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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 162 added, 250 removed, 330 unchanged (56% of the section changed)

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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, anticipated impacts of the COVID-19 pandemic on our business, financial results and financial condition;

These forward-looking statements include, but are not limited to, 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;

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our competitive positions;

changes in economic and political conditions;

changes in economic and political conditions, including supply chain disruptions and constraints and inflationary pressures;

changes in accounting principles;

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our intentions regarding the use of cash;

expectations regarding legal and regulatory requirements and our compliance thereto;

expectations regarding legal and regulatory requirements, including 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 as a result of various important factors, including those set forth in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” 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.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” The words “anticipates,” “believes,” “expects,” “intends,” “future,” “estimates,” “plans,” “could,” “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.

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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.

Approximately 70% of our medical end market sales are related to surgical procedures, both elective and emergency based.

Advanced Industrial Market

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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;

increasing our penetration of high growth advanced industrial applications, such as laser materials processing, intelligent end-of-arm robotic technology solutions, 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;

broadening our product and service offerings through the acquisition of innovative and complementary technologies and solutions in medical and advanced industrial technology applications;

expanding sales and marketing channels to reach new target customers;

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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 (as amended, the “Third Amended and Restated Credit Agreement”).

Our Third Amended and Restated Credit Agreement provides for an aggregate credit facility of $450.0 million, comprised of a $100.0 million U.S.

dollar equivalent euro-denominated (approximately €90.2 million) 5-year term loan facility and a $350.0 million 5-year revolving credit facility (collectively, the “Senior Credit Facilities”).

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.

Additionally, the uncommitted accordion feature was reset to $200 million for potential future expansion.

Acquisition of ATI Industrial Automation, Inc.

On August 30, 2021, we acquired 100% of the outstanding shares of ATI Industrial Automation, Inc.

(“ATI”), an Apex, North Carolina-based leading supplier of intelligent end-of-arm technology solutions to OEMs for advanced industrial and surgical robots for an upfront cash purchase price of $169.2 million, net of cash acquired and estimated working capital adjustments, and $44.0 million estimated fair value of contingent consideration.

The contingent consideration will be payable in 2022 based on a multiple of the standalone ATI Adjusted EBITDA, as defined in the purchase and sale agreement, for the fiscal year ended December 31, 2021.

The initial cash purchase price was financed with borrowings under our revolving credit facility and cash available on hand.

We expect that the addition of ATI will complement and add intelligent technology solutions to further expand our position in mission critical robotic applications within the Precision Motion reportable segment.

Acquisition of Schneider Electric Motion USA, Inc.

On August 31, 2021, we acquired 100% of the outstanding shares of Schneider Electric Motion USA, Inc.

(“SEM”), a Marlborough, Connecticut-based manufacturer of integrated motion control solutions and electronic controls for automation equipment for a total cash purchase price of $114.7 million, inclusive of post-closing working capital adjustments and net of cash acquired.

The acquisition was financed with borrowings under our revolving credit facility.

We expect that the addition of SEM will complement and expand our presence in life science applications and solutions for industrial automation applications within the Precision Motion reportable segment.

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

We established rigorous safety measures in all of our facilities and have adapted our COVID-19 safety measures as the pandemic and related government mandates evolved over the past two years.

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

purposes of our business.

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 all of our employees, other than the Chief Executive Officer, the Chief Financial Officer, the Chief Human Resource Officer and the Chief Accounting Officer, 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 vested in February 2021.

These actions were implemented to create an ownership mindset and focus among all employees for the duration of the COVID-19 pandemic 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 a reduction in cash compensation for 2020.

Further, the Officers did not receive the special one-time restricted stock unit grant issued to the rest of the employees.

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.

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 2020, the decline in customer demand in both medical and advanced industrial end markets resulted in a decrease in sales to many of our customers.

In the event of a further prolonged economic recession, overall demand for our products could decline further in the near term 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 December 31, 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, the spread of new variants of the virus, and delays in effective vaccination of a large proportion of the populations, 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.

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 in accordance with relief provisions under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

As of December 31, 2020, we deferred $2.8 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.

As of December 31 , 2020, we had cash and cash equivalents of $125.

1 million and available borrowing capacity under our revolving credit facility of $395.2 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.

In connection with our COVID-19 remediation actions, we have incurred additional costs to protect the health of our employees, including investments in technologies and monitoring equipment , weekly testing of unvaccinated employees for COVID-19 at certain locations and rearranging some of our facilities to accommodate social distancing and flexible post-pandemic work environment .

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

Through December 31, 2021, we have experienced disruptions to our supply chain as a result of the COVID-19 pandemic and global electronics and other raw material shortages.

While we regularly monitor the manufacturing output of companies in our supply chain, disruptions to our suppliers and/or sub-suppliers caused by these events could further challenge our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations and customer relationships.

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

Despite of our mitigation actions, if certain suppliers cannot produce a key part or component for us, or if the receipt of certain materials is otherwise delayed, we may miss our scheduled shipment deadlines and our relationship with customers may be harmed.

Additionally, restrictions on or disruptions of transportation, such as reduced availability of air transports, port closures and backlogs, 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.

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

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

however, our ability to raise our selling prices depends on market conditions and competitive dynamics.

Given the timing of our actions compared to the timing of these inflationary pressures, there may be periods during which we are unable to fully recover the increases in our costs.

Overview of Financial Results

Total revenue for 2020 was $590.6 million, a decrease of $35.5 million, or 5.7%, versus 2019.

This decrease was 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 acquisitions in 2019 resulted in an increase in revenue of $8.4 million, or 1.3%.

Total revenue for 2021 was $706.8 million, an increase of $116.2 million, or 19.7%, versus 2020.

This increase was primarily due to increased demand in the advanced industrial market related to microelectronics and increases in industrial manufacturing spending as compared to 2020, which was impacted by COVID-19, as well as revenue from current year acquisitions.

The effect of our current year acquisitions resulted in an increase in revenue of $43.2 million, or 7.3%.

In addition, foreign exchange rates positively impacted our revenue by $12.5 million, or 2.1%, in 2021.

Operating income increased $0.6 million from $55.3 million in 2019 to $55.9 million in 2020.

This increase was primarily attributable to a decrease of selling, general and administrative (“SG&A”) expenses of $8.6 million and a decrease in restructuring and acquisition related costs of $12.8 million, offset by a decrease in gross profit of $17.6 million as a result of lower revenue and an increase in research and development and engineering (“R&D”) spending of $5.0 million.

Operating income for 2021 was $64.1 million, an increase of $8.2 million, or 14.6%, versus 2020.

This increase was primarily attributable to an increase in gross profit of $55.8 million mostly attributable to higher revenue, partially offset by an increase in research and development and engineering (“R&D”) expenses of $11.5 million, selling, general and administrative (“SG&A”) expenses of $19.3 million and restructuring, acquisition, and related charges of $14.2 million.

Basic earnings per common share (“basic EPS”) of $1.42 in 2021 increased $0.15 from the basic EPS of $1.27 in 2020.

Diluted earnings per common share (“diluted EPS”) of $1.41 in 2021 increased $0.16 from the diluted EPS of $1.25 in 2020.

The increase of basic EPS and diluted EPS was primarily attributable to decreases in interest expense and income tax provision.

The increase of basic EPS and diluted EPS was primarily attributable to an increase in operating income offset by the increase of income tax provision.

Specific components of our operating results for 2021 and 2020 are further discussed below.

Results of Operations

Information pertaining to fiscal year 2019 results of operations, including a year-over-year comparison with fiscal year 2020, was included in our Annual Report on Form 10-K for the year ended December 31, 2020 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the SEC on March 1, 2021.

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

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Consolidated net income

Net income attributable to noncontrolling interest

Net income attributable to Novanta Inc.

The following table sets forth external revenue by reportable segment for 2021 and 2020 (dollars in thousands):

Precision Motion

Photonics segment revenue in 2020 decreased by $30.8 million, or 13.4%, versus 2019, primarily due to decreased demand in the advanced industrial market related to reductions in global 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.

Photonics segment revenue in 2019 decreased by $18.9 million, or 7.6%, versus 2018, primarily due to decreased demand in the advanced industrial market related to reductions in global industrial manufacturing spending, and a decrease in revenue from our optical light engine products, partially offset by $4.9 million of revenue from the acquisition of ARGES in July 2019.

Vision segment revenue in 2020 decreased by $9.8 million, or 3.6%, versus 2019, 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 in 2019 increased by $38.5 million, or 16.5%, versus 2018.

The increase was primarily due to an increase in revenue of $28.4 million from our minimally invasive surgery products as a result of new product introductions and increased demand in the medical market and $5.4 million of revenue from the acquisition of Med X Change in June 2019 .

Photonics segment revenue in 2021 increased by $32.8 million, or 16.5%, versus 2020, primarily due to increased demand in the advanced industrial market as a result of increases in industrial manufacturing spending as compared to 2020, which was impacted by COVID-19 pandemic.

Vision segment revenue in 2021 increased by $0.4 million, or 0.2%, versus 2020, primarily flat due to consistent customer demand dynamics from our minimally invasive surgery (“MIS”) products as a result of deferrals of elective surgical procedures during the COVID-19 pandemic.

Precision Motion

Precision Motion segment revenue in 2020 increased by $5.1 million, or 4.1%, versus 2019, primarily due to an increase in revenue related to increased demand by microelectronics customers, 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 in 2019 decreased by $7.9 million, or 6.0%, versus 2018.

The decrease was primarily due to decreased demand in the microelectronics and industrial market related to reductions in global industrial manufacturing spending, partially offset by increased demand in the medical market and the acquisitions of Ingenia in April 2019 and Zettlex Holdings Limited (“Zettlex”) in May 2018.

Precision Motion segment revenue in 2021 increased by $82.9 million, or 64.1%, versus 2020, primarily due to an increase in demand in advanced industrial market and certain medical robotic applications as well as an aggregate of $43.2 million revenue contributions from the ATI and SEM acquisitions.

The following table sets forth the gross profit and gross profit margin for each of our reportable segments for 2021 and 2020 (dollars in thousands):

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Gross profit and gross profit margin can be influenced by a number of factors, including product mix, pricing, volume, manufacturing efficiencies and utilization, costs for raw materials and outsourced manufacturing, headcount, inventory obsolescence and warranty expenses.

Photonics segment gross profit for 2020 decreased $16.8 million, or 15.9%, versus 2019, primarily due to a decrease in revenue.

Photonics segment gross profit margin was 44.6% for 2020, compared with a gross profit margin of 45.9% for 2019.

The decrease in gross profit margin was primarily attributable to lower factory utilization associated with lower production volumes and higher costs as a result of the COVID-19 pandemic.

Photonics segment gross profit for 2019 decreased $11.3 million, or 9.6%, versus 2018, primarily due to a decrease in revenue.

Photonics segment gross profit margin was 45.9% for 2019, compared with a gross profit margin of 47.0% for 2018.

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

Amortization of inventory fair value adjustments and amortization of developed technologies increased $1.1 million, which resulted in a 0.5 percentage point decrease in gross profit margin.

Vision segment gross profit for 2020 decreased $5.0 million, or 4.7%, versus 2019, primarily due to a decrease in revenue.

Vision segment gross profit margin was 38.3% for 2020, compared with a gross profit margin of 38.8% for 2019.

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 2019 increased $18.0 million, or 20.7%, versus 2018, primarily due to an increase in revenue.

Photonics segment gross profit for 2021 increased $18.9 million, or 21.3%, versus 2020, primarily due to an increase in both revenue and gross profit margin.

Photonics segment gross profit margin was 46.5% for 2021, versus a gross profit margin of 44.6% for 2020.

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

Vision segment gross profit for 2021 increased $0.6 million, or 0.6%, versus 2020, primarily flat due to consistent customer demand dynamics from our MIS products as a result of deferrals of elective surgical procedures during the COVID-19 pandemic.

Vision segment gross profit margin was 38.5% for 2021, compared with a gross profit margin of 38.3% for 2020.

The increase in gross profit margin was primarily attributable to increased utilization of our German facility and cost reductions in our optical data collection products, partially offset by the cost of a redundant manufacturing facility in San Jose, California until the transfer of our manufacturing activities was substantially completed at the end of 2019.

Precision Motion

Precision Motion segment gross profit for 2020 increased $5.0 million, or 9.3%, versus 2019, primarily due to an increase in revenue.

Precision Motion segment gross profit margin was 45.1% for 2020, compared with a gross profit margin of 42.9% for 2019.

The increase in gross profit margin was primarily attributable to favorable product and customer mix changes as well as productivity improvements implemented during 2020.

Precision Motion segment gross profit for 2019 decreased $6.2 million, or 10.3%, versus 2018, primarily due to a decrease in revenue and a decrease in gross profit margin.

Precision Motion segment gross profit for 2021 increased $41.1 million, or 70.5%, versus 2020, primarily due to an increase in both revenue and gross profit margin.

Precision Motion segment gross profit margin was 46.8% for 2021, compared with a gross profit margin of 45.1% for 2020.

The decrease in gross profit margin was primarily attributable to business volume reductions that could not be fully compensated by cost reduction initiatives.

The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes and favorable year over year comparison due to higher inventory obsolescence in the prior year, offset by higher purchased intangible asset amortization of $2.5 million and an increase in the amortization of acquisition inventory fair value adjustments of $1.4 million.

Operating Expenses

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R&D expenses were $72.5 million, or 10.3% of revenue, in 2021, versus $61.0 million, or 10.3% of revenue, in 2020.

R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to R&D expenses added from 2019 acquisitions, higher R&D project spending and higher share-based compensation expense offset by lower cash compensation and a reduction in discretionary spending.

R&D expenses were $56.0 million, or 8.9% of revenue in 2019, versus $51.0 million, or 8.3% of revenue in 2018.

R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to R&D expenses added from acquisitions and higher investments in R&D.

R&D expenses increased in terms of total dollars primarily due to higher compensation related expenses and R&D expenses from acquisitions.

Selling, General and Administrative Expenses

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SG&A expenses were $129.2 million, or 18.3% of revenue, in 2021, versus $109.9 million, or 18.6% of revenue, in 2020.

SG&A expenses decreased in terms of total dollars and as a percentage of revenue primarily due to lower cash compensation and lower discretionary spending, partially offset by higher share-based compensation expense.

SG&A expenses were $118.4 million, or 18.9% of revenue in 2019, versus $115.9 million, or 18.9% of revenue in 2018.

SG&A expenses increased in terms of total dollars primarily due to SG&A expenses added from acquisitions and higher professional services spending, partially offset by lower variable compensation expense.

SG&A expenses increased in terms of total dollars primarily due to the re-establishment of employee bonus plans in 2021 and other compensation related increases, and SG&A expenses from acquisitions.

Amortization of Purchased Intangible Assets

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Amortization of purchased intangible assets, excluding the amortization of developed technologies that is included in cost of revenue, was $16.6 million, or 2.3% of revenue, in 2021, versus $14.0 million, or 2.4% of revenue, in 2020.

The decrease in terms of total dollars was the result of certain acquired intangible assets being fully amortized at the end of 2019.

Amortization of purchased intangible assets, excluding the amortization of developed technologies that is included in cost of revenue, was $15.9 million, or 2.5% of revenue, in 2019, versus $15.6 million, or 2.5% of revenue in 2018.

The increase in terms of total dollars was the result of acquired intangible assets from acquisitions in 2018 and 2019.

Restructuring and Acquisition Related Costs

Restructuring and acquisition related charges primarily relate to our restructuring programs, acquisition related costs incurred for completed acquisitions, acquisition costs related to future potential acquisitions and failed acquisitions, and changes in fair value of contingent considerations.

We recorded restructuring and acquisition related costs of $3.8 million in 2020, versus $16.6 million in 2019.

The decrease in restructuring and acquisition related costs versus 2019 was primarily due to a decrease in restructuring charge s of $4.2 million and a decrease in acquisition and related cost s of $8.6 million.

The decrease in acquisition and related costs was primarily attributable to the reduction in fair value of the contingent considerations in 2020 related to 2019 acquisitions and higher professional services fees for acquisitions during 2019 , offset by legal fees during 2020 related to a dispute involving a company we acquired in 2019.

The increase in terms of total dollars was the result of more acquired intangible assets from current year acquisitions.

Restructuring, Acquisition, and Related Costs

Restructuring, acquisition, and related charges primarily relate to our restructuring programs, acquisition related costs incurred for completed acquisitions, acquisition costs related to future potential acquisitions and failed acquisitions, and changes in fair value of contingent considerations.

We recorded restructuring and acquisition related costs of $18.0 million in 2021, versus $3.8 million in 2020.

The increase in restructuring and acquisition related costs in 2019 versus 2018 was primarily due to an increase in restructuring charges of $6.6 million as a result of the 2018 and 2019 restructuring programs and an increase in acquisition related costs of $1.9 million primarily related to an increase in professional services fees, partially offset by a decrease in costs recognized under earn-out agreements.

The increase in restructuring, acquisition, and related costs versus the prior year was primarily due to an increase in acquisition related professional service fees of $5.4 million, acquisition related contingent consideration increase of $4.9 million primarily as result of a reduction in the fair value of contingent considerations in 2020, and restructuring costs of $3.9 million primarily related to the 2020 restructuring plan.

Operating Income (Loss) by Segment

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Photonics segment operating income was $46.8 million, or 20.1% of revenue, in 2021, versus $34.0 million, or 17.0% of revenue, in 2020.

The decrease in operating income was primarily due to a decrease in gross profit of $16.8 million and an increase in R&D spending of $2.5 million, partially offset by a decrease in SG&A expense of $1.9 million, a decrease in restructuring and acquisition related charges of $7.1 million, and a decrease in amortization of purchased intangible assets of $2.3 million.

Photonics segment operating income was $42.0 million, or 18.2% of revenue, in 2019, versus $59.3 million, or 23.8% of revenue, in 2018.

The decrease in operating income was primarily due to a decrease in gross profit of $11.3 million, an increase in R&D expenses of $2.1 million and restructuring related charges of $5.0 million associated with the 2019 restructuring program, including a $2.2 million impairment of an operating lease right-of-use asset.

Vision segment operating income was $16.4 million, or 6.3% of revenue, in 2020, versus $21.0 million, or 7.7% of revenue, in 2019.

The decrease in operating income was primarily due to a decrease in gross profit of $5.0 million, an increase in R&D spending of $2.6 million, and an increase in restructuring and acquisition related charges of $1.6 million, partially offset by a decrease of SG&A expenses of $4.8 million.

The increase in operating income was primarily due to an increase in gross profit of $18.9 million, partially offset by increases in R&D spending of $2.2 million and restructuring, acquisition, and related charges of $4.7 million.

Vision segment operating income was $17.7 million, or 6.8% of revenue, in 2021, versus $16.4 million, or 6.3% of revenue, in 2020.

The increase in operating income was primarily due to an increase in gross profit of $18.0 million, partially offset by an increase in R&D expenses of $1.6 million and SG&A expenses of $2.8 million.

Vision segment operating income was negatively affected by a $0.9 million net increase in amortization of inventory fair value adjustments and amortization of intangible assets.

The increase in operating income was primarily due to an increase in gross profit of $0.6 million, a decrease in SG&A expenses of $1.7 million, and a decrease in restructuring, acquisition, and related charges of $1.4 million, partially offset by an increase in R&D expenses of $2.6 million.

