Risks and Opportunities

Effective Management of Risks and Opportunities

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Risks and opportunities are inherent in all aspects of our business activities and embedded in our routine management decision-making. Effective management of these risks and opportunities is critical to our success as a strategic supplier to our customers, a key customer to our suppliers, a trusted employer to our employees, and a good investment to our investors. 

The Novanta Leadership Team leads the overall risk management program at Novanta. Business unit General Managers and their leadership teams and corporate functional leaders are responsible for the execution of the respective components of the risk management program.  

Our risk assessment is updated annually based on changes in the overall economic environment and specific trends affecting Novanta businesses and our strategic goals. Material risks are disclosed under Part I, Item 1A. Risk Factors, of our annual report on Form 10-K filed with the Securities Exchange Commission (SEC). Short-term market dynamics are analyzed and discussed as part our quarterly business operating reviews to address any new or emerging risks and opportunities that need to be taken into account to deliver on our annual and strategic goals. Key Performance Indicators (KPIs) are developed, agreed to, and monitored in response to any significant adjustments made to the original action plans. If any new material risk is identified in our quarterly review processes, we will add appropriate disclosures in our quarterly report on Form 10-Q filed with the SEC. 

Enterprise Risk Assessment

Our independent Internal Audit function performs an annual update to Novanta’s enterprise risk assessment by conducting interviews of various senior leaders within the Company. The risk management program is designed to engage Novanta leaders, including both corporate leadership and business unit leadership, in identifying, monitoring, and managing key risks and opportunities that affect our business and the execution of our strategic initiatives. All risks are ranked based on both the likelihood of occurrence and the severity of the potential impact. The results of the risk assessment are summarized and reviewed by the Novanta Leadership Team. Based on the updated risk assessment, internal audit plans are developed to evaluate and monitor management’s processes and controls around the higher ranked risk areas. Internal audit plans and risk assessments are then reviewed and approved by the Audit Committee of the Board of Directors. 
Beginning in 2021, we expanded the existing risk management program to incorporate a broader ESG assessment and a specific climate-related risks and opportunities assessment, utilizing the recommendations of the TCFD and SASB’s Sustainability Accounting Standards for Electrical & Electronic Equipment industry and Medical Equipment & Supplies industry as key inputs to this process with respect to our identification, assessment, and monitoring of climate-related risks. We evaluate both the likelihood and the potential impact of risks and opportunities relevant to our business over the short-, medium- and long-term time horizons to help guide us in setting priorities to manage identified risks. The results of these assessments are reviewed with the ESG Committee of the Board. 

Climate Risks and Opportunities

The complex and quickly evolving regulatory landscape around environmental, social and governance reporting and the governmental laws and regulations to reduce greenhouse gas emissions worldwide present significant challenges and risks. We will need to commit resources to navigate through the complex and evolving reporting requirements across different regions of the world. For example, the proposed climate-disclosure rules from the SEC and the Corporate Sustainability Reporting Directive (CSRD) promulgated by the EU impose significant additional reporting obligations, which are expected to increase our compliance costs. Additionally, we anticipate that various governments around the world will impose various levies on carbon emissions and that we will incur significant additional costs to achieve our net-zero emissions goal over the long term.

One of the highest-ranked climate-related risks stems from certain medical products that we produce and sell to our medical OEMs. Our medical insufflators require the use of CO2 gas by hospitals in order to create the space within patients’ body cavities for surgeons to perform minimally invasive surgery procedures. CO2 is the only gas safe for use in the human body due to the high physiological compatibility of this gas type. As a result, hospitals cannot avoid the release of CO2 gas into the atmosphere from the use of our insufflator technology. Further, single-use medical consumable products for our medical insufflators and pumps play a significant role in patient safety because of the vital hygiene considerations and outcomes. However, at the end of their use, even when disposed of properly by end users, they have a negative impact on the environment. In collaboration with a reputable sustainability research institution in Berlin, we previously analyzed reusable tube sets as an alternative to single-use plastic tube sets that can be used with our medical pump technology. Since the production of heat resistant materials for the tube set (autoclavation at 273°F/134°C), the hygienic preparation after surgery and the autoclaving of a reusable tube set in the hospital are so energy-intensive, coupled with the environmental harm from the required cleaning chemicals, that it was concluded that it is not only safer for the patient, but also more environmentally friendly, to use a disposable tube set during surgery.

We plan to develop strategies to continuously improve how we manufacture and distribute our products, aiming to reduce the negative environmental impact from such medical consumables in their product lifetime. For example, we acquired a medical consumable manufacturing business in Europe during 2022. One of the strategic benefits from this acquisition is the shortening of our distribution channel for our medical consumables to key customers as well as the optimization of the supply chain from raw materials subcomponent production, assembly, packaging to sterilization, leading to future reduction in greenhouse gas emissions from our downstream product distribution. Additionally, we have also launched our NovantaSUSTAIN new-product development model to embed environmental requirements into our new-product development processes.

Another of the highest-ranked climate-related risks is the potential disruptions to the business operations of our facilities and our suppliers and customers as a consequence of energy supply shortages or damages from extreme weather conditions and natural disasters caused by global warming. While the risk is inherent and unavoidable in nature, we are developing strategies to mitigate the risk to the extent possible by identifying alternative suppliers and distributors, sourcing raw materials from different supplier and distributor locations, modifying our product designs to allow for alternative components to be used without compromising quality, performance, or other requirements, in-sourcing production of parts, and installing power generation equipment where feasible.

With the heightened focus on climate change, we also identified growth opportunities in product offerings in green technology applications, such as electric vehicles, robotics, solar, and energy storage, such as batteries. Several of our existing businesses are already supplying components to OEMs in this space, and we continue to invest in new product development targeting and expanding our presence in these applications.

Insurance Program

We maintain comprehensive insurance programs to best protect the Company from various identified enterprise risks through careful evaluations of the risks and the related cost and benefit of third-party insurance policies. Our insurance programs currently include, among others, general liability, workers compensation, business interruption, professional liabilities, employment practices, cybersecurity, global cargo, property and casualty, global pollution, and directors’ and officers’ insurance. 

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