What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 153 added, 89 removed, 279 unchanged (46% of the section changed)

53 unchanged sentences

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.

potential penalties for violating foreign and U.S.

federal and state healthcare laws and regulations;

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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.

The interim consolidated financial statements of Novanta Inc.

and its subsidiaries (collectively referred to as the “Company”, “Novanta”, “we”, “us”, “our”) are prepared for each quarterly period ending on the Friday closest to the end of the calendar quarter, except for the fourth quarter which always ends on December 31.

Business Overview

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Photonics, Vision, and Precision Motion.

The reportable segments and their principal activities consist of the following:

The reportable segments and their principal activities are summarized below.

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.

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Medical Market

For the three months ended April 1, 2022, the medical market accounted for approximately 47% of our revenue.

For the six months ended July 1, 2022, the medical market accounted for approximately 47% of our revenue.

Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending, growth rates of surgical procedures, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, changes in technology requirements, timing of OEM customers’ product development and new product launches, changes in customer or patient preferences, and general demographic trends.

Advanced Industrial Market

For the three months ended April 1, 2022, the advanced industrial market accounted for approximately 53% of our revenue.

Revenue from our products sold to the advanced industrial market is affected by a number of factors, including changing technology

requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, financial condition s of our customers, changes in regulatory requirements and laws, and general economic conditions.

For the six months ended July 1, 2022, the advanced industrial market accounted for approximately 53% of our revenue.

Revenue from our products sold to the advanced industrial market is affected by several factors, including changing technology requirements and preferences of our customers, productivity or quality investments in a manufacturing environment, financial conditions of our customers, changes in regulatory requirements and laws, and general economic conditions.

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

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On March 10, 2022, we entered into an amendment (the “Fifth Amendment”) to the third amended and restated credit agreement, dated as of December 31, 2019 (as amended, the “Credit Agreement”).

The Fifth Amendment amends the Credit Agreement to extend the maturity date thereof from December 31, 2024 to March 10, 2027, update the pricing grid, replace LIBOR with SOFR as the reference rate for US dollar borrowings, and increase the uncommitted accordion option from $200 million to $350 million.

dollar borrowings, and increase the uncommitted accordion option from $200 million to $350 million.

Impact of COVID-19 on Our Business

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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 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

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

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Infection rates and the corresponding public health restrictions vary across the countries in which we operate.

Many g overnmental authorities have continued to implement numerous evolving measures to try to contain the virus, such as travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limit ation s on gatherings, mandatory quarantines, shelter-in-place orders, and business shutdowns.

Many governmental authorities have continued to implement numerous evolving measures to try to contain the virus, such as travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limitations on gatherings, mandatory quarantines, shelter-in-place orders, and business shutdowns.

While COVID-19 restrictions have been relaxed in the U.S.

and Europe, in response to outbreak s of infection in various locations within China , governmental authorities have implemented lockdown order s in some areas , significantly slowing economic and business activit ies .

and Europe, in response to outbreaks of infection in various locations within China, governmental authorities have implemented lockdown orders in some areas, significantly slowing economic and business activities.

Our manufacturing and distribution operations in Suzhou, China have been impacted to a limited degree by these recent lockdowns.

The extent to which government lockdowns in China or any other country will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be reasonably estimated at this time.

Through April 1, 2022 , we have experienced disruptions to our supply chain as a result of the COVID-19 pandemic and global electronics and other raw material shortages.

Through July 1, 2022 , 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.

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 where feasible to allow for alternative components to be used 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 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.

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In February 2022, Russian forces invaded Ukraine.

In response, the United States, European Union, and several other countries imposed economic and trade sanctions, and other restrictions (collectively, “global sanctions”) targeting Russia and Belarus.

Russia then imposed retaliatory economic measures against the United States, European Union, and several other countries.

In response, the United States, the European Union, and several other countries imposed economic and trade sanctions and other restrictions (collectively, “global sanctions”) targeting Russia and Belarus.

Russia then imposed retaliatory economic measures against the United States, the European Union, and several other countries.

Our sales to Russia are not material.

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Any longer-term impact to our business is currently unknown due to the uncertainty around the duration of the conflict, any further global sanctions and their broader impact on the global economy and inflation.

Results of Operations for the Three Months Ended April 1, 2022 Compared with the Three Months Ended April 2, 2021

Results of Operations for the Three and Six Months Ended July 1, 2022 Compared with the Three and Six Months Ended July 2, 2021

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

Three Months Ended

Six Months Ended

Cost of revenue

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Overview of Financial Results

Total revenue of $204.2 million for the three months ended April 1, 2022 increased $41.6 million, or 25.6%, from the prior year period primarily due to increased demand in the advanced industrial market related to microelectronics applications and as a result of increases in industrial manufacturing spending compared to the prior year period, as well as revenue from prior year acquisitions.

Total revenue of $215.4 million for the three months ended July 1, 2022 increased $47.8 million, or 28.6%, from the prior year period primarily due to revenue from prior year acquisitions and increased demand in the advanced industrial and medical markets.

The effect of our prior year acquisitions resulted in an increase in revenue of $34.9 million, or 20.9%.

In addition, foreign currency exchange rates negatively impacted our revenue by $3.3 million, or 2.0%, for the three months ended April 1, 2022.

Operating income of $24.3 million for the three months ended April 1, 2022 increased $13.2 million, or 118.8%, from the prior year period.

In addition, foreign currency exchange rates adversely impacted our revenue by $8.6 million, or 5.2%, for the three months ended July 1, 2022.

Total revenue of $419.6 million for the six months ended July 1, 2022 increased $89.5 million, or 27.1%, from the prior year period primarily due to revenue from prior year acquisitions and increased demand in the advanced industrial and medical markets.

The effect of our prior year acquisitions resulted in an increase in revenue of $67.8 million, or 20.5%.

In addition, foreign currency exchange rates adversely impacted our revenue by $11.9 million, or 3.6%, for the six months ended July 1, 2022.

Operating income of $23.3 million for the three months ended July 1, 2022 increased $7.3 million, or 45.6%, from the prior year period.

This increase was attributable to an increase in gross profit of $22.8 million primarily attributable to higher revenue, an increase in gross profit margin, and a decrease in restructuring, acquisition, and related charges of $2.0 million, partially offset by an increase in research and development and engineering (“R&D”) expenses of $4.6 million, an increase in selling, general and administrative (“SG&A”) expenses of $9.3 million and an increase in amortization expense of $3.6 million.

Basic earnings per common share (“Basic EPS”) of $0.53 for the three months ended April 1, 2022 increased $0.21 from the prior year period.

Diluted earnings per common share (“Diluted EPS”) of $0.53 for the three months ended April 1, 2022 increased $0.21 from the prior year period.

The increases were primarily attributable to an increase in operating income, partially offset by increases in interest expense and income tax provision.

Operating income of $47.6 million for the six months ended July 1, 2022 increased $20.5 million, or 75.6%, from the prior year period.

This increase was attributable to an increase in gross profit of $44.4 million primarily attributable to higher revenue, an increase in gross profit margin, and a decrease in restructuring, acquisition, and related charges of $7.3 million, partially offset by an increase in R&D expenses of $6.9 million, an increase in SG&A expenses of $17.0 million and an increase in amortization expense of $7.4 million.

Basic earnings per common share (“Basic EPS”) of $0.49 for the three months ended July 1, 2022 increased $0.16 from the prior year period.

Diluted earnings per common share (“Diluted EPS”) of $0.49 for the three months ended July 1, 2022 increased $0.16 from the prior year period.

The increases were primarily attributable to an increase in operating income.

Basic EPS of $1.02 for the six months ended July 1, 2022 increased $0.37 from the prior year period.

Diluted EPS of $1.01 for the six months ended July 1, 2022 increased $0.37 from the prior year period.

The increases were primarily attributable to an increase in operating income, partially offset by an increase in income tax provision.

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

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Precision Motion

Photonics segment revenue for the three months ended April 1, 2022 increased by $4.3 million, or 7.3%, versus the prior year period, primarily due to increased demand in advanced industrial and medical markets.

