What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-12 · 173 added, 115 removed, 279 unchanged (51% of the section changed)

106 unchanged sentences

Medical Market

For the three months ended April 3, 2020, the medical market accounted for approximately 58% of our revenue.

For the three and six months ended July 3, 2020, the medical market accounted for approximately 55% and 57%, respectively, 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 3, 2020, the advanced industrial market accounted for approximately 42% of our revenue.

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

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

For the three and six months ended July 3, 2020, the advanced industrial market accounted for approximately 45% and 43%, respectively, of our revenue.

environment, the f inancial condition of our customers, changes in regulatory requirements and laws, and general economic conditions.

We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market .

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We established steering committees at both the corporate level and at each of our facilities to provide leadership for and manage our COVID-19 risk mitigation actions and countermeasures.

We enacted 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 onsite to perform their work, suspending travel, spreading work 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.

We enacted 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 instituted frequent, often daily, employee communications, providing guidance and updates to our employees with regard to COVID-19 safety procedures and status.

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

We have incurred and expect to

continue to incur additional costs to protect the health of our employees.

We may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees.

have incurred and expect to continue to incur additional costs to protect the health of our employees.

We may take further actions as government authorities require or recommend or as we determine to be in the best interest of our employees.

We are committed to retaining and supporting our employees during this pandemic.

To retain our employees, we issued to substantially all of our employees a special one-time restricted stock unit grant in April 2020 totaling $14.4 million in aggregate, which will vest in February 2021.

For the majority of our on-site production staff, we will also be providing special cash incentive bonuses during the pandemic for keeping our factories open and running.

To retain our employees, we issued to substantially all of our employees a special one-time restricted stock unit grant in April 2020 totaling $14.4 million in the aggregate, which will vest in February 2021.

During the three months ended July 3, 2020, we provided special cash incentive bonuses to the majority of our on-site production staff for keeping our factories open and running during the pandemic.

In addition to retention, these actions were implemented to create an ownership mindset and focus among all employees for the duration of the crisis and through the expected recovery, while maintaining the Company’s talent and capabilities.

We are also committed to providing non-monetary support to our communities.

For example, we donated 10,000 facemasks to a local hospital in the U.S.

Executive Compensation

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These actions will result in an aggregate amount of $1.6 million (approximately 50%) reduction in the 2020 cash compensation, assuming bonuses were paid at target, for these Officers previously approved by the Compensation Committee in February 2020.

In June 2020, our Board of Directors agreed to forgo the cash retainers payable to our non-employee directors for the third quarter of 2020.

This action will result in an aggregate amount of $0.1 million (approximately 25%) reduction in cash compensation of our Board of Directors for 2020.

Our Customers

The outbreak has significantly increased economic and demand uncertainty.

We believe that a portion of recent customer orders may be attributable to customers increasing their inventory levels to reduce their exposure to risks of future supply disruptions, which could be an offset to future demand for our products.

We anticipate that the spread of COVID-19 will cause a prolonged global economic slowdown, and it is possible that it may cause a severe global recession.

In the event of a recession, overall demand for our products could decline and our business would be adversely affected.

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

In the event of a prolonged economic recession, overall demand for our products could decline further and our business would be adversely affected to a greater extent.

Our Facilities

Because of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the spread of the virus, such as travel bans and restrictions, limits on social gatherings, quarantines, shelter-in-place orders, and business shutdowns.

Because of the COVID-19 pandemic, governmental authorities worldwide implemented numerous evolving measures to try to contain the spread of the virus, such as travel bans and restrictions, limits on social gatherings, quarantines, shelter-in-place orders, business shutdowns and social distancing.

We have important manufacturing operations in the U.S., the U.K., Germany, and China, all of which have been affected by the COVID-19 pandemic.

As of the date of this filing, our manufacturing facilities around the world are in operation.

While governmental measures may be modified or extended, we expect that our manufacturing facilities will remain operational.

While governmental measures may be modified or extended in the event of a resurgence of COVID-19 infections and in the absence of effective vaccines becoming available, we have taken measures to protect our employees and expect that our manufacturing facilities will remain operational.

In connection with the COVID-19 pandemic, we have experienced limited absenteeism from those employees who are required to be on-site to perform their jobs.

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We have experienced limited disruption to our supply chain as a result of the COVID-19 pandemic to date.

