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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended July 29, 2023
or
☐ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from ______ to ______
Commission file number 001-33731
METHODE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
36-2090085 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
8750 West Bryn Mawr Avenue, Suite 1000, Chicago, Illinois |
60631-3518 |
(Address of principal executive offices) |
(Zip Code) |
(Registrant’s telephone number, including area code) (708) 867-6777
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Common Stock, $0.50 Par Value |
|
MEI |
|
New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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☐ |
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Emerging growth company |
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☐ |
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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 ☐ No ☒
At September 5, 2023, the registrant had 36,009,532 shares of common stock outstanding.
METHODE ELECTRONICS, INC.
INDEX
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Page |
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PART I. |
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Item 1. |
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2 |
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Condensed Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended July 29, 2023 and July 30, 2022 |
3 |
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Condensed Consolidated Balance Sheets as of July 29, 2023 (unaudited) and April 29, 2023 |
4 |
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5 |
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6 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
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Item 3. |
29 |
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Item 4. |
30 |
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PART II. |
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Item 1A. |
31 |
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Item 2. |
31 |
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Item 5. |
31 |
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Item 6. |
31 |
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32 |
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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 29, 2023 |
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July 30, 2022 |
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Net sales |
|
$ |
289.7 |
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$ |
282.4 |
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Cost of products sold |
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235.7 |
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220.6 |
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Gross profit |
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54.0 |
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61.8 |
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Selling and administrative expenses |
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44.5 |
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35.3 |
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Amortization of intangibles |
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5.7 |
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4.7 |
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Income from operations |
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3.8 |
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21.8 |
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Interest expense, net |
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2.8 |
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— |
|
Other income, net |
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— |
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(4.1 |
) |
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Pre-tax income |
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1.0 |
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25.9 |
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Income tax expense |
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0.1 |
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4.4 |
|
Net income |
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0.9 |
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21.5 |
|
Net income attributable to redeemable noncontrolling interest |
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— |
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— |
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Net income attributable to Methode |
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$ |
0.9 |
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$ |
21.5 |
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Basic and diluted income per share attributable to Methode: |
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Basic |
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$ |
0.03 |
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$ |
0.59 |
|
Diluted |
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$ |
0.02 |
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$ |
0.58 |
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Cash dividends per share |
|
$ |
0.14 |
|
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$ |
0.14 |
|
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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|||||
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July 29, 2023 |
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July 30, 2022 |
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Net income |
|
$ |
0.9 |
|
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$ |
21.5 |
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|
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Other comprehensive income (loss), net of tax: |
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|
|
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Foreign currency translation adjustments |
|
|
(2.5 |
) |
|
|
(10.9 |
) |
Derivative financial instruments |
|
|
(1.6 |
) |
|
|
1.5 |
|
Other comprehensive income (loss) |
|
|
(4.1 |
) |
|
|
(9.4 |
) |
Comprehensive income (loss) |
|
|
(3.2 |
) |
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|
12.1 |
|
Comprehensive income attributable to redeemable noncontrolling interest |
|
|
— |
|
|
|
— |
|
Comprehensive income (loss) attributable to Methode |
|
$ |
(3.2 |
) |
|
$ |
12.1 |
|
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 29, 2023 |
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April 29, 2023 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
147.9 |
|
|
$ |
157.0 |
|
Accounts receivable, net |
|
|
300.8 |
|
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|
314.3 |
|
Inventories |
|
|
175.6 |
|
|
|
159.7 |
|
Income tax receivable |
|
|
13.4 |
|
|
|
12.9 |
|
Prepaid expenses and other current assets |
|
|
19.8 |
|
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20.5 |
|
Total current assets |
|
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657.5 |
|
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664.4 |
|
Long-term assets: |
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Property, plant and equipment, net |
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225.2 |
|
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220.3 |
|
Goodwill |
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|
302.5 |
|
|
|
301.9 |
|
Other intangible assets, net |
|
|
251.3 |
|
|
|
256.7 |
|
Operating lease right-of-use assets, net |
|
|
29.5 |
|
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28.4 |
|
Deferred tax assets |
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33.7 |
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33.6 |
|
Pre-production costs |
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38.9 |
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|
36.1 |
|
Other long-term assets |
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35.5 |
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|
37.7 |
|
Total long-term assets |
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|
916.6 |
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|
914.7 |
|
Total assets |
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$ |
1,574.1 |
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$ |
1,579.1 |
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LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
|
$ |
131.9 |
|
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$ |
138.7 |
|
Accrued employee liabilities |
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26.7 |
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36.7 |
|
Other accrued liabilities |
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33.7 |
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34.5 |
|
Short-term operating lease liabilities |
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6.9 |
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6.8 |
|
Short-term debt |
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3.2 |
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3.2 |
|
Income tax payable |
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6.0 |
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8.1 |
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Total current liabilities |
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208.4 |
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228.0 |
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Long-term liabilities: |
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Long-term debt |
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335.8 |
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303.6 |
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Long-term operating lease liabilities |
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22.4 |
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21.8 |
|
Long-term income tax payable |
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|
16.7 |
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16.7 |
|
Other long-term liabilities |
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17.1 |
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14.3 |
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Deferred tax liabilities |
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|
41.4 |
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41.8 |
|
Total long-term liabilities |
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|
433.4 |
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398.2 |
|
Total liabilities |
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|
641.8 |
|
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626.2 |
|
Redeemable noncontrolling interest |
|
|
0.9 |
|
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|
11.1 |
|
Shareholders' equity: |
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Common stock, $0.50 par value, 100,000,000 shares authorized, 37,356,156 shares and 37,167,375 shares issued as of July 29, 2023 and April 29, 2023, respectively |
|
|
18.7 |
|
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|
18.6 |
|
Additional paid-in capital |
|
|
182.5 |
|
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|
181.0 |
|
Accumulated other comprehensive loss |
|
|
(23.1 |
) |
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(19.0 |
) |
Treasury stock, 1,346,624 shares as of July 29, 2023 and April 29, 2023 |
|
|
(11.5 |
) |
|
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(11.5 |
) |
Retained earnings |
|
|
764.8 |
|
|
|
772.7 |
|
Total shareholders' equity |
|
|
931.4 |
|
|
|
941.8 |
|
Total liabilities, redeemable noncontrolling interest and shareholders' equity |
|
$ |
1,574.1 |
|
|
$ |
1,579.1 |
|
See notes to condensed consolidated financial statements.
4
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
(in millions, except share data)
|
|
Three Months Ended July 29, 2023 |
|
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|
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Redeemable noncontrolling interest |
|
|
Common |
|
|
Common |
|
|
Additional |
|
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Accumulated |
|
|
Treasury |
|
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Retained |
|
|
Total |
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||||||||
Balance as of April 29, 2023 |
|
$ |
11.1 |
|
|
|
37,167,375 |
|
|
$ |
18.6 |
|
|
$ |
181.0 |
|
|
$ |
(19.0 |
) |
|
$ |
(11.5 |
) |
|
$ |
772.7 |
|
|
$ |
941.8 |
|
Issuance of restricted stock, net of tax withholding |
|
|
— |
|
|
|
188,781 |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3.8 |
) |
|
|
(3.8 |
) |
Purchase of redeemable noncontrolling interest |
|
|
(10.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.6 |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4.1 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
|
|
0.9 |
|
Dividends on common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.0 |
) |
|
|
(5.0 |
) |
Balance as of July 29, 2023 |
|
$ |
0.9 |
|
|
|
37,356,156 |
|
|
$ |
18.7 |
|
|
$ |
182.5 |
|
|
$ |
(23.1 |
) |
|
$ |
(11.5 |
) |
|
$ |
764.8 |
|
|
$ |
931.4 |
|
|
|
|
|
|
Three Months Ended July 30, 2022 |
|
||||||||||||||||||||||||||
|
|
Redeemable noncontrolling interest |
|
|
Common |
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Treasury |
|
|
Retained |
|
|
Total |
|
||||||||
Balance as of April 30, 2022 |
|
$ |
— |
|
|
|
38,276,968 |
|
|
$ |
19.2 |
|
|
$ |
169.0 |
|
|
$ |
(26.8 |
) |
|
$ |
(11.5 |
) |
|
$ |
763.9 |
|
|
$ |
913.8 |
|
Issuance of restricted stock, net of tax withholding |
|
|
— |
|
|
|
42,381 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Purchases of common stock |
|
|
— |
|
|
|
(317,635 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11.7 |
) |
|
|
(11.9 |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.0 |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9.4 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21.5 |
|
|
|
21.5 |
|
Dividends on common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.2 |
) |
|
|
(5.2 |
) |
Balance as of July 30, 2022 |
|
$ |
— |
|
|
|
38,001,714 |
|
|
$ |
19.0 |
|
|
$ |
172.0 |
|
|
$ |
(36.2 |
) |
|
$ |
(11.5 |
) |
|
$ |
768.1 |
|
|
$ |
911.4 |
|
See notes to condensed consolidated financial statements.
5
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
|
|
Three Months Ended |
|
|||||
|
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
0.9 |
|
|
$ |
21.5 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
14.0 |
|
|
|
12.3 |
|
Stock-based compensation expense |
|
|
2.6 |
|
|
|
4.0 |
|
Change in cash surrender value of life insurance |
|
|
0.6 |
|
|
|
0.2 |
|
Amortization of debt issuance costs |
|
|
0.2 |
|
|
|
0.2 |
|
Impairment of long-lived assets |
|
|
0.6 |
|
|
|
— |
|
Change in deferred income taxes |
|
|
(0.5 |
) |
|
|
(1.8 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
11.5 |
|
|
|
(11.9 |
) |
Inventories |
|
|
(16.5 |
) |
|
|
(17.4 |
) |
Prepaid expenses and other assets |
|
|
(2.3 |
) |
|
|
(4.3 |
) |
Accounts payable |
|
|
(5.7 |
) |
|
|
10.5 |
|
Other liabilities |
|
|
(11.0 |
) |
|
|
(0.6 |
) |
Net cash (used in) provided by operating activities |
|
|
(5.6 |
) |
|
|
12.7 |
|
|
|
|
|
|
|
|
||
Investing activities: |
|
|
|
|
|
|
||
Purchases of property, plant and equipment |
|
|
(13.8 |
) |
|
|
(9.6 |
) |
Net cash used in investing activities |
|
|
(13.8 |
) |
|
|
(9.6 |
) |
|
|
|
|
|
|
|
||
Financing activities: |
|
|
|
|
|
|
||
Taxes paid related to net share settlement of equity awards |
|
|
(3.8 |
) |
|
|
(0.5 |
) |
Repayments of finance leases |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Purchases of common stock |
|
|
— |
|
|
|
(11.9 |
) |
Cash dividends |
|
|
(5.3 |
) |
|
|
(5.0 |
) |
Purchase of redeemable noncontrolling interest |
|
|
(10.2 |
) |
|
|
— |
|
Proceeds from borrowings |
|
|
42.0 |
|
|
|
— |
|
Repayments of borrowings |
|
|
(10.1 |
) |
|
|
(3.3 |
) |
Net cash provided by (used in) financing activities |
|
|
12.5 |
|
|
|
(20.8 |
) |
Effect of foreign currency exchange rate changes on cash and cash equivalents |
|
|
(2.2 |
) |
|
|
(1.9 |
) |
Decrease in cash and cash equivalents |
|
|
(9.1 |
) |
|
|
(19.6 |
) |
Cash and cash equivalents at beginning of the period |
|
|
157.0 |
|
|
|
172.0 |
|
Cash and cash equivalents at end of the period |
|
$ |
147.9 |
|
|
$ |
152.4 |
|
|
|
|
|
|
|
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
|
||
Interest |
|
$ |
3.0 |
|
|
$ |
0.8 |
|
Income taxes, net of refunds |
|
$ |
2.2 |
|
|
$ |
5.6 |
|
Operating lease obligations |
|
$ |
2.3 |
|
|
$ |
1.9 |
|
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 and consumer appliance.
Basis of presentation
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the year ended April 29, 2023, filed with the SEC on June 27, 2023. Results may vary from quarter to quarter for reasons other than seasonality.
Financial reporting periods
The Company maintains its financial records on the basis of a 52- or 53-week fiscal year ending on the Saturday closest to April 30. The three months ended July 29, 2023 and July 30, 2022 were both 13-week periods.
Use of estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. These estimates and assumptions are subject to an inherent degree of uncertainty and may change, as new events occur, and additional information is obtained. As a result, actual results may differ from previously estimated amounts, and such differences may be material to the condensed consolidated financial statements.
Recently adopted accounting pronouncements
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured at the acquisition date in accordance with Accounting Standards Codification ("ASC") 606, as if the acquirer had originated the contracts. Prior to the issuance of this ASU, contract assets and liabilities were recognized at fair value on the acquisition date. The Company adopted this ASU in the first quarter of fiscal 2024 on a prospective basis. The adoption of this ASU did not have a material impact on its condensed consolidated financial statements or related disclosures and is only applicable to future business acquisitions.
Summary of significant accounting policies
The Company’s significant accounting policies are described in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Company’s Form 10-K for the year ended April 29, 2023. There have been no material changes to the significant accounting policies in the three months ended July 29, 2023.
7
Note 2. Revenue
The Company generates revenue from manufacturing products for customers in diversified global markets. The substantial 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) and ongoing price adjustments. 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 29, 2023 and July 30, 2022 were not material.
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 29, 2023 |
|
|||||||||||||||||
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Total |
|
|||||
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
$ |
66.8 |
|
|
$ |
40.0 |
|
|
$ |
15.2 |
|
|
$ |
0.8 |
|
|
$ |
122.8 |
|
Europe, the Middle East & Africa ("EMEA") |
|
|
52.2 |
|
|
|
51.1 |
|
|
|
— |
|
|
|
— |
|
|
|
103.3 |
|
Asia |
|
|
39.3 |
|
|
|
24.3 |
|
|
|
— |
|
|
|
— |
|
|
|
63.6 |
|
Total net sales |
|
$ |
158.3 |
|
|
$ |
115.4 |
|
|
$ |
15.2 |
|
|
$ |
0.8 |
|
|
$ |
289.7 |
|
Timing of revenue recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Goods transferred at a point in time |
|
$ |
154.2 |
|
|
$ |
115.4 |
|
|
$ |
15.2 |
|
|
$ |
0.8 |
|
|
$ |
285.6 |
|
Goods transferred over time |
|
|
4.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.1 |
|
Total net sales |
|
$ |
158.3 |
|
|
$ |
115.4 |
|
|
$ |
15.2 |
|
|
$ |
0.8 |
|
|
$ |
289.7 |
|
|
|
Three Months Ended July 30, 2022 |
|
|||||||||||||||||
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Total |
|
|||||
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
$ |
94.7 |
|
|
$ |
40.7 |
|
|
$ |
13.0 |
|
|
$ |
0.7 |
|
|
$ |
149.1 |
|
EMEA |
|
|
52.1 |
|
|
|
28.5 |
|
|
|
— |
|
|
|
— |
|
|
|
80.6 |
|
Asia |
|
|
29.8 |
|
|
|
22.9 |
|
|
|
— |
|
|
|
— |
|
|
|
52.7 |
|
Total net sales |
|
$ |
176.6 |
|
|
$ |
92.1 |
|
|
$ |
13.0 |
|
|
$ |
0.7 |
|
|
$ |
282.4 |
|
Timing of revenue recognition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Goods transferred at a point in time |
|
$ |
172.1 |
|
|
$ |
92.1 |
|
|
$ |
13.0 |
|
|
$ |
0.7 |
|
|
$ |
277.9 |
|
Goods transferred over time |
|
|
4.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.5 |
|
Total net sales |
|
$ |
176.6 |
|
|
$ |
92.1 |
|
|
$ |
13.0 |
|
|
$ |
0.7 |
|
|
$ |
282.4 |
|
8
Note 3. Acquisition
On April 20, 2023, the Company acquired 92.2% of the outstanding shares in Nordic Lights Group Corporation (“Nordic Lights”), a premium provider of high-quality lighting solutions for heavy duty equipment headquartered in Finland, for €121.8 million ($134.2 million) in cash. In the three months ended July 29, 2023, the Company acquired an additional 7.2% of the outstanding shares of Nordic Lights for €9.2 million ($10.2 million), increasing the Company’s ownership to 99.4%. The Company has commenced redemption proceedings in order to obtain ownership of all the remaining issued and outstanding shares in Nordic Lights. The Company expects the redemption proceedings to be completed by October 31, 2023. The acquisition of Nordic Lights complements the Company’s existing LED lighting solution offerings.
The acquisition was funded through a combination of borrowings under the Company's revolving credit facility and cash on hand. The results of the operations of Nordic Lights are reported within the Industrial segment from the date of acquisition. The acquisition was accounted for as a business combination. The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase price, are as follows:
(in millions) |
|
|
|
|
Cash and cash equivalents |
|
$ |
19.6 |
|
Accounts receivable |
|
|
17.1 |
|
Inventories |
|
|
9.6 |
|
Property, plant and equipment |
|
|
12.9 |
|
Identifiable intangible assets |
|
|
68.1 |
|
Accounts payable |
|
|
(10.8 |
) |
Long-term debt |
|
|
(24.4 |
) |
Other assets and liabilities, net |
|
|
(2.8 |
) |
Deferred tax liabilities |
|
|
(13.4 |
) |
Total identifiable net assets acquired |
|
|
75.9 |
|
Goodwill |
|
|
69.6 |
|
Total fair value of net assets acquired |
|
|
145.5 |
|
Less: redeemable noncontrolling interest |
|
|
(11.3 |
) |
Total purchase price |
|
$ |
134.2 |
|
The noncontrolling interest was recognized at fair value, which was determined to be the noncontrolling interest’s proportionate share of the fair value of net assets acquired, as of the acquisition date. The noncontrolling interest is classified as a redeemable noncontrolling interest on the condensed consolidated balance sheets as minority shareholders owning less than 10% of the outstanding shares in a company in Finland have the right to require the company to redeem their shares. As noted above, in the three months ended July 29, 2023, the Company acquired $10.2 million of the redeemable noncontrolling interest.
As of July 29, 2023, the Company considered these amounts to be provisional because it is still in the process of gathering and reviewing information to support the valuations of the assets acquired, liabilities assumed and related tax positions. Goodwill arising from the acquisition was included in the Industrial segment as of July 29, 2023 and was attributable to potential synergies and an assembled workforce. The Company does not expect any recognized goodwill from this acquisition to be deductible for income tax purposes.
Intangible assets primarily include customer relationships, technology licenses and trademarks. The weighted average amortization period for the acquired intangible assets is approximately 16.4 years.
The pro-forma effects of this acquisition would not materially impact the Company’s operating results for the three months ended July 30, 2022, and as a result no pro-forma financial statements are presented. In the three months ended July 29, 2023, additional acquisition costs of $0.5 million were incurred and reported in selling and administrative expenses.
9
Note 4. Income Taxes
The provision for income taxes for an interim period is based on an estimated annual effective income tax rate applied to ordinary year-to-date earnings or losses. The estimated annual effective income tax rate is determined excluding the effects of unusual or significant one-time items that are reported net of the related tax effects in the period in which they occur. In addition, any material effects of enacted tax law or rate changes as well as the Company’s ability to utilize various tax assets is recognized in the period in which the change occurs.
The computation of the estimated annual effective income tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year by jurisdiction, certain book to tax adjustments, and the likelihood of the realizability of deferred tax assets generated in the current year. The estimates used to compute the provision or benefit for income taxes may change as new events occur, additional information is obtained or as the Company’s tax environment changes.
The Company’s income tax expense and effective tax rate for the three months ended July 29, 2023 and July 30, 2022 were as follows:
|
|
Three Months Ended |
|
|||||
($ in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Pre-tax income |
|
$ |
1.0 |
|
|
$ |
25.9 |
|
Income tax expense |
|
0.1 |
|
|
4.4 |
|
||
Effective tax rate |
|
|
10.0 |
% |
|
|
17.0 |
% |
The effective tax rate for the three months ended July 29, 2023 was lower than the U.S. statutory tax rate primarily due to income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions, partially offset by GILTI and non-deductible expenses. The effective tax rate for the three months ended July 30, 2022 was lower than the U.S. statutory tax rate primarily due to income derived from foreign operations with lower statutory tax rates partially offset by non-deductible expenses.
The Company’s gross unrecognized income tax benefits was $4.5 million at both July 29, 2023 and April 29, 2023. If any portion of the Company’s unrecognized tax benefits is recognized, it would impact the Company’s effective tax rate. The unrecognized tax benefits are reviewed periodically and adjusted for changing facts and circumstances, such as tax audits, the lapsing of applicable statutes of limitations and changes in tax law. The Company recognizes interest and penalties related to income tax uncertainties in income tax expense. Accrued interest and penalties were $0.3 million and $0.2 million as of July 29, 2023 and April 29, 2023, respectively.
Note 5. Balance Sheet Components
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less. Highly liquid investments include money market funds which are classified within Level 1 of the fair value hierarchy. As of July 29, 2023 and April 29, 2023, the Company had a balance of $0.2 million and $1.3 million, respectively, in money market accounts.
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. 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 $1.3 million at both July 29, 2023 and April 29, 2023.
10
Inventories
Inventories are stated at the lower-of-cost or net realizable value. Cost is determined using the first-in, first-out method. Finished products and work-in-process inventories include direct material costs and direct and indirect manufacturing costs. The Company records reserves for inventory that may be obsolete or in excess of current and future market demand. A summary of inventories is shown below:
(in millions) |
|
July 29, 2023 |
|
|
April 29, 2023 |
|
||
Finished products |
|
$ |
43.1 |
|
|
$ |
36.6 |
|
Work in process |
|
|
17.5 |
|
|
|
14.4 |
|
Raw materials |
|
|
115.0 |
|
|
|
108.7 |
|
Total inventories |
|
$ |
175.6 |
|
|
$ |
159.7 |
|
Property, plant and equipment
Property, plant and equipment is stated at cost. Maintenance and repair costs are expensed as incurred. Depreciation is calculated using the straight-line method using estimated useful lives of 5 to 40 years for buildings and building improvements and 3 to 15 years for machinery and equipment. A summary of property, plant and equipment is shown below:
(in millions) |
|
July 29, 2023 |
|
|
April 29, 2023 |
|
||
Land |
|
$ |
3.0 |
|
|
$ |
3.0 |
|
Buildings and building improvements |
|
|
100.5 |
|
|
|
98.8 |
|
Machinery and equipment |
|
|
418.8 |
|
|
|
414.3 |
|
Construction in progress |
|
|
47.7 |
|
|
|
40.6 |
|
Total property, plant and equipment, gross |
|
|
570.0 |
|
|
|
556.7 |
|
Less: accumulated depreciation |
|
|
(344.8 |
) |
|
|
(336.4 |
) |
Property, plant and equipment, net |
|
$ |
225.2 |
|
|
$ |
220.3 |
|
Depreciation expense was $8.3 million and $7.6 million in the three months ended July 29, 2023 and July 30, 2022, respectively. As of July 29, 2023 and April 29, 2023, capital expenditures recorded in accounts payable totaled $5.3 million and $4.5 million, respectively.
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 29, 2023 and April 29, 2023, the Company had $38.9 million and $36.1 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling.
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 the estimated useful life of the assets. As of July 29, 2023 and April 29, 2023, Company-owned tooling was $15.2 million and $12.2 million, respectively.
Note 6. Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. A summary of the changes in the carrying amount of goodwill, by segment, is shown below:
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Total |
|
|||
Balance as of April 29, 2023 |
|
|
106.2 |
|
|
|
195.7 |
|
|
|
301.9 |
|
Foreign currency translation |
|
|
— |
|
|
|
0.6 |
|
|
|
0.6 |
|
Balance as of July 29, 2023 |
|
$ |
106.2 |
|
|
$ |
196.3 |
|
|
$ |
302.5 |
|
The Company tests goodwill and indefinite-lived intangible assets for impairment on an annual basis as of the beginning of the fourth quarter each fiscal year. In addition, the Company continuously monitors for events and circumstances that could negatively impact the key assumptions used in determining fair value and therefore require interim goodwill impairment testing, including long-term revenue growth projections, profitability, discount rates, volatility in the Company's market capitalization, and general industry, market and macroeconomic conditions.
11
During the three months ended July 29, 2023, the Company concluded that a triggering event had occurred for goodwill at a reporting unit in its Automotive segment. The triggering event was a result of an earlier than expected sunsetting of a significant program for a major electric vehicle customer, which led to a downward revision of forecasted cash flows. As a result, the Company performed a quantitative impairment assessment of the fair value for this reporting unit.
The Company engaged a third-party valuation specialist to assist management in performing the interim goodwill impairment assessment. The fair value of the reporting unit was estimated using a combination of the income approach and market approach. The income approach uses a discounted cash flow method and the market approach uses appropriate valuation multiples observed for the reporting unit’s guideline public companies. The determination of discounted cash flows are based on management’s estimates of revenue growth rates and earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins, taking into consideration business and market conditions for the countries and markets in which the reporting unit operates. The Company calculates the discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry specific rates of return on debt and equity capital for a target industry capital structure, adjusted for risks associated with business size, geography and other factors specific to the reporting unit. Long-range forecasting involves uncertainty which increases with each successive period. Revenue growth rates and profitability assumptions, especially in the outer years, involve a greater degree of uncertainty.
Based upon the quantitative impairment assessment, the Company determined the fair value exceeded the carrying amount for this reporting unit, and thus no impairment was recorded. However, further changes to the assumptions regarding future performance, an adverse change to macroeconomic conditions, or a change to other assumptions could result in impairment losses in the future, which could be significant.
Other intangible assets, net
Details of identifiable intangible assets are shown below:
|
|
As of July 29, 2023 |
|
|||||||||||||
(in millions) |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Weighted average remaining useful life (years) |
|
||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships and agreements |
|
$ |
285.3 |
|
|
$ |
(72.3 |
) |
|
$ |
213.0 |
|
|
|
14.6 |
|
Trade names, patents and technology licenses |
|
|
73.5 |
|
|
|
(37.0 |
) |
|
|
36.5 |
|
|
|
6.9 |
|
Total amortized intangible assets |
|
|
358.8 |
|
|
|
(109.3 |
) |
|
|
249.5 |
|
|
|
|
|
Unamortized trade name |
|
|
1.8 |
|
|
|
— |
|
|
|
1.8 |
|
|
|
|
|
Total other intangible assets |
|
$ |
360.6 |
|
|
$ |
(109.3 |
) |
|
$ |
251.3 |
|
|
|
|
|
|
|
As of April 29, 2023 |
|
|||||||||||||
(in millions) |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Weighted average remaining useful life (years) |
|
||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships and agreements |
|
$ |
286.7 |
|
|
$ |
(68.2 |
) |
|
$ |
218.5 |
|
|
|
14.8 |
|
Trade names, patents and technology licenses |
|
|
71.6 |
|
|
|
(35.2 |
) |
|
|
36.4 |
|
|
|
6.0 |
|
Total amortized intangible assets |
|
|
358.3 |
|
|
|
(103.4 |
) |
|
|
254.9 |
|
|
|
|
|
Unamortized trade name |
|
|
1.8 |
|
|
|
— |
|
|
|
1.8 |
|
|
|
|
|
Total other intangible assets |
|
$ |
360.1 |
|
|
$ |
(103.4 |
) |
|
$ |
256.7 |
|
|
|
|
|
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 2024 |
|
$ |
17.2 |
|
2025 |
|
|
22.4 |
|
2026 |
|
|
21.6 |
|
2027 |
|
|
20.9 |
|
2028 |
|
|
18.6 |
|
Thereafter |
|
|
148.8 |
|
Total |
|
$ |
249.5 |
|
12
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.
Net investment hedges
The Company is exposed to the risk that adverse changes in foreign currency exchange rates could impact its net investment in non-U.S. subsidiaries. To manage this risk, the Company designates certain qualifying derivative and non-derivative instruments, including cross-currency swaps and foreign currency-denominated debt, as net investment hedges of certain non-U.S. subsidiaries.
The Company had a variable-rate, cross-currency swap, with a notional value of $60.0 million (€54.8 million), that matured on August 31, 2023 with a gain of approximately $0.4 million. The cross-currency swap was designated as a hedge of the Company’s net investment in its euro-denominated subsidiaries. The gain will remain in AOCI until the hedged net investment is sold or substantially liquidated.
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, which represents the interest rate differential of the cross-currency swap, through interest expense. For the three months ended July 29, 2023 and July 30, 2022, the Company recorded gains of $0.7 million and $0.3 million, respectively, in interest expense, net in the condensed consolidated statements of income.
The Company has also designated its euro-denominated long-term borrowings of $145.5 million under the Credit Agreement as a hedge of the Company's investment in its euro-denominated subsidiaries. The objective of the hedge is to protect the net investment in the foreign operation against adverse changes in the euro exchange rate. The change in the value of the euro-denominated long-term borrowings, which is due to changes in foreign exchange rates, is recorded as a cumulative translation adjustment in AOCI, net of tax. For the three months ended July 29, 2023, the transaction loss associated with this net investment hedge reported in AOCI was $0.2 million.
13
Interest rate swaps
The Company utilizes interest rate swaps to limit its exposure to market fluctuations on its variable-rate borrowings. The interest rate swaps effectively convert a portion of the Company's variable rate borrowings to a fixed rate based upon a determined notional amount. The Company has an interest rate swap, maturing on October 31, 2027, with a notional value of $145.5 million (€132.0 million) and had two interest rate swaps that matured on August 31, 2023, with a notional value of $100.0 million. The interest rate swaps are designated as cash flow hedges.
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 in the condensed consolidated balance sheets. 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. No ineffectiveness was recognized in the three months ended July 29, 2023 and July 30, 2022.
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 29, 2023 and April 29, 2023, the Company held foreign currency forward contracts with a notional value of $61.5 million and $59.9 million, respectively. During the three months ended July 29, 2023, the Company recognized a loss of $1.9 million related to foreign currency forward contracts in the condensed consolidated statements of income. During the three months ended July 30, 2022, a loss of $0.4 million was recognized in the condensed consolidated statements of income.
Fair value of derivative instruments on the balance sheet
The fair value of derivative instruments are classified as Level 2 within the fair value hierarchy and are recorded in the balance sheets as follows:
|
|
|
|
Asset/(Liability) |
|
|||||
(in millions) |
|
Financial Statement Caption |
|
July 29, 2023 |
|
|
April 29, 2023 |
|
||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
||
Net investment hedges |
|
Other accrued liabilities |
|
$ |
(0.4 |
) |
|
$ |
(0.5 |
) |
Interest rate swaps |
|
Prepaid expenses and other current assets |
|
$ |
0.4 |
|
|
$ |
1.6 |
|
Interest rate swaps |
|
Other long-term liabilities |
|
$ |
(1.1 |
) |
|
$ |
— |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
||
Foreign currency forward contracts |
|
Prepaid expenses and other current assets |
|
$ |
— |
|
|
$ |
0.1 |
|
Foreign currency forward contracts |
|
Other accrued liabilities |
|
$ |
(0.1 |
) |
|
$ |
(0.1 |
) |
Effect of derivative instruments on comprehensive income (loss)
Gross amounts recorded in other comprehensive income (loss) were as follows:
|
|
Three Months Ended |
|
|||||
(in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Net investment hedges |
|
$ |
0.1 |
|
|
$ |
2.0 |
|
Interest rate swaps |
|
|
(2.3 |
) |
|
|
— |
|
Total |
|
$ |
(2.2 |
) |
|
$ |
2.0 |
|
14
Note 8. Debt
A summary of debt is shown below:
(in millions) |
|
July 29, 2023 |
|
|
April 29, 2023 |
|
||
Revolving credit facility |
|
$ |
337.5 |
|
|
$ |
305.4 |
|
Other debt |
|
|
4.6 |
|
|
|
4.7 |
|
Unamortized debt issuance costs |
|
|
(3.1 |
) |
|
|
(3.3 |
) |
Total debt |
|
|
339.0 |
|
|
|
306.8 |
|
Less: current maturities |
|
|
(3.2 |
) |
|
|
(3.2 |
) |
Total long-term debt |
|
$ |
335.8 |
|
|
$ |
303.6 |
|
Revolving credit facility/term loan
On October 31, 2022, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the Lenders and other parties named therein. The Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated September 12, 2018 and as previously amended (the “Prior Credit Agreement”), among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders named therein. Among other things, the Credit Agreement (i) increased the multicurrency revolving credit commitments under the Prior Credit Agreement to $750,000,000, (ii) refinanced in full and terminated the term loan facility under the Prior Credit Agreement, and (iii) made certain other changes to the covenants, terms, and conditions under the Prior Credit Agreement. In addition, the Credit Agreement permits the Company to increase the revolving commitments and/or add one or more tranches of term loans under the Credit Agreement from time to time by up to an amount equal to (i) $250,000,000 plus (ii) an additional amount so long as the leverage ratio would not exceed 3.00:1.00 on a pro forma basis, subject to, among other things, the receipt of additional commitments from existing and/or new lenders. The Credit Agreement matures on October 31, 2027.
Loans denominated in US dollars under the Credit Agreement bear interest at either (a) an adjusted base rate or (b) an adjusted term Secured Overnight Financing Rate (“SOFR”) rate or term SOFR daily floating rate (in each case, as determined in accordance with the provisions of the Credit Agreement) in each case plus an applicable rate (the “Applicable Rate”) ranging between 0.375% and 1.25%, in the case of adjusted base rate loans, and between 1.375% and 2.25%, in the case of adjusted term SOFR rate loans and term SOFR daily floating rate loans. Loans denominated in euros will bear interest at the Euro Interbank Offered Rate plus an Applicable Rate ranging between 1.375% and 2.25%. The Applicable Rate is set based on the Company’s consolidated leverage ratio.
As of July 29, 2023, the outstanding balance under the revolving credit facility included $145.5 million (€132.0 million) of euro-denominated borrowings which was primarily used to fund the Company's acquisition of Nordic Lights. The Company has designated the euro-denominated borrowings as a net investment hedge of the foreign currency exposure of its investments in euro-denominated subsidiaries. Refer to Note 7, "Derivative Financial Instruments and Hedging Activities" for further information. On August 31, 2023, the Company borrowed €143.0 million ($156.0 million) under the revolving credit facility and used the proceeds to primarily repay US dollar borrowings under the revolving credit facility.
The weighted-average interest rate on outstanding US dollar and euro-denominated borrowings under the Credit Agreement was approximately 7.0% and 5.2%, respectively, as of July 29, 2023. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. As of July 29, 2023, the Company was in compliance with all the covenants in the Credit Agreement.
Other debt
One of the Company’s European subsidiaries has debt that consists of three notes with maturities ranging from 2023 to 2031. The weighted-average interest rate on this debt was approximately 1.4% at July 29, 2023 and $3.2 million of the debt was classified as short-term.
15
Note 9. Shareholders’ Equity
Share buyback program
The Board of Directors authorized a program to purchase up to $200.0 million of the Company’s outstanding common stock through June 14, 2024. Purchases may be made in private transactions or on the open market, including pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934.
The following table summarizes the Company’s stock buyback activity under this share buyback program:
|
|
Three Months Ended |
|
|||||
(in millions, except share and per share data) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Shares purchased |
|
|
— |
|
|
|
317,635 |
|
Average price per share |
|
$ |
— |
|
|
$ |
37.43 |
|
Total cost |
|
$ |
— |
|
|
$ |
11.9 |
|
As of July 29, 2023, a total of 2,790,375 shares have been purchased at a total cost of $119.3 million since the commencement of the share buyback program. All purchased shares were retired and are reflected as a reduction of common stock for the par value of shares, with the excess applied as a reduction to retained earnings. As of July 29, 2023, the dollar value of shares that remained available to be purchased by the Company under this share buyback program was $80.7 million.
Dividends
The Company paid dividends totaling $5.3 million and $5.0 million in the three months ended July 29, 2023 and July 30, 2022, respectively. Dividends paid in the three months ended July 29, 2023 include $0.4 million of dividend equivalent payments for restricted stock units that vested at the end of fiscal 2023.
Accumulated other comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. A summary of changes in AOCI, net of tax is shown below:
|
|
Three Months Ended July 29, 2023 |
|
|||||||||
(in millions) |
|
Currency translation adjustments |
|
|
Derivative instruments |
|
|
Total |
|
|||
Balance at beginning of period |
|
$ |
(19.8 |
) |
|
$ |
0.8 |
|
|
$ |
(19.0 |
) |
Other comprehensive income (loss) |
|
|
(2.7 |
) |
|
|
(2.2 |
) |
|
|
(4.9 |
) |
Tax (expense) benefit |
|
|
0.2 |
|
|
|
0.6 |
|
|
|
0.8 |
|
Net other comprehensive income (loss) |
|
|
(2.5 |
) |
|
|
(1.6 |
) |
|
|
(4.1 |
) |
Balance at the end of period |
|
$ |
(22.3 |
) |
|
$ |
(0.8 |
) |
|
$ |
(23.1 |
) |
|
|
Three Months Ended July 30, 2022 |
|
|||||||||
(in millions) |
|
Currency translation adjustments |
|
|
Derivative instruments |
|
|
Total |
|
|||
Balance at beginning of period |
|
$ |
(30.5 |
) |
|
$ |
3.7 |
|
|
$ |
(26.8 |
) |
Other comprehensive income (loss) |
|
|
(10.9 |
) |
|
|
2.0 |
|
|
|
(8.9 |
) |
Tax (expense) benefit |
|
|
— |
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Net other comprehensive income (loss) |
|
|
(10.9 |
) |
|
|
1.5 |
|
|
|
(9.4 |
) |
Balance at the end of period |
|
$ |
(41.4 |
) |
|
$ |
5.2 |
|
|
$ |
(36.2 |
) |
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. 2022 Omnibus Incentive Plan (“2022 Plan”), the Methode Electronics, Inc. 2014 Omnibus Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”), and the Methode Electronics, Inc. 2004 Stock Plan (“2004 Plan”). The Company’s stockholders approved the 2022 Plan on September 14, 2022. The Company can no longer make grants under the 2014 Plan, 2010 Plan and 2004 Plan.
Subject to adjustment as provided in the 2022 Plan and the 2022 Plan’s share counting provisions, the number of shares of the Company's common stock that will be available for all awards under the 2022 Plan is 5,550,000, less one share for every one share of common stock subject to an option or SAR award granted after April 30, 2022 under the 2014 Plan and 2.28 shares for every one share that was subject to an award other than an option or SAR granted after April 30, 2022 under the 2014 Plan. As of July 29, 2023, there were 5,146,941 shares available for award under the 2022 Plan.
16
Restricted stock awards and performance units
As of July 29, 2023, the Company had 933,674 RSAs outstanding which may be earned based on the achievement of an earnings before net interest, taxes, fixed asset depreciation and intangible asset amortization (“EBITDA”) measure for fiscal 2025. The RSAs will vest ranging from 0% (for performance below threshold) to 100% (target performance) based on the achievement of the EBITDA performance measure and continued employment. In addition, if the target performance is exceeded, up to an additional 466,837 PUs can be earned that will be settled in cash. At the discretion of the Compensation Committee, the PUs may be settled in shares of common stock.
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 the 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 exceeded. 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, no compensation expense has been recognized for the RSAs or PUs to date, as the performance conditions are not probable of being met. Unrecognized stock-based compensation expense at target level of performance is $26.8 million as of July 29, 2023, which, subject to the performance conditions being met, will be recognized through fiscal 2025. The following table summarizes RSA activity:
|
|
Restricted |
|
|
Weighted |
|
||
Non-vested at April 29, 2023 |
|
|
933,674 |
|
|
$ |
28.73 |
|
Awarded |
|
|
— |
|
|
$ |
— |
|
Vested |
|
|
— |
|
|
$ |
— |
|
Forfeited |
|
|
— |
|
|
$ |
— |
|
Non-vested at July 29, 2023 |
|
|
933,674 |
|
|
$ |
28.73 |
|
Restricted stock units
RSUs granted vest over a pre-determined period of time, up to five years from the date of grant. The fair value of the RSUs granted are based on the closing stock price on the date of grant and earn dividend equivalents during the vesting periods, which are forfeitable if the RSUs don’t vest. The following table summarizes RSU activity:
|
|
Restricted |
|
|
Weighted |
|
||
Non-vested at April 29, 2023 |
|
|
727,467 |
|
|
$ |
30.60 |
|
Awarded |
|
|
— |
|
|
$ |
— |
|
Vested |
|
|
— |
|
|
$ |
— |
|
Forfeited |
|
|
(6,852 |
) |
|
$ |
41.87 |
|
Non-vested at July 29, 2023 |
|
|
720,615 |
|
|
$ |
30.49 |
|
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 29, 2023, common stock to be delivered to these executives totaled 577,055 shares.
Director awards
The Company grants stock awards to its non-employee directors as a component of their compensation. The stock awards vest immediately upon grant. Non-employee directors may elect to defer receipt of their shares under the Company’s non-qualified deferred compensation plan. The following table summarizes awards granted to non-employee directors:
|
|
Non-employee director awards |
|
|
Deferred non-employee director awards |
|
|
Total |
|
|
Weighted |
|
||||
Outstanding at April 29, 2023 |
|
|
— |
|
|
|
45,750 |
|
|
|
45,750 |
|
|
$ |
40.56 |
|
Awarded |
|
|
16,804 |
|
|
|
29,729 |
|
|
|
46,533 |
|
|
$ |
33.32 |
|
Issued |
|
|
(16,804 |
) |
|
|
— |
|
|
|
(16,804 |
) |
|
$ |
33.32 |
|
Outstanding at July 29, 2023 |
|
|
— |
|
|
|
75,479 |
|
|
|
75,479 |
|
|
$ |
37.31 |
|
17
Stock options
The following table summarizes stock option activity:
|
|
Stock |
|
|
Weighted average exercise price |
|
|
Weighted- |
|
|
Aggregate |
|
||||
Outstanding and exercisable at April 29, 2023 |
|
|
20,000 |
|
|
$ |
37.01 |
|
|
|
1.2 |
|
|
$ |
0.1 |
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
||
Forfeited |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
||
Outstanding and exercisable at July 29, 2023 |
|
|
20,000 |
|
|
$ |
37.01 |
|
|
|
0.9 |
|
|
$ |
0.0 |
|
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.
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. The table below summarizes the stock-based compensation expense related to the equity awards:
|
|
Three Months Ended |
|
|||||
(in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
RSUs |
|
$ |
1.0 |
|
|
$ |
2.4 |
|
Deferred non-employee director awards |
|
|
1.0 |
|
|
|
1.0 |
|
Non-employee director awards |
|
|
0.6 |
|
|
|
0.6 |
|
Total stock-based compensation expense |
|
$ |
2.6 |
|
|
$ |
4.0 |
|
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 29, 2023 |
|
|
July 30, 2022 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net income (in millions) |
|
$ |
0.9 |
|
|
$ |
21.5 |
|
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
|
||
Denominator for basic income per share - weighted average shares outstanding and vested/unissued restricted stock units |
|
|
35,687,876 |
|
|
|
36,565,975 |
|
Dilutive potential common shares |
|
|
593,531 |
|
|
|
649,825 |
|
Denominator for diluted income per share |
|
|
36,281,407 |
|
|
|
37,215,800 |
|
|
|
|
|
|
|
|
||
Basic and diluted income per share: |
|
|
|
|
|
|
||
Basic income per share |
|
$ |
0.03 |
|
|
$ |
0.59 |
|
Diluted income per share |
|
$ |
0.02 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
||
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding |
|
|
935,698 |
|
|
|
928,534 |
|
18
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. 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. In July 2023, the Company made the decision to wind-down its Dabir Surfaces business, which is expected to be completed by approximately the end of fiscal 2024.
The tables below present information about the Company’s reportable segments:
|
|
Three Months Ended July 29, 2023 |
|
|||||||||||||||||||||
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Eliminations/ |
|
|
Consolidated |
|
||||||
Net sales |
|
$ |
161.1 |
|
|
$ |
122.6 |
|
|
$ |
15.3 |
|
|
$ |
0.8 |
|
|
$ |
(10.1 |
) |
|
$ |
289.7 |
|
Transfers between segments |
|
|
(2.8 |
) |
|
|
(7.2 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
10.1 |
|
|
|
— |
|
Net sales to unaffiliated customers |
|
$ |
158.3 |
|
|
$ |
115.4 |
|
|
$ |
15.2 |
|
|
$ |
0.8 |
|
|
$ |
— |
|
|
$ |
289.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income (loss) from operations |
|
$ |
(2.8 |
) |
|
$ |
24.2 |
|
|
$ |
2.9 |
|
|
$ |
(2.2 |
) |
|
$ |
(18.3 |
) |
|
$ |
3.8 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|||||
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
Pre-tax income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.0 |
|
|||||
|
|
Three Months Ended July 30, 2022 |
|
|||||||||||||||||||||
(in millions) |
|
Automotive |
|
|
Industrial |
|
|
Interface |
|
|
Medical |
|
|
Eliminations |
|
|
Consolidated |
|
||||||
Net sales |
|
$ |
177.3 |
|
|
$ |
93.7 |
|
|
$ |
13.0 |
|
|
$ |
0.7 |
|
|
$ |
(2.3 |
) |
|
$ |
282.4 |
|
Transfers between segments |
|
|
(0.7 |
) |
|
|
(1.6 |
) |
|
|
— |
|
|
|
— |
|
|
|
2.3 |
|
|
|
— |
|
Net sales to unaffiliated customers |
|
$ |
176.6 |
|
|
$ |
92.1 |
|
|
$ |
13.0 |
|
|
$ |
0.7 |
|
|
$ |
— |
|
|
$ |
282.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income (loss) from operations |
|
$ |
14.7 |
|
|
$ |
22.4 |
|
|
$ |
1.6 |
|
|
$ |
(1.5 |
) |
|
$ |
(15.4 |
) |
|
$ |
21.8 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
|
|||||
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.1 |
) |
|||||
Pre-tax income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25.9 |
|
|||||
(in millions) |
|
July 29, 2023 |
|
|
April 29, 2023 |
|
||
Identifiable assets: |
|
|
|
|
|
|
||
Automotive |
|
$ |
702.8 |
|
|
$ |
700.2 |
|
Industrial |
|
|
665.7 |
|
|
|
672.3 |
|
Interface |
|
|
126.8 |
|
|
|
127.2 |
|
Medical |
|
|
2.1 |
|
|
|
6.2 |
|
Eliminations/Corporate |
|
|
76.7 |
|
|
|
73.2 |
|
Total identifiable assets |
|
$ |
1,574.1 |
|
|
$ |
1,579.1 |
|
19
Note 12. Contingencies
Certain litigation arising in the normal course of business is pending against us. The Company is, from time-to-time, subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, breach of contracts, employment-related matters, environmental matters and intellectual property matters. The Company considers insurance coverage and third-party indemnification when determining required accruals for pending litigation and claims. Although the outcome of potential legal actions and claims cannot be determined, it is the Company's opinion, based on the information available, that it has adequate reserves for these liabilities.
Hetronic Germany-GmbH Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as 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 $102 million in compensatory damages and $11 million in punitive damages. On April 22, 2020, the District 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 District 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 instructed the District Court to modify the injunction from the entire world to all of the countries in which Hetronic sells its products. On April 20 and 21, 2022, the District Court held a hearing related to modifying the injunction pursuant to the Tenth Circuit’s opinion, and the parties have filed post-hearing briefs. The defendants also filed a petition for certiorari with the United States Supreme Court seeking to further appeal the extraterritorial application of the Lanham Act in this case. The Company opposed that petition. The Supreme Court requested the views of the Solicitor General on the petition for certiorari, and the Solicitor General recommended granting the petition. On November 4, 2022, the Supreme Court granted the petition. The Supreme Court heard arguments in this matter on March 21, 2023. On June 29, 2023, the Supreme Court vacated the Tenth Circuit’s August 2021 decision and remanded the matter back to the Tenth Circuit for further proceedings. On September 1, 2023, the Tenth Circuit requested supplemental briefing from the parties regarding the effect of the Supreme Court’s decision on the appeal and the proper course of further proceedings. Like any judgment, particularly a judgment involving defendants outside of the United States, there is no guarantee that the Company will be able to collect all or any portion of the judgment.
20
Note 13. Restructuring
The Company continually monitors market factors and industry trends and takes restructuring actions to reduce overall costs and improve operational profitability as appropriate. Restructuring actions generally result in charges for employee termination benefits, plant closures, asset impairments and contract termination costs.
In the three months ended July 29, 2023, the Company made the decision to initiate the discontinuation of the Dabir business in the Medical segment. The Company is currently executing a wind down process of the Dabir business which is expected to be completed by approximately the end of fiscal 2024 in accordance with contractual and regulatory commitments. The Company recognized $0.1 million of severance costs in the three months ended July 29, 2023 in selling and administrative expenses. The Company expects to recognize an additional $0.4 million of severance costs in the second quarter of fiscal 2024. In addition, in the three months ended July 29, 2023, the Company recognized fixed asset impairment charges of $0.6 million in cost of products sold related to this restructuring action.
Note 14. Subsequent Events
On August 31, 2023, the Company announced that Donald W. Duda, its President and Chief Executive Officer, plans to retire once a successor is found. Mr. Duda has agreed to offer his resignation as a director as of the appointment of his successor. The Company and Mr. Duda executed a Retention, Transition Services and Consulting Agreement (the “Transition Agreement”) for the purpose of outlining Mr. Duda’s role in the Company’s leadership transition following the appointment of his successor and setting his compensation relating to those transition services. The Transition Agreement provides that Mr. Duda will remain in the role of President and Chief Executive Officer at the discretion of the Board until a new chief executive officer is hired, at which time he will remain an employee of the Company with such title as may be determined by the Board until the last day of the third month following the hiring of his successor.
21
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:
22
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 April 29, 2023. 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 disclaim 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.
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 and consumer appliance. Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical.
Impacts of Macroeconomic and Geopolitical Conditions
Adverse macroeconomic conditions, including but not limited to inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, wage and commodity inflation, currency fluctuations and new or increased tariffs, could adversely affect demand for our products. In addition, the Russia/Ukraine conflict has resulted in, among other things, economic sanctions imposed by the international community which have impacted the global economy and given rise to potential global security issues that may adversely affect international business and economic conditions. Although we have no operations in Russia or Ukraine, certain of our customers and suppliers have been negatively impacted by these events, which in turn has impacted markets where we do business, including Europe and Asia. The economic sanctions imposed on Russia have further increased existing global supply chain, logistics, and inflationary challenges.
Global Supply Chain Disruptions
Due to various factors that are beyond our control, there continues to be global supply chain disruptions, including a worldwide semiconductor supply shortage. In addition, we have experienced, and may continue to experience, business interruptions, including customer shutdowns and increased material and logistics costs and labor shortages. 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 to have a continued impact on our operating results and financial condition in fiscal 2024.
Acquisition of Nordic Lights
We acquired 92.2% of the outstanding shares of Nordic Lights on April 20, 2023 and acquired a further 7.2% of the outstanding shares of Nordic Lights in the three months ended July 29, 2023. As of July 29, 2023, our current ownership in Nordic Lights is 99.4%. The results of operations of Nordic Lights are reported within the Industrial segment. For further information, see Note 3, “Acquisition” to the condensed consolidated financial statements included in this Report.
23
Consolidated Results of Operations
The table below compares our results of operations between the three months ended July 29, 2023 and the three months ended July 30, 2022:
|
|
Three Months Ended |
|
|||||
(in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Net sales |
|
$ |
289.7 |
|
|
$ |
282.4 |
|
Cost of products sold |
|
|
235.7 |
|
|
|
220.6 |
|
Gross profit |
|
|
54.0 |
|
|
|
61.8 |
|
Selling and administrative expenses |
|
|
44.5 |
|
|
|
35.3 |
|
Amortization of intangibles |
|
|
5.7 |
|
|
|
4.7 |
|
Interest expense, net |
|
|
2.8 |
|
|
|
— |
|
Other expense (income), net |
|
|
— |
|
|
|
(4.1 |
) |
Income tax expense |
|
|
0.1 |
|
|
|
4.4 |
|
Net income |
|
|
0.9 |
|
|
|
21.5 |
|
Net income attributable to redeemable noncontrolling interest |
|
|
— |
|
|
|
— |
|
Net income attributable to Methode |
|
$ |
0.9 |
|
|
$ |
21.5 |
|
Net sales
Net sales increased $7.3 million, or 2.6%, to $289.7 million in the three months ended July 29, 2023, compared to $282.4 million in the three months ended July 30, 2022. The increase was primarily due to the acquisition of Nordic Lights, which contributed $21.2 million of net sales, and favorable foreign currency translation of $0.5 million, partially offset by lower customer cost recoveries from spot buys of materials and premium freight costs of $10.4 million. Excluding the impact of Nordic Lights, foreign currency translation and customer cost recoveries, net sales decreased $4.0 million, or 1.5%. See further discussion below by reportable operating segment.
Cost of products sold
Cost of products sold increased $15.1 million, or 6.8%, to $235.7 million (81.4% of net sales) in the three months ended July 29, 2023, compared to $220.6 million (78.1% of net sales) in the three months ended July 30, 2022. The increase was primarily due to the acquisition of Nordic Lights, which accounted for $15.9 million of the increase, and favorable foreign currency translation of $0.3 million. Excluding Nordic Lights and foreign currency translation, cost of products sold decreased $1.1 million. The decrease was primarily due to lower material costs as a result of a decrease in sales volumes, partially offset by higher salary, freight and operating expenses. Restructuring costs were $0.6 million in the three months ended July 29, 2023, compared to zero in the three months ended July 30, 2022.
Gross profit margin
Gross profit margin was 18.6% of net sales in the three months ended July 29, 2023, compared to 21.9% of net sales in the three months ended July 30, 2022. The decrease was a result of continued inflationary pressures on material costs and operational inefficiencies in the Automotive segment.
Selling and administrative expenses
Selling and administrative expenses increased $9.2 million, or 26.1%, to $44.5 million (15.4% of net sales) in the three months ended July 29, 2023, compared to $35.3 million (12.5% of net sales) in the three months ended July 30, 2022. The acquisition of Nordic Lights and favorable foreign currency translation accounted for $2.0 million and $0.3 million, respectively, of the increase. Excluding Nordic Lights and foreign currency translation, selling and administrative expenses increased $6.9 million primarily due to higher professional fees and outbound freight expense.
Amortization of intangibles
Amortization of intangibles was $5.7 million in the three months ended July 29, 2023, compared to $4.7 million in the three months ended July 30, 2022. The increase was due to the recognition of amortization expense associated with the acquisition of Nordic Lights.
Interest expense, net
Interest expense, net was $2.8 million in the three months ended July 29, 2023, compared to zero in the three months ended July 30, 2022. The increase was due to higher borrowings, primarily to fund the acquisition of Nordic Lights, and higher interest rates.
24
Other expense (income), net
Other expense, net was zero in the three months ended July 29, 2023, compared to other income, net of $4.1 million in the three months ended July 30, 2022. In the three months ended July 30, 2022, we received $4.1 million of international government assistance. We did not receive any international government assistance in the three months ended July 29, 2023.
Income tax expense
Income tax expense was $0.1 million (10.0% effective tax rate) in the three months ended July 29, 2023, compared to $4.4 million (17.0% effective tax rate) in the three months ended July 30, 2022. The effective tax rate for the three months ended July 29, 2023 was lower than the U.S. statutory tax rate primarily due to income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions, partially offset by GILTI and non-deductible expenses. The effective tax rate for the three months ended July 30, 2022 was lower than the U.S. statutory tax rate primarily due to income derived from foreign operations with lower statutory tax rates partially offset by non-deductible expenses.
Net income
Net income decreased $20.6 million, or 95.8%, to $0.9 million in the three months ended July 29, 2023, compared to $21.5 million in the three months ended July 30, 2022. The acquisition of Nordic Lights contributed $1.1 million of net income, and the impact from favorable foreign currency translation was $0.2 million. Excluding Nordic Lights and foreign currency translation, net income decreased $21.9 million as a result of the reasons described above.
Reportable Operating Segments
Automotive
|
|
Three Months Ended |
|
|||||
($ in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Net sales |
|
|
|
|
|
|
||
North America |
|
$ |
66.8 |
|
|
$ |
94.7 |
|
Europe, the Middle East & Africa ("EMEA") |
|
|
52.2 |
|
|
|
52.1 |
|
Asia |
|
|
39.3 |
|
|
|
29.8 |
|
Net sales |
|
|
158.3 |
|
|
|
176.6 |
|
Gross profit |
|
$ |
15.3 |
|
|
$ |
29.4 |
|
As a percent of net sales |
|
|
9.7 |
% |
|
|
16.6 |
% |
(Loss) income from operations |
|
$ |
(2.8 |
) |
|
$ |
14.7 |
|
As a percent of net sales |
|
|
(1.8 |
)% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
||
Customer cost recoveries: |
|
|
|
|
|
|
||
North America |
|
$ |
— |
|
|
$ |
7.9 |
|
EMEA |
|
|
0.2 |
|
|
|
1.2 |
|
Asia |
|
|
— |
|
|
|
— |
|
Total |
|
$ |
0.2 |
|
|
$ |
9.1 |
|
Net sales
Automotive segment net sales decreased $18.3 million, or 10.4%, to $158.3 million in the three months ended July 29, 2023, compared to $176.6 million in the three months ended July 30, 2022. Excluding foreign currency translation and customer cost recoveries, net sales decreased $9.4 million, or 5.6%.
Net sales in North America decreased $27.9 million to $66.8 million in the three months ended July 29, 2023, compared to $94.7 million in the three months ended July 30, 2022. Excluding customer cost recoveries, net sales decreased $20.0 million primarily due to lower sales volumes from a major program roll-off and lower sales volumes of integrated center stack products. Net sales in EMEA increased $0.1 million to $52.2 million in the three months ended July 29, 2023, compared to $52.1 million in the three months ended July 30, 2022. The stronger euro, relative to the U.S. dollar, increased net sales in EMEA by $2.3 million. Excluding foreign currency translation and customer cost recoveries, net sales in EMEA decreased $1.2 million due to lower sales volumes of sensor products, partially offset by higher sales volumes of user interface and switch products. Net sales in Asia increased $9.5 million to $39.3 million in the three months ended July 29, 2023, compared to $29.8 million in the three months ended July 30, 2022. The weaker Chinese renminbi, relative to the U.S. dollar, decreased net sales in Asia by $2.3 million. Excluding foreign currency translation, Asia net sales increased $11.8 million. Net sales in the three months ended July 30, 2022 were impacted by COVID-19 lockdowns in China.
25
Gross profit
Automotive segment gross profit decreased $14.1 million, or 48.0%, to $15.3 million in the three months ended July 29, 2023, compared to $29.4 million in the three months ended July 30, 2022. Excluding the impact of foreign currency translation, gross profit decreased $14.3 million. Gross profit margins decreased to 9.7% in the three months ended July 29, 2023, compared to 16.6% in the three months ended July 30, 2022. The decrease in gross profit margins was due to lower sales volumes in North America and EMEA and operational inefficiencies in North America. This was partially offset by higher gross profit in Asia as a result of an increase in sales volumes.
Income from operations
Automotive segment income from operations decreased $17.5 million, or 119.0%, to a loss of $2.8 million in the three months ended July 29, 2023, compared to income of $14.7 million in the three months ended July 30, 2022. Excluding the impact of foreign currency translation, income from operations decreased $17.2 million. The decrease was primarily due to lower gross profit and higher selling and administrative expenses. Selling and administrative expenses increased primarily due to higher outbound freight expense.
Industrial
|
|
Three Months Ended |
|
|||||
($ in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Net sales |
|
$ |
115.4 |
|
|
$ |
92.1 |
|
Gross profit |
|
$ |
35.6 |
|
|
$ |
30.4 |
|
As a percent of net sales |
|
|
30.8 |
% |
|
|
33.0 |
% |
Income from operations |
|
$ |
24.2 |
|
|
$ |
22.4 |
|
As a percent of net sales |
|
|
21.0 |
% |
|
|
24.3 |
% |
|
|
|
|
|
|
|
||
Customer cost recoveries |
|
$ |
0.1 |
|
|
$ |
1.4 |
|
Net sales
Industrial segment net sales increased $23.3 million, or 25.3%, to $115.4 million in the three months ended July 29, 2023, compared to $92.1 million in the three months ended July 30, 2022. The increase was primarily due to the acquisition of Nordic Lights, which contributed $21.2 million of net sales, and favorable foreign currency translation of $0.5 million, partially offset by lower customer cost recoveries from spot buys of materials and premium freight costs of $1.3 million. Excluding the impact of Nordic Lights, foreign currency translation and customer cost recoveries, net sales increased $2.9 million, or 3.2%, primarily due to higher sales volumes of commercial vehicle lighting solutions and radio remote control devices.
Gross profit
Industrial segment gross profit increased $5.2 million, or 17.1%, to $35.6 million in the three months ended July 29, 2023, compared to $30.4 million in the three months ended July 30, 2022. The increase was due to the acquisition of Nordic Lights, which contributed $5.3 million of gross profit. Gross profit margins decreased to 30.8% in the three months ended July 29, 2023, compared to 33.0% in the three months ended July 30, 2022. Gross profit margins were impacted by product mix.
Income from operations
Industrial segment income from operations increased $1.8 million, or 8.0%, to $24.2 million in the three months ended July 29, 2023, compared to $22.4 million in the three months ended July 30, 2022. The increase was due to the acquisition of Nordic Lights, which contributed $2.2 million of income from operations. Excluding Nordic Lights and the impact of foreign currency translation, income from operations decreased $0.6 million due to higher selling and administrative expenses.
Interface
|
|
Three Months Ended |
|
|||||
($ in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Net sales |
|
$ |
15.2 |
|
|
$ |
13.0 |
|
Gross profit |
|
$ |
3.6 |
|
|
$ |
2.2 |
|
As a percent of net sales |
|
|
23.7 |
% |
|
|
16.9 |
% |
Income from operations |
|
$ |
2.9 |
|
|
$ |
1.6 |
|
As a percent of net sales |
|
|
19.1 |
% |
|
|
12.3 |
% |
|
|
|
|
|
|
|
||
Customer cost recoveries |
|
$ |
0.4 |
|
|
$ |
0.6 |
|
26
Net sales
Interface segment net sales increased $2.2 million, or 16.9% to $15.2 million in the three months ended July 29, 2023, compared to $13.0 million in the three months ended July 30, 2022. Excluding customer cost recoveries, net sales increased $2.4 million, or 19.4%. The increase was primarily due to higher sales volumes of appliance products and data solutions products.
Gross profit
Interface segment gross profit increased $1.4 million, or 63.6%, to $3.6 million in the three months ended July 29, 2023, compared to $2.2 million in the three months ended July 30, 2022. Gross profit margins increased to 23.7% in the three months ended July 29, 2023, compared to 16.9% in the three months ended July 30, 2022. The increase in gross profit margins was primarily due to higher sales volumes.
Income from operations
Interface segment income from operations increased $1.3 million, or 81.3%, to $2.9 million in the three months ended July 29, 2023, compared to $1.6 million in the three months ended July 30, 2022. The increase was due to higher gross profit.
Medical
|
|
Three Months Ended |
|
|||||
(in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Net sales |
|
$ |
0.8 |
|
|
$ |
0.7 |
|
Gross profit |
|
$ |
(0.7 |
) |
|
$ |
(0.2 |
) |
Loss from operations |
|
$ |
(2.2 |
) |
|
$ |
(1.5 |
) |
In the first quarter of fiscal 2024, we made the decision to initiate the discontinuation of the Dabir business (which accounts for all of the Medical segment's financial results). We are currently executing a wind down process of the Dabir business which is expected to be completed by approximately the end of fiscal 2024 in accordance with contractual and regulatory commitments.
Net sales
Medical segment net sales increased $0.1 million to $0.8 million in the three months ended July 29, 2023, compared to $0.7 million in the three months ended July 30, 2022.
Gross profit
Medical segment gross profit was a loss of $0.7 million in the three months ended July 29, 2023 compared to a loss of $0.2 million in the three months ended July 30, 2022. The increase in the loss was due to the recognition of restructuring costs of $0.6 million in the three months ended July 29, 2023.
Loss from operations
Medical segment loss from operations increased $0.7 million to $2.2 million in the three months ended July 29, 2023, compared to $1.5 million in the three months ended July 30, 2022. The increase in the loss was primarily due to higher selling and administrative expenses and restructuring costs. Selling and administrative expenses include $0.1 million of restructuring costs recognized in the three months ended July 29, 2023.
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 stock repurchases. 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 supply chain disruptions, inflationary pressure or other geopolitical risks, including the Russia-Ukraine war, our liquidity position could be severely impacted.
As of July 29, 2023, we had $147.9 million of cash and cash equivalents, of which $139.7 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.
27
Share Buyback Program
The Board of Directors authorized a program to purchase up to $200.0 million of our outstanding common stock through June 14, 2024. Purchases may be made in private transactions or on the open market, including pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. We did not purchase any shares during the three months ended July 29, 2023. As of July 29, 2023, a total of 2,790,375 shares have been purchased at a total cost of $119.3 million since the commencement of the share buyback program. As of July 29, 2023, the dollar value of shares that remained available to be purchased under this share buyback program was $80.7 million.
Credit Agreement
On October 31, 2022, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the Lenders and other parties named therein. The Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated September 12, 2018 and as previously amended (the “Prior Credit Agreement”), with Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders named therein. Among other things, the Credit Agreement (i) increased the multicurrency revolving credit commitments under the Prior Credit Agreement to $750,000,000, (ii) refinanced in full and terminated the term loan facility under the Prior Credit Agreement, and (iii) made certain other changes to the covenants, terms, and conditions under the Prior Credit Agreement. In addition, the Credit Agreement permits us to increase the revolving commitments and/or add one or more tranches of term loans under the Credit Agreement from time to time by up to an amount equal to (i) $250,000,000 plus (ii) an additional amount so long as the leverage ratio would not exceed 3.00:1.00 on a pro forma basis, subject to, among other things, the receipt of additional commitments from existing and/or new lenders. The Credit Agreement matures on October 31, 2027.
As of July 29, 2023, $337.5 million was outstanding under the revolving credit facility. We were in compliance with all covenants under the Credit Agreement as of July 29, 2023. For further information, see Note 8, “Debt” to the condensed consolidated financial statements included in this Report.
Cash Flows
|
|
Three Months Ended |
|
|||||
(in millions) |
|
July 29, 2023 |
|
|
July 30, 2022 |
|
||
Operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
0.9 |
|
|
$ |
21.5 |
|
Non-cash items |
|
|
17.5 |
|
|
|
14.9 |
|
Changes in operating assets and liabilities |
|
|
(24.0 |
) |
|
|
(23.7 |
) |
Net cash (used in) provided by operating activities |
|
|
(5.6 |
) |
|
|
12.7 |
|
Net cash used in investing activities |
|
|
(13.8 |
) |
|
|
(9.6 |
) |
Net cash provided by (used in) financing activities |
|
|
12.5 |
|
|
|
(20.8 |
) |
Effect of foreign currency exchange rate changes on cash and cash equivalents |
|
|
(2.2 |
) |
|
|
(1.9 |
) |
Decrease in cash and cash equivalents |
|
|
(9.1 |
) |
|
|
(19.6 |
) |
Cash and cash equivalents at beginning of the period |
|
|
157.0 |
|
|
|
172.0 |
|
Cash and cash equivalents at end of the period |
|
$ |
147.9 |
|
|
$ |
152.4 |
|
Operating activities
Net cash used in operating activities was $5.6 million in the three months ended July 29, 2023, compared to net cash provided by operating activities of $12.7 million in the three months ended July 30, 2022. The decrease was due to lower net income adjusted for non-cash items. The $24.0 million of cash outflows for operating assets and liabilities in the three months ended July 29, 2023 was primarily due to higher inventory and lower accounts payable and other liabilities, partially offset by lower accounts receivable.
Investing activities
Net cash used in investing activities was $13.8 million in the three months ended July 29, 2023, compared to $9.6 million in the three months ended July 30, 2022 and represented capital expenditures.
28
Financing activities
Net cash provided by financing activities was $12.5 million in the three months ended July 29, 2023, compared to net cash used in financing activities of $20.8 million in the three months ended July 30, 2022. In the three months ended July 30, 2022, we used $11.9 million cash for the purchase of shares under our share buyback program. We did not purchase any of our shares in the three months ended July 29, 2023. We paid cash dividends of $5.3 million in the three months ended July 29, 2023, compared to $5.0 million in the three months ended July 30, 2022. In the three months ended July 29, 2023, we had net borrowings of $31.9 million, compared to net repayments of borrowings of $3.3 million in the three months ended July 30, 2022. In addition, we paid $10.2 million for the purchase of redeemable noncontrolling interests related to Nordic Lights.
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.
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 favor of the Company. The verdict included approximately $102 million in compensatory damages and $11 million in punitive damages. On April 22, 2020, the District 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 District 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 instructed the District Court to modify the injunction from the entire world to all of the countries in which Hetronic sells its products. On April 20 and 21, 2022, the District Court held a hearing related to modifying the injunction pursuant to the Tenth Circuit’s opinion, and the parties have filed post-hearing briefs. The defendants also filed a petition for certiorari with the United States Supreme Court seeking to further appeal the extraterritorial application of the Lanham Act in this case. We opposed that petition. The Supreme Court requested the views of the Solicitor General on the petition for certiorari, and the Solicitor General recommended granting the petition. On November 4, 2022, the Supreme Court granted the petition. The Supreme Court heard arguments in this matter on March 21, 2023. On June 29, 2023, the Supreme Court vacated the Tenth Circuit’s August 2021 decision and remanded the matter back to the Tenth Circuit for further proceedings. On September 1, 2023, the Tenth Circuit requested supplemental briefing from the parties regarding the effect of the Supreme Court’s decision on the appeal and the proper course of further proceedings. Like any judgment, particularly a judgment involving defendants outside of the United States, there is no guarantee that we will be able to collect all or any portion of the judgment.
In the three months ended July 29, 2023 and July 30, 2022, we incurred Hetronic-related legal fees of $0.1 million and $0.8 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 29, 2023. 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 April 29, 2023.
29
Item 4. Controls and Procedures
Evaluation of Disclosure 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 (“CEO”) and our Chief Financial Officer (“CFO”), of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Our 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 CEO and CFO concluded that our disclosure controls and procedures were not effective as of July 29, 2023 due to the previously reported material weakness that was disclosed in our Annual Report on Form 10-K for the year ended April 29, 2023.
Notwithstanding the identified material weakness, management, including our CEO and CFO, believe that the condensed consolidated financial statements contained in this Quarterly Report fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal period presented in conformity with GAAP.
Previously Disclosed Material Weakness
As previously disclosed in our Annual Report on Form 10-K for the year ended April 29, 2023, our management concluded that our internal controls over financial reporting were not effective as of April 29, 2023 due to a material weakness. The material weakness related to revenue at a business unit in our Automotive segment. Specifically, we did not maintain effective review, approval and validation controls over pricing data entered into the business unit's financial system and non-standard contract terms.
We are in the process of implementing a plan to address the material weakness. Our remediation plan includes, among other items, (1) enhancing the design and operating effectiveness of internal controls over the review, approval and validation of customer pricing data and non-standard contract terms; and (2) developing and deploying additional training programs around the operation and importance of internal controls. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above. When fully implemented and operational, we believe the controls we have designed or plan to design will remediate the control deficiency that has led to the material weakness we have identified and strengthen our internal controls over financial reporting. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
Except as described above, there have been no changes in our internal control over financial reporting during the three months ended July 29, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
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 April 29, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Board of Directors authorized a program to purchase of up to $200.0 million of the Company’s outstanding common stock through June 14, 2024. Purchases may be made in private transactions or on the open market, including pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of July 29, 2023, we purchased and retired $119.3 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 29, 2023.
Period |
|
Total number of shares purchased |
|
|
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) |
|
||||
April 29, 2023 through May 27, 2023 (1) |
|
|
92,156 |
|
|
$ |
40.99 |
|
|
|
- |
|
|
$ |
80.7 |
|
May 28, 2023 through July 1, 2023 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
80.7 |
|
July 2, 2023 through July 29, 2023 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
80.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(1) Represents shares of common stock that were surrendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units. No purchases were made under the Company’s share buyback program during the three month period ended July 29, 2023. |
|
|||||||||||||||
Item 5. Other Information
None.
Item 6. Exhibits
|
Exhibit Number |
|
Description |
10.1** |
|
|
10.2** |
|
|
10.3** |
|
|
10.4** |
|
Change in Control Agreement dated as of March 16, 2022 between the Company and Kerry Vyverberg. |
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 |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
|
|
* |
|
Indicates that the exhibit is being furnished with this report and not filed as part of it. |
** |
|
Management compensatory plan. |
|
|
|
|
|
|
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
METHODE ELECTRONICS, INC. |
||
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Ronald L.G. Tsoumas |
|
|
|
|
|
|
Ronald L.G. Tsoumas |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
Dated: |
|
September 7, 2023 |
|
|
|
|
32
Exhibit 10.1
METHODE ELECTRONICS, INC.
LONG-TERM PERFORMANCE-BASED AWARD AGREEMENT
This Long-Term Performance-Based Award Agreement (the “Award Agreement”), effective as of September 14, 2022 (the “Award Date”), is entered into by and between Methode Electronics, Inc., a Delaware corporation (the “Company”), and Kerry A. Vyverberg (the “Grantee”).
WHEREAS, the Company desires to encourage Grantee to work for the benefit of the Company in a manner that will benefit all Company stockholders.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations hereinafter set forth, the Company agrees to award to Grantee (i) shares of Restricted Stock of the Company (the “Restricted Stock”), and (ii) a Performance Grant designated as performance units as provided herein (the “Performance Units”) under the Methode Electronics, Inc. 2022 Omnibus Incentive Plan (the “Plan”) on the terms and conditions set forth herein and in the Plan (collectively, the “Awards”).
129143940
For this purpose and subject to Section 4 below, Fiscal 2025 EBITDA shall equal the Company’s earnings before net interest, taxes, fixed asset depreciation and intangible asset amortization (“EBITDA”) in Fiscal 2025 adjusted as follows: (A) all positive EBITDA from acquisitions that close during the period from the Award Date to the end of the Performance Period and that are not accretive (as defined below) in Fiscal 2025 shall be excluded; and (B) to the extent not otherwise included in 2025 EBITDA, all EBITDA from business unit divestitures or spinoffs that were approved by the Company’s Board of Directors and close during the period from the Award Date to the end of the Performance Period shall be included. The amount of EBITDA to be included for a business unit divestiture or spinoff shall be the actual EBITDA of the business unit for the four full quarters immediately preceding the divestiture or spinoff, or if greater, the amount of EBITDA that the Committee reasonably determines more appropriately reflects the amount of EBITDA the business unit would have contributed to Fiscal 2025 EBITDA. In order for an acquisition to qualify as accretive, (Y) the EBITDA in Fiscal 2025 from the acquisition must exceed Fiscal 2025 interest expense related to any debt assumed or issued in connection with the acquisition, and (Z) the net impact of the acquisition on Fiscal 2025 earnings per share (“EPS”) must be positive (i.e., Fiscal 2025 EPS with the acquisition is greater than Fiscal 2025 EPS without the acquisition). Exhibit D hereto includes an illustrative calculation of the net impact on EPS.
The Threshold, Target and Maximum levels of Fiscal 2025 EBITDA are set forth on Exhibit A attached hereto.
-2-
(i) if Grantee’s employment with the Company and its Subsidiaries and Affiliates is terminated due to total and permanent disability as determined by the Company or death, then all of the Restricted Stock will become immediately vested and no Performance Units shall be earned and payable; and
(ii) if Grantee’s employment with the Company and its Subsidiaries and Affiliates is terminated due to retirement on or after Grantee’s sixty-fifth birthday or retirement on or after Grantee’s fifty-fifth birthday with consent of the Committee then, the shares of Restricted Stock and the Performance Units shall, as of the Vesting Date, vest and be earned based on actual performance on a pro rata basis based on the date of termination. The fraction to be used to determine the number of shares of Restricted Stock to vest and the number of Performance Units to be earned hereunder shall have a numerator equal to the number of fiscal months elapsed between April 30, 2022 and the date of termination (rounded up to the nearest whole month), and the denominator of which shall be thirty-six (36).
(i) in the event of a Change of Control, the surviving or successor entity (or its parent corporation) may continue, assume or replace the Awards on substantially the same terms and conditions (with such adjustments as may be required or permitted by Section 4.6 of the Plan), and such Awards or replacements therefor shall remain outstanding and be governed by their respective terms, subject to (iii) and (iv) below;
(ii) if and to the extent that the Awards are not continued, assumed or replaced in connection with a Change of Control, then a pro rata portion of the shares of Restricted Stock will become immediately vested based on the date of the Change of Control and no Performance Units shall be earned and payable. The fraction to be used to determine the number of shares of Restricted Stock to vest hereunder shall have a numerator equal to the number of fiscal months elapsed between April 30, 2022 and the date of the Change of Control (rounded up to the nearest whole month) and the denominator of which shall be thirty-six (36);
(iii) if and to the extent that the Awards are continued, assumed or replaced under the circumstances described in Section 3(e)(i), and if within two years after the Change of Control, Grantee experiences an involuntary termination of employment or other service for reasons other than Cause or Grantee shall terminate employment with Good Reason, then a pro rata portion of the shares of Restricted Stock will become immediately vested based on the date of termination and no Performance Units shall be earned and payable.
-3-
The fraction (subject to a maximum of one (1)) to be used to determine the number of shares of Restricted Stock to vest hereunder shall have a numerator equal to the number of fiscal months elapsed between April 30, 2022 and the date of the termination (rounded up to the nearest whole month), and the denominator of which shall be thirty-six (36); and (iv) Notwithstanding whether the Awards are continued, assumed or replaced in connection with a Change of Control, if Grantee experiences an involuntary termination of employment or other service for reasons other than Cause or Grantee shall terminate employment with Good Reason during the period beginning on the date an agreement is entered into by the Company with respect to a merger, consolidation or similar transaction of the Company, which would constitute a Change of Control, and the effective time of such merger, consolidation or similar transaction of the Company, then a pro rata portion of the shares of Restricted Stock will become immediately vested based on the date of the Change of Control and no Performance Units shall be earned and payable. The fraction (subject to a maximum of one (1)) to be used to determine the number of shares of Restricted Stock to vest hereunder shall have a numerator equal to the number of fiscal months elapsed between April 30, 2022 and the date of the Change of Control (rounded up to the nearest whole month), and the denominator of which shall be thirty-six (36).
“Good Reason” shall exist under (iii) or (iv) above if, without Grantee’s express written consent any of the following events or actions occurs, provided that no finding of Good Reason shall be effective unless and until the Grantee has provided the Company, within sixty (60) calendar days of becoming aware of the facts and circumstances underlying the finding of Good Reason, with written notice thereof stating with specificity the facts and circumstances underlying the finding of Good Reason and, if the basis for such finding of Good Reason is capable of being cured by the Company, providing the Company with an opportunity to cure the same within thirty (30) calendar days after receipt of such notice: (A) the Company shall materially reduce the nature, scope or level of Grantee’s responsibilities from the nature, scope or level of such responsibilities prior to the Change of Control, or shall fail to provide Grantee with adequate office facilities and support services to perform such responsibilities; (B) the Company shall require Grantee to move Grantee’s principal business office more than 25 miles from Grantee’s principal business office at the time of this Award Agreement, or assign to Grantee duties that would reasonably require such move; provided, however, that if Grantee’s principal business office is not located at the Company’s then current corporate headquarters, and the Company requires Grantee to move Grantee’s principal business office to such corporate headquarters, or assigns to Grantee duties that would reasonably require such move, such actions shall not constitute “Good Reason” under this subsection; (C) the Company shall require Grantee, or assign duties to Grantee which would reasonably require Grantee, to increase, by more than twenty-four, the number of normal working days (determined at the time of this Award Agreement) that Grantee spends away from Grantee’s principal business office during any consecutive twelve-month period; (D) the Company shall reduce Grantee’s annual salary below that in effect as of the date of this Award Agreement (or as of the Change of Control, if greater); (E) the Company shall materially reduce or fail to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such incentive, bonus, retirement and benefit plans, programs and arrangements provided to Grantee is not materially less than their aggregate value as of the date of this Award Agreement (or as of the Change of Control, if greater); or (F) if the Board of Directors fails to act in good faith with respect to the Company’s obligations hereunder, or the Company breaches its obligations hereunder.
Grantee agrees, as a condition of this Award, to make acceptable arrangements to pay any withholding or other taxes or deductions that may be due or may arise as a result of the vesting of the Restricted Stock, the settlement of the Performance Units, or any other payment or issuance of shares of Common Stock under this Award Agreement. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment or other deduction is required relating to the vesting or issuance of shares or the payment of cash under this Award Agreement, the Company shall have the right to require such amounts or deductions from Grantee, or withhold such amounts or deductions from other payments due Grantee from the Company or any Subsidiary or Affiliate.
-4-
-5-
-6-
It is the intention of the Company and the Grantee that the Performance Units and related benefits awarded under this Award Agreement shall comply with Section 409A and shall be interpreted in a manner consistent with this intent. Notwithstanding anything to the contrary contained herein, a termination of Grantee’s employment shall not be deemed to have occurred for purposes of making any payments under this Award Agreement related to the Performance Units unless such termination gives rise to a “Separation from Service” (within the meaning of Section 409A, a “Separation from Service”) and references to “termination of employment” shall mean Separation from Service. In the event that the Company or the Grantee reasonably determines that the Performance Units and/or any related benefits under this Award Agreement fails to comply with Section 409A, the Company and Grantee shall work together to adopt such amendments to this Award Agreement or adopt other policies or procedures (including amendments, policies and procedures with retroactive effective to the extent allowable by applicable laws), or take any other commercially reasonable actions necessary or appropriate to comply with the requirements of Section 409A. Nothing in this Agreement shall be construed as a guarantee of any particular tax treatment to Grantee. Grantee shall be solely responsible for the tax consequences with respect to all amounts payable under this Award Agreement, and in no event shall the Company have any responsibility or liability if this Award Agreement does not meet any applicable requirements of Section 409A.
-7-
[Signature Page to Follow]
-8-
IN WITNESS WHEREOF, the Company by one of its duly authorized representatives has executed this Award Agreement as of the day and year first above written.
METHODE ELECTRONICS, INC.
By: /s/ Bruce K. Crowther
Bruce K. Crowther
Its: Chair, Compensation Committee
Please indicate your acceptance of the terms and conditions of this Award Agreement by signing in the space provided below and returning a signed copy of this Award Agreement to the Company. IF A COPY OF THIS AWARD AGREEMENT EXECUTED BY THE GRANTEE HAS NOT BEEN RECEIVED BY THE COMPANY BY OCTOBER 14, 2022, THE AWARD UNDER THIS AWARD AGREEMENT SHALL BE CANCELLED.
BY SIGNING BELOW, YOU ACKNOWLEDGE AND AGREE THAT YOU HAVE RECEIVED A COPY OF THE PLAN AND ARE FAMILIAR WITH THE TERMS AND PROVISIONS THEREOF, INCLUDING THE TERMS AND PROVISIONS OF THIS AWARD AGREEMENT. YOU HAVE REVIEWED THE PLAN AND THIS AWARD AGREEMENT IN THEIR ENTIRETY, HAVE HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO EXECUTING THIS AWARD AGREEMENT AND FULLY UNDERSTAND ALL PROVISIONS OF THIS AWARD AGREEMENT. FINALLY, YOU HEREBY AGREE TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE ADMINISTRATOR UPON ANY QUESTIONS ARISING UNDER THE PLAN OR THIS AWARD AGREEMENT.
The undersigned hereby accepts, and agrees to, all terms and provisions of this Award Agreement and the Plan as they pertain hereto.
-9-
GRANTEE
/s/ Kerry A. Vyverberg
Name: Kerry A. Vyverberg
129143940
-11-
Exhibit A
Threshold Fiscal 2025 EBITDA $270 million
Target Fiscal 2025 EBITDA $300 million
Maximum Fiscal 2025 EBITDA $330 million If Fiscal 2025 EBITDA achieved is less than Threshold Fiscal 2025 EBITDA, then no Restricted Stock will vest.
-12-
Exhibit B
If Fiscal 2025 EBITDA achieved equals or exceeds Threshold Fiscal 2025 EBITDA, then the following formula will be used to calculate the percentage of Restricted Stock that will vest (subject to a maximum of 100%):
(i) 50%, plus (ii) 50% multiplied by a fraction equal to (Fiscal 2025 EBITDA achieved less Threshold Fiscal 2025 EBITDA) divided by (Target Fiscal 2025 EBITDA less Threshold Fiscal 2025 EBITDA)
-13-
Exhibit C
If Fiscal 2025 EBITDA achieved is less than Target Fiscal 2025 EBITDA, then no Performance Units shall be earned. If Fiscal 2025 EBITDA achieved equals or exceeds Target Fiscal 2025 EBITDA, then the following formula will be used to calculate the number of Performance Units earned:
The number of Performance Units multiplied by a fraction (subject to a maximum of one (1)), the numerator of which shall equal (i) Fiscal 2025 EBITDA achieved minus (ii) Target Fiscal 2025 EBITDA, and the denominator of which shall equal (a) Maximum Fiscal 2025 EBITDA minus (b) Target Fiscal 2025 EBITDA.
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Exhibit D
Following is an example (not actual numbers) of the calculation of whether the net impact of an acquisition on Fiscal 2025 earnings per share (EPS) is positive.
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Fiscal 2025 |
||||
|
Methode |
|
Acquired |
|
Methode |
|
Actual |
- |
Unit |
= |
Pro Forma |
EBITDA |
$ 300,000,000 |
|
$ 11,000,000 |
|
$ 289,000,000 |
Depr. & Amor. |
$ 50,000,000 |
|
$ 1,000,000 |
|
$ 49,000,000 |
Interest expense (income) |
$ 5,000,000 |
|
$ 200,000 |
|
$ 4,800,000 |
Income before taxes |
$ 245,000,000 |
|
$ 9,800,000 |
|
$ 235,200,000 |
Income tax (20% eff. tax rate) |
$ 49,000,000 |
|
$ 1,960,000 |
|
$ 47,040,000 |
Net income |
$ 196,000,000 |
|
$ 7,840,000 |
|
$ 188,160,000 |
Basic common shares O/S |
39,600,866 |
|
|
|
38,100,866 |
Shares issued for acquisition |
- |
|
1,500,000 |
|
|
Basic EPS |
$ 4.95 |
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|
|
$ 4.94 |
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Actual > Pro Forma = Accretive |
||||
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Actual < Pro Forma = Not Accretive |
||||
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Exhibit 10.2
METHODE ELECTRONICS, INC.
LONG-TERM TIME-BASED AWARD AGREEMENT
This Long-Term Time-Based Award Agreement (the “Award Agreement”), effective as of September 14, 2022 (the “Award Date”), is entered into by and between Methode Electronics, Inc., a Delaware corporation (the “Company”) and Kerry A. Vyverberg (the “Grantee”).
WHEREAS, the Company desires to encourage Grantee to work for the benefit of the Company in a manner that will benefit all Company stockholders.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations set forth herein, the Company agrees to award to Grantee Restricted Stock Units under the Methode Electronics, Inc. 2022 Omnibus Incentive Plan (the “Plan”) on the terms and conditions set forth herein and in the Plan.
129144041
(a) if Grantee’s employment with the Company and its Subsidiaries and Affiliates is terminated due to total and permanent disability as determined by the Company or death, the unvested Restricted Stock Units shall become vested and payable as of the date of termination; and
(b) if Grantee’s employment with the Company and its Subsidiaries and Affiliates is terminated due to retirement on or after Grantee’s sixty-fifth birthday or retirement on or after Grantee’s fifty-fifth birthday with consent of the Committee, then the unvested Restricted Stock Units shall vest pro rata based on the date of termination and be paid on such termination date. For purposes of this calculation, the number of Restricted Stock Units to vest under 7(b) shall be calculated as follows:
2
|
Number of Restricted Stock Units |
x |
Number of fiscal months elapsed between April 30, 2022 and termination date (rounded up to the nearest whole month)
|
x |
1 60 |
|
− |
Number of Restricted Stock Units previously vested under Section 6 |
129144041
(a) In the event of a Change of Control, the surviving or successor entity (or its parent corporation) may continue, assume or replace the Restricted Stock Units outstanding as of the date of the Change of Control on substantially the same terms and conditions (with such adjustments as may be required or permitted by Section 4.6 of the Plan), and such Restricted Stock Units or replacements therefor shall remain outstanding and be governed by their respective terms, subject to (c) and (d) below.
(b) If and to the extent that the outstanding Restricted Stock Units are not continued, assumed or replaced in connection with a Change of Control, then all unvested Restricted Stock Units will become immediately vested and non-forfeitable and payable as of the date of the Change of Control.
(c) If and to the extent that the Restricted Stock Units are continued, assumed or replaced under the circumstances described in (a), and if within two years after the Change of Control the Grantee experiences an involuntary termination of employment or other service for reasons other than Cause or Grantee shall terminate employment with Good Reason, then all unvested Restricted Stock Units will become immediately vested and non-forfeitable and payable as of the date of termination of employment.
(d) Notwithstanding whether an Award is continued, assumed or replaced in connection with a Change of Control, if Grantee experiences an involuntary termination of employment or other service for reasons other than Cause or Grantee shall terminate employment with Good Reason during the period beginning on the date an agreement is entered into by the Company with respect to a merger, consolidation or similar transaction of the Company, which would constitute a Change of Control, and the effective time of such merger, consolidation or similar transaction of the Company, then all unvested Restricted Stock Units will become immediately vested and non-forfeitable and payable as of the date of the Change of Control.
“Good Reason” shall exist hereunder if, without Grantee’s express written consent any of the following events or actions occurs, provided that no finding of Good Reason shall be effective unless and until the Grantee has provided the Company, within sixty (60) calendar days of becoming aware of the facts and circumstances underlying the finding of Good Reason, with written notice thereof stating with specificity the facts and circumstances underlying the finding of Good Reason and, if the basis for such finding of Good Reason is capable of being cured by the Company, providing the Company with an opportunity to cure the same within thirty (30) calendar days after receipt of such notice: (A) the Company shall materially reduce the nature, scope or level of Grantee’s responsibilities from the nature, scope or level of such responsibilities prior to the Change of Control, or shall fail to provide Grantee with adequate office facilities and support services to perform such responsibilities; (B) the Company shall require Grantee to move Grantee’s principal business office more than 25 miles from Grantee’s principal business office at the time of this Award Agreement, or assign to Grantee duties that would reasonably require such move; provided, however, that if Grantee’s principal business office is not located at the Company’s then current corporate headquarters, and the Company requires Grantee to move Grantee’s principal business office to such corporate headquarters, or assigns to Grantee duties that would reasonably require such move, such actions shall not constitute “Good Reason” under this subsection; (C) the Company shall require Grantee, or assign duties to Grantee which would reasonably require
129144041
Grantee, to increase, by more than twenty-four, the number of normal working days (determined at the time of this Award Agreement) that Grantee spends away from Grantee’s principal business office during any consecutive twelve-month period; (D) the Company shall reduce Grantee’s annual salary below that in effect as of the date of this Award Agreement (or as of the Change of Control, if greater); (E) the Company shall materially reduce or fail to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such incentive, bonus, retirement and benefit plans, programs and arrangements provided to Grantee is not materially less than their aggregate value as of the date of this Award Agreement (or as of the Change of Control, if greater); or (F) if the Board of Directors fails to act in good faith with respect to the Company’s obligations hereunder, or the Company breaches its obligations hereunder.
3
4
[Signature Page to Follow]
5
IN WITNESS WHEREOF, the Company by one of its duly authorized representatives has executed this Award Agreement as of the day and year first above written.
METHODE ELECTRONICS, INC.
By: /s/ Bruce K. Crowther
Bruce K. Crowther
Its: Chair, Compensation Committee
Please indicate your acceptance of the terms and conditions of this Award Agreement by signing in the space provided below and returning a signed copy of this Award Agreement to the Company. IF A COPY OF THIS AWARD AGREEMENT EXECUTED BY THE GRANTEE HAS NOT BEEN RECEIVED BY THE COMPANY BY OCTOBER 14, 2022, THE RESTRICTED STOCK UNITS GRANTED UNDER THIS AWARD AGREEMENT SHALL BE CANCELLED.
BY SIGNING BELOW, YOU ACKNOWLEDGE AND AGREE THAT YOU HAVE RECEIVED A COPY OF THE PLAN AND ARE FAMILIAR WITH THE TERMS AND PROVISIONS THEREOF, INCLUDING THE TERMS AND PROVISIONS OF THIS AWARD AGREEMENT. YOU HAVE REVIEWED THE PLAN AND THIS AWARD AGREEMENT IN THEIR ENTIRETY, HAVE HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO EXECUTING THIS AWARD AGREEMENT AND FULLY UNDERSTAND ALL PROVISIONS OF THIS AWARD AGREEMENT. FINALLY, YOU HEREBY AGREE TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE ADMINISTRATOR UPON ANY QUESTIONS ARISING UNDER THE PLAN OR THIS AWARD AGREEMENT.
The undersigned hereby accepts, and agrees to, all terms and provisions of this Award Agreement and the Plan as they pertain hereto.
GRANTEE
/s/ Kerry A. Vyverberg
Name: Kerry A. Vyverberg
6
Exhibit 10.3
METHODE ELECTRONICS, INC.
2021 RESTRICTED STOCK UNIT AWARD AGREEMENT
This Restricted Stock Unit Award Agreement (the “Award Agreement”), effective as of June 16, 2021 (the “Award Date”), is entered into by and between Methode Electronics, Inc., a Delaware corporation (the “Company”) and Kerry Vyverberg (the “Grantee”).
WHEREAS, the Company desires to reward Grantee for services to the Company and to encourage Grantee to continue to work for the benefit of the Company in a manner that will benefit all Company stockholders.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations set forth herein, the Company agrees to award to Grantee Restricted Stock Units under the Methode Electronics, Inc. 2014 Omnibus Incentive Plan (the “Plan”) on the terms and conditions set forth herein and in the Plan.
83681073
(a) if Grantee’s employment with the Company and its Subsidiaries and Affiliates is terminated due to total and permanent disability as determined by the Company or death, the unvested Restricted Stock Units shall become vested and payable as of the date of termination; and
(b) if Grantee’s employment with the Company and its Subsidiaries and Affiliates is terminated due to retirement on or after Grantee’s sixty-fifth birthday or retirement on or after Grantee’s fifty-fifth birthday with consent of the Committee, then the unvested Restricted Stock Units shall vest pro rata based on the date of termination and be paid on such termination date. For purposes of this calculation, the number of Restricted Stock Units to vest under 7(b) shall be calculated as follows:
2
|
Number of Restricted Stock Units |
x |
Number of fiscal months elapsed between May 1, 2021 and termination date (rounded up to the nearest whole month)
|
x |
1 36 |
|
− |
Number of Restricted Stock Units previously vested under Section 6 |
83681073
(a) In the event of a Change of Control, the surviving or successor entity (or its parent corporation) may continue, assume or replace the Restricted Stock Units outstanding as of the date of the Change of Control on substantially the same terms and conditions (with such adjustments as may be required or permitted by Section 15 of the Plan), and such Restricted Stock Units or replacements therefor shall remain outstanding and be governed by their respective terms, subject to (c) and (d) below.
(b) If and to the extent that the outstanding Restricted Stock Units are not continued, assumed or replaced in connection with a Change of Control, then all unvested Restricted Stock Units will become immediately vested and non-forfeitable and payable as of the date of the Change of Control.
(c) If and to the extent that the Restricted Stock Units are continued, assumed or replaced under the circumstances described in (a), and if within two years after the Change of Control the Grantee experiences an involuntary termination of employment or other service for reasons other than Cause or Grantee shall terminate employment with Good Reason, then all unvested Restricted Stock Units will become immediately vested and non-forfeitable and payable as of the date of termination of employment.
(d) Notwithstanding whether an Award is continued, assumed or replaced in connection with a Change of Control, if Grantee experiences an involuntary termination of employment or other service for reasons other than Cause or Grantee shall terminate employment with Good Reason during the period beginning on the date an agreement is entered into by the Company with respect to a merger, consolidation or similar transaction of the Company, which would constitute a Change of Control, and the effective time of such merger, consolidation or similar transaction of the Company, then all unvested Restricted Stock Units will become immediately vested and non-forfeitable and payable as of the date of the Change of Control.
“Good Reason” shall exist hereunder if, without Grantee’s express written consent any of the following events or actions occurs, provided that no finding of Good Reason shall be effective unless and until the Grantee has provided the Company, within sixty (60) calendar days of becoming aware of the facts and circumstances underlying the finding of Good Reason, with written notice thereof stating with specificity the facts and circumstances underlying the finding of Good Reason and, if the basis for such finding of Good Reason is capable of being cured by the Company, providing the Company with an opportunity to cure the same within thirty (30) calendar days after receipt of such notice: (A) the Company shall materially reduce the nature, scope or level of Grantee’s responsibilities from the nature, scope or level of such responsibilities prior to the Change of Control, or shall fail to provide Grantee with adequate office facilities and support services to perform such responsibilities; (B) the Company shall require Grantee to move Grantee’s principal business office more than 25 miles from Grantee’s principal business office at the time of this Award Agreement, or assign to Grantee duties that would reasonably require such move; provided, however, that if Grantee’s principal business office is not located at the Company’s then current corporate headquarters, and the Company requires Grantee to move Grantee’s principal business office to such corporate headquarters, or assigns to Grantee duties that would reasonably require such move, such actions shall not constitute “Good Reason” under this subsection; (C) the Company shall require Grantee, or assign duties to Grantee which would reasonably require
83681073
Grantee, to increase, by more than twenty-four, the number of normal working days (determined at the time of this Award Agreement) that Grantee spends away from Grantee’s principal business office during any consecutive twelve-month period; (D) the Company shall reduce Grantee’s annual salary below that in effect as of the date of this Award Agreement (or as of the Change of Control, if greater); (E) the Company shall materially reduce or fail to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such incentive, bonus, retirement and benefit plans, programs and arrangements provided to Grantee is not materially less than their aggregate value as of the date of this Award Agreement (or as of the Change of Control, if greater); or (F) if the Board of Directors fails to act in good faith with respect to the Company’s obligations hereunder, or the Company breaches its obligations hereunder.
3
4
[Signature Page to Follow]
5
IN WITNESS WHEREOF, the Company by one of its duly authorized representatives has executed this Award Agreement as of the day and year first above written.
METHODE ELECTRONICS, INC.
By: /s/ Bruce K. Crowther
Bruce K. Crowther
Its: Chair, Compensation Committee
Please indicate your acceptance of the terms and conditions of this Award Agreement by signing in the space provided below and returning a signed copy of this Award Agreement to the Company. IF A FULLY EXECUTED COPY OF THIS AWARD AGREEMENT HAS NOT BEEN RECEIVED BY THE COMPANY BY JULY 16, 2021, THE RESTRICTED STOCK UNITS GRANTED UNDER THIS AWARD AGREEMENT SHALL BE CANCELLED.
BY SIGNING BELOW, YOU ACKNOWLEDGE AND AGREE THAT YOU HAVE RECEIVED A COPY OF THE PLAN AND ARE FAMILIAR WITH THE TERMS AND PROVISIONS THEREOF, INCLUDING THE TERMS AND PROVISIONS OF THIS AWARD AGREEMENT. YOU HAVE REVIEWED THE PLAN AND THIS AWARD AGREEMENT IN THEIR ENTIRETY, HAVE HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO EXECUTING THIS AWARD AGREEMENT AND FULLY UNDERSTAND ALL PROVISIONS OF THIS AWARD AGREEMENT. FINALLY, YOU HEREBY AGREE TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE ADMINISTRATOR UPON ANY QUESTIONS ARISING UNDER THE PLAN OR THIS AWARD AGREEMENT.
The undersigned hereby accepts, and agrees to, all terms and provisions of this Award Agreement and the Plan as they pertain hereto.
GRANTEE
/s/ Kerry Vyverberg
Kerry Vyverberg
6
Exhibit 10.4
CHANGE IN CONTROL AGREEMENT
This Change in Control Agreement is dated as of March 16, 2022, between Methode Electronics, Inc., a Delaware corporation (the “Company”), and Kerry A. Vyverberg (the “Employee”).
WITNESSETH:
WHEREAS, Employee is employed by the Company or one of its wholly-owned subsidiaries (referred to collectively as the “Company”) and the Company desires to provide certain security to Employee in connection with any potential change in control of the Company.
NOW, THEREFORE, it is hereby agreed by and between the parties, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, as follows:
Notwithstanding the foregoing, however, in any circumstance or transaction in which compensation resulting from or in respect of this Agreement would result in the imposition of an additional tax under Section 409A of the Code if the foregoing definition of “Change in Control” were to apply, but would not result in the imposition of any additional tax if the term “Change in Control” were defined herein to mean a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5), then “Change in Control” shall mean a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5), but only to the extent necessary to prevent such compensation from becoming subject to an additional tax under Section 409A of the Code.
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-3-
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written above.
METHODE ELECTRONICS, INC.
By: /s/ Bruce K. Crowther
Bruce K. Crowther
Compensation Committee Chair
EMPLOYEE:
/s/ Kerry A. Vyverberg
Name: Kerry A. Vyverberg
-6-
Exhibit 31.1
CERTIFICATION
I, Donald W. Duda, certify that:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 7, 2023 |
|
By: |
/s/ Donald W. Duda |
|
|
|
Donald W. Duda |
|
|
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Ronald L.G. Tsoumas, certify that:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 7, 2023 |
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By: |
/s/ Ronald L.G. Tsoumas |
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Ronald L. G. Tsoumas |
|
|
|
Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Methode Electronics, Inc. (the “Company”) certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended July 29, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
.
Date: September 7, 2023 |
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By: |
/s/ Donald W. Duda |
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|
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Donald W. Duda Chief Executive Officer |
|
Date: September 7, 2023 |
|
By: |
/s/ Ronald L.G. Tsoumas |
|
|
|
Ronald L. G. Tsoumas |
|
|
|
Chief Financial Officer |