What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-10 compared with 2021-05-11 · 152 added, 82 removed, 270 unchanged (46% of the section changed)

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Medical Market

For the three months ended April 2, 2021, the medical market accounted for approximately 55% of our revenue.

For the six months ended July 2, 2021, the medical market accounted for approximately 53% 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.

Advanced Industrial Market

For the three months ended April 2, 2021, the advanced industrial market accounted for approximately 45% 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

For the six months ended July 2, 2021, the advanced industrial market accounted for approximately 47% of our revenue.

condition of our customers, changes in regulatory requirements and laws, and general economic conditions.

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We have provided frequent employee communications that include guidance and updates to our employees with regards to COVID-19 safety procedures and status.

We established rigorous safety measures in all of our facilities, including implementing social distancing protocols, requiring working from home for those employees that do not need to be physically present on the manufacturing floor or in our facilities to perform their work, suspending travel, spreading production over more shifts, implementing temperature checks at the entrances to our facilities, frequently disinfecting our workspaces, and providing masks to those employees who must be physically present in our facilities.

We established rigorous safety measures in all of our facilities, including implementing social distancing protocols, working from home for those employees that do not need to be physically present on the manufacturing floor or in our facilities to perform their work, reducing travel, spreading production over more shifts, implementing temperature checks at the entrances to our facilities, frequently disinfecting our workspaces, and providing masks to those employees who must be physically present in our facilities.

We expect to continue these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business.

In connection with our COVID-19 remediation actions, we have incurred additional costs to protect the health of our employees, including investments in technologies and monitoring equipment and weekly testing for COVID-19 at certain locations.

We expect such costs to continue to be significant to our cost of operations.

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The outbreak has significantly increased economic and demand uncertainty.

The spread of COVID-19 has caused a global economic slowdown and a global recession.

Even as governmental restrictions are relaxed and economies gradually, partially or fully, reopen, the ongoing economic impacts and health concerns associated with COVID-19 may continue to affect customer demand.

Through April 2, 2021, w e experienced limited dis ruption s to our supply chain as a result of the COVID-19 pandemic.

The spread of COVID-19 caused a global economic slowdown and a global recession.

Through July 2, 2021, w e experienced limited dis ruption s to our supply chain as a result of the COVID-19 pandemic.

W e regularly monitor the manufacturing output of companies in our supply chain .

Disruption s on our suppliers or sub-suppliers caused by the COVID-19 pandemic and the recent electronics and other material shortages could cause further challenges in our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations.

To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic and electronics and other material shortages, we are identifying alternative suppliers, sourcing raw materials from different supplier locations, modifying our designs to allow for alternative components to be used without compromising quality or performance, and taking other actions to ensure our supply of raw materials.

Although we are mitigating potential supply interruptions from the COVID-19 pandemic and electronics and other material shortages, if certain suppliers cannot produce a key part or component for us, or if the receipt of certain materials is otherwise delayed, we may miss our scheduled shipment deadlines and our relationship with customers may be harmed.

Disruption s to our suppliers or sub-suppliers caused by the COVID-19 pandemic and the recent electronics and other material shortages could cause further challenges in our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations.

To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic and the electronics and other material shortages, we are identifying alternative suppliers and distributors, sourcing raw materials from different supplier and distributor locations, modifying our designs to allow for alternative components to be used without compromising quality, performance or other requirements, and taking other actions to ensure our supply of raw materials.

Although we are working to mitigate potential supply interruptions from the COVID-19 pandemic and the electronics and other material shortages, if certain suppliers cannot produce a key part or component for us, or if the receipt of certain materials is otherwise delayed, we may miss our scheduled shipment deadlines and our relationship with customers may be harmed.

Additionally, restrictions on or disruptions of transportation, such as reduced availability of air transports, port closures and increased border controls or closures, have resulted in higher costs and delays, both for obtaining raw materials from suppliers and for shipping finished products to customers.

COVID-19 has caused inflation pressures on the market prices for certain of our primary raw materials as well as increases in the costs of freight, packaging, energy and other consumables that are used in our manufacturing processes.

COVID-19 has caused inflationary pressures on the market prices for certain of our parts and primary raw materials as well as increases in the costs of freight, packaging, energy and other consumables that are used in our manufacturing processes.

We have generally been able to offset increases in these costs through various productivity and cost reduction initiatives, as well as adjusting our selling prices to pass through some of these higher costs to our customers;

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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 increases in our costs.

Results of Operations for the Three Months Ended April 2, 2021 Compared with the Three Months Ended April 3, 2020

Results of Operations for the Three and Six Months Ended July 2, 2021 Compared with the Three and Six Months Ended July 3, 2020

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

Three Months Ended

Six Months Ended

Cost of revenue

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Income before income taxes

Income tax provision

Income tax provision (benefit)

Consolidated net income

Overview of Financial Results

Total revenue of $162.6 million for the three months ended April 2, 2021 increased $7.1 million, or 4.6%, from the prior year period primarily due to increased demand in the advanced industrial market related to microelectronics and as a result of increases in industrial manufacturing spending, partially offset by a decrease in demand in the medical market as a result of deferrals of elective surgical procedures during COVID-19 pandemic.

In addition, foreign currency exchange rates positively impacted our revenue by $5.4 million, or 3.5%, for the three months ended April 2, 2021.

Operating income of $11.1 million for the three months ended April 2, 2021 decreased $2.2 million, or 16.2%, from the prior year period.

This decrease was primarily attributable to an increase in Research and Development and Engineering (“R&D”) expense of $3.3 million and restructuring, acquisition, and related cost of $2.1 million, partially offset by an increase in gross profit of $4.3 million primarily attributable to higher revenue.

Basic earnings per common share (“Basic EPS”) of $0.32 for the three months ended April 2, 2021 decreased $0.02 from the prior year period.

Diluted earnings per common share (“Diluted EPS”) of $0.32 for the three months ended April 2, 2021 decreased $0.02 from the prior year period.

The decreases were primarily attributable to a decrease in operating income, offset by a decrease in income tax expense.

Total revenue of $167.5 million for the three months ended July 2, 2021 increased $22.8 million, or 15.8%, from the prior year period primarily due to increased demand in the advanced industrial market related to microelectronics and as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19.

In addition, foreign currency exchange rates positively impacted our revenue by $6.2 million, or 4.4%, for the three months ended July 2, 2021.

Total revenue of $330.1 million for the six months ended July 2, 2021 increase d $29.9 million, or $10.0%, from the prior year period primarily due to increased demand in the advanced industrial market related to microelectronics and as a result of increase s in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19 .

In addition, foreign currency exchange rate s positively impacted our revenue by $ 11 .

6 million, or 3 .

9 %, for the six months ended July 2, 2021 .

Operating income of $16.0 million for the three months ended July 2, 2021 increased $2.3 million, or 16.7%, from the prior year period.

This increase was primarily attributable to an increase in gross profit of $13.7 million primarily attributable to higher revenue, partially offset by an increase in research and development and engineering (“R&D”) expenses of $2.5 million, selling, general and administrative (“SG&A”) expenses of $6.3 million and restructuring, acquisition, and related costs of $2.4 million.

Operating income of $27.1 million for the six months ended July 2, 2021 increased $0.1 million, or 0.5%, from the prior year period.

This increase was primarily attributable to an increase in gross profit of $18.0 million primarily attributable to higher revenue, partially offset by an increase in R&D expenses of $5.9 million, SG&A expenses of $7.2 million and restructuring, acquisition, and related cost of $4.5 million.

Basic earnings per common share (“Basic EPS”) of $0.33 for the three months ended July 2, 2021 remained consistent from the prior year period.

Diluted earnings per common share (“Diluted EPS”) of $0.33 for the three months ended July 2, 2021 remained consistent from the prior year period.

Basic EPS of $0.65 for the six months ended July 2, 2021 decreased $0.02 from the prior year period.

Diluted EPS of $0.64 for the six months ended July 2, 2021 decreased $0.02 from the prior year period.

The decreases were primarily attributable to an increase income tax provision.

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

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Precision Motion

Photonics segment revenue for the three months ended April 2, 2021 increased by $3.4 million, or 6.1%, versus the prior year period, primarily due to increased demand in the advanced industrial market as a result of increases in industrial manufacturing spending.

Vision segment revenue for the three months ended April 2, 2021 decreased by $1.4 million, or 2.0%, versus the prior year period, primarily due to a decrease in revenue from our minimally invasive surgery (“MIS”) products as a result of deferrals of elective surgical procedures during the COVID-19 pandemic.

Six Months Ended

Precision Motion

Precision Motion segment revenue for the three months ended April 2, 2021 increased by $5.1 million, or 16.4%, versus the prior year period, primarily due to increased demand in advanced industrial market as a result of an increase in industrial manufacturing spending.

Photonics segment revenue for the three months ended July 2, 2021 increased by $14.6 million, or 30.4%, versus the prior year period, primarily due to increased demand in the advanced industrial market as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19.

Photonics segment revenue for the six months ended July 2, 2021 increased by $17.9 million, or 17.4%, versus the prior year period, primarily due to increased demand in the advanced industrial market as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19.

Vision segment revenue for the three months ended July 2, 2021 decreased by $1.3 million, or 2.0%, versus the prior year period, primarily due to a decrease in revenue from our medical end market products as a result of lower healthcare spending.

Vision segment revenue for the six months ended July 2, 2021 decreased by $ 2 .

7 million, or 2.0%, versus the prior year period, primarily due to a decrease in revenue from our minimally invasive surgery (“MIS”) products as a result of continued deferrals of elective surgical procedures during the COVID-19 pandemic.

Precision Motion

Precision Motion segment revenue for the three months ended July 2, 2021 increased by $9.5 million, or 29.6%, versus the prior year period, primarily due to increased demand in advanced industrial market as a result of an increase in industrial manufacturing spending.

Precision Motion segment revenue for the six months ended July 2, 2021 increased by $14.7 million, or 23.1%, versus the prior year period, primarily due to increased demand in advanced industrial market as a result of an increase in industrial manufacturing spending.

Gross Profit and Gross Profit Margin

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Three Months Ended

Six Months Ended

Gross profit:

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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, trade tariffs, freight costs, headcount, inventory obsolescence and warranty expenses.

Photonics segment gross profit for the three months ended April 2, 2021 increased $3.4 million, or 14.0%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Photonics segment gross profit margin was 48.1% for the three months ended April 2, 2021, versus a gross profit margin of 44.7% for the prior year period.

Photonics segment gross profit for the three months ended July 2, 2021 increased $8.7 million, or 41.6%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Photonics segment gross profit margin was 47.5% for the three months ended July 2, 2021, versus a gross profit margin of 43.7% for the prior year period.

The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes.

Vision segment gross profit for the three months ended April 2, 2021 increased $0.4 million, or 1.3%, versus the prior year period.

Vision segment gross profit margin was 39.8% for the three months ended April 2, 2021, versus a gross profit margin of 38.5% for the prior year period.

The increase in gross profit and gross profit margin were primarily attributable to improvements to factory productivity and lower cost of poor quality.

Photonics segment gross profit for the six months ended July 2, 2021 increased $12.1 million, or 26.7%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Photonics segment gross profit margin was 47.7% for the six months ended July 2, 2021, versus a gross profit margin of 44.3% for the prior year period.

The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes.

Vision segment gross profit for the three months ended July 2, 2021 decreased $0.1 million, or 0.3%, versus the prior year period.

Vision segment gross profit margin was 38.5% for the three months ended July 2, 2021, versus a gross profit margin of 37.9% for the prior year period.

Vision segment gross profit for the six months ended July 2, 2021 increased $0.3 million, or 0.5%, versus the prior year period.

Vision segment gross profit margin was 39.2% for the six months ended July 2, 2021, versus a gross profit margin of 38.2% for the

prior year period .

The increase in gross profit and gross profit margin w ere primarily attributable to improvements to factory productivity and product mix .

Precision Motion

Precision Motion segment gross profit for the three months ended April 2, 2021 increased $2.2 million, or 16.0%, versus the prior year period, primarily due to an increase in revenue.

Precision Motion segment gross profit margin was 44.1% for the three months ended April 2, 2021, versus a gross profit margin of 44.4% for the prior year period.

Precision Motion segment gross profit for the three months ended July 2, 2021 increased $7.0 million, or 50.9%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Precision Motion segment gross profit margin was 50.0% for the three months ended July 2, 2021, versus a gross profit margin of 43.0% for the prior year period.

The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes and favorable year over year comparison due to higher inventory obsolescence in the prior year period.

Precision Motion segment gross profit for the six months ended July 2, 2021 increased $9.2 million, or 33.2%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Precision Motion segment gross profit margin was 47.3% for the six months ended July 2, 2021, versus a gross profit margin of 43.7% for the prior year period.

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.

These costs for the three months ended April 2, 2021 increased by $1.7 million versus the prior year period primarily due to COVID-19 testing costs for employees of $1.4 million.