Certain of our suppliers have faced difficulties maintaining operations in light of government-ordered restrictions, shelter-in-place mandates, and other factors.

We regularly monitor the financial health and manufacturing output of companies in our supply chain.

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Although we are mitigating potential supply interruptions from the COVID-19 pandemic, if certain suppliers cannot produce a key 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 or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, may result in higher costs and delays, both on obtaining raw materials and shipping finished goods to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers.

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

Our Liquidity

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payroll tax payments for the remainder of 2020 in accordance with relief provisions under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), deferring lease payments on certain facilities and temporarily suspending repurchases under our share repurchase plans.

As of April 3, 2020, we had cash and cash equivalents of $73.7 million and available borrowing capacity under our revolving credit facility of $374.9 million.

As of July 3, 2020, we deferred $1.1 million in certain U.S.

payroll tax payments under the CARES Act.

As of July 3, 2020, we had cash and cash equivalents of $97.5 million and available borrowing capacity under our revolving credit facility of $372.1 million.

We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on our business.

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Additionally, we believe we will remain in compliance with our debt covenants for the next twelve months.

In connection with our initiatives to preserve cash from a prolonged economic downturn caused by the COVID-19 pandemic, we reached an agreement with the former owner of ARGES in April 2020 to postpone a portion of the deferred cash consideration.

We are now expected to pay the seller €5.0 million ($5.4 million) in cash in June 2020 and €20.0 million ($21.7 million) in cash in December 2020.

Results of Operations for the Three Months Ended April 3, 2020 Compared with the Three Months Ended March 29, 2019

In connection with our initiatives to preserve cash from a prolonged economic downturn caused by the COVID-19 pandemic, we reached an agreement with the former owner of ARGES GmbH (“ARGES”) in April 2020 to postpone a portion of the deferred cash consideration.

We paid the seller €5.0 million in cash in June 2020 and expect to pay €20.0 million in cash in December 2020.

Results of Operations for the Three and Six Months Ended July 3, 2020 Compared with the Three and Six Months Ended June 28, 2019

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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Amortization of purchased intangible assets

Restructuring and acquisition related costs

Restructuring, acquisition, and related costs

Total operating expenses

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Overview of Financial Results

Total revenue of $155.5 million for the three months ended April 3, 2020 decreased $1.7 million, or 1.1%, from the prior year period primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by revenue growth in our medical market.

Total revenue of $144.7 million for the three months ended July 3, 2020 decreased $10.4 million, or 6.7%, from the prior year period primarily due to the COVID-19 pandemic as we experienced decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending and in the medical market as a result of deferrals of elective surgical procedures.

The effect of our prior year acquisitions resulted in an increase in revenue of $1.7 million, or 1.1%.

In addition, foreign currency exchange rates adversely impacted our revenue by $1.5 million, or 1%, for the three months ended April 3, 2020.

Operating income of $13.3 million for the three months ended April 3, 2020 decreased $1.1 million, or 7.9%, from the prior year period.

This decrease was primarily attributable to a decrease in gross profit of $1.8 million as a result of lower revenue, offset by decreases in amortization expense and restructuring and acquisition related costs.

Basic earnings per common share (“ B asic EPS”) of $ 0.

34 for the three months ended April 3, 2020 decreased $ 0.

01 from the prior year period.

Diluted earnings per common share (“Diluted EPS”) of $0.

34 for the three months ended April 3, 2020 decreased $0.

01 from the prior year period.

The decrease was primarily attributable to a decrease in operating income.

In addition, foreign currency exchange rates adversely impacted our revenue by $1.3 million, or 0.9%, for the three months ended July 3, 2020.

Total revenue of $300.2 million for the six months ended July 3, 2020 decreased $12.1 million, or 3.9%, from the prior year period primarily due to the COVID-19 pandemic as we experienced decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending and in the medical market as a result of deferrals of elective surgical procedures.

The effect of our prior year acquisitions resulted in an increase in revenue of $8.3 million, or 2.6%.

In addition, foreign currency exchange rates adversely impacted our revenue by $2.9 million, or 0.9%, for the six months ended July 3, 2020.

Operating income of $13.7 million for the three months ended July 3, 2020 decreased $1.4 million, or 9.3%, from the prior year period.

