UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
10-Q(Mark One)
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended
or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from ______ to ______
Commission file number
METHODE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-2090085 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer |
8750 West Bryn Mawr Avenue, | Suite 1000, Chicago, Illinois | 60631-3518 | |||
(Address of principal executive offices) | (Zip Code) | ||||
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class | ||||
Trading Symbol(s) | Name of each exchange | |||
| on which registered | ||||
Common Stock, $0.50 Par Value | MEI | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒ 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):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging Growth Company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.
☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐At March 3,September 1, 2020, the registrant had 37,091,48737,529,738 shares of common stock outstanding.
INDEX
Page | ||
6 | ||
7 | ||
20 | ||
29 | ||
29 | ||
30 | ||
30 | ||
32 | ||
Item 1. Financial Statements
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions, except per share data)
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Net Sales |
| $ | 190.9 |
|
| $ | 270.2 |
|
|
|
|
|
|
|
|
|
|
Cost of Products Sold |
|
| 145.8 |
|
|
| 194.4 |
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
| 45.1 |
|
|
| 75.8 |
|
|
|
|
|
|
|
|
|
|
Selling and Administrative Expenses |
|
| 26.6 |
|
|
| 32.4 |
|
Amortization of Intangibles |
|
| 4.7 |
|
|
| 4.8 |
|
|
|
|
|
|
|
|
|
|
Income from Operations |
|
| 13.8 |
|
|
| 38.6 |
|
|
|
|
|
|
|
|
|
|
Interest Expense, Net |
|
| 1.6 |
|
|
| 2.9 |
|
Other (Income) Expense, Net |
|
| (3.4 | ) |
|
| 0.1 |
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
| 15.6 |
|
|
| 35.6 |
|
|
|
|
|
|
|
|
|
|
Income Tax (Benefit) Expense |
|
| (5.1 | ) |
|
| 7.3 |
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income per Share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.55 |
|
| $ | 0.75 |
|
Diluted |
| $ | 0.54 |
|
| $ | 0.75 |
|
|
|
|
|
|
|
|
|
|
Cash Dividends per Share |
| $ | 0.11 |
|
| $ | 0.11 |
|
| Three Months Ended | Nine Months Ended | |||||||||||||||
| February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
| (14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | |||||||||||||
| Net Sales | $ | 285.9 | $ | 246.9 | $ | 813.3 | $ | 734.3 | ||||||||
| Cost of Products Sold | 206.6 | 182.6 | 589.6 | 539.1 | ||||||||||||
| Gross Profit | 79.3 | 64.3 | 223.7 | 195.2 | ||||||||||||
| Selling and Administrative Expenses | 33.0 | 32.8 | 98.6 | 110.3 | ||||||||||||
| Amortization of Intangibles | 4.8 | 5.5 | 14.3 | 11.1 | ||||||||||||
| Income from Operations | 41.5 | 26.0 | 110.8 | 73.8 | ||||||||||||
| Interest Expense, Net | 2.4 | 3.2 | 8.0 | 5.0 | ||||||||||||
| Other Income, Net | (4.9 | ) | (4.9 | ) | (5.8 | ) | (4.7 | ) | ||||||||
| Income before Income Taxes | 44.0 | 27.7 | 108.6 | 73.5 | ||||||||||||
| Income Tax Expense (Benefit) | 2.8 | (3.0 | ) | 15.3 | 4.5 | |||||||||||
| Net Income | $ | 41.2 | $ | 30.7 | $ | 93.3 | $ | 69.0 | ||||||||
| Basic and Diluted Income per Share: | ||||||||||||||||
| Basic | $ | 1.10 | $ | 0.82 | $ | 2.48 | $ | 1.84 | ||||||||
| Diluted | $ | 1.09 | $ | 0.82 | $ | 2.47 | $ | 1.83 | ||||||||
| Cash Dividends per Share | $ | 0.11 | $ | 0.11 | $ | 0.33 | $ | 0.33 | ||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax: |
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments |
|
| 20.3 |
|
|
| (1.6 | ) |
Derivative Financial Instruments |
|
| (3.6 | ) |
|
| — |
|
Total Comprehensive Income |
| $ | 37.4 |
|
| $ | 26.7 |
|
| Three Months Ended | Nine Months Ended | |||||||||||||||
| February 1, 2020 | January 26, 2019 | February 1, 2020 | January 26, 2019 | |||||||||||||
| (14 Weeks) | (13 Weeks) | (40 Weeks) | (39 Weeks) | |||||||||||||
| Net Income | $ | 41.2 | $ | 30.7 | $ | 93.3 | $ | 69.0 | ||||||||
| Foreign Currency Translation Adjustments | 1.6 | 3.2 | (2.8 | ) | (22.4 | ) | ||||||||||
| Total Comprehensive Income | $ | 42.8 | $ | 33.9 | $ | 90.5 | $ | 46.6 | ||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per-share data)
|
| August 1, 2020 |
|
| May 2, 2020 |
| ||
|
| (Unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
| $ | 211.0 |
|
| $ | 217.3 |
|
Accounts Receivable, Net |
|
| 233.0 |
|
|
| 188.5 |
|
Inventories |
|
| 124.0 |
|
|
| 131.0 |
|
Income Tax Receivable |
|
| 13.6 |
|
|
| 12.9 |
|
Prepaid Expenses and Other Current Assets |
|
| 16.4 |
|
|
| 15.9 |
|
TOTAL CURRENT ASSETS |
|
| 598.0 |
|
|
| 565.6 |
|
LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
| 208.6 |
|
|
| 201.9 |
|
Goodwill |
|
| 233.3 |
|
|
| 231.6 |
|
Other Intangible Assets, Net |
|
| 242.1 |
|
|
| 244.8 |
|
Operating Lease Assets, Net |
|
| 22.1 |
|
|
| 23.5 |
|
Deferred Tax Assets |
|
| 41.0 |
|
|
| 31.4 |
|
Pre-production Costs |
|
| 36.0 |
|
|
| 37.1 |
|
Other Long-term Assets |
|
| 37.1 |
|
|
| 34.7 |
|
TOTAL LONG-TERM ASSETS |
|
| 820.2 |
|
|
| 805.0 |
|
TOTAL ASSETS |
| $ | 1,418.2 |
|
| $ | 1,370.6 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts Payable |
| $ | 83.2 |
|
| $ | 73.8 |
|
Accrued Employee Liabilities |
|
| 20.0 |
|
|
| 19.1 |
|
Other Accrued Expenses |
|
| 28.3 |
|
|
| 18.5 |
|
Short-term Operating Lease Liability |
|
| 5.5 |
|
|
| 5.5 |
|
Short-term Debt |
|
| 15.4 |
|
|
| 15.3 |
|
Income Tax Payable |
|
| 7.6 |
|
|
| 11.6 |
|
TOTAL CURRENT LIABILITIES |
|
| 160.0 |
|
|
| 143.8 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Long-term Debt |
|
| 334.4 |
|
|
| 336.8 |
|
Long-term Operating Lease Liability |
|
| 18.4 |
|
|
| 20.4 |
|
Long-term Income Tax Payable |
|
| 29.3 |
|
|
| 29.3 |
|
Other Long-term Liabilities |
|
| 20.0 |
|
|
| 15.3 |
|
Deferred Tax Liabilities |
|
| 42.3 |
|
|
| 41.6 |
|
TOTAL LONG-TERM LIABILITIES |
|
| 444.4 |
|
|
| 443.4 |
|
TOTAL LIABILITIES |
|
| 604.4 |
|
|
| 587.2 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,876,362 shares and 38,438,111 shares issued as of August 1, 2020 and May 2, 2020, respectively |
|
| 19.4 |
|
|
| 19.2 |
|
Additional Paid-in Capital |
|
| 151.5 |
|
|
| 150.7 |
|
Accumulated Other Comprehensive Loss |
|
| (10.2 | ) |
|
| (26.9 | ) |
Treasury Stock, 1,346,624 shares as of August 1, 2020 and May 2, 2020 |
|
| (11.5 | ) |
|
| (11.5 | ) |
Retained Earnings |
|
| 664.6 |
|
|
| 651.9 |
|
TOTAL SHAREHOLDERS' EQUITY |
|
| 813.8 |
|
|
| 783.4 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
| $ | 1,418.2 |
|
| $ | 1,370.6 |
|
| February 1, 2020 | April 27, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and Cash Equivalents | $ | 79.9 | $ | 83.2 | ||||
| Accounts Receivable, Net | 227.9 | 219.3 | ||||||
| Inventories | 126.1 | 116.7 | ||||||
| Income Tax Receivable | 9.7 | 14.3 | ||||||
| Prepaid Expenses and Other Current Assets | 20.3 | 20.0 | ||||||
| TOTAL CURRENT ASSETS | 463.9 | 453.5 | ||||||
| LONG-TERM ASSETS | ||||||||
| Property, Plant and Equipment, Net | 199.0 | 191.9 | ||||||
| Goodwill | 233.2 | 233.3 | ||||||
| Other Intangible Assets, Net | 251.0 | 264.9 | ||||||
| Operating Lease Assets, Net | 27.3 | — | ||||||
| Deferred Tax Assets | 34.3 | 34.3 | ||||||
| Pre-production Costs | 39.9 | 32.8 | ||||||
| Other Long-term Assets | 33.7 | 21.0 | ||||||
| TOTAL LONG-TERM ASSETS | 818.4 | 778.2 | ||||||
| TOTAL ASSETS | $ | 1,282.3 | $ | 1,231.7 | ||||
| LIABILITIES & SHAREHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts Payable | $ | 88.8 | $ | 91.9 | ||||
| Accrued Employee Liabilities | 19.7 | 20.1 | ||||||
| Other Accrued Expenses | 22.6 | 33.9 | ||||||
| Short-term Operating Lease Liability | 6.0 | — | ||||||
| Short-term Debt | 15.1 | 15.7 | ||||||
| Income Tax Payable | 11.4 | 19.3 | ||||||
| TOTAL CURRENT LIABILITIES | 163.6 | 180.9 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Long-term Debt | 241.9 | 276.9 | ||||||
| Long-term Operating Lease Liability | 21.9 | — | ||||||
| Long-term Income Tax Payable | 29.3 | 33.0 | ||||||
| Other Long-term Liabilities | 16.9 | 14.8 | ||||||
| Deferred Tax Liabilities | 35.8 | 36.4 | ||||||
| TOTAL LONG-TERM LIABILITIES | 345.8 | 361.1 | ||||||
| TOTAL LIABILITIES | 509.4 | 542.0 | ||||||
| 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 | 19.2 | 19.2 | ||||||
| Additional Paid-in Capital | 156.0 | 150.4 | ||||||
| Accumulated Other Comprehensive Loss | (16.4 | ) | (13.6 | ) | ||||
| Treasury Stock, 1,346,624 shares as of February 1, 2020 and April 27, 2019 | (11.5 | ) | (11.5 | ) | ||||
| Retained Earnings | 625.6 | 545.2 | ||||||
| TOTAL SHAREHOLDERS' EQUITY | 772.9 | 689.7 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,282.3 | $ | 1,231.7 | ||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(in millions, except share data)
|
| Three Months Ended August 1, 2020 |
| |||||||||||||||||||||||||
|
| Common Stock Shares |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Retained Earnings |
|
| Total Equity |
| |||||||
Balance as of May 2, 2020 |
|
| 38,438,111 |
|
| $ | 19.2 |
|
| $ | 150.7 |
| �� | $ | (26.9 | ) |
| $ | (11.5 | ) |
| $ | 651.9 |
|
| $ | 783.4 |
|
Earned Portion of Restricted Stock, Net of Tax Withholding |
|
| 433,251 |
|
|
| 0.2 |
|
|
| (0.2 | ) |
|
| — |
|
|
| — |
|
|
| (3.9 | ) |
|
| (3.9 | ) |