These costs for the three months ended July 2, 2021 increased by $2.0 million versus the prior year period primarily due to COVID-19 testing costs for employees of $1.5 million.

Unallocated corporate and shared services costs for the six months ended July 2, 2021 increased by $3.6 million versus the prior year period primarily due to COVID-19 testing costs for employees of $2.9 million.

Operating Expenses

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Three Months Ended

Six Months Ended

Research and development and engineering

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R&D expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects.

R&D expenses were $18.7 million, or 11.5% of revenue, during the three months ended April 2, 2021, versus $15.3 million, or 9.9% of revenue, during the prior year period.

R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher compensation related expense as a result of higher headcount and higher R&D project spending.

R&D expenses were $17.0 million, or 10.1% of revenue, during the three months ended July 2, 2021, versus $14.4 million, or 10.0% of revenue, during the prior year period.

R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher compensation related expense.

R&D expenses were $35.6 million, or 10.8% of revenue, during the six months ended July 2, 2021, versus $29.8 million, or 9.9% of revenue, during the prior year period.

R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher compensation related expense.

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 $31.7 million, or 19.5% of revenue, during the three months ended April 2, 2021, versus $30.8 million, or 19.8% of revenue, during the prior year period.

SG&A expenses increased in terms of total dollars primarily due to higher share-based compensation expense and higher variable compensation expense as a result of re-establishment of 2021 cash bonuses, partially offset by lower travel costs and other discretionary spending.

SG&A expenses were $31.2 million, or 18.6% of revenue, during the three months ended July 2, 2021, versus $24.9 million, or 17.2% of revenue, during the prior year period.

SG&A expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher share-based compensation expense and higher variable compensation expense as a result of re-establishment of 2021 bonuses.

SG&A expenses were $ 62.9 million, or 19.1% of revenue, during the six months ended July 2, 2021 , versus $ 55.7 million, or 18.5 % of revenue, during the prior year period.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets, excluding the amortization of developed technologies that is included in cost of revenue, was $3.6 million, or 2.2% of revenue, during the three months ended April 2, 2021, versus $3.4 million, or 2.2% of revenue, during the prior year period.

Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was $3.6 million, or 2.1% of revenue, during the three months ended July 2, 2021, versus $3.4 million, or 2.4% of revenue, during the prior year period.

Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was $7.2 million, or 2.2% of revenue, during the six months ended July 2, 2021, versus $6.9 million, or 2.3% of revenue, during the prior year period.

Restructuring, Acquisition, and Related Costs

We recorded restructuring, acquisition, and related costs of $3.7 million during the three months ended April 2, 2021, versus $1.7 million during the prior year period.

The increase in restructuring, acquisition, and related costs versus the prior year period was primarily due to an increase in restructuring cost related to the 2020 restructuring plan and legal fees related to a dispute involving a company we acquired in 2019.

We recorded restructuring, acquisition, and related costs of $4.6 million during the three months ended July 2, 2021, versus $2.2 million during the prior year period.

The increase in restructuring, acquisition, and related costs versus the prior year period was primarily due to an increase in acquisition costs related to pending acquisitions, restructuring cost related to the 2020 restructuring plan, and legal fees related to a dispute involving a company we acquired in 2019.

We recorded restructuring, acquisition, and related costs of $8.4 million during the six months ended July 2, 2021, versus $3.9 million during the prior year period.

Operating Income (Loss) by Segment

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Three Months Ended

Six Months Ended

Operating Income (Loss)

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Unallocated Corporate and Shared Services

Photonics segment operating income was $12.4 million, or 21.2% of revenue, during the three months ended April 2, 2021, versus $8.9 million, or 16.2% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $3.4 million and a decrease in SG&A spending of $0.9 million, offset by an increase in R&D spending of $0.7 million.

Vision segment operating income was $3.4 million, or 5.0% of revenue, during the three months ended April 2, 2021, versus $5.6 million, or 8.2% of revenue, during the prior year period.

The decrease in operating income was primarily due to an increase in R&D spending of $2.0 million, and an increase in restructuring, acquisition, and related charges of $1.1 million, partially offset by a decrease in SG&A spending of $0.6 million.

Photonics segment operating income was $14.2 million, or 22.8% of revenue, during the three months ended July 2, 2021, versus $6.9 million, or 14.5% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $8.7 million, partially offset by an increase in R&D spending of $0.4 million and SG&A spending of $0.7 million.