This decrease was primarily attributable to a decrease in gross profit of $7.1 million as a result of lower revenue and an increase in research and development and engineering (“R&D”) spending of $1.1 million, partially offset by decreases in selling, general and administrative (“SG&A”) expenses of $4.3 million and restructuring, acquisition, and related costs of $2.1 million.

Operating income of $27.0 million for the six months ended July 3, 2020 decreased $2.5 million, or 8.6%, from the prior year period.

This decrease was primarily attributable to a decrease in gross profit of $8.9 million as a result of lower revenue and an increase in R&D spending of $2.4 million, offset by decreases in SG&A expenses of $5.4 million and restructuring, acquisition, and related costs of $2.5 million.

Basic earnings per common share (“Basic EPS”) of $0.33 for the three months ended July 3, 2020 increased $0.03 from the prior year period.

Diluted earnings per common share (“Diluted EPS”) of $0.33 for the three months ended July 3, 2020 increased $0.04 from the prior year period.

The increase was primarily attributable to a decrease in income tax provision, partially offset by a decrease in operating income.

Basic EPS of $0.67 for the six months ended July 3, 2020 increased $0.02 from the prior year period.

Diluted EPS of $0.66 for the six months ended July 3, 2020 increased $0.02 from the prior year period.

The increase was primarily attributable to a decrease in income tax provision, partially offset by a decrease in operating income.

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 3, 2020 decreased by $4.1 million, or 6.9%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending and a decrease in revenue from our optical light engine products, partially offset by revenue of $3.2 million from the ARGES acquisition in July 2019.

Vision segment revenue for the three months ended April 3, 2020 increased by $3.1 million, or 4.7%, versus the prior year period, primarily due to an increase in revenue of $2.7 million as a result of the Med X Change acquisition in June 2019.

Six Months Ended

Precision Motion

Precision Motion segment revenue for the three months ended April 3, 2020 decreased by $0.7 million, or 2.2%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending, partially offset by the Ingenia CAT, S.L.

(“Ingenia”) acquisition in April 2019.

Photonics segment revenue for the three months ended July 3, 2020 decreased by $10.5 million, or 18.0%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending and in the medical market as a result of deferrals of elective surgical procedures and a reduction in certain medical

diagnostic testing during the COVID-19 pandemic , partially offset by revenue from the ARGES acquisition consummated in July 2019 .

Photonics segment revenue for the six months ended July 3, 2020 decreased by $14.6 million, or 12.4%, versus the prior year period, primarily due to decreased demand in the advanced industrial market related to reductions in industrial manufacturing spending and in the medical market as a result of deferrals of elective surgical procedures and a reduction in certain medical diagnostic testing during the COVID-19 pandemic, partially offset by revenue of $4.1 million from the ARGES acquisition consummated in July 2019.

Vision segment revenue for the three months ended July 3, 2020 decreased by $1.2 million, or 1.8%, 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, partially offset by an increase in revenue from our optical data collection products and an increase in revenue from the Med X Change acquisition consummated in June 2019.

Vision segment revenue for the six months ended July 3, 2020 increased by $1.9 million, or 1.5%, versus the prior year period, primarily due to a $3.7 million increase in revenue from the Med X Change acquisition consummated in June 2019 and an increase in revenue from our optical data collection products, partially offset by a decrease in revenue from our MIS products as a result of deferrals of elective surgical procedures during the COVID-19 pandemic.

Precision Motion

Precision Motion segment revenue for the three months ended July 3, 2020 increased by $1.2 million, or 3.9%, versus the prior year period, primarily due to an increase in revenue related to microelectronics demand, partially offset by decreased demand in the medical market as a result of deferrals of elective surgical procedures during the COVID-19 pandemic.

Precision Motion segment revenue for the six months ended July 3, 2020 increased by $0.5 million, or 0.8%, versus the prior year period, primarily due to an increase in revenue related to microelectronics demand and an increase in revenue from the Ingenia acquisition consummated in June 2019, partially offset by decreased demand in the medical market as a result of deferrals of elective surgical procedures during the COVID-19 pandemic.

Gross Profit and Gross Profit Margin

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Three Months Ended

Six Months Ended

Gross profit:

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Precision Motion

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, headcount, inventory obsolescence and warranty expenses.

Photonics segment gross profit for the three months ended April 3, 2020 decreased $2.7 million, or 9.7%, versus the prior year period, primarily due to a decrease in revenue.

Photonics segment gross profit margin was 44.7% for the three months ended April 3, 2020, versus a gross profit margin of 46.1% for the prior year period.

The decrease in gross profit margin was primarily attributable to product mix and operational inefficiencies.

Vision segment gross profit for the three months ended April 3, 2020 increased $0.6 million, or 2.3%, versus the prior year period, primarily due to an increase in revenue.

Vision segment gross profit margin was 38.5% for the three months ended April 3, 2020, versus a gross profit margin of 39.4% for the prior year period.

The decrease in gross profit margin was primarily attributable to product mix.

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 July 3, 2020 decreased $6.4 million, or 23.5%, versus the prior year period, primarily due to a decrease in revenue.

Photonics segment gross profit margin was 43.7% for the three months ended July 3, 2020, versus a gross profit margin of 46.9% for the prior year period.

The decrease in gross profit margin was primarily attributable to higher operational costs in our factories and unfavorable product mix changes as a result of the COVID-19 pandemic.

Photonics segment gross profit for the six months ended July 3, 2020 decreased $9.1 million, or 16.6%, versus the prior year period, primarily due to a decrease in revenue.

Photonics segment gross profit margin was 44.3% for the six months ended July 3, 2020, versus a gross profit margin of 46.5% for the prior year period.

The decrease in gross profit margin was primarily attributable to higher operational costs in our factories and unfavorable product mix changes as a result of the COVID-19 pandemic.

Vision segment gross profit for the three months ended July 3, 2020 decreased $0.7 million, or 2.8%, versus the prior year period, primarily due to a decrease in revenue.

Vision segment gross profit margin was 37.9% for the three months ended July 3, 2020, versus a gross profit margin of 38.3% for the prior year period.

The decrease in gross profit margin was primarily attributable to higher operational costs in our factories and unfavorable product mix changes as a result of the COVID-19 pandemic.

Vision segment gross profit for the six months ended July 3, 2020 decreased $0.1 million, or 0.2%, versus the prior year period, primarily due to a decrease in gross profit margin.

Vision segment gross profit margin was 38.2% for the six months ended July 3, 2020, versus a gross profit margin of 38.8% for the prior year period.

The decrease in gross profit margin was primarily attributable to higher operational costs in our factories and unfavorable product mix changes as a result of the COVID-19 pandemic.

Precision Motion

Precision Motion segment gross profit for the three months ended April 3, 2020 increased $0.4 million, or 2.9%, versus the prior year period, primarily due an increase in gross profit margin.

Precision Motion segment gross profit margin was 44.4% for the three months ended April 3, 2020, versus a gross profit margin of 42.2% for the prior year period.

The increase in gross profit margin was primarily attributable to product mix and operational improvements.

Precision Motion segment gross profit for the three months ended July 3, 2020 increased $0.1 million, or 0.5%, versus the prior year period, primarily due to an increase in revenue.

Precision Motion segment gross profit margin was 43.0% for the three months ended July 3, 2020, versus a gross profit margin of 44.4% for the prior year period.

The decrease in gross profit margin was primarily attributable to higher inventory obsolescence related to the discontinuation of a product.

Precision Motion segment gross profit for the six months ended July 3, 2020 increased $0.5 million, or 1.7%, versus the prior year period, primarily due to an increase in revenue and an increase in gross profit margin.

Precision Motion segment gross profit margin was 43.7% for the six months ended July 3, 2020, versus a gross profit margin of 43.3% for the prior year period.

Operating Expenses

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Three Months Ended

Six Months Ended

Research and development and engineering

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Amortization of purchased intangible assets

Restructuring and acquisition related costs

Restructuring, acquisition, and related costs

Research and Development and Engineering Expenses

Research and Development and Engineering (“R&D”) expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects.

R&D expenses were $15.3 million, or 9.9% of revenue, during the three months ended April 3, 2020, versus $14.0 million, or 8.9% 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 R&D expenses from prior year acquisitions.

R&D expenses were $14.4 million, or 10.0% of revenue, during the three months ended July 3, 2020, versus $13.4 million, or 8.6% 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 R&D expenses from 2019 acquisitions.

R&D expenses were $29.8 million, or 9.9% of revenue, during the six months ended July 3, 2020, versus $27.4 million, or 8.8% 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 R&D expenses from 2019 acquisitions.