Exercise of Stock Options |
|
| 5,000 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Stock-based Compensation Expense |
|
| — |
|
|
| — |
|
|
| 0.9 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.9 |
|
Other Comprehensive Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16.7 |
|
|
| — |
|
|
| — |
|
|
| 16.7 |
|
Net Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20.7 |
|
|
| 20.7 |
|
Dividends on Common Stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4.1 | ) |
|
| (4.1 | ) |
Balance as of August 1, 2020 |
|
| 38,876,362 |
|
| $ | 19.4 |
|
| $ | 151.5 |
|
| $ | (10.2 | ) |
| $ | (11.5 | ) |
| $ | 664.6 |
|
| $ | 813.8 |
|
|
| Three Months Ended July 27, 2019 |
| |||||||||||||||||||||||||
|
| Common Stock Shares |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Treasury Stock |
|
| Retained Earnings |
|
| Total Equity |
| |||||||
Balance as of April 27, 2019 |
|
| 38,333,576 |
|
| $ | 19.2 |
|
| $ | 150.4 |
|
| $ | (13.6 | ) |
| $ | (11.5 | ) |
| $ | 545.2 |
|
| $ | 689.7 |
|
Earned Portion of Restricted Stock, Net of Tax Withholding |
|
| 104,535 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.4 | ) |
|
| (0.4 | ) |
Stock-based Compensation Expense |
|
| — |
|
|
| — |
|
|
| 2.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.5 |
|
Other Comprehensive Loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.6 | ) |
|
| — |
|
|
| — |
|
|
| (1.6 | ) |
Net Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 28.3 |
|
|
| 28.3 |
|
Dividends on Common Stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4.2 | ) |
|
| (4.2 | ) |
Balance as of July 27, 2019 |
|
| 38,438,111 |
|
| $ | 19.2 |
|
| $ | 152.9 |
|
| $ | (15.2 | ) |
| $ | (11.5 | ) |
| $ | 568.9 |
|
| $ | 714.3 |
|
| 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 | 38,438,111 | $ | 19.2 | $ | 154.4 | $ | (18.0 | ) | $ | (11.5 | ) | $ | 588.5 | $ | 732.6 | |||||||||||
| Stock-based Compensation Expense | — | — | 1.6 | — | — | — | 1.6 | |||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | 1.6 | — | — | 1.6 | |||||||||||||||||||
| Net Income | — | — | — | — | — | 41.2 | 41.2 | |||||||||||||||||||
| Cash Dividends on Common Stock | — | — | — | — | — | (4.1 | ) | (4.1 | ) | |||||||||||||||||
| Balance as of February 1, 2020 | 38,438,111 | $ | 19.2 | $ | 156.0 | $ | (16.4 | ) | $ | (11.5 | ) | $ | 625.6 | $ | 772.9 | |||||||||||
| 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 | 38,333,576 | $ | 19.2 | $ | 147.3 | $ | (11.7 | ) | $ | (11.5 | ) | $ | 500.0 | $ | 643.3 | |||||||||||
| Stock-based Compensation Expense | — | — | 0.9 | — | — | — | 0.9 | |||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | 3.2 | — | — | 3.2 | |||||||||||||||||||
| Net Income | — | — | — | — | — | 30.7 | 30.7 | |||||||||||||||||||
| Cash Dividends on Common Stock | — | — | — | — | — | (4.0 | ) | (4.0 | ) | |||||||||||||||||
| Balance as of January 26, 2019 | 38,333,576 | $ | 19.2 | $ | 148.2 | $ | (8.5 | ) | $ | (11.5 | ) | $ | 526.7 | $ | 674.1 | |||||||||||
| 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 | 38,333,576 | $ | 19.2 | $ | 150.4 | $ | (13.6 | ) | $ | (11.5 | ) | $ | 545.2 | $ | 689.7 | |||||||||||
| Earned Portion of Restricted Stock, Net of Tax Withholding | 104,535 | — | — | — | — | (0.4 | ) | (0.4 | ) | |||||||||||||||||
| Stock-based Compensation Expense | — | — | 5.6 | — | — | — | 5.6 | |||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | (2.8 | ) | — | — | (2.8 | ) | |||||||||||||||||
| Net Income | — | — | — | — | — | 93.3 | 93.3 | |||||||||||||||||||
| Dividends on Common Stock | — | — | — | — | — | (12.5 | ) | (12.5 | ) | |||||||||||||||||
| Balance as of February 1, 2020 | 38,438,111 | $ | 19.2 | $ | 156.0 | $ | (16.4 | ) | $ | (11.5 | ) | $ | 625.6 | $ | 772.9 | |||||||||||
| 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 | 38,198,353 | $ | 19.1 | $ | 136.5 | $ | 13.9 | $ | (11.5 | ) | $ | 472.0 | $ | 630.0 | ||||||||||||
| Earned Portion of Restricted Stock, Net of Tax Withholding | 135,223 | 0.1 | (0.1 | ) | — | — | (1.7 | ) | (1.7 | ) | ||||||||||||||||
| Stock-based Compensation Expense | — | — | 11.8 | — | — | — | 11.8 | |||||||||||||||||||
| Adoption of ASU 2014-09 | — | — | — | — | — | 0.1 | 0.1 | |||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | (22.4 | ) | — | — | (22.4 | ) | |||||||||||||||||
| Net Income | — | — | — | — | — | 69.0 | 69.0 | |||||||||||||||||||
| Dividends on Common Stock | — | — | — | — | — | (12.7 | ) | (12.7 | ) | |||||||||||||||||
| Balance as of January 26, 2019 | 38,333,576 | $ | 19.2 | $ | 148.2 | $ | (8.5 | ) | $ | (11.5 | ) | $ | 526.7 | $ | 674.1 | |||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
| 12.1 |
|
|
| 11.8 |
|
Stock-based Compensation Expense |
|
| 0.9 |
|
|
| 2.5 |
|
Change in Cash Surrender Value of Life Insurance |
|
| (0.6 | ) |
|
| (0.3 | ) |
Amortization of Debt Issuance Costs |
|
| 0.2 |
|
|
| 0.2 |
|
Change in Deferred Income Taxes |
|
| (6.2 | ) |
|
| — |
|
Other |
|
| 1.0 |
|
|
| — |
|
Changes in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
| (37.3 | ) |
|
| (12.8 | ) |
Inventories |
|
| 9.1 |
|
|
| (5.7 | ) |
Prepaid Expenses and Other Assets |
|
| 1.5 |
|
|
| 0.7 |
|
Accounts Payable and Other Liabilities |
|
| 15.0 |
|
|
| (5.6 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 16.4 |
|
|
| 19.1 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of Property, Plant and Equipment |
|
| (11.6 | ) |
|
| (13.2 | ) |
NET CASH USED IN INVESTING ACTIVITIES |
|
| (11.6 | ) |
|
| (13.2 | ) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Taxes Paid Related to Net Share Settlement of Equity Awards |
|
| (3.9 | ) |
|
| (0.4 | ) |
Proceeds from Exercise of Stock Options |
|
| 0.1 |
|
|
| — |
|
Repayments of Finance Leases |
|
| (0.1 | ) |
|
| (0.2 | ) |
Cash Dividends |
|
| (5.0 | ) |
|
| (4.1 | ) |
Proceeds from Borrowings |
|
| — |
|
|
| 1.0 |
|
Repayments of Borrowings |
|
| (4.1 | ) |
|
| (10.7 | ) |
NET CASH USED IN FINANCING ACTIVITIES |
|
| (13.0 | ) |
|
| (14.4 | ) |
Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents |
|
| 1.9 |
|
|
| (0.9 | ) |
DECREASE IN CASH AND CASH EQUIVALENTS |
|
| (6.3 | ) |
|
| (9.4 | ) |
Cash and Cash Equivalents at Beginning of the Year |
|
| 217.3 |
|
|
| 83.2 |
|
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD |
| $ | 211.0 |
|
| $ | 73.8 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash Paid During the Period For: |
|
|
|
|
|
|
|
|
Interest |
| $ | 1.5 |
|
| $ | 2.9 |
|
Income Taxes, Net of Refunds |
| $ | 4.8 |
|
| $ | 7.8 |
|
Operating Lease Obligations |
| $ | 2.1 |
|
| $ | 2.1 |
|
| Nine Months Ended | ||||||||
| February 1, 2020 | January 26, 2019 | |||||||
| (40 Weeks) | (39 Weeks) | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net Income | $ | 93.3 | $ | 69.0 | ||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
| Depreciation and Amortization | 36.0 | 30.6 | ||||||
| Stock-based Compensation Expense | 5.6 | 11.7 | ||||||
| Change in Cash Surrender Value of Life Insurance | (0.6 | ) | (0.2 | ) | ||||
| Amortization of Debt Issuance Costs | 0.5 | 0.3 | ||||||
| Gain on Sale of Business/Investment/Property | (0.4 | ) | (0.6 | ) | ||||
| Other | 0.3 | (0.4 | ) | |||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | (10.5 | ) | 12.2 | |||||
| Inventories | (9.9 | ) | (10.9 | ) | ||||
| Prepaid Expenses and Other Assets | (12.8 | ) | (16.5 | ) | ||||
| Accounts Payable and Other Liabilities | (18.9 | ) | (30.9 | ) | ||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 82.6 | 64.3 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Purchases of Property, Plant and Equipment | (34.9 | ) | (37.0 | ) | ||||
| Acquisitions of Businesses, Net of Cash Acquired | — | (421.6 | ) | |||||
| Sale of Business/Investment/Property | 0.5 | 0.3 | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | (34.4 | ) | (458.3 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Taxes Paid Related to Net Share Settlement of Equity Awards | (0.4 | ) | (1.7 | ) | ||||
| Repayments of Finance Leases | (0.5 | ) | — | |||||
| Cash Dividends | (12.2 | ) | (12.7 | ) | ||||
| Proceeds from Borrowings | 57.3 | 350.0 | ||||||
| Repayments of Borrowings | (93.9 | ) | (103.3 | ) | ||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (49.7 | ) | 232.3 | |||||
| Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents | (1.8 | ) | (10.7 | ) | ||||
| 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 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash Paid During the Period For: | ||||||||
| Interest | $ | 7.6 | $ | 5.6 | ||||
| Income Taxes, Net of Refunds | $ | 16.2 | $ | 18.7 | ||||
See notes to condensed consolidated financial statements.
6
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. | Description of Business and Summary of Significant Accounting Policies |
Description of Business and Summary of Significant Accounting Policies
Methode Electronics, Inc. (the "Company" or "Methode") is a global developer of custom engineered and application specific products and solutions with manufacturing, design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States. The Company's primary manufacturing facilities are located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, Mexico. The Company designs, manufactures and markets devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing technologies.
Impact of COVID-19
The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. The Company expects the disruptions caused by the COVID-19 pandemic to continue to have an adverse impact on the Company's operating results across all segments for the remainder of fiscal 2021. The Company began to see the impacts of the COVID-19 pandemic at the beginning of its fourth quarter of fiscal 2020 at its China manufacturing facilities, which were initially closed after the Chinese New Year. The Company’s manufacturing facilities in China resumed operations later in the fourth quarter of fiscal 2020, but at lower capacity utilization. However, the major impact to the Company’s business from the COVID-19 pandemic began in mid-March 2020, as the Company’s operations in North America and Europe were adversely impacted by many customers suspending their manufacturing operations due to the COVID-19 pandemic. As a result, production levels at the Company’s major North American and European manufacturing facilities were still significantly reduced to well below capacity through early June 2020. In the first quarter of fiscal 2021, the Company’s operations in North America and Europe gradually resumed operations, however production levels were still significantly reduced, resulting in lower capacity utilization. Some of the Company’s international locations received government assistance with respect to wages and other expenses. The amount of assistance received was $2.9 million in the three months ended August 1, 2020 and have been reported as other income.
The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, its allowance for credit losses, the carrying value of the Company's goodwill, intangible assets, and other long-lived assets, and valuation allowances in context with the information reasonably available to the Company and the unknown future impacts of the COVID-19 pandemic as of August 1, 2020 and through the date of this report. As a result of these assessments, the Company concluded that there were no impairments or material increases in credit allowances or valuation allowances that impacted the Company's condensed consolidated financial statements as of and for the three months ended August 1, 2020. However, the Company's future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material impacts to its consolidated financial statements in future reporting periods.
Basis of Presentation
The unaudited 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,May 2, 2020, filed with the SEC on June 20, 2019.30, 2020. Results may vary from quarter-to-quarter for reasons other than seasonality.
7
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 theThe three months ended FebruaryAugust 1, 2020 the Company's accounting period included 14 weeks compared to and July 27, 2019 were both 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.week
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from these estimates.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, "Description of Business and Summary of Significant Accounting Policies," to the consolidated financial statements included in the Company's Form 10-K for the year ended April 27, 2019.May 2, 2020. There have been no material changes to the significant accounting policies in the ninethree months ended FebruaryAugust 1, 2020 other than those noted below.
Recently Adopted Accounting Pronouncements
In FebruaryJune 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) 2016-02, “
The Company adopted this guidance is effectiveas of May 3, 2020. The guidance allows for fiscal years beginning after December 15, 2019, with earlyvarious methods for measuring expected credit losses. The Company elected to apply a historical loss rate based on historic write-offs to aging categories. The historical loss rate will be adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary. The adoption permitted. Management is currently assessing the impact of the new standard, but doesguidance did not anticipate that the adoption of this standard will have a material impact on the way it estimates theCompany's condensed consolidated financial statements. The allowance for doubtful accounts on its trade accounts receivable.balance was $0.8 million and $0.6 million as of August 1, 2020 and May 2, 2020, respectively
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.In August 2018, the FASB issued ASU 2018-13, “
Fair Value Measurement (Topic 820) – DisclosureNew Accounting Pronouncements Not Adopted
In December 2019, the FASB issued ASU 2019-12, "
Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)," which simplifies the accounting for income taxes. The new guidance removes certain exceptions to the general principles in Accounting Standards Codification (“ASC8
annual periods beginning after December 15, 2020, and interim periods thereafter; however, early adoption is permitted. The Company is evaluatingcurrently assessing the provisionspotential impact of the updated guidance and assessing the impactstandard on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference LIBOR or another rate that is expected to be discontinued, subject to meeting certain criteria. ASU 2020-04 will be in effect through December 31, 2022. The Company is currently assessing the potential impact of the standard on its condensed consolidated financial statements.
Note 2. | Revenue |
The majority of the Company's revenue is recognized at a point in time. The Company has determined that the most definitive demonstration that control has transferred to a customer is physical shipment or delivery, depending on the contractual shipping terms, except for consignment transactions. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon the customer’s usage.
Revenues associated with products which the Company believes have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over time basis. The Company believes the most faithful depiction of the transfer of goods to the 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
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 Companyan entity has received consideration, or the amount is due from the customer in advance of revenue recognition. Contract assetsThe net change in the contract asset and contract liabilities are recognized in prepaid expensesliability balances for the three months ended August 1, 2020 and other current assets and other long-term liabilities, respectively, in the Company's condensed consolidated balance sheets.
9
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 0 impairments of contract assets as of February 1, 2020.
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 August 1, 2020 |
| |||||||||||||||||
(Dollars in Millions) |
| Auto |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Total |
| |||||
Geographic Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 76.3 |
|
| $ | 20.6 |
|
| $ | 13.2 |
|
| $ | 0.4 |
|
| $ | 110.5 |
|
Europe & Africa |
|
| 28.8 |
|
|
| 12.8 |
|
|
| — |
|
|
| — |
|
|
| 41.6 |
|
Asia |
|
| 20.0 |
|
|
| 18.6 |
|
|
| 0.2 |
|
|
| — |
|
|
| 38.8 |
|
Total Net Sales |
| $ | 125.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 190.9 |
|
Timing of Revenue Recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods Transferred at a Point in Time |
| $ | 120.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 185.9 |
|
Goods Transferred Over Time |
|
| 5.0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.0 |
|
Total Net Sales |
| $ | 125.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 190.9 |
|
|
| Three Months Ended July 27, 2019 |
| |||||||||||||||||
(Dollars in Millions) |
| Auto |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Total |
| |||||
Geographic Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 121.6 |
|
| $ | 48.9 |
|
| $ | 12.5 |
|
| $ | 0.3 |
|
| $ | 183.3 |
|
Europe & Africa |
|
| 49.0 |
|
|
| 12.5 |
|
|
| 0.1 |
|
|
| — |
|
|
| 61.6 |
|
Asia |
|
| 15.6 |
|
|
| 9.4 |
|
|
| 0.3 |
|
|
| — |
|
|
| 25.3 |
|
Total Net Sales |
| $ | 186.2 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 270.2 |
|
Timing of Revenue Recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods Transferred at a Point in Time |
| $ | 179.0 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 263.0 |
|
Goods Transferred Over Time |
|
| 7.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7.2 |
|
Total Net Sales |
| $ | 186.2 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 270.2 |
|
Note 3. | Restructuring |
| Three Months Ended February 1, 2020 (14 Weeks) | ||||||||||||||||||||
| (Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
| Geographic Net Sales: | ||||||||||||||||||||
| U.S. | $ | 111.0 | $ | 34.2 | $ | 14.6 | $ | 0.6 | $ | 160.4 | ||||||||||
| Malta | 33.7 | 7.7 | — | — | 41.4 | |||||||||||||||
| China | 22.8 | 9.5 | 0.1 | — | 32.4 | |||||||||||||||
| Canada | 19.3 | 4.2 | — | — | 23.5 | |||||||||||||||
| Other | 23.5 | 4.5 | 0.2 | — | 28.2 | |||||||||||||||
| Total Net Sales | $ | 210.3 | $ | 60.1 | $ | 14.9 | $ | 0.6 | $ | 285.9 | ||||||||||
| Timing of Revenue Recognition: | ||||||||||||||||||||
| Goods Transferred at a Point in Time | $ | 198.6 | $ | 60.1 | $ | 14.9 | $ | 0.6 | $ | 274.2 | ||||||||||
| Goods Transferred Over Time | 11.7 | — | — | — | 11.7 | |||||||||||||||
| Total Net Sales | $ | 210.3 | $ | 60.1 | $ | 14.9 | $ | 0.6 | $ | 285.9 | ||||||||||
| Three Months Ended January 26, 2019 (13 Weeks) | ||||||||||||||||||||
| (Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
| Geographic Net Sales: | ||||||||||||||||||||
| U.S. | $ | 80.7 | $ | 33.8 | $ | 13.3 | $ | 0.1 | $ | 127.9 | ||||||||||
| Malta | 26.7 | 7.0 | 0.1 | — | 33.8 | |||||||||||||||
| China | 20.5 | 9.6 | — | — | 30.1 | |||||||||||||||
| Canada | 21.1 | 5.5 | — | — | 26.6 | |||||||||||||||
| Other | 23.9 | 4.3 | 0.3 | — | 28.5 | |||||||||||||||
| Total Net Sales | $ | 172.9 | $ | 60.2 | $ | 13.7 | $ | 0.1 | $ | 246.9 | ||||||||||
| Timing of Revenue Recognition: | ||||||||||||||||||||
| Goods Transferred at a Point in Time | $ | 165.7 | $ | 60.2 | $ | 13.7 | $ | 0.1 | $ | 239.7 | ||||||||||
| Goods Transferred Over Time | 7.2 | — | — | — | 7.2 | |||||||||||||||
| Total Net Sales | $ | 172.9 | $ | 60.2 | $ | 13.7 | $ | 0.1 | $ | 246.9 | ||||||||||
| Nine Months Ended February 1, 2020 (40 Weeks) | ||||||||||||||||||||
| (Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
| Geographic Net Sales: | ||||||||||||||||||||
| U.S. | $ | 295.2 | $ | 117.3 | $ | 38.9 | $ | 1.2 | $ | 452.6 | ||||||||||
| Malta | 88.4 | 22.8 | 0.2 | — | 111.4 | |||||||||||||||
| China | 59.1 | 26.0 | 0.1 | — | 85.2 | |||||||||||||||
| Canada | 63.4 | 15.9 | — | — | 79.3 | |||||||||||||||
| Other | 70.5 | 13.8 | 0.5 | — | 84.8 | |||||||||||||||
| Total Net Sales | $ | 576.6 | $ | 195.8 | $ | 39.7 | $ | 1.2 | $ | 813.3 | ||||||||||
| Timing of Revenue Recognition: | ||||||||||||||||||||
| Goods Transferred at a Point in Time | $ | 546.3 | $ | 195.8 | $ | 39.7 | $ | 1.2 | $ | 783.0 | ||||||||||
| Goods Transferred Over Time | 30.3 | — | — | — | 30.3 | |||||||||||||||
| Total Net Sales | $ | 576.6 | $ | 195.8 | $ | 39.7 | $ | 1.2 | $ | 813.3 | ||||||||||
| Nine Months Ended January 26, 2019 (39 Weeks) | ||||||||||||||||||||
| (Dollars in Millions) | Auto | Industrial | Interface | Medical | Total | |||||||||||||||
| Geographic Net Sales: | ||||||||||||||||||||
| U.S. | $ | 254.7 | $ | 70.8 | $ | 42.7 | $ | 0.7 | $ | 368.9 | ||||||||||
| Malta | 86.8 | 22.7 | 0.2 | — | 109.7 | |||||||||||||||
| China | 63.0 | 27.5 | 0.1 | — | 90.6 | |||||||||||||||
| Canada | 66.2 | 8.0 | — | — | 74.2 | |||||||||||||||
| Other | 79.1 | 10.8 | 1.0 | — | 90.9 | |||||||||||||||
| Total Net Sales | $ | 549.8 | $ | 139.8 | $ | 44.0 | $ | 0.7 | $ | 734.3 | ||||||||||
| Timing of Revenue Recognition: | ||||||||||||||||||||
| Goods Transferred at a Point in Time | $ | 524.8 | $ | 139.8 | $ | 44.0 | $ | 0.7 | $ | 709.3 | ||||||||||
| Goods Transferred Over Time | 25.0 | — | — | — | 25.0 | |||||||||||||||
| Total Net Sales | $ | 549.8 | $ | 139.8 | $ | 44.0 | $ | 0.7 | $ | 734.3 | ||||||||||
The Company leases real estate, automobilescontinually monitors market factors and industry trends and takes necessary actions to reduce overall costs and improve operational profitability. In the three months ended August 1, 2020, the Company initiated certain equipment under both operatingrestructuring actions in response to the adverse impacts from the COVID-19 pandemic. These actions included plant consolidations and finance leases.workforce reductions in the Automotive, Industrial and Interface segments. In the three months ended August 1, 2020, the Company recognized $3.4 million of restructuring costs. These charges consist of $1.9 million recorded in cost of products sold and $1.5 million recorded in selling and administrative expenses.
Employee termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable. Asset impairment charges primarily relate to the impairment of right-of-use lease assets. Contract termination costs are recorded when notification of termination is given to the other party. The Company does not have any significant arrangements where itfollowing is the lessor. The majoritya rollforward 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.
| (Dollars in Millions) | Three Months Ended February 1, 2020 | Nine Months Ended February 1, 2020 | ||||||
| Lease Cost: | ||||||||
| Operating Lease Cost | $ | 2.3 | $ | 7.1 | ||||
| Variable Lease Cost | 0.3 | 0.7 | ||||||
| Total Lease Cost | $ | 2.6 | $ | 7.8 | ||||
| (Dollars in Millions) | Nine Months Ended February 1, 2020 | |||
| Operating Cash Flows: | ||||
| Cash Paid Related to Operating Lease Obligations | $ | 6.5 | ||
| Non-cash Activity: | ||||
| Right-of-use Assets Obtained in Exchange for Lease Obligations | $ | 5.7 | ||
| Weighted-average Remaining Lease Term | 5.8 years | |||
| Weighted-average Discount Rate | 4.70 | % | ||
| (Dollars in Millions) | Operating Leases | |||
| Fiscal Year: | ||||
| Remainder of 2020 | $ | 2.2 | ||
| 2021 | 6.5 | |||
| 2022 | 5.9 | |||
| 2023 | 5.3 | |||
| 2024 | 4.1 | |||
| Thereafter | 8.1 | |||
| Total Lease Payments | 32.1 | |||
| Less: Imputed Interest | (4.2 | ) | ||
| Present Value of Lease Liabilities | $ | 27.9 | ||
| (Dollars in Millions) | Operating Leases | |||
| Fiscal Years: | ||||
| 2020 | $ | 7.8 | ||
| 2021 | 5.6 | |||
| 2022 | 4.9 | |||
| 2023 | 4.2 | |||
| 2024 | 3.3 | |||
| Thereafter | 8.4 | |||
| Net Minimum Lease Payments | $ | 34.2 | ||
| (Dollars in Millions) | ||||
| Cash | $ | 6.9 | ||
| Accounts Receivable | 36.1 | |||
| Inventory | 30.8 | |||
| Prepaid Expenses and Other Current Assets | 1.6 | |||
| Other Intangible Assets | 221.9 | |||
| Goodwill | 175.1 | |||
| Pre-production Costs | 1.5 | |||
| Property, Plant and Equipment | 16.2 | |||
| Accounts Payable | (19.4 | ) | ||
| Accrued Employee Liabilities | (4.4 | ) | ||
| Other Accrued Expenses | (7.6 | ) | ||
| Income Tax Payable | (0.3 | ) | ||
| Deferred Income Tax Liability | (29.4 | ) | ||
| Total Purchase Price | $ | 429.0 | ||
| (Dollars in Millions) | Fair Value at Date of Acquisition | Amortization Period | ||||
| Customer Relationships and Agreements - Significant Customer | $ | 57.0 | 19.5 years | |||
| Customer Relationships and Agreements - All Other Customers | 125.0 | 19.5 years | ||||
| Technology Licenses | 17.7 | 11.7 years | ||||
| Trade Names | 22.2 | 8.5 years | ||||
| Total | $ | 221.9 | ||||
|
|
|
|
|
|
|
|
|
| Utilization |
|
|
|
|
| |||||
(Dollars in Millions) |
| Accrual as of May 2, 2020 |
|
| YTD Charges |
|
| Cash |
|
| Non-cash |
|
| Accrual as of August 1, 2020 |
| |||||
Employee Termination Benefits |
| $ | 0.2 |
|
| $ | 2.5 |
|
| $ | (1.1 | ) |
| $ | — |
|
| $ | 1.6 |
|
Asset Impairment Charges |
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
Contract Termination Costs |
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
Total |
| $ | 0.2 |
|
| $ | 3.4 |
|
| $ | (1.1 | ) |
| $ | (0.3 | ) |
| $ | 2.2 |
|
The table below presents restructuring costs by reportable segment:
10
Table of costs which have been reportedContents
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Automotive |
| $ | 2.0 |
|
| $ | — |
|
Industrial |
|
| 0.6 |
|
|
| — |
|
Interface |
|
| 0.7 |
|
|
| — |
|
Medical |
|
| — |
|
|
| — |
|
Eliminations/Corporate |
|
| 0.1 |
|
|
| — |
|
Total Restructuring Costs |
| $ | 3.4 |
|
| $ | — |
|
Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in selling and administrativeestimating restructuring expenses, and $3.0 millionactual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of costs which have been reported inprevious estimates by adjusting previously established accruals. The Company expects to incur additional restructuring costs of products sold onapproximately $2.0 million during the condensed consolidated statements of income. Acquisition-related costs forcurrent fiscal year related to the nine months ended January 26, 2019 included $9.7 million of costs which have been reportedinitiated restructuring programs and may take additional restructuring actions in sellingfuture periods based upon market conditions 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.industry trends.
Note 4. | Income Taxes |
| (Unaudited) | ||||
| (Dollars in Millions) | Nine Months Ended January 26, 2019 | |||
| Net Sales | $ | 805.7 | ||
| Net Income | $ | 92.1 | ||
The provision for income taxes for an interim period is based on an estimated annual effective income tax rate for the full fiscal year and applies thatthis rate is applied to ordinary year-to-date earnings or losses. The estimated annual effective income tax rate is determined excluding the effects of unusual or significant discreteone-time 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.
The computation of the estimated annual effective income tax rate at each interim period requires certain estimates and
assumptions including, but not limited to, the expected pre-tax income (or loss) for the year by jurisdiction, certain book to tax adjustments, and the likelihood of the realizability of deferred tax assets generated in the current year. The volatile global economic conditions resulting from the COVID-19 pandemic, the impacts of which are difficult to predict, may cause fluctuations in the Company’s expected pre-tax income (or loss) for the year, which could create volatility in the estimated annual effective income tax rate. The estimates used to compute the provision or benefit for income taxes may change as new events occur, additional information is obtained or as the Company’s tax environment changes.
The Company’s income tax (benefit) expense and effective tax rate for the three months ended August 1, 2020 and July 27, 2019 were as follows:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 2, 2020 |
|
| July 27, 2019 |
| ||
Income before Income Taxes |
| $ | 15.6 |
|
| $ | 35.6 |
|
Income Tax (Benefit) Expense |
| $ | (5.1 | ) |
| $ | 7.3 |
|
Effective Tax Rate |
|
| (32.7 | )% |
|
| 20.5 | % |
| 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 | $ | 44.0 | $ | 27.7 | $ | 108.6 | $ | 73.5 | ||||||||
| Income Tax Expense (Benefit) | $ | 2.8 | $ | (3.0 | ) | $ | 15.3 | $ | 4.5 | |||||||
| Effective Tax Rate | 6.4 | % | (10.4 | )% | 14.1 | % | 6.1 | % | ||||||||
The income tax provision in bothfor the three and nine months ended FebruaryAugust 1, 2020 was lower than the U.S. statutory tax rate primarily due to changes related to U.S. Tax Reforma benefit from tax credits claimed in a foreign jurisdiction of $6.6 million, additional beneficial tax attributes claimed of $1.2 million and income derived from foreign operations with lower statutory rates. The income tax provision for both the three and nine months ended January 26,July 27, 2019 was lower than the U.S. statutory tax rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates partially offset with the finalization of U.S. Tax Reform and the release of a tax reserve.
The Company's unrecognized income tax benefits were $5.1$5.3 million and $3.1$5.2 million as of FebruaryAugust 1, 2020 and April 27, 2019,May 2, 2020, 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.
Inventories
Inventories are stated at the lower-of-cost or net realizable value. Cost is determined using the first-in, first-out method. Finished products and work-in-process inventories include direct material costs and direct and indirect manufacturing costs. The Company records reserves for inventory that may be obsolete or in excess of current and future market demand. A summary of inventories is shown below:
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Finished Products |
| $ | 34.2 |
|
| $ | 45.7 |
|
Work in Process |
|
| 11.1 |
|
|
| 10.8 |
|
Raw Materials |
|
| 78.7 |
|
|
| 74.5 |
|
Total Inventories |
| $ | 124.0 |
|
| $ | 131.0 |
|
| (Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
| Raw Materials | $ | 75.9 | $ | 67.1 | ||||
| Work in Process | 11.3 | 9.4 | ||||||
| Finished Products | 38.9 | 40.2 | ||||||
| Total Inventories | $ | 126.1 | $ | 116.7 | ||||
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repair costs are expensed as incurred. Depreciation is calculated using the straight-line method using estimated useful lives of 5 to 40 years for buildings and building improvements and 3 to 15 years for machinery and equipment. A summary of property, plant and equipment is shown below:
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Land |
| $ | 3.3 |
|
| $ | 3.3 |
|
Buildings and Building Improvements |
|
| 90.6 |
|
|
| 87.3 |
|
Machinery and Equipment |
|
| 432.0 |
|
|
| 412.3 |
|
Total Property, Plant and Equipment, Gross |
|
| 525.9 |
|
|
| 502.9 |
|
Less: Accumulated Depreciation |
|
| (317.3 | ) |
|
| (301.0 | ) |
Property, Plant and Equipment, Net |
| $ | 208.6 |
|
| $ | 201.9 |
|
| (Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
| Land | $ | 3.4 | $ | 3.7 | ||||
| Buildings and Building Improvements | 85.9 | 81.2 | ||||||
| Machinery and Equipment | 408.6 | 390.7 | ||||||
| Total Property, Plant and Equipment, Gross | 497.9 | 475.6 | ||||||
| Less: Accumulated Depreciation | 298.9 | 283.7 | ||||||
| Property, Plant and Equipment, Net | $ | 199.0 | $ | 191.9 | ||||
Depreciation expense was $7.5$7.4 million and $6.7$7.0 million in the three months ended FebruaryAugust 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,July 27, 2019, respectively. As of FebruaryAugust 1, 2020 and April 27, 2019,May 2, 2020, capital expenditures recorded in accounts payable totaled $2.0$1.9 million and $6.4$5.8 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 FebruaryAugust 1, 2020 and April 27, 2019,May 2, 2020, the Company had $39.9$36.0 million and $32.8$37.1 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 FebruaryAugust 1, 2020 and April 27, 2019,May 2, 2020, the Company had $15.9$17.9 million and $15.0$19.0 million, respectively, of Company owned pre-production tooling, which is capitalized within property, plant and equipment.
Derivative Instruments
The Company is exposed to foreign currency risks that arise from normal business operations. The Company strives to control its exposure to these risks through our normal operating activities and, where appropriate, through derivative instruments.
On April 14, 2020, the Company entered into a variable-rate, cross-currency swap, maturing on August 31, 2023, with a
notional value of $60.0 million (€54.8 million). The cross-currency swap is designated as a hedge of the Company's net investment in a euro-based subsidiary. The Company entered into the cross-currency swap to mitigate changes in net assets due to changes in U.S.
dollar-euro spot exchange rates. The cross-currency swap was in a net liability position with an aggregate fair value of $5.9 million and $1.3 million as of August 1, 2020 and May 2, 2020, respectively, and is recorded within other long-term liabilities in the condensed consolidated balance sheets.
12
The fair value of the cross-currency swap is classified within Level 2 of the fair value hierarchy. Hedge effectiveness is
assessed at the inception of the hedging relationship and quarterly thereafter, under the spot-to-spot method. The Company records
changes in fair value attributable to the translation of foreign currencies through accumulated other comprehensive income (loss). The
Company amortizes the impact of all other changes in fair value of the derivative through interest expense, which was not material in the three and nine months ended FebruaryAugust 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.
Note 6.7.Goodwill and Other Intangible Assets
Goodwill
A summary of the changes in the carrying amount of goodwill, by segment:segment, is shown below:
(Dollars in Millions) |
| Automotive |
|
| Industrial |
|
| Total |
| |||
Balance as of May 2, 2020 |
| $ | 106.2 |
|
| $ | 125.4 |
|
| $ | 231.6 |
|
Foreign Currency Translation |
|
| 0.4 |
|
|
| 1.3 |
|
|
| 1.7 |
|
Balance as of August 1, 2020 |
| $ | 106.6 |
|
| $ | 126.7 |
|
| $ | 233.3 |
|
| (Dollars in Millions) | February 1, 2020 | April 27, 2019 | ||||||
| Automotive | $ | 106.3 | $ | 106.3 | ||||
| Industrial | 126.9 | 127.0 | ||||||
| Total | $ | 233.2 | $ | 233.3 | ||||
The Company tests indefinite-lived intangible assets and goodwill for impairment by either performing a qualitative evaluation or a quantitative test at least annually, or more frequently if an indication of impairment arises. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount.
During the first quarter of fiscal 2021, the Company evaluated the effects of the COVID-19 pandemic and its negative impact on the global economy on each of the Company’s reporting units and indefinite-lived intangible assets. Management reviewed key assumptions, including revisions of projected future revenues for reporting units and the results of the previous annual impairment testing performed during the fourth quarter of fiscal 2020. The Company did not identify an indication of impairment for any of its reporting units or indefinite-lived intangible assets. Although it was determined that a triggering event had not occurred as of August 1, 2020, management will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges.
Other Intangible Assets, Net
Details of the Company's identifiable intangible assets:assets are shown below:
|
| As of August 1, 2020 |
| |||||||||||||
(Dollars in Millions) |
| Gross |
|
| Accumulated Amortization |
|
| Net |
|
| Wtd. Avg. Remaining Amortization Periods (Years) |
| ||||
Definite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships and Agreements |
| $ | 245.4 |
|
| $ | (44.3 | ) |
| $ | 201.1 |
|
|
| 16.3 |
|
Trade Names, Patents and Technology Licenses |
|
| 75.8 |
|
|
| (36.6 | ) |
|
| 39.2 |
|
|
| 7.6 |
|
Total Definite-lived Intangible Assets |
|
| 321.2 |
|
|
| (80.9 | ) |
|
| 240.3 |
|
|
|
|
|
Indefinite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names, Patents and Technology Licenses |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Indefinite-lived Intangible Assets |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Other Intangible Assets |
| $ | 323.0 |
|
| $ | (80.9 | ) |
| $ | 242.1 |
|
|
|
|
|
| February 1, 2020 | |||||||||||||
| (Dollars in Millions) | Gross | Accumulated Amortization | Net | Wtd. Avg. Remaining Amortization Periods (Years) | |||||||||
| Definite-lived Intangible Assets: | |||||||||||||
| Customer Relationships and Agreements | $ | 244.8 | $ | 37.6 | $ | 207.2 | 16.7 | ||||||
| Trade Names, Patents and Technology Licenses | 75.6 | 33.6 | 42.0 | 8.0 | |||||||||
| Total Definite-lived Intangible Assets | 320.4 | 71.2 | 249.2 | ||||||||||
| Indefinite-lived Intangible Assets: | |||||||||||||
| Trade Names, Patents and Technology Licenses | 1.8 | — | 1.8 | ||||||||||
| Total Indefinite-lived Intangible Assets | 1.8 | — | 1.8 | ||||||||||
| Total Intangible Assets | $ | 322.2 | $ | 71.2 | $ | 251.0 | |||||||
| April 27, 2019 | |||||||||||||
| (Dollars in Millions) | Gross | Accumulated Amortization | Net | Wtd. Avg. Remaining Amortization Periods (Years) | |||||||||
| Definite-lived Intangible Assets: | |||||||||||||
| Customer Relationships and Agreements | $ | 244.5 | $ | 27.7 | $ | 216.8 | 17.4 | ||||||
| Trade Names, Patents and Technology Licenses | 75.5 | 29.2 | 46.3 | 8.4 | |||||||||
| Total Definite-lived Intangible Assets | 320.0 | 56.9 | 263.1 | ||||||||||
| Indefinite-lived Intangible Assets: | |||||||||||||
| Trade Names, Patents and Technology Licenses | 1.8 | — | 1.8 | ||||||||||
| Total Indefinite-lived Intangible Assets | 1.8 | — | 1.8 | ||||||||||
| Total Intangible Assets | $ | 321.8 | $ | 56.9 | $ | 264.9 | |||||||
13
|
| As of May 2, 2020 |
| |||||||||||||
(Dollars in Millions) |
| Gross |
|
| Accumulated Amortization |
|
| Net |
|
| Wtd. Avg. Remaining Amortization Periods (Years) |
| ||||
Definite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships and Agreements |
| $ | 243.5 |
|
| $ | (40.8 | ) |
| $ | 202.7 |
|
|
| 16.5 |
|
Trade Names, Patents and Technology Licenses |
|
| 75.3 |
|
|
| (35.0 | ) |
|
| 40.3 |
|
|
| 7.8 |
|
Total Definite-lived Intangible Assets |
|
| 318.8 |
|
|
| (75.8 | ) |
|
| 243.0 |
|
|
|
|
|
Indefinite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names, Patents and Technology Licenses |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Indefinite-lived Intangible Assets |
|
| 1.8 |
|
|
| — |
|
|
| 1.8 |
|
|
|
|
|
Total Other Intangible Assets |
| $ | 320.6 |
|
| $ | (75.8 | ) |
| $ | 244.8 |
|
|
|
|
|
Based on the current amount of intangible assets subject to amortization, the estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
(Dollars in Millions) |
|
|
|
|
Fiscal Year: |
|
|
|
|
Remainder of 2021 |
| $ | 14.4 |
|
2022 |
|
| 19.1 |
|
2023 |
|
| 19.0 |
|
2024 |
|
| 18.6 |
|
2025 |
|
| 18.1 |
|
Thereafter |
|
| 151.1 |
|
Total |
| $ | 240.3 |
|
Note 7.Debt
| (Dollars in Millions) | |||
| Fiscal Year: | |||
| Remainder of 2020 | $ | 4.8 | |
| 2021 | 19.0 | ||
| 2022 | 19.0 | ||
| 2023 | 19.0 | ||
| 2024 | 18.6 | ||
| Thereafter | 168.8 | ||
| Total | $ | 249.2 | |
A summary of the Company's debt:debt is shown below:
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Revolving Credit Facility |
| $ | 108.5 |
|
| $ | 108.5 |
|
Term Loan |
|
| 228.1 |
|
|
| 231.2 |
|
Other Debt |
|
| 15.2 |
|
|
| 14.6 |
|
Unamortized Debt Issuance Costs |
|
| (2.0 | ) |
|
| (2.2 | ) |
Total Debt |
|
| 349.8 |
|
|
| 352.1 |
|
Less: Current Maturities |
|
| (15.4 | ) |
|
| (15.3 | ) |
Total Long-term Debt |
| $ | 334.4 |
|
| $ | 336.8 |
|
14
The Company entered intois a five-yearparty to an 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 amendsterminates in September 2023 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.defined in the Credit Agreement. The weighted-average interest rate on outstanding borrowings under the Credit Agreement was 2.89%1.67% at FebruaryAugust 1, 2020. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. As of FebruaryAugust 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 1514 notes with maturities ranging from 20202021 to 2031. The weighted-average interest rate on this debt was approximately 1.50%1.48% at FebruaryAugust 1, 2020 and $2.6$2.9 million of the debt was classified as short-term.
Note 8.Shareholders’ Equity
Dividends
The Company paid dividends totaling $5.0 million and $4.1 million in the three months ended August 1, 2020 and July 27, 2019, respectively. Dividends paid in the three months ended August 1, 2020 include $0.9 million of dividends on restricted stock that vested during the period.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. A summary of changes in accumulated other comprehensive income (loss), net of tax is shown below:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Currency Translation Adjustments: |
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
| $ | (25.9 | ) |
| $ | (13.6 | ) |
Other Comprehensive Income (Loss) Recognized During the Period, Net of Tax |
|
| 20.3 |
|
|
| (1.6 | ) |
Balance at End of Period |
|
| (5.6 | ) |
|
| (15.2 | ) |
|
|
|
|
|
|
|
|
|
Derivative Instruments: |
|
|
|
|
|
|
|
|
Balance at Beginning of Year |
|
| (1.0 | ) |
|
| — |
|
Other Comprehensive Loss Recognized During the Period, Net of Tax |
|
| (3.6 | ) |
|
| — |
|
Balance at End of Period |
|
| (4.6 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, End of Period |
| $ | (10.2 | ) |
| $ | (15.2 | ) |
15
Stock-based Compensation
The Company has granted stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock awards to employees and non-employee directors under the Methode Electronics, Inc. 2014 Omnibus Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”) and, the Methode Electronics, Inc. 2007 Stock Plan (“2007 Plan”). The Company’s stockholders approved and the 2014Methode Electronics, Inc. 2004 Stock Plan in September 2014.(“2004 Plan”). The Company can no longer make grants under the 2010 Plan, or 2007 Plan and 2004 Plan. The number of shares of common stock originally authorized under the 2014 Plan is 3,000,000, less one share3,000,000. As of August 1, 2020, there was 2,051,588 shares available 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.
| RSA Shares | Wtd. Avg. Grant Date Fair Value | |||||
| Non-vested and Unissued at April 27, 2019 | 1,031,408 | $ | 34.09 | |||
| Awarded | — | $ | — | |||
| Vested | (11,250 | ) | $ | 33.78 | ||
| Forfeited | (17,295 | ) | $ | 37.13 | ||
| Non-vested and Unissued at February 1, 2020 | 1,002,863 | $ | 34.04 | |||
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.
Under the RSU activity undervarious stock plans, common stock underlying vested RSUs held by certain executives will not be delivered until termination of employment or a change of control of the 2014 Plan inCompany. As of August 1, 2020, common stock to be delivered to these executives totaled 577,055.
Director Awards
In the ninethree months ended February 1, 2020:
| RSU Shares | Wtd. Avg. Grant Date Fair Value | ||||||
| Non-vested at April 27, 2019 | 187,844 | $ | 34.55 | ||||
| Awarded | — | $ | — | ||||
| Vested | (4,500 | ) | $ | 33.78 | |||
| Forfeited | (7,750 | ) | $ | 38.75 | |||
| Non-vested at February 1, 2020 | 175,594 | $ | 34.39 | ||||
Stock Options
The following table summarizes combined stock options outstanding and exercisableoption activity 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.Plan:
|
| Shares |
|
| Wtd. Avg. Exercise Price |
| ||
Outstanding and Exercisable at May 2, 2020 |
|
| 106,668 |
|
| $ | 35.76 |
|
Exercised |
|
| (5,000 | ) |
| $ | 10.55 |
|
Forfeited |
|
| — |
|
| $ | — |
|
Outstanding and Exercisable at August 1, 2020 |
|
| 101,668 |
|
| $ | 37.01 |
|
Stock-based Compensation Expense
All stock-based awards to employees and non-employee directors are recognized in selling and administrative expenses on the condensed consolidated statements of income.
The table below summarizes the stock-based compensation expense related to the equity awards:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
RSAs |
| $ | — |
|
| $ | 1.2 |
|
RSUs |
|
| — |
|
|
| 0.4 |
|
Director Awards |
|
| 0.9 |
|
|
| 0.9 |
|
Total Stock-based Compensation Expense |
| $ | 0.9 |
|
| $ | 2.5 |
|
16
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 adjustingThe weighted average number of common shares used in the denominator of the basicdiluted income per share calculation foris determined using the treasury stock method which includes the effect of all potentiallypotential dilutive common shares outstanding during the period.
The following table sets forth the computation of basic and diluted income per share:
|
| Three Months Ended |
| |||||
|
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Numerator: |
|
|
|
|
|
|
|
|
Net Income (in millions) |
| $ | 20.7 |
|
| $ | 28.3 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for Basic Income per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Units |
|
| 37,836,543 |
|
|
| 37,534,451 |
|
Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units |
|
| 321,875 |
|
|
| 132,603 |
|
Denominator for Diluted Income per Share |
|
| 38,158,418 |
|
|
| 37,667,054 |
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income per Share: |
|
|
|
|
|
|
|
|
Basic Income per Share |
| $ | 0.55 |
|
| $ | 0.75 |
|
Diluted Income per Share |
| $ | 0.54 |
|
| $ | 0.75 |
|
|
|
|
|
|
|
|
|
|
Number of Anti-dilutive Potentially Issuable Shares Excluded from Diluted Common Shares Outstanding |
|
| 101,668 | �� |
|
| 109,418 |
|
| 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) | $ | 41.2 | $ | 30.7 | $ | 93.3 | $ | 69.0 | ||||||||
| Denominator: | ||||||||||||||||
| Denominator for Basic Income per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Units | 37,587,742 | 37,405,550 | 37,570,423 | 37,387,181 | ||||||||||||
| Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units | 166,229 | 248,700 | 150,093 | 250,289 | ||||||||||||
| Denominator for Diluted Income per Share | 37,753,971 | 37,654,250 | 37,720,516 | 37,637,470 | ||||||||||||
| Basic and Diluted Income per Share: | ||||||||||||||||
| Basic Income per Share | $ | 1.10 | $ | 0.82 | $ | 2.48 | $ | 1.84 | ||||||||
| Diluted Income per Share | $ | 1.09 | $ | 0.82 | $ | 2.47 | $ | 1.83 | ||||||||
Note 10.
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”).
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
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.
17
The tables below present information about the Company's reportable segments.segments:
|
| Three Months Ended August 1, 2020 |
| |||||||||||||||||||||
(Dollars in Millions) |
| Automotive |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Eliminations /Corporate |
|
| Consolidated |
| ||||||
Net Sales |
| $ | 126.4 |
|
| $ | 52.4 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | (1.7 | ) |
| $ | 190.9 |
|
Transfers between Segments |
|
| (1.3 | ) |
|
| (0.4 | ) |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 1.7 |
|
|
| 0 |
|
Net Sales to Unaffiliated Customers |
| $ | 125.1 |
|
| $ | 52.0 |
|
| $ | 13.4 |
|
| $ | 0.4 |
|
| $ | 0 |
|
| $ | 190.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
| $ | 15.3 |
|
| $ | 7.0 |
|
| $ | 1.1 |
|
| $ | (1.6 | ) |
| $ | (8.0 | ) |
| $ | 13.8 |
|
Interest Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.6 |
|
Other Income, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3.4 | ) |
Income before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 15.6 |
|
|
| Three Months Ended July 27, 2019 |
| |||||||||||||||||||||
(Dollars in Millions) |
| Automotive |
|
| Industrial |
|
| Interface |
|
| Medical |
|
| Eliminations /Corporate |
|
| Consolidated |
| ||||||
Net Sales |
| $ | 187.5 |
|
| $ | 71.6 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | (2.1 | ) |
| $ | 270.2 |
|
Transfers between Segments |
|
| (1.3 | ) |
|
| (0.8 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 2.1 |
|
|
| 0 |
|
Net Sales to Unaffiliated Customers |
| $ | 186.2 |
|
| $ | 70.8 |
|
| $ | 12.9 |
|
| $ | 0.3 |
|
| $ | 0 |
|
| $ | 270.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations |
| $ | 33.1 |
|
| $ | 16.5 |
|
| $ | 0.2 |
|
| $ | (1.5 | ) |
| $ | (9.7 | ) |
| $ | 38.6 |
|
Interest Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.9 |
|
Other Expense, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0.1 |
|
Income before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 35.6 |
|
(Dollars in Millions) |
| August 1, 2020 |
|
| May 2, 2020 |
| ||
Identifiable Assets: |
|
|
|
|
|
|
|
|
Automotive |
| $ | 728.7 |
|
| $ | 670.9 |
|
Industrial |
|
| 440.5 |
|
|
| 421.8 |
|
Interface |
|
| 70.9 |
|
|
| 71.0 |
|
Medical |
|
| 8.2 |
|
|
| 8.8 |
|
Eliminations/Corporate |
|
| 169.9 |
|
|
| 198.1 |
|
Total Identifiable Assets |
| $ | 1,418.2 |
|
| $ | 1,370.6 |
|
| Three Months Ended February 1, 2020 (14 Weeks) | ||||||||||||||||||||||||
| (Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
| Net Sales | $ | 211.5 | $ | 60.8 | $ | 14.9 | $ | 0.6 | $ | (1.9 | ) | $ | 285.9 | |||||||||||
| Transfers between Segments | (1.2 | ) | (0.7 | ) | — | — | 1.9 | — | ||||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 210.3 | $ | 60.1 | $ | 14.9 | $ | 0.6 | $ | — | $ | 285.9 | ||||||||||||
| Income (Loss) from Operations | $ | 39.2 | $ | 13.2 | $ | 0.7 | $ | (1.6 | ) | $ | (10.0 | ) | $ | 41.5 | ||||||||||
| Interest Expense, Net | 2.4 | |||||||||||||||||||||||
| Other Income, Net | (4.9 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 44.0 | ||||||||||||||||||||||
| Three Months Ended January 26, 2019 (13 Weeks) | ||||||||||||||||||||||||
| (Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
| Net Sales | $ | 174.0 | $ | 60.9 | $ | 13.8 | $ | 0.1 | $ | (1.9 | ) | $ | 246.9 | |||||||||||
| Transfers between Segments | (1.1 | ) | (0.7 | ) | (0.1 | ) | — | 1.9 | — | |||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 172.9 | $ | 60.2 | $ | 13.7 | $ | 0.1 | $ | — | $ | 246.9 | ||||||||||||
| Income (Loss) from Operations | $ | 27.0 | $ | 8.9 | $ | — | $ | (1.7 | ) | $ | (8.2 | ) | $ | 26.0 | ||||||||||
| Interest Expense, Net | 3.2 | |||||||||||||||||||||||
| Other Income, Net | (4.9 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 27.7 | ||||||||||||||||||||||
| Nine Months Ended February 1, 2020 (40 Weeks) | ||||||||||||||||||||||||
| (Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
| Net Sales | $ | 580.3 | $ | 197.8 | $ | 39.8 | $ | 1.2 | $ | (5.8 | ) | $ | 813.3 | |||||||||||
| Transfers between Segments | (3.7 | ) | (2.0 | ) | (0.1 | ) | — | 5.8 | — | |||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 576.6 | $ | 195.8 | $ | 39.7 | $ | 1.2 | $ | — | $ | 813.3 | ||||||||||||
| Income (Loss) from Operations | $ | 101.2 | $ | 44.8 | $ | 0.7 | $ | (4.9 | ) | $ | (31.0 | ) | $ | 110.8 | ||||||||||
| Interest Expense, Net | 8.0 | |||||||||||||||||||||||
| Other Income, Net | (5.8 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 108.6 | ||||||||||||||||||||||
| Nine Months Ended January 26, 2019 (39 Weeks) | ||||||||||||||||||||||||
| (Dollars in Millions) | Automotive | Industrial | Interface | Medical | Eliminations/Corporate | Consolidated | ||||||||||||||||||
| Net Sales | $ | 555.0 | $ | 141.8 | $ | 44.2 | $ | 0.7 | $ | (7.4 | ) | $ | 734.3 | |||||||||||
| Transfers between Segments | (5.2 | ) | (2.0 | ) | (0.2 | ) | — | 7.4 | — | |||||||||||||||
| Net Sales to Unaffiliated Customers | $ | 549.8 | $ | 139.8 | $ | 44.0 | $ | 0.7 | $ | — | $ | 734.3 | ||||||||||||
| Income (Loss) from Operations | $ | 96.7 | $ | 21.1 | $ | 0.2 | $ | (6.3 | ) | $ | (37.9 | ) | $ | 73.8 | ||||||||||
| Interest Expense, Net | 5.0 | |||||||||||||||||||||||
| Other Income, Net | (4.7 | ) | ||||||||||||||||||||||
| Income before Income Taxes | $ | 73.5 | ||||||||||||||||||||||
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.
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as the Company'sour 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
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties. We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations. Our business is highly dependent upon two large automotive customers and specific makes and models of vehicles. Our results will be subject to many of the same risks that apply to the automotive, appliance, commercial vehicle, computer and communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes. Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believe to be insignificant may also adversely affect our financial condition or results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these factors could cause our actual results and condition to differ materially from those projected in forward-looking statements. The forward-looking statements in this report are subject to the safe harbor protection provided under the securities laws and are made as of the date of this report. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:
• | Impact from pandemics, such as the COVID-19 pandemic; |
• | Dependence on the automotive, appliance, commercial vehicle, computer and communications industries; |
• | Dependence on a small number of large customers, including two large automotive customers; |
• | Recognition of goodwill and long-lived asset impairment charges; |
• | Costs associated with restructuring activities; |
• | International trade disputes resulting in tariffs and our ability to mitigate tariffs; |
• | Timing, quality and cost of new program launches; |
• | Ability to withstand price pressure, including pricing reductions; |
• | Failure to attract and retain qualified personnel; |
• | Ability to successfully market and sell Dabir Surfaces products; |
• | Currency fluctuations; |
• | Customary risks related to conducting global operations; |
• | Costs associated with environmental, health and safety regulations; |
• | Ability to withstand business interruptions; |
• | Ability to successfully benefit from acquisitions and divestitures; |
• | Investment in programs prior to the recognition of revenue; |
• | Dependence on the availability and price of materials; |
• | Dependence on our supply chain; |
• | Judgments related to accounting for tax positions; |
• | Income tax rate fluctuations; |
• | Ability to keep pace with rapid technological changes; |
• | Breaches to our information technology systems; |
• | Ability to avoid design or manufacturing defects; |
• | Ability to compete effectively; |
• | Ability to protect our intellectual property; |
• | Success of recent acquisitions and/or our ability to implement and profit from new applications of the acquired technology; |
• | Ability to manage our debt levels and any restrictions thereunder; and |
• | Impact to interest expense from the replacement or modification of LIBOR. |
Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those foreseen in such forward-looking statements. These forward-looking statements speak only as of the date of the report, press release, statement, document, webcast or oral discussion in which they are made. We do not intend to
20
update any forward-looking statements, all of which are expressly qualified by the foregoing. See Part I — Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 27, 2019May 2, 2020 and Part II - Item 1A, Risk Factors of this Form 10-Q for further discussions regarding some of the reasons that actual results may be materially different from those we anticipate.
Overview
We are a global 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.
Our components are found in the primary end-markets of the aerospace, appliance, automotive, commercial vehicle, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries.
Impact of COVID-19
The COVID-19 global pandemic has negatively affected the stockglobal economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impacts of 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,COVID-19 at 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 componentbeginning of our strategic direction. Grakon'sfourth quarter of fiscal 2020 at our China manufacturing facilities, which were initially closed after the Chinese New Year. Our manufacturing facilities in China resumed operations later in the fourth quarter of fiscal 2020, but at lower capacity utilization. However, the major impact to our business from the COVID-19 pandemic began in mid-March 2020, as our operations in North America and Europe were adversely impacted by many of our customers suspending their manufacturing operations due to the COVID-19 pandemic. As a result, production levels at our major North American and European manufacturing facilities were still significantly reduced to well below capacity through early June 2020. In the first quarter of fiscal 2021, our operations in North America and Europe gradually resumed operations, however production levels were still significantly reduced, resulting in lower capacity utilization, thus impacting our results have beenof operations during the first quarter of fiscal 2021.
In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve
liquidity and enhance employee safety. These measures included the following:
• | Reduction of payroll costs through a combination of temporary salary reductions, four-day work weeks and furloughs. Since the end of the first quarter of fiscal 2021, we have reinstated some of the salary reductions and resumed five-day work weeks; |
• | Elimination of most business travel and restriction of visitors to our facilities; |
• | Enhanced cleaning and disinfection procedures at our facilities, temperature checks for our workers before they enter our manufacturing facilities, promotion of social distancing at our facilities and requirements for employees to work from home where possible; |
• | Reduction of non-program related capital expenditures; |
• | Deferral of discretionary spending; and |
• | The March 2020 draw-down of $100.0 million available under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets resulting from the COVID-19 pandemic. |
In addition, we initiated certain restructuring actions in the first quarter intended to rationalize our operations, lower our costs and improve financial performance and long-term cash flow generation. These actions included plant consolidations and workforce reductions in the Automotive, Industrial 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.
21
The extent of the impact of the COVID-19 pandemic on our accounting period included 14 weeks comparedbusiness, financial results and liquidity will depend largely on
future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on our customers, especially in the automotive and commercial vehicle markets. These future developments are outside of our control, are highly uncertain and cannot be predicted. If the impact is further prolonged, then it can further increase the difficulty of planning for operations and may require us to 13 weekstake further actions as it relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic will adversely impact our results 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 shouldfiscal 2021, and that impact could be reviewed in this context.
Results of Operations for the Three Months Ended FebruaryAugust 1, 2020 compared to the Three Months Ended January 26,July 27, 2019
Consolidated Results
Below is a table summarizing results for the three months ended:
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(Dollars in Millions) |
| August 1, 2020 |
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| July 27, 2019 |
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| Net Change ($) |
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| Net Change (%) |
| ||||
Net Sales |
| $ | 190.9 |
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| $ | 270.2 |
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| $ | (79.3 | ) |
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| (29.3 | )% |
Cost of Products Sold |
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| 145.8 |
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| 194.4 |
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|
| (48.6 | ) |
|
| (25.0 | )% |
Gross Profit |
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| 45.1 |
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| 75.8 |
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| (30.7 | ) |
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| (40.5 | )% |
Selling and Administrative Expenses |
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| 26.6 |
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| 32.4 |
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|
| (5.8 | ) |
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| (17.9 | )% |
Amortization of Intangibles |
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| 4.7 |
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| 4.8 |
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| (0.1 | ) |
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| (2.1 | )% |
Interest Expense, Net |
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| 1.6 |
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| 2.9 |
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| (1.3 | ) |
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| (44.8 | )% |
Other (Income) Expense, Net |
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| (3.4 | ) |
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| 0.1 |
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| (3.5 | ) |
| N/M* |
| |
Income Tax (Benefit) Expense |
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| (5.1 | ) |
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| 7.3 |
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| (12.4 | ) |
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| (169.9 | )% |
Net Income |
| $ | 20.7 |
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| $ | 28.3 |
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| $ | (7.6 | ) |
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| (26.9 | )% |
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Percent of sales: |
| August 1, 2020 |
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| July 27, 2019 |
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Net Sales |
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| 100.0 | % |
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| 100.0 | % |
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Cost of Products Sold |
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| 76.4 | % |
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| 71.9 | % |
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Gross Margins |
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| 23.6 | % |
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| 28.1 | % |
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Selling and Administrative Expenses |
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| 13.9 | % |
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| 12.0 | % |
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*N/M equals non-meaningful |
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| 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 salesCost of Products Sold
. Consolidated cost of products soldGross Profit. Gross profit decreased $30.7 million, or 40.5%, to $45.1 million (23.6% of sales) in the three months ended August 1, 2020, compared to $75.8 million (28.1% of sales) in the three months ended July 27, 2019. The decrease in gross profit margins were primarily due to lower sales volumes, product mix and restructuring costs, partially offset by lower operating costs.
Selling and Administrative Expenses. Selling and administrative expenses decreased $5.8 million, or 17.9%, to $26.6 million (13.9% of sales) in the three months ended August 1, 2020, compared to $32.4 million (12.0% of sales) in the three months ended July 27, 2019. The decrease was primarily due to lower compensation expense, stock-based compensation expense and travel expense. As
22
noted above, we initiated actions which included temporary salary reductions and four-day work weeks and the elimination of most business travel. In addition, stock-based compensation expense was lower by $1.6 million as our five-year, long-term incentive plan concluded in fiscal 2019.2020. In the three months ended January 26, 2019,August 1, 2020, we incurred $1.3recognized $1.5 million of expensesrestructuring costs related to initiativesactions taken to reduce overall costs and improve operational profitability versus $0.4profitability.
Amortization of Intangibles. Amortization of intangibles decreased $0.1 million, of expenses incurredor 2.1%, to $4.7 million in the three months ended February 1, 2020.
Interest Expense, Net. Interest expense, net was $1.6 million in the three months ended January 26, 2019. The decrease was primarily dueAugust 1, 2020, compared to lower amortization expense in the Interface segment.
Other Income,(Income) Expense, Net.
Income Tax (Benefit) Expense. Income tax benefit was $5.1 million in the three months ended FebruaryAugust 1, 2020, partially offset by favorable adjustments duecompared to U.S. Tax Reform from IRS regulations issuedincome tax expense of $7.3 million in Decemberthe three months ended July 27, 2019. The income tax benefit in the three months ended January 26,August 1, 2020 resulted in a negative effective tax rate of 32.7% which was primarily due to discrete tax benefits recorded of $7.8 million. These discrete tax benefits include tax credits earned and research deductions claimed in foreign jurisdictions. Excluding the discrete tax benefits, the effective tax rate would have been 17.2%. In the three months ended July 27, 2019, primarily related toincome tax expense included discrete tax expenses of $1.4 million. Excluding the finalization ofdiscrete tax expense, the transitioneffective tax from U.S. Tax Reform.rate would have been 16.6% in the three months ended July 27, 2019.
Net Income.
Net incomeOperating Segments
Automotive Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
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| July 27, 2019 |
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| Net Change ($) |
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| Net Change (%) |
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Net Sales |
| $ | 125.1 |
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| $ | 186.2 |
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| $ | (61.1 | ) |
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| (32.8 | )% |
Gross Profit |
| $ | 26.2 |
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| $ | 47.4 |
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| $ | (21.2 | ) |
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| (44.7 | )% |
Income from Operations |
| $ | 15.3 |
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| $ | 33.1 |
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| $ | (17.8 | ) |
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| (53.8 | )% |
Percent of sales: |
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Net Sales |
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| 100.0 | % |
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| 100.0 | % |
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Gross Profit |
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| 20.9 | % |
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| 25.5 | % |
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Income from Operations |
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| 12.2 | % |
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| 17.8 | % |
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| 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 | % | |||||||||||
23
Net Sales. Automotive segment net sales increased $37.4decreased $61.1 million, or 21.6%32.8%, to $210.3$125.1 million in the three months ended FebruaryAugust 1, 2020, from $172.9compared to $186.2 million in the three months ended January 26,July 27, 2019. Net sales increasedwere negatively impacted in the three months ended August 1, 2020 from the COVID-19 pandemic. Many of our automotive customers in North America and Europe began to resume production in the middle of our first quarter and our production gradually resumed, but not at pre-COVID-19 levels. As a result, sales volumes were lower in North America and Europe. Net sales decreased in North America by $21.9$45.3 million, or 20.2%37.3%, to $130.3$76.3 million in the three months ended FebruaryAugust 1, 2020, compared to $108.4$121.6 million in the three months ended January 26,July 27, 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
Gross Profit. Automotive segment gross profit increased $13.2decreased $21.2 million, or 31.6%44.7%, to $55.0$26.2 million in the three months ended FebruaryAugust 1, 2020, compared to $41.8$47.4 million in the three months ended January 26,July 27, 2019. The Automotive segment gross profit margins increaseddecreased to 26.2%20.9% in the three months ended FebruaryAugust 1, 2020, compared to 24.2%25.5% in the three months ended January 26,July 27, 2019. The increasedecrease in gross profit marginmargins was primarily due to the increased sales volumes in both North Americaimpact of the COVID-19 pandemic and Europe, and the benefits realized from initiativesrestructuring actions taken in the first quarter of fiscal 20192021. In the three months ended August 1, 2020, we recognized $1.9 million of restructuring costs related to actions taken to reduce overall costs and improve operational profitability, partially offset by the impact of foreign currency translation of $0.6 million.profitability.
Income from Operations.
Automotive segment income from operationsIndustrial Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
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| July 27, 2019 |
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| Net Change ($) |
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| Net Change (%) |
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Net Sales |
| $ | 52.0 |
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| $ | 70.8 |
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| $ | (18.8 | ) |
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| (26.6 | )% |
Gross Profit |
| $ | 16.4 |
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| $ | 26.5 |
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| $ | (10.1 | ) |
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| (38.1 | )% |
Income from Operations |
| $ | 7.0 |
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| $ | 16.5 |
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| $ | (9.5 | ) |
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| (57.6 | )% |
Percent of sales: |
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Net Sales |
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| 100.0 | % |
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Gross Profit |
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| 31.5 | % |
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| 37.4 | % |
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Income from Operations |
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| 13.5 | % |
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| 23.3 | % |
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| 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 decreasedGross Profit.
Industrial segment gross profit24
Income from Operations. Industrial segment income from operations increased $4.3decreased $9.5 million, or 48.3%57.6%, to $13.2$7.0 million in the three months ended FebruaryAugust 1, 2020, compared to $8.9$16.5 million in the three months ended January 26,July 27, 2019. The increasedecrease was primarily due to higherlower gross profit lower selling and administrative expensesrestructuring actions taken in the first quarter of fiscal 2021. In the three months ended August 1, 2020, we recognized $0.6 million of restructuring costs related to actions taken to reduce overall costs and lower amortization of intangibles during the period.improve operational profitability.
Interface Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
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| July 27, 2019 |
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| Net Change ($) |
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| Net Change (%) |
| ||||
Net Sales |
| $ | 13.4 |
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| $ | 12.9 |
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| $ | 0.5 |
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| 3.9 | % |
Gross Profit |
| $ | 2.5 |
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| $ | 1.5 |
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| $ | 1.0 |
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| 66.7 | % |
Income from Operations |
| $ | 1.1 |
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| $ | 0.2 |
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| $ | 0.9 |
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| 450.0 | % |
Percent of sales: |
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Net Sales |
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| 100.0 | % |
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| 100.0 | % |
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Gross Profit |
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| 18.7 | % |
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| 11.6 | % |
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Income from Operations |
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| 8.2 | % |
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| 1.6 | % |
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| 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 increasedGross Profit.
Interface segment gross profitIncome from Operations.
Interface segment income from operations increased toMedical Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
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| Net Change ($) |
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| Net Change (%) |
| ||||
Net Sales |
| $ | 0.4 |
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| $ | 0.3 |
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| $ | 0.1 |
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| 33.3 | % |
Gross Profit |
| $ | (0.6 | ) |
| $ | (0.4 | ) |
| $ | (0.2 | ) |
|
| 50.0 | % |
Loss from Operations |
| $ | (1.6 | ) |
| $ | (1.5 | ) |
| $ | (0.1 | ) |
|
| 6.7 | % |
| 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 net sales of $0.4 million in the three months ended August 1, 2020, compared to $0.3 million in the three months ended July 27, 2019. Net sales in the three months ended August 1, 2020 were negatively impacted by the COVID-19 pandemic as hospitals deferred spending on medical products.Gross Profit. Medical segment gross profit was a loss of $0.6 million in the three months ended February 1, 2020, compared to $0.1 million in the three months ended January 26, 2019. Higher sales were due to increased product acceptance.
25
Loss from Operations. Medical segment loss from operations decreasedincreased $0.1 million, to $1.6 million in the three months ended FebruaryAugust 1, 2020, compared to $1.7$1.5 million in the three months ended January 26,July 27, 2019. The decrease was due to higher gross profit, partially offset by higher selling and administrative expenses.
| February 1, 2020 | January 26, 2019 | ||||||||||||||
| (Dollars in Millions) | (40 Weeks) | (39 Weeks) | Net Change ($) | 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 | % | |||||||||||
| 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 | % | |||||||||||
| 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 | % | |||||||||||
| 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 | % | |||||||||||
| 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 | % | |||||
Financial Condition, Liquidity and Capital Resources
Credit Agreement
Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior unsecured credit agreement. The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We believe our current world-wide cash balances together with expected future cash flows to be generated from operations and our committed credit facilityliquidity position will be sufficient to supportfund our existing operations and current operations. A significant amount of cash and expected future cash flows are located outside ofcommitments for at least 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.
| 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 | ||||
Our senior unsecured credit agreement that providedprovides for a $200.0 million revolving credit facility and a $250.0 million term loan. In addition,On March 23, 2020, we have an optiondrew down $100.0 million under our revolving credit facility as a precautionary measure in order to increase the sizeour cash position and preserve financial flexibility in light of the senior unsecured credit agreement by up to an additional $200.0 million, subject to customary conditions and approval ofuncertainty in the lenders providing new commitments.global markets resulting from the COVID-19 pandemic. As of FebruaryAugust 1, 2020, $244.5$108.5 million in principal was outstanding under the revolving credit agreement.facility and we have $91.4 million of availability under the revolving credit facility. As of August 1, 2020, $228.1 million in principal was outstanding under the term loan. The term loan matures in September 2023 and requires quarterly principal payments of $3.1 million over the five-year term, with the remaining balance due upon maturity. We were in compliance with all covenants under the senior unsecured credit agreement as of FebruaryAugust 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.
Our senior unsecured credit agreement provides an option to increase the size of our revolving credit facility and term loan by an additional $200.0 million, subject to customary conditions and approval of the lenders providing the new commitments. There can be no assurance that lenders will approve additional commitments under current circumstances. As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional capital and our access to, and cost of, financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, and our future prospects.
At August 1, 2020, we had $211.0 million of cash and cash equivalents, of which $66.0 million was held in subsidiaries outside the U.S. Cash held by these subsidiaries is used to fund operational activities and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating material additional income tax expense.
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Cash Flows
Cash flow is summarized below:
|
| Three Months Ended |
| |||||
(Dollars in Millions) |
| August 1, 2020 |
|
| July 27, 2019 |
| ||
Operating activities: |
|
|
|
|
|
|
|
|
Net Income |
| $ | 20.7 |
|
| $ | 28.3 |
|
Non-cash Items |
|
| 7.4 |
|
|
| 14.2 |
|
Changes in Operating Assets and Liabilities |
|
| (11.7 | ) |
|
| (23.4 | ) |
Net Cash Provided by Operating Activities |
|
| 16.4 |
|
|
| 19.1 |
|
Net Cash Used in Investing Activities |
|
| (11.6 | ) |
|
| (13.2 | ) |
Net Cash Used in Financing Activities |
|
| (13.0 | ) |
|
| (14.4 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
| 1.9 |
|
|
| (0.9 | ) |
Net Decrease in Cash and Cash Equivalents |
|
| (6.3 | ) |
|
| (9.4 | ) |
Cash and Cash Equivalents at Beginning of the Year |
|
| 217.3 |
|
|
| 83.2 |
|
Cash and Cash Equivalents at End of the Period |
| $ | 211.0 |
|
| $ | 73.8 |
|
Operating Activities
Net cash provided by operating activities decreased $2.7 million to $16.4 million in the three months ended August 1, 2020, compared to $19.1 million in the three months ended July 27, 2019. The decrease was due to lower net income adjusted for non-cash items, partially offset by lower cash outflows related to changes in operating assets and liabilities. The $11.7 million of cash outflows for operating assets and liabilities in the three months ended August 1, 2020 was primarily due to higher accounts receivable, partially offset by higher accounts payable and other liabilities, lower inventory and lower prepaid expenses and other assets.
Investing Activities
Net cash used in investing activities was $11.6 million in the three months ended August 1, 2020, compared to $13.2 million in the three months ended July 27, 2019. The activity in both the three months ended August 1, 2020 and July 27, 2019 relates to purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $13.0 million in the three months ended August 1, 2020, compared to $14.4 million in the three months ended July 27, 2019. We paid dividends of $5.0 million in the three months ended August 1, 2020, compared to $4.1 million in the three months ended July 27, 2019. In the three months ended August 1, 2020, we paid $3.9 million in taxes related to the net share settlement of equity awards compared to $0.4 million in the three months ended July 27, 2019. In the three months ended August 1, 2020, we had net repayments on our borrowings of $4.1 million, compared to $9.7 million in the three months ended July 27, 2019.
Recent Accounting Pronouncements
See Note 1, "Description of Business and Summary of Significant Accounting Policies" to the condensed consolidated financial statements included in Item 1.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined under SEC rules.
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, weterminated 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$11 million in punitive damages. AOn April 22, 2020, the Court entered a permanent injunction barring defendants from selling infringing products and ordering them to return Hetronic’s confidential information. Defendants appealed entry of the permanent injunction. On May 29, 2020, the Court held defendants in contempt for violating the permanent injunction and entered the final judgment. Defendants appealed entry of the final monetary judgment has not yet been entered and is subject to post-trial motions and possible appeal. Once the judgment is final, we will workas well. We are working with counsel to collect on the judgment.judgment though there are challenges in Europe in doing so while the appeal is pending. 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.judgment
In the ninethree months ended FebruaryAugust 1, 2020 and January 26,July 27, 2019, we incurred Hetronic-related legal fees of $3.3$1.9 million and $2.7$0.8 million, respectively. These amounts are included in the selling and administrative expenses in the Industrial segment.
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Item 3. Quantitative Andand 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 notmanage a portion of these risks through use anyof 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$1.4 million in the ninethree months ended FebruaryAugust 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 lossincome (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 FebruaryAugust 1, 2020, the cumulative net currency translation adjustments reduced shareholders’ equity by $16.4$5.6 million. We have outstanding a euro denominated cross-currency swap which is treated as a net investment hedge to reduce our exposure to translational exchange risk. As of August 1, 2020, we recorded a deferred loss, net of tax, of $4.6 million and as of April 27, 2019,related to 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 senior unsecured credit agreement, under which we had $244.5$336.6 million of net borrowings as of FebruaryAugust 1, 2020, is variable and is based on LIBOR. We estimate that a 1% increase in interest rates under our senior unsecured credit agreement would result in increased annual interest expense of $2.4$3.4 million.
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 Andand Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, we performed an evaluation under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). The Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s applicable rules and forms. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during the quarter ended FebruaryAugust 1, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1A. Risk Factors
The Company's business, financial condition, results of operations and cash flows are subject to various risksrisks which could cause actual results to vary from recent results or from anticipated future results. Other than the supplemental risk factors set forth below, thereThere have beenbeen no material changes to the risk factors disclosed in Part I - Item 1A, Risk Factors of our Form 10-K for the fiscalfiscal year ended April 27, 2019.
The coronavirus outbreakeffects of the COVID-19 pandemic has had and could continue to have a material adverse impact on our international operations and results of operations.
The COVID-19 pandemic continues to impact worldwide economic activity. As a result of the COVID-19 pandemic, we, our employees, our suppliers, our customers and others may be materiallyrestricted or prevented from conducting business activities for indefinite or intermittent periods of time, including as a result of employee health and safety concerns, shutdowns, shelter in place orders, travel restrictions and other actions and restrictions that may be requested or mandated by governmental authorities.
While we have implemented measures to mitigate the impact of the COVID-19 pandemic, we expect our fiscal 2021 results of operations to be adversely affected by the effectsCOVID-19 pandemic. The extent of the impact on our business will depend on a widespread outbreaknumber of a contagious disease,evolving factors, including the recent outbreakduration and spread 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,pandemic, as well as temporary closuresthe possibility of our facilities or the facilitiespandemic re-occurring, actions taken by governmental authorities to restrict certain business operations and social activity and impose travel restrictions, the impact of our customers, suppliers, or other vendors in our supply chain, potentially including single source suppliers. Any disruptionthe pandemic on economic activity and whether recessionary conditions will persist, consumer demand, the ability of our supply chain orto deliver in a timely and cost-effective manner, the businessability of our employees and manufacturing facilities to operate efficiently and effectively, the continued viability and financial stability of our customers could adverselyand suppliers and future access to capital, all of which remain uncertain. As a result, the magnitude and duration of the impact on our business, and results of operations includingand financial condition cannot be determined at this time.
The automotive and commercial vehicle industries are our primary markets. The COVID-19 pandemic has significantly disrupted, and is expected to continue to significantly disrupt, the global automotive and commercial vehicle industries and customer sales, production volumes and purchases of vehicles by causing usend consumers. In addition, the spread of COVID-19 has created a significant disruption in the manufacturing, delivery and overall supply chain of automobile and commercial vehicle manufacturers and suppliers. Further, the COVID-19 pandemic has resulted in a temporary shutdown of substantially all of the major OEMs in our markets at various times in calendar 2020. This has significantly reduced our fiscal 2021 year-to-date sales volumes and future sales volumes and revenue remain highly uncertain. Although automotive and commercial vehicle production has resumed, customer sales and production volumes may significantly decrease or may be very volatile due to cease manufacturing one or more productsglobal economic impacts and uncertainties.
In addition to the risks specifically described above, the COVID-19 pandemic has exacerbated and precipitated the other risks described in our Annual Report on Form 10-K for a periodthe year ended May 2, 2020, and may continue to do so, in ways that we are not currently able to predict, any 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 couldsignificantly adversely affect the economies andour business, results of operations, 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 | |
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32 | ||
101.1 | Inline XBRL Instance | |
101.2 | Inline XBRL Taxonomy Extension Schema Document |
30
101.3 | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.4 | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.5 | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.6 | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended |
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 | ||||||
( | ||||||
Dated: | September 3, 2020 | |||||
32