Photonics segment operating income was $26.6 million, or 22.0% of revenue, during the six months ended July 2, 2021, versus $15.9 million, or 15.4% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $12.1 million, partially offset by an increase in R&D spending of $1.2 million.

Vision segment operating income was $3.2 million, or 5.1% of revenue, during the three months ended July 2, 2021, versus $4.7 million, or 7.2% of revenue, during the prior year period.

The decrease in operating income was primarily due to an increase in R&D spending of $1.4 million.

Vision segment operating income was $ 6.6 million, or 5.0% of revenue, during the six months ended July 2, 2021 , versus $ 10.3 million , or 7.7% o f revenue , during the prior year period.

The de crease in operating income was primarily due to an increase in R&D spending of $3.4 million.

Precision Motion

Precision Motion segment operating income was $7.4 million, or 20.4% of revenue, during the three months ended April 2, 2021, versus $6.5 million, or 20.9% of revenue, during the prior year period.

Precision Motion segment operating income was $12.3 million, or 29.4% of revenue, during the three months ended July 2, 2021, versus $6.5 million, or 20.2% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $7.0 million, partially offset by an increase in restructuring, acquisition, and related charges of $0.8 million, and R&D spending of $0.7 million.

Precision Motion segment operating income was $19.7 million, or 25.2% of revenue, during the six months ended July 2, 2021, versus $13.1 million, or 20.6% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $9.2 million, partially offset by an increase in restructuring, acquisition, and related charges of $1.5 million, and R&D spending of $1.3 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 costs.

These costs for the three months ended April 2, 2021 increased by $4.3 million versus the prior year period primarily due to costs related to COVID-19 testing for employees of $1.4 million included in costs of goods sold, and an increase in SG&A spending of $2.4 million related to stock-based compensation and the re-establishment of 2021 cash bonuses.

These costs for the three months ended July 2, 2021 increased by $9.3 million versus the prior year period primarily due to costs related to COVID-19 testing for employees of $1.5 million included in costs of revenue, an increase in SG&A spending of $5.7 million primarily related to share-based compensation and the re-establishment of 2021 bonuses, and an increase in restructuring, acquisition, and related charges of $1.6 million.

Unallocated corporate and shared services costs for the six months ended July 2, 2021 increased by $13.5 million versus the prior year period primarily due to costs related to COVID-19 testing for employees of $2.9 million included in costs of revenue, an increase in SG&A spending of $8.1 million primarily related to share-based compensation and the re-establishment of 2021 bonuses, and an increase in restructuring, acquisition, and related charges of $1.8 million.

Other Income and Expense Items

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Three Months Ended

Six Months Ended

Interest income (expense), net

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Interest Income (Expense), Net

Net interest expense was $1.4 million for the three months ended April 2, 2021, versus $1.7 million in the prior year period.

Net interest expense was $1.4 million for the three months ended July 2, 2021, versus $1.7 million in the prior year period.

The decrease in net interest expense was primarily due to a decrease in average debt levels and a decrease in the weighted average interest rate on our senior credit facilities.

The weighted average interest rate on our senior credit facilities was 2.02% during the three months ended April 2, 2021, versus 2.39% during the three months ended April 3, 2020.

The weighted average interest rate on our senior credit facilities was 2.04% during the three months ended July 2, 2021, versus 2.40% during the three months ended July 3, 2020.

Net interest expense was $2.8 million for the six months ended July 2, 2021, versus $3.4 million in the prior year period.

The decrease in net interest expense was primarily due to a decrease in average debt levels and a decrease in the weighted average interest rate on our senior credit facilities.

The weighted average interest rate on our senior credit facilities was 2.03% during the six months ended July 2, 2021, versus 2.40% during the six months ended July 3, 2020.

Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses) were $(0.3) million net losses for the three months ended April 2, 2021, versus $0.3 million net gains in the prior year period.

The decrease in net gains was primarily due to changes in the value of the U.S.

Foreign exchange transaction gains (losses) were $(0.1) million net losses for the three months ended July 2, 2021, versus $(0.3) million net losses in the prior year period.

Foreign exchange transaction gains (losses) were $ (0.

3 ) million net losses for the six months ended July 2, 2021 , versus less than $(0.1) million net losses in the prior year period .

The increase in net losses was primarily due to changes in the value of the U.S.

Dollar against the British Pound and the Euro and lower net realized gains from foreign currency contracts.

Other Income (Expense), Net

Net other expense was nominal for both the three months ended April 2, 2021 and the three months ended April 3, 2021.

Net other expense was nominal for both the three and six months ended July 2, 2021 and the three and six months ended July 3, 2020.

Income Tax Provision

Our effective tax rate for the three months ended April 2, 2021 was (20.8)%, versus (0.3)% for the prior year period.

Our effective tax rate of (20.8)% for the three months ended April 2, 2021 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions, other tax credits, and windfall tax benefits upon vesting of certain stock-based compensation awards during the period.

For the three months ended April 2, 2021, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 35.9% on our effective tax rate.

Our effective tax rate of (0.3)% for the three months ended April 3, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions, other tax credits, and windfall tax benefits upon vesting of certain stock-based compensation awards during the period.

For the three months ended April 3, 2020, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 19.8% on our effective tax rate.

Our effective tax rate for the three months ended July 2, 2021 was 19.2%, versus 0.3% for the prior year period.

Our effective tax rate of 19.2% for the three months ended July 2, 2021 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions, other tax credits, and a release of uncertain tax position reserves, offset by the revaluation of long term deferred tax balances resulting from the UK corporate tax rate change.

Our effective tax rate of 0.3% for the three months ended July 3, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions and other tax credits, and a release of a portion of the valuation allowance on our deferred tax assets in Canada.

For the three months ended July 3, 2020, the release of the valuation allowance had a benefit of 11.4% on our effective tax rate.

Our effective tax rate for the six months ended July 2, 2021 was 3.5%, versus (0%) for the prior year period.

Our effective tax rate of 3.5% for the six months ended July 2, 2021 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions, other tax credits, a release of uncertain tax positions reserves, and windfall tax benefits upon vesting of certain share-based compensation awards, partially offset by the revaluation of long term deferred tax balances resulting from the UK corporate tax rate change during the period.

For the six months ended July 2, 2021, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 14.7% on our effective tax rate.

Our effective tax rate of (0%) for the six months ended July 3, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income, U.K.

patent box deductions and other tax credits, windfall tax benefits upon vesting of certain share-based compensation awards during the period, and a release of a portion of the valuation allowance.

For the six months ended July 3, 2020, the windfall tax benefits upon vesting of certain share-based compensation awards and the release of the valuation allowance had a benefit of 11.2% and 5.7%, respectively, on our effective tax rate.

Liquidity and Capital Resources

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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 borrowing capacity under our revolving credit facility provides another potential source of liquidity for acquisitions.

We may also seek to raise additional capital, which could be in the form of bonds, convertible debt or equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Third Amended and Restated Credit Agreement.

The availability of borrowing capacity under our revolving credit facility provides a sufficient source of liquidity to pay the purchase prices for our pending acquisitions of ATI Industrial Automation, Inc.

and Schneider Electric Motion USA, Inc.

as well as a potential source of liquidity for any future capital expenditures and other liquidity needs.

In addition, we have the ability to expand our borrowing capacity by up to $200.0 million by exercising the accordion feature under our revolving credit agreement.

We may also seek to raise additional capital, which could be in the form of bonds, convertible debt or preferred or common equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Third Amended and Restated Credit Agreement.

There is no assurance that such capital will be available on reasonable terms or at all.

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, risks associated with events outside our control, such as the economic consequences of the COVID-19 pandemic, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, availability of borrowings under our revolving credit facility, 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, 20 20 .

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There is no assurance that the 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.

As of April 2, 2021, $87.0 million of our $113.6 million cash and cash equivalents was held by subsidiaries outside of Canada and the United States.

As of July 2, 2021, $87.8 million of our $133.9 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 Senior Credit Facilities (as defined below).

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payroll tax payments in 2020 in accordance with relief provisions under the CARES Act.

As of April 2, 2021, we had $2.8 million in such deferred U.S.

As of July 2, 2021, we had $2.8 million in such deferred U.S.

payroll tax payments under the CARES Act.

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payroll tax payments by December 31, 2021 and the remaining half by December 31, 2022.

In May 2021, the Company’s shareholders approved a special resolution to amend the Company’s articles to authorize up to 7.0 million preferred shares for future issuance.

The Company’s Board of Directors may designate and issue one or more series of preferred shares in order to raise additional capital.