Vision segment revenue for the three months ended April 1, 2022 decreased by $5.6 million, or 8.3%, versus the prior year period, primarily due to raw materials shortage and demand dynamics resulting from continued deferrals of elective surgical procedures as a result of the COVID-19 pandemic.

Six Months Ended

Precision Motion

Precision Motion segment revenue for the three months ended April 1, 2022 increased by $42.9 million, or 117.8%, versus the prior year period, primarily due to $32.8 million of revenue contributions from 2021 acquisitions and increased demand in advanced industrial and medical markets.

Photonics segment revenue for the three months ended July 1, 2022 increased by $7.1 million, or 11.4%, versus the prior year period, primarily due to increased demand in advanced industrial and medical markets.

Photonics segment revenue for the six months ended July 1, 2022 increased by $11.4 million, or 9.4%, versus the prior year period, primarily due to increased demand in advanced industrial and medical markets.

Vision segment revenue for the three months ended July 1, 2022 increased by $2.1 million, or 3.3%, versus the prior year period, primarily due to increases in sales from our minimally invasive surgery products.

Vision segment revenue for the six months ended July 1, 2022 decreased by $3.5 million, or 2.7%, versus the prior year period, primarily due to raw material shortage and other supply chain disruptions.

Precision Motion

Precision Motion segment revenue for the three months ended July 1, 2022 increased by $38.7 million, or 92.7%, versus the prior year period, primarily due to $34.9 million of revenue contributions from 2021 acquisitions and increased demand in advanced industrial and medical markets.

Precision Motion segment revenue for the six months ended July 1, 2022 increased by $81.6 million, or 104.4%, versus the prior year period, primarily due to $67.8 million of revenue contributions from 2021 acquisitions and increased demand in advanced industrial and medical markets.

Gross Profit and Gross Profit Margin

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Three Months Ended

Six Months Ended

Gross profit:

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

Photonics segment gross profit for the three months ended April 1, 2022 increased $0.3 million, or 1.0%, versus the prior year period, due to an increase in revenue.

Photonics segment gross profit margin was 45.2% for the three months ended April 1, 2022 versus a gross profit margin of 48.1% for the prior year period.

Photonics segment gross profit for the three months ended July 1, 2022 increased $1.6 million, or 5.4%, versus the prior year period, primarily due to an increase in revenue.

Photonics segment gross profit margin was 44.9% for the three months ended July 1, 2022 versus a gross profit margin of 47.5% for the prior year period.

The decrease in gross profit margin was primarily attributable to supply chain disruptions and overall raw material cost inflation.

Vision segment gross profit for the three months ended April 1, 2022 decreased $1.7 million, or 6.3%, versus the prior year period, primarily due to a decrease in revenue.

Vision segment gross profit margin was 40.7% for the three months ended April 1, 2022, versus a gross profit margin of 39.8% for the prior year period.

Photonics segment gross profit for the six months ended July 1, 2022 increased $1.9 million, or 3.2%, versus the prior year period, primarily due to an increase in revenue.

Photonics segment gross profit margin was 45.0% for the six months ended July 1, 2022 versus a gross profit margin of 47.7% for the prior year period.

The decrease in gross profit margin was primarily attributable to supply chain disruptions and overall raw material cost inflation.

Vision segment gross profit for the three months ended July 1, 2022 increased $2.1 million, or 8.6%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Vision segment gross profit margin was 40.5% for the three months ended July 1, 2022, versus a gross profit margin of 38.5% for the prior year period.

The increase in gross profit margin was primarily attributable to improved factory efficiency.

Vision segment gross profit for the six months ended July 1, 2022 increased $0.4 million, or 0.8%, versus the prior year period, primarily due to an increase in gross profit margin.

Vision segment gross profit margin was 40.6% for the six months ended July 1, 2022, versus a gross profit margin of 39.2% for the prior year period.

The increase in gross profit margin was primarily attributable to improved factory efficiency.

Precision Motion

Precision Motion segment gross profit for the three months ended April 1, 2022 increased $22.1 million, or 137.3%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Precision Motion segment gross profit margin was 48.1% for the three months ended April 1, 2022, versus a gross profit margin of 44.1% for the prior year period.

