UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________________
FORM 10-Q
(Mark One)
for the quarterly period ended February 1, 2020
or
for the transition period from ______ to ______
__________________________________
Commission file number 0-2816
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
(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:
Name of each exchange | ||
Title of each Class | Trading Symbol(s) | on which registered |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer.” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
☒ | 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 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 ☐
No ☒
At March 3, 2020, the registrant had 37,091,487 shares of common stock outstanding.
METHODE ELECTRONICS, INC.
FORM 10-Q
February 1, 2020
TABLE OF CONTENTS
Page | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
(14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | |||||||||||||
Net Sales | $ | $ | $ | $ | ||||||||||||
Cost of Products Sold | ||||||||||||||||
Gross Profit | ||||||||||||||||
Selling and Administrative Expenses | ||||||||||||||||
Amortization of Intangibles | ||||||||||||||||
Income from Operations | ||||||||||||||||
Interest Expense, Net | ||||||||||||||||
Other Income, Net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income before Income Taxes | ||||||||||||||||
Income Tax Expense (Benefit) | ( | ) | ||||||||||||||
Net Income | $ | $ | $ | $ | ||||||||||||
Basic and Diluted Income per Share: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
Cash Dividends per Share | $ | $ | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
2
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
(14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | |||||||||||||
Net Income | $ | $ | $ | $ | ||||||||||||
Foreign Currency Translation Adjustments | ( | ) | ( | ) | ||||||||||||
Total Comprehensive Income | $ | $ | $ | $ | ||||||||||||
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)
February 1, 2020 | April 27, 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and Cash Equivalents | $ | $ | ||||||
Accounts Receivable, Net | ||||||||
Inventories | ||||||||
Income Tax Receivable | ||||||||
Prepaid Expenses and Other Current Assets | ||||||||
TOTAL CURRENT ASSETS | ||||||||
LONG-TERM ASSETS | ||||||||
Property, Plant and Equipment, Net | ||||||||
Goodwill | ||||||||
Other Intangible Assets, Net | ||||||||
Operating Lease Assets, Net | ||||||||
Deferred Tax Assets | ||||||||
Pre-production Costs | ||||||||
Other Long-term Assets | ||||||||
TOTAL LONG-TERM ASSETS | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES & SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts Payable | $ | $ | ||||||
Accrued Employee Liabilities | ||||||||
Other Accrued Expenses | ||||||||
Short-term Operating Lease Liability | ||||||||
Short-term Debt | ||||||||
Income Tax Payable | ||||||||
TOTAL CURRENT LIABILITIES | ||||||||
LONG-TERM LIABILITIES | ||||||||
Long-term Debt | ||||||||
Long-term Operating Lease Liability | ||||||||
Long-term Income Tax Payable | ||||||||
Other Long-term Liabilities | ||||||||
Deferred Tax Liabilities | ||||||||
TOTAL LONG-TERM LIABILITIES | ||||||||
TOTAL LIABILITIES | ||||||||
SHAREHOLDERS' EQUITY | ||||||||
Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,438,111 shares and 38,333,576 shares issued as of February 1, 2020 and April 27, 2019, respectively | ||||||||
Additional Paid-in Capital | ||||||||
Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ||||
Treasury Stock, 1,346,624 shares as of February 1, 2020 and April 27, 2019 | ( | ) | ( | ) | ||||
Retained Earnings | ||||||||
TOTAL SHAREHOLDERS' EQUITY | ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ | ||||||
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 February 1, 2020 (14 Weeks) | ||||||||||||||||||||||||||
Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Treasury Stock | Retained Earnings | Total Equity | ||||||||||||||||||||
Balance as of October 26, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Stock-based Compensation Expense | — | — | — | — | — | |||||||||||||||||||||
Foreign Currency Translation Adjustments | — | — | — | — | — | |||||||||||||||||||||
Net Income | — | — | — | — | — | |||||||||||||||||||||
Cash Dividends on Common Stock | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Balance as of February 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Three Months Ended January 26, 2019 (13 Weeks) | ||||||||||||||||||||||||||
Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Retained Earnings | Total Equity | ||||||||||||||||||||
Balance as of October 27, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Stock-based Compensation Expense | — | — | — | — | — | |||||||||||||||||||||
Foreign Currency Translation Adjustments | — | — | — | — | — | |||||||||||||||||||||
Net Income | — | — | — | — | — | |||||||||||||||||||||
Cash Dividends on Common Stock | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Balance as of January 26, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
5
Nine Months Ended February 1, 2020 (40 Weeks) | ||||||||||||||||||||||||||
Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Treasury Stock | Retained Earnings | Total Equity | ||||||||||||||||||||
Balance as of April 27, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Earned Portion of Restricted Stock, Net of Tax Withholding | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Stock-based Compensation Expense | — | — | — | — | — | |||||||||||||||||||||
Foreign Currency Translation Adjustments | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||
Net Income | — | — | — | — | — | |||||||||||||||||||||
Dividends on Common Stock | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Balance as of February 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Nine Months Ended January 26, 2019 (39 Weeks) | ||||||||||||||||||||||||||
Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Treasury Stock | Retained Earnings | Total Equity | ||||||||||||||||||||
Balance as of April 28, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
Earned Portion of Restricted Stock, Net of Tax Withholding | ( | ) | — | — | ( | ) | ( | ) | ||||||||||||||||||
Stock-based Compensation Expense | — | — | — | — | — | |||||||||||||||||||||
Adoption of ASU 2014-09 | — | — | — | — | — | |||||||||||||||||||||
Foreign Currency Translation Adjustments | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||
Net Income | — | — | — | — | — | |||||||||||||||||||||
Dividends on Common Stock | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Balance as of January 26, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
See notes to condensed consolidated financial statements.
6
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Nine Months Ended | ||||||||
February 1, 2020 | January 26, 2019 | |||||||
(40 Weeks) | (39 Weeks) | |||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | $ | ||||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
Depreciation and Amortization | ||||||||
Stock-based Compensation Expense | ||||||||
Change in Cash Surrender Value of Life Insurance | ( | ) | ( | ) | ||||
Amortization of Debt Issuance Costs | ||||||||
Gain on Sale of Business/Investment/Property | ( | ) | ( | ) | ||||
Other | ( | ) | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | ( | ) | ||||||
Inventories | ( | ) | ( | ) | ||||
Prepaid Expenses and Other Assets | ( | ) | ( | ) | ||||
Accounts Payable and Other Liabilities | ( | ) | ( | ) | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
INVESTING ACTIVITIES | ||||||||
Purchases of Property, Plant and Equipment | ( | ) | ( | ) | ||||
Acquisitions of Businesses, Net of Cash Acquired | ( | ) | ||||||
Sale of Business/Investment/Property | ||||||||
NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
FINANCING ACTIVITIES | ||||||||
Taxes Paid Related to Net Share Settlement of Equity Awards | ( | ) | ( | ) | ||||
Repayments of Finance Leases | ( | ) | ||||||
Cash Dividends | ( | ) | ( | ) | ||||
Proceeds from Borrowings | ||||||||
Repayments of Borrowings | ( | ) | ( | ) | ||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents | ( | ) | ( | ) | ||||
DECREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
Cash and Cash Equivalents at Beginning of the Year | ||||||||
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD | $ | $ | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash Paid During the Period For: | ||||||||
Interest | $ | $ | ||||||
Income Taxes, Net of Refunds | $ | $ | ||||||
See notes to condensed consolidated financial statements.
7
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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.
Basis of Presentation
The unaudited condensed 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"). All intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements included in the Company's Form 10-K for the year ended April 27, 2019, filed with the SEC on June 20, 2019. 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. For the three months ended February 1, 2020, the Company's accounting period included 14 weeks compared to 13 weeks for the three months ended January 26, 2019. For the nine months ended February 1, 2020, the Company's accounting period included 40 weeks compared to 39 weeks for the nine months ended January 26, 2019. The following discussions of comparative results among periods should be reviewed in this context.
Reclassifications
The Company has reclassified certain prior period amounts in the condensed consolidated financial statements and in the accompanying notes to conform with current year presentation.
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.
Change in Presentation
During the second quarter of fiscal 2019, the Company changed its reportable segments. Refer to Note 11 “Segment Information,” for further discussion on the impact of the change.
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 April 27, 2019. There have been no material changes to the significant accounting policies in the nine months ended February 1, 2020 other than those noted below.
8
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases,” which amended authoritative guidance on leases and is codified in Accounting Standards Codification ("ASC") 842. The amended guidance requires entities to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The FASB subsequently issued updates to provide clarification on specific topics, including adoption guidance, practical expedients and interim transition disclosure requirements.
The Company adopted the standard on April 28, 2019, by applying the modified retrospective method without restatement of comparative periods' financial information, as permitted by the transition guidance. Accordingly, the Company has provided disclosures required by prior lease guidance for comparative periods. The adoption of this standard resulted in the recognition of right-of-use assets of $27.6 million and related lease obligations of $28.1 million as of April 28, 2019. The standard did not have a significant impact on the Company's operating results or cash flows.
The Company elected certain practical expedients, including the election not to reassess its prior conclusions about lease identification, lease classification and initial direct costs, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee. Lastly, the Company elected to recognize a right-of-use asset and related lease liability for leases with a lease term of 12 months or less for all classes of underlying assets. The Company determines if an arrangement contains a lease at inception. Operating lease expense is recognized on a straight-line basis over the lease term.
For purposes of calculating operating lease obligations under the standard, the Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company's leases do not contain material residual value guarantees or material restrictive covenants. The discount rate used to measure a lease obligation should be the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments. Refer to Note 3, "Leases," for additional information.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this update allow 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 Company adopted ASU 2018-02 as of April 28, 2019 and the adoption had no impact on the Company’s consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The guidance in ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Management is currently assessing the impact of the new standard, but does not anticipate that the adoption of this standard will have a material impact on the way it estimates the allowance for doubtful accounts on its trade accounts receivable.
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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
9
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 guidance 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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the provisions of the updated guidance and assessing the impact on its consolidated financial statements.
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 ASC 740, such as recognizing deferred taxes for equity investments, the incremental approach to performing intra-period 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 effect 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 annual periods beginning after December 15, 2020, and interim periods thereafter; however, early adoption is permitted. The Company is evaluating the provisions of the updated guidance and assessing the impact on its consolidated financial statements.
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 customer 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 transaction price is allocated to the material right and recognized over the life of the contract.
The Company 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. Shipping and handling costs are estimated at quarter-end in proportion to revenue recognized for transactions where actual costs are not yet known.
Across all products, the amount of revenue recognized corresponds to the related purchase order. Revenue is adjusted for variable consideration (such as discounts) as described further below. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue.
Contract Balances
The Company receives payment from customers based on the contractual billing schedule and specific performance requirements established in the contract. Billings are recorded as accounts receivable when an unconditional right to the contractual consideration exists. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. A contract liability exists when the Company has received consideration or the amount is due from the customer in advance of revenue recognition. Contract assets and contract liabilities are recognized in prepaid expenses and other current assets and other long-term liabilities, respectively, in the Company's condensed consolidated balance sheets.
10
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Unbilled Receivables (Contract Assets) - Unbilled receivables were $0.9 million as of February 1, 2020 and $0.8 million as of April 27, 2019. In the nine months ended February 1, 2020, $0.8 million of previously unbilled receivables were recorded into accounts receivable. There were no impairments of contract assets as of February 1, 2020.
Deferred Revenue (Contract Liabilities) - Deferred revenue was $0.3 million as of both February 1, 2020 and April 27, 2019. In the nine months ended February 1, 2020, $0.1 million of previously deferred revenue was recorded into revenue.
Disaggregated Revenue Information
The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods. Geographic net sales are determined based on sales from the Company's various 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 February 1, 2020 (14 Weeks) | ||||||||||||||||||||
(Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
Geographic Net Sales: | ||||||||||||||||||||
U.S. | $ | $ | $ | $ | $ | |||||||||||||||
Malta | ||||||||||||||||||||
China | ||||||||||||||||||||
Canada | ||||||||||||||||||||
Other | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
Timing of Revenue Recognition: | ||||||||||||||||||||
Goods Transferred at a Point in Time | $ | $ | $ | $ | $ | |||||||||||||||
Goods Transferred Over Time | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
Three Months Ended January 26, 2019 (13 Weeks) | ||||||||||||||||||||
(Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
Geographic Net Sales: | ||||||||||||||||||||
U.S. | $ | $ | $ | $ | $ | |||||||||||||||
Malta | ||||||||||||||||||||
China | ||||||||||||||||||||
Canada | ||||||||||||||||||||
Other | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
Timing of Revenue Recognition: | ||||||||||||||||||||
Goods Transferred at a Point in Time | $ | $ | $ | $ | $ | |||||||||||||||
Goods Transferred Over Time | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
11
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Nine Months Ended February 1, 2020 (40 Weeks) | ||||||||||||||||||||
(Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
Geographic Net Sales: | ||||||||||||||||||||
U.S. | $ | $ | $ | $ | $ | |||||||||||||||
Malta | ||||||||||||||||||||
China | ||||||||||||||||||||
Canada | ||||||||||||||||||||
Other | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
Timing of Revenue Recognition: | ||||||||||||||||||||
Goods Transferred at a Point in Time | $ | $ | $ | $ | $ | |||||||||||||||
Goods Transferred Over Time | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
Nine Months Ended January 26, 2019 (39 Weeks) | ||||||||||||||||||||
(Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
Geographic Net Sales: | ||||||||||||||||||||
U.S. | $ | $ | $ | $ | $ | |||||||||||||||
Malta | ||||||||||||||||||||
China | ||||||||||||||||||||
Canada | ||||||||||||||||||||
Other | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
Timing of Revenue Recognition: | ||||||||||||||||||||
Goods Transferred at a Point in Time | $ | $ | $ | $ | $ | |||||||||||||||
Goods Transferred Over Time | ||||||||||||||||||||
Total Net Sales | $ | $ | $ | $ | $ | |||||||||||||||
3. Leases
The Company leases real estate, automobiles and certain equipment under both operating and finance leases. The Company does not have any significant arrangements where it is the lessor. The majority of the Company's global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses and buildings. As of February 1, 2020, the Company's leases have remaining lease terms of up to 11.5 years, some of which include optional renewals or terminations, which are considered in the Company’s assessments when such options are reasonably certain to be exercised. Any variable payments related to the lease will be recorded as lease expense when and as incurred. The Company’s lease payments are largely fixed. As of February 1, 2020, the operating leases that the Company has signed but have not yet commenced are immaterial.
In addition to the operating lease assets presented on the condensed consolidated balance sheets, assets under finance leases of $0.8 million are included in property, plant and equipment, net on the condensed consolidated balance sheets as of February 1, 2020. The finance lease obligation is split between other accrued expenses for the short-term portion and other long-term liabilities for the long-term portion on the condensed consolidated balance sheets. The Company had an immaterial amount of finance lease expense in the three and nine months ended February 1, 2020.
12
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The components of lease expense were as follows:
(Dollars in Millions) | Three Months Ended February 1, 2020 | Nine Months Ended February 1, 2020 | ||||||
Lease Cost: | ||||||||
Operating Lease Cost | $ | $ | ||||||
Variable Lease Cost | ||||||||
Total Lease Cost | $ | $ | ||||||
Supplemental cash flow and other information related to operating leases was as follows:
(Dollars in Millions) | Nine Months Ended February 1, 2020 | |||
Operating Cash Flows: | ||||
Cash Paid Related to Operating Lease Obligations | $ | |||
Non-cash Activity: | ||||
Right-of-use Assets Obtained in Exchange for Lease Obligations | $ | |||
Weighted-average Remaining Lease Term | ||||
Weighted-average Discount Rate | % | |||
Maturities of operating lease liabilities as of February 1, 2020, are shown below:
(Dollars in Millions) | Operating Leases | |||
Fiscal Year: | ||||
Remainder of 2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total Lease Payments | ||||
Less: Imputed Interest | ( | ) | ||
Present Value of Lease Liabilities | $ | |||
13
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Disclosures related to periods prior to the adoption of ASC 842
Total rent expense was $1.9 million and $5.0 million in the three and nine months ended January 26, 2019, respectively. Future minimum lease payments for assets under operating leases as of April 27, 2019 were as follows:
(Dollars in Millions) | Operating Leases | |||
Fiscal Years: | ||||
2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Net Minimum Lease Payments | $ | |||
4. Acquisition
Acquisition of Grakon
On September 12, 2018, the Company acquired 100 % of the stock of Grakon Parent, Inc. ("Grakon") for $422.1 million in cash, net of cash acquired. The business, headquartered in Seattle, Washington, is a manufacturer of custom designed lighting solutions and highly styled engineered components. Grakon’s manufacturing capabilities and products help diversify the Company's product offerings and expand the Industrial segment, which is a key component of the Company's strategic direction. The accounts and transactions of Grakon have been included in the Automotive and Industrial segments in the condensed consolidated financial statements from the effective date of the acquisition.
During the second quarter of fiscal 2020, the Company completed the allocation of the purchase price to the assets acquired and liabilities assumed. Based on the final allocation, goodwill decreased $0.2 million from the preliminary amount reported in the Company's consolidated financial statements as of April 27, 2019. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed were:
(Dollars in Millions) | ||||
Cash | $ | |||
Accounts Receivable | ||||
Inventory | ||||
Prepaid Expenses and Other Current Assets | ||||
Other Intangible Assets | ||||
Goodwill | ||||
Pre-production Costs | ||||
Property, Plant and Equipment | ||||
Accounts Payable | ( | ) | ||
Accrued Employee Liabilities | ( | ) | ||
Other Accrued Expenses | ( | ) | ||
Income Tax Payable | ( | ) | ||
Deferred Income Tax Liability | ( | ) | ||
Total Purchase Price | $ | |||
14
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table presents details of the intangible assets acquired:
(Dollars in Millions) | Fair Value at Date of Acquisition | Amortization Period | ||||
Customer Relationships and Agreements - Significant Customer | $ | |||||
Customer Relationships and Agreements - All Other Customers | ||||||
Technology Licenses | ||||||
Trade Names | ||||||
Total | $ | |||||
Acquisition-related costs of $3.8 million and $15.3 million were incurred in relation to the acquisition of Grakon in the three and nine months ended January 26, 2019, respectively. Acquisition-related costs for the three months ended January 26, 2019 included $0.8 million of costs which have been reported in selling and administrative expenses and $3.0 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income. Acquisition-related costs for the nine months ended January 26, 2019 included $9.7 million of costs which have been reported in selling and administrative expenses and $5.6 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income.
The following table presents unaudited supplemental pro forma results for the nine months ended January 26, 2019 as if the Grakon acquisition had occurred as of the beginning of fiscal 2018. The unaudited pro forma information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time. The unaudited pro forma results presented below primarily include amortization charges for acquired intangible assets, depreciation adjustments for property, plant and equipment that has been revalued, interest expense adjustments due to an increased debt level, adjustments for certain acquisition-related charges and related tax effects.
(Unaudited) | ||||
(Dollars in Millions) | Nine Months Ended January 26, 2019 | |||
Net Sales | $ | |||
Net Income | $ | |||
5. Income Taxes
The provision for income taxes for an interim period is based on an estimated effective income tax rate for the full fiscal year and applies that rate to ordinary year-to-date earnings or losses. The estimated annual effective income tax rate is determined excluding the effects of unusual or significant discrete items that are reported net of the related tax effects and in the period in which they occur. In addition, any material effects of enacted tax law or rate changes as well as the Company’s ability to utilize various tax assets is recognized in the period in which the change occurs.
Three Months Ended | Nine Months Ended | |||||||||||||||
February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | ||||||||||||
Income before Income Taxes | $ | $ | $ | $ | ||||||||||||
Income Tax Expense (Benefit) | $ | $ | ( | ) | $ | $ | ||||||||||
Effective Tax Rate | % | ( | )% | % | % | |||||||||||
The income tax provision in both the three and nine months ended February 1, 2020 was lower than the U.S. statutory tax rate primarily due to changes related to U.S. Tax Reform and foreign operations with lower statutory rates. The income tax provision for both the three and nine months ended January 26, 2019 was lower than the U.S. statutory tax rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates, finalization of U.S. Tax Reform and the release of a tax reserve.
15
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Company's unrecognized income tax benefits were $5.1 million and $3.1 million as of February 1, 2020 and April 27, 2019, respectively. If any portion of the Company’s unrecognized tax benefits is recognized, it would impact the Company’s effective tax rate. The unrecognized tax benefits are reviewed periodically and adjusted for changing facts and circumstances, such as tax audits, lapse of applicable statutes of limitations and changes in tax law.
6. Balance Sheet Components
Inventories
(Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
Raw Materials | $ | $ | ||||||
Work in Process | ||||||||
Finished Products | ||||||||
Total Inventories | $ | $ | ||||||
Property, Plant and Equipment
(Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
Land | $ | $ | ||||||
Buildings and Building Improvements | ||||||||
Machinery and Equipment | ||||||||
Total Property, Plant and Equipment, Gross | ||||||||
Less: Accumulated Depreciation | ||||||||
Property, Plant and Equipment, Net | $ | $ | ||||||
Depreciation expense was $7.5 million and $6.7 million in the three months ended February 1, 2020 and January 26, 2019, respectively. Depreciation expense was $21.7 million and $19.5 million in the nine months ended February 1, 2020 and January 26, 2019, respectively. As of February 1, 2020 and April 27, 2019, capital expenditures recorded in accounts payable totaled $2.0 million and $6.4 million, respectively.
Pre-Production Tooling Costs Related to Long-term Supply Arrangements
The Company incurs pre-production tooling costs related to certain products produced for its customers under long-term supply arrangements. As of February 1, 2020 and April 27, 2019, the Company had $39.9 million and $32.8 million, 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 customer contract. As of February 1, 2020 and April 27, 2019, the Company had $15.9 million and $15.0 million, respectively, of Company owned pre-production tooling, which is capitalized within property, plant and equipment.
16
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Government Grants
In the three and nine months ended February 1, 2020 and January 26, 2019, the Company recognized income from international government grants of $5.6 million and $5.7 million, respectively. Grant income is recognized in Other Income in the condensed consolidated statements of income when it is considered that there is reasonable assurance that the grant will be received and the necessary qualifying conditions, as stated in the grant agreement, are met. The international government grants are generally paid over a period of years and are recorded at amortized cost on the Company’s condensed consolidated balance sheets. As of February 1, 2020 and April 27, 2019, grant receivables outstanding were $14.4 million and $10.6 million, respectively. Additionally, as of February 1, 2020 and April 27, 2019, the Company has no deferred grant income.
7. Goodwill and Other Intangible Assets
Goodwill
The following table shows goodwill by segment:
(Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
Automotive | $ | $ | ||||||
Industrial | ||||||||
Total | $ | $ | ||||||
Other Intangible Assets, Net
The following tables present details of the Company's identifiable intangible assets:
February 1, 2020 | |||||||||||||
(Dollars in Millions) | Gross | Accumulated Amortization | Net | Wtd. Avg. Remaining Amortization Periods (Years) | |||||||||
Definite-lived Intangible Assets: | |||||||||||||
Customer Relationships and Agreements | $ | $ | $ | ||||||||||
Trade Names, Patents and Technology Licenses | |||||||||||||
Total Definite-lived Intangible Assets | |||||||||||||
Indefinite-lived Intangible Assets: | |||||||||||||
Trade Names, Patents and Technology Licenses | — | ||||||||||||
Total Indefinite-lived Intangible Assets | — | ||||||||||||
Total Intangible Assets | $ | $ | $ | ||||||||||
April 27, 2019 | |||||||||||||
(Dollars in Millions) | Gross | Accumulated Amortization | Net | Wtd. Avg. Remaining Amortization Periods (Years) | |||||||||
Definite-lived Intangible Assets: | |||||||||||||
Customer Relationships and Agreements | $ | $ | $ | ||||||||||
Trade Names, Patents and Technology Licenses | |||||||||||||
Total Definite-lived Intangible Assets | |||||||||||||
Indefinite-lived Intangible Assets: | |||||||||||||
Trade Names, Patents and Technology Licenses | — | ||||||||||||
Total Indefinite-lived Intangible Assets | — | ||||||||||||
Total Intangible Assets | $ | $ | $ | ||||||||||
17
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total | $ | ||
8. Debt
The following table summarizes components of the Company's debt:
(Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
Revolving Credit Facility | $ | $ | ||||||
Term Loan | ||||||||
Other Debt | ||||||||
Unamortized Debt Issuance Costs | ( | ) | ( | ) | ||||
Total Debt | ||||||||
Less: Current Maturities | ( | ) | ( | ) | ||||
Total Long-term Debt | $ | $ | ||||||
Revolving Credit Facility/Term Loan
On September 12, 2018, the Company entered into a five-year Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., as Administrative Agent, and Wells Fargo Bank, N.A. The Credit Agreement amends and restates the credit agreement, dated November 18, 2016, among the Company, Bank of America, N.A. and Wells Fargo Bank, N.A. The Credit Agreement consists of a senior unsecured revolving credit facility (“Revolving Credit Facility”) of $200.0 million and a senior unsecured term loan (“Term Loan”) of $250.0 million. In addition, the Company has an option to increase the size of the Revolving Credit Facility and Term Loan by up to an additional $200.0 million, subject to customary conditions and approval of the lenders providing new 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. The weighted-average interest rate on outstanding borrowings under the Credit Agreement was 2.89 % at February 1, 2020. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. As of February 1, 2020, the Company was in compliance with all the covenants in the Credit Agreement.
Other Debt
One of the Company’s European subsidiaries has debt that consists of 15 notes with maturities ranging from 2020 to 2031. The weighted-average interest rate on this debt was approximately 1.50 % at February 1, 2020 and $2.6 million of the debt was classified as short-term.
18
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
9. 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 Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”) and the Methode Electronics, Inc. 2007 Stock Plan (“2007 Plan”). The Company’s stockholders approved the 2014 Plan in September 2014. The Company can no longer make grants under the 2010 Plan or 2007 Plan. The number of shares of common stock originally authorized under the 2014 Plan is 3,000,000 , less one share for every one share of common stock issued or issuable pursuant to awards made after May 3, 2014 under the 2007 Plan or 2010 Plan.
Restricted Stock Awards
The RSAs granted under the 2014 Plan are performance-based awards that are scheduled to vest at the end of fiscal 2020 based on the achievement of an EBITDA hurdle. The number of shares ultimately earned could range from 0 % to 150 % of the target award based on the achievement of the EBITDA performance condition. The fair value of the RSAs granted was based on the closing stock price on the date of grant. All non-vested RSAs accrue dividend equivalents, which are subject to vesting and paid in cash upon release. Accrued dividends are forfeitable to the extent that the underlying awards do not vest.
Per ASC 718, "Compensation - Stock Compensation," compensation expense is recognized for these awards over the vesting period based on the projected probability (70 % confidence) of achievement of the EBITDA hurdle in fiscal 2020. In each period, the stock-based compensation expense may be adjusted, as necessary, in response to any changes in the Company’s forecast with respect to achieving the fiscal 2020 EBITDA hurdle. Prior to the second quarter of fiscal 2019, the Company was recognizing stock-based compensation at threshold. During the second quarter of fiscal 2019, the Company determined that the target hurdle would be achieved based on the recent acquisition of Grakon and adjusted its stock-based compensation expense for these awards. The result was an additional expense of $7.4 million. The Company is currently recognizing stock-based compensation at target.
The following table summarizes the RSA activity under the 2014 Plan in the nine months ended February 1, 2020:
RSA Shares | Wtd. Avg. Grant Date Fair Value | |||||
Non-vested and Unissued at April 27, 2019 | $ | |||||
Awarded | $ | |||||
Vested | ( | ) | $ | |||
Forfeited | ( | ) | $ | |||
Non-vested and Unissued at February 1, 2020 | $ | |||||
The shares vested in the nine months ended February 1, 2020 relate to a deceased employee. Under the terms of the RSA award agreements, awards vest immediately at the target level upon the death of an employee.
Restricted Stock Units
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.
The following table summarizes the RSU activity under the 2014 Plan in the nine months ended February 1, 2020:
RSU Shares | Wtd. Avg. Grant Date Fair Value | ||||||
Non-vested at April 27, 2019 | $ | ||||||
Awarded | $ | ||||||
Vested | ( | ) | $ | ||||
Forfeited | ( | ) | $ | ||||
Non-vested at February 1, 2020 | $ | ||||||
19
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The shares vested in the nine months ended February 1, 2020 relate to a deceased employee. Under the terms of the RSU award agreements, awards vest immediately upon the death of an employee.
Director Awards
In the nine months ended February 1, 2020 and January 26, 2019, the Company granted 30,000 shares and 24,000 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
As of February 1, 2020, the Company has 72,000 stock options outstanding and exercisable under the 2010 Plan at a weighted average exercise price of $37.01 per share and 34,668 stock options outstanding and exercisable under the 2007 Plan at a weighted average exercise price of $33.20 per share. There were no awards, exercises or forfeitures of stock options in the nine months ended February 1, 2020.
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 | Nine Months Ended | |||||||||||||||
February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | ||||||||||||
RSAs | $ | $ | $ | $ | ||||||||||||
RSUs | ||||||||||||||||
Director Awards | ||||||||||||||||
Total Stock-based Compensation Expense | $ | $ | $ | $ | ||||||||||||
10. 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. Diluted income per share is calculated after adjusting the denominator of the basic income per share calculation for the effect of all potentially dilutive common shares outstanding during the period.
20
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table sets forth the computation of basic and diluted income per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
(14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | |||||||||||||
Numerator: | ||||||||||||||||
Net Income (in millions) | $ | $ | $ | $ | ||||||||||||
Denominator: | ||||||||||||||||
Denominator for Basic Income per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Units | ||||||||||||||||
Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units | ||||||||||||||||
Denominator for Diluted Income per Share | ||||||||||||||||
Basic and Diluted Income per Share: | ||||||||||||||||
Basic Income per Share | $ | $ | $ | $ | ||||||||||||
Diluted Income per Share | $ | $ | $ | $ | ||||||||||||
In the three months ended February 1, 2020, no options and RSUs were excluded from the computation of diluted net income per share. In the nine months ended February 1, 2020, options and RSUs of 70,362 were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive. All RSAs have been excluded in the computation of diluted net income per share in the three and nine months ended February 1, 2020 as these awards contain performance conditions that would not have been achieved for the periods presented.
In the three months ended January 26, 2019, options and RSUs of 109,418 were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive. In the nine months ended January 26, 2019, options and RSUs of 101,668 were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive. All RSAs have been excluded in the computation of diluted net income per share in the three and nine months ended January 26, 2019, as these awards contain performance conditions that would not have been achieved for the periods presented.
11. Segment Information
An operating segment is defined as a component of an enterprise 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 Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”).
Effective October 27, 2018, the Company reorganized its reportable segments upon the acquisition of Grakon. Prior to the acquisition, the Company's reportable segments were Automotive, Power, Interface and Other. As a result of this change, the Company's reportable segments are now Automotive, Industrial, Interface and Medical. Historical information has been revised to reflect the new reportable segments.
A summary of the significant reportable segment changes is as follows:
• | Grakon's automotive business has been included in the Automotive segment, while Grakon's non-automotive business has been included in the Industrial segment. |
• | The busbar business, previously included in the Power segment, is now part of the Industrial segment. |
• | The radio-remote control business, previously included in the Interface segment, is now part of the Industrial segment. |
• | The medical devices business, previously included in the Other segment, now makes up the Medical segment. |
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
21
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that monitor 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 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.
The tables below present information about the Company's reportable segments.
Three Months Ended February 1, 2020 (14 Weeks) | ||||||||||||||||||||||||
(Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
Net Sales | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Transfers between Segments | ( | ) | ( | ) | ||||||||||||||||||||
Net Sales to Unaffiliated Customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income (Loss) from Operations | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Interest Expense, Net | ||||||||||||||||||||||||
Other Income, Net | ( | ) | ||||||||||||||||||||||
Income before Income Taxes | $ | |||||||||||||||||||||||
Three Months Ended January 26, 2019 (13 Weeks) | ||||||||||||||||||||||||
(Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
Net Sales | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Transfers between Segments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Net Sales to Unaffiliated Customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income (Loss) from Operations | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Interest Expense, Net | ||||||||||||||||||||||||
Other Income, Net | ( | ) | ||||||||||||||||||||||
Income before Income Taxes | $ | |||||||||||||||||||||||
22
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Nine Months Ended February 1, 2020 (40 Weeks) | ||||||||||||||||||||||||
(Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
Net Sales | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Transfers between Segments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Net Sales to Unaffiliated Customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income (Loss) from Operations | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Interest Expense, Net | ||||||||||||||||||||||||
Other Income, Net | ( | ) | ||||||||||||||||||||||
Income before Income Taxes | $ | |||||||||||||||||||||||
Nine Months Ended January 26, 2019 (39 Weeks) | ||||||||||||||||||||||||
(Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
Net Sales | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Transfers between Segments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Net Sales to Unaffiliated Customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Income (Loss) from Operations | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Interest Expense, Net | ||||||||||||||||||||||||
Other Income, Net | ( | ) | ||||||||||||||||||||||
Income before Income Taxes | $ | |||||||||||||||||||||||
12. 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.
Hetronic Germany-GmbH Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as the Company's 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 its 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 have 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 $12 million in punitive damages. A final judgment has not yet been entered and is subject to post-trial motions and possible appeal. Once the judgment is final, the Company will work with counsel to collect on the judgment. Like any judgment, particularly any judgment involving defendants outside of the United States, there is no guarantee that the Company will be able to collect the judgment.
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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:
• | Our business is dependent on two large automotive customers. For our largest customer, our sales primarily consist of integrated center consoles for use in light trucks and SUVs. If we were to lose either of these customers or experienced a significant decline in the volume or price of products purchased by these customers, are not selected to produce products for successor models or if either of the customers declared bankruptcy, our future results could be adversely affected. |
• | Because we derive a substantial portion of our revenues from customers in the automotive, commercial vehicle, appliance, computer and communications industries, we are susceptible to trends and factors affecting those industries. |
• | International trade disputes could result in tariffs, 'trade wars,' and other protectionist measures that could adversely affect our business, including its ability to mitigate tariff costs. |
• | The coronavirus outbreak could impact our international operations and results of operations. |
• | Our inability, or our customers' inability, to effectively manage the timing, quality and cost of new program launches could adversely affect our financial performance. |
• | We are subject to continuing pressure to lower our prices. |
• | Our Dabir Surfaces medical device products are emerging technologies. Our ability to successfully market and sell these products will depend on acceptance by the medical community. |
• | A significant fluctuation between the U.S. dollar and other currencies could adversely impact our results of operations and financial condition. |
• | A significant portion of our business activities are conducted in foreign countries, exposing us to additional risks that may not exist in the United States. |
• | Should a catastrophic event or other significant business interruption occur at any of our facilities, we could face significant reconstruction or remediation costs, penalties, third party liability and loss of production capacity, which could adversely affect our business. |
• | Impairment charges relating to our goodwill and long-lived assets could adversely affect our financial statements. |
• | Our inability to capitalize on prior or future acquisitions or any decision to strategically divest one or more current businesses may adversely affect our business. |
• | Our ability to market our automotive and commercial vehicle products is subject to a lengthy sales cycle, which requires significant investment prior to significant sales revenues, and there is no assurance that our products will be implemented in any particular vehicle. |
• | We are dependent on the availability and price of materials. |
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• | Our gross profit margins are subject to fluctuations due to many factors. |
• | Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations. |
• | Changes in our effective tax rate may harm our results of operations. |
• | We may be unable to keep pace with rapid technological changes, which could adversely affect our business. |
• | Our information technology (“IT”) systems could be breached. |
• | Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services and liability claims against us. |
• | Our technology-based businesses and the markets in which we operate are highly competitive. If we are unable to compete effectively, our sales could decline. |
• | If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on another person’s intellectual property, our business, financial condition and operating results could be materially adversely affected. |
• | We cannot guarantee that the acquired Grakon business will be successful or that we can implement and profit from any new applications of the acquired technology. |
• | Our long-term incentive plan could require significant adjustments to compensation expense in our consolidated statements of income if management changes its determinations on the probability of meeting certain performance levels. The adjustments could be material to the financial statements. |
• | We have incurred a significant amount of indebtedness, and our level of indebtedness and restrictions under our indebtedness could adversely affect our operations and liquidity. |
• | Regulations related to the use of conflict-free minerals may increase our costs and expenses, and an inability to certify that our products are conflict-free may adversely affect customer relationships. |
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 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 27, 2019 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 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. Our primary manufacturing facilities are located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, Mexico. We design, manufacture and market devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing technologies.
Effective October 27, 2018, we reorganized our reportable segments resulting from the acquisition of Grakon. Prior to the Grakon acquisition, our reportable segments were Automotive, Power, Interface and Other. As a result of this change, our reportable segments are now Automotive, Industrial, Interface and Medical. Historical information has been revised to reflect the new reportable segments.
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.
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Grakon Transaction
On September 12, 2018, we acquired 100% of the stock of Grakon for $422.1 million in cash, net of cash acquired. The business, headquartered in Seattle, Washington, is a manufacturer of custom designed exterior lighting solutions and highly styled engineered components, with locations in Canada, China, the Netherlands and the United Kingdom. Grakon’s manufacturing capabilities and products help diversify our product offerings and expand the Industrial segment, which is a key component of our strategic direction. Grakon's results have been included in the Automotive and Industrial segments in the consolidated financial statements from the effective date of the acquisition. Grakon's results are included for the entire period in the nine months ended February 1, 2020 and only included for 4.5 months in the nine months ended January 26, 2019.
In connection with the agreement to purchase Grakon, on September 12, 2018, we amended our credit agreement. The credit agreement now has a maturity date of September 12, 2023. The credit agreement includes a senior unsecured revolving credit facility and a senior unsecured term loan, which are guaranteed by our wholly owned U.S. subsidiaries. See “Financial Condition, Liquidity and Capital Resources” below for more information.
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. For the three months ended February 1, 2020, our accounting period included 14 weeks compared to 13 weeks for the three months ended January 26, 2019. For the nine months ended February 1, 2020, our accounting period included 40 weeks compared to 39 weeks for the nine months ended January 26, 2019. The following discussions of comparative results among periods should be reviewed in this context.
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Results of Operations for the Three Months Ended February 1, 2020 compared to the Three Months Ended January 26, 2019
Consolidated Results
Below is a table summarizing results for the three months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 285.9 | $ | 246.9 | $ | 39.0 | 15.8 | % | |||||||
Cost of Products Sold | 206.6 | 182.6 | 24.0 | 13.1 | % | ||||||||||
Gross Profit | 79.3 | 64.3 | 15.0 | 23.3 | % | ||||||||||
Selling and Administrative Expenses | 33.0 | 32.8 | 0.2 | 0.6 | % | ||||||||||
Amortization of Intangibles | 4.8 | 5.5 | (0.7 | ) | (12.7 | )% | |||||||||
Interest Expense, Net | 2.4 | 3.2 | (0.8 | ) | (25.0 | )% | |||||||||
Other Income, Net | (4.9 | ) | (4.9 | ) | — | — | % | ||||||||
Income Tax Expense (Benefit) | 2.8 | (3.0 | ) | 5.8 | (193.3 | )% | |||||||||
Net Income | $ | 41.2 | $ | 30.7 | $ | 10.5 | 34.2 | % | |||||||
February 1, 2020 | January 26, 2019 | ||||||||||||||
Percent of sales: | (14 Weeks) | (13 Weeks) | |||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Cost of Products Sold | 72.3 | % | 74.0 | % | |||||||||||
Gross Margins | 27.7 | % | 26.0 | % | |||||||||||
Selling and Administrative Expenses | 11.5 | % | 13.3 | % | |||||||||||
Amortization of Intangibles | 1.7 | % | 2.2 | % | |||||||||||
Interest Expense, Net | 0.8 | % | 1.3 | % | |||||||||||
Other Income, Net | (1.7 | )% | (2.0 | )% | |||||||||||
Income Tax Expense (Benefit) | 1.0 | % | (1.2 | )% | |||||||||||
Net Income | 14.4 | % | 12.4 | % | |||||||||||
Net Sales. Consolidated net sales increased $39.0 million, or 15.8%, to $285.9 million in the three months ended February 1, 2020, compared to $246.9 million in the three months ended January 26, 2019. The impact of foreign currency translation decreased net sales by $2.2 million primarily due to the weaker euro and Chinese renminbi. Excluding foreign currency translation, net sales increased $41.2 million, primarily due to higher sales in the Automotive segment.
Cost of Products Sold. Consolidated cost of products sold increased $24.0 million, or 13.1%, to $206.6 million (72.3% of sales) in the three months ended February 1, 2020, compared to $182.6 million (74.0% of sales) in the three months ended January 26, 2019. The impact of foreign currency translation decreased cost of products sold by $1.6 million. Excluding foreign currency translation, cost of products sold increased $25.6 million primarily due to higher sales in the Automotive segment, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. In the three months ended January 26, 2019, we incurred $1.3 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $0.4 million of expenses incurred in the three months ended February 1, 2020.
Gross Profit. Gross profit increased $15.0 million, or 23.3%, to $79.3 million (27.7% of sales) in the three months ended February 1, 2020, compared to $64.3 million (26.0% of sales) in the three months ended January 26, 2019. The impact of foreign currency translation decreased gross profit by $0.6 million. Excluding foreign currency translation, gross profit increased $15.6 million, primarily due to higher sales in the Automotive segment. In addition, gross profit improved due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. Gross profit in the three months ended January 26, 2019 also included $3.0 million of purchase accounting adjustments to inventory related to the acquisition of Grakon.
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Selling and Administrative Expenses. Selling and administrative expenses increased $0.2 million, or 0.6%, to $33.0 million (11.5% of sales) in the three months ended February 1, 2020, compared to $32.8 million (13.3% of sales) in the three months ended January 26, 2019. Selling and administrative expenses increased primarily due to higher performance-based compensation expense, partially offset by lower employee salaries and professional fees. Salaries were lower due to benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability. In the three months ended January 26, 2019, we incurred $1.3 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $0.7 million of expenses incurred in the three months ended February 1, 2020. Professional fees were higher in the three months ended January 26, 2019 primarily due to transaction costs associated with the acquisition of Grakon.
Amortization of Intangibles. Amortization of intangibles decreased $0.7 million, or 12.7%, to $4.8 million in the three months ended February 1, 2020, compared to $5.5 million in the three months ended January 26, 2019. The decrease was primarily due to lower amortization expense in the Interface segment.
Interest Expense, Net. Interest expense, net was $2.4 million in the three months ended February 1, 2020, compared to $3.2 million in the three months ended January 26, 2019. The decrease was due to lower levels of outstanding borrowings and a lower effective interest rate on outstanding borrowings.
Other Income, Net. Other income, net was $4.9 million in both the three months ended February 1, 2020 and January 26, 2019. The three months ended February 1, 2020 and January 26, 2019 include $5.6 million and $5.7 million, respectively, for an international government grant for maintaining certain employment levels during those periods. In addition, net foreign exchange losses were $0.7 million in both the three months ended February 1, 2020 and January 26, 2019.
Income Tax Expense (Benefit). Income tax expense was $2.8 million in the three months ended February 1, 2020, compared to an income tax benefit of $3.0 million in the three months ended January 26, 2019. Our effective tax rate was 6.4% in the three months ended February 1, 2020, compared to a benefit of (10.4%) in the three months ended January 26, 2019. The increase primarily related to higher pre-tax income in the three months ended February 1, 2020, partially offset by favorable adjustments due to U.S. Tax Reform from IRS regulations issued in December 2019. The tax benefit in the three months ended January 26, 2019 primarily related to the finalization of the transition tax from U.S. Tax Reform.
Net Income. Net income increased $10.5 million, or 34.2%, to $41.2 million in the three months ended February 1, 2020, compared to $30.7 million in the three months ended January 26, 2019. The impact of foreign currency translation decreased net income by $0.4 million. Excluding foreign currency translation, net income increased $10.9 million primarily due to higher gross profit, lower interest expense and lower amortization expense, partially offset by higher income tax expense.
Operating Segments
Automotive Segment Results
Below is a table summarizing results for the three months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 210.3 | $ | 172.9 | $ | 37.4 | 21.6 | % | |||||||
Gross Profit | $ | 55.0 | $ | 41.8 | $ | 13.2 | 31.6 | % | |||||||
Income from Operations | $ | 39.2 | $ | 27.0 | $ | 12.2 | 45.2 | % | |||||||
Percent of sales: | |||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Gross Profit | 26.2 | % | 24.2 | % | |||||||||||
Income from Operations | 18.6 | % | 15.6 | % | |||||||||||
Net Sales. Automotive segment net sales increased $37.4 million, or 21.6%, to $210.3 million in the three months ended February 1, 2020, from $172.9 million in the three months ended January 26, 2019. Net sales increased in North America by $21.9 million, or 20.2%, to $130.3 million in the three months ended February 1, 2020, compared to $108.4 million in the three months ended January 26, 2019. The increase was primarily due to higher sales volumes of our integrated center stack and human machine interface assembly products and higher sales from Grakon's automotive lighting products. A
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portion of the higher sales volumes of integrated center stacks was due to additional orders from General Motors ("GM") after the settlement of the UAW labor strike. Net sales in Europe increased $13.2 million, or 30.0%, to $57.2 million in the three months ended February 1, 2020, compared to $44.0 million in the three months ended January 26, 2019. The impact of the weaker euro decreased net sales in Europe by $1.6 million. Excluding foreign currency translation, European sales increased $14.8 million primarily due to higher sales volumes of sensor and switch products. Net sales in Asia increased $2.3 million, or 11.2%, to $22.8 million in the three months ended February 1, 2020, compared to $20.5 million in the three months ended January 26, 2019. The weaker Chinese renminbi decreased net sales in Asia by $0.4 million. Excluding foreign currency translation, Asia sales increased $2.7 million primarily due to higher touchscreen sales volumes to an Asian automotive OEM, partially offset by lower sales volumes of our transmission lead-frame assemblies and sensor products.
Gross Profit. Automotive segment gross profit increased $13.2 million, or 31.6%, to $55.0 million in the three months ended February 1, 2020, compared to $41.8 million in the three months ended January 26, 2019. The Automotive segment gross profit margins increased to 26.2% in the three months ended February 1, 2020, compared to 24.2% in the three months ended January 26, 2019. The increase in gross profit margin was primarily due to the increased sales volumes in both North America and Europe, and the benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability, partially offset by the impact of foreign currency translation of $0.6 million.
Income from Operations. Automotive segment income from operations increased $12.2 million, or 45.2%, to $39.2 million in the three months ended February 1, 2020, compared to $27.0 million in the three months ended January 26, 2019. The increase was primarily due to higher gross profit and the benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability, partially offset by higher amortization of intangibles and selling and administrative expenses. In the three months ended January 26, 2019, we incurred $2.3 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $0.5 million of expenses incurred in the three months ended February 1, 2020.
Industrial Segment Results
Below is a table summarizing results for the three months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 60.1 | $ | 60.2 | $ | (0.1 | ) | (0.2 | )% | ||||||
Gross Profit | $ | 21.9 | $ | 19.9 | $ | 2.0 | 10.1 | % | |||||||
Income from Operations | $ | 13.2 | $ | 8.9 | $ | 4.3 | 48.3 | % | |||||||
Percent of sales: | |||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Gross Profit | 36.4 | % | 33.1 | % | |||||||||||
Income from Operations | 22.0 | % | 14.8 | % | |||||||||||
Net Sales. Industrial segment net sales decreased $0.1 million, or 0.2%, to $60.1 million in the three months ended February 1, 2020, from $60.2 million in the three months ended January 26, 2019. The impact of foreign currency translation decreased net sales by $0.3 million. Excluding foreign currency translation, net sales increased by $0.2 million primarily due to higher sales volumes of busbar products, partially offset by lower sales volumes from Grakon and radio remote control products.
Gross Profit. Industrial segment gross profit increased $2.0 million, or 10.1%, to $21.9 million in the three months ended February 1, 2020, compared to $19.9 million in the three months ended January 26, 2019. Gross profit margins increased to 36.4% in the three months ended February 1, 2020, compared to 33.1% in the three months ended January 26, 2019. The increase in gross profit margin was due to $3.0 million of purchase accounting adjustments to inventory related to the Grakon acquisition recorded in the three months ended January 26, 2019. Excluding the purchase accounting adjustment, gross profit margin was lower due to product mix.
Income from Operations. Industrial segment income from operations increased $4.3 million, or 48.3%, to $13.2 million in the three months ended February 1, 2020, compared to $8.9 million in the three months ended January 26, 2019. The increase was primarily due to higher gross profit, lower selling and administrative expenses and lower amortization of intangibles during the period.
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Interface Segment Results
Below is a table summarizing results for the three months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 14.9 | $ | 13.7 | $ | 1.2 | 8.8 | % | |||||||
Gross Profit | $ | 1.8 | $ | 2.2 | $ | (0.4 | ) | (18.2 | )% | ||||||
Income from Operations | $ | 0.7 | $ | — | $ | 0.7 | — | % | |||||||
Percent of sales: | |||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Gross Profit | 12.1 | % | 16.1 | % | |||||||||||
Income from Operations | 4.7 | % | — | % | |||||||||||
Net Sales. Interface segment net sales increased $1.2 million, or 8.8%, to $14.9 million in the three months ended February 1, 2020, compared to $13.7 million in the three months ended January 26, 2019. The increase was primarily due to higher sales volumes of our legacy data solutions products.
Gross Profit. Interface segment gross profit decreased $0.4 million, or 18.2%, to $1.8 million in the three months ended February 1, 2020, compared to $2.2 million in the three months ended January 26, 2019. Gross profit margins decreased to 12.1% in the three months ended February 1, 2020, from 16.1% in the three months ended January 26, 2019. The decrease was primarily due to product mix, partially offset by higher sales volumes of our legacy data solutions products.
Income from Operations. Interface segment income from operations increased to $0.7 million in the three months ended February 1, 2020, compared to break-even in the three months ended January 26, 2019. The increase was primarily due to lower selling and administrative expense and lower amortization of intangibles, partially offset by lower gross profit. Selling and administrative expenses were lower as a result of the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. In the three months ended January 26, 2019, we incurred $0.2 million of expenses related to initiatives to reduce overall costs and improve operational profitability.
Medical Segment Results
Below is a table summarizing results for the three months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (14 Weeks) | (13 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 0.6 | $ | 0.1 | $ | 0.5 | 500.0 | % | |||||||
Gross Profit | $ | (0.3 | ) | $ | (0.7 | ) | $ | 0.4 | (57.1 | )% | |||||
Loss from Operations | $ | (1.6 | ) | $ | (1.7 | ) | $ | 0.1 | (5.9 | )% | |||||
Net Sales. The Medical segment had sales of $0.6 million in the three months ended February 1, 2020, compared to $0.1 million in the three months ended January 26, 2019. Higher sales were due to increased product acceptance.
Gross Profit. Medical segment gross profit was a loss of $0.3 million in the three months ended February 1, 2020, compared to a loss of $0.7 million in the three months ended January 26, 2019. The improvement primarily relates to higher sales volumes during the period.
Loss from Operations. Medical segment loss from operations decreased $0.1 million, to $1.6 million in the three months ended February 1, 2020, compared to $1.7 million in the three months ended January 26, 2019. The decrease was due to higher gross profit, partially offset by higher selling and administrative expenses.
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Results of Operations for the Nine Months Ended February 1, 2020 compared to the Nine Months Ended January 26, 2019
Consolidated Results
Below is a table summarizing results for the nine months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (40 Weeks) | (39 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 813.3 | $ | 734.3 | $ | 79.0 | 10.8 | % | |||||||
Cost of Products Sold | 589.6 | 539.1 | 50.5 | 9.4 | % | ||||||||||
Gross Profit | 223.7 | 195.2 | 28.5 | 14.6 | % | ||||||||||
Selling and Administrative Expenses | 98.6 | 110.3 | (11.7 | ) | (10.6 | )% | |||||||||
Amortization of Intangibles | 14.3 | 11.1 | 3.2 | 28.8 | % | ||||||||||
Interest Expense, Net | 8.0 | 5.0 | 3.0 | 60.0 | % | ||||||||||
Other Income, Net | (5.8 | ) | (4.7 | ) | (1.1 | ) | 23.4 | % | |||||||
Income Tax Expense | 15.3 | 4.5 | 10.8 | 240.0 | % | ||||||||||
Net Income | $ | 93.3 | $ | 69.0 | $ | 24.3 | 35.2 | % | |||||||
February 1, 2020 | January 26, 2019 | ||||||||||||||
Percent of sales: | (40 Weeks) | (39 Weeks) | |||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Cost of Products Sold | 72.5 | % | 73.4 | % | |||||||||||
Gross Profit | 27.5 | % | 26.6 | % | |||||||||||
Selling and Administrative Expenses | 12.1 | % | 15.0 | % | |||||||||||
Amortization of Intangibles | 1.8 | % | 1.5 | % | |||||||||||
Interest Expense, Net | 1.0 | % | 0.7 | % | |||||||||||
Other Income, Net | (0.7 | )% | (0.6 | )% | |||||||||||
Income Tax Expense | 1.9 | % | 0.6 | % | |||||||||||
Net Income | 11.5 | % | 9.4 | % | |||||||||||
Net Sales. Consolidated net sales increased $79.0 million, or 10.8%, to $813.3 million in the nine months ended February 1, 2020, compared to $734.3 million in the nine months ended January 26, 2019. The acquisition of Grakon accounted for $91.9 million of the increase, while the impact of foreign currency translation decreased net sales by $10.4 million. The weaker euro and Chinese renminbi impacted foreign currency translation. Excluding the acquisition of Grakon and foreign currency translation, net sales decreased $2.5 million, primarily due to the adverse impact from the UAW labor strike at GM of $28.7 million and lower sales in the Interface and Industrial segments, partially offset by higher sales from our sensor and human machine interface assembly products in the Automotive segment.
Cost of Products Sold. Consolidated cost of products sold increased $50.5 million, or 9.4%, to $589.6 million (72.5% of sales) in the nine months ended February 1, 2020, compared to $539.1 million (73.4% of sales) in the nine months ended January 26, 2019. The acquisition of Grakon accounted for $57.5 million of the increase, while the impact of foreign currency translation decreased cost of products sold by $6.7 million. Excluding the acquisition of Grakon and foreign currency translation, cost of products sold decreased $0.3 million primarily due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, partially offset by product mix within our segments. In the nine months ended January 26, 2019, we incurred $2.7 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $0.6 million of expenses incurred in the nine months ended February 1, 2020.
Gross Profit. Gross profit increased $28.5 million, or 14.6%, to $223.7 million (27.5% of sales) in the nine months ended February 1, 2020, compared to $195.2 million (26.6% of sales) in the nine months ended January 26, 2019. The
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acquisition of Grakon accounted for $34.4 million of the increase, while foreign currency translation decreased gross profit by $3.7 million. Excluding the acquisition of Grakon and foreign currency translation, gross profit decreased $2.2 million, primarily due to lower sales in the Automotive segment as a result of the UAW labor strike at GM and lower sales in the Interface and Industrial segments, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. Gross profit in the nine months ended January 26, 2019 also includes $5.6 million of purchase accounting adjustments related to the acquisition of Grakon.
Selling and Administrative Expenses. Selling and administrative expenses decreased $11.7 million, or 10.6%, to $98.6 million (12.1% of sales) in the nine months ended February 1, 2020, compared to $110.3 million (15.0% of sales) in the nine months ended January 26, 2019. The acquisition of Grakon increased expenses by $2.8 million, while the impact of foreign currency translation decreased selling and administrative expenses by $1.0 million. Excluding the acquisition of Grakon and foreign currency translation, selling and administrative expenses decreased $13.5 million. The decrease was primarily due to lower stock-based compensation expense, professional fees and salaries. Stock-based compensation expense decreased $6.1 million, as the nine months ended January 26, 2019 included a $7.4 million accrual adjustment. Professional fees were higher in the nine months ended January 26, 2019 primarily due to transaction costs associated with the acquisition of Grakon. Salaries were lower due to benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability. In the nine months ended January 26, 2019, we incurred $3.1 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $1.0 million of expenses incurred in the nine months ended February 1, 2020.
Amortization of Intangibles. Amortization of intangibles increased $3.2 million, or 28.8%, to $14.3 million in the nine months ended February 1, 2020, compared to $11.1 million in the nine months ended January 26, 2019. The increase was due to amortization expense related to the Grakon acquisition, partially offset by lower amortization expense in the Interface segment.
Interest Expense, Net. Interest expense, net was $8.0 million in the nine months ended February 1, 2020, compared to $5.0 million in the nine months ended January 26, 2019. The increase was due to borrowings made in the second quarter of fiscal 2019 to fund the acquisition of Grakon.
Other Income, Net. Other income, net was $5.8 million in the nine months ended February 1, 2020, compared to $4.7 million in the nine months ended January 26, 2019. The nine months ended February 1, 2020 and January 26, 2019 include $5.6 million and $5.7 million, respectively, for an international government grant for maintaining certain employment levels during those periods. In the nine months ended February 1, 2020, we sold assets related to a previously closed business and recognized a gain on sale of $0.5 million. In addition, net foreign exchange losses were $0.5 million in the nine months ended February 1, 2020, compared to $0.7 million in the nine months ended January 26, 2019.
Income Tax Expense. Income tax expense increased $10.8 million to $15.3 million in the nine months ended February 1, 2020, compared to $4.5 million in the nine months ended January 26, 2019. Our effective tax rate increased to 14.1% in the nine months ended February 1, 2020, compared to 6.1% in the nine months ended January 26, 2019. The increase was primarily related to the higher pre-tax income from the Grakon acquisition in the nine months ended February 1, 2020, partially offset by favorable adjustments due to U.S. Tax Reform from IRS regulations issued in December 2019. The effective tax rate in the nine months ended January 26, 2019 was lower primarily due to a tax benefit related to the finalization of the transition tax from U.S. Tax Reform.
Net Income. Net income increased $24.3 million, or 35.2%, to $93.3 million in the nine months ended February 1, 2020, compared to $69.0 million in the nine months ended January 26, 2019. The acquisition of Grakon accounted for $24.3 million of the increase, while the impact of foreign currency translation decreased net income by $2.1 million. Excluding the acquisition of Grakon and foreign currency translation, net income increased $2.1 million primarily due to lower selling and administrative expenses, partially offset by the negative impact of the UAW labor strike at GM, higher interest expense and higher income tax expense.
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Operating Segments
Automotive Segment Results
Below is a table summarizing results for the nine months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (40 Weeks) | (39 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 576.6 | $ | 549.8 | $ | 26.8 | 4.9 | % | |||||||
Gross Profit | $ | 146.6 | $ | 143.7 | $ | 2.9 | 2.0 | % | |||||||
Income from Operations | $ | 101.2 | $ | 96.7 | $ | 4.5 | 4.7 | % | |||||||
Percent of sales: | |||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Gross Profit | 25.4 | % | 26.1 | % | |||||||||||
Income from Operations | 17.6 | % | 17.6 | % | |||||||||||
Net Sales. Automotive segment net sales increased $26.8 million, or 4.9%, to $576.6 million in the nine months ended February 1, 2020, compared to $549.8 million in the nine months ended January 26, 2019. Net sales in North America increased $18.6 million, or 5.5%, to $358.6 million in the nine months ended February 1, 2020, compared to $340.0 million in the nine months ended January 26, 2019. The increase was primarily due to higher sales from Grakon of $32.1 million, partially offset by the adverse impact from the UAW labor strike at GM which reduced North American sales by $28.7 million. Other North American sales increased from our human machine interface assembly products due to recent program launches. Sales from our transmission lead-frame assemblies decreased due to lower sales volumes. Net sales in Europe increased $12.1 million, or 8.2%, to $158.9 million in the nine months ended February 1, 2020, compared to $146.8 million in the nine months ended January 26, 2019. The impact of the weaker euro decreased net sales in Europe by $6.1 million. Excluding the impact of foreign currency translation, net sales in Europe increased $18.2 million primarily due to higher sales volumes of sensor and switch products. Net sales in Asia decreased $3.9 million, or 6.2%, to $59.1 million in the nine months ended February 1, 2020, compared to $63.0 million in the nine months ended January 26, 2019. The weaker Chinese renminbi also decreased net sales in Asia by $2.0 million. Excluding foreign currency translation, net sales in Asia decreased $1.9 million, primarily due to lower sales of our sensor and transmission lead-frame assembly products, partially offset by the launch of touchscreen product sales to an Asian automobile OEM.
Gross Profit. Automotive segment gross profit increased $2.9 million, or 2.0%, to $146.6 million in the nine months ended February 1, 2020, compared to $143.7 million in the nine months ended January 26, 2019. The Automotive segment gross profit margin decreased to 25.4% in the nine months ended February 1, 2020, compared to 26.1% in the nine months ended January 26, 2019. The decrease in gross profit margin was primarily due to the adverse impact from the UAW labor strike at GM which decreased gross profit by $8.7 million and product mix. Gross profit was also negatively impacted by $2.7 million from the weaker euro and Chinese renminbi. This was partially offset by higher gross profit from Grakon of $5.5 million and the benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability. In the nine months ended January 26, 2019, we incurred $2.7 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $0.6 million of expenses incurred in the nine months ended February 1, 2020.
Income from Operations. Automotive segment income from operations increased $4.5 million, or 4.7%, to $101.2 million in the nine months ended February 1, 2020, compared to $96.7 million in the nine months ended January 26, 2019. The increase was primarily due to higher income from operations from Grakon and the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, partially offset by the adverse impact from the UAW labor strike at GM, higher amortization of intangibles and a negative impact from foreign currency translation.
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Industrial Segment Results
Below is a table summarizing results in the nine months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (40 Weeks) | (39 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 195.8 | $ | 139.8 | $ | 56.0 | 40.1 | % | |||||||
Gross Profit | $ | 72.9 | $ | 44.5 | $ | 28.4 | 63.8 | % | |||||||
Income from Operations | $ | 44.8 | $ | 21.1 | $ | 23.7 | 112.3 | % | |||||||
Percent of sales: | |||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Gross Profit | 37.2 | % | 31.8 | % | |||||||||||
Income from Operations | 22.9 | % | 15.1 | % | |||||||||||
Net Sales. Industrial segment net sales increased $56.0 million, or 40.1%, to $195.8 million in the nine months ended February 1, 2020, compared to $139.8 million in the nine months ended January 26, 2019. The acquisition of Grakon accounted for $59.8 million of the increase, while the impact of foreign currency translation decreased net sales by $2.3 million. Excluding the acquisition of Grakon and foreign currency translation, net sales decreased $1.5 million primarily due to lower sales volumes of radio remote control products, partially offset by higher sales volumes of busbar products.
Gross Profit. Industrial segment gross profit increased $28.4 million, or 63.8%, to $72.9 million in the nine months ended February 1, 2020, compared to $44.5 million in the nine months ended January 26, 2019. Gross profit margins increased to 37.2% in the nine months ended February 1, 2020, compared to 31.8% in the nine months ended January 26, 2019. The increase in gross profit margin was primarily due to a favorable product mix relating to our Grakon business, partially offset by reduced radio remote control sales volumes and net tariff expense. Gross profit in the nine months ended January 26, 2019 also included $5.6 million of purchase accounting adjustments related to the acquisition of Grakon.
Income from Operations. Industrial segment income from operations increased $23.7 million, or 112.3%, to $44.8 million in the nine months ended February 1, 2020, compared to $21.1 million in the nine months ended January 26, 2019. The increase was primarily due to income from operations from Grakon, partially offset by lower sales of our radio remote control products and the impact of foreign currency translation.
Interface Segment Results
Below is a table summarizing results in the nine months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (40 Weeks) | (39 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 39.7 | $ | 44.0 | $ | (4.3 | ) | (9.8 | )% | ||||||
Gross Profit | $ | 4.5 | $ | 6.6 | $ | (2.1 | ) | (31.8 | )% | ||||||
Income from Operations | $ | 0.7 | $ | 0.2 | $ | 0.5 | 250.0 | % | |||||||
Percent of sales: | |||||||||||||||
Net Sales | 100.0 | % | 100.0 | % | |||||||||||
Gross Profit | 11.3 | % | 15.0 | % | |||||||||||
Income from Operations | 1.8 | % | 0.5 | % | |||||||||||
Net Sales. Interface segment net sales decreased $4.3 million, or 9.8%, to $39.7 million in the nine months ended February 1, 2020, compared to $44.0 million in the nine months ended January 26, 2019. The decrease was primarily due to lower appliance product sales volumes.
Gross Profit. Interface segment gross profit decreased $2.1 million, or 31.8%, to $4.5 million in the nine months ended February 1, 2020, compared to $6.6 million in the nine months ended January 26, 2019. Gross profit margin decreased to
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11.3% in the nine months ended February 1, 2020, compared to 15.0% in the nine months ended January 26, 2019. The decrease in gross profit margin was primarily due to lower appliance product sales volumes.
Income from Operations. Interface segment income from operations increased $0.5 million, or 250.0%, to $0.7 million in the nine months ended February 1, 2020, compared to $0.2 million in the nine months ended January 26, 2019. The increase was due to lower amortization of intangibles and the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, partially offset by lower gross profit.
Medical Segment Results
Below is a table summarizing results in the nine months ended:
February 1, 2020 | January 26, 2019 | ||||||||||||||
(Dollars in Millions) | (40 Weeks) | (39 Weeks) | Net Change ($) | Net Change (%) | |||||||||||
Net Sales | $ | 1.2 | $ | 0.7 | $ | 0.5 | 71.4 | % | |||||||
Gross Profit | $ | (1.3 | ) | $ | (2.1 | ) | $ | 0.8 | 38.1 | % | |||||
Loss from Operations | $ | (4.9 | ) | $ | (6.3 | ) | $ | 1.4 | 22.2 | % | |||||
Net Sales. The Medical segment had $1.2 million of net sales in the nine months ended February 1, 2020, compared to $0.7 million in the nine months ended January 26, 2019. Higher sales were due to increased product acceptance.
Gross Profit. Medical segment gross profit was a loss of $1.3 million in the nine months ended February 1, 2020, compared to a loss of $2.1 million in the nine months ended January 26, 2019. The improvement primarily relates to lower engineering costs and wages incurred during the period and higher sales volumes.
Loss from Operations. Medical segment loss from operations decreased $1.4 million to $4.9 million in the nine months ended February 1, 2020, compared to $6.3 million in the nine months ended January 26, 2019. The decrease was due to lower selling and administrative expenses and an improvement in gross profit. Selling and administrative expenses were lower due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. In the nine months ended January 26, 2019, we incurred $0.9 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $0.1 million of expenses incurred in the nine months ended February 1, 2020.
Financial Condition, Liquidity and Capital Resources
We believe our current world-wide cash balances together with expected future cash flows to be generated from operations and our committed credit facility will be sufficient to support current operations. A significant amount of cash and expected future cash flows are located outside of the U.S. Of the $79.9 million of cash and cash equivalents as of February 1, 2020, $69.7 million was held in subsidiaries outside the U.S. and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating material additional income tax expense.
Cash flow is summarized below:
Nine Months Ended | ||||||||
February 1, 2020 | January 26, 2019 | |||||||
(Dollars in Millions) | (40 Weeks) | (39 Weeks) | ||||||
Operating activities: | ||||||||
Net Income | $ | 93.3 | $ | 69.0 | ||||
Non-cash Items | 41.4 | 41.4 | ||||||
Changes in Operating Assets and Liabilities | (52.1 | ) | (46.1 | ) | ||||
Net Cash Provided by Operating Activities | 82.6 | 64.3 | ||||||
Net Cash Used in Investing Activities | (34.4 | ) | (458.3 | ) | ||||
Net Cash (Used in) Provided by Financing Activities | (49.7 | ) | 232.3 | |||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (1.8 | ) | (10.7 | ) | ||||
Net Decrease in Cash and Cash Equivalents | (3.3 | ) | (172.4 | ) | ||||
Cash and Cash Equivalents at Beginning of the Year | 83.2 | 246.1 | ||||||
Cash and Cash Equivalents at End of the Period | $ | 79.9 | $ | 73.7 | ||||
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Operating Activities
Net cash provided by operating activities increased $18.3 million to $82.6 million in the nine months ended February 1, 2020, compared to $64.3 million in the nine months ended January 26, 2019. The increase was due to higher net income adjusted for non-cash items, partially offset by higher cash outflows related to changes in operating assets and liabilities. The $52.1 million of cash outflows for operating assets and liabilities in the nine months ended February 1, 2020 was primarily due to lower accounts payable and other liabilities, higher prepaid expenses and other assets, higher accounts receivable and higher inventory.
Investing Activities
Net cash used in investing activities was $34.4 million in the nine months ended February 1, 2020, compared to $458.3 million in the nine months ended January 26, 2019. The activity in the nine months ended February 1, 2020 primarily relates to purchases of property, plant and equipment. The activity in the nine months ended January 26, 2019 primarily relates to the $421.6 million of cash used to purchase Grakon and purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $49.7 million in the nine months ended February 1, 2020, compared to net cash provided by financing activities of $232.3 million in the nine months ended January 26, 2019. In the nine months ended February 1, 2020, we had net repayments on our borrowings of $36.6 million, compared to net borrowings of $246.7 million in the nine months ended January 26, 2019. The borrowings in the nine months ended January 26, 2019 were primarily used to fund the acquisition of Grakon. We paid dividends of $12.2 million in the nine months ended February 1, 2020, compared to $12.7 million in the nine months ended January 26, 2019.
Credit Agreement
On September 12, 2018, we entered into a senior unsecured credit agreement that provided a $200.0 million revolving credit facility and a $250.0 million term loan. In addition, we have an option to increase the size of the senior unsecured credit agreement by up to an additional $200.0 million, subject to customary conditions and approval of the lenders providing new commitments. As of February 1, 2020, $244.5 million in principal was outstanding under the credit agreement. 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 credit agreement as of February 1, 2020.
Borrowings under our senior unsecured credit agreement bear interest at rates equal to the London 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 discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our interest expense.
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 SEC rules.
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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 defendants have filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our 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 our favor. The verdict included approximately $102 million in compensatory damages and $12 million in punitive damages. A final judgment has not yet been entered and is subject to post-trial motions and possible appeal. Once the judgment is final, we will work with counsel to collect on the judgment. Like any judgment, particularly any judgment involving defendants outside of the United States, there is no guarantee that we will be able to collect the judgment.
In the nine months ended February 1, 2020 and January 26, 2019, we incurred Hetronic-related legal fees of $3.3 million and $2.7 million, respectively. These amounts are included in the selling and administrative expenses in the Industrial segment.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk
We are exposed to market risks from foreign currency exchange, interest rates, and commodity prices, which could affect our operating results, financial position and cash flows. We do not use any derivative financial instruments to manage these risks.
Foreign Currency Risk
We are exposed to foreign currency risk on sales, costs and assets and liabilities denominated in currencies other than the U.S. dollar. We seek to manage our foreign exchange risk largely through operational means, including matching revenue with same-currency costs and assets with same-currency liabilities. We currently transact business in eight primary currencies worldwide, of which the most significant were the U.S. dollar, the euro, the Mexican peso, and the Chinese renminbi. A hypothetical 10% adverse change in foreign currency exchange rates could have impacted our income before income taxes by $6.6 million in the nine months ended February 1, 2020. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.
The translation of the assets and liabilities of our international subsidiaries is made using the foreign currency exchange rates as of the end of the reporting period. Translation adjustments are not included in determining net income but are included in accumulated other comprehensive loss within shareholders’ equity on the condensed consolidated balance sheets until a sale or substantially complete liquidation of the net investment in the international subsidiary takes place. As of February 1, 2020, the cumulative net currency translation adjustments reduced shareholders’ equity by $16.4 million and as of April 27, 2019, the cumulative net currency translation adjustments reduced shareholders’ equity by $13.6 million.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. The interest rate risk for our credit agreement, under which we had $244.5 million of borrowings as of February 1, 2020, is variable and is based on LIBOR. We estimate that a 1% increase in interest rates under our credit agreement would result in increased annual interest expense of $2.4 million.
LIBOR is expected to be phased out by the end of 2021, which is before the maturity of our 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 discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our interest expense.
Commodity Price Risk
We are exposed to commodity price risk primarily on our raw material purchases. These raw materials are not rare or unique to our industry. The cost of copper, 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 products. However, in the short-term, rapid increases in raw material costs can be very difficult to offset with price increases because of contractual agreements with our customers.
Item 4. Controls And 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.
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There have been no changes in our internal control over financial reporting during the quarter ended February 1, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
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. Other than the supplemental risk factors set forth below, there have been no material changes to the risk factors disclosed in Part I - Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 27, 2019.
The coronavirus outbreak could impact our international operations and results of operations.
Our business and results of operations could be materially and adversely affected by the effects of a widespread outbreak of a contagious disease, including the recent outbreak of the respiratory illness caused by a coronavirus strain first identified in Wuhan, Hubei Province, China, or any other outbreak of contagious diseases, and other adverse public health developments. These effects could include disruptions or restrictions on our employees’ and other service providers’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain, potentially including single source suppliers. Any disruption of our supply chain or the business of our customers could adversely impact our business and results of operations, including by causing us to cease manufacturing one or more products for a period of time, which could also lead to loss of customers, as well as reputational, competitive, or business harm. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products and likely impact our operating results.
Item 6. Exhibits
Exhibit Number | Description | |
31.1 | ||
31.2 | ||
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101.1 | XBRL Instance | |
101.2 | XBRL Taxonomy Extension Schema Document | |
101.3 | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.4 | XBRL Taxonomy Extension Label Linkbase Document | |
101.5 | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.6 | XBRL Taxonomy Extension Definition Linkbase Document | |
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended February 1, 2020, formatted as Inline XBRL and contained in Exhibit 101 | |
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SIGNATURES
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 | |||
Ronald L.G. Tsoumas | ||||
Chief Financial Officer | ||||
(principal financial officer) | ||||
Dated: | March 5, 2020 | |||
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