As of July 2, 2021, no preferred shares have been issued and outstanding.

Senior Credit Facilities

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The First Amendment increased the revolving credit facility commitment under the Third Amended and Restated Credit Agreement by $145.0 million, from $350.0 million to $495.0 million, and reset the uncommitted accordion feature to $200.0 million for potential future expansion.

As of April 2, 2021, we had $99.2 million term loan and $96.3 million revolver borrowings outstanding under our Senior Credit Facilities.

As of July 2, 2021, we had $98.9 million term loan and $97.1 million revolver borrowings outstanding under our Senior Credit Facilities.

The borrowings outstanding under the Senior Credit Facilities bear interest at rates based on (a) the Base Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 0.25% and 1.25% per annum, determined by reference to our consolidated leverage ratio, or (b) the Eurocurrency Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 1.25% and 2.25% per annum, determined by reference to our consolidated leverage ratio.

In addition, we are obligated to pay a commitment fee on the unused portion of the revolving credit facility, ranging between 0.20% and 0.40% per annum, determined by reference to our consolidated leverage ratio.

As of April 2, 2021, we had outstanding borrowings under the Third Amended and Restated Credit Agreement denominated in Euro and U.S.

As of July 2, 2021, we had outstanding borrowings under the Third Amended and Restated Credit Agreement denominated in Euro and U.S.

Dollars of $177.1 million and $19.0 million, respectively.

The Third Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio (as defined in the Third Amended and Restated Credit Agreement).

The following table summarizes these financial covenants and our compliance therewith as of April 2, 2021:

The following table summarizes these financial covenants and our compliance therewith as of July 2, 2021:

Maximum consolidated leverage ratio

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Share repurchases have been made under the 2018 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934.

We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of April 2, 2021.

We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of July 2, 2021.

In February 2020, our Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $50.0 million worth of common shares.

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No shares have been repurchased under the 2020 Repurchase Plan to date.

Cash Flows for the T hree M onths Ended April 2, 202 1 and April 3, 2020

Pending Acquisitions

On July 9, 2021, we signed a purchase and sale agreement to acquire Schneider Electric Motion USA, Inc.

(“SEM”), a Marlborough, Connecticut-based manufacturer of integrated stepper motors and electronic controls for automation equipment for a total purchase price of $115 million in cash, subject to customary closing and net working capital adjustments.

The transaction is subject to customary regulatory approvals and closing conditions and is anticipated to close in the third quarter of fiscal year 2021.

SEM will be included in our Precision Motion reportable segment.

On July 18, 2021, we signed a purchase and sale agreement to acquire ATI Industrial Automation Inc.

(“ATI”), an Apex, North Carolina-based developer and manufacturer of robotic end-of-arm tooling for an initial purchase price of $172 million upfront in cash and additional contingent cash payments associated with 2021 financial performance.

The transaction is subject to customary regulatory approvals and closing conditions and is anticipated to close in the third quarter of fiscal year 2021.

ATI will be included in our Precision Motion reportable segment.

We expect to fund the SEM and ATI acquisitions using cash on hand and funds from drawdowns under our Senior Credit Facilities.

Cash Flows for the Six Months Ended July 2, 2021 and July 3, 2020

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

Three Months Ended

Six Months Ended

Net cash provided by operating activities

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Operating Cash Flows

Cash provided by operating activities was $23.3 million for the three months ended April 2, 2021, versus $17.8 million for the prior year period.

Cash provided by operating activities for the three months ended April 2, 2022 increased from the prior year period primarily due to working capital improvements resulting in an increase in cash flows from inventory and substantially no bonus payout in 2021 as a result of the elimination of our 2020 annual bonus plan, offset by an increase in accounts receivable due to increases in revenue.

Cash provided by operating activities for the three months ended April 2, 2021 was positively impacted by an increase in our inventory turnover ratio from 3.7 at December 31, 2020 to 4.1 at April 2, 2021 and an increase in our days payables outstanding which increased from 45 days at December 31, 2020 to 51 days at April 2, 2021, offset by an increase in accounts receivable as a result of increased revenue.

Cash provided by operating activities for the three months ended April 3, 2020 was positively impacted by an increase in our inventory turnover ratio from 3.1 at December 31, 2019 to 3.2 at April 3, 2020 and a decrease in accounts receivable, offset by a decrease in our days payables outstanding which decreased from 53 days at December 31, 2019 to 50 days at April 3, 2020.