The increase in gross profit margin was primarily attributable to improved factory efficiency and utilization.

Precision Motion segment gross profit for the three months ended July 1, 2022 increased $18.0 million, or 86.2%, versus the prior year period, primarily due to an increase in revenue.

Precision Motion segment gross profit margin was 48.4% for the three months ended July 1, 2022, versus a gross profit margin of 50.0% for the prior year period.

The decrease in gross profit margin was primarily attributable to an increase in amortization of purchased intangible assets.

Precision Motion segment gross profit for the six months ended July 1, 2022 increased $40.1 million, or 108.4%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin.

Precision Motion segment gross profit margin was 48.2% for the six months ended July 1, 2022, versus a gross profit margin of 47.3% for the prior year period.

The increase in

gross profit margin was primarily attributable to improved factory efficiency and utilization , offset by an increase in amortization of purchased intangible assets .

Unallocated Corporate and Shared Services

Unallocated corporate and shared services costs primarily represent costs of corporate and shared services functions that are not allocated to the operating segments.

These costs for the three months ended April 1, 2022 decreased by $0.9 million versus the prior year period primarily due to reduced COVID-19 testing costs for employees of $1.3 million.

These costs for the three months ended July 1, 2022 decreased by $1.2 million versus the prior year period primarily due to reduced COVID-19 testing costs for employees of $1.4 million.

Unallocated corporate and shared services costs for the six months ended July 1, 2022 decreased by $2.1 million versus the prior year period primarily due to reduced COVID-19 testing costs for employees of $2.7 million.

Operating Expenses

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Three Months Ended

Six Months Ended

Research and development and engineering

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Research and Development and Engineering Expenses

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

R&D expenses were $20.9 million, or 10.2% of revenue, during the three months ended April 1, 2022, versus $18.7 million, or 11.5% of revenue, during the prior year period.

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 $21.6 million, or 10.0% of revenue, during the three months ended July 1, 2022, versus $17.0 million, or 10.1% of revenue, during the prior year period.

R&D expenses increased in terms of total dollars primarily due to expenses related to 2021 acquisitions.

R&D expenses decreased as a percentage of revenue due to leverage from higher sales.

R&D expenses were $42.5 million, or 10.1% of revenue, during the six months ended July 1, 2022, versus $35.6 million, or 10.8% of revenue, during the prior year period.

R&D expenses increased in terms of total dollars primarily due to expenses related to 2021 acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, and executive management functions.

SG&A expenses were $39.4 million, or 19.3% of revenue, during the three months ended April 1, 2022, versus $31.7 million, or 19.5% of revenue, during the prior year period.

SG&A expenses were $40.5 million, or 18.8% of revenue, during the three months ended July 1, 2022, versus $31.2 million, or 18.6% of revenue, during the prior year period.

SG&A expenses increased in terms of total dollars primarily due to SG&A expenses related to 2021 acquisitions and increases in variable compensation and discretionary spending.

SG&A expenses were $79.9 million, or 19.0% of revenue, during the six months ended July 1, 2022, versus $62.9 million, or 19.1% of revenue, during the prior year period.

SG&A expenses increased in terms of total dollars primarily due to SG&A expenses related to 2021 acquisitions and increases in variable compensation and discretionary spending.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was $7.3 million, or 3.6% of revenue, during the three months ended April 1, 2022, versus $3.6 million, or 2.2% of revenue, during the prior year period.

Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was $7.2 million, or 3.3% of revenue, during the three months ended July 1, 2022, versus $3.6 million, or 2.1% of revenue, during the prior year period.

The increase, in terms of total dollars and as a percentage of revenue, was the result of more acquired intangible assets from 2021 acquisitions.

Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was $ 14.5 million, or 3.5% of revenue, during the six months ended July 1, 2022 , versus $ 7.2 million, or 2.2 % of revenue, during the prior year period.

The increase, in terms of total dollars and as a percentage of revenue, was the result of more acquired intangible assets from 2021 acquisitions.

Restructuring, Acquisition, and Related Costs

We recorded restructuring, acquisition, and related costs of $(1.6) million during the three months ended April 1, 2022, versus $3.7 million during the prior year period.

The acquisition and related costs decreased primarily due to a $3.2 million reduction in earnout expenses related to prior year acquisitions and a $0.9 million reduction in legal fees.

The restructuring costs decreased $0.9 million related to decreased spending for the 2020 restructuring plan.

We recorded restructuring, acquisition, and related costs of $2.7 million during the three months ended July 1, 2022, versus $4.6 million during the prior year period.

The acquisition and related costs decreased primarily due to a $1.4 million reduction in acquisition and related expenses and a $0.8 million reduction in legal fees, partially offset by a $0.9 million increase in earnout expenses related to prior year acquisitions.

The restructuring costs decreased $0.6 million related to decreased expenses for the 2020 restructuring plan.

We recorded restructuring, acquisition, and related costs of $1.0 million during the six months ended July 1, 2022, versus $8.4 million during the prior year period.

The acquisition and related costs decreased primarily due to a $2.4 million reduction in earnout expenses related to prior year acquisitions, a $1.8 million reduction in legal fees and a $1.5 million reduction in other acquisition and related expenses.

The restructuring costs decreased $1.5 million related to decreased expenses for the 2020 restructuring plan.

Operating Income (Loss) by Segment

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Three Months Ended

Six Months Ended

Operating Income (Loss)

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Unallocated Corporate and Shared Services

Photonics segment operating income was $13.4 million, or 21.4% of revenue, during the three months ended April 1, 2022, versus $12.4 million, or 21.2% of revenue, during the prior year period.

The increase in operating income was primarily due to a decrease in restructuring, acquisition and related cost of $1.4 million, partially offset by an increase in SG&A expense of $0.6 million.

Vision segment operating income was $5.0 million, or 8.1% of revenue, during the three months ended April 1, 2022, versus $3.4 million, or 5.0% of revenue, during the prior year period.

The increase in operating income was primarily due to a decrease in restructuring, acquisition, and related charges of $1.6 million and a decrease in R&D spending of $1.2 million, partially offset by a decrease in gross profit of $1.7 million.

Photonics segment operating income was $14.0 million, or 20.1% of revenue, during the three months ended July 1, 2022, versus $14.2 million, or 22.8% of revenue, during the prior year period.

The decrease in operating income was primarily due to an increase in R&D costs of $1.1 million and an increase in S&GA expenses of $0.4 million, partially offset by an increase in gross profit of $1.6 million.

Photonics segment operating income was $27.4 million, or 20.7% of revenue, during the six months ended July 1, 2022, versus $26.6 million, or 22.0% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $1.9 million, and a decrease in restructuring, acquisition, and related charges of $1.1 million, partially offset by an increase in R&D costs of $1.0 million and an increase in S&GA expenses of $0.9 million.

Vision segment operating income was $7.0 million, or 10.7% of revenue, during the three months ended July 1, 2022, versus $3.2 million, or 5.1% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $2.1 million and a decrease in restructuring, acquisition, and related charges of $1.3 million.

Vision segment operating income was $12.1 million, or 9.5% of revenue, during the six months ended July 1, 2022, versus $6.6 million, or 5.0% of revenue, during the prior year period.

The increase in operating income was primarily due to a decrease in restructuring, acquisition, and related charges of $2.9 million, a decrease in R&D costs of $1.4 million, a decrease in amortization expense of 0.8 million, and an increase in gross profit of $0.4 million.

Precision Motion

Precision Motion segment operating income was $18.4 million, or 23.1% of revenue, during the three months ended April 1, 2022, versus $7.4 million, or 20.4% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $22.1 million and a decrease of restructuring, acquisition, and related charges of $2.1 million, partially offset by increases in R&D spending of $3.6 million, SG&A expenses of $5.7 million and amortization expense of $4.0 million primarily as a result of prior year acquisitions.

