Entity information:

• Entity registrant name: NOVANTA INC
• CIK: 0001076930
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1076930/000156459018003687/0001564590-18-003687-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1076930/000156459018003687/novt-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1076930/000156459018003687/novt-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001076930
• Generator: Donnelley Financial Solutions
• Total assets: 726,703,000
• Income tax expense (benefit): 13,827,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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14. Income Taxes

Components of the Company’s income (loss) from continuing operations before income taxes are as follows (in thousands):

 

 

Components of the Company’s income tax provision (benefit) are as follows (in thousands):

 

 

The Company is incorporated in Canada and therefore uses the Canadian statutory rate for income tax disclosure. The reconciliation of the statutory Canadian tax rate to the effective tax rate related to income before income taxes from continuing operations is as follows (in thousands, except percentage data):

 

 

On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The Tax Reform Act significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, providing a one-time transition Toll Charge on foreign earnings, creating a new limitation on deductible interest expense and modifying the limitation on officer compensation. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

The Company’s accounting for the Tax Reform Act is incomplete. However, the Securities and Exchange Commission has issued guidance that allows for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts. The Company has made reasonable estimates of the effects on the consolidated statements of operations and consolidated balance sheets and has, therefore, recorded provisional amounts. Provisional amounts recorded as of December 31, 2017 are subject to refinement due to various factors, including, but not limited to, changes in interpretations, analysis and assumptions made by the Company, additional guidance that may be issued by the U.S. Department of the Treasury and the Internal Revenue Service, and any updates or changes to estimates that the Company has utilized to calculate the transition impact. The Company currently anticipates finalizing and recording any resulting adjustments by December 2018.

As a result of the Tax Reform Act, the Company was required to revalue deferred tax assets and liabilities at the newly enacted 21% U.S. federal corporate income tax rate. This revaluation resulted in an additional income tax provision of $2.8 million in income from continuing operations for the year ended December 31, 2017 and a corresponding reduction in the net deferred tax assets and liabilities. Because of the ownership structure of the Company, the Company’s foreign entities outside the U.S. are not considered controlled foreign corporations of the U.S. company, as defined under U.S. tax principles, and accordingly, the accumulated earnings of these foreign subsidiaries are not subject to the one-time Toll Charge under the Tax Reform Act.

Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items and operating loss and tax credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):

 

 

In determining its income tax provisions, the Company calculated deferred tax assets and liabilities for each separate jurisdiction. The Company then considered a number of factors, including positive and negative evidence related to the realization of its deferred tax assets, to determine whether a valuation allowance should be recognized with respect to its deferred tax assets.  

In 2017, the Company released valuation allowance of $0.1 million recorded on net operating losses and other timing items in certain tax jurisdictions. Further, the Company released $0.3 million of valuation allowance recorded on certain U.S. state net operating losses.

In 2016, the Company recorded valuation allowance of $1.3 million against its current year net operating losses and other timing items in certain tax jurisdictions. The Company also reduced its Canadian loss carryforward and other attributes and the related valuation allowance of $0.3 million. Further, the Company released $0.1 million of valuation allowance recorded on certain U.S. state net operating losses and utilized $0.4 million of its U.S. capital loss carryforward against the current year net capital gain.

Valuation allowance continues to be provided on the remaining balances of certain U.S. state net operating losses and certain foreign tax attributes that the Company has determined that it is more likely than not that they will not be realized. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.

As of December 31, 2017, the Company had net operating loss carryforwards of $3.7 million (tax effected) available to reduce future taxable income. Of this amount, approximately $1.0 million relates to the U.S. and expires through 2036; and $2.7 million relates to Canada and expires starting in 2032. In addition, the Company had capital loss carryforwards of $5.7 million, which had a full valuation allowance. Of this amount, $5.2 million and $0.5 million related to Canada and the U.K, respectively.

As of December 31, 2016, the Company had net operating loss carryforwards of $4.4 million (tax effected) available to reduce future taxable income. Of this amount, approximately $1.3 million relates to the U.S. and expires through 2035; and $3.1 million relates to Canada and expires starting in 2031. In addition, the Company had capital loss carryforwards of $5.2 million, which had a full valuation allowance. Of this amount, $4.7 million and $0.5 million related to Canada and the U.K, respectively.

As of December 31, 2017, the Company had tax credit carryforwards of approximately $2.6 million available to reduce income taxes in future years. Approximately $0.7 million relates to the U.S. state tax attributes, of which $0.6 million will expire through 2032 and $0.1 million can be carried forward indefinitely. The remaining $1.9 million tax credit carryforwards were related to Canada, of which $1.2 million expires through 2022 and $0.7 million can be carried forward indefinitely.

As of December 31, 2016, the Company had tax credit carryforwards of approximately $2.3 million available to reduce income taxes in future years. Approximately $0.5 million relates to the U.S. state tax attributes, of which $0.4 million will expire through 2031 and $0.1 million can be carried forward indefinitely. The remaining $1.8 million tax credit carryforwards were related to Canada, of which $1.1 million expires through 2022 and $0.7 million can be carried forward indefinitely.

Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon a repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The amount of undistributed earnings of foreign subsidiaries totaled $98.0 million as of December 31, 2017. However, these undistributed earnings are generally not subject to the repatriation taxes under the Tax Reform Act. The estimated unrecognized income and foreign tax withholding tax liability on this temporary difference is approximately $0.2 million.

As of December 31, 2017, the Company’s total amount of gross unrecognized tax benefits was $4.1 million, of which $3.4 million would favorably affect the effective tax rate if benefited. Over the next twelve months, the Company may need to record up to $0.2 million of previously unrecognized tax benefits due to statute of limitations closures. The Company believes there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes that it has adequately provided for all income tax uncertainties.

As of December 31, 2016, the Company’s total amount of gross unrecognized tax benefits was $5.0 million, of which $4.0 million would favorably affect the effective tax rate is benefited.

The reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):

 

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had approximately $0.4 million and $1.1 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2017 and 2016, the Company recognized less than $0.1 million of expense for an increase in interest and penalties related to uncertain tax positions.

The Company files income tax returns in Canada, the U.S., and various states and foreign jurisdictions. Generally, the Company is no longer subject to U.S. or foreign income tax examinations, including transfer pricing tax audits, by tax authorities for the years before 2007.

The Company’s income tax returns may be reviewed by tax authorities in the following countries for the following periods under the appropriate statute of limitations: