NOVANTA INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report on Form 10-Q. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to the anticipated impacts of the COVID-19 pandemic on our business, our financial results and our financial condition; our belief that the Purchasing Managers Index (“PMI”) may provide an indication of the impact of general economic conditions on our sales into the advanced industrial end market; our strategy; anticipated financial performance; expected liquidity and capitalization; drivers of revenue growth and our growth expectations in various markets; management’s plans and objectives for future operations, expenditures and product development and investments in research and development; business prospects; potential of future product releases and expansion of our product and service offerings; anticipated revenue performance; industry trends; market conditions; our competitive positions; changes in economic and political conditions; changes in accounting principles; changes in actual or assumed tax liabilities; expectations regarding tax exposures; anticipated reinvestment of future earnings and dividend policy; anticipated expenditures in regard to the Company’s benefit plans; future acquisitions; integration and anticipated benefits from acquisitions and dispositions; anticipated economic benefits, costs and timelines of restructuring programs; ability to repay our indebtedness; our intentions regarding the use of cash; expectations regarding legal and regulatory environmental requirements and our compliance thereto; and other statements that are not historical facts. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following: economic and political conditions and the effects of these conditions on our customers’ businesses and level of business activities; our significant dependence upon our customers’ capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate and successfully commercialize our innovations; failure to introduce new products in a timely manner; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our information technology systems; our failure to comply with data privacy regulations; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; risks associated with the COVID-19 pandemic and other events outside our control; our increased use of outsourcing in foreign countries; risks associated with increased outsourcing of components manufacturing; our exposure to increased tariffs, trade restrictions or taxes on our products; negative effects on global economic conditions, financial markets and our business as a result of the United Kingdom’s impending withdrawal from the European Union and the actions of the current U.S. government, including its policies on trade tariffs and reactions from other countries to any new tariffs imposed by the U.S.; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors’ products; disruptions in the supply of certain key components or other goods from our suppliers; our failure to accurately forecast component and raw material requirements leading to excess inventories or delays in the delivery of our products; production difficulties and product delivery delays or disruptions; our exposure to medical device regulations, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products; potential penalties for violating foreign, U.S. federal, and state healthcare laws and regulations; changes in governmental regulations affecting our business or products; our compliance, or failure to comply, with environmental regulations; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; being subject to U.S. federal income taxation even though we are a non-U.S. corporation; changes in tax laws, and fluctuations in our effective tax rates; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; our existing indebtedness limiting our ability to engage in certain activities; volatility in the market price for our common shares; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company’s operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 under the heading “Risk Factors” as updated in Part 2, Item 1A of this Quarterly Report on Form 10-Q. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements, except as required under applicable law. 28 Accounting Period The interim financial statements of Novanta Inc. and its subsidiaries (collectively referred to as the “Company”, “we”, “us”, “our”) are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, with the exception of the fourth quarter which always ends on December 31. Business Overview We are a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers (“OEMs”) a competitive advantage. We combine deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables us to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers' demanding applications. Reportable Segments We operate in three reportable segments: Photonics, Vision, and Precision Motion. The reportable segments and their principal activities consist of the following: Photonics Our Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, solid state laser, ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors. Vision Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless, recorder and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification (“RFID”) technologies; thermal chart recorders; spectrometry technologies, and embedded touch screen solutions. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors. Precision Motion Our Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion control sub-assemblies, servo drives, air bearings, and air bearing spindles to customers worldwide. The vast majority of the segment’s product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors. End Markets We primarily operate in two end markets: the medical market and the advanced industrial market. Medical Market For the three and nine months ended October 2, 2020, the medical market accounted for approximately 54% and 56%, 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 and nine months ended October 2, 2020, the advanced industrial market accounted for approximately 46% and 44%, respectively, 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 29 manufacturing 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 . Strategy Our strategy is to drive sustainable, profitable growth through short-term and long-term initiatives, including: • disciplined focus on our diversified business model of providing functionality to long life-cycle OEM customer platforms in attractive medical and advanced industrial niche markets; • improving our business mix to increase medical sales as a percentage of total revenue by: - introducing new products aimed at attractive medical applications, such as minimally invasive and robotic surgery, ophthalmology, patient monitoring, drug delivery, clinical laboratory testing and life science equipment; - deepening our key account management relationships with and driving cross selling of our product offerings to leading medical equipment manufacturers; and - pursuing complementary medical technology acquisitions; • increasing our penetration of high growth advanced industrial applications, such as laser materials processing, robotics, laser additive manufacturing, automation and metrology, by working closely with OEM customers to launch application specific products that closely match the requirements of each application; • broadening our portfolio of enabling proprietary technologies and capabilities through increased investment in new product development, and investments in application development to further penetrate existing customers, while expanding the applicability of our solutions to new markets; • broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications, including increasing our recurring revenue streams such as services, spare parts and consumables; • expanding sales and marketing channels to reach new target customers; • improving our existing operations to expand profit margins and improve customer satisfaction by implementing lean manufacturing principles, strategic sourcing across our major production sites; and optimizing and limiting the growth of our fixed cost base; and • attracting, retaining, and developing world-class talented and motivated employees. Significant Events and Updates Amendment to Third Amended and Restated Credit Agreement On March 27, 2020, we entered into an amendment (the “First Amendment”) to the third amended and restated credit agreement, dated as of December 31, 2019 (the “Third Amended and Restated Credit Agreement”). The First Amendment exercised a portion of the $200 million uncommitted accordion feature under the Third Amended and Restated Credit Agreement and increased the revolving credit facility commitment by $145 million, from $350 million to $495 million, and reset the uncommitted accordion feature to $200 million for potential future expansion. Impact of COVID-19 on Our Business Our Employees In response to the COVID-19 pandemic, we have taken proactive, aggressive actions to protect the health and safety of our employees. 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 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 expect to 30 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 investment in technologies and monitoring equipment. We expect such costs to continue to grow and be significant to our cost of operations . 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 at a total fair value of $14.4 million in the aggregate. The restricted stock units are expected to vest in February 2021. 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. Executive Compensation The Compensation Committee of our Board of Directors approved the 2020 compensation plans for our executive officers and a Section 16 officer (collectively, the “Officers”) in February 2020. To support our business during the COVID-19 pandemic, the Officers agreed to waive their 2020 merit and promotional increases, eliminate their 2020 cash bonuses, and take two weeks of unpaid time-off. Further, the Officers did not receive the one-time special restricted stock unit grant issued to the rest of the employees. 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 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 resulted in an aggregate amount of $0.1 million (approximately 25%) reduction in the cash compensation of our Board of Directors for 2020. Our Customers The outbreak has significantly increased economic and demand uncertainty. The spread of COVID-19 has caused a global economic slowdown and a 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 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 October 2, 2020, our manufacturing facilities around the world were in operation. 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 in the near term, we have taken measures to protect our employees and expect our manufacturing facilities to 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. Our Supply Chain We have experienced limited disruption to our supply chain as a result of the COVID-19 pandemic to date. We regularly monitor the financial health and manufacturing output of companies in our supply chain. Hardship on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause further disruption 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, we are identifying alternative suppliers, sourcing raw materials from different supplier locations, and taking other actions to ensure our supply of raw materials. 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 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. 