Precision Motion

Precision Motion segment operating income was $52.7 million, or 24.8% of revenue, in 2021, versus $31.7 million, or 24.5% of revenue, in 2020.

The increase in operating income was primarily due to an increase in gross profit of $5.0 million, a decrease in SG&A expenses of $1.5 million, and a decrease in restructuring and acquisition related charges of $2.9 million.

Precision Motion segment operating income was $22.3 million, or 18.0% of revenue, in 2019, versus $31.7 million, or 24.0% of revenue, in 2018.

The decrease in operating income was primarily due to a decrease in gross profit of $6.2 million, an increase in R&D expenses of $1.3 million and SG&A expenses of $2.8 million, partially offset by a decrease in acquisition related earn-out costs of $1.8 million associated with the Zettlex acquisition.

The increase in operating income was primarily due to an increase in gross profit of $41.1 million, partially offset by an increase in restructuring, acquisition, and related charges of $5.8 million, R&D spending of $6.8 million, SG&A expense of $5.2 million and amortization of purchased intangible assets expense of $2.3 million.

Unallocated Corporate and Shared Services

Unallocated corporate and shared services costs primarily represent costs of corporate and shared SG&A functions and other public company costs that are not allocated to the operating segments, including certain restructuring and most acquisition related costs.

Unallocated corporate and shared services costs for 2020 decreased by $3.9 million, or 13.1%, from 2019, primarily due to a decrease in restructuring and acquisition related costs of $4.4 million.

Unallocated corporate and shared services costs for 2019 increased by $1.1 million, or 3.9%, from 2018, primarily due to an increase in restructuring and acquisition related costs of $3.8 million, partially offset by a decrease in SG&A expenses of $2.6 million primarily related to lower variable compensation expense.

Unallocated corporate and shared services costs for 2021 increased by $27.0 million, or 103.2%, from 2020, primarily due to an increase in SG&A spending of $17.1 million mostly related to the re-establishment of employee bonus plans in 2021 and other compensation related increases, an increase in acquisition related costs of $5.3 million and an increase in costs related to COVID-19 testing for employees of $3.3 million included in cost of revenue.

Interest Income (Expense), Foreign Exchange Transaction Gains (Losses), and Other Income (Expense), Net

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Net interest expense was $7.4 million in 2021 versus $6.6 million in 2020.

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 2.32% and 3.30% during 2020 and 2019, respectively.

Included in net interest expense was non-cash interest expense of approximately $1.0 million and $1.1 million in 2020 and 2019, respectively, related to the amortization of deferred financing costs on our debt.

Net interest expense was $8.5 million in 2019 versus $9.8 million in 2018.

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 increase in net interest expense was primarily due to an increase in average debt levels offset by a decrease in the weighted average interest rate on our senior credit facilities.

The weighted average interest rate on our senior credit facilities was 2.16% and 2.32% during 2021 and 2020, respectively.

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Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses), net, were $0.9 million net losses in 2020 versus $0.8 million net losses in 2019 primarily due to changes in the value of the U.S.

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

Foreign exchange transaction gains (losses), net, were $0.8 million net losses in 2019 versus $0.1 million net gains in 2018 primarily due to changes in the value of the U.S.

Foreign exchange transaction gains (losses), net, were $0.1 million of net losses in 2021 versus $0.9 million of net losses in 2020, primarily due to changes in the value of the U.S.

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

Other Income (Expense), Net

Net other expense was nominal in 2020, 2019 and 2018, respectively.

Net other expense was nominal in both 2021 and 2020.

Income Tax Provision

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Our effective tax rate for 2021 differed from the Canadian statutory rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, $2.6 million benefit from U.K.

patent box deductions, $2.3 million benefit from share-based compensation, $0.7 million reversal of valuation allowance recorded on net operating losses and other timing items in certain tax jurisdictions due to current and forecasted taxable income, $2.0 million of R&D and other tax credits, $1.1 million of estimated deductions for foreign derived intangible income, and $1.5 million benefit from the reduction in fair value of non-deductible

acquisition contingent consideration liabilities, offset by miscellaneous other items such as foreign withholding taxes and impact of changes in statutory tax rates on our deferred tax attributes .

We recorded a tax provision of $5.0 million in 2019, compared to a tax provision of $10.2 million in 2018.

The effective tax rate for 2019 was 10.9% of income before income taxes, compared to an effective tax rate of 16.7% of income before income taxes for 2018.

Our effective tax rate for 2019 differed from the Canadian statutory rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, a $2.0 million benefit from U.K.

patent box deductions, a $1.7 million benefit from share-based compensation, $1.5 million of other tax credits, and $0.8 million of estimated deductions for foreign derived intangible income;

offset by $0.3 million of non-deductible expenses recognized under earn-out agreements in connection with various acquisitions and $0.2 million of non-deductible acquisition costs.

patent box deductions, $5.1 million benefit from share-based compensation, $1.4 million benefit from R&D and other tax credits, and $1.2 million benefit for foreign derived intangible income,

partially offset by $1.1 million detriment related to disallowed compensation, and a $0.9 million detriment on the establishment of a valuation allowance recorded on net operating losses and other timing items in certain tax jurisdictions .

Our effective tax rate for 2020 differed from the Canadian statutory rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, $1.3 million benefit from U.K.

patent box deductions, $2.3 million benefit from share-based compensation, $0.7 million release of a portion of the valuation allowance on our deferred tax assets in Canada, $2.0 million of R&D and other tax credits, $1.1 million of estimated deductions for foreign derived intangible income, and $1.5 million benefit from the reduction in fair value of non-deductible acquisition contingent consideration liabilities, offset by miscellaneous other items such as foreign withholding taxes and impact of changes in statutory tax rates on our deferred tax attributes.

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.

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

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

The consolidated net income was $50.3 million for the year ended December 31, 2021, compared to $44.5 million for the year ended December 31, 2020, reflecting the impact of the factors described above.

Liquidity and Capital Resources

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We believe our future operating cash flows will be sufficient to meet our future operating and capital expenditure cash needs for the foreseeable future, including at least the next 12 months.

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

We may 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 any future capital expenditures and other liquidity needs.

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

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

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

Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long term capital with satisfactory terms.

The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, risks associated with events outside of our control, such as economic consequences of the COVID-19 pandemic, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, availability of borrowings under our revolving credit facility, and market changes in general.

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 of our control, such as economic consequences of the COVID-19 pandemic, worsening supply chain disruptions and electronics and other material shortages, a decrease in demand for our products, our ability to integrate current and future acquisitions, deterioration in certain financial ratios, availability of borrowings under our revolving credit facility, and market changes in general.

See “Risks Relating to Our Common Shares and Our Capital Structure” included in Item 1A of this Annual Report on Form 10-K.

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There is no assurance that 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 December 31, 2020, $92.1 million of our $125.1 million cash and cash equivalents was held by our subsidiaries outside of Canada and the United States.

As of December 31, 2021, $77.3 million of our $117.4 million cash and cash equivalents was held by our subsidiaries outside of North America.

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.

Approximately $185.8 million of our outstanding 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.

We are deferring certain U.S.

Approximately $164.6 million of our outstanding borrowings under our senior credit facilities were held in our subsidiaries outside of North America as of December 31, 2021.

Additionally, we may use intercompany loans to address short-term cash flow needs from various subsidiaries.

We deferred $2.8 million of U.S.

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

As of December 31, 2020, we deferred $2.8 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 taxes 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.

We paid $1.4 million of such deferred payroll tax payments during 2021.

As permitted under the CARES Act, we expect to pay the remaining $1.4 million deferred U.S.

payroll taxes by December 31, 2022.

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

Our Board of Directors may designate and issue one or more series of preferred shares in order to raise additional capital, provided that no shares of any series may be entitled to more than one vote per share.

As of December 31, 2021, no preferred shares were issued and outstanding.

Share Repurchase P lan s

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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 2020, we repurchased 65 thousand shares for an aggregate purchase price of $5.5 million at an average price of $84.52 per share under the 2018 Repurchase Plan.

We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of December 31, 2021.

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

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.

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.

No Shares were purchased under the 2018 Repurchase Plan during the year ended December 31, 2021.

In February 2020, our Board of Directors approved a new share repurchase plan (the “2020 Repurchase Plan”) authorizing the repurchase of an additional $50.0 million worth of common shares, effective after the 2018 Repurchase Plan is completed.

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

Senior Credit Facilities

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The Second Amendment revised our consolidated leverage ratio definition (as defined in the Third amended and Restated Credit Agreement) allowing for the use of up to $25 million unrestricted cash and cash equivalents as a reduction to consolidated funded indebtedness (as defined in the Third amended and Restated Credit Agreement).

On October 5, 2021, we entered into the Fourth Amendment to the Third Amended and Restated Credit Agreement to exercise the accordion feature.

The Fourth Amendment increased the revolving credit facility commitment under the Third Amended and Restated Credit Agreement by $200.0 million, from $495.0 million to $695.0 million, and reset the uncommitted accordion feature to $200.0 million for potential future expansion.

As of December 31, 2021, we had $92.0 (€81.1) million term loan and $346.6 million revolver borrowings outstanding under our Senior Credit Facilities.

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The following table summarizes these financial covenants and our compliance therewith as of December 31, 20 2 1 :

December 31, 2020

Actual December 31, 2021

Maximum consolidated leverage ratio

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Cash and cash equivalents totaled $117.4 million at December 31, 2021, versus $125.1 million at December 31, 2020.

The net increase in cash and cash equivalents is primarily attributable to cash provided by operating activities of $140.2 million offset by $35.4 million debt repayments, $31.0 million of payments of deferred and escrowed purchase price related to prior year acquisitions, $10.5 million capital expenditures, $8.6 million of payroll tax payments upon vesting of share-based compensation awards, and $5.5 million of repurchases of common shares.

The net decrease in cash and cash equivalents is primarily attributable to cash considerations paid for the ATI and SEM acquisitions of $284.7 million (net of cash acquired of $14.6 million), $32.4 million of debt repayments, $30.8 million of employee payroll withholding tax payments upon vesting of share-based compensation awards, $20.0 million capital expenditures, and $8.7 million payment for the purchase of a building under a finance lease agreement.

These cash outflows were partially offset by borrowings under our revolving credit facility of $280.0 million used to fund the cash considerations paid for the ATI and SEM acquisitions and cash provided by operating activities of $94.6 million.

The following table summarizes our cash and cash equivalent balances, cash flows and unused borrowing capacity available under our revolving credit facility for the years indicated (in thousands):

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Cash provided by operating activities was $94.6 million in 2021, versus $140.2 million in 2020.

Cash provided by operating activities increased from the prior year primarily due to working capital improvements resulting in an increase in cash inflows from reductions in accounts receivable and inventory balances, and a decrease in income tax payments.

Cash provided by operating activities decreased from the prior year primarily due to an increase in accounts receivable and inventories due to increases in revenue and demand, and an $8.3 million payment in accordance with an acquisition earnout arrangement that was recorded as compensation, partially offset by an increase in days payables outstanding and substantially no bonus payout in 2021 as a result of the elimination of our 2020 annual employee cash bonus plan which was replaced with a special one-time restricted stock unit grant to employees in April 2020.

Cash provided by operating activities for 2020 was positively impacted by an increase in our inventory turnover ratio from 3.1 at December 31, 2019 to 3.7 at December 31, 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 45 days at December 31, 2020.

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

Cash provided by operating activities for 2019 was negatively impacted by an increase in our days sales outstanding which increased from 51 days at December 31, 2018 to 54 days at December 31, 2019 primarily due to poor sales linearity, a decrease in our outstanding payables and accrued expenses, excluding payables and accrued expenses assumed from acquisitions in 2019, and an increase in inventories.

Our inventory turnover ratio decreased from 3.4 at December 31, 2018 to 3.1 at December 31, 2019.

Cash provided by operating activities for 2018 was positively impacted by an increase in our days payables outstanding and an increase in accrued expenses.

The Company’s growth in revenue of $93.0 million and gross profit of $41.0 million increased our outstanding trade receivables and inventories, which negatively impacted our cash provided by operating activities.

During 2020, we paid the 2019 annual employee cash bonuses which had been accrued for as of December 31, 2019.

Investing Cash Flows

Cash used in investing activities was $13.2 million during 2020, primarily driven by capital expenditures of $10.5 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 $ 63.

8 million during 201 9 , primarily related to $ 53.1 million in cash outflows ( net of cash acquired of $ 4.2 million ) related to 2019 acquisitions .

We also paid $ 10.

7 million for capital expenditures during 2019.

Cash used in investing activities was $45.6 million during 2018, primarily related to $29.6 million in cash outflows (net of cash acquired of $3.8 million) related to acquisitions in 2018 and $14.7 million for capital expenditures.

Cash used in investing activities was $306.7 million in 2021, primarily driven by the ATI and SEM acquisitions.

In connection with these acquisitions, we paid cash considerations of $284.7 million (net of cash acquired of $14.6 million).

We also paid capital expenditures of $20.0 million and a contingent consideration payment of $2.2 million related to our 2016 asset acquisition of video signal processing and management technologies.

Cash used in investing activities was $13.2 million in 2020, primarily driven by capital expenditures of $10.5 million and a contingent consideration payment of $2.6 million related to our 2016 asset acquisition of video signal processing and management technologies.

We have no material commitments to purchase property, plant and equipment as of December 31, 2021.

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Financing Cash Flows

Cash used in financing activities was $84.4 million during 2020, primarily due to $35.4 million in repayments of borrowings under our Senior Credit Facilities, $31.0 million payments of deferred and escrowed purchase price related to prior year acquisitions, $8.6 million of payroll tax payments upon vesting of share-based compensation awards, $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.

Cash used in financing activities was $3.9 million during 2019, primarily due to $50.7 million repayment of term loan and revolving credit facility borrowings, $6.9 million of payroll tax payments on share-based compensation awards, and $10.0 million of repurchases of common shares, partially offset by $66.8 million of borrowings under our revolving credit facility used to fund cash considerations paid for 2019 acquisitions.

We also paid $2.7 million for debt issuance costs as a result of the Third Amended and Restated Credit Agreement entered into in December 2019.

Cash used in financing activities was $60.2 million during 2018, primarily due to $30.8 million of cash consideration paid for the acquisition of the remaining equity interest in Laser Quantum Limited (“Laser Quantum”), $9.2 million of contractual term loan payments, $65.4 million of optional repayments of borrowings under our revolving credit facility, $3.6 million of payroll tax payments on share-based compensation awards, and $5.9 million of repurchases of common shares, partially offset by $55.3 million of borrowings under our revolving credit facility used to fund a portion of the cash consideration paid for the acquisition of Zettlex Holdings Limited and the remaining equity interest in Laser Quantum.

In 2021, we are contractually required to pay $5.5 million in repayments under our term loan facility and $0.9 million in principal payments under our finance lease obligations.

We exercised an option in December 2020 to purchase a facility for $9.2 million in Germany and expect to pay the related cash proceeds in March 2021.

Cash provided by financing activities was $204.8 million in 2021, primarily due to $280.0 million of borrowings under our revolving credit facility used to fund the cash considerations paid for the ATI and SEM acquisitions, partially offset by $32.4 million of term loan and revolving credit facility repayments, $30.8 million of payroll tax payments upon vesting of share-based compensation awards, an $8.7 million payment for the purchase of a building under a finance lease agreement, and $1.8 million of contingent consideration payments related to prior year acquisitions.

Cash used in financing activities was $84.4 million in 2020, primarily due to $35.4 million in repayments of borrowings under our Senior Credit Facilities, $31.0 million payments of deferred and escrowed purchase price related to prior year acquisitions, $8.6 million of employee payroll withholding tax payments upon vesting of share-based compensation awards, $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.

In 2022, we are contractually required to make $5.1 million in repayments under our term loan facility.

In addition, we may make optional repayments under our term loan and revolving credit facility from time to time with available cash generated from future operating activities.

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Plan was closed to new members in 1997 and stopped accruing additional pension benefits for existing members in 2003, thereby limiting our obligation to benefits earned through that date.

Benefits under this plan were based on the employees’ years of service and compensation as of the date the plan was frozen, adjusted for inflation.

Benefits under this plan were based on the participants’ years of service and compensation as of the date the plan was frozen, adjusted for inflation.

On July 1, 2013, the Company provided a Guarantee (the “Guarantee”) in favor of the trustees of the U.K.

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Plan based on actuarial methods as permitted by the Pensions Regulator in the U.K.

The results of funding valuations depend on both the funding deficit and the assumptions used (such as asset returns, discount rates, mortality, retail price inflation and other market driven assumptions).

The results of funding valuations depend on both the funding deficit and the assumptions used, such as asset returns, discount rates, mortality rates, retail price inflation and other market driven assumptions.

Each assumption used represents one estimate of many possible future outcomes.

The final cost to us will be determined by events as they actually become known, including actual return on plan assets and pension payments to plan participants.

As of December 31, 2020, the projected benefit obligation under the U.K.

Plan exceeded the fair value of plan assets by $1.5 million.

Based on the results of the most recent funding valuation, our annual contributions are expected to be approximately $1.0 million in 2021 and will increase by 2.9% per year thereafter.

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2020 and the effect that such obligations are expected to have on our liquidity and cash flows in future years.

We have excluded the future cash payments for unrecognized tax benefits of $5.1 million, including interest and penalties, because we are uncertain if and when such amounts may be settled.

unrecognized tax benefits are further explained in Note 15 to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Contractual Obligations

(In thousands)

As of December 31, 2021, the fair value of plan assets exceeded the projected benefit obligation under the U.K.

Plan by $2.8 million.

Based on the results of the most recent funding valuation, our annual funding contributions are expected to be approximately $1.1 million in 2022 and will increase by 2.9% per year until the next statutory funding valuation date in 2024.

Material Cash Requirements

Senior Credit Facilities

Interest on Senior Credit Facilities (2)

Finance leases (3)

Operating leases (4)

Purchase commitments (5)

pension plan (6)

Contingent considerations and earn-outs (7)

Total contractual obligations

As of December 31, 2020, a total of $105.1 million term loan and $99.8 million revolving credit facility were outstanding under the Senior Credit Facilities.

As of December 31, 2021, we had $92.0 million (€81.1 million) term loan and $346.6 million revolving credit facility borrowings outstanding under the Senior Credit Facilities.

The term loan is payable in quarterly installments of approximately €1.1 million ($1.3 million) with the final installment of €68.7 million ($77.9 million) due upon maturity in December 2024.

Borrowings under the revolving credit facility are due at maturity in December 2024.

For the purpose of this presentation, current interest rates on floating rate obligations (LIBOR plus applicable margin, as defined in the Third Amended and Restated Credit Agreement) were used for the remainder contractual life of both the term loan and outstanding borrowings under the revolving credit facility.

Current commitment fee rate was used for the unused commitments under the revolving credit facility as of December 31, 2020.

Future minimum lease payments under finance leases include the exercise price of an option to purchase a facility for $9.2 million in Germany in 2021.

The Company exercised the option in December 2020 and expects to pay the related cash proceeds in March 2021.

These amounts primarily represent the gross amounts due for leased facilities.

The amounts include payments due with respect to both active operating facilities and idle facilities that have been vacated.

Purchase commitments represent purchase obligations as of December 31, 2020.

Amounts shown represent expected funding contributions to reach an actuarial funded status where the market value of plan assets equals the projected benefit obligations as reported on the Company’s consolidated balance sheet as of December 31, 2020.

The Company expects to continue its annual funding contributions thereafter, increasing 2.9% annually through 2022, until the value of plan assets is sufficient to settle the benefit obligations under the U.K.

Plan in full.

These amounts represent the estimated contingent consideration and earn-out payments accrued in the consolidated balance sheet as of December 31, 2020 that are expected to be paid between 2021 and 2027.

The undiscounted range of the possible contingent consideration and earn-out payments is $2.7 million to $32.9 million.

Off-Balance Sheet Arrangements

Through December 31, 2020, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.

As of December 31, 2021, the future interest payments under our Senior Credit Facilities are expected to be approximately $33.2 million, with $11.5 million payable within the next twelve months.

These estimates are based on current interest rates on floating rate obligations, as defined in the Third Amended and Restated Credit Agreement, for the remainder of the contractual life of both the term loan and outstanding borrowings under the revolving credit facility, and the current commitment fee rate was used for the unused commitments under revolving credit facility as of December 31, 2021.

See Note 11, “Debt,” in the Consolidated Financial Statements for further details of our debt obligations and the timing of expected future payments.

Operating and Finance Leases

We entered into various lease agreements for office and manufacturing facilities, vehicles, and equipment used in the normal course of business.

Undiscounted operating and finance lease obligations were $74.3 million, with $10.1 million payable within 12

See Note 12, “Leases,” in the Consolidated Financial Statement s for further details of our obligations and the timing of expected future payments.

Purchase Obligations

Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services.

As of December 31, 2021, we had $169.6 million of purchase obligations, with $167.1 million payable within the next twelve months.

Contingent Consideration and Earn-outs

As of December 31, 2021, total estimated payments for contingent considerations and earn-outs accrued for in the consolidated balance sheet amounted to $50.9 million, with $47.5 million estimated payments due within the next twelve months.

See Note 7, “Fair Value Measurements”, in the Consolidated Financial Statements for further information related to the fair values of our obligations under the contingent consideration and earn-out arrangements.

Critical Accounting Policies and Estimates

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Revenue Recognition.

Beginning January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09” or “Topic 606”) using the modified retrospective method.

Under Topic 606, an entity

recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

R evenue recognition for arrangements within the scope of Topic 606 includes the following five steps:

( i ) identify ing the contract(s) with a customer;

(ii) identify ing the performance obligations in the contract;

(iii) determin ing the transaction price;

(iv) allocat ing the transaction price to the performance obligations in the contract;

and (v) recogniz ing revenue when (or as) a performance obligation is satisfied .

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

Revenue recognition for arrangements within the scope of ASC 606 includes the following five steps:

(i) identifying the contract(s) with a customer;

(ii) identifying the performance obligations in the contract;

(iii) determining the transaction price;

(iv) allocating the transaction price to the performance obligations in the contract;

and (v) recognizing revenue when (or as) a performance obligation is satisfied.

We recognize revenue when control of promised goods or services is transferred to customers.

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We generally provide warranties for our products.

The standard warranty period is typically 12 months to 24 months for our Photonics and Precision Motion segments and 12 months to 36 months for the Vision segment.

The standard warranty period is typically 12 months to 36 months .

The standard warranty period for product sales is accounted for under the provisions of ASC 450, “Contingencies,” as we have the ability to ascertain the likelihood of the liability and can reasonably estimate the amount of the liability.

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Cost includes the cost of purchased materials, inbound freight charges, customs duties and trade tariffs on imported materials and components, external and internal processing and applicable labor and overhead costs.

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, storage, disposal and transportation.

We regularly review inventory quantities on hand and, when necessary, record provisions for excess and obsolete inventory based on either our forecasted product demand and production requirements or trailing historical usage of the product.

If our sales do not materialize as planned or at historical levels, we may have to increase our reserve for excess and obsolete inventory, which would reduce our earnings.

If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of revenue and higher income from operations than expected in that period.

If our sales do not materialize as planned or at historical levels, we may have to increase our reserve for excess and obsolete inventory, which would reduce our operating income.

If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of revenue and higher operating income than expected in that period.

Share-Based Compensation.

We record expenses associated with share-based compensation awards to employees and directors based on the fair value of awards as of the grant date.

For share-based compensation awards that vest over time based on employment, the associated expenses are recognized in the consolidated statement of operations ratably over the vesting period of the award, net of estimated forfeitures.

We typically grant two types of performance-based awards to certain members of the executive management team:

non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”) and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”).

For EPS-PSUs, share-based compensation expense is recognized ratably over the vesting period when it is probable that specified performance targets are expected to be achieved based on management’s projections.

Management’s projections are revised, if necessary, in subsequent periods when underlying factors change the evaluation of the probability of achieving the performance targets as well as the level of achievement .

In addition to service-based awards granted to a wider employee base, we typically grant three types of performance-based awards to certain members of the executive management team:

non-GAAP EPS performance-based restricted stock units (“EPS-PSUs”), operating cash flow performance-based restricted stock units (“OCF-PSUs”), and relative total shareholder return performance-based restricted stock units (“TSR-PSUs”).

For EPS-PSUs and OCF-PSUs, share-based compensation expenses are recognized ratably over the vesting period when it is probable that specified performance targets are expected to be achieved based on management’s projections as of the end of each period.

Management’s projections are revised, if necessary, in subsequent periods when underlying factors change the estimated probability of achieving the performance targets as well as the levels of achievement.

When the estimated achievement levels are adjusted at a later date, a cumulative adjustment to the share-based compensation expense previously recognized would be required.

Accordingly, share-based compensation expense associated with EPS-PSUs may differ significantly from period to period based on changes to both the probability and the level of achievement against performance targets.

For TSR-PSUs, we recognize the related compensation expense based on the fair value of the TSR-PSUs, which is determined using the Monte-Carlo simulation valuation model as of the date of grant.

The expense related to TSR-PSUs is recognized on a straight-line basis from the grant date to the end of the performance period, which is generally three years , regardless of whether the target relative total s hare holder return is achieved .

Accordingly, share-based compensation expenses associated with EPS-PSUs and OCF-PSUs may differ significantly from period to period based on changes to both the probability and the level of achievement against performance targets.

For TSR-PSUs, share-based compensation expenses are recognized based on the fair value of the TSR-PSUs, which is determined using the Monte-Carlo simulation valuation model as of the date of grant.

Shared-based compensation expenses related to TSR-PSUs are recognized on a straight-line basis from the grant date to the end of the performance period, which is generally three years, regardless of whether the target relative total shareholder return is achieved.

The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the grant agreement in a large number of simulated scenarios.

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Our most significant identifiable intangible assets are customer relationships, acquired technologies, trademarks and trade names.

In addition to our review of the carrying value of each asset, the useful life assumption for each asset, including the classification of certain intangible assets as “indefinite-lived,” are reviewed on a periodic basis to determine if changes in circumstances warrant revisions to them.

In addition to our review of the carrying value of each asset, the estimated useful life assumptions for identifiable intangible assets, including the classification of certain intangible assets as “indefinite-lived,” are reviewed on a periodic basis to determine if

changes in circumstances warrant revisions to them.

All definite-lived intangible assets are amortized over the periods in which their economic benefits are expected to be realized.

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Should the fair value of our goodwill or indefinite-lived intangible assets decline because of reduced operating performance, market declines or other indicators of impairment, or as a result of changes in the discount rate, charges for impairment loss may be necessary.

We evaluate our goodwill, intangible assets and other long-lived assets for impairment at the reporting unit level which is generally at least one level below our reportable segments.

We evaluate our goodwill, intangible assets and other long-lived assets for impairment at the reporting unit levels which is generally at least one level below our reportable segments.

We have the option of first performing a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test.

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The fair value of a reporting unit is estimated primarily using a discounted cash flow (“DCF”) method.

The DCF approach requires that we forecast future cash flows for each of the reporting units and discount the cash flow streams based on a weighted average cost of capital (“WACC”) that is derived, in part, from comparable companies within similar industries.

The DCF method requires that we forecast future cash flows for each of the reporting units and discount the cash flow streams based on a weighted average cost of capital (“WACC”) that is derived, in part, from comparable companies within similar industries.

The DCF calculations also include a terminal value calculation that is based upon an expected long-term growth rate for the applicable reporting unit.

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We evaluate amortizable intangible assets and other long-lived assets for impairment in accordance with ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets,” whenever changes in events or circumstances indicate that the carrying values of the reporting units may exceed the undiscounted cash flow forecasts attributable to the reporting units.

If undiscounted cash flow forecasts indicate that the carrying value of definite-lived intangible asset s or other long-lived asset s may not be recoverable, a fair value assessment is performed.

If undiscounted cash flow forecasts indicate that the carrying value of definite-lived intangible assets or other long-lived assets may not be recoverable, a fair value assessment is performed.

For intangible assets, fair value estimates are derived from discounted cash flow forecasts.

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Unallocated Corporate and Shared Services

Contingent Consideration.

We record contingent consideration resulting from a business combination at its fair value on the acquisition date.

Key assumptions used in the determination of the fair value of the contingent consideration include the following:

future revenue projections;

volatility of future revenue;

Contingent Considerations and Earnouts.

We record contingent considerations and earnouts resulting from business combinations at fair value as of the acquisition date.

Key assumptions used in the determination of the fair value of our contingent considerations include the following:

future revenue projections and earnings before interest, depreciation, amortization and other agreed-upon adjustments as specified in the purchase and sale agreement (“Adjusted EBITDA”);

volatility of future revenue and Adjusted EBITDA;

discount rates used to present value the projected cash flows.

On a quarterly basis, we revalue these assumptions and record the necessary adjustments to fair value in the consolidated statement of operations.

Changes to contingent consideration obligation can result from adjustments to future revenue projections, volatility of future revenue and discount rates.

The assumptions used for the determin ation of the fair value of contingent consideration s include a significant amount of judgment, and changes in the underlying estimates could have a material impact on the amount of contingent consideration expense recorded in any given period.

On a quarterly basis, we reassess these assumptions and record the necessary adjustments to fair value in the consolidated statement of operations.

Changes to contingent consideration obligations can result from adjustments to future revenue and Adjusted EBITDA projections, volatility of future revenue and Adjusted EBITDA, and discount rates.

The assumptions used for the determination of the fair value of contingent considerations involve significant judgment, and changes in the underlying assumptions could have a material impact on the amount of contingent consideration expense recorded in any given period.

Accounting for Income Taxes .

As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax provision (benefit) in each of the jurisdictions in which we operate.

This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for income tax return and financial accounting purposes.

These differences result in deferred tax assets and liabilities, which are reported on our consolidated balance sheet.

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In conjunction with our ongoing review of our actual results and anticipated future earnings, we continuously reassess the adequacy of the valuation allowance currently in place on our deferred tax assets.

In 2020, we reversed valuation allowance of $0.7 million recorded on net operating losses and other timing items in certain tax jurisdictions due to current and forecasted taxable income.

In 2021, we recorded a valuation allowance of $0.9

million on net operating losses and other timing items in certain tax jurisdictions due to taxable income (losses) generated in both the current and future year s .

The amount of income taxes we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed assessments.

We believe that we have adequately provided for any reasonably foreseeable outcome related to these matters.

We believe that we have adequately provided for any reasonably foreseeable outcomes related to these matters.

However, our future results may include favorable or unfavorable adjustments to our tax liabilities in the period that the assessments are made or resolved, or when the statute of limitations for certain periods expires.

As of December 31, 2020, the total amount of gross unrecognized tax benefits was $5.3 million, of which $5.0 million would favorably affect our effective tax rate, if recognized.

Over the next twelve months, we may need to recognize up to $0.5 million of previously unrecognized tax benefits in the event of statute of limitations closures.

Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature.

This amount becomes taxable upon a repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary.

As of December 31, 2021, the total amount of unrecognized tax benefits was $4.8 million, of which $4.6 million would favorably affect the effective tax rate, if benefited.

Over the next twelve months, we may need to reverse up to $0.5 million of previously recorded unrecognized tax benefits in the event of statute of limitations closures.

Income and foreign withholding taxes have not been recognized on the excess of the amount recognized for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature.

The excess amount becomes taxable upon a repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary.

The amount of undistributed earnings of foreign subsidiaries totaled $266.1 million as of December 31, 2021.

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Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable.

Because of uncertainties related to these matters, accruals are based only on the best information available as of the date of the financial statement.

Because of uncertainties related to these matters, accruals are based only on the best information available as of the date of the financial statements.

As additional information becomes available, we will reassess the potential liability related to our pending claims and litigation and may revise our estimates.

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Recent Accounting Pronouncements

See Note 2 to Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.

See Note 2 to Consolidated Financial Statements for recent accounting pronouncements that could have a significant effect on us.

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-K

Item 7. Management’s Discussion and Analysis