3. Business Combinations

2017 Acquisitions

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 surgery market, for a total purchase price of €118.1 million ($134.9 million). The acquisition was financed with a €118.0 million ($134.8 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 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 accrued liabilities and unrecognized tax benefits.

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

	Amount
Cash	$	1,400
Accounts receivable		11,807
Inventories		14,549
Property, plant and equipment		21,940
Intangible assets		59,732
Goodwill		55,632
Other assets		2,660
Total assets acquired		167,720

Accounts payable		4,398
Other liabilities		8,681
Deferred tax liabilities		19,707
Total liabilities assumed		32,786
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		35,634	12 years
Trademarks and trade names		2,284	10 years
Backlog		228	1 year
Total	$	59,732

The purchase price allocation resulted in $59.7 million of identifiable intangible assets and $55.6 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 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 $49.4 million and an operating loss from continuing operations before income taxes of $1.2 million for the year ended December 31, 2017. Operating loss from continuing operations before income taxes for the year ended December 31, 2017 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $6.0 million.

Laser Quantum

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, ultrafast 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 the 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 (“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 twelve months ended December 31, 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 the additional equity interest in Laser Quantum 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 final purchase price allocation is as follows (in thousands):

	Amount
Cash	$	15,343
Accounts receivable		2,739
Inventories		6,264
Property, plant and equipment		2,286
Intangible assets		38,955
Goodwill		31,168
Other assets		717
Total fair value of assets		97,472

Accounts payable		796
Other liabilities		2,068
Deferred tax liabilities		7,337
Total fair value of liabilities		10,201
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 $31.2 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 $44.7 million and income from continuing operations before income taxes of $11.3 million for the year ended December 31, 2017. Operating income from continuing operations before income taxes for the year ended December 31, 2017 included $7.1 million of expenses associated with the amortization of inventory fair value step-up and purchased intangible assets.

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. 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 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 reportable 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 acquired and liabilities assumed. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date.

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

	Amount
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 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) 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 $8.6 million and operating income from continuing operations before income taxes of $0.4 million for the year ended December 31, 2017. Operating income from continuing operations before income taxes for the year ended December 31, 2017 included amortization of inventory fair value adjustments and amortization of purchased intangible assets of $1.5 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.

Unaudited Pro Forma Information

The unaudited pro forma information 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 acquisitions, elimination of the gain from the Laser Quantum acquisition and income from the Company’s previous equity method investment in Laser Quantum, and the related tax effects, as though the acquisitions had been consummated as of January 1, 2016. The unaudited 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.


	Year Ended December 31,
	2017		2016
Revenue	$	562,818	$	487,960
Income from continuing operations	$	39,630	$	21,020
Earnings per share attributable to Novanta Inc. – Basic (1)	$	0.49	$	0.62
Earnings per share attributable to Novanta Inc. – Diluted (1)	$	0.49	$	0.61

(1)

The computation of pro forma earnings per share attributable to Novanta Inc. included $20.2 million and zero adjustment of redeemable noncontrolling interest to estimated redemption value for the years ended December 31, 2017 and 2016, respectively.

Pro forma earnings during the year ended December 31, 2017 were adjusted to exclude non-recurring items such as amortization of inventory fair value adjustments of $4.4 million, acquisition related costs of $4.3 million, the gain on business acquisition of $26.4 million and income from equity method investment of $0.1 million. Pro forma earnings during the year ended December 31, 2017 were adjusted to include an increase in amortization of intangible assets of $5.3 million and an increase in interest expense of $1.4 million associated with borrowings under the Company’s revolving credit facility used to fund the acquisitions.

Pro forma earnings during the year ended December 31, 2016 were adjusted to exclude non-recurring items such as acquisition related costs of $1.2 million and income from equity method investment of $2.2 million. Pro forma earnings during the year ended December 31, 2016 were adjusted to include an increase in amortization of intangible assets of $12.5 million and an increase in interest expense of $3.9 million associated with borrowings under the Company’s revolving credit facility used to fund the acquisitions.

2016 Acquisitions

Reach

On May 24, 2016, the Company acquired 100% of the outstanding stock of Reach Technology Inc. (“Reach”), a Fremont, California-based provider of embedded touch screen technology solutions for OEMs in the medical and advanced industrial markets, for a total purchase price of $9.4 million. The Company expects that the addition of Reach will enable the Company to enhance its value proposition with medical OEM customers by adding Reach’s high-performance touch screen solutions to its product offerings.

