Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report on Form 10-Q. The MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, but are not limited to the anticipated impacts of the COVID-19 pandemic on our business, our financial results and our financial condition; our belief that the Purchasing Managers Index ("PMI") may provide an indication of the impact of general economic conditions on our sales into the advanced industrial end market; our strategy; anticipated financial performance; expected liquidity and capitalization; drivers of revenue growth and our growth expectations in various markets; management's plans and objectives for future operations, expenditures and product development and investments in research and development; business prospects; potential of future product releases and expansion of our product and service offerings; anticipated revenue performance; industry trends; market conditions; our competitive positions; changes in economic and political conditions, including supply chain constraints; changes in accounting principles; changes in actual or assumed tax liabilities; expectations regarding tax exposures; anticipated reinvestment of future earnings and dividend policy; anticipated expenditures in regard to the Company's benefit plans; future acquisitions; integration and anticipated benefits from acquisitions and dispositions; anticipated economic benefits, costs and timelines of restructuring programs; ability to repay our indebtedness; our intentions regarding the use of cash; expectations regarding legal and regulatory environmental requirements and our compliance thereto; and other statements that are not historical facts. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various important factors, including, but not limited to, the following: economic and political conditions and the effects of these conditions on our customers' businesses and level of business activities; our significant dependence upon our customers' capital expenditures, which are subject to cyclical market fluctuations; our dependence upon our ability to respond to fluctuations in product demand; our ability to continually innovate and successfully commercialize our innovations; failure to introduce new products in a timely manner; customer order timing and other similar factors beyond our control; disruptions or breaches in security of our information technology systems; our failure to comply with data privacy regulations; changes in interest rates, credit ratings or foreign currency exchange rates; risks associated with our operations in foreign countries; risks associated with the COVID-19 pandemic and other events outside our control; our increased use of outsourcing in foreign countries; risks associated with increased outsourcing of components manufacturing; our exposure to increased tariffs, trade restrictions or taxes on our products; negative effects on global economic conditions, financial markets and our business as a result of theUnited Kingdom's withdrawal from theEuropean Union ; violations of our intellectual property rights and our ability to protect our intellectual property against infringement by third parties; risk of losing our competitive advantage; our failure to successfully integrate recent and future acquisitions into our business; our ability to attract and retain key personnel; our restructuring and realignment activities and disruptions to our operations as a result of consolidation of our operations; product defects or problems integrating our products with other vendors' products; disruptions in the supply of certain key components or other goods from our suppliers; our failure to accurately forecast component and raw material requirements leading to excess inventories or delays in the delivery of our products; production difficulties and product delivery delays or disruptions; our exposure to medical device regulations, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products; potential penalties for violating foreign,U.S. federal, and state healthcare laws and regulations; changes in governmental regulations affecting our business or products; our compliance, or failure to comply, with environmental regulations; our failure to implement new information technology systems and software successfully; our failure to realize the full value of our intangible assets; our exposure to the credit risk of some of our customers and in weakened markets; our reliance on third party distribution channels; being subject toU.S. federal income taxation even though we are a non-U.S. corporation; changes in tax laws, and fluctuations in our effective tax rates; any need for additional capital to adequately respond to business challenges or opportunities and repay or refinance our existing indebtedness, which may not be available on acceptable terms or at all; our existing indebtedness limiting our ability to engage in certain activities; volatility in the market price for our common shares; and our failure to maintain appropriate internal controls in the future. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company's operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 under the heading "Risk Factors" as updated in our other filings with theSecurities and Exchange Commission . In this Quarterly Report on Form 10-Q, the words "anticipates," "believes," "expects," "intends," "future," "could," "estimates," "plans," "would," "should," "potential," "continues," and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Management and the Company disclaim any obligation to publicly update or revise any such statement to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements, except as required under applicable law. 31
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Accounting period
The interim financial statements ofNovanta 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 onDecember 31 .
Company presentation
We are a leading global supplier of core technology solutions that give medical and advanced industrial original equipment manufacturers ("OEMs") a competitive advantage. We combine deep proprietary technology expertise and competencies in photonics, vision and precision motion with a proven ability to solve complex technical challenges. This enables us to engineer core components and sub-systems that deliver extreme precision and performance, tailored to our customers' demanding applications.
Segments to be declared
We operate in three segments to present: photonics, vision and precision movement. The sectors to be presented and their main activities are as follows:
Photonics Our Photonics segment designs, manufactures and markets photonics-based solutions, including laser scanning, laser beam delivery, CO2 laser, solid state laser, ultrafast laser, and optical light engine products to customers worldwide. The segment serves highly demanding photonics-based applications for advanced industrial processes, metrology, medical and life science imaging, DNA sequencing, and medical laser procedures. The vast majority of the segment's product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors. Vision Our Vision segment designs, manufactures and markets a range of medical grade technologies, including medical insufflators, pumps and related disposables; visualization solutions; wireless, recorder and video integration technologies for operating room integrations; optical data collection and machine vision technologies; radio frequency identification ("RFID") technologies; thermal chart recorders; spectrometry technologies; and embedded touch screen solutions. The vast majority of the segment's product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors.
Precision movement
Our Precision Motion segment designs, manufactures and markets optical and inductive encoders, precision motor and motion control sub-assemblies, servo drives, intelligent robotic end-of-arm technology solutions, air bearings, and air bearing spindles to customers worldwide. The vast majority of the segment's product offerings are sold to OEM customers. The segment sells these products both directly, utilizing a highly technical sales force, and indirectly, through resellers and distributors. End Markets
We mainly operate in two end markets: the medical market and the advanced industrial market.
Medical Market For the nine months endedOctober 1, 2021 , the medical market accounted for approximately 53% of our revenue. Revenue from our products sold to the medical market is generally affected by hospital and other healthcare provider capital spending, growth rates of surgical procedures, changes in regulatory requirements and laws, aggregation of purchasing by healthcare networks, changes in technology requirements, timing of OEM customers' product development and new product launches, changes in customer or patient preferences, and general demographic trends.
Advanced industrial market
For the nine months endedOctober 1, 2021 , the advanced industrial market accounted for approximately 47% 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 32 -------------------------------------------------------------------------------- condition of our customers, changes in regulatory requirements and laws, and general economic conditions. We believe that the Purchasing Managers Index (PMI) on manufacturing activities specific to different regions around the world may provide an indication of the impact of general economic conditions on our sales into the advanced industrial market.
Strategy
Our strategy is to generate sustainable and profitable growth through short and long term initiatives, including:
• disciplined focus on our diversified business model of providing
components and subsystems to long-life OEM customer platforms in
attractive, leading edge medical and industrial niche markets;
• improve our mix of activities to increase medical sales as a percentage of
total turnover by:
– the introduction of new products intended for attractive medical applications,
such as minimally invasive and robotic surgery, ophthalmology, patient monitoring, drug delivery, clinical laboratory testing and life science equipment; - deepening our key account management relationships with and driving cross selling of our product offerings to leading medical equipment manufacturers; and - pursuing complementary medical technology acquisitions; • increasing our penetration of high growth advanced industrial
applications, such as laser material processing, robotics, laser additives
manufacturing, automation and metrology, working closely with OEMs
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
customers, while expanding the applicability of our solutions to new markets;
• expand 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, parts and consumables;
• expanding sales and marketing channels to reach new target customers;
• improve our existing operations to increase profit margins and improve
customer satisfaction through the implementation of lean production principles,
strategic sourcing at our main production sites; and optimize and
limit the growth of our fixed cost base; and
• attract, retain and develop world-class talent and motivation
employees.
Important events and updates
The acquisition of
OnAugust 30, 2021 , we acquired 100% of the outstanding shares ofATI Industrial Automation, Inc. ("ATI"), anApex, North Carolina -based leading supplier of intelligent end-of-arm technology solutions to OEMs for advanced industrial and surgical robots for an initial cash purchase price of$170.0 million , net of cash acquired, and$51.9 million estimated fair value of contingent consideration. The contingent consideration will be payable in 2022 based on actual standalone ATI Adjusted EBITDA, as defined in the purchase and sale agreement, for the fiscal year endingDecember 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. ATI will contribute to our operations and growth within the Precision Motion reportable segment.
The acquisition of
OnAugust 31, 2021 , we acquired 100% of the outstanding shares ofSchneider Electric Motion USA, Inc. ("SEM"), aMarlborough, Connecticut -based manufacturer of integrated stepper motors and electronic controls for automation equipment for a total purchase price of$115.1 million , net of cash acquired, subject to customary working capital adjustment. 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. 33
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Impact of COVID-19 on our business
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 major 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, working from home for those employees that do not need to be physically present on the manufacturing floor or in our facilities to perform their work, reducing travel, spreading production over more shifts, implementing temperature checks at the entrances to our facilities, frequently disinfecting our workspaces, and providing masks to those employees who must be physically present in our facilities. We expect to continue these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business. In connection with our COVID-19 remediation actions, we have incurred additional costs to protect the health of our employees, including investments in technologies and monitoring equipment and weekly testing of employees for COVID-19 at certain locations. We expect such costs to continue to be significant to our cost of operations. We may take further actions as government authorities require or recommend or as we determine to be in the best interest of our employees. The outbreak has significantly increased economic and demand uncertainty. Even as governmental restrictions are relaxed and economies gradually, partially or fully, reopen, the ongoing economic impacts and health concerns associated with COVID-19 may continue to affect customer demand and restrictions may resume. ThroughOctober 1, 2021 , we experienced some disruptions to our supply chain as a result of the COVID-19 pandemic and the recent electronics and other material shortages. We regularly monitor the manufacturing output of companies in our supply chain. Disruptions to our suppliers or sub-suppliers caused by these events could cause further challenges in our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations. To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic and the electronics and other material shortages, we are identifying alternative suppliers and distributors, sourcing raw materials from different supplier and distributor locations, modifying our designs to allow for alternative components to be used without compromising quality, performance or other requirements and taking other actions to ensure our supply of raw materials. 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 recent electronics and other 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 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. 34 --------------------------------------------------------------------------------
Results of operations for the three and nine months ended
Compared to the three and nine months ended
The following table presents our unaudited operating results as a percentage of sales for the periods indicated:
Three Months Ended
Nine months ended
October 1, October 2, October 1, October 2, 2021 2020 2021 2020 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 57.1 58.6 57.2 58.9 Gross profit 42.9 41.4 42.8 41.1 Operating expenses: Research and development and engineering 9.8 10.7 10.5 10.2 Selling, general and administrative 17.6 18.7 18.5 18.6 Amortization of purchased intangible assets 2.3 2.5 2.2 2.3 Restructuring, acquisition, and related costs 4.6 1.2 3.2 1.3 Total operating expenses 34.3 33.1 34.5 32.4 Operating income 8.6 8.3 8.3 8.8 Interest income (expense), net (1.0 ) (1.2 ) (0.9 ) (1.1 ) Foreign exchange transaction gains (losses), net 0.0 (0.1 ) (0.1 ) (0.0 ) Other income (expense), net (0.0 ) (0.0 ) (0.0 ) 0.0 Income before income taxes 7.6 7.0 7.4 7.6 Income tax provision (benefit) (0.0 ) 1.2 0.1 0.4 Consolidated net income 7.7 % 5.8 % 7.2 % 7.2 %
Financial results overview
Total revenue of$177.7 million for the three months endedOctober 1, 2021 increased$34.8 million , or 24.3%, from the prior year period primarily due to increased demand in the advanced industrial market related to microelectronics and as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19, as well as revenue from current year acquisitions. The effect of our current year acquisitions resulted in an increase in revenue of$11.1 million , or 7.7%. In addition, foreign currency exchange rates positively impacted our revenue by$2.2 million , or 1.5%, for the three months endedOctober 1, 2021 . Total revenue of$507.8 million for the nine months endedOctober 1, 2021 increased$64.7 million , or$14 .6%, from the prior year period primarily due to increased demand in the advanced industrial market related to microelectronics and as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19. The effect of our current year acquisitions also resulted in an increase in revenue of$11.1 million , or 2.5%. In addition, foreign currency exchange rates positively impacted our revenue by$13.8 million , or 3.1%, for the nine months endedOctober 1, 2021 . Operating income of$15.3 million for the three months endedOctober 1, 2021 increased$3.4 million , or 28.7%, from the prior year period. This increase was attributable to an increase in gross profit of$17.2 million primarily attributable to higher revenue, partially offset by an increase in research and development and engineering ("R&D") expenses of$2.2 million , selling, general and administrative ("SG&A") expenses of$4.5 million and restructuring, acquisition, and related charges of$6.4 million . Operating income of$42.4 million for the nine months endedOctober 1, 2021 increased$3.5 million , or 9.1%, from the prior year period. This increase was attributable to an increase in gross profit of$35.2 million primarily attributable to higher revenue, partially offset by an increase in R&D expenses of$8.1 million , SG&A expenses of$11.7 million and restructuring, acquisition, and related charges of$10.9 million . Basic earnings per common share ("Basic EPS") of$0.38 for the three months endedOctober 1, 2021 increased$0.15 from the prior year period. Diluted earnings per common share ("Diluted EPS") of$0.38 for the three months endedOctober 1, 2021 increased$0.15 from the prior year period. The increases were primarily attributable to an increase in operating income and a decrease in income tax provision (benefit). Basic EPS of$1.03 for the nine months endedOctober 1, 2021 increased$0.12 from the prior year period. Diluted EPS of$1.02 for the nine months endedOctober 1, 2021 increased$0.13 from the prior year period. The increases were primarily attributable to an increase in operating income and a decrease in income tax provision. 35 --------------------------------------------------------------------------------
Returned
The following table presents the external revenues by segment to be presented for the periods indicated (in thousands of dollars):
Three Months Ended October 1, October 2, Increase Percentage 2021 2020 (Decrease) Change Photonics$ 55,263 $ 46,394 $ 8,869 19.1 % Vision 65,346 64,299 1,047 1.6 % Precision Motion 57,117 32,236 24,881 77.2 % Total$ 177,726 $ 142,929 $ 34,797 24.3 % Nine Months Ended October 1, October 2, Increase Percentage 2021 2020 (Decrease) Change Photonics$ 176,113 $ 149,337 $ 26,776 17.9 % Vision 196,429 198,047 (1,618 ) (0.8 )% Precision Motion 135,291 95,741 39,550 41.3 % Total$ 507,833 $ 443,125 $ 64,708 14.6 % Photonics Photonics segment revenue for the three months endedOctober 1, 2021 increased by$8.9 million , or 19.1%, versus the prior year period, primarily due to increased demand in the advanced industrial market as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19. Revenue was negatively impacted during the three months endedOctober 1, 2021 due to temporary production shutdowns in our factories inTaunton, U.K. andSuzhou, China . Photonics segment revenue for the nine months endedOctober 1, 2021 increased by$26.8 million , or 17.9%, versus the prior year period, primarily due to increased demand in the advanced industrial market as a result of increases in industrial manufacturing spending as compared to the 2020 period, which was impacted by COVID-19.
Vision
Revenue for the Vision segment for the closed quarter
Vision segment revenue for the nine months endedOctober 1, 2021 decreased by$1.6 million , or 0.8%, versus the prior year period, primarily due to a decrease in revenue from our minimally invasive surgery ("MIS") products as a result of continued deferrals of elective surgical procedures during the COVID-19 pandemic.
Precision movement
Precision Motion segment revenue for the three months endedOctober 1, 2021 increased by$24.9 million , or 77.2%, versus the prior year period, primarily due to increased demand in advanced industrial and medical markets and$11.1 million of revenue contributions from the ATI and SEM acquisitions. Precision Motion segment revenue for the nine months endedOctober 1, 2021 increased by$39.6 million , or 41.3%, versus the prior year period, primarily due to increased demand in advanced industrial market as a result of an increase in industrial manufacturing spending and$11.1 million of revenue contributions from the ATI and SEM acquisitions. 36 --------------------------------------------------------------------------------
Gross profit and gross profit margin
The following table shows the gross profit and gross profit margin for each of our reportable segments for the periods indicated (in thousands of dollars):
Three Months Ended Nine Months Ended October 1, October 2, October 1, October 2, 2021 2020 2021 2020 Gross profit: Photonics$ 25,311 $ 20,166 $ 83,014 $ 65,725 Vision 24,763 24,586 76,132 75,676 Precision Motion 27,743 15,011 64,694 42,753 Unallocated Corporate and Shared Services (1,519 ) (658 ) (6,396 ) (1,902 ) Total$ 76,298 $ 59,105 $ 217,444 $ 182,252 Gross profit margin: Photonics 45.8 % 43.5 % 47.1 % 44.0 % Vision 37.9 % 38.2 % 38.8 % 38.2 % Precision Motion 48.6 % 46.6 % 47.8 % 44.7 % Total 42.9 % 41.4 % 42.8 % 41.1 %
Gross profit and gross profit margin can be influenced by a number of factors including product line, prices, volume, manufacturing efficiency and utilization, raw material and manufacturing costs. subcontracted, commercial tariffs, transport costs, manpower, obsolescence of stocks and warranty expenses.
Photonics
Photonics segment gross profit for the three months endedOctober 1, 2021 increased$5.1 million , or 25.5%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin. Photonics segment gross profit margin was 45.8% for the three months endedOctober 1, 2021 , versus a gross profit margin of 43.5% for the prior year period. The increase in gross profit margin was primarily attributable to higher production volumes. Photonics segment gross profit for the nine months endedOctober 1, 2021 increased$17.3 million , or 26.3%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin. Photonics segment gross profit margin was 47.1% for the nine months endedOctober 1, 2021 , versus a gross profit margin of 44.0% for the prior year period. The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes.
Vision
Vision segment gross profit for the three months endedOctober 1, 2021 increased$0.2 million , or 0.7%, versus the prior year period. Vision segment gross profit margin was 37.9% for the three months endedOctober 1, 2021 , versus a gross profit margin of 38.2% for the prior year period. Vision segment gross profit for the nine months endedOctober 1, 2021 increased$0.5 million , or 0.6%, versus the prior year period. Vision segment gross profit margin was 38.8% for the nine months endedOctober 1, 2021 , versus a gross profit margin of 38.2% for the prior year period.
Precision movement
Precision Motion segment gross profit for the three months endedOctober 1, 2021 increased$12.7 million , or 84.8%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin. Precision Motion segment gross profit margin was 48.6% for the three months endedOctober 1, 2021 , versus a gross profit margin of 46.6% for the prior year period. The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes. Precision Motion segment gross profit for the nine months endedOctober 1, 2021 increased$21.9 million , or 51.3%, versus the prior year period, primarily due to an increase in both revenue and gross profit margin. Precision Motion segment gross profit margin was 47.8% for the nine months endedOctober 1, 2021 , versus a gross profit margin of 44.7% for the prior year period. The increase in gross profit margin was primarily attributable to higher factory utilization associated with higher production volumes and favorable year over year comparison due to higher inventory obsolescence in the prior year period. 37 --------------------------------------------------------------------------------
Unallocated enterprise 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 endedOctober 1, 2021 increased by$0.9 million versus the prior year period primarily due to COVID-19 testing costs for employees of$0.4 million .
Unallocated general and shared service costs for the completed nine-month period
Operating Expenses
The following table sets forth operating expenses for the periods noted (in thousands): Three Months Ended Nine Months Ended October 1, October 2, October 1, October 2, 2021 2020 2021 2020 Research and development and engineering$ 17,468 $ 15,231 $ 53,104 $ 45,005 Selling, general and administrative 31,296 26,788 94,189 82,451 Amortization of purchased intangible assets 4,139 3,533 11,300 10,388 Restructuring, acquisition, and related costs 8,120 1,687 16,485 5,591 Total$ 61,023 $ 47,239 $ 175,078 $ 143,435
Research and development and engineering costs
R&D expenses are primarily comprised of employee compensation related expenses and cost of materials for R&D projects. R&D expenses were$17.5 million , or 9.8% of revenue, during the three months endedOctober 1, 2021 , versus$15.2 million , or 10.7% of revenue, during the prior year period. R&D expenses increased in terms of total dollars primarily due to higher compensation related expense and R&D expenses from current year acquisitions. R&D expenses decreased as a percentage of revenue due to the timing of acquisitions. R&D expenses were$53.1 million , or 10.5% of revenue, during the nine months endedOctober 1, 2021 , versus$45.0 million , or 10.2% of revenue, during the prior year period. R&D expenses increased in terms of total dollars and as a percentage of revenue primarily due to higher compensation related expenses.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses include costs for sales and marketing, sales administration, finance, human resources, legal, information systems, and executive management functions. SG&A expenses were$31.3 million , or 17.6% of revenue, during the three months endedOctober 1, 2021 , versus$26.8 million , or 18.7% of revenue, during the prior year period. SG&A expenses increased in terms of total dollars primarily due to higher variable compensation expense as a result of the re-establishment of employee bonus plans in 2021 and SG&A expenses from current year acquisitions. SG&A expenses decreased as a percentage of revenue due to the timing of acquisitions. SG&A expenses were$94.2 million , or 18.5% of revenue, during the nine months endedOctober 1, 2021 , versus$82.5 million , or 18.6% of revenue, during the prior year period. SG&A expenses increased in terms of total dollars primarily due to higher share-based compensation expense and higher variable compensation expense as a result of the re-establishment of employee bonus plans in 2021.
Amortization of purchased intangible assets
Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was$4.1 million , or 2.3% of revenue, during the three months endedOctober 1, 2021 , versus$3.5 million , or 2.5% of revenue, during the prior year period. The increase, in terms of total dollars was the result of more acquired intangible assets from current year acquisitions. Amortization of purchased intangible assets, excluding amortization of developed technologies that is included in cost of revenue, was$11.3 million , or 2.2% of revenue, during the nine months endedOctober 1, 2021 , versus$10.4 million , or 2.3% of revenue, during the prior year period. The increase, in terms of total dollars was the result of more acquired intangible assets from current year acquisitions. 38 --------------------------------------------------------------------------------
Restructuring, acquisition and related costs
We recorded restructuring, acquisition, and related costs of$8.1 million during the three months endedOctober 1, 2021 , versus$1.7 million during the prior year period. The increase in restructuring, acquisition, and related costs versus the prior year period was primarily due to an increase in acquisition costs related to current year acquisitions and restructuring costs related to the 2020 restructuring plan. We recorded restructuring, acquisition, and related costs of$16.5 million during the nine months endedOctober 1, 2021 , versus$5.6 million during the prior year period. The increase in restructuring, acquisition, and related costs versus the prior year period was primarily due to an increase in acquisition costs related to current year acquisitions, restructuring costs related to the 2020 restructuring plan, and legal fees related to a dispute involving a company we acquired in 2019.
Operating profit (loss) by segment
The following table presents the operating income (loss) by segment for the periods indicated (in thousands):
Three Months Ended Nine Months Ended October 1, October 2, October 1, October 2, 2021 2020 2021 2020 Operating Income (Loss) Photonics$ 9,294 $ 7,026 $ 35,885 $ 22,878 Vision 5,606 3,799 12,178 14,098 Precision Motion 14,957 7,675 34,681 20,728
Unallocated corporate and shared services (14,582) (6,634)
(40,378 ) (18,887 ) Total$ 15,275 $ 11,866 $ 42,366 $ 38,817 Photonics Photonics segment operating income was$9.3 million , or 16.8% of revenue, during the three months endedOctober 1, 2021 , versus$7.0 million , or 15.1% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of$5.1 million , partially offset by an increase in restructuring charges of$2.3 million . Photonics segment operating income was$35.9 million , or 20.4% of revenue, during the nine months endedOctober 1, 2021 , versus$22.9 million , or 15.3% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of$17.3 million , partially offset by an increase in R&D spending of$1.5 million and restructuring, acquisition, and related charges of$3.1 million .
Vision
Vision segment operating income was$5.6 million , or 8.6% of revenue, during the three months endedOctober 1, 2021 , versus$3.8 million , or 5.9% of revenue, during the prior year period. The increase in operating income was primarily due to a decrease in SG&A expenses of$0.5 million and restructuring, acquisitions, and related charges of$1.2 million . Vision segment operating income was$12.2 million , or 6.2% of revenue, during the nine months endedOctober 1, 2021 , versus$14.1 million , or 7.1% of revenue, during the prior year period. The decrease in operating income was primarily due to an increase in R&D spending of$3.6 million , partially offset by an increase in gross profit of$0.5 million and a decrease in SG&A expenses of$1.0 million .