During the three months ended April 3, 2020, we paid the 2019 annual employee bonuses which had been accrued for as of December 31, 2019.

Cash provided by operating activities was $52.0 million for the six months ended July 2, 2021, versus $51.6 million for the prior year period.

Cash provided by operating activities for the six months ended July 2, 2021 increased from the prior year period primarily

due to an increase in our days payables outstanding which increased from 45 days at December 31, 2020 to 52 days at July 2, 2021 and substantially no bonus payout in 2021 as a result of the elimination of our 2020 annual bonus plan, offset by an increase in accounts receivable and inventory due to increases in revenue and demand .

Cash provided by operating activities for the six months ended July 3, 2020 was positively impacted by an increase in our inventory turnover ratio from 3.1 at December 31, 2019 to 3.2 at July 3, 2020 and a decrease in accounts receivable, offset by a decrease in our days payables outstanding which decreased from 53 days at December 31, 2019 to 49 days at July 3, 2020.

During the six months ended July 3, 2020, we paid the 2019 annual employee bonuses which had been accrued for as of December 31, 2019.

Investing Cash Flows

Cash used in investing activities was $5.5 million for the three months ended April 2, 2021, primarily driven by capital expenditures of $3.3 million and a contingent consideration payment of $2.2 million related to our 2016 asset acquisition of video signal processing and management technologies.

Cash used in investing activities was $5.1 million for the three months ended April 3, 2020, primarily related to capital expenditures of $2.3 million and a contingent consideration payment of $2.6 million related to our 2016 asset acquisition of video signal processing and management technologies.

We have no material commitments to purchase property, plant, and equipment as of April 2, 2021.

Cash used in investing activities was $10.8 million for the six months ended July 2, 2021, primarily driven by capital expenditures of $8.6 million and a contingent consideration payment of $2.2 million related to our 2016 asset acquisition of video signal processing and management technologies.

Cash used in investing activities was $7.3 million for the six months ended July 3, 2020, primarily related to capital expenditures of $4.6 million and a contingent consideration payment of $2.6 million related to our 2016 asset acquisition of video signal processing and management technologies.

We expect to use an aggregate of approximately $21 million to $23 million in fiscal 2021 for capital expenditures related to investments in new property, plant and equipment for our existing businesses.

Financing Cash Flows

Cash used in financing activities was $28.9 million for the three months ended April 2, 2021, primarily due to $18.3 million of payroll tax payments upon vesting of share-based compensation awards, $8.7 million of payment made for the purchase of a building under a finance lease, and $1.3 million of term loan repayments.

Cash used in financing activities was $16.0 million for the three months ended April 3, 2020, primarily due to $1.3 million of term loan repayments, $1.3 million of fees paid in connection with the First Amendment to our Third Amended and Restated Credit Agreement, $7.8 million of payroll tax payments upon vesting of share-based compensation awards, and $5.5 million of repurchases of common shares.

Cash used in financing activities was $32.0 million for the six months ended July 2, 2021, primarily due to $18.4 million of payroll tax payments upon vesting of share-based compensation awards, a $8.7 million payment for the purchase of a building under a finance lease agreement, $2.7 million of term loan repayments, and $1.8 million of contingent consideration payments related to acquisitions.

Cash used in financing activities was $25.0 million for the six months ended July 3, 2020, primarily due to $7.9 million of payroll tax payments on share-based compensation awards, $5.6 million of ARGES deferred purchase price payment, $5.5 million of repurchases of common shares, $2.5 million repayment of our term loan, and $1.6 million of fees paid in connection with the First Amendment to our Third Amended and Restated Credit Agreement.

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

Our contractual obligations primarily consist of the principal and interest payments associated with our Senior Credit Facilities, operating and finance leases, purchase commitments, pension obligations, deferred cash considerations associated with acquisitions, contingent considerations and earn-outs.

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, 2020.

As of April 2, 2021, we have not entered into any other material new or modified contractual obligations since December 31, 2020 .

As of July 2, 2021, we have not entered into any other material new or modified contractual obligations since December 31, 2020 .

Off-Balance Sheet Arrangements

Through April 2, 2021, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.

Through July 2, 2021, 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, 2020.

There have been no material changes to our critical accounting policies and estimates through April 2, 2021 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

There have been no material changes to our critical accounting policies and estimates through July 2, 2021 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis