments During the first quarter of 2023, we changed the names of our reportable segments from “Photonics” to “Precision Medicine and Manufacturing”, from “Vision” to “Medical Solutions”, and from “Precision Motion” to “Robotics and Automation”, respectively.

The segment name changes did not result in any change to the compositions of our segments and therefore did not result in any change to historical results. We have determined that we have three reportable segments. Our reportable segments have been identified based on commonality and adjacency of technologies, applications, and customers amongst our individual product lines.

We evaluate the performance of, and allocate resources to, our segments based on revenue, gross profit and operating profit.

The following table shows the external revenues, gross profit margin and operating profit for each of the segments for the year ended December 31, 2023 (dollars in millions): Revenue Gross Profit Margin Operating Profit Precision Medicine and Manufacturing $ 283.0 49.1 % $ 69.3 Medical Solutions $ 325.2 41.7 % $ 41.9 Robotics and Automation $ 273.5 47.9 % $ 48.4 See Note 18 to Consolidated Financial Statements for additional financial information about our reportable segments.

Precision Medicine and Manufacturing The Precision Medicine and Manufacturing segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, solid state laser, ultrafast laser, and optical light engine products to customers worldwide.

The segment serves highly demanding photonics-based applications for advanced industrial processes, medical and life science imaging, DNA sequencing, and medical laser procedures, particularly ophthalmology applications. The vast majority of the segment’s product offerings are sold to OEM customers.

The segment sells the majority of these products directly, utilizing a highly technical sales force, and also sells some indirectly, through resellers and distributors. 3 The Precision Medicine and Manufacturing segment is comprised of the following four product lines: Product Lines Key End Markets Brand Names Description Laser Beam Delivery Components Advanced Industrial and Medical Cambridge Technology Galvanometer and polygon optical scanning components.

These products provide precise control and delivery of laser beams through motorized manipulation of mirrors and optical elements and are integrated by OEM manufacturers with their controlling hardware and software. Advanced industrial applications include additive manufacturing, packaging converting, laser marking, micromachining and metrology. Medical applications include optical coherence tomography imaging, microscopy, and laser-based vision correction.

Laser Beam Delivery Solutions Advanced Industrial and Medical Cambridge Technology, Synrad, Laser Quantum Galvanometer and polygon optical scan heads that provide precise control and delivery of laser beams through motorized manipulation of mirrors and optical elements in multi-axis scan heads, highly integrated scanning subsystems, and controlling hardware and software.

Optical light engine products that integrate lasers into light engines with full beam parameter control. Advanced industrial applications include additive manufacturing, packaging converting, laser marking, micromachining and metrology. Medical applications include DNA sequencing, optical coherence tomography imaging, microscopy, super-resolution imaging, and laser-based vision correction.

CO 2 Lasers Advanced Industrial Synrad Continuous and pulsed CO 2 lasers with power ranges from 5 to 400 watts. Applications include coding, marking, engraving, cutting and trimming of non-metals, fine materials processing, additive manufacturing, packaging converting, and medical applications in dental and dermatology.

Solid State and Ultrafast Lasers Medical and Advanced Industrial Laser Quantum Diode-pumped solid-state lasers and ultrafast lasers in the visible to near-infrared.

Applications include DNA sequencing, microscopy, micromachining and super-resolution imaging. 4 Medical Solutions The Medical Solutions segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless technologies, video recorders, and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies, and embedded touch screen solutions.

The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells the majority of these products directly, utilizing a highly technical sales force, and also sells some indirectly, through resellers and distributors.

The Medical Solutions segment is comprised of the following nine product lines: Product Lines Key End Markets Brand Names Description Medical Insufflators, Pumps and Accessories Medical WOM Insufflators, pumps, light sources and video couplers, gamma probes and related accessories and consumables for minimally invasive surgery.

Visualization Solutions Medical NDS High definition, 4K and 4K 3D visualization solutions for minimally invasive surgery. Video Processing, Streaming and Capture Medical NDS, Med X Change Imaging management for visual information, including real-time distribution, documentation, control, recording, and streaming for multiple imaging modalities for surgical applications. High definition wireless transmission of video signals in minimally invasive surgical equipment.

Touch Panel Displays Medical and Advanced Industrial Reach Technology Embedded capacitive and resistive touch panel technology that delivers high-performance solutions. Machine Vision Medical and Advanced Industrial JADAK Camera-based machine vision products and solutions used for image analysis within medical devices and advanced industrial applications.

RFID Technologies Medical and Advanced Industrial JADAK, ThingMagic RFID technologies via High-Frequency (HF) and Ultra-High Frequency (UHF) readers, writers and antennas for applications such as surgical part tracking and counterfeit detection. Barcode Identification Medical and Advanced Industrial JADAK Embedded and handheld data collection products for barcode identification.

Thermal Chart Recorders Medical JADAK Rugged thermal chart recorders for patient monitoring, defibrillator equipment, blood gas analyzers, and pulse oximeters.

Light and Color Measurement Advanced Industrial Photo Research Light and color measurement devices, including spectroradiometers, photometers, and color characterization software, used in research and development and quality control testing. 5 Robotics and Automation The Robotics and Automation segment designs, manufactures and markets optical and inductive encoders, precision motors, servo drives and motion control solutions, integrated stepper motors, intelligent robotic end-of-arm technology solutions, and air bearing spindles to customers worldwide.

The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells the majority of these products directly, utilizing a highly technical sales force, and also sells some indirectly, through resellers and distributors.

The Robotics and Automation segment is comprised of the following seven product lines: Product Lines Key End Markets Brand Names Description Optical Encoders Advanced Industrial and Medical Celera Motion Optical encoders for precision motion control and sensing in semiconductor and electronics manufacturing, industrial and medical robotics, metrology, satellite communications, medical devices, and laboratory and diagnostics equipment.

Inductive Encoders Advanced Industrial and Medical Celera Motion, Zettlex Inductive encoders for precision motion control and sensing in satellite communications, medical devices, industrial and medical robotics, autonomous vehicles, and laboratory and diagnostics equipment.

Precision Motors Advanced Industrial and Medical Celera Motion, Applimotion, IMS Direct drive motor components and integrated motion sub-assemblies for precision motion control in semiconductor and electronics manufacturing, industrial and medical robotics, autonomous vehicles, metrology, satellite communications, medical devices, and laboratory and diagnostics equipment.

Servo drives and motion control solutions Advanced Industrial and Medical Celera Motion, Ingenia Precision motion servo drives and control software used in industrial robotics, medical robotics, autonomous vehicles, satellite communications, and medical equipment. Integrated Stepper Motors Advanced Industrial and Medical IMS Integrated motion control solutions and electronic controls for automation equipment, agricultural robotics, industrial robotics, medical and life science applications.

Intelligent robotic end-of-arm technology solutions Advanced Industrial and Medical ATI Robotic accessories and end-of-arm tooling, including tool changers, multi-axis force torque sensors, utility couplers, material removal tools, collision sensors, and compliance devices. Applications include advanced industrial and medical robotics. Air Bearing Spindles Advanced Industrial Westwind High-speed and precision air bearings and air bearing spindles.

Applications include printed circuit board (“PCB”) manufacturing, automotive coating, and semiconductor manufacturing equipment. End Markets We primarily operate in two end markets: the medical market and the advanced industrial market. Medical Market For the year ended December 31, 2023, the medical market accounted for approximately 54% of our revenue.

Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending, growth rates of surgical procedures, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, changes in technology requirements, timing of OEM customers’ product development and new product launches, changes in customer or patient preferences, and general demographic trends. 6 Advanced Industrial Market For the year ended December 31, 2023, the advanced industrial market accounted for approximately 46% of our revenue.

Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, the financial condition of our customers, changes in regulatory requirements and laws, and general economic conditions.

We believe that the Purchasing Managers’ Index 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. Customers We have a diverse group of customers that includes companies that are global leaders in the medical and advanced industrial markets.

Many of our customers participate in several market industries. During the year ended December 31, 2023, revenue from an OEM customer primarily in the medical end market accounted for approximately 10% of our consolidated revenue. No customer accounted for 10% or more of our consolidated revenue during the years ended December 31, 2022 or 2021, respectively.

Our customers include many OEMs who integrate our products into their systems for sale to end users.

A typical OEM customer will usually evaluate our products and our ability to provide application knowledge and expertise, post-sales application support and services, supply chain management over long durations, manufacturing capabilities, product quality, global presence, and product customization before deciding to incorporate our products into their products or systems.

Customers generally choose suppliers based on several factors, including product performance, reliability, application support, price, breadth of the supplier’s product offerings, the financial condition of the supplier, and the geographical coverage offered by the supplier.

Once certain products have been designed into a given OEM customer’s product or system, there are generally significant barriers to subsequent supplier changes until the end of the product or system life cycle, especially in the medical market.

Seasonality While our revenues are not highly seasonal on a consolidated basis, sales from some of our individual product lines are impacted in the first quarter by the lower seasonal spending patterns of our customers due to their annual capital budgeting cycles.

Backlog As of December 31, 2023 and 2022, our consolidated backlog was approximately $473.1 million and $611.6 million, respectively. Most orders included in backlog represent open orders for products and services that, based on management’s projections, have a reasonable probability of being delivered over the subsequent twelve months.

The ability to reschedule orders included in backlog varies depending on the customer and the order.

Management believes that backlog typically is not a complete indicator of future business prospects for any of our reportable segments due to the ability of customers to reschedule orders based on their updated demand, changes in customer order lead times, and potential fluctuations in our supply chain and manufacturing capacity.

Therefore, backlog as of any date should not be relied upon as a complete indicator of our revenues for any future period.

During 2023, several of our product lines continued to experience longer than normal lead times for customer orders, caused by higher customer demand, the unprecedented raw material shortages and supply chain disruptions in the previous two years, as well as other economic and geopolitical factors.

Manufacturing The majority of our manufacturing functions are performed internally, while a relatively small portion of our manufacturing processes are outsourced to highly qualified third parties primarily for cost related reasons. Products offered by our Precision Medicine and Manufacturing segment are manufactured at facilities in Bedford, Massachusetts; Mukilteo, Washington; Taunton and Manchester, United Kingdom; and Suzhou, China.

Products offered by our Medical Solutions segment are primarily manufactured at facilities in Syracuse, New York; Mukilteo, Washington; Přelouč, Czech Republic; and Ludwigsstadt, Germany. Products offered by our Robotics and Automation segment are manufactured at facilities in Bedford, Massachusetts; Apex, North Carolina; Marlborough, Connecticut; Rocklin, California; and Suzhou, China.

The majority of our products are produced in manufacturing operations certified under either ISO 9001 certification or ISO 13485 certification. All of our manufacturing operations have been certified under ISO 14001. More than 50% of our manufacturing operations are certified under ISO 45001.

Certain visualization solutions, imaging informatics, and medical insufflators, pumps, disposables, and accessories products are manufactured under current good manufacturing practices (cGMPs), which is a requirement for medical devices by the United States Food and Drug Administration (the “FDA”). 7 Marketing, Sales and Distribution We sell our products globally, primarily through our direct sales force.

We also use distributors, including manufacturers’ representatives, to either augment our selling effort or serve a local market where we have no direct sales force. Our local sales, applications, and service teams and our distributors work closely with our customers to ensure customer satisfaction with our products.

We have sales and service centers located in the United States, Europe and Asia. To support our sales efforts, we maintain and continue to invest in a number of application centers around the world, where our application experts work closely with customers on integrating and using our solutions in their equipment.

We currently maintain service and application centers in the United States, Europe and Asia. Competition We encounter strong competition in virtually all the markets, applications, and technologies we serve. Due to the wide and diverse range of products and technologies, we face many different types of competitors and competition.

Our competitors range from large foreign and domestic organizations, which produce a comprehensive array of goods and services and may have greater financial and other resources than we do, to small organizations producing a limited number of highly specialized products or services for specialized applications.

The competitive climate of many of the end market applications we serve is characterized by rapidly evolving technology and customer demands that require continuous investments by us.

Our competitive success requires advances in technology and product performance, improved price-for-performance ratios, demonstrated increased throughput performance for our customers' products, lower total cost of ownership, product quality, depth of our application knowledge and expertise, reputation amongst customers, customer service and technical support, speed to market, geographical presence, and deep customer relationships.

We believe that our products offer many competitive advantages for our customers and the breadth of our technologies gives us deep applications knowledge to better serve our customers’ needs.

Raw Materials, Components and Supplies Each of our businesses uses a wide variety of raw materials, components and parts that are generally available from alternative sources of supply and in adequate quantities from domestic and foreign sources.

In some instances, we are able to design and/or re-engineer the parts and components used in our products in case of supply chain shortages. For certain raw materials, components and parts used in the production of some of our principal products, we have identified only a limited number of suppliers or, in some instances, a single source of supply.

We also rely on a limited number of suppliers to manufacture subassemblies for some of our products. For a further discussion of the importance and risks associated with our supply chain, see applicable risk factors under Item 1A of this Annual Report on Form 10-K.

Patents and Intellectual Property We rely upon a combination of copyrights, patents, trademarks, trade secret laws and restrictions on disclosure to protect our intellectual property rights. We hold several registered and pending patents in the United States and other countries. In addition, we also have trademarks registered in the United States and other countries.

We will continue to actively pursue applications for new patents and trademarks as we deem appropriate. However, there can be no assurance that any other patents will be issued to us or that such patents, if and when issued, will provide any protection or benefit to us.

Although we believe that our patents and pending patent applications are important, we rely upon several additional factors that are essential to our business success, including: market position, technological innovation, know-how, application knowledge and product performance. However, there can be no assurance that we will be able to sustain these advantages.

Considering the diversified nature of our businesses, we do not believe that any individual patent is material to our business as a whole. We also protect our proprietary rights by controlling access to our proprietary information and by maintaining confidentiality agreements with our employees, consultants, and certain customers and suppliers.

For a further discussion of the importance of risks associated with our intellectual property rights, see applicable risk factors under Item 1A of this Annual Report on Form 10-K. Human Capital We believe that our employees are our most important asset. The Chief Human Resources Officer (“CHRO”) is responsible for developing and executing our human capital strategy.

This includes the acquisition, development, and retention of talent to deliver on our strategy as well as the design of employee compensation and benefits, and diversity, equity, and inclusion (“DEI”) initiatives.