Precision movement
Precision Motion segment operating income was$15.0 million , or 26.2% of revenue, during the three months endedOctober 1, 2021 , versus$7.7 million , or 23.8% of revenue, during the prior year period. The increase in operating income was primarily due to an increase in gross profit of$12.7 million , partially offset by an increase in R&D spending of$1.7 million , SG&A expenses of$1.3 million and restructuring, acquisition, and related charges of$1.9 million . Precision Motion segment operating income was$34.7 million , or 25.6% of revenue, during the nine months endedOctober 1, 2021 , versus$20.7 million , or 21.7% of revenue, during the prior year period. The increase in operating income was primarily due to 39
-------------------------------------------------------------------------------- an increase in gross profit of$21.9 million , partially offset by an increase in restructuring, acquisition, and related charges of$3.4 million , R&D spending of$3.0 million and SG&A expenses of$1.0 million .
Unallocated enterprise 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 endedOctober 1, 2021 increased by$7.9 million versus the prior year period primarily due to costs related to COVID-19 testing for employees of$0.4 million included in cost of revenue, an increase in SG&A spending of$4.3 million primarily related to the re-establishment of employee bonus plans in 2021, and an increase in restructuring, acquisition, and related charges of$2.9 million . Unallocated corporate and shared services costs for the nine months endedOctober 1, 2021 increased by$21.5 million versus the prior year period primarily due to costs related to COVID-19 testing for employees of$3.3 million included in cost of revenue, an increase in SG&A spending of$12.4 million primarily related to share-based compensation, the re-establishment of employee bonus plans in 2021, and an increase in restructuring, acquisition, and related charges of$4.6 million .
Other income and expenses
The following table sets forth other income and expense items for the periods noted (in thousands): Three Months Ended Nine Months Ended October 1, October 2, October 1, October 2, 2021 2020 2021 2020
Net interest income (expense)
(4,496 )$ (5,077 ) Foreign exchange transaction gains (losses), net 34 (136 ) (299 ) (164 ) Other income (expense), net (71 ) (14 ) (238 ) 47
Interest Income (Expenses), Net
Net interest expense was$1.7 million for both the three months endedOctober 1, 2021 and the prior year period. The weighted average interest rate on our senior credit facilities was 2.28% during the three months endedOctober 1, 2021 , versus 2.31% during the prior year period. Net interest expense was$4.5 million for the nine months endedOctober 1, 2021 , versus$5.1 million in the prior year period. The decrease in net interest expense was primarily due to a decrease in average debt levels and a decrease in the weighted average interest rate on our senior credit facilities. The weighted average interest rate on our senior credit facilities was 2.12% during the nine months endedOctober 1, 2021 , versus 2.37% during the prior year period.
Gains (losses) on foreign exchange transactions, net
Foreign exchange transaction gains (losses) were less than$0.1 million net gain for the three months endedOctober 1, 2021 , versus$(0.1) million net losses in the prior year period. Foreign exchange transaction gains (losses) were$(0.3) million net losses for the nine months endedOctober 1, 2021 , versus$(0.2) million net losses in the prior year period. Other Income (Expense), Net
Other net charges were minimal for the three and nine months ended
Income tax provision (benefit)
Our effective tax rate for the three months endedOctober 1, 2021 was (0.6%), versus 17.6% for the prior year period. Our effective tax rate of (0.6%) for the three months endedOctober 1, 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, windfall tax benefits upon vesting of certain share-based compensation awards and a release of uncertain tax position reserves due to expiration of statutes of limitation, partially offset by an increase in our valuation allowance. 40 -------------------------------------------------------------------------------- Our effective tax rate of 17.6% for the three months endedOctober 2, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income,U.K. patent box deductions and other tax credits. Our effective tax rate for the nine months endedOctober 1, 2021 was 2.0%, versus 5.2% for the prior year period. Our effective tax rate of 2.0% for the nine months endedOctober 1, 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 theU.K. corporate tax rate change during the period and an increase in our valuation allowances. For the nine months endedOctober 1, 2021 , the windfall tax benefits upon vesting of certain share-based compensation awards had a benefit of 14.5% on our effective tax rate. Our effective tax rate of 5.2% for the nine months endedOctober 2, 2020 differs from the Canadian statutory tax rate of 29.0% primarily due to the mix of income earned in jurisdictions with varying tax rates, estimated deductions for Foreign Derived Intangible Income,U.K. patent box deductions, other tax credits, windfall tax benefits upon vesting of certain share-based compensation awards during the period, and a release of a portion of the valuation allowance on our deferred tax assets inCanada . For the nine months endedOctober 2, 2020 , the windfall tax benefits upon vesting of certain share-based compensation awards and the release of the valuation allowance had a benefit of 7.9% and 3.3%, respectively, on our effective tax rate.
Liquidity and capital resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, investments in businesses, and repayment of debt and related interest payments. Our primary sources of liquidity are cash flows from operations and borrowings under our revolving credit facility. We believe our future operating cash flows will be sufficient to meet our future operating and capital expenditure cash needs for the foreseeable future, including at least the next 12 months. The availability of borrowing capacity under our revolving credit facility provides a potential source of liquidity for any future capital expenditures and other liquidity needs. In addition, we have the ability to expand our borrowing capacity by up to$200.0 million by exercising the accordion feature under our revolving credit agreement. We may also seek to raise additional capital, which could be in the form of bonds, convertible debt or preferred or common equity, to fund business development activities or other future investing cash requirements, subject to approval by the lenders in the Third Amended and Restated Credit Agreement. There is no assurance that such capital will be available on reasonable terms or at all. Significant factors affecting the management of our ongoing cash requirements are the adequacy of available bank lines of credit and our ability to attract long term capital with satisfactory terms. The sources of our liquidity are subject to all of the risks of our business and could be adversely affected by, among other factors, risks associated with events outside our control, such as the economic consequences of the COVID-19 pandemic, worsening supply chain disruptions and electronics and 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 our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Our ability to make payments on our indebtedness and to fund our operations may be dependent upon the earnings and the distribution of funds from our subsidiaries. Local laws and regulations and/or the terms of our indebtedness restrict certain of our subsidiaries from paying dividends and transferring assets to us. There is no assurance that the applicable laws and regulations and/or the terms of our indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans when necessary. As ofOctober 1, 2021 ,$69.0 million of our$102.4 million cash and cash equivalents was held by subsidiaries outside ofCanada andthe United States . Generally, our intent is to use cash held in these foreign subsidiaries to fund our local operations or acquisitions by those local subsidiaries and to pay down borrowings under our Senior Credit Facilities (as defined below). Approximately$171.6 million of our outstanding term loan and revolver borrowings under our Senior Credit Facilities were held in our subsidiaries outside ofCanada andthe United States . Additionally, we may use intercompany loans to address short-term cash flow needs for various subsidiaries. We deferred certainU.S. payroll tax payments in 2020 in accordance with relief provisions under the CARES Act. As ofOctober 1, 2021 , we had$2.8 million in such deferredU.S. payroll tax payments under the CARES Act. As permitted under the CARES Act, we expect to pay half of the deferredU.S. payroll tax payments byDecember 31, 2021 and the remaining half byDecember 31, 2022 . 41 -------------------------------------------------------------------------------- InMay 2021 , the Company's shareholders approved a special resolution to amend the Company's articles to authorize up to 7.0 million preferred shares for future issuance. The Company's Board of Directors may designate and issue one or more series of preferred shares in order to raise additional capital. As ofOctober 1, 2021 , no preferred shares had been issued and outstanding.
Senior credit facilities
InDecember 2019 , we entered into the Third Amended and Restated Credit Agreement, consisting of a$100.0 million U.S. dollar equivalent euro-denominated 5-year term loan facility (approximately €90.2 million) and a$350.0 million 5-year revolving credit facility (collectively, the "Senior Credit Facilities"). The Senior Credit Facilities mature inDecember 2024 and included an uncommitted "accordion" feature pursuant to which the commitments under the revolving credit facility may be increased by an additional$200.0 million in aggregate, subject to certain customary conditions. The term loan facility requires quarterly scheduled principal repayments of approximately €1.1 million beginning inMarch 2020 with the remaining principal balance due upon maturity. We may make additional principal payments at any time, which will reduce the next quarterly installment payment due. We may pay down outstanding borrowings under our revolving credit facility with cash on hand and cash generated from future operations at any time. InMarch 2020 , we entered into an amendment (the "First Amendment") to the Third Amended and Restated Credit Agreement and exercised a portion of the uncommitted accordion feature. The First Amendment increased the revolving credit facility commitment under the Third Amended and Restated Credit Agreement by$145.0 million , from$350.0 million to$495.0 million , and reset the uncommitted accordion feature to$200.0 million for potential future expansion. As ofOctober 1, 2021 , we had$95.3 million term loan and$355.3 million revolver borrowings outstanding under our Senior Credit Facilities. The borrowings outstanding under the Senior Credit Facilities bear interest at rates based on (a) the Base Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 0.25% and 1.25% per annum, determined by reference to our consolidated leverage ratio, or (b) the Eurocurrency Rate, as defined in the Third Amended and Restated Credit Agreement, plus a margin ranging between 1.25% and 2.25% per annum, determined by reference to our consolidated leverage ratio. In addition, we are obligated to pay a commitment fee on the unused portion of the revolving credit facility, ranging between 0.20% and 0.40% per annum, determined by reference to our consolidated leverage ratio. As ofOctober 1, 2021 , we had outstanding borrowings under the Third Amended and Restated Credit Agreement denominated in Euro andU.S. Dollars of$171.6 million and$279.0 million , respectively. OnOctober 5, 2021 , the Company entered into an amendment (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. The Third Amended and Restated Credit Agreement contains various covenants that we believe are usual and customary for this type of agreement, including a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio (as defined in the Third Amended and Restated Credit Agreement). The following table summarizes these financial covenants and our compliance therewith as ofOctober 1, 2021 : Requirement Actual Maximum consolidated leverage ratio 3.50 2.64
Minimum consolidated fixed charge coverage ratio 1.50 13.23
Share buyback plans
Our Board of Directors may approve share repurchase plans from time to time. Under these repurchase plans, shares may be repurchased at our discretion based on ongoing assessment of the capital needs of the business, the market price of our common shares, and general market conditions. Shares may also be repurchased through an accelerated share purchase agreement, on the open market or in privately negotiated transactions in accordance with applicable federal securities laws. Repurchases may be made under certainSEC regulations, which would permit common shares to be repurchased when we would otherwise be prohibited from doing so under insider trading laws. While the share repurchase plans are generally intended to offset dilution from equity awards granted to our employees and directors, the plans do not obligate us to acquire any particular amount of common shares. No time limit is typically set for the completion of the share repurchase plans, and the plans may be suspended or discontinued at any time. We expect to fund share repurchases through cash on hand and cash generated from operations. InOctober 2018 , our Board of Directors approved a share repurchase plan (the "2018 Repurchase Plan") authorizing the repurchase of$25.0 million worth of common shares. Share repurchases have been made under the 2018 Repurchase Plan pursuant to 42
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Rule 10b-18 under the Securities Exchange Act of 1934. We had
available for share buybacks under the 2018 Buyback Plan from
InFebruary 2020 , our Board of Directors approved a new share repurchase plan (the "2020 Repurchase Plan") authorizing the repurchase of an additional$50.0 million worth of common shares. We expect that share repurchases will be made under the 2020 Repurchase Plan after the 2018 Repurchase Plan is completed. No shares have been repurchased under the 2020 Repurchase Plan to date.
Cash flow for the nine months ended
The following table summarizes our cash flows, cash and cash equivalents, and unused and available funds under our revolving credit facility for the periods indicated (in thousands): Nine Months Ended October 1, October 2, 2021 2020 Net cash provided by operating activities$ 65,912 $ 93,686 Net cash used in investing activities$ (302,140 ) $ (9,796 ) Net cash provided by (used in) financing activities$ 214,290 $ (57,195 ) October 1, December 31, 2021 2020 Cash and cash equivalents$ 102,395
Unused and available funds under the revolving credit facility
Operating Cash Flows Cash provided by operating activities was$65.9 million for the nine months endedOctober 1, 2021 , versus$93.7 million for the prior year period. Cash provided by operating activities for the nine months endedOctober 1, 2021 decreased from the prior year period primarily due to an increase in accounts receivable and inventories due to increases in revenue and demand, and the$8.3 million payout of an acquisition earnout 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 bonus plan. Cash provided by operating activities for the nine months endedOctober 2, 2020 was positively impacted by an increase in our inventory turnover ratio from 3.1 atDecember 31, 2019 to 3.3 atOctober 2, 2020 and a decrease in accounts receivable, offset by a decrease in our days payables outstanding which decreased from 53 days atDecember 31, 2019 to 44 days atOctober 2, 2020 . During the nine months endedOctober 2, 2020 , we paid the 2019 annual employee bonuses which had been accrued for as ofDecember 31, 2019 .
Investing cash flow
Cash used in investing activities was$302.1 million for the nine months endedOctober 1, 2021 , primarily driven by the ATI and SEM acquisitions. In connection with these acquisitions, we paid cash consideration of$285.2 million (net of cash acquired of$14.6 million ) during the nine months endedOctober 1, 2021 . We also paid capital expenditures of$14.8 million and a contingent consideration payment of$2.2 million related to our 2016 asset acquisition of video signal processing and management technologies during the nine months endedOctober 1, 2021 . Cash used in investing activities was$9.8 million for the nine months endedOctober 2, 2020 , primarily related to capital expenditures of$7.2 million and a contingent consideration payment of$2.6 million related to our 2016 asset acquisition of video signal processing and management technologies. We expect to use an aggregate of approximately$20 million to$22 million in fiscal 2021 for capital expenditures related to investments in new property, plant and equipment for our existing businesses.
Cash flow financing
Cash provided by financing activities was$214.3 million for the nine months endedOctober 1, 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$30.7 million of payroll tax payments upon vesting of share-based compensation awards,$24.0 million of term loan 43 -------------------------------------------------------------------------------- and revolver credit facility repayments, a$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 acquisitions. Cash used in financing activities was$57.2 million for the nine months endedOctober 2, 2020 , primarily due to$34.0 million in repayments of borrowings under our Senior Credit Facilities,$8.3 million of payroll tax payments upon vesting of share-based compensation awards,$5.8 million payments of deferred and escrowed purchase price related to prior year acquisitions,$5.5 million of repurchases of common shares, and$1.6 million of fees paid in connection with the First Amendment to our Third Amended and Restated Credit Agreement.
Off-balance sheet provisions, contractual obligations
Contractual obligations
Our contractual obligations primarily consist of the principal and interest payments associated with our Senior Credit Facilities, operating and finance leases, purchase commitments, pension obligations, contingent considerations and earn-outs. Such contractual obligations are described in our Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements, each included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Excluding the estimated contingent considerations payments and non-cancellable inventory purchase commitments from current year acquisitions, throughOctober 1, 2021 , we have not entered into any other material new or modified contractual obligations sinceDecember 31, 2020 .
Off-balance sheet provisions
ThroughOctober 1, 2021 , we have not entered into any other off-balance sheet arrangements or material transactions with any unconsolidated entities or other persons.
Critical accounting conventions 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 endedDecember 31, 2020 . There have been no material changes to our critical accounting policies and estimates throughOctober 1, 2021 from those disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Recent accounting positions
See note 1 of the consolidated financial statements.
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