Precision Motion segment operating income was $14.1 million, or 17.5% of revenue, during the three months ended July 1, 2022, versus $12.3 million, or 29.4% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $18.0 million, partially offset by increases in R&D spending of $3.8 million, SG&A expenses of $8.0 million, and amortization expense of $4.0 million primarily as a result of prior year acquisitions.

Precision Motion segment operating income was $32.4 million, or 20.3% of revenue, during the six months ended July 1, 2022, versus $19.7 million, or 25.2% of revenue, during the prior year period.

The increase in operating income was primarily due to an increase in gross profit of $40.1 million, and a decrease in restructuring, acquisition, and related charges of $1.6 million, partially offset by increases in R&D spending of $7.3 million, SG&A expenses of $13.7 million, and amortization expense of $8.0 million primarily as a result of prior year acquisitions.

Unallocated Corporate and Shared Services

Unallocated corporate and shared services costs primarily represent costs of corporate and shared services functions that are not allocated to the operating segments, including certain restructuring and most acquisition costs.

These costs for the three months ended April 1, 2022 increased by $0.4 million versus the prior year period primarily due to an increase in SG&A spending of $1.6 million, partially offset by a decrease in costs related to COVID-19 testing for employees of $1.3 million included in cost of revenue.

These costs for the three months ended July 1, 2022 decreased by $1.9 million versus the prior year period primarily due to a decrease in costs related to COVID-19 testing for employees of $1.4 million included in cost of revenue, and a decrease in restructuring, acquisition, and related charges of $1.5 million, partially offset by an increase in SG&A expenses of $0.8 million.

Unallocated corporate and shared services costs for the six months ended July 1, 2022 decreased by $1.5 million versus the prior year period primarily due to a decrease in costs related to COVID-19 testing for employees of $2.7 million included in cost of revenue, and a decrease in restructuring, acquisition, and related charges of $1.7 million, partially offset by an increase in SG&A expenses of $2.4 million.

Other Income and Expense Items

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Three Months Ended

Six Months Ended

Interest income (expense), net

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Interest Income (Expense), Net

Net interest expense was $3.1 million for the three months ended April 1, 2022, versus $1.4 million in the prior year period.

The increase in net interest expense was primarily due to an increase in average debt levels and an increase in the weighted average interest

rate on our senior credit facilities.

The weighted average interest rate on our senior credit facilities was 2 .

49 % during the three months ended April 1 , 202 2 , versus 2 .

02 % during the prior year period.

Net interest expense was $2.8 million for the three months ended July 1, 2022, versus $1.4 million in the prior year period.

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

The weighted average interest rate on our senior credit facilities was 2.29% during the three months ended July 1, 2022, versus 2.04% during the prior year period.

Net interest expense was $5.9 million for the six months ended July 1, 2022, versus $2.8 million in the prior year period.

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

The weighted average interest rate on our senior credit facilities was 2.39% during the six months ended July 1, 2022, versus 2.03% during the prior year period.

Foreign Exchange Transaction Gains (Losses), Net

Foreign exchange transaction gains (losses) were $0.1 million of net gain for the three months ended April 1, 2022, versus $(0.3) million of net losses in the prior year period.

Foreign exchange transaction gains (losses) were nominal for both the three and six months ended July 1, 2022 and the three and six months ended July 2, 2021.

Other Income (Expense), Net

Other expense was $0.5 million for the three months ended April 1, 2022, versus $0.1 million in the prior year period.

The increase in other expense was primarily due to $0.6 million of loss from the write-off of a portion of the unamortized deferred financing cost as a result of the Fifth Amendment.

Net other expense was nominal for the three months ended July 1, 2022 and July 2, 2021.

The increase in other expense for the six months ended July 1, 2022 compared to the prior year comparable period was primarily due to a $0.6 million loss from the write-off of a portion of the unamortized deferred financing cost as a result of the Fifth Amendment.

Income Tax Provision (Benefit)

Our effective tax rate for the three months ended April 1, 2022 was 9.1%, versus (20.8)% for the prior year period.

Our effective tax rate of 9.1% for the three months ended April 1, 2022 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, partially offset by disallowed compensation and uncertain tax position accruals.

For the three months ended April 1, 2022, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 3% on our effective tax rate.