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

	Amount
Cash	$	238
Accounts receivable		991
Inventory		1,611
Prepaid expenses and other current assets		12
Intangible assets		3,953
Goodwill		4,715
Total assets acquired		11,520

Accounts payable		280
Other liabilities		148
Deferred tax liabilities		1,474
Total liabilities assumed		1,902
Total assets acquired, net of liabilities assumed		9,618
Less: cash acquired		238
Total purchase price, net of cash acquired	$	9,380

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

			Weighted Average
	Estimated Fair		Amortization
	Value		Period
Customer relationships	$	2,770	15 years
Developed technology		500	7 years
Trademarks and trade names		258	10 years
Backlog		425	1 year
Total	$	3,953

The purchase price allocation resulted in $4.7 million of goodwill and $4.0 million of identifiable intangible assets, none of which is expected to be 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) Reach’s ability to grow their business with existing and new customers, including leveraging the Company’s customer base, and (ii) cost improvements due to scale and more efficient operations.

The operating results of Reach were included in the Company’s results of operations beginning on May 24, 2016. Reach is included in the Company’s Vision reportable segment.

2015 Acquisitions

Skyetek

On December 18, 2015, the Company acquired all assets and certain liabilities of Skyetek Inc. (“Skyetek”), a Denver, Colorado-based provider of embedded and standalone RFID solutions for medical OEMs, for a total purchase price of $2.8 million. The purchase price includes $2.6 million in cash paid for the acquisition and $0.2 million in estimated fair value of future contingent consideration payable upon 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. The actual contingent consideration was $0.1 million, which was paid during the third quarter of 2017. Skyetek specializes in high frequency and ultra high frequency RFID technologies that maximize efficiency and visibility for OEMs serving the medical and advanced industrial markets.

Lincoln Laser

On November 9, 2015, the Company acquired certain assets and liabilities of Lincoln Laser Company (“Lincoln Laser”), a Phoenix, Arizona-based provider of ultrafast precision polygon scanners and other optical scanning solutions for the medical, food processing, and advanced industrial markets, for a total purchase price of $12.1 million. This total purchase price includes $9.8 million in cash paid for the acquisition and $2.3 million in estimated fair value of future contingent consideration payable upon the achievement of certain revenue targets for fiscal year 2016. The undiscounted range of the contingent consideration under the purchase and sale agreement was zero to $6.0 million. The actual contingent consideration payment was $1.4 million, which was paid during the first quarter of 2017. Lincoln Laser specializes in ultrafast scanning solutions, leveraging their expertise in polygon scanner design and electro-optic subsystems.

Applimotion

On February 19, 2015, the Company acquired 100% of the outstanding stock of Applimotion Inc. (“Applimotion”), a Loomis, California based provider of advanced precision motor and motion control technology to OEM customers in the medical and advanced industrial markets, for a total purchase price of $14.0 million. This total purchase price includes $13.0 million in cash paid for the acquisition and $1.0 million in estimated fair value of future contingent considerations payable upon the achievement of certain revenue targets for the fiscal years 2015 to 2017. The undiscounted range of contingent considerations was zero to $4.0 million. Based on Applimotion revenue performance for 2015 and 2016, the Company paid $1.2 million in contingent consideration during the first quarter of 2017. Based on revenue performance for 2016 and 2017, the Company paid $2.8 million in contingent consideration in January 2018. Applimotion specializes in motor applications that require highly precise and dynamic motion control. The acquisition enhances our strategic position in precision motion control by enabling us to offer a broader range of motion control technologies and integrated solutions.

The final purchase price for Skyetek, Lincoln Laser and Applimotion was allocated as follows (in thousands):

	Amount
Cash	$	331
Accounts receivable		3,166
Inventory		3,544
Prepaid expenses and other current assets		148
Property, plant and equipment		3,220
Intangible assets		11,370
Goodwill		12,668
Other assets		10
Total assets acquired		34,457

Accounts payable		1,681
Other liabilities		1,197
Deferred tax liabilities		2,308
Total liabilities assumed		5,186
Total assets acquired, net of liabilities assumed		29,271
Less: cash acquired		331
Total purchase price, net of cash acquired		28,940
Less: contingent consideration		3,459
Net cash used for acquisition of businesses	$	25,481

The fair value of intangible assets for Skyetek, Lincoln Laser and Applimotion is comprised of the following (dollar amounts in thousands):

			Weighted Average
	Estimated Fair		Amortization
	Value		Period
Developed technologies	$	4,993	10 years
Customer relationships		4,266	12 years
Trademarks and trade names		593	9 years
Non-compete covenant		684	4 years
Backlog		834	1 year
Total	$	11,370

The purchase price allocation resulted in $12.7 million of goodwill and $11.4 million of identifiable intangible assets, $10.3 million of which is expected to be 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) the ability to develop and market new products and technologies; (ii) the ability to develop relationships with new customers; and (iii) expected sales synergies from cross-selling current and future product offerings of Skyetek, Lincoln Laser, Applimotion and the Company to OEM customers.

Acquisition Costs

The Company recognized acquisition costs of $4.4 million, $0.2 million and $0.9 million in the years ended December 31, 2017, 2016 and 2015, respectively, related to the acquisitions of WOM, Laser Quantum, ThingMagic, Reach, Skyetek, Lincoln Laser, and Applimotion. These amounts were included in restructuring, acquisition and divestiture related costs in the consolidated statements of operations.