31 Our Liquidity With respect to liquidity, we have taken actions to reduce costs and cash expenditures across the Company. These actions included 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, deferring lease payments on certain facilities, and deferring certain U.S. 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”). As of October 2, 2020, we deferred $2.0 million in certain U.S. payroll tax payments under the CARES Act. Due to the uncertainty related to the future impact of the COVID-19 pandemic, we temporarily suspended repurchases under our share repurchase plans in April 2020. In connection with our initiatives to preserve cash for 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. As of October 2, 2020, we had cash and cash equivalents of $106.6 million and available borrowing capacity under our revolving credit facility of $398.8 million. We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on our business. Based on our analysis, we believe our existing balances of cash and cash equivalents, anticipated cash flows from our operating activities, and available borrowing capacity under our revolving credit facility will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. Additionally, we believe we will remain in compliance with our debt covenants for the next twelve months. Results of Operations for the Three and Nine Months Ended October 2, 2020 Compared with the Three and Nine Months Ended September 27, 2019 The following table sets forth our unaudited results of operations as a percentage of revenue for the periods indicated: Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 58.6 58.4 58.9 57.9 Gross profit 41.4 41.6 41.1 42.1 Operating expenses: Research and development and engineering 10.7 9.0 10.2 8.8 Selling, general and administrative 18.7 18.1 18.6 19.1 Amortization of purchased intangible assets 2.5 2.6 2.3 2.5 Restructuring, acquisition, and related costs 1.2 3.6 1.3 2.6 Total operating expenses 33.1 33.3 32.4 33.0 Operating income 8.3 8.3 8.8 9.1 Interest income (expense), net (1.2 ) (1.4 ) (1.1 ) (1.4 ) Foreign exchange transaction gains (losses), net (0.1 ) 0.3 (0.0 ) 0.1 Other income (expense), net (0.0 ) (0.0 ) 0.0 (0.0 ) Income before income taxes 7.0 7.1 7.6 7.8 Income tax provision 1.2 1.3 0.4 1.0 Consolidated net income 5.8 % 5.8 % 7.2 % 6.8 % 32 Overview of Financial Results Total revenue of $142.9 million for the three months ended October 2, 2020 decreased $11.1 million, or 7.2%, 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 $0.1 million, or 0.1%. In addition, foreign currency exchange rates positively impacted our revenue by $2.6 million, or 1.7%, for the three months ended October 2, 2020. Total revenue of $443.1 million for the nine months ended October 2, 2020 decreased $23.3 million, or 5.0%, 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 $8.4 million, or 1.8%. In addition, foreign currency exchange rates adversely impacted our revenue by $0.2 million, or 0.1%, for the nine months ended October 2, 2020. Operating income of $11.9 million for the three months ended October 2, 2020 decreased $0.9 million, or 7.3%, from the prior year period. This decrease was primarily attributable to a decrease in gross profit of $4.9 million as a result of lower revenue, partially offset by a decrease in restructuring, acquisition, and related costs of $3.9 million. Operating income of $38.8 million for the nine months ended October 2, 2020 decreased $3.5 million, or 8.2%, from the prior year period. This decrease was primarily attributable to a decrease in gross profit of $13.9 million as a result of lower revenue and an increase in R&D spending of $3.8 million, offset by decreases in SG&A expenses of $6.5 million and restructuring, acquisition, and related costs of $6.3 million. Basic earnings per common share (“Basic EPS”) of $0.23 for the three months ended October 2, 2020 decreased $0.02 from the prior year period. Diluted earnings per common share (“Diluted EPS”) of $0.23 for the three months ended October 2, 2020 decreased $0.02 from the prior year period. The decrease was primarily attributable to a decrease in operating income. Basic EPS of $0.91 for the nine months ended October 2, 2020 increased $0.01 from the prior year period. The increase was primarily attributable to decreases in income tax provision and net interest expense, partially offset by a decrease in operating income. Diluted EPS of $0.89 for the nine months ended October 2, 2020 remained flat from the prior year period. Revenue The following table sets forth external revenue by reportable segment for the periods noted (dollars in thousands): Three Months Ended October 2, September 27, Increase Percentage 2020 2019 (Decrease) Change Photonics $ 46,394 $ 54,570 $ (8,176 ) (15.0 )% Vision 64,299 69,923 (5,624 ) (8.0 )% Precision Motion 32,236 29,573 2,663 9.0 % Total $ 142,929 $ 154,066 $ (11,137 ) (7.2 )% Nine Months Ended October 2, September 27, Increase Percentage 2020 2019 (Decrease) Change Photonics $ 149,337 $ 172,081 $ (22,744 ) (13.2 )% Vision 198,047 201,754 (3,707 ) (1.8 )% Precision Motion 95,741 92,562 3,179 3.4 % Total $ 443,125 $ 466,397 $ (23,272 ) (5.0 )% Photonics Photonics segment revenue for the three months ended October 2, 2020 decreased by $8.2 million, or 15.0%, 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. 33 Photonics segment revenue for the nine months ended October 2, 2020 decreased by $ 22.7 million, or 13.2% , 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 a $3.3 million increase in revenue from the ARGES acquisition consummated in July 2019 . Vision Vision segment revenue for the three months ended October 2, 2020 decreased by $5.6 million, or 8.0%, 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. Vision segment revenue for the nine months ended October 2, 2020 decreased by $3.7 million, or 1.8%, versus the prior year period, primarily due to a decrease in revenue from our MIS products as a result of deferrals of elective surgical procedures during the COVID-19 pandemic, partially offset by a $3.0 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. Precision Motion Precision Motion segment revenue for the three months ended October 2, 2020 increased by $2.7 million, or 9.0%, 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 nine months ended October 2, 2020 increased by $3.2 million, or 3.4%, 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. Gross Profit and Gross Profit Margin The following table sets forth the gross profit and gross profit margin for each of our reportable segments for the periods noted (dollars in thousands): Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Gross profit: Photonics $ 20,166 $ 25,289 $ 65,725 $ 79,911 Vision 24,586 26,922 75,676 78,106 Precision Motion 15,011 12,504 42,753 39,784 Unallocated Corporate and Shared Services (658 ) (661 ) (1,902 ) (1,676 ) Total $ 59,105 $ 64,054 $ 182,252 $ 196,125 Gross profit margin: Photonics 43.5 % 46.3 % 44.0 % 46.4 % Vision 38.2 % 38.5 % 38.2 % 38.7 % Precision Motion 46.6 % 42.3 % 44.7 % 43.0 % Total 41.4 % 41.6 % 41.1 % 42.1 % 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 Photonics segment gross profit for the three months ended October 2, 2020 decreased $5.1 million, or 20.3%, versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 43.5% for the three months ended October 2, 2020, versus a gross profit margin of 46.3% for the prior year period. The decrease in gross profit margin was primarily attributable to lower factory utilization associated with lower production volumes and higher period costs as a result of the COVID-19 pandemic. 34 Photonics segment gross profit for the nine months ended October 2, 2020 decreased $ 14.2 million, or 17.8% , versus the prior year period, primarily due to a decrease in revenue. Photonics segment gross profit margin was 44. 0 % for the nine months ended October 2, 2020 , versus a gross profit margin of 46. 4 % for the prior year period. The decrease in gross profit margin was primarily attributable to lower factory utilization associated with lower production volumes and higher period costs as a result of the COVID-19 pandemic . Vision Vision segment gross profit for the three months ended October 2, 2020 decreased $2.3 million, or 8.7%, versus the prior year period, primarily due to a decrease in revenue. Vision segment gross profit margin was 38.2% for the three months ended October 2, 2020, versus a gross profit margin of 38.5% for the prior year period. The decrease in gross profit margin was primarily attributable to unfavorable product mix changes as a result of the COVID-19 pandemic. Vision segment gross profit for the nine months ended October 2, 2020 decreased $2.4 million, or 3.1%, versus the prior year period, primarily due to a decrease in revenue. Vision segment gross profit margin was 38.2% for the nine months ended October 2, 2020, versus a gross profit margin of 38.7% for the prior year period. The decrease in gross profit margin was primarily attributable to unfavorable product mix changes as a result of the COVID-19 pandemic. Precision Motion Precision Motion segment gross profit for the three months ended October 2, 2020 increased $2.5 million, or 20.0%, 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 46.6% for the three months ended October 2, 2020, versus a gross profit margin of 42.3% for the prior year period. The increase in gross profit margin was primarily attributable to favorable product and customer mix changes. Precision Motion segment gross profit for the nine months ended October 2, 2020 increased $3.0 million, or 7.5%, 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 44.7% for the nine months ended October 2, 2020, versus a gross profit margin of 43.0% for the prior year period. The increase in gross profit margin was primarily attributable to favorable product and customer mix changes. Operating Expenses The following table sets forth operating expenses for the periods noted (in thousands): Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Research and development and engineering $ 15,231 $ 13,811 $ 45,005 $ 41,196 Selling, general and administrative 26,788 27,926 82,451 88,977 Amortization of purchased intangible assets 3,533 3,970 10,388 11,740 Restructuring, acquisition, and related costs 1,687 5,546 5,591 11,913 Total $ 47,239 $ 51,253 $ 143,435 $ 153,826 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 $15.2 million, or 10.7% of revenue, during the three months ended October 2, 2020, versus $13.8 million, or 9.0% 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 R&D project spending and higher share-based compensation expense. R&D expenses were $45.0 million, or 10.2% of revenue, during the nine months ended October 2, 2020, versus $41.2 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, higher R&D project spending and higher share-based compensation 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 $26.8 million, or 18.7% of 35 revenue, during the three months ended October 2, 2020 , versus $ 27.9 million, or 18. 1 % of revenue, during the prior year period . SG&A expenses de creased in terms of total dollars primarily due to lower salaries as a result of unpaid-time off, and lower travel costs and other discretionary spending , partially offset by higher s hare -based compensation expense. SG&A expenses were $82.5 million, or 18.6% of revenue, during the nine months ended October 2, 2020, versus $89.0 million, or 19.1% 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 share-based compensation expense. Amortization of Purchased Intangible Assets Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $3.5 million, or 2.5% of revenue, during the three months ended October 2, 2020, versus $4.0 million, or 2.6% of revenue, during the prior year period. Amortization of purchased intangible assets, excluding the amortization of developed technologies included in cost of revenue, was $10.4 million, or 2.3% of revenue, during the nine months ended October 2, 2020, versus $11.7 million, or 2.5% of revenue, during the prior year period. Restructuring, Acquisition, and Related Costs We recorded restructuring, acquisition, and related costs of $1.7 million during the three months ended October 2, 2020, versus $5.5 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 acquisition and related charges attributable to higher professional services fees for acquisitions in the prior year. We recorded restructuring, acquisition, and related costs of $5.6 million during the nine months ended October 2, 2020, versus $11.9 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 $2.4 million and a decrease in acquisition and related costs of $3.9 million. The decrease in acquisition and related costs was primarily attributable to higher professional services fees for acquisitions in the prior year and a decrease in costs recognized under earn-out agreements in the current year period, offset by legal fees during the nine months ended October 2, 2020 related to a dispute involving a company we acquired in 2019. Operating Income (Loss) by Segment The following table sets forth operating income (loss) by segment for the periods noted (in thousands): Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Operating Income (Loss) Photonics $ 7,026 $ 10,661 $ 22,878 $ 34,637 Vision 3,799 5,830 14,098 14,602 Precision Motion 7,675 5,221 20,728 16,839 Unallocated Corporate and Shared Services (6,634 ) (8,911 ) (18,887 ) (23,779 ) Total $ 11,866 $ 12,801 $ 38,817 $ 42,299 Photonics Photonics segment operating income was $7.0 million, or 15.1% of revenue, during the three months ended October 2, 2020, versus $10.7 million, or 19.5% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $5.1 million and an increase in R&D spending of $0.5 million, offset by a decrease in restructuring, acquisition, and related charges of $1.2 million and a decrease in amortization of purchased intangible assets of $0.6 million. Photonics segment operating income was $22.9 million, or 15.3% of revenue, during the nine months ended October 2, 2020, versus $34.6 million, or 20.1% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $14.2 million and an increase in R&D spending of $2.7 million, partially offset by a decrease in SG&A expenses of $1.2 million, a decrease in restructuring, acquisition, and related charges of $2.4 million, and a decrease in amortization of purchased intangible assets of $1.5 million. 36 Vision Vision segment operating income was $3.8 million, or 5.9% of revenue, during the three months ended October 2, 2020, versus $5.8 million, or 8.3% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $2.3 million, an increase in R&D spending of $0.6 million, and an increase in restructuring, acquisition, and related charges of $0.6 million, partially offset by a decrease in SG&A expenses of $1.6 million. Vision segment operating income was $14.1 million, or 7.1% of revenue, during the nine months ended October 2, 2020, versus $14.6 million, or 7.2% of revenue, during the prior year period. The decrease in operating income was primarily due to a decrease in gross profit of $2.4 million, an increase in R&D spending of $0.9 million, and an increase in restructuring, acquisition, and related charges of $1.1 million, partially offset by a decrease in SG&A expenses of $4.2 million. Precision Motion Precision Motion segment operating income was $7.7 million, or 23.8% of revenue, during the three months ended October 2, 2020, versus $5.2 million, or 17.7% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $2.5 million. Precision Motion segment operating income was $20.7 million, or 21.7% of revenue, during the nine months ended October 2, 2020, versus $16.8 million, or 18.2% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of $3.0 million and a decrease in SG&A expenses of $0.8 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 October 2, 2020 decreased by $2.3 million versus the prior year period primarily due to a decrease in restructuring, acquisition, and related costs of $3.0 million, partially offset by higher shared-based compensation expense. Unallocated corporate and shared services costs for the nine months ended October 2, 2020 decreased by $4.9 million versus the prior year period primarily due to a decrease in restructuring, acquisition, and related costs of $4.8 million. Other Income and Expense Items The following table sets forth other income and expense items for the periods noted (in thousands): Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Interest income (expense), net $ (1,698 ) $ (2,153 ) $ (5,077 ) $ (6,357 ) Foreign exchange transaction gains (losses), net (136 ) 387 (164 ) 455 Other income (expense), net (14 ) (48 ) 47 (186 ) Interest Income (Expense), Net Net interest expense was $1.7 million for the three months ended October 2, 2020, versus $2.2 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 2.31% during the three months ended October 2, 2020, versus 3.13% during the three months ended September 27, 2019. Net interest expense was $5.1 million for the nine months ended October 2, 2020, versus $6.4 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 2.37% during the nine months ended October 2, 2020, versus 3.46% during the nine months ended September 27, 2019. 37 Foreign Exchange Transaction Gains (Losses), Net Foreign exchange transaction gains (losses) were $0.1 million net losses for the three months ended October 2, 2020, versus $0.4 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 the Euro and lower net realized gains from foreign currency contracts. Foreign exchange transaction gains (losses) were $0.2 million net losses for the nine months ended October 2, 2020, versus $0.5 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 the Euro and lower net realized gains from foreign currency contracts. Other Income (Expense), Net Net other expense was nominal for both the three and nine months ended October 2, 2020 and the three and nine months ended September 27, 2019. Income Tax Provision Our effective tax rate for the three months ended October 2, 2020 was 17.6%, versus 18.8% for the prior year period. Our effective tax rate of 17.6% for the three months ended October 2, 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. Our effective tax rate of 18.8% for the three months ended September 27, 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. Our effective tax rate for the nine months ended October 2, 2020 was 5.2%, versus 12.9% for the prior year period. Our effective tax rate of 5.2% for the nine months ended October 2, 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, windfall tax benefits upon vesting of certain share-based compensation awards during the period, and a release of a portion of the valuation allowance on our deferred tax assets in Canada. For the nine months ended October 2, 2020, the windfall tax benefits upon vesting of certain share-based compensation awards and the release of the valuation allowance had a benefit of 7.9% and 3.3%, respectively, on our effective tax rate. Our effective tax rate of 12.9% for the nine months ended September 27, 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, other tax credits, and windfall tax benefits upon vesting of certain share-based compensation awards during the period. For the nine months ended September 27, 2019, the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 7.4% on our effective tax rate. On March 27, 2020, the U.S. federal government enacted the CARES Act in response to the COVID-19 pandemic. The CARES Act is an emergency economic stimulus package which, among other things, contains numerous provisions concerning income taxes. 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 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 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. 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 38 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, 2019. Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. 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 October 2, 2020, $69.6 million of our $106.6 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). Approximately $179.0 million of our outstanding term loan and revolver borrowings under our Senior Credit Facilities were held in our subsidiaries outside of Canada and the United States. Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries. In connection with our initiatives to preserve cash for 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 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 October 2, 2020, we deferred $2.0 million in certain U.S. payroll tax payments under the CARES Act. As permitted under the CARES Act, we expect to pay half of the deferred U.S. payroll tax by December 31, 2021 and the remaining half by December 31, 2022. In addition, with respect to the COVID-19 pandemic impact on liquidity, we have taken actions to reduce costs and cash expenditures across the Company. These included 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 deferring lease payments on certain facilities. Senior Credit Facilities In December 2019, we entered into the Third Amended and Restated Credit Agreement, consisting of a $100.0 million U.S. dollar equivalent euro-denominated 5-year term loan facility (approximately €90.2 million) and a $350.0 million 5-year revolving credit facility (collectively, the “Senior Credit Facilities”). The Senior Credit Facilities mature in December 2024 and included an uncommitted “accordion” feature pursuant to which the commitments under the revolving credit facility may be increased by an additional $200.0 million in aggregate, subject to certain customary conditions. The term loan facility requires quarterly scheduled principal repayments of approximately €1.1 million beginning in March 2020 with the remaining principal balance due upon maturity. We may make additional principal payments at any time, which will reduce the next quarterly installment payment due. We may pay down outstanding borrowings under our revolving credit facility with cash on hand and cash generated from future operations at any time. On March 27, 2020, we entered into an amendment (the “First Amendment”) to the Third Amended and Restated Credit Agreement and exercised a portion of the uncommitted accordion feature. 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 October 2, 2020, we had $101.8 million term loan and $96.2 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 October 2, 2020, we had outstanding borrowings under the Third Amended and Restated Credit Agreement denominated in Euro and U.S. Dollars of $179.0 million and $19.0 million, respectively. 39 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 covenant s and our compliance therewith as of October 2, 2020 : Requirement Actual Maximum consolidated leverage ratio 3.50 1.45 Minimum consolidated fixed charge coverage ratio 1.50 8.56 Share Repurchase Plans Our Board of Directors may approve share repurchase plans from time to time. Under these repurchase plans, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of the business, the market price of our common shares, and general market conditions. Shares may also be repurchased through an accelerated share purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certain SEC regulations, which would permit common shares to be repurchased when we would otherwise be prohibited from doing so under insider trading laws. While the share repurchase plans are generally intended to offset dilution from equity awards granted to our employees and directors, the plans do not obligate us to acquire any particular amount of common shares. No time limit is typically set for the completion of the share repurchase plans, and the plans may be suspended or discontinued at any time. We expect to fund share repurchases through cash on hand and cash generated from operations. In October 2018, our Board of Directors approved a share repurchase plan (the “2018 Repurchase Plan”) authorizing the repurchase of $25.0 million worth of common shares. Share repurchases have been made under the 2018 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934. During the nine months ended October 2, 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 October 2, 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. We expect that share repurchases will be made under the 2020 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 after the 2018 Repurchase Plan is completed. 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 since April 2020. Cash Flows for the Nine Months Ended October 2, 2020 and September 27, 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): Nine Months Ended October 2, September 27, 2020 2019 Net cash provided by operating activities $ 93,686 $ 27,843 Net cash used in investing activities $ (9,796 ) $ (61,052 ) Net cash provided by (used in) financing activities $ (57,195 ) $ 12,379 October 2, December 31, 2020 2019 Cash and cash equivalents $ 106,630 $ 78,944 Unused and available funds under revolving credit facility $ 398,773 $ 226,616 Operating Cash Flows Cash provided by operating activities was $93.7 million for the nine months ended October 2, 2020, versus $27.8 million for the prior year period. Cash provided by operating activities for the nine months ended October 2, 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. 40 Cash provided by op erating activities for the nine months ended October 2, 2020 was pos itively impacted by an increase in our inventory turnover ratio from 3.1 at December 31, 2019 to 3. 3 at October 2, 2020 and a decrease in accounts receivable, offset by a decrease in our days payables outstanding which decreased from 5 3 days at December 31, 2019 to 4 4 days at October 2, 2020 . During the nine months ended October 2, 2020 , we paid the 201 9 annual employee bonuses which had been accrued for as of December 31, 2019 . Cash provided by operating activities for the nine months ended September 27, 2019 was negatively impacted by an increase in our days sales outstanding which increased from 51 days at December 31, 2018 to 59 days at September 27, 2019 primarily due to poor sales linearity, a decrease in our days payables outstanding which decreased from 52 days at December 31, 2018 to 48 days at September 27, 2019 and an increase in inventories. Our inventory turnover ratio decreased from 3.4 at December 31, 2018 to 3.2 at September 27, 2019. During the nine months ended September 27, 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 $9.8 million for the nine months ended October 2, 2020, primarily driven by capital expenditures of $7.2 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 $61.1 million for the nine months ended September 27, 2019, primarily driven by the Arges GmbH, Med X Change Inc., and Ingenia CAT, S.L. acquisitions. In connection with these acquisitions, we paid $53.1 million cash considerations, net of cash acquired, during the nine months ended September 27, 2019. We also paid $8.0 million for capital expenditures during the nine months ended September 27, 2019. We have no material commitments to purchase property, plant, and equipment as of October 2, 2020. We expect to use an aggregate of approximately $8 million to $9 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 $57.2 million for the nine months ended October 2, 2020, primarily due to $34.0 million in repayments of borrowings under our Senior Credit Facilities, $8.3 million of payroll tax payments upon vesting of share-based compensation awards, $5.8 million payments of deferred and escrowed purchase price related to prior year acquisitions, $5.5 million of repurchases of common shares, and $1.6 million of fees paid in connection with the First Amendment to our Third Amended and Restated Credit Agreement. We expect to pay the final ARGES deferred purchase price of €20.0 million in cash in December 2020. Cash provided by financing activities was $12.4 million for the nine months ended September 27, 2019, primarily due to $66.8 million of borrowings under our revolving credit facility used to fund the Arges GmbH, Med X Change Inc., and Ingenia CAT, S.L. acquisitions, partially offset by $40.8 million repayments of borrowings under our Senior Credit Facilities, $6.8 million of payroll tax payments upon vesting of share-based compensation awards, and $6.7 million of repurchases of common shares. 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, 2019. As of October 2, 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 December 31, 2019 . Off-Balance Sheet Arrangements Through October 2, 2020, we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons. 41 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 October 2, 2020 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Recent Accounting Pronouncements See Note 1 to Consolidated Financial Statements.