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

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

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

Our effective tax rate for the three months ended July 1, 2022 was 15.8%, versus 19.2% for the prior year period.

Our effective tax rate of 15.8% for the three months ended July 1, 2022 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 R&D tax credits, partially offset by disallowed compensation and uncertain tax position accruals.

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

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

corporate tax rate change.

Our effective tax rate for the six months ended July 1, 2022 was 12.4%, versus 3.5% for the prior year period.

Our effective tax rate of 12.4% for the six months ended July 1, 2022 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, R&D tax credits and windfall tax benefits upon vesting of certain share-based compensation awards, partially offset by disallowed compensation and uncertain tax position accruals.

For the six months ended July 1, 2022, the windfall tax benefits upon vesting of certain stock-based compensation awards had a benefit of 1.4% on our effective tax rate.

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

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

corporate tax rate change during the period.

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

Beginning in January 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) requires R&D expenditures be capitalized and amortized for income tax purposes over five years for domestic research and fifteen years for foreign research, rather than being deducted as incurred.

This has the effect of increasing our cash taxes and deferred tax assets.

Since January 2022, the Company has recognized deferred tax assets of $6.3 million for the relevant R&D expenditures.

This provision also has an indirect benefit of 3% on our effective tax rate for the six months ended July 1, 2022, as our estimated deductions for Foreign Derived Intangible Income has increased as a result of increased U.S.

taxable income.

The provision for income taxes for both the three months and the six months ended July 1, 2022 reflects the impact of the TCJA.

Liquidity and Capital Resources

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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, 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.

and Europe, 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, 2021.

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Such contractual obligations are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

T hrough April 1, 2022, we have not entered into any other material new or modified contractual obligations since December 31, 2021 .

T hrough July 1, 2022 , we have not entered into any other material new or modified contractual obligations since December 31, 20 21 .

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.

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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 April 1, 2022, $64.7 million of our $98.8 million cash and cash equivalents was held by subsidiaries outside of Canada and the United States.

As of July 1, 2022, $72.5 million of our $100.5 million cash and cash equivalents was held by subsidiaries outside of Canada and the U.S.

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 $155.2 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.

Approximately $144.8 million of our outstanding term loan and revolver borrowings under our Senior Credit Facilities were held in our subsidiaries outside of Canada and the U.S.

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

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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 option to $200.0 million for potential future expansion.

On March 10, 2022, the Company entered into an amendment (the “Fifth Amendment”) to the Credit Agreement to extend the maturity date thereof from December 31, 2024 to March 10, 2027, update the pricing grid, replace LIBOR with SOFR as the reference rate for US dollar borrowings, and increase the uncommitted accordion option from $200 million to $350 million.

As of April 1, 2022, we had $88.7 million term loan and $334.5 million revolver borrowings outstanding under our Senior Credit Facilities.

dollar borrowings, and increase the uncommitted accordion option from $200 million to $350 million.

As of July 1, 2022, we had $82.2 million term loan and $330.6 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 Credit Agreement, plus a margin ranging between 0.00% and 0.75% per annum, determined by reference to our consolidated leverage ratio, or (b) the Eurocurrency Rate, as defined in the Credit Agreement, plus a margin ranging between 0.75% and 1.75% 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 0.30% per annum, determined by reference to our consolidated leverage ratio.

As of April 1, 2022, we had outstanding borrowings under the Credit Agreement denominated in Euro and U.S.

As of July 1, 2022, we had outstanding borrowings under the Credit Agreement denominated in Euro and U.S.

Dollars of $144.8 million and $268.0 million, respectively.

The 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 Credit Agreement).

The following table summarizes these financial covenant s and our compliance therewith as of April 1 , 202 2 :

The following table summarizes these financial covenant s and our compliance therewith as of July 1 , 202 2 :

Maximum consolidated leverage ratio (1)

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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.

Through April 1, 2022, we have repurchased 185 thousand shares for an aggregate purchase price of $15.5 million under the 2018 Repurchase plan.

We had $9.5 million available for share repurchases under the 2018 Repurchase Plan as of April 1, 2022.

