(Mark One)
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended
or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from ______ to ______
Commission file number 0-2816
METHODE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-2090085 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer |
8750 West Bryn Mawr Avenue, Suite 1000, Chicago, Illinois | 60631-3518 | |
(Address of principal executive offices) | (Zip Code) | |
(Registrant’s telephone number, including area code)
(708) 867-6777(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.50 Par Value | MEI | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”filer.” “accelerated filer,” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging Growth Company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At February 27, 2018,September 1, 2020, the registrant had 36,846,72937,529,738 shares of common stock outstanding.
INDEX
Page | ||
5 | ||
6 | ||
7 | ||
20 | ||
29 | ||
29 | ||
30 | ||
30 | ||
32 | ||
Item 1. Financial Statements
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME (Unaudited)
(Dollars in millions, except per share data)
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Net Sales |
| $ | 190.9 |
|
| $ | 270.2 |
|
|
|
|
|
|
|
|
|
|
Cost of Products Sold |
|
| 145.8 |
|
|
| 194.4 |
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
| 45.1 |
|
|
| 75.8 |
|
|
|
|
|
|
|
|
|
|
Selling and Administrative Expenses |
|
| 26.6 |
|
|
| 32.4 |
|
Amortization of Intangibles |
|
| 4.7 |
|
|
| 4.8 |
|
|
|
|
|
|
|
|
|
|
Income from Operations |
|
| 13.8 |
|
|
| 38.6 |
|
|
|
|
|
|
|
|
|
|
Interest Expense, Net |
|
| 1.6 |
|
|
| 2.9 |
|
Other (Income) Expense, Net |
|
| (3.4 | ) |
|
| 0.1 |
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
| 15.6 |
|
|
| 35.6 |
|
|
|
|
|
|
|
|
|
|
Income Tax (Benefit) Expense |
|
| (5.1 | ) |
|
| 7.3 |
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income per Share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.55 |
|
| $ | 0.75 |
|
Diluted |
| $ | 0.54 |
|
| $ | 0.75 |
|
|
|
|
|
|
|
|
|
|
Cash Dividends per Share |
| $ | 0.11 |
|
| $ | 0.11 |
|
| Three Months Ended | Nine Months Ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Sales | $ | 228.0 | $ | 195.6 | $ | 659.3 | $ | 596.7 | ||||||||
| Cost of Products Sold | 167.9 | 142.2 | 481.6 | 433.7 | ||||||||||||
| Gross Profit | 60.1 | 53.4 | 177.7 | 163.0 | ||||||||||||
| Selling and Administrative Expenses | 22.5 | 23.7 | 83.3 | 76.4 | ||||||||||||
| Amortization of Intangibles | 2.0 | 0.6 | 3.7 | 1.8 | ||||||||||||
| Income from Operations | 35.6 | 29.1 | 90.7 | 84.8 | ||||||||||||
| Interest Expense (Income), Net | 0.3 | (0.2 | ) | 0.3 | (0.3 | ) | ||||||||||
| Other Income, Net | (3.8 | ) | (1.0 | ) | (2.6 | ) | (2.9 | ) | ||||||||
| Income before Income Taxes | 39.1 | 30.3 | 93.0 | 88.0 | ||||||||||||
| Income Tax Expense | 63.4 | 6.6 | 72.6 | 18.3 | ||||||||||||
| Net Income (Loss) | $ | (24.3 | ) | $ | 23.7 | $ | 20.4 | $ | 69.7 | |||||||
| Basic and Diluted Income (Loss) per Share: | ||||||||||||||||
| Basic | $ | (0.65 | ) | $ | 0.64 | $ | 0.54 | $ | 1.87 | |||||||
| Diluted | $ | (0.65 | ) | $ | 0.63 | $ | 0.54 | $ | 1.86 | |||||||
| Cash Dividends: | ||||||||||||||||
| Common Stock | $ | 0.11 | $ | 0.09 | $ | 0.29 | $ | 0.27 | ||||||||
| Weighted Average Number of Common Shares Outstanding: | ||||||||||||||||
| Basic | 37,292,934 | 37,217,302 | 37,275,041 | 37,297,757 | ||||||||||||
| Diluted | 37,292,934 | 37,470,653 | 37,661,020 | 37,477,967 | ||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in millions)
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax: |
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments |
|
| 20.3 |
|
|
| (1.6 | ) |
Derivative Financial Instruments |
|
| (3.6 | ) |
|
| — |
|
Total Comprehensive Income |
| $ | 37.4 |
|
| $ | 26.7 |
|
| Three Months Ended | Nine Months Ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Income (Loss) | $ | (24.3 | ) | $ | 23.7 | $ | 20.4 | $ | 69.7 | |||||||
| Foreign Currency Translation Adjustment | 32.2 | (9.0 | ) | 50.3 | (23.7 | ) | ||||||||||
| Comprehensive Income | $ | 7.9 | $ | 14.7 | $ | 70.7 | $ | 46.0 | ||||||||
| January 27, 2018 | April 29, 2017 | |||||||
| (Unaudited) | ||||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | 304.0 | $ | 294.0 | ||||
| Accounts Receivable, Net | 201.4 | 165.3 | ||||||
| Inventories: | ||||||||
| Finished Products | 14.6 | 10.9 | ||||||
| Work in Process | 15.6 | 8.7 | ||||||
| Materials | 53.4 | 38.3 | ||||||
| Total Inventories | 83.6 | 57.9 | ||||||
| Prepaid and Refundable Income Taxes | 0.6 | 0.6 | ||||||
| Prepaid Expenses and Other Current Assets | 15.7 | 12.5 | ||||||
| Total Current Assets | 605.3 | 530.3 | ||||||
| Property Plan and Equipment: | ||||||||
| Land | 0.8 | 0.6 | ||||||
| Buildings and Building Improvements | 64.3 | 48.2 | ||||||
| Machinery and Equipment | 364.6 | 287.9 | ||||||
| Property, Plant and Equipment, Gross | 429.7 | 336.7 | ||||||
| Less: Allowances for Depreciation | 276.0 | 246.1 | ||||||
| Property, Plant and Equipment, Net | 153.7 | 90.6 | ||||||
| Other Assets: | ||||||||
| Goodwill | 59.6 | 1.6 | ||||||
| Other Intangible Assets, Net | 65.6 | 6.6 | ||||||
| Cash Surrender Value of Life Insurance | 8.2 | 7.8 | ||||||
| Deferred Income Taxes | 35.9 | 40.4 | ||||||
| Pre-production Costs | 18.0 | 15.5 | ||||||
| Other | 13.5 | 11.2 | ||||||
| Total Other Assets | 200.8 | 83.1 | ||||||
| Total Assets | $ | 959.8 | $ | 704.0 | ||||
| Liabilities and Shareholders' Equity: | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 87.9 | $ | 75.3 | ||||
| Salaries, Wages and Payroll Taxes | 20.1 | 18.7 | ||||||
| Other Accrued Expenses | 27.0 | 17.7 | ||||||
| Short-term Debt | 2.9 | — | ||||||
| Income Tax Payable | 12.4 | 12.7 | ||||||
| Total Current Liabilities | 150.3 | 124.4 | ||||||
| Long-term Debt | 116.0 | 27.0 | ||||||
| Long-term Income Taxes Payable | 48.3 | — | ||||||
| Other Liabilities | 8.2 | 2.6 | ||||||
| Deferred Income Taxes | 19.6 | — | ||||||
| Deferred Compensation | 10.2 | 8.9 | ||||||
| Total Liabilities | 352.6 | 162.9 | ||||||
| Shareholders' Equity: | ||||||||
| Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,193,353 and 38,133,925 shares issued as of January 27, 2018 and April 29, 2017, respectively | 19.1 | 19.1 | ||||||
| Additional Paid-in Capital | 135.8 | 132.2 | ||||||
| Accumulated Other Comprehensive Income (Loss) | 24.6 | (25.7 | ) | |||||
| Treasury Stock, 1,346,624 shares as of January 27, 2018 and April 29, 2017 | (11.5 | ) | (11.5 | ) | ||||
| Retained Earnings | 439.2 | 427.0 | ||||||
| Total Shareholders' Equity | 607.2 | 541.1 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 959.8 | $ | 704.0 | ||||
See notes to condensed consolidated financial statements.
3
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per-share data)
|
| August 1, 2020 |
|
| May 2, 2020 |
| ||
|
| (Unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
| $ | 211.0 |
|
| $ | 217.3 |
|
Accounts Receivable, Net |
|
| 233.0 |
|
|
| 188.5 |
|
Inventories |
|
| 124.0 |
|
|
| 131.0 |
|
Income Tax Receivable |
|
| 13.6 |
|
|
| 12.9 |
|
Prepaid Expenses and Other Current Assets |
|
| 16.4 |
|
|
| 15.9 |
|
TOTAL CURRENT ASSETS |
|
| 598.0 |
|
|
| 565.6 |
|
LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
| 208.6 |
|
|
| 201.9 |
|
Goodwill |
|
| 233.3 |
|
|
| 231.6 |
|
Other Intangible Assets, Net |
|
| 242.1 |
|
|
| 244.8 |
|
Operating Lease Assets, Net |
|
| 22.1 |
|
|
| 23.5 |
|
Deferred Tax Assets |
|
| 41.0 |
|
|
| 31.4 |
|
Pre-production Costs |
|
| 36.0 |
|
|
| 37.1 |
|
Other Long-term Assets |
|
| 37.1 |
|
|
| 34.7 |
|
TOTAL LONG-TERM ASSETS |
|
| 820.2 |
|
|
| 805.0 |
|
TOTAL ASSETS |
| $ | 1,418.2 |
|
| $ | 1,370.6 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts Payable |
| $ | 83.2 |
|
| $ | 73.8 |
|
Accrued Employee Liabilities |
|
| 20.0 |
|
|
| 19.1 |
|
Other Accrued Expenses |
|
| 28.3 |
|
|
| 18.5 |
|
Short-term Operating Lease Liability |
|
| 5.5 |
|
|
| 5.5 |
|
Short-term Debt |
|
| 15.4 |
|
|
| 15.3 |
|
Income Tax Payable |
|
| 7.6 |
|
|
| 11.6 |
|
TOTAL CURRENT LIABILITIES |
|
| 160.0 |
|
|
| 143.8 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Long-term Debt |
|
| 334.4 |
|
|
| 336.8 |
|
Long-term Operating Lease Liability |
|
| 18.4 |
|
|
| 20.4 |
|
Long-term Income Tax Payable |
|
| 29.3 |
|
|
| 29.3 |
|
Other Long-term Liabilities |
|
| 20.0 |
|
|
| 15.3 |
|
Deferred Tax Liabilities |
|
| 42.3 |
|
|
| 41.6 |
|
TOTAL LONG-TERM LIABILITIES |
|
| 444.4 |
|
|
| 443.4 |
|
TOTAL LIABILITIES |
|
| 604.4 |
|
|
| 587.2 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,876,362 shares and 38,438,111 shares issued as of August 1, 2020 and May 2, 2020, respectively |
|
| 19.4 |
|
|
| 19.2 |
|
Additional Paid-in Capital |
|
| 151.5 |
|
|
| 150.7 |
|
Accumulated Other Comprehensive Loss |
|
| (10.2 | ) |
|
| (26.9 | ) |
Treasury Stock, 1,346,624 shares as of August 1, 2020 and May 2, 2020 |
|
| (11.5 | ) |
|
| (11.5 | ) |
Retained Earnings |
|
| 664.6 |
|
|
| 651.9 |
|
TOTAL SHAREHOLDERS' EQUITY |
|
| 813.8 |
|
|
| 783.4 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
| $ | 1,418.2 |
|
| $ | 1,370.6 |
|
See notes to condensed consolidated financial statements.
4
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(in millions, except share data)
|
| Three Months Ended August 1, 2020 |
| |||||||||||||||||||||||||
|
| Common Stock Shares |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Retained Earnings |
|
| Total Equity |
| |||||||
Balance as of May 2, 2020 |
|
| 38,438,111 |
|
| $ | 19.2 |
|
| $ | 150.7 |
| �� | $ | (26.9 | ) |
| $ | (11.5 | ) |
| $ | 651.9 |
|
| $ | 783.4 |
|
Earned Portion of Restricted Stock, Net of Tax Withholding |
|
| 433,251 |
|
|
| 0.2 |
|
|
| (0.2 | ) |
|
| — |
|
|
| — |
|
|
| (3.9 | ) |
|
| (3.9 | ) |
Exercise of Stock Options |
|
| 5,000 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Stock-based Compensation Expense |
|
| — |
|
|
| — |
|
|
| 0.9 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.9 |
|
Other Comprehensive Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16.7 |
|
|
| — |
|
|
| — |
|
|
| 16.7 |
|
Net Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20.7 |
|
|
| 20.7 |
|
Dividends on Common Stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4.1 | ) |
|
| (4.1 | ) |
Balance as of August 1, 2020 |
|
| 38,876,362 |
|
| $ | 19.4 |
|
| $ | 151.5 |
|
| $ | (10.2 | ) |
| $ | (11.5 | ) |
| $ | 664.6 |
|
| $ | 813.8 |
|
|
| Three Months Ended July 27, 2019 |
| |||||||||||||||||||||||||
|
| Common Stock Shares |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Treasury Stock |
|
| Retained Earnings |
|
| Total Equity |
| |||||||
Balance as of April 27, 2019 |
|
| 38,333,576 |
|
| $ | 19.2 |
|
| $ | 150.4 |
|
| $ | (13.6 | ) |
| $ | (11.5 | ) |
| $ | 545.2 |
|
| $ | 689.7 |
|
Earned Portion of Restricted Stock, Net of Tax Withholding |
|
| 104,535 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.4 | ) |
|
| (0.4 | ) |
Stock-based Compensation Expense |
|
| — |
|
|
| — |
|
|
| 2.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.5 |
|
Other Comprehensive Loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.6 | ) |
|
| — |
|
|
| — |
|
|
| (1.6 | ) |
Net Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 28.3 |
|
|
| 28.3 |
|
Dividends on Common Stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4.2 | ) |
|
| (4.2 | ) |
Balance as of July 27, 2019 |
|
| 38,438,111 |
|
| $ | 19.2 |
|
| $ | 152.9 |
|
| $ | (15.2 | ) |
| $ | (11.5 | ) |
| $ | 568.9 |
|
| $ | 714.3 |
|
See notes to condensed consolidated financial statements.
5
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in millions)
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
| 12.1 |
|
|
| 11.8 |
|
Stock-based Compensation Expense |
|
| 0.9 |
|
|
| 2.5 |
|
Change in Cash Surrender Value of Life Insurance |
|
| (0.6 | ) |
|
| (0.3 | ) |
Amortization of Debt Issuance Costs |
|
| 0.2 |
|
|
| 0.2 |
|
Change in Deferred Income Taxes |
|
| (6.2 | ) |
|
| — |
|
Other |
|
| 1.0 |
|
|
| — |
|
Changes in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
| (37.3 | ) |
|
| (12.8 | ) |
Inventories |
|
| 9.1 |
|
|
| (5.7 | ) |
Prepaid Expenses and Other Assets |
|
| 1.5 |
|
|
| 0.7 |
|
Accounts Payable and Other Liabilities |
|
| 15.0 |
|
|
| (5.6 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 16.4 |
|
|
| 19.1 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of Property, Plant and Equipment |
|
| (11.6 | ) |
|
| (13.2 | ) |
NET CASH USED IN INVESTING ACTIVITIES |
|
| (11.6 | ) |
|
| (13.2 | ) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Taxes Paid Related to Net Share Settlement of Equity Awards |
|
| (3.9 | ) |
|
| (0.4 | ) |
Proceeds from Exercise of Stock Options |
|
| 0.1 |
|
|
| — |
|
Repayments of Finance Leases |
|
| (0.1 | ) |
|
| (0.2 | ) |
Cash Dividends |
|
| (5.0 | ) |
|
| (4.1 | ) |
Proceeds from Borrowings |
|
| — |
|
|
| 1.0 |
|
Repayments of Borrowings |
|
| (4.1 | ) |
|
| (10.7 | ) |
NET CASH USED IN FINANCING ACTIVITIES |
|
| (13.0 | ) |
|
| (14.4 | ) |
Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents |
|
| 1.9 |
|
|
| (0.9 | ) |
DECREASE IN CASH AND CASH EQUIVALENTS |
|
| (6.3 | ) |
|
| (9.4 | ) |
Cash and Cash Equivalents at Beginning of the Year |
|
| 217.3 |
|
|
| 83.2 |
|
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD |
| $ | 211.0 |
|
| $ | 73.8 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash Paid During the Period For: |
|
|
|
|
|
|
|
|
Interest |
| $ | 1.5 |
|
| $ | 2.9 |
|
Income Taxes, Net of Refunds |
| $ | 4.8 |
|
| $ | 7.8 |
|
Operating Lease Obligations |
| $ | 2.1 |
|
| $ | 2.1 |
|
| Nine Months Ended | ||||||||
| January 27, 2018 | January 28, 2017 | |||||||
| Operating Activities: | ||||||||
| Net Income | $ | 20.4 | $ | 69.7 | ||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
| Gain on Sale of Licensing Agreement | (1.6 | ) | — | |||||
| Provision for Depreciation | 16.3 | 15.8 | ||||||
| Amortization of Intangible Assets | 3.7 | 1.8 | ||||||
| Stock-based Compensation | 3.3 | 9.8 | ||||||
| Provision for Bad Debt | 0.1 | — | ||||||
| Change in Deferred Income Taxes | (12.2 | ) | — | |||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | 5.9 | 16.5 | ||||||
| Inventories | (5.8 | ) | 3.1 | |||||
| Prepaid Expenses and Other Assets | 14.6 | (7.5 | ) | |||||
| Accounts Payable and Other Expenses | 42.4 | (2.5 | ) | |||||
| Net Cash Provided by Operating Activities | 87.1 | 106.7 | ||||||
| Investing Activities: | ||||||||
| Purchases of Property, Plant and Equipment | (34.7 | ) | (13.2 | ) | ||||
| Acquisition of Business, Net of Cash Received | (129.9 | ) | — | |||||
| Purchases of Technology Licenses, Net | (0.7 | ) | — | |||||
| Sale of Business/Investment/Property | 0.3 | — | ||||||
| Net Cash Used in Investing Activities | (165.0 | ) | (13.2 | ) | ||||
| Financing Activities: | ||||||||
| Taxes Paid Related to Net Share Settlement of Equity Awards | (0.3 | ) | (1.1 | ) | ||||
| Purchase of Common Stock | — | (9.8 | ) | |||||
| Proceeds from Exercise of Stock Options | 0.2 | 2.7 | ||||||
| Tax Benefit from Stock Option Exercises | — | 0.5 | ||||||
| Cash Dividends | (10.6 | ) | (10.3 | ) | ||||
| Proceeds from Borrowings | 71.3 | — | ||||||
| Repayment of Borrowings | (3.0 | ) | (20.0 | ) | ||||
| Net Cash Provided (Used) in Financing Activities | 57.6 | (38.0 | ) | |||||
| Effect of Foreign Currency Exchange Rate Changes on Cash | 30.3 | (14.5 | ) | |||||
| Increase in Cash and Cash Equivalents | 10.0 | 41.0 | ||||||
| Cash and Cash Equivalents at Beginning of Year | 294.0 | 227.8 | ||||||
| Cash and Cash Equivalents at End of Period | $ | 304.0 | $ | 268.8 | ||||
See notes to condensed consolidated financial statements.
6
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. | Description of Business and Summary of Significant Accounting Policies |
Description of Business
Methode Electronics, Inc. (the "Company" or "Methode") is a global developer of custom engineered and application specific products and solutions with manufacturing, design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States. The Company's primary manufacturing facilities are located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, Mexico. The Company designs, manufactures and markets devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing technologies.
Impact of COVID-19
The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. The Company expects the disruptions caused by the COVID-19 pandemic to continue to have an adverse impact on the Company's operating results across all segments for the remainder of fiscal 2021. The Company began to see the impacts of the COVID-19 pandemic at the beginning of its fourth quarter of fiscal 2020 at its China manufacturing facilities, which were initially closed after the Chinese New Year. The Company’s manufacturing facilities in China resumed operations later in the fourth quarter of fiscal 2020, but at lower capacity utilization. However, the major impact to the Company’s business from the COVID-19 pandemic began in mid-March 2020, as the Company’s operations in North America and Europe were adversely impacted by many customers suspending their manufacturing operations due to the COVID-19 pandemic. As a result, production levels at the Company’s major North American and European manufacturing facilities were still significantly reduced to well below capacity through early June 2020. In the first quarter of fiscal 2021, the Company’s operations in North America and Europe gradually resumed operations, however production levels were still significantly reduced, resulting in lower capacity utilization. Some of the Company’s international locations received government assistance with respect to wages and other expenses. The amount of assistance received was incorporated$2.9 million in 1946the three months ended August 1, 2020 and have been reported as an Illinois corporationother income.
The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, its allowance for credit losses, the carrying value of the Company's goodwill, intangible assets, and reincorporatedother long-lived assets, and valuation allowances in Delawarecontext with the information reasonably available to the Company and the unknown future impacts of the COVID-19 pandemic as of August 1, 2020 and through the date of this report. As a result of these assessments, the Company concluded that there were no impairments or material increases in 1966. As used herein, “we,” “us,” “our,”credit allowances or valuation allowances that impacted the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries. Our business is managed, and our financial results are reported, on a segment basis, with those segments being Automotive, Interface, Power Products and Other. TheCompany's condensed consolidated financial statements and related disclosures as of January 27, 2018 and results of operations for the three and nine months ended January 27, 2018August 1, 2020. However, the Company's future assessment of the magnitude and January 28, 2017 areduration of the COVID-19 pandemic, as well as other factors, could result in material impacts to its consolidated financial statements in future reporting periods.
Basis of Presentation
The unaudited pursuant tocondensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”("SEC"). The April 29, 2017 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally acceptedAll intercompany balances and transactions have been eliminated in the United States of America (“U.S. GAAP”).consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAPaccounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In our opinion, theseThese interim condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments)adjustments, except as otherwise disclosed) that management believes are necessary for thea fair statementpresentation of the results of operations, financial position and cash flows of the Company for the interim periods.periods presented. These financial statements should be read in conjunction with the consolidated financial statements included in ourthe Company's Form 10-K for the year ended April 29, 2017,May 2, 2020, filed with the SEC on June 22, 2017.30, 2020. Results may vary from quarter-to-quarter for reasons other than seasonality.
Financial Reporting Periods
The Company maintains its financial records on the basis of a 52- or 53-week fiscal year ending on the Saturday closest to April 30. The three months ended August 1, 2020 and July 27, 2019 were both 13 week periods.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from these estimates.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, "Description of Business and Summary of Significant Accounting Policies," to the consolidated financial statements included in the Company's Form 10-K for the year ended May 2, 2020. There have been no material changes to the significant accounting policies in the three months ended August 1, 2020 other than those noted below.
Recently Adopted Accounting Pronouncements
In February 2018,June 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) No. 2018-02, "Income Statement—Reporting Comprehensive Income2016-13, “Financial Instruments-Credit Losses (Topic 220): Reclassification326) - Measurement of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this update are intended to address a specific consequence of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. Tax Reform’s reduction of the U.S. federal corporate income tax rate. The ASU is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate is recognized. Management does not expect this ASU to have a material impactCredit Losses on the Company’s consolidated financial statements.
The standard will be effective for us in the fiscal years beginning April 29, 2018. Earlier adoption is permitted.
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. The Company adopted this guidance prospectively as of May 3, 2020, and the impact on its condensed consolidated financial statements at October 28, 2017.will depend on the nature of the Company’s future cloud computing arrangements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement." The revised preliminaryguidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. The Company adopted this guidance as of May 3, 2020, and there was no impact on the condensed consolidated financial statements.
New Accounting Pronouncements Not Adopted
In December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)," which simplifies the accounting for income taxes. The new guidance removes certain exceptions to the general principles in Accounting Standards Codification (“ASC 740”), such as recognizing deferred taxes for equity investments, the incremental approach to performing intraperiod tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the purchase priceeffect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This guidance is effective for
8
annual periods beginning after December 15, 2020, and interim periods thereafter; however, early adoption is permitted. The Company is currently assessing the potential impact of the standard on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference LIBOR or another rate that is expected to be discontinued, subject to meeting certain criteria. ASU 2020-04 will be in effect through December 31, 2022. The Company is currently assessing the potential impact of the standard on its condensed consolidated financial statements.
Note 2. | Revenue |
The majority of the Company's revenue is recognized at a point in time. The Company has determined that the most definitive demonstration that control has transferred to a customer is physical shipment or delivery, depending on the contractual shipping terms, except for consignment transactions. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon the customer’s usage.
Revenues associated with products which the Company believes have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over time basis. The Company believes the most faithful depiction of the transfer of goods to the fair valuescustomer is based on progress to date, which is typically smooth throughout the production process. As such, the Company recognizes revenue evenly over the production process through transfer of control to the customer.
Customers typically negotiate annual price downs. Management has evaluated these price downs and determined that in some instances, these price downs give rise to a material right. In instances that a material right exists, a portion of the assets acquiredtransaction price is allocated to the material right and liabilities assumed were:
| (Dollars in Millions) | ||||
| Cash | $ | 1.3 | ||
| Accounts Receivable | 10.8 | |||
| Inventory | 3.5 | |||
| Intangible Assets | 19.2 | |||
| Goodwill | 8.1 | |||
| Other Assets | 0.1 | |||
| Property, Plant and Equipment | 23.8 | |||
| Accounts Payable | (4.9 | ) | ||
| Salaries, Wages and Payroll Taxes | (0.8 | ) | ||
| Other Accrued Expenses | (4.7 | ) | ||
| Income Taxes Payable | (0.6 | ) | ||
| Short-term Debt | (1.7 | ) | ||
| Other Liabilities | (5.6 | ) | ||
| Long-term Debt | (17.1 | ) | ||
| Deferred Income Tax Liability | (7.9 | ) | ||
| Total Purchase Price | $ | 23.5 | ||
The Company's condensed consolidated statementsCompany treats shipping and handling costs as an activity necessary to fulfill the performance obligation to transfer product to the customer and not as a separate performance obligation.
Across all products, the amount of incomerevenue recognized corresponds to the related purchase order. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue.
Contract Balances
A contract asset is an entity’s right to consideration in exchange for goods or services that the threeentity has transferred to a customer. A contract liability exists when an entity has received consideration, or the amount is due from the customer in advance of revenue recognition. The net change in the contract asset and six months ended October 28, 2017 were prepared based on provisional amounts for cost of products sold, amortization of intangibles and income tax expense. During the third quarter of fiscal 2018, the Company recognized measurement period adjustments to these provisional amounts. These adjustments were included in earningscontract liability balances for the three months ended JanuaryAugust 1, 2020 and July 27, 2018. If2019 were not material.
9
Disaggregated Revenue Information
Geographic net sales are determined based on the Company's operational locations. Though revenue recognition patterns and contracts are generally consistent, the amount, timing and uncertainty of revenue and cash flows may vary in each reportable segment due to geographic and economic factors.
|
| Three Months Ended August 1, 2020 |
| |||||||||||||||||
(Dollars in Millions) |
| Auto |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Total |
| |||||
Geographic Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 76.3 |
|
| $ | 20.6 |
|
| $ | 13.2 |
|
| $ | 0.4 |
|
| $ | 110.5 |
|
Europe & Africa |
|
| 28.8 |
|
|
| 12.8 |
|
|
| — |
|
|
| — |
|
|
| 41.6 |
|
Asia |
|
| 20.0 |
|
|
| 18.6 |
|
|
| 0.2 |
|
|
| — |
|
|
| 38.8 |
|
Total Net Sales |
| $ | 125.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 190.9 |
|
Timing of Revenue Recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods Transferred at a Point in Time |
| $ | 120.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 185.9 |
|
Goods Transferred Over Time |
|
| 5.0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.0 |
|
Total Net Sales |
| $ | 125.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 190.9 |
|
|
| Three Months Ended July 27, 2019 |
| |||||||||||||||||
(Dollars in Millions) |
| Auto |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Total |
| |||||
Geographic Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 121.6 |
|
| $ | 48.9 |
|
| $ | 12.5 |
|
| $ | 0.3 |
|
| $ | 183.3 |
|
Europe & Africa |
|
| 49.0 |
|
|
| 12.5 |
|
|
| 0.1 |
|
|
| — |
|
|
| 61.6 |
|
Asia |
|
| 15.6 |
|
|
| 9.4 |
|
|
| 0.3 |
|
|
| — |
|
|
| 25.3 |
|
Total Net Sales |
| $ | 186.2 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 270.2 |
|
Timing of Revenue Recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods Transferred at a Point in Time |
| $ | 179.0 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 263.0 |
|
Goods Transferred Over Time |
|
| 7.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7.2 |
|
Total Net Sales |
| $ | 186.2 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 270.2 |
|
Note 3. | Restructuring |
The Company continually monitors market factors and industry trends and takes necessary actions to reduce overall costs and improve operational profitability. In the three months ended August 1, 2020, the Company had completedinitiated certain restructuring actions in response to the purchase price allocation as ofadverse impacts from the acquisition dateCOVID-19 pandemic. These actions included plant consolidations and recognized these measurement period adjustmentsworkforce reductions in its condensed consolidated statements of income forthe Automotive, Industrial and Interface segments. In the three and six months ended October 28, 2017,August 1, 2020, the Company recognized $3.4 million of restructuring costs. These charges consist of $1.9 million recorded in cost of products sold for bothand $1.5 million recorded in selling and administrative expenses.
Employee termination benefits are accrued upon the threecommitment to a termination plan and six months ended October 28, 2017 would have been $0.6 million lower, amortizationwhen the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable. Asset impairment charges primarily relate to the impairment of intangibles for bothright-of-use lease assets. Contract termination costs are recorded when notification of termination is given to the three and six months ended October 28, 2017 would have been $0.4 million higher, and income tax expense for both the three and six months ended October 28, 2017 would have been $0.1 million lower.
| (Dollars in Millions) | Fair Value at Date of Acquisition | Amortization Period | ||||
| Customer Relationships and Agreements - Significant Customer | $ | 12.3 | 17.0 years | |||
| Customer Relationships and Agreements - All Other Customers | 2.8 | 11.5 years | ||||
| Technology Licenses | 2.1 | 8.5 years | ||||
| Trade Names | 2.0 | 8.5 years | ||||
| Total | $ | 19.2 | ||||
|
|
|
|
|
|
|
|
|
| Utilization |
|
|
|
|
| |||||
(Dollars in Millions) |
| Accrual as of May 2, 2020 |
|
| YTD Charges |
|
| Cash |
|
| Non-cash |
|
| Accrual as of August 1, 2020 |
| |||||
Employee Termination Benefits |
| $ | 0.2 |
|
| $ | 2.5 |
|
| $ | (1.1 | ) |
| $ | — |
|
| $ | 1.6 |
|
Asset Impairment Charges |
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
Contract Termination Costs |
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
Total |
| $ | 0.2 |
|
| $ | 3.4 |
|
| $ | (1.1 | ) |
| $ | (0.3 | ) |
| $ | 2.2 |
|
The table below presents restructuring costs by reportable segment:
10
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Automotive |
| $ | 2.0 |
|
| $ | — |
|
Industrial |
|
| 0.6 |
|
|
| — |
|
Interface |
|
| 0.7 |
|
|
| — |
|
Medical |
|
| — |
|
|
| — |
|
Eliminations/Corporate |
|
| 0.1 |
|
|
| — |
|
Total Restructuring Costs |
| $ | 3.4 |
|
| $ | — |
|
Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals. The Company expects to incur additional restructuring costs of $1.3approximately $2.0 million were incurred in relation to the acquisition of Procoplast for the nine months ended January 27, 2018, of which $1.1 million have been reported in selling and administrative expenses and $0.2 million have been reported in costs of products sold on the condensed consolidated statements of operations.
| (Dollars in Millions) | ||||
| Cash | $ | 4.9 | ||
| Accounts Receivable | 18.3 | |||
| Inventory | 12.7 | |||
| Prepaid Expenses and Other Current Assets | 0.3 | |||
| Income Taxes Receivable | 1.2 | |||
| Intangible Assets | 41.8 | |||
| Goodwill | 48.5 | |||
| Pre-production Costs | 0.8 | |||
| Property, Plant and Equipment | 13.8 | |||
| Accounts Payable | (7.9 | ) | ||
| Salaries, Wages and Payroll Taxes | (0.8 | ) | ||
| Other Accrued Expenses | (3.9 | ) | ||
| Short-term Debt | (0.8 | ) | ||
| Long-term Debt | (3.4 | ) | ||
| Deferred Income Tax Liability | (12.9 | ) | ||
| Total Purchase Price | $ | 112.6 | ||
| (Dollars in Millions) | Fair Value at Date of Acquisition | Amortization Period | ||||
| Customer Relationships and Agreements - Automotive | $ | 23.7 | 11.5 years | |||
| Customer Relationships and Agreements - Commercial | 10.1 | 14.0 years | ||||
| Trade Names | 6.4 | 7.5 years | ||||
| Technology Licenses | 1.6 | 6.0 years | ||||
| Total | $ | 41.8 | ||||
| (Unaudited) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | ||||||||||||
| Revenues | $ | 227.8 | $ | 217.8 | $ | 698.3 | $ | 666.0 | ||||||||
| Net Income (Loss) | $ | (24.4 | ) | $ | 24.9 | $ | 25.3 | $ | 72.6 | |||||||
| Automotive | Interface | Power Products | Total | |||||||||||||
| Balance as of April 29, 2017 | $ | — | $ | 0.6 | $ | 1.0 | $ | 1.6 | ||||||||
| Goodwill Acquired | 56.6 | — | — | 56.6 | ||||||||||||
| Foreign Currency Translation | 1.3 | 0.1 | — | 1.4 | ||||||||||||
| Balance as of January 27, 2018 | $ | 57.9 | $ | 0.7 | $ | 1.0 | $ | 59.6 | ||||||||
| As of January 27, 2018 | ||||||||||||||
| Gross | Accumulated Amortization | Net | Wtd. Avg. Remaining Amortization Periods (Years) | |||||||||||
| Customer Relationships and Agreements | $ | 66.5 | $ | 17.2 | $ | 49.3 | 13.0 | |||||||
| Trade Names, Patents and Technology Licenses | 38.3 | 22.0 | 16.3 | 5.5 | ||||||||||
| Total | $ | 104.8 | $ | 39.2 | $ | 65.6 | ||||||||
| As of April 29, 2017 | ||||||||||||||
| Gross | Accumulated Amortization | Net | Wtd. Avg. Remaining Amortization Periods (Years) | |||||||||||
| Customer Relationships and Agreements | $ | 16.3 | $ | 15.6 | $ | 0.7 | 6.8 | |||||||
| Trade Names, Patents and Technology Licenses | 25.8 | 19.9 | 5.9 | 1.4 | ||||||||||
| Covenants Not to Compete | 0.1 | 0.1 | — | 0.4 | ||||||||||
| Total | $ | 42.2 | $ | 35.6 | $ | 6.6 | ||||||||
| 2018 | $ | 5.7 | ||
| 2019 | $ | 7.7 | ||
| 2020 | $ | 5.7 | ||
| 2021 | $ | 5.6 | ||
| 2022 | $ | 5.6 | ||
Note 4. | Income Taxes |
The provision for income taxes for all periods presentedan interim period is based on an estimated annual effective income tax rate for the respective full fiscal years. As a result of enacted U.S. Tax Reform, the Company's estimated effective income taxand this rate includes the reduced federal statutory income tax rate of 30%, resulting in an income tax benefit of approximately $0.9 million for the first nine months of fiscal 2018.is applied to ordinary year-to-date earnings or losses. The estimated annual effective income tax rate is determined excluding the
The computation of fiscal 2018 compared to an income tax expense of $6.6 million in the third quarter of fiscal 2017. Theestimated annual effective income tax rate at each interim period requires certain estimates and
assumptions including, but not limited to, the expected pre-tax income (or loss) for the third quarter of fiscal 2018 was 162.1% versus 21.9% inyear by jurisdiction, certain book to tax adjustments, and the third quarter of fiscal 2017. The income tax expense recorded on income before income taxes for the third quarter of fiscal 2018 was primarily due to the one-time repatriation tax from the earningslikelihood of the Company’s foreign subsidiaries and the re-measurementrealizability of deferred tax assets atgenerated in the new US tax rate.
The Company’s income tax (benefit) expense of $18.3 million in the first nine months of fiscal 2017. Theand effective income tax rate for the first ninethree months of fiscal 2018 was 78.1% versus 20.8% in the first nine months of fiscal 2017. ended August 1, 2020 and July 27, 2019 were as follows:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 2, 2020 |
|
| July 27, 2019 |
| ||
Income before Income Taxes |
| $ | 15.6 |
|
| $ | 35.6 |
|
Income Tax (Benefit) Expense |
| $ | (5.1 | ) |
| $ | 7.3 |
|
Effective Tax Rate |
|
| (32.7 | )% |
|
| 20.5 | % |
The income tax benefit recorded on income before income taxesprovision for the first nine months of fiscal 2018 was primarily due to the one-time repatriation tax from the earnings of the Company’s foreign subsidiaries and the re-measurement of deferred tax assets.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
| Numerator - Net Income (Loss) | $ | (24.3 | ) | $ | 23.7 | $ | 20.4 | $ | 69.7 | |||||||
| Denominator: | ||||||||||||||||
| Denominator for Basic Net Income (Loss) per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Awards | 37,292,934 | 37,217,302 | 37,275,041 | 37,297,757 | ||||||||||||
| Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units | — | 253,351 | 385,979 | 180,210 | ||||||||||||
| Denominator for Diluted Net Income (Loss) per Share | 37,292,934 | 37,470,653 | 37,661,020 | 37,477,967 | ||||||||||||
| Net Income (Loss) per Share: | ||||||||||||||||
| Basic | $ | (0.65 | ) | $ | 0.64 | $ | 0.54 | $ | 1.87 | |||||||
| Diluted | $ | (0.65 | ) | $ | 0.63 | $ | 0.54 | $ | 1.86 | |||||||
The Company's unrecognized income tax benefits were $5.3 million and $5.2 million as these awards are contingent on the Company's full-year performance in fiscal 2020.
11
Note 5.Balance Sheet Components
Inventories
Inventories are stated at the endlower-of-cost or net realizable value. Cost is determined using the first-in, first-out method. Finished products and work-in-process inventories include direct material costs and direct and indirect manufacturing costs. The Company records reserves for inventory that may be obsolete or in excess of fiscal 2017 duecurrent and future market demand. A summary of inventories is shown below:
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Finished Products |
| $ | 34.2 |
|
| $ | 45.7 |
|
Work in Process |
|
| 11.1 |
|
|
| 10.8 |
|
Raw Materials |
|
| 78.7 |
|
|
| 74.5 |
|
Total Inventories |
| $ | 124.0 |
|
| $ | 131.0 |
|
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repair costs are expensed as incurred. Depreciation is calculated using the straight-line method using estimated useful lives of 5 to market conditions.
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Land |
| $ | 3.3 |
|
| $ | 3.3 |
|
Buildings and Building Improvements |
|
| 90.6 |
|
|
| 87.3 |
|
Machinery and Equipment |
|
| 432.0 |
|
|
| 412.3 |
|
Total Property, Plant and Equipment, Gross |
|
| 525.9 |
|
|
| 502.9 |
|
Less: Accumulated Depreciation |
|
| (317.3 | ) |
|
| (301.0 | ) |
Property, Plant and Equipment, Net |
| $ | 208.6 |
|
| $ | 201.9 |
|
Depreciation expense was $7.4 million and insulated-gate bipolar transistor solutions. Due to market conditions, this business was shuttered at the end of fiscal 2017.
| Three Months Ended January 27, 2018 | ||||||||||||||||||||||||
| Automotive | Interface | Power Products | Other | Eliminations/Corporate | Consolidated | |||||||||||||||||||
| Net Sales | $ | 187.7 | $ | 28.0 | $ | 15.2 | $ | 0.1 | $ | (3.0 | ) | $ | 228.0 | |||||||||||
| Transfers between Segments | (2.8 | ) | (0.1 | ) | — | — | 2.9 | — | ||||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 184.9 | $ | 27.9 | $ | 15.2 | $ | 0.1 | $ | (0.1 | ) | $ | 228.0 | |||||||||||
| Income (Loss) from Operations | $ | 39.4 | $ | 1.8 | $ | 3.0 | $ | (2.3 | ) | $ | (6.3 | ) | $ | 35.6 | ||||||||||
| Interest Expense, Net | 0.3 | |||||||||||||||||||||||
| Other Income, Net | (3.8 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 39.1 | ||||||||||||||||||||||
| Three Months Ended January 28, 2017 | ||||||||||||||||||||||||
| Automotive | Interface | Power Products | Other | Eliminations/Corporate | Consolidated | |||||||||||||||||||
| Net Sales | $ | 152.7 | $ | 29.8 | $ | 15.4 | $ | 0.1 | $ | (2.4 | ) | $ | 195.6 | |||||||||||
| Transfers between Segments | (2.3 | ) | — | — | — | 2.3 | — | |||||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 150.4 | $ | 29.8 | $ | 15.4 | $ | 0.1 | $ | (0.1 | ) | $ | 195.6 | |||||||||||
| Income (Loss) from Operations | $ | 36.9 | $ | 1.3 | $ | 3.2 | $ | (3.3 | ) | $ | (9.0 | ) | $ | 29.1 | ||||||||||
| Interest Income, Net | (0.2 | ) | ||||||||||||||||||||||
| Other Income, Net | (1.0 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 30.3 | ||||||||||||||||||||||
| Nine Months Ended January 27, 2018 | ||||||||||||||||||||||||
| Automotive | Interface | Power Products | Other | Eliminations/Corporate | Consolidated | |||||||||||||||||||
| Net Sales | $ | 535.4 | $ | 86.4 | $ | 44.9 | $ | 0.2 | $ | (7.6 | ) | $ | 659.3 | |||||||||||
| Transfers between Segments | (7.3 | ) | (0.1 | ) | (0.1 | ) | — | 7.5 | — | |||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 528.1 | $ | 86.3 | $ | 44.8 | $ | 0.2 | $ | (0.1 | ) | $ | 659.3 | |||||||||||
| Income (Loss) from Operations | $ | 118.1 | $ | 4.0 | $ | 9.3 | $ | (8.1 | ) | $ | (32.6 | ) | $ | 90.7 | ||||||||||
| Interest Expense, Net | 0.3 | |||||||||||||||||||||||
| Other Income, Net | (2.6 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 93.0 | ||||||||||||||||||||||
| Nine Months Ended January 28, 2017 | ||||||||||||||||||||||||
| Automotive | Interface | Power Products | Other | Eliminations/Corporate | Consolidated | |||||||||||||||||||
| Net Sales | $ | 467.9 | $ | 95.6 | $ | 40.0 | $ | 2.1 | $ | (8.9 | ) | $ | 596.7 | |||||||||||
| Transfers between Segments | (6.3 | ) | (0.7 | ) | (0.1 | ) | (1.9 | ) | 9.0 | — | ||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 461.6 | $ | 94.9 | $ | 39.9 | $ | 0.2 | $ | 0.1 | $ | 596.7 | ||||||||||||
| Income (Loss) from Operations | $ | 111.2 | $ | (0.1 | ) | $ | 7.7 | $ | (8.0 | ) | $ | (26.0 | ) | $ | 84.8 | |||||||||
| Interest Income, Net | (0.3 | ) | ||||||||||||||||||||||
| Other Income, Net | (2.9 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 88.0 | ||||||||||||||||||||||
Pre-Production Tooling Costs Related to Long-term Supply Arrangements
The Company incurs pre-production tooling costs related to certain products produced for ourits customers under long-term supply agreements. Wearrangements. As of August 1, 2020 and May 2, 2020, the Company had $18.0$36.0 million and $15.5$37.1 million, as of January 27, 2018 and April 29, 2017, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a
Derivative Instruments
The Company is exposed to foreign currency risks that arise from normal business operations. The Company strives to control its exposure to these risks through our normal operating activities and, where appropriate, through derivative instruments.
On April 14, 2020, the Company entered into a variable-rate, cross-currency swap, maturing on August 31, 2023, with a
notional value of $60.0 million (€54.8 million). The cross-currency swap is designated as a hedge of the Company's net investment in a euro-based subsidiary. The Company entered into the cross-currency swap to mitigate changes in net assets due to changes in U.S.
dollar-euro spot exchange rates. The cross-currency swap was in a net liability position with an aggregate fair value of $5.9 million and $1.3 million as of August 1, 2020 and May 2, 2020, respectively, and is recorded within other long-term liabilities in the condensed consolidated balance sheets.
12
The fair value of the cross-currency swap is classified within Level 2 of the fair value hierarchy. Hedge effectiveness is
assessed at the inception of the hedging relationship and quarterly thereafter, under the spot-to-spot method. The Company records
changes in fair value attributable to the translation of foreign currencies through accumulated other comprehensive income (loss). The
Company amortizes the impact of all other changes in fair value of the derivative through interest expense, which was not material in the three months ended August 1, 2020.
Note 6.Goodwill and Other Intangible Assets
Goodwill
A summary of the changes in the carrying amount of goodwill, by segment, is shown below:
(Dollars in Millions) |
| Automotive |
|
| Industrial |
|
| Total |
| |||
Balance as of May 2, 2020 |
| $ | 106.2 |
|
| $ | 125.4 |
|
| $ | 231.6 |
|
Foreign Currency Translation |
|
| 0.4 |
|
|
| 1.3 |
|
|
| 1.7 |
|
Balance as of August 1, 2020 |
| $ | 106.6 |
|
| $ | 126.7 |
|
| $ | 233.3 |
|
The Company tests indefinite-lived intangible assets and goodwill for impairment by either performing a qualitative evaluation or a quantitative test at least annually, or more frequently if an indication of impairment arises. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount.
During the first quarter of fiscal 2021, the Company evaluated the effects of the COVID-19 pandemic and its negative impact on the global economy on each of the Company’s reporting units and indefinite-lived intangible assets. Management reviewed key assumptions, including revisions of projected future revenues for reporting units and the results of the previous annual impairment testing performed during the fourth quarter of fiscal 2020. The Company did not identify an indication of impairment for any of its reporting units or indefinite-lived intangible assets. Although it was determined that a triggering event had not occurred as of August 1, 2020, management will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges.
Other Intangible Assets, Net
Details of identifiable intangible assets are shown below:
|
| As of August 1, 2020 |
| |||||||||||||
(Dollars in Millions) |
| Gross |
|
| Accumulated Amortization |
|
| Net |
|
| Wtd. Avg. Remaining Amortization Periods (Years) |
| ||||
Definite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships and Agreements |
| $ | 245.4 |
|
| $ | (44.3 | ) |
| $ | 201.1 |
|
|
| 16.3 |
|
Trade Names, Patents and Technology Licenses |
|
| 75.8 |
|
|
| (36.6 | ) |
|
| 39.2 |
|
|
| 7.6 |
|
Total Definite-lived Intangible Assets |
|
| 321.2 |
|
|
| (80.9 | ) |
|
| 240.3 |
|
|
|
|
|
Indefinite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names, Patents and Technology Licenses |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Indefinite-lived Intangible Assets |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Other Intangible Assets |
| $ | 323.0 |
|
| $ | (80.9 | ) |
| $ | 242.1 |
|
|
|
|
|
13
|
| As of May 2, 2020 |
| |||||||||||||
(Dollars in Millions) |
| Gross |
|
| Accumulated Amortization |
|
| Net |
|
| Wtd. Avg. Remaining Amortization Periods (Years) |
| ||||
Definite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships and Agreements |
| $ | 243.5 |
|
| $ | (40.8 | ) |
| $ | 202.7 |
|
|
| 16.5 |
|
Trade Names, Patents and Technology Licenses |
|
| 75.3 |
|
|
| (35.0 | ) |
|
| 40.3 |
|
|
| 7.8 |
|
Total Definite-lived Intangible Assets |
|
| 318.8 |
|
|
| (75.8 | ) |
|
| 243.0 |
|
|
|
|
|
Indefinite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names, Patents and Technology Licenses |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Indefinite-lived Intangible Assets |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Other Intangible Assets |
| $ | 320.6 |
|
| $ | (75.8 | ) |
| $ | 244.8 |
|
|
|
|
|
Based on the current amount of intangible assets subject to amortization, the estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
(Dollars in Millions) |
|
|
|
|
Fiscal Year: |
|
|
|
|
Remainder of 2021 |
| $ | 14.4 |
|
2022 |
|
| 19.1 |
|
2023 |
|
| 19.0 |
|
2024 |
|
| 18.6 |
|
2025 |
|
| 18.1 |
|
Thereafter |
|
| 151.1 |
|
Total |
| $ | 240.3 |
|
Note 7.Debt
A summary of debt is shown below:
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Revolving Credit Facility |
| $ | 108.5 |
|
| $ | 108.5 |
|
Term Loan |
|
| 228.1 |
|
|
| 231.2 |
|
Other Debt |
|
| 15.2 |
|
|
| 14.6 |
|
Unamortized Debt Issuance Costs |
|
| (2.0 | ) |
|
| (2.2 | ) |
Total Debt |
|
| 349.8 |
|
|
| 352.1 |
|
Less: Current Maturities |
|
| (15.4 | ) |
|
| (15.3 | ) |
Total Long-term Debt |
| $ | 334.4 |
|
| $ | 336.8 |
|
14
Revolving Credit Facility/Term Loan
The Company is a party to aan Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders named therein (the “Credit Agreement”).N.A. The Credit Agreement hasterminates in September 2023 and consists of a maturity date of November 18, 2021. Thesenior unsecured revolving credit facility is in(“Revolving Credit Facility”) of $200.0 million and a senior unsecured term loan (“Term Loan”) of $250.0 million. In addition, the maximum principal amount of $150.0 million, withCompany has an option to increase the principal amountsize of the Revolving Credit Facility and Term Loan by up to an additional $100.0$200.0 million, subject to customary conditions and approval of the lender(s)lenders providing new commitment(s). The credit facility is available for general corporate purposes, including working capital and acquisitions. The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio.commitments. The Credit Agreement is guaranteed by the Company’s wholly-owned U.S. subsidiaries. For the Term Loan, the Company is required to make quarterly principal payments of 1.25% of the original Term Loan ($3.1 million) through maturity, with the remaining balance due on September 12, 2023.
Outstanding borrowings under the Credit Agreement bear interest at variable rates based on the type of borrowing and the Company’s debt to EBITDA financial ratio, as defined in the Credit Agreement. The weighted-average interest rate on outstanding borrowings under the Credit Agreement was 1.67% at August 1, 2020. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. At January 27, 2018, the interest rate on the credit facility was 1.25% plus LIBOR and we were in compliance with the covenants of the agreement. During the nine months ended January 27, 2018, we had $70.0 million of borrowings and payments of $3.2 million, which includes interest of $1.2 million, under this credit facility. As of January 27, 2018, there were outstanding balances againstAugust 1, 2020, the credit facility of $95.0 million. We believe the fair value approximates the carrying amount as of January 27, 2018.
Other Debt
One of the agreement.
Note 8.Shareholders’ Equity
Dividends
The Company paid dividends totaling $5.0 million and maturities ranging from 2019 to 2031. Pacific Insight holds debt$4.1 million in the formthree months ended August 1, 2020 and July 27, 2019, respectively. Dividends paid in the three months ended August 1, 2020 include $0.9 million of dividends on restricted stock that vested during the period.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. A summary of changes in accumulated other comprehensive income (loss), net of tax is shown below:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Currency Translation Adjustments: |
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
| $ | (25.9 | ) |
| $ | (13.6 | ) |
Other Comprehensive Income (Loss) Recognized During the Period, Net of Tax |
|
| 20.3 |
|
|
| (1.6 | ) |
Balance at End of Period |
|
| (5.6 | ) |
|
| (15.2 | ) |
|
|
|
|
|
|
|
|
|
Derivative Instruments: |
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
|
| (1.0 | ) |
|
| — |
|
Other Comprehensive Loss Recognized During the Period, Net of Tax |
|
| (3.6 | ) |
|
| — |
|
Balance at End of Period |
|
| (4.6 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, End of Period |
| $ | (10.2 | ) |
| $ | (15.2 | ) |
15
Stock-based Compensation
The Company has granted stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock awards to employees and non-employee directors under the Methode Electronics, Inc. 2014 Omnibus Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”), the Methode Electronics, Inc. 2007 Stock Plan (“2007 Plan”) and the Methode Electronics, Inc. 2004 Stock Plan (“2004 Plan”). The Company can no longer make grants under the 2010 Plan, 2007 Plan and 2004 Plan. The number of shares of common stock originally authorized under the 2014 Plan is 3,000,000. As of August 1, 2020, there was 2,051,588 shares available for award under the 2014 Plan.
Restricted Stock Units (“RSUs”)
RSUs granted under the 2014 Plan vest over a pre-determined period of time, generally between three to five years from the date of grant. The fair value of the RSUs are based on the closing stock price on the date of grant. As of August 1, 2020, there were 3,100 RSUs outstanding.
Under the various stock plans, common stock underlying vested RSUs held by certain executives will not be delivered until termination of employment or a change of control of the Company. As of August 1, 2020, common stock to be delivered to these executives totaled 577,055.
Director Awards
In the three months ended August 1, 2020 and July 27, 2019, the Company granted 33,000 shares and 30,000 shares, respectively, of common stock to its non-employee directors under the 2014 Plan. The shares vested immediately upon grant. The fair value was determined based on the closing price of the Company’s stock on the date of grant.
Stock Options
The following table summarizes combined stock option activity under the 2010 Plan and 2007 Plan:
|
| Shares |
|
| Wtd. Avg. Exercise Price |
| ||
Outstanding and Exercisable at May 2, 2020 |
|
| 106,668 |
|
| $ | 35.76 |
|
Exercised |
|
| (5,000 | ) |
| $ | 10.55 |
|
Forfeited |
|
| — |
|
| $ | — |
|
Outstanding and Exercisable at August 1, 2020 |
|
| 101,668 |
|
| $ | 37.01 |
|
Stock-based Compensation Expense
All stock-based awards to employees and non-employee directors are recognized in selling and administrative expenses on the condensed consolidated statements of income.
The table below summarizes the stock-based compensation expense related to the equity awards:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
RSAs |
| $ | — |
|
| $ | 1.2 |
|
RSUs |
|
| — |
|
|
| 0.4 |
|
Director Awards |
|
| 0.9 |
|
|
| 0.9 |
|
Total Stock-based Compensation Expense |
| $ | 0.9 |
|
| $ | 2.5 |
|
16
Note 9. Income per Share
Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period. The weighted average number of common shares used in the diluted income per share calculation is determined using the treasury stock method which includes the effect of all potential dilutive common shares outstanding during the period.
The following table sets forth the computation of basic and diluted income per share:
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Numerator: |
|
|
|
|
|
|
|
|
Net Income (in millions) |
| $ | 20.7 |
|
| $ | 28.3 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for Basic Income per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Units |
|
| 37,836,543 |
|
|
| 37,534,451 |
|
Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units |
|
| 321,875 |
|
|
| 132,603 |
|
Denominator for Diluted Income per Share |
|
| 38,158,418 |
|
|
| 37,667,054 |
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income per Share: |
|
|
|
|
|
|
|
|
Basic Income per Share |
| $ | 0.55 |
|
| $ | 0.75 |
|
Diluted Income per Share |
| $ | 0.54 |
|
| $ | 0.75 |
|
|
|
|
|
|
|
|
|
|
Number of Anti-dilutive Potentially Issuable Shares Excluded from Diluted Common Shares Outstanding |
|
| 101,668 | �� |
|
| 109,418 |
|
Note 10.Segment Information
An operating segment is defined as a component of an interest-free loanenterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Canadian governmentChief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”). The Company has four reporting segments as described below.
The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile OEMs, either directly or through their tiered suppliers. Products include integrated center consoles, hidden switches, ergonomic switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that maturesmonitor the operation or status of a component or system.
The Industrial segment manufactures external lighting solutions, industrial safety radio remote controls, braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail® solution, high-current low-voltage flexible power cabling systems and powder-coated busbars that are used in 2019.various markets and applications, including aerospace, computers, industrial, power conversion, military, telecommunications and transportation.
The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the appliance, commercial food service, construction, consumer, material handling, point-of-sale and telecommunications markets. Solutions include copper transceivers and solid-state field-effect consumer touch panels.
The Medical segment is made up of the Company's medical device business, Dabir Surfaces, with its surface support technology aimed at pressure injury prevention. Methode has developed the technology for use by patients who are immobilized or otherwise at risk for pressure injuries, including patients undergoing long-duration surgical procedures.
17
The tables below present information about the Company's reportable segments:
|
| Three Months Ended August 1, 2020 |
| |||||||||||||||||||||
(Dollars in Millions) |
| Automotive |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Eliminations /Corporate |
|
| Consolidated |
| ||||||
Net Sales |
| $ | 126.4 |
|
| $ | 52.4 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | (1.7 | ) |
| $ | 190.9 |
|
Transfers between Segments |
|
| (1.3 | ) |
|
| (0.4 | ) |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 1.7 |
|
|
| 0 |
|
Net Sales to Unaffiliated Customers |
| $ | 125.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 0 |
|
| $ | 190.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
| $ | 15.3 |
|
| $ | 7.0 |
|
| $ | 1.1 |
|
| $ | (1.6 | ) |
| $ | (8.0 | ) |
| $ | 13.8 |
|
Interest Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.6 |
|
Other Income, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3.4 | ) |
Income before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 15.6 |
|
|
| Three Months Ended July 27, 2019 |
| |||||||||||||||||||||
(Dollars in Millions) |
| Automotive |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Eliminations /Corporate |
|
| Consolidated |
| ||||||
Net Sales |
| $ | 187.5 |
|
| $ | 71.6 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | (2.1 | ) |
| $ | 270.2 |
|
Transfers between Segments |
|
| (1.3 | ) |
|
| (0.8 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 2.1 |
|
|
| 0 |
|
Net Sales to Unaffiliated Customers |
| $ | 186.2 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 0 |
|
| $ | 270.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
| $ | 33.1 |
|
| $ | 16.5 |
|
| $ | 0.2 |
|
| $ | (1.5 | ) |
| $ | (9.7 | ) |
| $ | 38.6 |
|
Interest Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.9 |
|
Other Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0.1 |
|
Income before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 35.6 |
|
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Identifiable Assets: |
|
|
|
|
|
|
|
|
Automotive |
| $ | 728.7 |
|
| $ | 670.9 |
|
Industrial |
|
| 440.5 |
|
|
| 421.8 |
|
Interface |
|
| 70.9 |
|
|
| 71.0 |
|
Medical |
|
| 8.2 |
|
|
| 8.8 |
|
Eliminations/Corporate |
|
| 169.9 |
|
|
| 198.1 |
|
Total Identifiable Assets |
| $ | 1,418.2 |
|
| $ | 1,370.6 |
|
Note 11. Contingencies
Certain litigation arising in the normal course of business is pending against us. The Company is, from time-to-time, subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, breach of contracts, employment-related matters, environmental matters and intellectual property matters. The Company considers insurance coverage and third-party indemnification when determining required accruals for pending litigation and claims. Although the outcome of potential legal actions and claims cannot be determined, it is the Company's opinion, based on the information available, that it has adequate reserves for these liabilities.
18
Hetronic Germany-GmbH Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. The Company became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, the Company terminated all of January 27, 2018, $0.1its agreements with the Fuchs companies. On June 20, 2014, the Company filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, the Company amended its complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. A trial with respect to the matter began in February 2020. During the trial, the defendants dismissed their one remaining counterclaim with prejudice. On March 2, 2020, the jury returned a verdict in favor of the Company. The verdict included approximately $102 million in compensatory damages and $11 million in punitive damages. On April 22, 2020, the Court entered a permanent injunction barring defendants from selling infringing products and ordering them to return Hetronic’s confidential information. Defendants appealed entry of the permanent injunction. On May 29, 2020, the Court held defendants in contempt for violating the permanent injunction and entered the final judgment. Defendants appealed entry of the final monetary judgment as well. The Company is classified as short-term and $0.1 millionworking with counsel to collect on the judgment though there are challenges in Europe in doing so while the appeal is classified as long-term.
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties. We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations. Our business is highly dependent upon two large automotive customers and specific makes and models of vehicles. Our results will be subject to many of the same risks that apply to the automotive, appliance, commercial vehicle, computer and communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes. Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believe to be insignificant may also adversely affect our financial condition or results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these factors could cause our actual results and condition to differ materially from those projected in forward-looking statements. The forward-looking statements in this report are subject to the safe harbor protection provided under the securities laws and are made as of the date of this report. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:
• | Impact from pandemics, such as the COVID-19 pandemic; |
• | Dependence on the automotive, appliance, commercial vehicle, computer and communications industries; |
• | Dependence on a small number of large customers, including two large automotive customers; |
• | Recognition of goodwill and long-lived asset impairment charges; |
• | Costs associated with restructuring activities; |
• | International trade disputes resulting in tariffs and our ability to mitigate tariffs; |
• | Timing, quality and cost of new program launches; |
• | Ability to withstand price pressure, including pricing reductions; |
• | Failure to attract and retain qualified personnel; |
• | Ability to successfully market and sell Dabir Surfaces products; |
• | Currency fluctuations; |
• | Customary risks related to conducting global operations; |
• | Costs associated with environmental, health and safety regulations; |
• | Ability to withstand business interruptions; |
• | Ability to successfully benefit from acquisitions and divestitures; |
• | Investment in programs prior to the recognition of revenue; |
• | Dependence on the availability and price of materials; |
• | Dependence on our supply chain; |
• | Judgments related to accounting for tax positions; |
• | Income tax rate fluctuations; |
• | Ability to keep pace with rapid technological changes; |
• | Breaches to our information technology systems; |
• | Ability to avoid design or manufacturing defects; |
• | Ability to compete effectively; |
• | Ability to protect our intellectual property; |
• | Success of recent acquisitions and/or our ability to implement and profit from new applications of the acquired technology; |
• | Ability to manage our debt levels and any restrictions thereunder; and |
• | Impact to interest expense from the replacement or modification of LIBOR. |
Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those foreseen in such forward-looking statements. These forward-looking statements speak only as of the date of the report, press release, statement, document, webcast or oral discussion in which they are made. We do not intend to
20
update any forward-looking statements, all of which are expressly qualified by the foregoing. See Part I — Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 29, 2017May 2, 2020 and Part II —- Item 1A, Risk Factors of this Form 10-Q for further discussions regarding some of the reasons that actual results may be materially different from those we anticipate.
Overview
We are a global manufacturerdeveloper of componentcustom engineered and subsystem devicesapplication specific products and solutions with manufacturing, design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States. Our primary manufacturing facilities are located in Dongguan and Shanghai,China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, and Fresnilla, Mexico; and Nelson, British Columbia, Canada.Mexico. We design, manufacture and market devices employing electrical, radio remote control, electronic, wireless,LED lighting, and sensing and optical technologies. Our business is managed, and our financial results are reported, on a segment basis, with those segments being Automotive, Industrial, Interface Power Products and Other. For more information regarding the business and products of these segments, see “Item 1. Business.” of our Form 10-K for the fiscal year ended April 29, 2017, and the descriptions below regarding the business and products of our newly-acquired Procoplast and Pacific Insight subsidiaries.
Our components are found in the primary end-markets of the aerospace, appliance, automotive, commercial vehicle, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries.
Impact of COVID-19
The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impacts of COVID-19 at the beginning of our fourth quarter of fiscal 2020 at our China manufacturing facilities, which were initially closed after the Chinese New Year. Our manufacturing facilities in China resumed operations later in the fourth quarter of fiscal 2020, but at lower capacity utilization. However, the major impact to our business from the COVID-19 pandemic began in mid-March 2020, as our operations in North America and Europe were adversely impacted by many of our customers suspending their manufacturing operations due to the COVID-19 pandemic. As a result, production levels at our major North American and European manufacturing facilities were still significantly reduced to well below capacity through early June 2020. In the first quarter of fiscal 2021, our operations in North America and Europe gradually resumed operations, however production levels were still significantly reduced, resulting in lower capacity utilization, thus impacting our results of operations during the first quarter of fiscal 2021.
In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve
liquidity and enhance employee safety. These measures included the following:
• | Reduction of payroll costs through a combination of temporary salary reductions, four-day work weeks and furloughs. Since the end of the first quarter of fiscal 2021, we have reinstated some of the salary reductions and resumed five-day work weeks; |
• | Elimination of most business travel and restriction of visitors to our facilities; |
• | Enhanced cleaning and disinfection procedures at our facilities, temperature checks for our workers before they enter our manufacturing facilities, promotion of social distancing at our facilities and requirements for employees to work from home where possible; |
• | Reduction of non-program related capital expenditures; |
• | Deferral of discretionary spending; and |
• | The March 2020 draw-down of $100.0 million available under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets resulting from the COVID-19 pandemic. |
In addition, we acquired 100% ofinitiated certain restructuring actions in the stock of Procoplast for $22.2 million infirst quarter intended to rationalize our operations, lower our costs and improve financial performance and long-term cash net of cash acquired. The business, located near the Belgian-German border, is an independent manufacturer of automotive assemblies. The accountsflow generation. These actions included plant consolidations and
21
The extent of the acquisition.
future developments, including the duration of Pacific Insightthe spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on our customers, especially in a cash transaction for $107.7 million, net of cash acquired. Pacific Insight, headquartered in Vancouver, British Columbia, Canada, is a global solutions provider offering design, development, manufacturing and delivery of lighting and electronic products and full-service solutions to the automotive and commercial vehicle markets. Its technology in LED-based ambientThese future developments are outside of our control, are highly uncertain and direct lighting will expand our presence withincannot be predicted. If the automotive interior,impact is further prolonged, then it can further increase the difficulty of planning for operations and may require us to take further actions as well as augment our efforts in overhead consoleit relates to costs and liquidity. These and other areas.potential impacts of the COVID-19 pandemic will adversely impact our results for fiscal 2021, and that impact could be material.
Results of Operations for the Three Months Ended August 1, 2020 compared to the Three Months Ended July 27, 2019
Consolidated Results
Below is a table summarizing results for the three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
|
| Net Change ($) |
|
| Net Change (%) |
| ||||
Net Sales |
| $ | 190.9 |
|
| $ | 270.2 |
|
| $ | (79.3 | ) |
|
| (29.3 | )% |
Cost of Products Sold |
|
| 145.8 |
|
|
| 194.4 |
|
|
| (48.6 | ) |
|
| (25.0 | )% |
Gross Profit |
|
| 45.1 |
|
|
| 75.8 |
|
|
| (30.7 | ) |
|
| (40.5 | )% |
Selling and Administrative Expenses |
|
| 26.6 |
|
|
| 32.4 |
|
|
| (5.8 | ) |
|
| (17.9 | )% |
Amortization of Intangibles |
|
| 4.7 |
|
|
| 4.8 |
|
|
| (0.1 | ) |
|
| (2.1 | )% |
Interest Expense, Net |
|
| 1.6 |
|
|
| 2.9 |
|
|
| (1.3 | ) |
|
| (44.8 | )% |
Other (Income) Expense, Net |
|
| (3.4 | ) |
|
| 0.1 |
|
|
| (3.5 | ) |
| N/M* |
| |
Income Tax (Benefit) Expense |
|
| (5.1 | ) |
|
| 7.3 |
|
|
| (12.4 | ) |
|
| (169.9 | )% |
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
| $ | (7.6 | ) |
|
| (26.9 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of sales: |
| August 1, 2020 |
|
| July 27, 2019 |
|
|
|
|
|
|
|
|
| ||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
|
|
|
|
|
|
|
Cost of Products Sold |
|
| 76.4 | % |
|
| 71.9 | % |
|
|
|
|
|
|
|
|
Gross Margins |
|
| 23.6 | % |
|
| 28.1 | % |
|
|
|
|
|
|
|
|
Selling and Administrative Expenses |
|
| 13.9 | % |
|
| 12.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*N/M equals non-meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales. Consolidated net sales decreased $79.3 million, or 29.3%, to $190.9 million in the three months ended August 1, 2020, compared to $270.2 million in the three months ended July 27, 2019. The accounts and transactions of Pacific Insight have been includeddecrease was primarily due to lower sales in the Automotive segmentand Industrial segments which were negatively impacted by the COVID-19 pandemic. The impact of foreign currency translation was not significant.
Cost of Products Sold. Consolidated cost of products sold decreased $48.6 million, or 25.0%, to $145.8 million (76.4% of sales) in the three months ended August 1, 2020, compared to $194.4 million (71.9% of sales) in the three months ended July 27, 2019. The decrease was primarily due to lower sales volumes and lower labor costs. As noted above, we instituted four-day work weeks, furloughed certain employees and implemented temporary salary reductions in response to impact from the COVID-19 pandemic on our production volumes. In the three months ended August 1, 2020, we recognized $1.9 million of restructuring costs related to actions taken to reduce overall costs and improve operational profitability.
Gross Profit. Gross profit decreased $30.7 million, or 40.5%, to $45.1 million (23.6% of sales) in the three months ended August 1, 2020, compared to $75.8 million (28.1% of sales) in the three months ended July 27, 2019. The decrease in gross profit margins were primarily due to lower sales volumes, product mix and restructuring costs, partially offset by lower operating costs.
Selling and Administrative Expenses. Selling and administrative expenses decreased $5.8 million, or 17.9%, to $26.6 million (13.9% of sales) in the three months ended August 1, 2020, compared to $32.4 million (12.0% of sales) in the three months ended July 27, 2019. The decrease was primarily due to lower compensation expense, stock-based compensation expense and travel expense. As
22
noted above, we initiated actions which included temporary salary reductions and four-day work weeks and the elimination of most business travel. In addition, stock-based compensation expense was lower by $1.6 million as our five-year, long-term incentive plan concluded in fiscal 2020. In the three months ended August 1, 2020, we recognized $1.5 million of restructuring costs related to actions taken to reduce overall costs and improve operational profitability.
Amortization of Intangibles. Amortization of intangibles decreased $0.1 million, or 2.1%, to $4.7 million in the three months ended August 1, 2020, compared to $4.8 million in the three months ended July 27, 2019.
Interest Expense, Net. Interest expense, net was $1.6 million in the three months ended August 1, 2020, compared to $2.9 million in the three months ended July 27, 2019. The decrease was due to a lower effective interest rate on outstanding borrowings, offset by higher average borrowings. Average borrowings were higher due to the precautionary $100.0 million draw-dawn in March 2020.
Other (Income) Expense, Net. Other income was $3.4 million in the three months ended August 1, 2020, compared to other expense of $0.1 million in the three months ended July 27, 2019. The three months ended August 1, 2020 includes $2.9 million of government assistance received by certain of our foreign locations with respect to the COVID-19 pandemic. In addition, net foreign exchange gains were $0.7 million in the three months ended August 1, 2020 compared to a net foreign exchange loss of $0.2 million in the three months ended July 27, 2019.
Income Tax (Benefit) Expense. Income tax benefit was $5.1 million in the three months ended August 1, 2020, compared to income tax expense of $7.3 million in the three months ended July 27, 2019. The income tax benefit in the three months ended August 1, 2020 resulted in a negative effective tax rate of 32.7% which was primarily due to discrete tax benefits recorded of $7.8 million. These discrete tax benefits include tax credits earned and research deductions claimed in foreign jurisdictions. Excluding the discrete tax benefits, the effective tax rate would have been 17.2%. In the three months ended July 27, 2019, income tax expense included discrete tax expenses of $1.4 million. Excluding the discrete tax expense, the effective tax rate would have been 16.6% in the three months ended July 27, 2019.
Net Income. Net income decreased $7.6 million, or 26.9%, to $20.7 million in the three months ended August 1, 2020, compared to $28.3 million in the three months ended July 27, 2019. Net income decreased as a result of the reasons described above.
Operating Segments
Automotive Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
|
| Net Change ($) |
|
| Net Change (%) |
| ||||
Net Sales |
| $ | 125.1 |
|
| $ | 186.2 |
|
| $ | (61.1 | ) |
|
| (32.8 | )% |
Gross Profit |
| $ | 26.2 |
|
| $ | 47.4 |
|
| $ | (21.2 | ) |
|
| (44.7 | )% |
Income from Operations |
| $ | 15.3 |
|
| $ | 33.1 |
|
| $ | (17.8 | ) |
|
| (53.8 | )% |
Percent of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
|
|
|
|
|
|
|
Gross Profit |
|
| 20.9 | % |
|
| 25.5 | % |
|
|
|
|
|
|
|
|
Income from Operations |
|
| 12.2 | % |
|
| 17.8 | % |
|
|
|
|
|
|
|
|
23
Net Sales. Automotive segment net sales decreased $61.1 million, or 32.8%, to $125.1 million in the three months ended August 1, 2020, compared to $186.2 million in the three months ended July 27, 2019. Net sales were negatively impacted in the three months ended August 1, 2020 from the COVID-19 pandemic. Many of our automotive customers in North America and Europe began to resume production in the middle of our first quarter and our production gradually resumed, but not at pre-COVID-19 levels. As a result, sales volumes were lower in North America and Europe. Net sales decreased in North America by $45.3 million, or 37.3%, to $76.3 million in the three months ended August 1, 2020, compared to $121.6 million in the three months ended July 27, 2019. Net sales in Europe decreased $20.2 million, or 41.2%, to $28.8 million in the three months ended August 1, 2020, compared to $49.0 million in the three months ended July 27, 2019. Net sales in Asia increased $4.4 million, or 28.2%, to $20.0 million in the three months ended August 1, 2020, compared to $15.6 million in the three months ended July 27, 2019. The weaker Chinese renminbi decreased net sales in Asia by $0.6 million. Excluding foreign currency translation, Asia net sales increased $5.0 million primarily due to higher touchscreen sales volumes to an Asian automotive OEM, which launched in the second half of fiscal 2020.
Gross Profit. Automotive segment gross profit decreased $21.2 million, or 44.7%, to $26.2 million in the three months ended August 1, 2020, compared to $47.4 million in the three months ended July 27, 2019. Automotive segment gross profit margins decreased to 20.9% in the three months ended August 1, 2020, compared to 25.5% in the three months ended July 27, 2019. The decrease in gross profit margins was primarily due to the impact of the COVID-19 pandemic and restructuring actions taken in the first quarter of fiscal 2021. In the three months ended August 1, 2020, we recognized $1.9 million of restructuring costs related to actions taken to reduce overall costs and improve operational profitability.
Income from Operations. Automotive segment income from operations decreased $17.8 million, or 53.8%, to $15.3 million in the three months ended August 1, 2020, compared to $33.1 million in the three months ended July 27, 2019. The decrease was primarily due to lower gross profit, partially offset by lower selling and administrative expenses. Selling and administrative expenses decreased due to lower compensation expense as a result of temporary salary reductions and four-day work weeks.
Industrial Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
|
| Net Change ($) |
|
| Net Change (%) |
| ||||
Net Sales |
| $ | 52.0 |
|
| $ | 70.8 |
|
| $ | (18.8 | ) |
|
| (26.6 | )% |
Gross Profit |
| $ | 16.4 |
|
| $ | 26.5 |
|
| $ | (10.1 | ) |
|
| (38.1 | )% |
Income from Operations |
| $ | 7.0 |
|
| $ | 16.5 |
|
| $ | (9.5 | ) |
|
| (57.6 | )% |
Percent of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
|
|
|
|
|
|
|
Gross Profit |
|
| 31.5 | % |
|
| 37.4 | % |
|
|
|
|
|
|
|
|
Income from Operations |
|
| 13.5 | % |
|
| 23.3 | % |
|
|
|
|
|
|
|
|
Net Sales. Industrial segment net sales decreased $18.8 million, or 26.6%, to $52.0 million in the three months ended August 1, 2020, compared to $70.8 million in the three months ended July 27, 2019. The decrease was primarily due to lower sales from commercial vehicle lighting solutions and radio remote control devices which were adversely impacted from the COVID-19 pandemic. This was partially offset by higher sales volumes of busbar products. The impact of foreign currency translation was not significant.
Gross Profit. Industrial segment gross profit decreased $10.1 million, or 38.1%, to $16.4 million in the three months ended August 1, 2020, compared to $26.5 million in the three months ended July 27, 2019. Gross profit margins decreased to 31.5% in the three months ended August 1, 2020, compared to 37.4% in the three months ended July 27, 2019. The decrease in gross profit margins was primarily due to the impact of the COVID-19 pandemic on commercial vehicle lighting solutions and radio remote control product sales. This was partially offset by higher gross profit margins from busbar products.
24
Income from Operations. Industrial segment income from operations decreased $9.5 million, or 57.6%, to $7.0 million in the three months ended August 1, 2020, compared to $16.5 million in the three months ended July 27, 2019. The decrease was primarily due to lower gross profit and restructuring actions taken in the first quarter of fiscal 2021. In the three months ended August 1, 2020, we recognized $0.6 million of restructuring costs related to actions taken to reduce overall costs and improve operational profitability. This was partially offset by higher income from operations from busbar products.
Interface Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
|
| Net Change ($) |
|
| Net Change (%) |
| ||||
Net Sales |
| $ | 13.4 |
|
| $ | 12.9 |
|
| $ | 0.5 |
|
|
| 3.9 | % |
Gross Profit |
| $ | 2.5 |
|
| $ | 1.5 |
|
| $ | 1.0 |
|
|
| 66.7 | % |
Income from Operations |
| $ | 1.1 |
|
| $ | 0.2 |
|
| $ | 0.9 |
|
|
| 450.0 | % |
Percent of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
|
|
|
|
|
|
|
Gross Profit |
|
| 18.7 | % |
|
| 11.6 | % |
|
|
|
|
|
|
|
|
Income from Operations |
|
| 8.2 | % |
|
| 1.6 | % |
|
|
|
|
|
|
|
|
Net Sales. Interface segment net sales increased $0.5 million, or 3.9%, to $13.4 million in the three months ended August 1, 2020, compared to $12.9 million in the three months ended July 27, 2019. The increase was primarily due to higher sales volumes of our appliance products and our legacy data solutions products.
Gross Profit. Interface segment gross profit increased $1.0 million, or 66.7%, to $2.5 million in the three months ended August 1, 2020, compared to $1.5 million in the three months ended July 27, 2019. Gross profit margins increased to 18.7% in the three months ended August 1, 2020, from 11.6% in the three months ended July 27, 2019. The increase was primarily due to higher sales volumes of our appliance products and our legacy data solutions products.
Income from Operations. Interface segment income from operations increased to $1.1 million in the three months ended August 1, 2020, compared to $0.2 in the three months ended July 27, 2019. The increase was primarily due to higher gross profit, partially offset by restructuring actions taken in the first quarter of fiscal 2021. In the three months ended August 1, 2020, we recognized $0.7 million of restructuring costs related to actions taken to reduce overall costs and improve operational profitability.
Medical Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
|
| Net Change ($) |
|
| Net Change (%) |
| ||||
Net Sales |
| $ | 0.4 |
|
| $ | 0.3 |
|
| $ | 0.1 |
|
|
| 33.3 | % |
Gross Profit |
| $ | (0.6 | ) |
| $ | (0.4 | ) |
| $ | (0.2 | ) |
|
| 50.0 | % |
Loss from Operations |
| $ | (1.6 | ) |
| $ | (1.5 | ) |
| $ | (0.1 | ) |
|
| 6.7 | % |
Net Sales. The Medical segment had net sales of $0.4 million in the three months ended August 1, 2020, compared to $0.3 million in the three months ended July 27, 2019. Net sales in the three months ended August 1, 2020 were negatively impacted by the COVID-19 pandemic as hospitals deferred spending on medical products.
Gross Profit. Medical segment gross profit was a loss of $0.6 million in the three months ended August 1, 2020, compared to a loss of $0.4 million in the three months ended July 27, 2019.
25
Loss from Operations. Medical segment loss from operations increased $0.1 million, to $1.6 million in the three months ended August 1, 2020, compared to $1.5 million in the three months ended July 27, 2019.
Financial Condition, Liquidity and Capital Resources
Credit Agreement
Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior unsecured credit agreement. The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We believe our liquidity position will be sufficient to fund our existing operations and current commitments for at least the next twelve months. However, in the event that economic conditions remain impacted for longer than we expect due to the COVID-19 pandemic, our liquidity position could be severely impacted.
Our senior unsecured credit agreement provides for a $200.0 million revolving credit facility and a $250.0 million term loan. On March 23, 2020, we drew down $100.0 million under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. As of August 1, 2020, $108.5 million in principal was outstanding under the revolving credit facility and we have $91.4 million of availability under the revolving credit facility. As of August 1, 2020, $228.1 million in principal was outstanding under the term loan. The term loan matures in September 2023 and requires quarterly principal payments of $3.1 million over the five-year term, with the remaining balance due upon maturity. We were in compliance with all covenants under the senior unsecured credit agreement as of August 1, 2020. For further information, see Note 7, "Debt," to the condensed consolidated financial statements fromincluded in this Quarterly Report.
Borrowings under our senior unsecured credit agreement bear interest at rates equal to the effective dateLondon Interbank Offered Rate (“LIBOR”) plus an applicable margin. LIBOR is expected to be phased out by the end of 2021, which is before the maturity of our senior unsecured credit agreement. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate; however, we continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternative rate to replace LIBOR. The consequences of the acquisition.
Our senior unsecured credit agreement provides an option to Repurchase Common Stock
At August 1, 2020, we had $211.0 million of cash and cash equivalents, of which $66.0 million was held in subsidiaries outside the Company's outstanding common stockU.S. Cash held by these subsidiaries is used to fund operational activities and can be repatriated, primarily through September 1, 2017. The Company purchased no outstanding common stock duringthe repayment of intercompany loans and the payment of dividends, without creating material additional income tax expense.
26
Cash Flows
Cash flow is summarized below:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Operating activities: |
|
|
|
|
|
|
|
|
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
Non-cash Items |
|
| 7.4 |
|
|
| 14.2 |
|
Changes in Operating Assets and Liabilities |
|
| (11.7 | ) |
|
| (23.4 | ) |
Net Cash Provided by Operating Activities |
|
| 16.4 |
|
|
| 19.1 |
|
Net Cash Used in Investing Activities |
|
| (11.6 | ) |
|
| (13.2 | ) |
Net Cash Used in Financing Activities |
|
| (13.0 | ) |
|
| (14.4 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
| 1.9 |
|
|
| (0.9 | ) |
Net Decrease in Cash and Cash Equivalents |
|
| (6.3 | ) |
|
| (9.4 | ) |
Cash and Cash Equivalents at Beginning of the Year |
|
| 217.3 |
|
|
| 83.2 |
|
Cash and Cash Equivalents at End of the Period |
| $ | 211.0 |
|
| $ | 73.8 |
|
Operating Activities
Net cash provided by operating activities decreased $2.7 million to $16.4 million in the three and nine months ended JanuaryAugust 1, 2020, compared to $19.1 million in the three months ended July 27, 2018, which leaves2019. The decrease was due to lower net income adjusted for non-cash items, partially offset by lower cash outflows related to changes in operating assets and liabilities. The $11.7 million of cash outflows for operating assets and liabilities in the total repurchasedthree months ended August 1, 2020 was primarily due to higher accounts receivable, partially offset by higher accounts payable and other liabilities, lower inventory and lower prepaid expenses and other assets.
Investing Activities
Net cash used in investing activities was $11.6 million in the three months ended August 1, 2020, compared to $13.2 million in the three months ended July 27, 2019. The activity in both the three months ended August 1, 2020 and July 27, 2019 relates to purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $13.0 million in the three months ended August 1, 2020, compared to $14.4 million in the three months ended July 27, 2019. We paid dividends of $5.0 million in the three months ended August 1, 2020, compared to $4.1 million in the three months ended July 27, 2019. In the three months ended August 1, 2020, we paid $3.9 million in taxes related to the net share settlement of equity awards compared to $0.4 million in the three months ended July 27, 2019. In the three months ended August 1, 2020, we had net repayments on our borrowings of $4.1 million, compared to $9.7 million in the three months ended July 27, 2019.
Recent Accounting Pronouncements
See Note 1, "Description of Business and Summary of Significant Accounting Policies" to the condensed consolidated financial statements included in Item 1.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined under the plan at 2,277,466 sharesSEC rules.
27
Table of outstanding common stock for $71.9 million. The plan expired on September 1, 2017.
Legal Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, we
terminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendantsIn the three months ended JanuaryAugust 1, 2020 and July 27, 2018 and January 28, 2017, respectively. For the nine months ended January 27, 2018 and January 28, 2017,2019, we incurred Hetronic-related legal fees of $6.0$1.9 million and $8.2$0.8 million, respectively.
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | ||||||||||||
| Net Sales | $ | 228.0 | $ | 195.6 | $ | 32.4 | 16.6 | % | ||||||||
| Cost of Products Sold | 167.9 | 142.2 | 25.7 | 18.1 | % | |||||||||||
| Gross Profit | 60.1 | 53.4 | 6.7 | 12.5 | % | |||||||||||
| Selling and Administrative Expenses | 22.5 | 23.7 | (1.2 | ) | (5.1 | )% | ||||||||||
| Amortization of Intangibles | 2.0 | 0.6 | 1.4 | 233.3 | % | |||||||||||
| Interest (Income) Expense, Net | 0.3 | (0.2 | ) | 0.5 | N/M | * | ||||||||||
| Other Income, Net | (3.8 | ) | (1.0 | ) | (2.8 | ) | N/M | * | ||||||||
| Income Tax Expense | 63.4 | 6.6 | 56.8 | 860.6 | % | |||||||||||
| Net Income (Loss) | $ | (24.3 | ) | $ | 23.7 | $ | (48.0 | ) | (202.5 | )% | ||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | ||||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of Products Sold | 73.6 | % | 72.7 | % | ||||||||||||
| Gross Margins | 26.4 | % | 27.3 | % | ||||||||||||
| Selling and Administrative Expenses | 9.9 | % | 12.1 | % | ||||||||||||
| Amortization of Intangibles | 0.9 | % | 0.3 | % | ||||||||||||
| Interest (Income) Expense, Net | 0.1 | % | (0.1 | )% | ||||||||||||
| Other Income, Net | (1.7 | )% | (0.5 | )% | ||||||||||||
| Income Tax Expense | 27.8 | % | 3.4 | % | ||||||||||||
| Net Income (Loss) | (10.7 | )% | 12.1 | % | ||||||||||||
| * N/M equals non-meaningful | ||||||||||||||||
28
Table of fiscal 2018, comparedContents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the third quartermarket risks from foreign currency exchange, interest rates, and commodity prices, which could affect our operating results, financial position and cash flows. We manage a portion of fiscal 2017, primarily duethese risks through use of derivative financial instruments in accordance with our policies. We do not enter into derivative financial instruments for trading purposes.
Foreign Currency Risk
We are exposed to the strengthening of the euro compared to the U.S. dollar.
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | |||||||||||
| Net Sales | $ | 184.9 | $ | 150.4 | $ | 34.5 | 22.9 | % | |||||||
| Cost of Products Sold | 133.4 | 105.6 | 27.8 | 26.3 | % | ||||||||||
| Gross Profit | 51.5 | 44.8 | 6.7 | 15.0 | % | ||||||||||
| Selling and Administrative Expenses | 12.1 | 7.9 | 4.2 | 53.2 | % | ||||||||||
| Income from Operations | $ | 39.4 | $ | 36.9 | $ | 2.5 | 6.8 | % | |||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | |||||||||||
| Cost of Products Sold | 72.1 | % | 70.2 | % | |||||||||||
| Gross Margins | 27.9 | % | 29.8 | % | |||||||||||
| Selling and Administrative Expenses | 6.5 | % | 5.3 | % | |||||||||||
| Income from Operations | 21.3 | % | 24.5 | % | |||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | |||||||||||
| Net Sales | $ | 27.9 | $ | 29.8 | $ | (1.9 | ) | (6.4 | )% | ||||||
| Cost of Products Sold | 21.8 | 23.0 | (1.2 | ) | (5.2 | )% | |||||||||
| Gross Profit | 6.1 | 6.8 | (0.7 | ) | (10.3 | )% | |||||||||
| Selling and Administrative Expenses | 4.3 | 5.5 | (1.2 | ) | (21.8 | )% | |||||||||
| Income from Operations | $ | 1.8 | $ | 1.3 | $ | 0.5 | 38.5 | % | |||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | |||||||||||
| Cost of Products Sold | 78.1 | % | 77.2 | % | |||||||||||
| Gross Margins | 21.9 | % | 22.8 | % | |||||||||||
| Selling and Administrative Expenses | 15.4 | % | 18.5 | % | |||||||||||
| Income from Operations | 6.5 | % | 4.4 | % | |||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | |||||||||||
| Net Sales | $ | 15.2 | $ | 15.4 | $ | (0.2 | ) | (1.3 | )% | ||||||
| Cost of Products Sold | 11.6 | 11.3 | 0.3 | 2.7 | % | ||||||||||
| Gross Profit | 3.6 | 4.1 | (0.5 | ) | (12.2 | )% | |||||||||
| Selling and Administrative Expenses | 0.6 | 0.9 | (0.3 | ) | (33.3 | )% | |||||||||
| Income from Operations | $ | 3.0 | $ | 3.2 | $ | (0.2 | ) | (6.3 | )% | ||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | |||||||||||
| Cost of Products Sold | 76.3 | % | 73.4 | % | |||||||||||
| Gross Margins | 23.7 | % | 26.6 | % | |||||||||||
| Selling and Administrative Expenses | 3.9 | % | 5.8 | % | |||||||||||
| Income from Operations | 19.7 | % | 20.8 | % | |||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | |||||||||
| Net Sales | $ | 0.1 | $ | 0.1 | $ | — | ||||||
| Cost of Products Sold | 0.8 | 1.7 | (0.9 | ) | ||||||||
| Gross Profit | (0.7 | ) | (1.6 | ) | 0.9 | |||||||
| Selling and Administrative Expenses | 1.6 | 1.7 | (0.1 | ) | ||||||||
| Loss from Operations | $ | (2.3 | ) | $ | (3.3 | ) | $ | 1.0 | ||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | ||||||||||||
| Net Sales | $ | 659.3 | $ | 596.7 | $ | 62.6 | 10.5 | % | ||||||||
| Cost of Products Sold | 481.6 | 433.7 | 47.9 | 11.0 | % | |||||||||||
| Gross Profit | 177.7 | 163.0 | 14.7 | 9.0 | % | |||||||||||
| Selling and Administrative Expenses | 83.3 | 76.4 | 6.9 | 9.0 | % | |||||||||||
| Amortization of Intangibles | 3.7 | 1.8 | 1.9 | 105.6 | % | |||||||||||
| Interest (Income) Expense, Net | 0.3 | (0.3 | ) | 0.6 | N/M | * | ||||||||||
| Other Income, Net | (2.6 | ) | (2.9 | ) | 0.3 | N/M | * | |||||||||
| Income Tax Expense | 72.6 | 18.3 | 54.3 | 296.7 | % | |||||||||||
| Net Income | $ | 20.4 | $ | 69.7 | $ | (49.3 | ) | (70.7 | )% | |||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | ||||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of Products Sold | 73.0 | % | 72.7 | % | ||||||||||||
| Gross Margins | 27.0 | % | 27.3 | % | ||||||||||||
| Selling and Administrative Expenses | 12.6 | % | 12.8 | % | ||||||||||||
| Amortization of Intangibles | 0.6 | % | 0.3 | % | ||||||||||||
| Interest (Income) Expense, Net | — | % | (0.1 | )% | ||||||||||||
| Other Income, Net | (0.4 | )% | (0.5 | )% | ||||||||||||
| Income Tax Expense | 11.0 | % | 3.1 | % | ||||||||||||
| Net Income | 3.1 | % | 11.7 | % | ||||||||||||
| * N/M equals non-meaningful | ||||||||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | |||||||||||
| Net Sales | $ | 528.1 | $ | 461.6 | $ | 66.5 | 14.4 | % | |||||||
| Cost of Products Sold | 377.9 | 325.5 | 52.4 | 16.1 | % | ||||||||||
| Gross Profit | 150.2 | 136.1 | 14.1 | 10.4 | % | ||||||||||
| Selling and Administrative Expenses | 32.1 | 24.9 | 7.2 | 28.9 | % | ||||||||||
| Income from Operations | $ | 118.1 | $ | 111.2 | $ | 6.9 | 6.2 | % | |||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | |||||||||||
| Cost of Products Sold | 71.6 | % | 70.5 | % | |||||||||||
| Gross Margins | 28.4 | % | 29.5 | % | |||||||||||
| Selling and Administrative Expenses | 6.1 | % | 5.4 | % | |||||||||||
| Income from Operations | 22.4 | % | 24.1 | % | |||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | ||||||||||||
| Net Sales | $ | 86.3 | $ | 94.9 | $ | (8.6 | ) | (9.1 | )% | |||||||
| Cost of Products Sold | 67.4 | 74.4 | (7.0 | ) | (9.4 | )% | ||||||||||
| Gross Profit | 18.9 | 20.5 | (1.6 | ) | (7.8 | )% | ||||||||||
| Selling and Administrative Expenses | 14.9 | 20.6 | (5.7 | ) | (27.7 | )% | ||||||||||
| Income (Loss) from Operations | $ | 4.0 | $ | (0.1 | ) | $ | 4.1 | N/M | * | |||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | ||||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of Products Sold | 78.1 | % | 78.4 | % | ||||||||||||
| Gross Margins | 21.9 | % | 21.6 | % | ||||||||||||
| Selling and Administrative Expenses | 17.3 | % | 21.7 | % | ||||||||||||
| Income (Loss) from Operations | 4.6 | % | (0.1 | )% | ||||||||||||
| * N/M equals non-meaningful | ||||||||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | |||||||||||
| Net Sales | $ | 44.8 | $ | 39.9 | $ | 4.9 | 12.3 | % | |||||||
| Cost of Products Sold | 33.2 | 29.4 | 3.8 | 12.9 | % | ||||||||||
| Gross Profit | 11.6 | 10.5 | 1.1 | 10.5 | % | ||||||||||
| Selling and Administrative Expenses | 2.3 | 2.8 | (0.5 | ) | (17.9 | )% | |||||||||
| Income from Operations | $ | 9.3 | $ | 7.7 | $ | 1.6 | 20.8 | % | |||||||
| Percent of sales: | January 27, 2018 | January 28, 2017 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | |||||||||||
| Cost of Products Sold | 74.1 | % | 73.7 | % | |||||||||||
| Gross Margins | 25.9 | % | 26.3 | % | |||||||||||
| Selling and Administrative Expenses | 5.1 | % | 7.0 | % | |||||||||||
| Income from Operations | 20.8 | % | 19.3 | % | |||||||||||
| (Dollars in Millions) | January 27, 2018 | January 28, 2017 | Net Change ($) | Net Change (%) | |||||||||||
| Net Sales | $ | 0.2 | $ | 0.2 | $ | — | — | % | |||||||
| Cost of Products Sold | 2.4 | 3.8 | (1.4 | ) | (36.8 | )% | |||||||||
| Gross Profit | (2.2 | ) | (3.6 | ) | 1.4 | (38.9 | )% | ||||||||
| Selling and Administrative Expenses | 5.9 | 4.4 | 1.5 | 34.1 | % | ||||||||||
| Loss from Operations | $ | (8.1 | ) | $ | (8.0 | ) | $ | (0.1 | ) | 1.3 | % | ||||
The translation of the assets and liabilities of our net equity investment in our foreign operations to U.S. dollars. We generally view our investments in foreign operations with functional currencies other thaninternational subsidiaries is made using the U.S. dollar as long-term. The currencies to which we are exposed are the British pound, Canadian dollar, Chinese yuan, euro, Indian rupee, Mexican peso, Singapore dollar and Swiss franc. A 10% change in foreign currency exchange rates fromas of the end of the reporting period. Translation adjustments are not included in determining net income but are included in accumulated other comprehensive income (loss) within shareholders’ equity on the condensed consolidated balance sheet date levels could impactsheets until a sale or substantially complete liquidation of the net investment in the international subsidiary takes place. As of August 1, 2020, the cumulative net currency translation adjustments reduced shareholders’ equity by $5.6 million. We have outstanding a euro denominated cross-currency swap which is treated as a net investment hedge to reduce our exposure to translational exchange risk. As of August 1, 2020, we recorded a deferred loss, net foreign investments by $61.9of tax, of $4.6 million at January 27, 2018 and $41.1 million at April 29, 2017.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. The interest rate risk for our senior unsecured credit agreements,agreement, under which we had $98.8$336.6 million of net borrowings at January 27, 2018,as of August 1, 2020, is variable and is determined based on LIBOR. We estimate that a one percentage point change1% increase in interest rates under our senior unsecured credit agreement would not have a material impactresult in increased annual interest expense of $3.4 million.
Commodity Price Risk
We are exposed to commodity price risk primarily on our resultsraw material purchases. These raw materials are not rare or unique to our industry. The cost of operations for fiscal 2018 based uponcopper, resins, and other commodities, such as fuel and energy, has fluctuated in recent years due to changes in global supply and demand. Our gross margins could be affected if these types of costs continue to fluctuate. We actively manage these raw material costs through global sourcing initiatives and price increases on our current and expected levelsproducts. However, in the short-term, rapid increases in raw material costs can be very difficult to offset with price increases because of debt.
Item 4. Controls Andand Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, we performed an evaluation under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). The Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s applicable rules and forms. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during the quarter ended January 27, 2018August 1, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. There have beenbeen no material changes to the risk factors disclosed in Part I - Item 1A, Risk Factors of our Form 10-K for the fiscalfiscal year ended April 29, 2017.
The effects of the acquired technology.
The COVID-19 pandemic continues to impact worldwide economic activity. As a result of these acquisitions,the COVID-19 pandemic, we now manufacture LED-based lighting, our employees, our suppliers, our customers and others may be restricted or prevented from conducting business activities for indefinite or intermittent periods of time, including as a result of employee health and safety concerns, shutdowns, shelter in North America and automotive assemblies on mainland Europe, which are expected to aid in our expansion in the automotive sector. The markets for the products these companies produce are competitive and rapidly changing. If we do not keep pace with technological innovations in the industry, our products may not be competitive and our revenue and operating results may suffer. Furthermore, while we intend to expand these businesses by integrating the acquired technologies into additional automotiveplace orders, travel restrictions and other applications,actions and restrictions that may be requested or mandated by governmental authorities.
While we can make no guarantee that such ventures will be successful or profitable.
The automotive and commercial vehicle industries are our primary markets. The COVID-19 pandemic has significantly disrupted, and is expected to continue to significantly disrupt, the global automotive and commercial vehicle industries and customer sales, production volumes and purchases of vehicles by end consumers. In addition, the spread of COVID-19 has created a reversalsignificant disruption in the manufacturing, delivery and overall supply chain of RSA compensation expense relatingautomobile and commercial vehicle manufacturers and suppliers. Further, the COVID-19 pandemic has resulted in a temporary shutdown of substantially all of the major OEMs in our markets at various times in calendar 2020. This has significantly reduced our fiscal 2021 year-to-date sales volumes and future sales volumes and revenue remain highly uncertain. Although automotive and commercial vehicle production has resumed, customer sales and production volumes may significantly decrease or may be very volatile due to prior periodsglobal economic impacts and uncertainties.
In addition to the risks specifically described above, the COVID-19 pandemic has exacerbated and precipitated the other risks described in our Annual Report on Form 10-K for the year ended May 2, 2020, and may continue to do so, in ways that we are not currently able to predict, any of $6.0 million.
Item 6. Exhibits
Exhibit Number | Description | |
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32 | ||
101.1 | Inline XBRL Instance | |
101.2 | Inline XBRL Taxonomy Extension Schema Document |
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101.3 | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.4 | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.5 | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.6 | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 2020, formatted as Inline XBRL and contained in Exhibit 101 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
METHODE ELECTRONICS, INC. | ||||||
By: | /s/ | |||||
Ronald L.G. Tsoumas | ||||||
Chief Financial Officer | ||||||
( | ||||||
Dated: | September 3, 2020 | |||||
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