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 $30.8 million, or 19.8% of revenue, during the three months ended April 3, 2020, versus $31.8 million, or 20.3% of revenue, during the prior year period.

SG&A expenses decreased in terms of total dollars and as a percentage of revenue primarily due to lower variable compensation as we eliminated 2020 annual bonuses.

SG&A expenses were $24.9 million, or 17.2% of revenue, during the three months ended July 3, 2020, versus $29.2 million, or 18.8% of revenue, during the prior year period.

SG&A expenses decreased in terms of total dollars and as a percentage of revenue primarily due to lower variable compensation as we eliminated 2020 annual bonuses, lower salaries due to unpaid-time off, and lower travel costs and other discretionary spending, partially offset by higher stock-based compensation expense.

SG&A expenses were $55.7 million, or 18.5% of revenue, during the six months ended July 3, 2020, versus $61.1 million, or 19.5% of revenue, during the prior year period.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $3.4 million, or 2.2% of revenue, during the three months ended April 3, 2020, versus $4.0 million, or 2.5% of revenue, during the prior year period.

Restructuring and Acquisition Related Costs

We recorded restructuring and acquisition related costs of $1.7 million during the three months ended April 3, 2020, versus $2.1 million during the prior year period.

The decrease in restructuring and acquisition related costs versus the prior year period was primarily due to a decrease in restructuring charges of $0.6 million as a result of the 2018 and 2019 restructuring programs, partially offset by an increase in acquisition related costs of $0.2 million primarily related to expenses under an earn-out agreement associated with the Zettlex acquisition in May 2018.

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $3.4 million, or 2.4% of revenue, during the three months ended July 3, 2020, versus $3.8 million, or 2.4% of revenue, during the prior year period.

Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $6.9 million, or 2.3% of revenue, during the six months ended July 3, 2020, versus $7.8 million, or 2.5% of revenue, during the prior year period.

Restructuring, Acquisition, and Related Costs

We recorded restructuring, acquisition, and related costs of $2.2 million during the three months ended July 3, 2020, versus $4.3 million during the prior year period.

The decrease in restructuring, acquisition, and related costs versus the prior year period was primarily due to a decrease in restructuring charges of $1.4 million as a result of the 2018 and 2019 restructuring programs and a decrease in acquisition and related costs of $0.6 million.

The decrease was primarily attributable to higher acquisition costs associated with acquisitions in the prior year, offset by $0.6 million legal fees during the three months ended July 3, 2020 related to an arbitration demand in connection with a pre-acquisition contract dispute from a 2019 acquisition.

We recorded restructuring, acquisition, and related costs of $3.9 million during the six months ended July 3, 2020, versus $6.4 million during the prior year period.

The decrease in restructuring, acquisition, and related costs versus the prior year period was primarily due to a decrease in restructuring charges of $2.0 million as a result of the 2018 and 2019 restructuring programs and a decrease in acquisition and related costs of $0.4 million.

The decrease was primarily attributable to higher acquisition costs associated with acquisitions in the prior year, offset by $0.6 million legal fees during the six months ended July 3, 2020 related to an arbitration demand in connection with a pre-acquisition contract dispute from a 2019 acquisition.

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 $8.9 million, or 16.2% of revenue, during the three months ended April 3, 2020, versus $12.3 million, or 20.8% of revenue, during the prior year period.

The decrease in operating income was primarily due to a decrease in gross profit of $2.7 million and an increase in R&D spending of $1.2 million primarily due to R&D expenses from a prior year acquisition, offset by a decrease in amortization of purchased intangible assets of $0.4 million.

Vision segment operating income was $5.6 million, or 8.2% of revenue, during the three months ended April 3, 2020, versus $4.6 million, or 6.9% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $0.6 million, a decrease of SG&A expenses of $0.6 million, and a decrease in restructuring related charges of $0.3 million, partially offset by an increase in R&D expenses of $0.3 million.

Photonics segment operating income was $6.9 million, or 14.5% of revenue, during the three months ended July 3, 2020, versus $11.7 million, or 20.0% of revenue, during the prior year period.

The decrease in operating income was primarily due to a decrease in gross profit of $6.4 million and an increase in R&D spending of $1.0 million primarily due to R&D expenses from a prior year

acquisition , offset by a decrease in SG&A expenses of $0.9 million, a decrease in restructuring related charge s of $1.3 million and a decrease in amortization of purchased intangible assets of $0.4 million .

Photonics segment operating income was $15.9 million, or 15.4% of revenue, during the six months ended July 3, 2020, versus $24.0 million, or 20.4% of revenue, during the prior year period.

The decrease in operating income was primarily due to a decrease in gross profit of $9.1 million and an increase in R&D spending of $2.2 million primarily due to R&D expenses from a prior year acquisition, partially offset by a decrease in SG&A expenses of $1.0 million, a decrease in restructuring related charges of $1.3 million, and a decrease in amortization of purchased intangible assets of $0.9 million.

Vision segment operating income was $4.7 million, or 7.2% of revenue, during the three months ended July 3, 2020, versus $4.2 million, or 6.4% of revenue, during the prior year period.

The increase in operating income was primarily due to a decrease of SG&A expenses of $2.0 million, partially offset by a decrease in gross profit of $0.7 million and an increase in acquisition and related charges of $0.5 million.

Vision segment operating income was $10.3 million, or 7.7% of revenue, during the six months ended July 3, 2020, versus $8.8 million, or 6.7% of revenue, during the prior year period.

The increase in operating income was primarily due to a decrease of SG&A expenses of $2.6 million, partially offset by an increase in acquisition and related charges of $0.5 million and an increase in R&D expenses of $0.3 million.

Precision Motion

Precision Motion segment operating income was $6.5 million, or 20.9% of revenue, during the three months ended April 3, 2020, versus $5.6 million, or 17.6% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $0.4 million and decrease in SG&A expenses of $0.4 million.

Precision Motion segment operating income was $6.5 million, or 20.2% of revenue, during the three months ended July 3, 2020, versus $6.0 million, or 19.3% of revenue, during the prior year period.

The increase in operating income was primarily due to a decrease in SG&A expenses of $0.2 million and a decrease in restructuring, acquisition, and related costs of $0.2 million.

Precision Motion segment operating income was $13.1 million, or 20.6% of revenue, during the six months ended July 3, 2020, versus $ 11.6 million, or 18.4% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $0.5 million, a decrease in SG&A expenses of $0.6 million and a decrease in amortization of purchased intangible assets of $0.3 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 related costs.

These costs for the three months ended April 3, 2020 decreased by $0.3 million versus the prior year period.

These costs for the three months ended July 3, 2020 decreased by $2.3 million versus the prior year period primarily due to a decrease in SG&A expenses of $1.1 million and a decrease in restructuring, acquisition, and related costs of $1.3 million.

Unallocated corporate and shared services costs for the six months ended July 3, 2020 decreased by $2.6 million versus the prior year period primarily due to a decrease in SG&A expenses of $1.1 million and a decrease in restructuring, acquisition, and related costs 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 $1.7 million for the three months ended April 3, 2020, versus $2.0 million in the prior year period.

Net interest expense was $1.7 million for the three months ended July 3, 2020, versus $2.2 million in the prior year period.

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

The weighted average interest rate on our senior credit facilities was 2.39% during the three months ended April 3, 2020, versus 3.78% during the three months ended March 29, 2019.

As of April 3, 2020, our outstanding borrowings under the Third Amended and Restated Credit Agreement were denominated in Euro, British Pound, and U.S Dollars totaling $168.2 million, $13.6 million, and $35.0 million, respectively.

The weighted average interest rate on our senior credit facilities was 2.40% during the three months ended July 3, 2020, versus 3.51%

during the three months ended June 28, 2019 .

As of July 3, 2020 , our outstanding borrowings under the Third Amended and Restated Credit Agreement denominated in Euro, British Pound, and U.S .

Dollars were $1 73.2 million, $13.

7 million, and $35.0 million, respectively.

Net interest expense was $3.4 million for the six months ended July 3, 2020, versus $4.2 million in the prior year period.

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

The weighted average interest rate on our senior credit facilities was 2.40% during the six months ended July 3, 2020, versus 3.64% during the six months ended June 28, 2019.

Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses) were $0.3 million net gains for the three months ended April 3, 2020, versus less than $0.1 million net gains in the prior year period.

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

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

Foreign exchange transaction gains (losses) were $0.3 million net losses for the three months ended July 3, 2020, versus less than $0.1 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.

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

Foreign exchange transaction gains (losses) were less than $0.1 million net losses for the six months ended July 3, 2020, versus less than $0.1 million net gains in the prior year period.

Other Income (Expense), Net

Net other expense was nominal for the three months ended April 3, 2020 and the three months ended March 29, 2019.

Income Taxes Provision (Benefit)

Our effective tax rate for the three months ended April 3, 2020 was a benefit of (0.3)% versus a provision of 0.6% for the prior year period.

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 and 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 of 0.6% for the three months ended March 29, 2019 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.

Net other expense was nominal for both the six months ended July 3, 2020 and the six months ended June 28, 2019.

Income Tax Provision (Benefit)

Our effective tax rate for the three months ended July 3, 2020 was 0.3%, versus 19.5% for the prior year period.

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 of 19.5% for the three months ended June 28, 2019 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.

and patent box deductions and other tax credits.

Our effective tax rate for the six months ended July 3, 2020 was (0%), versus 10.3% for the prior year period.

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 stock-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.

Our effective tax rate of 10.3% for the six months ended June 28, 2019 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 windfall tax benefits upon vesting of certain stock-based compensation awards during the period.

For the three months ended March 29, 2019, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 19.3% on our effective tax rate.

For the six months ended June 28, 2019, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 10.6% on our effective tax rate.

On March 27, 2020, the U.S.

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The CARES Act is an emergency economic stimulus package which, among other things, contains numerous provisions concerning income taxes.

While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s income taxes or related disclosures.

The CARES Act will not have a material impact on our income taxes or related disclosures.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities.

Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of our debt and related interest payments.

Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of debt and related interest payments.

Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility.

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 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 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.

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

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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 3, 2020, $55.8 million of our $73.7 million cash and cash equivalents was held by subsidiaries outside of Canada and the United States.

As of July 3, 2020, $61.4 million of our $97.5 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 (defined below).

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In connection with our initiatives to preserve cash from a prolonged economic downturn caused by the COVID-19 pandemic, we reached an agreement with the former owner of ARGES in April 2020 to settle net working capital adjustments and to postpone a portion of the deferred cash consideration.

We are now expected to pay the seller €5.0 million ($5.4 million) in cash in June 2020 and €20.0 million ($21.7 million) in cash in December 2020.

We also expect to defer certain U.S.

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

In addition, with respect to the COVID-19 pandemic impact on liquidity, we are evaluating and taking actions to reduce costs and cash expenditures across the Company.

These include reducing hiring activities, restricting travel, adjusting employee compensation by eliminating fiscal year 2020 cash bonuses and base salary increases, implementing an unpaid time-off program for substantially all of our non-production workforce, limiting discretionary spending, reducing or deferring spending on capital investment projects, and deferrals lease payments on certain facilities.

We paid the seller €5.0 million in cash in June 2020 and expect to pay €20.0 million in cash in December 2020.

We also are deferring certain U.S.

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

As of July 3, 2020, we deferred $1.1 million in certain U.S.

payroll tax payments under the CARES Act.

In addition, with respect to the COVID-19 pandemic impact on liquidity, we are evaluating and have taken actions to reduce costs and cash expenditures across the Company.

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 3, 2020, we had a €89.0 million euro-denominated term loan (approximately $96.7 million) and $120.1 million revolver borrowings outstanding under our Senior Credit Facilities.

As of July 3, 2020, we had a €87.9 million euro-denominated term loan (approximately $99.1 million) and $122.9 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% to 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.

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 leverage ratio and a minimum 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 3, 2020:

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 .

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 July 3, 2020:

Maximum consolidated leverage ratio

Minimum consolidated fixed charge coverage ratio

Share Repurchase Plan s

Share Repurchase Plans

Our Board of Directors may approve share repurchase plans from time to time.

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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.

During the three months ended April 3, 2020, we repurchased 65 thousand shares for an aggregate purchase price of $5.5 million at an average price of $84.55 per share under the 2018 Repurchase Plan.

We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of April 3, 2020.

During the six months ended July 3, 2020, we repurchased 65 thousand shares for an aggregate purchase price of $5.5 million at an average price of $84.55 per share under the 2018 Repurchase Plan.

We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of July 3, 2020.

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.

In an effort to preserve cash in light of the economic slowdown caused by the COVID-19 pandemic, we have temporarily suspended repurchases under our share repurchase plans.

Cash Flows for the Three Months Ended April 3, 2020 and March 29, 2019

In an effort to preserve cash in light of the economic slowdown caused by the COVID-19 pandemic, we have temporarily suspended repurchases under our share repurchase plans since April 2020.

Cash Flows for the Six Months Ended July 3, 2020 and June 28, 2019

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 $17.8 million for the three months ended April 3, 2020, versus $5.5 million for the prior year period.

Cash provided by operating activities for the three months ended April 3, 2020 increased from the prior year period primarily due to working capital improvements resulting in an increase in cash flows from accounts receivable and inventories.

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 for the three months ended March 29, 2019 was negatively impacted by the timing of sales and inventory purchases in the three months ended March 29, 2019, compared to the three months ended December 31, 2018.

During the three months ended March 29, 2019, we paid the first milestone payment under the earn-out agreement for the Zettlex acquisition amounting to $3.9 million and paid the 2018 annual employee bonuses, both of which had been accrued for as of December 31, 2018.

Cash provided by operating activities was $51.6 million for the six months ended July 3, 2020, versus $20.9 million for the prior year period.

Cash provided by operating activities for the six months ended July 3, 2020 increased from the prior year period primarily

due to working capital improvements resulting in an increase in cash flows from accounts receivable and inventory , and a decrease in income tax payments.

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.

Cash provided by operating activities for the six months ended June 28, 2019 was negatively impacted by an increase in our days sales outstanding which increased from 51 days at December 31, 2018 to 52 days at June 28, 2019, a decrease in our days payables outstanding which decreased from 52 days at December 31, 2018 to 51 days at June 28, 2019 and an increase in inventories, as our inventory turnover ratio decreased from 3.4 at December 31, 2018 to 3.2 at June 28, 2019.

During the six months ended June 28, 2019, we paid the first milestone payment under the earn-out agreement for our acquisition of Zettlex Holdings Limited amounting to $3.9 million and paid the 2018 annual employee bonuses, both of which had been accrued for as of December 31, 2018.

Investing Cash Flows

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

Cash used in investing activities was $2.4 million for the three months ended March 29, 2019, primarily related to capital expenditures.

We have no material commitments to purchase property, plant, and equipment as of April 3, 2020.

We expect to use approximately $6 million to $8 million in 2020 for capital expenditures related to investments in new property, plant and equipment.

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

Cash used in investing activities was $34.4 million for the six months ended June 28, 2019, primarily driven by the Ingenia and Med X Change acquisitions.

In connection with these acquisitions, we paid $28.9 million cash considerations (net of cash acquired of $1.0 million) during the six months ended June 28, 2019.

We also paid $5.6 million for capital expenditures during the six months ended June 28, 2019.

We have no material commitments to purchase property, plant, and equipment as of July 3, 2020.

We expect to use an aggregate of approximately $6 million to $8 million in fiscal 2020 for capital expenditures related to investments in new property, plant and equipment.

Financing Cash Flows

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 on share-based compensation awards, and $5.5 million of repurchases of common shares.

Cash used in financing activities was $10.6 million for the three months ended March 29, 2019, primarily due to $4.6 million of term loan repayments, $5.9 million of payroll tax payments on stock-based compensation awards, and $0.1 million of principal payments under our finance lease obligations.

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, ARGES deferred purchase price payment of $5.6 million, $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.

Cash used in financing activities was $2.8 million for the six months ended June 28, 2019, primarily due to $16.1 million of term loan payments, $6.7 million of payroll tax payments upon vesting of stock-based compensation awards, and $3.3 million of repurchases of common stock, partially offset by $23.6 million of borrowings under our revolving credit facility used to fund the Ingenia and Med X Change acquisitions.

Off-Balance Sheet Arrangements, Contractual Obligations

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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, 2019.

As of April 3, 2020, other than the First Amendment to the Third Amended and Restated Credit Agreement, we have not entered into any other material new or modified contractual obligations since the end of the fiscal year ended December 31, 2019 .

As of July 3, 2020, other than the First Amendment to the Third Amended and Restated Credit Agreement, we have not entered into any other material new or modified contractual obligations since the end of the fiscal year ended December 31, 2019 .

Off-Balance Sheet Arrangements

Through April 3, 2020, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.

Through July 3, 2020, 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, 2019.

There have been no material changes to our critical accounting policies and estimates through April 3, 2020 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

There have been no material changes to our critical accounting policies and estimates through July 3, 2020 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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