During the six months ended July 1, 2022, we repurchased 80 thousand shares for an aggregate purchase price of $9.5 million at an average price of $118.97 per share under the 2018 Repurchase Plan.

As of July 1, 2022, we had repurchased a cumulative total of 264 thousand shares under the 2018 Repurchase Plan for an aggregate purchase price of $25.0 million at an average price of $94.57 per share.

As of July 1, 2022, we had completed the 2018 Repurchase Plan.

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 after the 2018 Repurchase Plan is completed.

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

Cash Flows for the Three Months Ended April 1, 2022 and April 2, 2021

Share repurchases have been made under the 2020 Repurchase Plan pursuant to Rule 10b-18 under the Securities Exchange Act of 1934.

During the six months ended July 1, 2022, we repurchased 4 thousand shares for an aggregate purchase price of $0.5 million at an average price of $116.95 per share under the 2020 Repurchase Plan.

As of July 1, 2022, we had $49.5 million available for share repurchases under the 2020 Repurchase Plan.

Cash Flows for the Six Months Ended July 1, 2022 and July 2, 2021

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

Three Months Ended

Six Months Ended

Net cash provided by operating activities

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Operating Cash Flows

Cash provided by operating activities was $11.3 million for the three months ended April 1, 2022, versus $23.3 million for the prior year period.

Cash provided by operating activities for the three months ended April 1, 2022 decreased from the prior year period primarily due to a $14.9 million increase in inventories driven by increased customer demand and higher critical raw material purchases, and a bonus payout in 2022 of $8.4 million compared to no bonus payout in 2021 as a result of the elimination of our 2020 annual bonus plan, partially offset by an increase in profit before tax from higher revenue and gross profit margin expansion.

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

Cash provided by operating activities was $35.4 million for the six months ended July 1, 2022, versus $52.0 million for the prior year period.

Cash provided by operating activities for the six months ended July 1, 2022 decreased from the prior year period primarily due to a $33.5 million increase in inventories driven by increased customer demand and higher critical raw material

purchases , and a bonus payout in 2022 of $8.4 million compared to no bonus payout in 2021 as a result of the elimination of our 2020 annual bonus plan, partially offset by an increase in profit before tax from higher revenue .

This has the effect of increasing our cash taxes and deferred tax assets.

If this provision under the TCJA is not deferred, modified, or repealed with retroactive effect going back to January 1, 2022, our operating cash flows are expected to decrease by approximately $10.2 million for the year ending December 31, 2022.

Investing Cash Flows

Cash used in investing activities was $6.8 million for the three months ended April 1, 2022, primarily driven by capital expenditures of $6.3 million and a contingent consideration payment of $1.5 million related to our 2016 asset acquisition of video signal processing and management technologies.

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

We expect to use an aggregate of approximately $25 million to $30 million in fiscal 2022 for capital expenditures related to investments in new property, plant and equipment for our existing businesses.

Cash used in investing activities was $12.6 million for the six months ended July 1, 2022, primarily driven by capital expenditures of $12.1 million and a contingent consideration payment of $1.5 million related to our 2016 asset acquisition of video signal processing and management technologies.

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

We expect to use an aggregate of approximately $25 million to $30 million in 2022 for capital expenditures related to investments in new property, plant and equipment for our existing businesses.

Financing Cash Flows

Cash used in financing activities was $22.0 million for the three months ended April 1, 2022, primarily due to $11.6 million of term loan and revolving credit facility repayments, $7.7 million of payroll tax payments upon vesting of share-based compensation awards, and $2.1 million of debt issuance costs in connection with the Fifth Amendment.

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

Cash used in financing activities was $35.5 million for the six months ended July 1, 2022, primarily due to $10 million of repurchase of common stock, $9.5 million of payroll tax payments upon vesting of share-based compensation awards, $12.8 million of term loan and revolving credit facility repayments, and $2.5 million of debt issuance costs in connection with the Fifth Amendment.

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

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, 2021.

There have been no material changes to our critical accounting policies and estimates through April 1, 2022 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

There have been no material changes to our critical accounting policies and estimates through July 1, 2022 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis