Methode Electronics Inc 10-Q for FY2022 Q1
Methode Electronics Inc (MEI)
About this 10-Q
Methode Electronics Inc filed this 10-Q on September 2, 2021, covering the quarter ended July 31, 2021 (FY2022 Q1).
Headline figures
Quarter ended July 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $287.8M
- up 50.8% from $190.9M a year earlier
- Net income
- $29.1M
- up 40.6% from net income of $20.7M a year earlier
- Diluted EPS
- $0.76
- up 40.7% from $0.54 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from ______ to ______
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(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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):
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Emerging Growth Company |
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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 August 26, 2021, the registrant had
METHODE ELECTRONICS, INC.
INDEX
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PART I. |
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Item 1. |
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Condensed Consolidated Balance Sheets as of July 31, 2021 (unaudited) and May 1, 2021 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1A. |
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Item 2. |
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Item 6. |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions, except per share data)
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Three Months Ended |
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July 31, 2021 |
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August 1, 2020 |
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Net sales |
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$ |
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$ |
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Cost of products sold |
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Gross profit |
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Selling and administrative expenses |
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Amortization of intangibles |
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Income from operations |
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Interest expense, net |
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Other income, net |
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Income before income taxes |
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Income tax expense (benefit) |
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Net income |
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$ |
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$ |
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Basic and diluted income per share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Cash dividends per share |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
2
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
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Three Months Ended |
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July 31, 2021 |
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August 1, 2020 |
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Net income |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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Derivative financial instruments |
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Total comprehensive income |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
3
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per-share data)
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July 31, 2021 |
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May 1, 2021 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Income taxes receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Long-term assets: |
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Property, plant and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Operating lease right-of-use assets, net |
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Deferred tax assets |
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Pre-production costs |
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Other long-term assets |
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Total long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued employee liabilities |
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Other accrued liabilities |
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Short-term operating lease liabilities |
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Short-term debt |
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Income tax payable |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt |
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Long-term operating lease liabilities |
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Long-term income taxes payable |
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Other long-term liabilities |
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Deferred tax liabilities |
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Total long-term liabilities |
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Total liabilities |
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Shareholders' equity: |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive income |
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Treasury stock, |
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( |
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Retained earnings |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
4
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(in millions, except share data)
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Three Months Ended July 31, 2021 |
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Common stock shares |
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Common stock |
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Additional paid-in capital |
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Accumulated other comprehensive income (loss) |
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Treasury stock |
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Retained earnings |
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Total shareholders' equity |
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Balance as of May 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Issuance of restricted stock, net of tax withholding |
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( |
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— |
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— |
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( |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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Purchases of common stock |
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( |
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— |
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— |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Dividends on common stock |
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— |
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— |
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— |
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— |
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— |
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( |
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Balance as of July 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Three Months Ended August 1, 2020 |
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Common stock shares |
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Common stock |
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Additional paid-in capital |
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Accumulated other comprehensive income (loss) |
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Treasury stock |
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Retained earnings |
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Total shareholders' equity |
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Balance as of May 2, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Issuance of restricted stock, net of tax withholding |
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( |
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— |
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— |
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( |
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( |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Dividends on common stock |
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— |
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— |
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— |
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— |
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— |
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( |
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Balance as of August 1, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
5
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
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Three Months Ended |
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July 31, 2021 |
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August 1, 2020 |
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Operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Change in cash surrender value of life insurance |
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Amortization of debt issuance costs |
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Gain on sale of property, plant and equipment |
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( |
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— |
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Change in deferred income taxes |
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( |
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( |
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Other |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Inventories |
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( |
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Prepaid expenses and other assets |
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( |
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Accounts payable |
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( |
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Other liabilities |
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( |
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Net cash provided by operating activities |
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Investing activities: |
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Purchases of property, plant and equipment |
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( |
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( |
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Sale of property, plant and equipment |
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— |
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Net cash used in investing activities |
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( |
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( |
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Financing activities: |
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Taxes paid related to net share settlement of equity awards |
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( |
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( |
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Repayments of finance leases |
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( |
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( |
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Proceeds from exercise of stock options |
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Purchases of common stock |
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( |
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— |
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Cash dividends |
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( |
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( |
) |
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Repayments of borrowings |
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( |
) |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of foreign currency exchange rate changes on cash and cash equivalents |
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( |
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Decrease in cash and cash equivalents |
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( |
) |
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( |
) |
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Cash and cash equivalents at beginning of the period |
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Cash and cash equivalents at end of the period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
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$ |
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Income taxes, net of refunds |
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$ |
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$ |
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Operating lease obligations |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
6
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of business
Methode Electronics, Inc. (the “Company” or “Methode”) is a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. The Company designs, engineers and produces mechatronic products for Original Equipment Manufacturers (“OEMs”) utilizing its broad range of technologies for user interface, light-emitting diode (“LED”) lighting system, power distribution and sensor applications.
The Company’s solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment, consumer appliance and medical devices.
Impact of the COVID-19 pandemic
The COVID-19 pandemic and the ongoing measures to reduce its spread have negatively impacted the global economy, disrupted consumer and customer demand and global supply chains, and resulted in manufacturing inefficiencies and increased freight costs due to global capacity constraints. The Company expects that the global health crisis caused by the COVID-19 pandemic will continue to negatively impact its business and results of operations for the foreseeable future. The extent of the impact will depend on a number of evolving and uncertain factors, including the duration and spread of COVID-19 (and its variants), the rate of vaccinations, actions taken by governmental authorities to further restrict business operations and social activity and impose travel restrictions, shifting consumer demand, the ability of the Company’s supply chain to deliver in a timely and cost-effective manner, the ability of the Company’s employees and manufacturing facilities to operate efficiently and effectively, the continued viability and financial stability of the Company’s customers and suppliers and future access to capital.
While demand for the Company’s products improved, the recovery in demand has had business interruptions, including increased material and logistics costs, and most significantly, impacts from the worldwide semiconductor supply shortage. The semiconductor supply shortage is due, in part, to increased demand across multiple industries, including the automotive industry, resulting in a slowdown in their production schedules. The semiconductor supply shortage is also impacting the Company’s supply chain and its ability to meet demand at some of its non-automotive customers. The Company expects this semiconductor shortage will likely have a continued impact on its operating results and financial condition in fiscal 2022.
Various government programs have been enacted to provide assistance to businesses impacted by the COVID-19 pandemic. The amount of assistance the Company received was $
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, identifiable intangible assets, and other long-lived assets, and its valuation allowances in context with the information reasonably available to the Company and the unknown future impacts of the COVID-19 pandemic as of July 31, 2021 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 July 31, 2021 and for the three months then ended. 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.
At this time, the ultimate impact of the COVID-19 pandemic cannot be reasonably estimated due to the uncertainty about the extent and duration of the spread of the virus. Therefore, it is possible the COVID-19 pandemic could still have an adverse impact on the Company’s future business, operating results and financial condition.
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 May 1, 2021, filed with the SEC on June 24, 2021. 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. The three months ended July 31, 2021 and August 1, 2020 were both periods.
Use of estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from these estimates.
Summary of significant accounting policies
The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Company’s Form 10-K for the year ended May 1, 2021. There have been no material changes to the significant accounting policies in the three months ended July 31, 2021 other than those noted below.
Recently adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740),” which simplifies the accounting for income taxes. The new guidance removes certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740, such as recognizing deferred taxes for equity investments, the incremental approach to performing intraperiod tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted this guidance as of May 2, 2021, and the impact on its condensed consolidated financial statements was not material.
Note 2. Revenue
The Company generates revenue from the manufacturing of products for customers in diversified global markets. 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.
Revenue associated with products which the Company believes have no alternative use (such as highly customized parts), and where the Company has an enforceable right to payment, are recognized on an over time basis. Revenue is recognized based on progress to date, which is typically even over the production process through transfer of control to the customer.
From time to time, customers may 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.
Across all products, the amount of revenue recognized corresponds to the related purchase order and is adjusted for variable consideration (such as discounts). Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue.
The Company’s performance obligations are typically short-term in nature. As a result, the Company has elected the practical expedient that provides an exemption from the disclosure requirements regarding information about remaining performance obligations on contracts that have original expected durations of one year or less.
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 an entity has received consideration, or the amount is due from the customer in advance of revenue recognition. The net changes in the contract asset and contract liability balances for the three months ended July 31, 2021 and August 1, 2020 were not material.
8
Disaggregated revenue information
The following table represents a disaggregation of revenue from contracts with customers by segment and geographical location. Net sales are attributed to regions based on the location of production. 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 July 31, 2021 |
|
|||||||||||||||||
|
(in millions) |
|
Auto |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Total |
|
|||||
|
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Europe & Africa |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Timing of revenue recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Goods transferred over time |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Total net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Three Months Ended August 1, 2020 |
|
|||||||||||||||||
|
(in millions) |
|
Auto |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Total |
|
|||||
|
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Europe & Africa |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Timing of revenue recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Goods transferred over time |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Total net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 3. Restructuring
The Company continually monitors market factors and industry trends and takes necessary actions to reduce overall costs and improve operational profitability. In fiscal 2021, the Company initiated certain restructuring actions in response to the adverse impacts from the COVID-19 pandemic. These actions included plant consolidations and workforce reductions in the Automotive, Industrial and Interface segments. In the three months ended August 1, 2020, the Company recognized $
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 relate to the impairment of right-of-use lease assets and equipment. Contract termination costs are recorded when notification of termination is given to the other party. The table below presents restructuring costs by reportable segment:
|
|
Three Months Ended August 1, 2020 |
|
|||||||||||||||||||||
|
(in millions) |
Auto |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Corporate |
|
|
Total |
|
||||||
|
Employee termination benefits |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
Asset impairment charges |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Contract termination costs |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
The Company’s restructuring liability was $
9
Note 4. Income Taxes
The provision for income taxes for an interim period is based on an estimated annual effective income tax rate and this 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 one-time items that are reported net of the related tax effects 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 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 expense and effective tax rate for the three months ended July 31, 2021 and August 1, 2020 were as follows:
|
|
|
Three Months Ended |
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
||
|
Income before income taxes |
|
$ |
|
|
|
$ |
|
|
|
Income tax expense (benefit) |
|
$ |
|
|
|
$ |
( |
) |
|
Effective tax rate |
|
|
|
% |
|
|
( |
)% |
The income tax provision for the three months ended July 31, 2021 was lower than the U.S. statutory tax rate primarily due to foreign operations with lower statutory tax rates. The income tax provision for the three months ended August 1, 2020 was lower than the U.S. statutory tax rate primarily due to a benefit from tax credits claimed in a foreign jurisdiction of $
The Company’s unrecognized income tax benefits were $
Note 5. Balance Sheet Components
Accounts receivable and allowance for doubtful accounts
Accounts receivable are customer obligations due under normal trade terms and are presented net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on the current expected credit loss impairment model (“CECL”). The Company applies a historical loss rate based on historic write-offs to aging categories. The historical loss rate is adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary. The Company may also record a specific reserve for individual accounts when it becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer’s operating results or financial position. The allowance for doubtful accounts balance was $
Inventories
|
(in millions) |
|
July 31, 2021 |
|
|
May 1, 2021 |
|
||
|
Finished products |
|
$ |
|
|
|
$ |
|
|
|
Work in process |
|
|
|
|
|
|
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
|
|
|
$ |
|
|
10
Property, plant and equipment
|
(in millions) |
|
July 31, 2021 |
|
|
May 1, 2021 |
|
||
|
Land |
|
$ |
|
|
|
$ |
|
|
|
Buildings and building improvements |
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
|
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, gross |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expense was $
Pre-production tooling costs related to long-term supply arrangements
The Company incurs pre-production tooling costs related to products produced for its customers under long-term supply arrangements. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable by the customer. As of July 31, 2021 and May 1, 2021, the Company had $
Costs for molds, dies and other tools used in products produced for its customers under long-term supply arrangements for which the Company has title are capitalized in property, plant and equipment and amortized over the shorter of the life of the arrangement or over the estimated useful life of the assets. As of July 31, 2021 and May 1, 2021, Company-owned tooling was $
Note 6. Goodwill and Other Intangible Assets
Goodwill
A summary of the changes in the carrying amount of goodwill, by segment, is shown below:
|
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Total |
|
|||
|
Balance as of May 1, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign currency translation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of July 31, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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. No impairment indicators were identified in the first quarter of fiscal 2022.
11
Other intangible assets, net
Details of identifiable intangible assets are shown below:
|
|
|
As of July 31, 2021 |
|
|||||||||||||
|
(in millions) |
|
Gross |
|
|
Accumulated amortization |
|
|
Net |
|
|
Weighted average useful life (years) |
|
||||
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and agreements |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
Trade names, patents and technology licenses |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Unamortized trade name |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
As of May 1, 2021 |
|
|||||||||||||
|
(in millions) |
|
Gross |
|
|
Accumulated amortization |
|
|
Net |
|
|
Weighted average useful life (years) |
|
||||
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and agreements |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
Trade names, patents and technology licenses |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Unamortized trade name |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
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:
|
(in millions) |
|
|
|
|
|
Fiscal Year: |
|
|
|
|
|
Remainder of 2022 |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
Note 7. Derivative Instruments and Hedging Activities
The Company is exposed to various market risks including, but not limited to, foreign currency exchange rates and market interest rates. The Company strives to control its exposure to these risks through our normal operating activities and, where appropriate, through the use of derivative financial instruments. Derivative financial instruments are measured at fair value on a recurring basis.
For a designated cash flow hedge, the effective portion of the change in the fair value of the derivative financial instrument is recorded in Accumulated Other Comprehensive Income (“AOCI”) in the condensed consolidated balance sheets. When the underlying hedged transaction is realized, the gain or loss previously included in AOCI is recorded in earnings and reflected in the condensed consolidated statements of income on the same line as the gain or loss on the hedged item attributable to the hedged risk. The gain or loss associated with changes in the fair value of derivatives not designated as hedges are recorded immediately in the condensed consolidated statements of income on the same line as the associated risk. For a designated net investment hedge, the effective portion of the change in the fair value of the derivative financial instrument is recorded as a cumulative translation adjustment in AOCI in the condensed consolidated balance sheets.
12
Net investment hedges
The Company has a variable-rate, cross-currency swap, maturing on
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 recognizes the impact of all other changes in fair value of the derivative through interest expense, which was not material in either the three months ended July 31, 2021 or August 1, 2020. As of July 31, 2021 and May 1, 2021, the cross-currency swap was in a net liability position with an aggregate fair value of $
Interest rate swaps
In April 2021, the Company entered into interest rate swaps, maturing on
The fair value of the interest rate 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. The effective portion of the periodic changes in fair value is recognized in AOCI. Subsequently, the accumulated gains and losses recorded in AOCI are reclassified to income in the period during which the hedged cash flow impacts earnings, which are expected to be immaterial over the next 12 months. As of July 31, 2021 and May 1, 2021, the interest rate swap was in a net liability position with an aggregate fair value of $
Derivatives not designated as hedges
The Company uses short-term foreign currency forward contracts to reduce the earnings impact that exchange rate fluctuations have on non-functional currency balance sheet exposures. These forward contracts are not designated as hedging instruments. Gains and losses on these forward contracts are recognized in other income, net, along with the foreign currency gains and losses on monetary assets and liabilities in the condensed consolidated statements of income.
As of July 31, 2021 and May 1, 2021, the Company held foreign currency forward contracts with a notional value of $
Note 8. Debt
A summary of debt is shown below:
|
(in millions) |
|
July 31, 2021 |
|
|
May 1, 2021 |
|
||
|
Revolving credit facility |
|
$ |
|
|
|
$ |
|
|
|
Term loan |
|
|
|
|
|
|
|
|
|
Other debt |
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Total debt |
|
|
|
|
|
|
|
|
|
Less: current maturities |
|
|
( |
) |
|
|
( |
) |
|
Total long-term debt |
|
$ |
|
|
|
$ |
|
|
13
Revolving credit facility/term loan
The Company is a party 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 terminates in
Outstanding borrowings under the Credit Agreement bear interest at variable rates based on the type of borrowing and the Company’s debt to EBITDA financial ratio, as defined in the Credit Agreement. The weighted-average interest rate on outstanding borrowings under the Credit Agreement was approximately
Other debt
One of the Company’s European subsidiaries has debt that consists of
Note 9. Shareholders’ Equity
Share buyback program
On March 31, 2021, the Board of Directors authorized the purchase of up to $
Dividends
The Company paid dividends totaling $
14
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.
|
|
|
Three Months Ended |
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
||
|
Currency Translation Adjustments: |
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
|
|
|
$ |
( |
) |
|
Other comprehensive (loss) income recognized during the period, net of tax (expense)/ benefit of $( |
|
|
( |
) |
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments: |
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive income (loss) recognized during the period, net of tax (expense)/benefit of $( |
|
|
|
|
|
|
( |
) |
|
Balance at end of period |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), end of period |
|
$ |
|
|
|
$ |
( |
) |
Stock-based compensation
The Company has granted stock options, restricted stock awards (“RSAs”), performance units (“PUs”), restricted stock units (“RSUs”) and stock awards to employees and non-employee directors under the Methode Electronics, Inc. 2014 Omnibus Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”), the Methode Electronics, Inc. 2007 Stock Plan (“2007 Plan”) and the Methode Electronics, Inc. 2004 Stock Plan (“2004 Plan”). The Company can no longer make grants under the 2010 Plan, 2007 Plan and 2004 Plan. The number of shares of common stock originally authorized under the 2014 Plan is
Restricted stock awards and performance units
As of July 31, 2021, the Company had
The fair value of the RSAs was based on the closing stock price on the date of grant and the RSAs earn dividend equivalents during the vesting period, which are forfeitable if the RSAs do not vest. Compensation expense for RSAs is recognized when it is probable the minimum threshold performance criteria will be achieved. Compensation expense for the PUs is recognized when it is probable that the target performance criteria will be achieved. The Company assesses the probability of vesting at each balance sheet date and adjusts compensation costs based on the probability assessment. The cash-settled PUs represent a non-equity unit with a conversion value equal to the fair market value of a share of the Company’s common stock on the vesting date. The PUs are classified as liability awards due to the cash settlement feature and are re-measured at each balance sheet date. In accordance with ASC 718, based on projections of the Company’s current business portfolio, compensation expense has not been recognized for the RSAs or PUs in the three months ended July 31, 2021, as the performance conditions are not probable of being met. Unrecognized stock-based compensation expense at target level of performance is $
15
Restricted stock units
RSUs granted under the 2014 Plan vest over a pre-determined period of time, up to
The following table summarizes RSU activity under the 2014 Plan:
|
|
|
Restricted Stock Units |
|
|
Weighted average grant date fair value |
|
||
|
Non-vested at May 1, 2021 |
|
|
|
|
|
$ |
|
|
|
Awarded |
|
|
|
|
|
$ |
|
|
|
Vested |
|
|
— |
|
|
$ |
— |
|
|
Forfeited |
|
|
— |
|
|
$ |
— |
|
|
Non-vested at July 31, 2021 |
|
|
|
|
|
$ |
|
|
Under the various stock plans, common stock underlying vested RSUs held by certain executives will not be delivered until termination of employment or a change of control of the Company. As of July 31, 2021, common stock to be delivered to these executives totaled
Director awards
In the three months ended July 31, 2021 and August 1, 2020, the Company granted
Stock options
The following table summarizes combined stock option activity under the 2010 Plan and 2007 Plan:
|
|
|
Shares |
|
|
Weighted average exercise price |
|
|
Weighted- average life (years) |
|
|
Aggregate intrinsic value (in millions) |
|
||||
|
Outstanding and exercisable at May 1, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at July 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that date. The total intrinsic value of options exercised in the three months ended July 31, 2021 was $
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. Awards subject to graded vesting are recognized using the accelerated recognition method over the requisite service period.
|
|
|
Three Months Ended |
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
||
|
RSUs |
|
$ |
|
|
|
$ |
— |
|
|
Director awards |
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
16
Note 10. Income per Share
Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period but excludes any contingently issued shares where the contingency has not been resolved. The weighted average number of common shares used in the diluted income per share calculation is determined using the treasury stock method which includes the effect of all potential dilutive common shares outstanding during the period.
The following table sets forth the computation of basic and diluted income per share:
|
|
|
Three Months Ended |
|
|||||
|
|
|
July 31, 2021 |
|
|
August 1, 2020 |
|
||
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net income (in millions) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Denominator for basic income per share - weighted average shares outstanding and vested/unissued restricted stock units |
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
|
|
|
|
|
|
|
Denominator for diluted income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share: |
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
|
|
|
$ |
|
|
|
Diluted income per share |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding |
|
|
|
|
|
|
|
|
Note 11.Segment Information
An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”). The Company has four reporting segments as described below.
The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile OEMs, either directly or through their tiered suppliers. Products include integrated center consoles, hidden switches, ergonomic switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system.
The Industrial segment manufactures external lighting solutions, industrial safety radio remote controls, braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail® solution, high-current low-voltage flexible power cabling systems and powder-coated busbars that are used in various markets and applications, including aerospace, computers, industrial, power conversion, military, telecommunications and transportation.
The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the appliance, commercial food service, construction, consumer, material handling, point-of-sale and telecommunications markets. Solutions include copper transceivers and solid-state field-effect consumer touch panels.
The Medical segment is made up of the Company’s medical device business, Dabir Surfaces, with its surface support technology aimed at pressure injury prevention. Methode has developed the technology for use by patients who are immobilized or otherwise at risk for pressure injuries, including patients undergoing long-duration surgical procedures.
17
The tables below present information about the Company’s reportable segments:
|
|
|
Three Months Ended July 31, 2021 |
|
|||||||||||||||||||||
|
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Eliminations /Corporate |
|
|
Consolidated |
|
||||||
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Transfers between segments |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
Three Months Ended August 1, 2020 |
|
|||||||||||||||||||||
|
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Eliminations /Corporate |
|
|
Consolidated |
|
||||||
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Transfers between segments |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
(in millions) |
|
July 31, 2021 |
|
|
May 1, 2021 |
|
||
|
Identifiable assets: |
|
|
|
|
|
|
|
|
|
Automotive |
|
$ |
|
|
|
$ |
|
|
|
Industrial |
|
|
|
|
|
|
|
|
|
Interface |
|
|
|
|
|
|
|
|
|
Medical |
|
|
|
|
|
|
|
|
|
Eliminations/Corporate |
|
|
|
|
|
|
|
|
|
Total identifiable assets |
|
$ |
|
|
|
$ |
|
|
18
Note 12. Contingencies
Hetronic Germany-GmbH Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. The Company became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, the Company terminated all of its agreements with the Fuchs companies. On June 20, 2014, the Company filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, the Company amended its complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties.
A trial with respect to the matter began in February 2020. During the trial, the defendants dismissed their one remaining counterclaim with prejudice. On March 2, 2020, the jury returned a verdict in favor of the Company. The verdict included approximately $
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, when made, our current views with respect to current events and financial performance. Such forward-looking statements are subject to many risks, uncertainties and factors relating to our operations and business environment, which may cause our actual results to be materially different from any future results, express or implied, by such forward-looking statements. All statements that address future operating, financial or business performance or our strategies or expectations are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “outlook” or “continue,” and other comparable terminology. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
|
|
• |
Impact from pandemics, such as the COVID-19 pandemic; |
|
|
• |
Dependence on the automotive and commercial vehicle industries; |
|
|
• |
Dependence on our supply chain, including semiconductor suppliers; |
|
|
• |
Dependence on a small number of large customers, including two large automotive customers; |
|
|
• |
Dependence on the availability and price of materials; |
|
|
• |
Failure to attract and retain qualified personnel; |
|
|
• |
Timing, quality and cost of new program launches; |
|
|
• |
Risks related to conducting global operations; |
|
|
• |
Ability to compete effectively; |
|
|
• |
Investment in programs prior to the recognition of revenue; |
|
|
• |
Ability to withstand pricing pressures, including price reductions; |
|
|
• |
Impact from production delays or cancelled orders; |
|
|
• |
Ability to successfully benefit from acquisitions and divestitures; |
|
|
• |
Ability to withstand business interruptions; |
|
|
• |
Breaches to our information technology systems; |
|
|
• |
Ability to keep pace with rapid technological changes; |
|
|
• |
Ability to protect our intellectual property; |
|
|
• |
Costs associated with environmental, health and safety regulations; |
|
|
• |
International trade disputes resulting in tariffs and our ability to mitigate tariffs; |
|
|
• |
Impact from climate change and related regulations; |
|
|
• |
Ability to avoid design or manufacturing defects; |
|
|
• |
Recognition of goodwill and long-lived asset impairment charges; |
|
|
• |
Ability to manage our debt levels and any restrictions thereunder; |
|
|
• |
Currency fluctuations; |
|
|
• |
Income tax rate fluctuations; |
|
|
• |
Judgments related to accounting for tax positions; |
|
|
• |
Adjustments to compensation expense for performance-based awards; |
|
|
• |
Timing and magnitude of costs associated with restructuring activities; and |
|
|
• |
Impact to interest expense from the replacement or modification of LIBOR. |
Additional details and factors are discussed under the caption “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended May 1, 2021. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Any forward-looking statements made by us speak only as of the date on which they are made. We are under no obligation to, and expressly disclaims any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
Overview
We are a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. We design, engineer and produce mechatronic products for Original Equipment Manufacturers (“OEMs”) utilizing our broad range of technologies for user interface, light-emitting diode (“LED”) lighting system, power distribution and sensor applications.
20
Our solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment, consumer appliance and medical devices. Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical.
COVID-19 Pandemic Update
The COVID-19 pandemic and the ongoing measures to reduce its spread have negatively impacted the global economy, disrupted consumer and customer demand and global supply chains, and resulted in manufacturing inefficiencies and increased freight costs due to global capacity constraints. We expect that the global health crisis caused by the COVID-19 pandemic will continue to negatively impact our business and results of operations for the foreseeable future. The extent of the impact will depend on a number of evolving and uncertain factors, including the duration and spread of COVID-19 (and its variants), the rate of vaccinations, actions taken by governmental authorities to further restrict business operations and social activity and impose travel restrictions, shifting consumer demand, the ability of our supply chain to deliver in a timely and cost-effective manner, the ability of our employees and manufacturing facilities to operate efficiently and effectively, the continued viability and financial stability of our customers and suppliers and future access to capital.
We continue to focus on effectively managing the unprecedented challenges and uncertainties of the pandemic on a global basis. Management has prioritized the health and safety of our employees and their families. We adopted numerous safety procedures at our global facilities, including hygiene and disinfection protocols, testing and contact tracing, social distancing and wearing personal protective equipment. We implemented the sharing of best practices throughout our global facilities, resulting in effective and standardized safety guidelines and procedures, updated on a regular basis, promoting the health and safety of our employees.
While demand for our products improved, the recovery in demand has had business interruptions, including increased material and logistics costs, and most significantly, impacts from the worldwide semiconductor supply shortage. The semiconductor supply shortage is due, in part, to increased demand across multiple industries, including the automotive industry, resulting in a slowdown in their production schedules. The semiconductor supply shortage is also impacting our supply chain and our ability to meet demand at some of our non-automotive customers. We expect this semiconductor shortage will likely have a continued impact on our operating results and financial condition in fiscal 2022.
Results of Operations for the Three Months Ended July 31, 2021 compared to the Three Months Ended August 1, 2020
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
|
Net Change ($) |
|
|
Net Change (%) |
|
||||||||||||
|
Net sales |
|
$ |
287.8 |
|
|
|
100.0 |
% |
|
$ |
190.9 |
|
|
|
100.0 |
% |
|
$ |
96.9 |
|
|
|
50.8 |
% |
|
Cost of products sold |
|
|
216.1 |
|
|
|
75.1 |
% |
|
|
145.8 |
|
|
|
76.4 |
% |
|
|
70.3 |
|
|
|
48.2 |
% |
|
Gross profit |
|
|
71.7 |
|
|
|
24.9 |
% |
|
|
45.1 |
|
|
|
23.6 |
% |
|
|
26.6 |
|
|
|
59.0 |
% |
|
Selling and administrative expenses |
|
|
32.8 |
|
|
|
11.4 |
% |
|
|
26.6 |
|
|
|
13.9 |
% |
|
|
6.2 |
|
|
|
23.3 |
% |
|
Amortization of intangibles |
|
|
4.8 |
|
|
|
1.7 |
% |
|
|
4.7 |
|
|
|
2.5 |
% |
|
|
0.1 |
|
|
|
2.1 |
% |
|
Interest expense, net |
|
|
1.1 |
|
|
|
0.4 |
% |
|
|
1.6 |
|
|
|
0.8 |
% |
|
|
(0.5 |
) |
|
|
(31.3 |
)% |
|
Other income, net |
|
|
(1.8 |
) |
|
|
(0.6 |
)% |
|
|
(3.4 |
) |
|
|
(1.8 |
)% |
|
|
1.6 |
|
|
|
(47.1 |
)% |
|
Income tax expense (benefit) |
|
|
5.7 |
|
|
|
2.0 |
% |
|
|
(5.1 |
) |
|
|
(2.7 |
)% |
|
|
10.8 |
|
|
|
(211.8 |
)% |
|
Net income |
|
$ |
29.1 |
|
|
|
10.1 |
% |
|
$ |
20.7 |
|
|
|
10.8 |
% |
|
$ |
8.4 |
|
|
|
40.6 |
% |
Net sales. Net sales increased $96.9 million, or 50.8%, to $287.8 million in the three months ended July 31, 2021, compared to $190.9 million in the three months ended August 1, 2020. The impact of foreign currency translation increased net sales by $10.3 million, primarily due to the strengthening of the euro and Chinese renminbi, relative to the U.S. dollar. Excluding the impact of foreign currency translation, net sales increased by $86.6 million, primarily due to higher sales in the Automotive and Industrial segments.
Cost of products sold. Cost of products sold increased $70.3 million, or 48.2%, to $216.1 million (75.1% of sales) in the three months ended July 31, 2021, compared to $145.8 million (76.4% of sales) in the three months ended August 1, 2020. The impact of foreign currency translation increased cost of products sold by $7.1 million. Excluding the impact of foreign currency translation, cost of products sold increased by $63.2 million primarily due to higher sales volumes and higher material and logistics costs. Labor costs were also higher as the three months ended August 1, 2020 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic.
Gross profit. Gross profit increased $26.6 million, or 59.0%, to $71.7 million (24.9% of sales) in the three months ended July 31, 2021, compared to $45.1 million (23.6% of sales) in the three months ended August 1, 2020. The impact of foreign currency translation increased gross profit by $3.2 million. Excluding the impact of foreign currency translation, gross profit increased by $23.4 million. The increase was due to higher sales volumes compared to the three months ended August 1, 2020 which was negatively impacted by the COVID-19 pandemic.
21
Selling and administrative expenses. Selling and administrative expenses increased $6.2 million, or 23.3%, to $32.8 million (11.4% of sales) in the three months ended July 31, 2021, compared to $26.6 million (13.9% of sales) in the three months ended August 1, 2020. The impact of foreign currency translation increased selling and administrative expenses by $0.8 million. Excluding the impact of foreign currency translation, selling and administrative expenses increased by $5.4 million. The increase was primarily due to higher stock-based compensation expense and salary expense, partially offset by lower restructuring costs. Stock-based compensation expense increased by $3.1 million as our long-term incentive plan was not introduced until the second quarter of fiscal 2021. Salary expense was higher as the three months ended August 1, 2020 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic. In the three months ended August 1, 2020, we recognized $1.5 million of restructuring costs.
Amortization of intangibles. Amortization of intangibles was $4.8 million and $4.7 million in the three months ended July 31, 2021 and August 1, 2020, respectively.
Interest expense, net. Interest expense, net was $1.1 million in the three months ended July 31, 2021, compared to $1.6 million in the three months ended August 1, 2020. The decrease was primarily due to lower average borrowings. Average borrowings were lower as the three months ended August 1, 2020 included the precautionary $100.0 million draw-down in March 2020, which was fully repaid in the third quarter of fiscal 2021.
Other income, net. Other income, net was $1.8 million in the three months ended July 31, 2021, compared to $3.4 million in the three months ended August 1, 2020. In the three months ended July 31, 2021, we received $1.9 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic, compared to $2.9 million in the three months ended August 1, 2020. Net foreign exchange losses were $0.2 million in the three months ended July 31, 2021, compared to net foreign exchange gains of $0.7 million in the three months ended August 1, 2020.
Income tax expense (benefit). Income tax expense was $5.7 million (16.4% effective tax rate) in the three months ended July 31, 2021, compared to an income tax benefit of $5.1 million in the three months ended August 1, 2020. The income tax benefit in the three months ended August 1, 2020 resulted in a negative effective tax rate of 32.7% which was primarily due to a 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. Excluding the discrete tax benefits, the effective tax rate would have been 17.2%.
Net income. Net income increased $8.4 million, or 40.6%, to $29.1 million in the three months ended July 31, 2021, compared to $20.7 million in the three months ended August 1, 2020. Net income increased as a result of the reasons described above and a favorable foreign currency translation of $1.9 million.
Operating Segments
Automotive
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
|
Net Change ($) |
|
|
Net Change (%) |
|
||||
|
Net sales |
|
$ |
195.8 |
|
|
$ |
125.1 |
|
|
$ |
70.7 |
|
|
|
56.5 |
% |
|
Gross profit |
|
$ |
41.7 |
|
|
$ |
26.2 |
|
|
$ |
15.5 |
|
|
|
59.2 |
% |
|
As a percent of net sales |
|
|
21.3 |
% |
|
|
20.9 |
% |
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
27.3 |
|
|
$ |
15.3 |
|
|
$ |
12.0 |
|
|
|
78.4 |
% |
|
As a percent of net sales |
|
|
13.9 |
% |
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
Net sales. Automotive segment net sales increased $70.7 million, or 56.5%, to $195.8 million in the three months ended July 31, 2021, compared to $125.1 million in the three months ended August 1, 2020. The impact of foreign currency translation increased net sales by $7.1 million. Excluding the impact of foreign currency translation, net sales increased by $63.6 million. Net sales in the three months ended August 1, 2020 were negatively impacted by the COVID-19 pandemic, resulting in lower demand from our automotive customers, primarily in North America and Europe.
Net sales in North America increased $22.8 million, or 29.9%, to $99.1 million in the three months ended July 31, 2021, compared to $76.3 million in the three months ended August 1, 2020. Net sales in Europe increased $29.0 million, or 100.7%, to $57.8 million in the three months ended July 31, 2021, compared to $28.8 million in the three months ended August 1, 2020. The stronger euro, relative to the U.S. dollar, increased net sales in Europe by $3.6 million. Excluding the impact of foreign currency translation, net sales in Europe increased by $25.4 million. Net sales in Asia increased $18.9 million, or 94.5%, to $38.9 million in the three months ended July 31, 2021, compared to $20.0 million in the three months ended August 1, 2020. The stronger Chinese renminbi, relative to the U.S. dollar, increased net sales in Asia by $3.5 million. Excluding foreign currency translation, net sales in Asia increased by $15.4 million primarily due to higher sales of electric vehicle products which shifted from North America to Asia.
22
Gross profit. Automotive segment gross profit increased $15.5 million, or 59.2%, to $41.7 million in the three months ended July 31, 2021, compared to $26.2 million in the three months ended August 1, 2020. The impact of foreign currency translation increased gross profit by $1.8 million. Excluding the impact of foreign currency translation, gross profit increased by $13.7 million. Automotive segment gross profit margins increased to 21.3% in the three months ended July 31, 2021, compared to 20.9% in the three months ended August 1, 2020. The increase in gross profit margins was primarily due to higher sales, partially offset by higher costs for premium freight and factory inefficiencies resulting from supply chain disruptions due to the COVID-19 pandemic.
Income from operations. Automotive segment income from operations increased $12.0 million, or 78.4%, to $27.3 million in the three months ended July 31, 2021, compared to $15.3 million in the three months ended August 1, 2020. The impact of foreign currency translation increased income from operations by $1.1 million. Excluding the impact of foreign currency translation, income from operations increased by $10.9 million. The increase was primarily due to higher gross profit, partially offset by higher selling and administrative expenses. Selling and administrative expenses were lower in the three months ended August 1, 2020 due to the impact of salary reductions and other cost saving measures in response to the COVID-19 pandemic.
Industrial
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
|
Net Change ($) |
|
|
Net Change (%) |
|
||||
|
Net sales |
|
$ |
78.5 |
|
|
$ |
52.0 |
|
|
$ |
26.5 |
|
|
|
51.0 |
% |
|
Gross profit |
|
$ |
28.5 |
|
|
$ |
16.4 |
|
|
$ |
12.1 |
|
|
|
73.8 |
% |
|
As a percent of net sales |
|
|
36.3 |
% |
|
|
31.5 |
% |
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
20.2 |
|
|
$ |
7.0 |
|
|
$ |
13.2 |
|
|
|
188.6 |
% |
|
As a percent of net sales |
|
|
25.7 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
Net sales. Industrial segment net sales increased $26.5 million, or 51.0%, to $78.5 million in the three months ended July 31, 2021, compared to $52.0 million in the three months ended August 1, 2020. Foreign currency translation increased net sales by $3.2 million. Excluding foreign currency translation, net sales increased by $23.3 million primarily due to higher sales volumes of all product categories in the Industrial segment. Net sales in the three months ended August 1, 2020 for commercial vehicle lighting solutions and radio remote control devices were negatively impacted by the COVID-19 pandemic, resulting in lower demand from customers.
Gross profit. Industrial segment gross profit increased $12.1 million, or 73.8%, to $28.5 million in the three months ended July 31, 2021, compared to $16.4 million in the three months ended August 1, 2020. Foreign currency translation increased gross profit by $1.4 million. Excluding foreign currency translation, gross profit increased by $10.7 million. Gross profit margins increased to 36.3% in the three months ended July 31, 2021, compared to 31.5% in the three months ended August 1, 2020. The increase in gross profit margins was primarily due to higher sales from commercial vehicle lighting solutions and radio remote control devices. This was partially offset by lower gross profit margins from busbar products due to higher materials costs.
Income from operations. Industrial segment income from operations increased $13.2 million, or 188.6%, to $20.2 million in the three months ended July 31, 2021, compared to $7.0 million in the three months ended August 1, 2020. Foreign currency translation increased income from operations by $1.3 million. Excluding foreign currency translation, income from operations increased by $11.9 million. The increase was primarily due to higher gross profit and lower selling and administrative expenses. Selling and administrative expenses were lower primarily due to lower legal expenses and restructuring costs. In the three months ended August 1, 2020, restructuring costs were $0.6 million.
Interface
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
|
Net Change ($) |
|
|
Net Change (%) |
|
||||
|
Net sales |
|
$ |
12.7 |
|
|
$ |
13.4 |
|
|
$ |
(0.7 |
) |
|
|
(5.2 |
)% |
|
Gross profit |
|
$ |
1.7 |
|
|
$ |
2.5 |
|
|
$ |
(0.8 |
) |
|
|
(32.0 |
)% |
|
As a percent of net sales |
|
|
13.4 |
% |
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
1.1 |
|
|
$ |
1.1 |
|
|
$ |
— |
|
|
|
— |
|
|
As a percent of net sales |
|
|
8.7 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
Net sales. Interface segment net sales decreased $0.7 million, or 5.2%, to $12.7 million in the three months ended July 31, 2021, compared to $13.4 million in the three months ended August 1, 2020. The decrease was primarily due to lower sales volumes of appliance products and data solutions products, which were negatively impacted by a shortage of semiconductor chips.
Gross profit. Interface segment gross profit decreased $0.8 million, or 32.0%, to $1.7 million in the three months ended July 31, 2021, compared to $2.5 million in the three months ended August 1, 2020. Gross profit margins decreased to 13.4% in the three months ended July 31, 2021, from 18.7% in the three months ended August 1, 2020. The decrease in gross profit margins was due to lower sales volumes and higher material costs.
23
Income from operations. Interface segment income from operations was $1.1 million in the three months ended July 31, 2021, unchanged from the three months ended August 1, 2020. Lower gross profit of $0.8 million was offset by lower selling and administrative expenses. Selling and administrative expenses decreased as the three months ended August 1, 2020 included $0.8 million of restructuring costs.
Medical
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
|
Net Change ($) |
|
|
Net Change (%) |
|
||||
|
Net sales |
|
$ |
0.8 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
|
100.0 |
% |
|
Gross profit |
|
$ |
- |
|
|
$ |
(0.6 |
) |
|
$ |
0.6 |
|
|
|
(100.0 |
)% |
|
Loss from operations |
|
$ |
(1.2 |
) |
|
$ |
(1.6 |
) |
|
$ |
0.4 |
|
|
|
(25.0 |
)% |
Net sales. The Medical segment had net sales of $0.8 million in the three months ended July 31, 2021, compared to $0.4 million in the three months ended August 1, 2020. Net sales increased due to higher product demand.
Gross profit. Medical segment gross profit was breakeven in the three months ended July 31, 2021, compared to a loss of $0.6 million in the three months ended August 1, 2020. The improvement was primarily due to higher net sales.
Loss from operations. Medical segment loss from operations decreased $0.4 million, to $1.2 million in the three months ended July 31, 2021, compared to $1.6 million in the three months ended August 1, 2020. The improvement was due to higher gross profit, partially offset by higher selling and administrative expenses.
Financial Condition, Liquidity and Capital Resources
Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, dividends and share buybacks. Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior unsecured credit agreement. We believe our liquidity position will be sufficient to fund our existing operations and current commitments for at least the next twelve months. However, if economic conditions remain impacted for longer than we expect due to the COVID-19 pandemic, our liquidity position could be severely impacted.
As of July 31, 2021, we had $207.9 million of cash and cash equivalents, of which $97.4 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 payment of dividends and the repayment of intercompany loans, without creating material additional income tax expense.
Share Buyback Program
On March 31, 2021, the Board of Directors authorized the purchase of up to $100.0 million of our common stock. Such purchases may be made on the open market, in private transactions or pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of July 31, 2021, a total of 325,462 shares have been purchased at a total cost of $15.1 million since the commencement of the share buyback program. As of July 31, 2021, the dollar value of shares that remained available to be purchased under this share buyback program was approximately $84.9 million.
Credit Agreement
Our senior unsecured credit agreement provides for a $200.0 million revolving credit facility and a $250.0 million term loan. As of July 31, 2021, $8.7 million in principal was outstanding under the revolving credit facility and we have $191.3 million of availability under the revolving credit facility. As of July 31, 2021, $215.6 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 July 31, 2021. For further information, see Note 8, “Debt” to the condensed consolidated financial statements included in this Quarterly Report.
Borrowings under our senior unsecured credit agreement bear interest at rates equal to 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.
24
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.
Cash Flows
|
|
|
Three Months Ended |
|
|||||
|
(in millions) |
|
July 31, 2021 |
|
|
August 1, 2020 |
|
||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29.1 |
|
|
$ |
20.7 |
|
|
Non-cash items |
|
|
16.0 |
|
|
|
7.4 |
|
|
Changes in operating assets and liabilities |
|
|
(35.4 |
) |
|
|
(11.7 |
) |
|
Net cash provided by operating activities |
|
|
9.7 |
|
|
|
16.4 |
|
|
Net cash used in investing activities |
|
|
(15.4 |
) |
|
|
(11.6 |
) |
|
Net cash used in financing activities |
|
|
(18.3 |
) |
|
|
(13.0 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1.3 |
) |
|
|
1.9 |
|
|
Decrease in cash and cash equivalents |
|
|
(25.3 |
) |
|
|
(6.3 |
) |
|
Cash and cash equivalents at beginning of the period |
|
|
233.2 |
|
|
|
217.3 |
|
|
Cash and cash equivalents at end of the period |
|
$ |
207.9 |
|
|
$ |
211.0 |
|
Operating activities
Net cash provided by operating activities decreased $6.7 million to $9.7 million in the three months ended July 31, 2021, from $16.4 million in the three months ended August 1, 2020. The decrease was due to higher cash outflows related to changes in operating assets and liabilities, partially offset by higher net income adjusted for non-cash items. The $35.4 million of cash outflows for operating assets and liabilities in the three months ended July 31, 2021 was primarily due to lower accounts payable and other liabilities and higher inventory and prepaid expenses and other assets, partially offset by lower accounts receivable.
Investing activities
Net cash used in investing activities was $15.4 million in the three months ended July 31, 2021, compared to $11.6 million in the three months ended August 1, 2020. Capital expenditures were $15.9 million and $11.6 million in the three months ended July 31, 2021 and August 1, 2020, respectively. We received $0.5 million of cash from the sale of property, plant and equipment in the three months ended July 31, 2021.
Financing activities
Net cash used in financing activities was $18.3 million in the three months ended July 31, 2021, compared to $13.0 million in the three months ended August 1, 2020. We paid cash dividends of $5.2 million in the three months ended July 31, 2021, compared to $5.0 million in the three months ended August 1, 2020. We increased our quarterly dividend from $0.11 per share to $0.14 per share in the three months ended July 31, 2021. In the three months ended July 31, 2021, we paid $0.3 million in taxes related to the net share settlement of equity awards compared to $3.9 million in the three months ended August 1, 2020. We also spent $8.4 million of cash for the purchase of shares under our share buyback program. In the three months ended July 31, 2021, we had net repayments on our borrowings of $4.7 million, compared to $4.1 million in the three months ended August 1, 2020.
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.
25
Legal Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, we terminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants 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 $11 million in punitive damages. On April 22, 2020, the Court entered a permanent injunction barring defendants from selling infringing products and ordering them to return Hetronic’s confidential information. Defendants appealed entry of the permanent injunction. On May 29, 2020, the Court held defendants in contempt for violating the permanent injunction and entered the final judgment. Defendants appealed entry of the final monetary judgment as well. The appeal of the permanent injunction and the appeal of the final judgment were consolidated into a single appeal before the U.S. Court of Appeals for the Tenth Circuit. On August 24, 2021, the Tenth Circuit issued a decision affirming the lower court’s ruling with the exception that it modified the injunction from the entire world to all of the countries in which Hetronic sells its products. It is possible that the defendants may seek to further appeal this decision and these matters. Like any judgment, particularly any judgment involving defendants outside of the United States, there is no guarantee that we will be able to collect the judgment.
In the three months ended July 31, 2021 and August 1, 2020, we incurred Hetronic-related legal fees of $0.7 million and $1.9 million, respectively. These amounts are included in the selling and administrative expenses in the Industrial segment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from foreign currency exchange, interest rates, and commodity prices, which could affect our operating results, financial position and cash flows. We manage a portion of these risks through use of derivative financial instruments in accordance with our policies. We do not enter into derivative financial instruments for speculative or trading purposes.
There has been no significant change in our exposure to market risk during the three months ended July 31, 2021. For a discussion of our exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended May 1, 2021.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, we performed an evaluation under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). The Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s applicable rules and forms. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during the quarter ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
26
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Our business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. There have been no material changes to the risk factors previously disclosed in Part I - Item 1A, “Risk Factors” of our Form 10-K for the year ended May 1, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 31, 2021, the Board of Directors authorized the purchase of up to $100.0 million of our common stock, expiring on March 31, 2023. Purchases under this program may be made on the open market, in private transactions or pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of July 31, 2021, we purchased and retired $15.1 million of common stock since the commencement of the share buyback program.
The following table provides information about our purchases of equity securities during the three months ended July 31, 2021:
|
Period |
|
Total number of shares purchased (1) |
|
|
Average price paid per share |
|
|
Total number of shares purchased as part of publicly announced plan |
|
|
Approximate dollar value of shares that may yet be purchased under the program (in millions) |
|
||||
|
May 2, 2021 through May 29, 2021 |
|
|
21,140 |
|
|
$ |
44.88 |
|
|
|
13,997 |
|
|
$ |
91.9 |
|
|
May 30, 2021 through July 3, 2021 |
|
|
105,916 |
|
|
$ |
48.60 |
|
|
|
105,916 |
|
|
$ |
86.7 |
|
|
July 4, 2021 through July 31, 2021 |
|
|
37,600 |
|
|
$ |
48.87 |
|
|
|
37,600 |
|
|
$ |
84.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In addition to open-market purchases, 7,143 shares of common stock were surrendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units. |
|
|||||||||||||||
Item 6. Exhibits
|
Exhibit Number |
|
Description |
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
|
32 |
|
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 |
|
101.INS |
|
Inline XBRL Instance Document* |
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document* |
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Document* |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document* |
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101.PRE |
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Inline XBRL Taxonomy Extension Presention Linkbase Document* |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
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* |
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Filed herewith |
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27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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METHODE ELECTRONICS, INC. |
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By: |
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/s/ Ronald L.G. Tsoumas |
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Ronald L.G. Tsoumas |
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Chief Financial Officer |
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(Principal Financial Officer) |
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Dated: |
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September 2, 2021 |
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