METHODE ELECTRONICS, INC.
Cautionary Statement
Certain statements in this report are forward-looking statements that are
subject to certain risks and uncertainties. We undertake no duty to update any
such forward-looking statements to conform to actual results or changes in our
expectations. Our business is highly dependent upon two large automotive
customers and specific makes and models of vehicles. Our results will be subject
to many of the same risks that apply to the automotive, appliance, commercial
vehicle, computer and communications industries, such as general economic
conditions, interest rate fluctuations, consumer spending patterns and
technological changes. Other factors which may result in materially different
results for future periods include the following risk factors. Additional risks
and uncertainties not presently known or that our management currently believe
to be insignificant may also adversely affect our financial condition or results
of operations. These risk factors should be considered in connection with
evaluating the forward-looking statements contained in this report because these
factors could cause our actual results and condition to differ materially from
those projected in forward-looking statements. The forward-looking statements in
this report are subject to the safe harbor protection provided under the
securities laws and are made as of the date of this report. Among the factors
that could cause actual results to differ materially from past results and
future plans and projected future results are the following:
• Our business is dependent on two large automotive customers. For our
largest customer, our sales primarily consist of integrated center
consoles for use in light trucks and SUVs. If we were to lose either of
these customers or experienced a significant decline in the volume or
price of products purchased by these customers, are not selected to
produce products for successor models or if either of the customers
declared bankruptcy, our future results could be adversely affected.
• Because we derive a substantial portion of our revenues from customers in
the automotive, commercial vehicle, appliance, computer and communications
industries, we are susceptible to trends and factors affecting those
industries.
• International trade disputes could result in tariffs, 'trade wars,' and
other protectionist measures that could adversely affect our business,
including its ability to mitigate tariff costs.
• The coronavirus outbreak could impact our international operations and
results of operations.
• Our inability, or our customers' inability, to effectively manage thetiming, quality and cost of new program launches could adversely affect
our financial performance.
• We are subject to continuing pressure to lower our prices.
• Our Dabir Surfaces medical device products are emerging technologies. Our
ability to successfully market and sell these products will depend on
acceptance by the medical community.
• A significant fluctuation between the
could adversely impact our results of operations and financial condition.
• A significant portion of our business activities are conducted in foreign
countries, exposing us to additional risks that may not exist in the
United States .
• Should a catastrophic event or other significant business interruption
occur at any of our facilities, we could face significant reconstruction
or remediation costs, penalties, third party liability and loss of
production capacity, which could adversely affect our business.
• Impairment charges relating to our goodwill and long-lived assets could
adversely affect our financial statements.
• Our inability to capitalize on prior or future acquisitions or any
decision to strategically divest one or more current businesses may
adversely affect our business.
• Our ability to market our automotive and commercial vehicle products is
subject to a lengthy sales cycle, which requires significant investment
prior to significant sales revenues, and there is no assurance that our
products will be implemented in any particular vehicle.
• We are dependent on the availability and price of materials.
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• Our gross profit margins are subject to fluctuations due to many factors.
• Disruption of our supply chain could have an adverse effect on our
business, financial condition and results of operations.
• Changes in our effective tax rate may harm our results of operations.
• We may be unable to keep pace with rapid technological changes, which
could adversely affect our business.
• Our information technology ("IT") systems could be breached.
• Products we manufacture may contain design or manufacturing defects that
could result in reduced demand for our products or services and liability
claims against us.
• Our technology-based businesses and the markets in which we operate are
highly competitive. If we are unable to compete effectively, our sales
could decline.
• If we are unable to protect our intellectual property or we infringe, or
are alleged to infringe, on another person's intellectual property, our
business, financial condition and operating results could be materially
adversely affected.
• We cannot guarantee that the acquired
or that we can implement and profit from any new applications of the
acquired technology.
• Our long-term incentive plan could require significant adjustments to
compensation expense in our consolidated statements of income if
management changes its determinations on the probability of meeting
certain performance levels. The adjustments could be material to the
financial statements.
• We have incurred a significant amount of indebtedness, and our level of
indebtedness and restrictions under our indebtedness could adversely
affect our operations and liquidity.
• Regulations related to the use of conflict-free minerals may increase our
costs and expenses, and an inability to certify that our products are
conflict-free may adversely affect customer relationships.
Any such forward-looking statements are not guarantees of future performance and
actual results, developments and business decisions may differ materially from
those foreseen in such forward-looking statements. These forward-looking
statements speak only as of the date of the report, press release, statement,
document, webcast or oral discussion in which they are made. We do not intend to
update any forward-looking statements, all of which are expressly qualified by
the foregoing. See Part I - Item 1A, Risk Factors of our Form 10-K for the
fiscal year ended April 27, 2019 and Part II - Item 1A, Risk Factors of this
Form 10-Q for further discussions regarding some of the reasons that actual
results may be materially different from those we anticipate.
Overview
We are a global developer of custom engineered and application specific products
and solutions with manufacturing, design and testing facilities in Belgium ,
Canada , China , Egypt , Germany , India , Italy , Lebanon , Malta , Mexico , the
Netherlands , Singapore , Switzerland , the United Kingdom and the United States .
Our primary manufacturing facilities are located in Dongguan and Shanghai,
China ; Cairo, Egypt ; Mriehel, Malta ; and Fresnillo and Monterrey, Mexico . We
design, manufacture and market devices employing electrical, radio remote
control, electronic, LED lighting, wireless and sensing technologies.
Effective October 27, 2018 , we reorganized our reportable segments resulting
from the acquisition of Grakon . Prior to the Grakon acquisition, our reportable
segments were Automotive, Power, Interface and Other. As a result of this
change, our reportable segments are now Automotive, Industrial, Interface and
Medical. Historical information has been revised to reflect the new reportable
segments.
Our components are found in the primary end-markets of the aerospace, appliance,
automotive, commercial vehicle, construction, consumer and industrial equipment,
communications (including information processing and storage, networking
equipment and wireless and terrestrial voice/data systems), medical, rail and
other transportation industries.
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Table of Contents Grakon Transaction OnSeptember 12, 2018 , we acquired 100% of the stock ofGrakon for$422.1 million in cash, net of cash acquired. The business, headquartered inSeattle, Washington , is a manufacturer of custom designed exterior lighting solutions and highly styled engineered components, with locations inCanada ,China ,the Netherlands and theUnited Kingdom .Grakon's manufacturing capabilities and products help diversify our product offerings and expand the Industrial segment, which is a key component of our strategic direction.Grakon's results have been included in the Automotive and Industrial segments in the consolidated financial statements from the effective date of the acquisition.Grakon's results are included for the entire period in the nine months endedFebruary 1, 2020 and only included for 4.5 months in the nine months endedJanuary 26, 2019 . In connection with the agreement to purchaseGrakon , onSeptember 12, 2018 , we amended our credit agreement. The credit agreement now has a maturity date ofSeptember 12, 2023 . The credit agreement includes a senior unsecured revolving credit facility and a senior unsecured term loan, which are guaranteed by our wholly ownedU.S. subsidiaries. See "Financial Condition, Liquidity and Capital Resources" below for more information. Financial Reporting Periods The Company maintains its financial records on the basis of a 52- or 53-week fiscal year ending on the Saturday closest toApril 30 . For the three months endedFebruary 1, 2020 , our accounting period included 14 weeks compared to 13 weeks for the three months endedJanuary 26, 2019 . For the nine months endedFebruary 1, 2020 , our accounting period included 40 weeks compared to 39 weeks for the nine months endedJanuary 26, 2019 . The following discussions of comparative results among periods should be reviewed in this context. 26
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Results of Operations for the Three Months EndedFebruary 1, 2020 compared to the Three Months EndedJanuary 26, 2019 Consolidated Results Below is a table summarizing results for the three months ended: February 1, January 26, 2020 2019 (Dollars in Millions) (14 Weeks) (13 Weeks) Net Change ($) Net Change (%) Net Sales$ 285.9 $ 246.9 $ 39.0 15.8 % Cost of Products Sold 206.6 182.6 24.0 13.1 % Gross Profit 79.3 64.3 15.0 23.3 % Selling and Administrative Expenses 33.0 32.8 0.2 0.6 % Amortization of Intangibles 4.8 5.5 (0.7 ) (12.7 )% Interest Expense, Net 2.4 3.2 (0.8 ) (25.0 )% Other Income, Net (4.9 ) (4.9 ) - - % Income Tax Expense (Benefit) 2.8 (3.0 ) 5.8 (193.3 )% Net Income$ 41.2 $ 30.7 $ 10.5 34.2 % February 1, January 26, 2020 2019 Percent of sales: (14 Weeks) (13 Weeks) Net Sales 100.0 % 100.0 % Cost of Products Sold 72.3 % 74.0 % Gross Margins 27.7 % 26.0 % Selling and Administrative Expenses 11.5 % 13.3 % Amortization of Intangibles 1.7 % 2.2 % Interest Expense, Net 0.8 % 1.3 % Other Income, Net (1.7 )% (2.0 )% Income Tax Expense (Benefit) 1.0 % (1.2 )% Net Income 14.4 % 12.4 %Net Sales . Consolidated net sales increased$39.0 million , or 15.8%, to$285.9 million in the three months endedFebruary 1, 2020 , compared to$246.9 million in the three months endedJanuary 26, 2019 . The impact of foreign currency translation decreased net sales by$2.2 million primarily due to the weaker euro and Chinese renminbi. Excluding foreign currency translation, net sales increased$41.2 million , primarily due to higher sales in the Automotive segment. Cost of Products Sold. Consolidated cost of products sold increased$24.0 million , or 13.1%, to$206.6 million (72.3% of sales) in the three months endedFebruary 1, 2020 , compared to$182.6 million (74.0% of sales) in the three months endedJanuary 26, 2019 . The impact of foreign currency translation decreased cost of products sold by$1.6 million . Excluding foreign currency translation, cost of products sold increased$25.6 million primarily due to higher sales in the Automotive segment, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. In the three months endedJanuary 26, 2019 , we incurred$1.3 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus$0.4 million of expenses incurred in the three months endedFebruary 1, 2020 . Gross Profit. Gross profit increased$15.0 million , or 23.3%, to$79.3 million (27.7% of sales) in the three months endedFebruary 1, 2020 , compared to$64.3 million (26.0% of sales) in the three months endedJanuary 26, 2019 . The impact of foreign currency translation decreased gross profit by$0.6 million . Excluding foreign currency translation, gross profit increased$15.6 million , primarily due to higher sales in the Automotive segment. In addition, gross profit improved due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. Gross profit in the three months endedJanuary 26, 2019 also included$3.0 million of purchase accounting adjustments to inventory related to the acquisition ofGrakon . 27
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Selling and Administrative Expenses. Selling and administrative expenses increased$0.2 million , or 0.6%, to$33.0 million (11.5% of sales) in the three months endedFebruary 1, 2020 , compared to$32.8 million (13.3% of sales) in the three months endedJanuary 26, 2019 . Selling and administrative expenses increased primarily due to higher performance-based compensation expense, partially offset by lower employee salaries and professional fees. Salaries were lower due to benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability. In the three months endedJanuary 26, 2019 , we incurred$1.3 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus$0.7 million of expenses incurred in the three months endedFebruary 1, 2020 . Professional fees were higher in the three months endedJanuary 26, 2019 primarily due to transaction costs associated with the acquisition ofGrakon . Amortization of Intangibles. Amortization of intangibles decreased$0.7 million , or 12.7%, to$4.8 million in the three months endedFebruary 1, 2020 , compared to$5.5 million in the three months endedJanuary 26, 2019 . The decrease was primarily due to lower amortization expense in the Interface segment. Interest Expense, Net. Interest expense, net was$2.4 million in the three months endedFebruary 1, 2020 , compared to$3.2 million in the three months endedJanuary 26, 2019 . The decrease was due to lower levels of outstanding borrowings and a lower effective interest rate on outstanding borrowings. Other Income, Net. Other income, net was$4.9 million in both the three months endedFebruary 1, 2020 andJanuary 26, 2019 . The three months endedFebruary 1, 2020 andJanuary 26, 2019 include$5.6 million and$5.7 million , respectively, for an international government grant for maintaining certain employment levels during those periods. In addition, net foreign exchange losses were$0.7 million in both the three months endedFebruary 1, 2020 andJanuary 26, 2019 . Income Tax Expense (Benefit). Income tax expense was$2.8 million in the three months endedFebruary 1, 2020 , compared to an income tax benefit of$3.0 million in the three months endedJanuary 26, 2019 . Our effective tax rate was 6.4% in the three months endedFebruary 1, 2020 , compared to a benefit of (10.4%) in the three months endedJanuary 26, 2019 . The increase primarily related to higher pre-tax income in the three months endedFebruary 1, 2020 , partially offset by favorable adjustments due toU.S. Tax Reform fromIRS regulations issued inDecember 2019 . The tax benefit in the three months endedJanuary 26, 2019 primarily related to the finalization of the transition tax fromU.S. Tax Reform. Net Income. Net income increased$10.5 million , or 34.2%, to$41.2 million in the three months endedFebruary 1, 2020 , compared to$30.7 million in the three months endedJanuary 26, 2019 . The impact of foreign currency translation decreased net income by$0.4 million . Excluding foreign currency translation, net income increased$10.9 million primarily due to higher gross profit, lower interest expense and lower amortization expense, partially offset by higher income tax expense. Operating Segments Automotive Segment Results Below is a table summarizing results for the three months ended: February 1, January 26, 2020 2019 (Dollars in Millions) (14 Weeks) (13 Weeks) Net Change ($) Net Change (%) Net Sales$ 210.3 $ 172.9 $ 37.4 21.6 % Gross Profit$ 55.0 $ 41.8 $ 13.2 31.6 % Income from Operations$ 39.2 $ 27.0 $ 12.2 45.2 % Percent of sales: Net Sales 100.0 % 100.0 % Gross Profit 26.2 % 24.2 % Income from Operations 18.6 % 15.6 %Net Sales . Automotive segment net sales increased$37.4 million , or 21.6%, to$210.3 million in the three months endedFebruary 1, 2020 , from$172.9 million in the three months endedJanuary 26, 2019 . Net sales increased inNorth America by$21.9 million , or 20.2%, to$130.3 million in the three months endedFebruary 1, 2020 , compared to$108.4 million in the three months endedJanuary 26, 2019 . The increase was primarily due to higher sales volumes of our integrated center stack and human machine interface assembly products and higher sales fromGrakon's automotive lighting products. A 28
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portion of the higher sales volumes of integrated center stacks was due to
additional orders from General Motors ("GM") after the settlement of the UAW
labor strike. Net sales in Europe increased $13.2 million , or 30.0%, to $57.2
million in the three months ended February 1, 2020 , compared to $44.0 million in
the three months ended January 26, 2019 . The impact of the weaker euro decreased
net sales in Europe by $1.6 million . Excluding foreign currency translation,
European sales increased $14.8 million primarily due to higher sales volumes of
sensor and switch products. Net sales in Asia increased $2.3 million , or 11.2%,
to $22.8 million in the three months ended February 1, 2020 , compared to $20.5
million in the three months ended January 26, 2019 . The weaker Chinese renminbi
decreased net sales in Asia by $0.4 million . Excluding foreign currency
translation, Asia sales increased $2.7 million primarily due to higher
touchscreen sales volumes to an Asian automotive OEM, partially offset by lower
sales volumes of our transmission lead-frame assemblies and sensor products.
Gross Profit. Automotive segment gross profit increased $13.2 million , or 31.6%,
to $55.0 million in the three months ended February 1, 2020 , compared to $41.8
million in the three months ended January 26, 2019 . The Automotive segment gross
profit margins increased to 26.2% in the three months ended February 1, 2020 ,
compared to 24.2% in the three months ended January 26, 2019 . The increase in
gross profit margin was primarily due to the increased sales volumes in both
North America and Europe , and the benefits realized from initiatives taken in
fiscal 2019 to reduce overall costs and improve operational profitability,
partially offset by the impact of foreign currency translation of $0.6 million .
Income from Operations. Automotive segment income from operations increased
$12.2 million , or 45.2%, to $39.2 million in the three months ended February 1,
2020 , compared to $27.0 million in the three months ended January 26, 2019 . The
increase was primarily due to higher gross profit and the benefits realized from
initiatives taken in fiscal 2019 to reduce overall costs and improve operational
profitability, partially offset by higher amortization of intangibles and
selling and administrative expenses. In the three months ended January 26, 2019 ,
we incurred $2.3 million of expenses related to initiatives to reduce overall
costs and improve operational profitability versus $0.5 million of expenses
incurred in the three months ended February 1, 2020 .
Industrial Segment Results
Below is a table summarizing results for the three months ended:
February 1, January 26,
2020 2019
(Dollars in Millions) (14 Weeks) (13 Weeks) Net Change ($) Net Change (%)
Net Sales $ 60.1 $ 60.2 $ (0.1 ) (0.2 )%
Gross Profit $ 21.9 $ 19.9 $ 2.0 10.1 %
Income from Operations $ 13.2 $ 8.9 $ 4.3 48.3 %
Percent of sales:
Net Sales 100.0 % 100.0 %
Gross Profit 36.4 % 33.1 %
Income from Operations 22.0 % 14.8 %
Net Sales . Industrial segment net sales decreased $0.1 million , or 0.2%, to
$60.1 million in the three months ended February 1, 2020 , from $60.2 million in
the three months ended January 26, 2019 . The impact of foreign currency
translation decreased net sales by $0.3 million . Excluding foreign currency
translation, net sales increased by $0.2 million primarily due to higher sales
volumes of busbar products, partially offset by lower sales volumes from Grakon
and radio remote control products.
Gross Profit. Industrial segment gross profit increased $2.0 million , or 10.1%,
to $21.9 million in the three months ended February 1, 2020 , compared to $19.9
million in the three months ended January 26, 2019 . Gross profit margins
increased to 36.4% in the three months ended February 1, 2020 , compared to 33.1%
in the three months ended January 26, 2019 . The increase in gross profit margin
was due to $3.0 million of purchase accounting adjustments to inventory related
to the Grakon acquisition recorded in the three months ended January 26, 2019 .
Excluding the purchase accounting adjustment, gross profit margin was lower due
to product mix.
Income from Operations. Industrial segment income from operations increased $4.3
million , or 48.3%, to $13.2 million in the three months ended February 1, 2020 ,
compared to $8.9 million in the three months ended January 26, 2019 . The
increase was primarily due to higher gross profit, lower selling and
administrative expenses and lower amortization of intangibles during the period.
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Interface Segment Results
Below is a table summarizing results for the three months ended:
February 1, January 26,
2020 2019
(Dollars in Millions) (14 Weeks) (13 Weeks) Net Change ($) Net Change (%)
Net Sales $ 14.9 $ 13.7 $ 1.2 8.8 %
Gross Profit $ 1.8 $ 2.2 $ (0.4 ) (18.2 )%
Income from Operations $ 0.7 $ - $ 0.7 - %
Percent of sales:
Net Sales 100.0 % 100.0 %
Gross Profit 12.1 % 16.1 %
Income from Operations 4.7 % - %
Net Sales . Interface segment net sales increased $1.2 million , or 8.8%, to $14.9
million in the three months ended February 1, 2020 , compared to $13.7 million in
the three months ended January 26, 2019 . The increase was primarily due to
higher sales volumes of our legacy data solutions products.
Gross Profit. Interface segment gross profit decreased $0.4 million , or 18.2%,
to $1.8 million in the three months ended February 1, 2020 , compared to $2.2
million in the three months ended January 26, 2019 . Gross profit margins
decreased to 12.1% in the three months ended February 1, 2020 , from 16.1% in the
three months ended January 26, 2019 . The decrease was primarily due to product
mix, partially offset by higher sales volumes of our legacy data solutions
products.
Income from Operations. Interface segment income from operations increased to
$0.7 million in the three months ended February 1, 2020 , compared to break-even
in the three months ended January 26, 2019 . The increase was primarily due to
lower selling and administrative expense and lower amortization of intangibles,
partially offset by lower gross profit. Selling and administrative expenses were
lower as a result of the benefits of initiatives to reduce overall costs and
improve operational profitability taken in fiscal 2019. In the three months
ended January 26, 2019 , we incurred $0.2 million of expenses related to
initiatives to reduce overall costs and improve operational profitability.
Medical Segment Results
Below is a table summarizing results for the three months ended:
February 1, January 26,
2020 2019
(Dollars in Millions) (14 Weeks) (13 Weeks) Net Change ($) Net Change (%)
Net Sales $ 0.6 $ 0.1 $ 0.5 500.0 %
Gross Profit $ (0.3 ) $ (0.7 ) $ 0.4 (57.1 )%
Loss from Operations $ (1.6 ) $ (1.7 ) $ 0.1 (5.9 )%
Net Sales . The Medical segment had sales of $0.6 million in the three months
ended February 1, 2020 , compared to $0.1 million in the three months ended
January 26, 2019 . Higher sales were due to increased product acceptance.
Gross Profit. Medical segment gross profit was a loss of $0.3 million in the
three months ended February 1, 2020 , compared to a loss of $0.7 million in the
three months ended January 26, 2019 . The improvement primarily relates to higher
sales volumes during the period.
Loss from Operations. Medical segment loss from operations decreased $0.1
million , to $1.6 million in the three months ended February 1, 2020 , compared to
$1.7 million in the three months ended January 26, 2019 . The decrease was due to
higher gross profit, partially offset by higher selling and administrative
expenses.
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Results of Operations for the Nine Months EndedFebruary 1, 2020 compared to the Nine Months EndedJanuary 26, 2019 Consolidated Results Below is a table summarizing results for the nine months ended: February 1, January 26, 2020 2019 (Dollars in Millions) (40 Weeks) (39 Weeks) Net Change ($) Net Change (%) Net Sales$ 813.3 $ 734.3 $ 79.0 10.8 % Cost of Products Sold 589.6 539.1 50.5 9.4 % Gross Profit 223.7 195.2 28.5 14.6 % Selling and Administrative Expenses 98.6 110.3 (11.7 ) (10.6 )% Amortization of Intangibles 14.3 11.1 3.2 28.8 % Interest Expense, Net 8.0 5.0 3.0 60.0 % Other Income, Net (5.8 ) (4.7 ) (1.1 ) 23.4 % Income Tax Expense 15.3 4.5 10.8 240.0 % Net Income$ 93.3 $ 69.0 $ 24.3 35.2 % February 1, January 26, 2020 2019 Percent of sales: (40 Weeks) (39 Weeks) Net Sales 100.0 % 100.0 % Cost of Products Sold 72.5 % 73.4 % Gross Profit 27.5 % 26.6 % Selling and Administrative Expenses 12.1 % 15.0 % Amortization of Intangibles 1.8 % 1.5 % Interest Expense, Net 1.0 % 0.7 % Other Income, Net (0.7 )% (0.6 )% Income Tax Expense 1.9 % 0.6 % Net Income 11.5 % 9.4 %Net Sales . Consolidated net sales increased$79.0 million , or 10.8%, to$813.3 million in the nine months endedFebruary 1, 2020 , compared to$734.3 million in the nine months endedJanuary 26, 2019 . The acquisition ofGrakon accounted for$91.9 million of the increase, while the impact of foreign currency translation decreased net sales by$10.4 million . The weaker euro and Chinese renminbi impacted foreign currency translation. Excluding the acquisition ofGrakon and foreign currency translation, net sales decreased$2.5 million , primarily due to the adverse impact from the UAW labor strike atGM of$28.7 million and lower sales in the Interface and Industrial segments, partially offset by higher sales from our sensor and human machine interface assembly products in the Automotive segment. Cost of Products Sold. Consolidated cost of products sold increased$50.5 million , or 9.4%, to$589.6 million (72.5% of sales) in the nine months endedFebruary 1, 2020 , compared to$539.1 million (73.4% of sales) in the nine months endedJanuary 26, 2019 . The acquisition ofGrakon accounted for$57.5 million of the increase, while the impact of foreign currency translation decreased cost of products sold by$6.7 million . Excluding the acquisition ofGrakon and foreign currency translation, cost of products sold decreased$0.3 million primarily due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, partially offset by product mix within our segments. In the nine months endedJanuary 26, 2019 , we incurred$2.7 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus$0.6 million of expenses incurred in the nine months endedFebruary 1, 2020 . Gross Profit. Gross profit increased$28.5 million , or 14.6%, to$223.7 million (27.5% of sales) in the nine months endedFebruary 1, 2020 , compared to$195.2 million (26.6% of sales) in the nine months endedJanuary 26, 2019 . The 31
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acquisition ofGrakon accounted for$34.4 million of the increase, while foreign currency translation decreased gross profit by$3.7 million . Excluding the acquisition ofGrakon and foreign currency translation, gross profit decreased$2.2 million , primarily due to lower sales in the Automotive segment as a result of the UAW labor strike atGM and lower sales in the Interface and Industrial segments, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. Gross profit in the nine months endedJanuary 26, 2019 also includes$5.6 million of purchase accounting adjustments related to the acquisition ofGrakon . Selling and Administrative Expenses. Selling and administrative expenses decreased$11.7 million , or 10.6%, to$98.6 million (12.1% of sales) in the nine months endedFebruary 1, 2020 , compared to$110.3 million (15.0% of sales) in the nine months endedJanuary 26, 2019 . The acquisition ofGrakon increased expenses by$2.8 million , while the impact of foreign currency translation decreased selling and administrative expenses by$1.0 million . Excluding the acquisition ofGrakon and foreign currency translation, selling and administrative expenses decreased$13.5 million . The decrease was primarily due to lower stock-based compensation expense, professional fees and salaries. Stock-based compensation expense decreased$6.1 million , as the nine months endedJanuary 26, 2019 included a$7.4 million accrual adjustment. Professional fees were higher in the nine months endedJanuary 26, 2019 primarily due to transaction costs associated with the acquisition ofGrakon . Salaries were lower due to benefits realized from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability. In the nine months endedJanuary 26, 2019 , we incurred$3.1 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus$1.0 million of expenses incurred in the nine months endedFebruary 1, 2020 . Amortization of Intangibles. Amortization of intangibles increased$3.2 million , or 28.8%, to$14.3 million in the nine months endedFebruary 1, 2020 , compared to$11.1 million in the nine months endedJanuary 26, 2019 . The increase was due to amortization expense related to theGrakon acquisition, partially offset by lower amortization expense in the Interface segment. Interest Expense, Net. Interest expense, net was$8.0 million in the nine months endedFebruary 1, 2020 , compared to$5.0 million in the nine months endedJanuary 26, 2019 . The increase was due to borrowings made in the second quarter of fiscal 2019 to fund the acquisition ofGrakon . Other Income, Net. Other income, net was$5.8 million in the nine months endedFebruary 1, 2020 , compared to$4.7 million in the nine months endedJanuary 26, 2019 . The nine months endedFebruary 1, 2020 andJanuary 26, 2019 include$5.6 million and$5.7 million , respectively, for an international government grant for maintaining certain employment levels during those periods. In the nine months endedFebruary 1, 2020 , we sold assets related to a previously closed business and recognized a gain on sale of$0.5 million . In addition, net foreign exchange losses were$0.5 million in the nine months endedFebruary 1, 2020 , compared to$0.7 million in the nine months endedJanuary 26, 2019 . Income Tax Expense. Income tax expense increased$10.8 million to$15.3 million in the nine months endedFebruary 1, 2020 , compared to$4.5 million in the nine months endedJanuary 26, 2019 . Our effective tax rate increased to 14.1% in the nine months endedFebruary 1, 2020 , compared to 6.1% in the nine months endedJanuary 26, 2019 . The increase was primarily related to the higher pre-tax income from theGrakon acquisition in the nine months endedFebruary 1, 2020 , partially offset by favorable adjustments due toU.S. Tax Reform fromIRS regulations issued inDecember 2019 . The effective tax rate in the nine months endedJanuary 26, 2019 was lower primarily due to a tax benefit related to the finalization of the transition tax fromU.S. Tax Reform. Net Income. Net income increased$24.3 million , or 35.2%, to$93.3 million in the nine months endedFebruary 1, 2020 , compared to$69.0 million in the nine months endedJanuary 26, 2019 . The acquisition ofGrakon accounted for$24.3 million of the increase, while the impact of foreign currency translation decreased net income by$2.1 million . Excluding the acquisition ofGrakon and foreign currency translation, net income increased$2.1 million primarily due to lower selling and administrative expenses, partially offset by the negative impact of the UAW labor strike atGM , higher interest expense and higher income tax expense. 32
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Operating Segments
Automotive Segment Results
Below is a table summarizing results for the nine months ended:
February 1, January 26,
2020 2019
(Dollars in Millions) (40 Weeks) (39 Weeks) Net Change ($) Net Change (%)
Net Sales $ 576.6 $ 549.8 $ 26.8 4.9 %
Gross Profit $ 146.6 $ 143.7 $ 2.9 2.0 %
Income from Operations $ 101.2 $ 96.7 $ 4.5 4.7 %
Percent of sales:
Net Sales 100.0 % 100.0 %
Gross Profit 25.4 % 26.1 %
Income from Operations 17.6 % 17.6 %
Net Sales . Automotive segment net sales increased $26.8 million , or 4.9%, to
$576.6 million in the nine months ended February 1, 2020 , compared to $549.8
million in the nine months ended January 26, 2019 . Net sales in North America
increased $18.6 million , or 5.5%, to $358.6 million in the nine months ended
February 1, 2020 , compared to $340.0 million in the nine months ended
January 26, 2019 . The increase was primarily due to higher sales from Grakon of
$32.1 million , partially offset by the adverse impact from the UAW labor strike
at GM which reduced North American sales by $28.7 million . Other North American
sales increased from our human machine interface assembly products due to recent
program launches. Sales from our transmission lead-frame assemblies decreased
due to lower sales volumes. Net sales in Europe increased $12.1 million , or
8.2%, to $158.9 million in the nine months ended February 1, 2020 , compared to
$146.8 million in the nine months ended January 26, 2019 . The impact of the
weaker euro decreased net sales in Europe by $6.1 million . Excluding the impact
of foreign currency translation, net sales in Europe increased $18.2 million
primarily due to higher sales volumes of sensor and switch products. Net sales
in Asia decreased $3.9 million , or 6.2%, to $59.1 million in the nine months
ended February 1, 2020 , compared to $63.0 million in the nine months ended
January 26, 2019 . The weaker Chinese renminbi also decreased net sales in Asia
by $2.0 million . Excluding foreign currency translation, net sales in Asia
decreased $1.9 million , primarily due to lower sales of our sensor and
transmission lead-frame assembly products, partially offset by the launch of
touchscreen product sales to an Asian automobile OEM.
Gross Profit. Automotive segment gross profit increased $2.9 million , or 2.0%,
to $146.6 million in the nine months ended February 1, 2020 , compared to $143.7
million in the nine months ended January 26, 2019 . The Automotive segment gross
profit margin decreased to 25.4% in the nine months ended February 1, 2020 ,
compared to 26.1% in the nine months ended January 26, 2019 . The decrease in
gross profit margin was primarily due to the adverse impact from the UAW labor
strike at GM which decreased gross profit by $8.7 million and product mix. Gross
profit was also negatively impacted by $2.7 million from the weaker euro and
Chinese renminbi. This was partially offset by higher gross profit from Grakon
of $5.5 million and the benefits realized from initiatives taken in fiscal 2019
to reduce overall costs and improve operational profitability. In the nine
months ended January 26, 2019 , we incurred $2.7 million of expenses related to
initiatives to reduce overall costs and improve operational profitability versus
$0.6 million of expenses incurred in the nine months ended February 1, 2020 .
Income from Operations. Automotive segment income from operations increased $4.5
million , or 4.7%, to $101.2 million in the nine months ended February 1, 2020 ,
compared to $96.7 million in the nine months ended January 26, 2019 . The
increase was primarily due to higher income from operations from Grakon and the
benefits of initiatives to reduce overall costs and improve operational
profitability taken in fiscal 2019, partially offset by the adverse impact from
the UAW labor strike at GM , higher amortization of intangibles and a negative
impact from foreign currency translation.
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Industrial Segment Results
Below is a table summarizing results in the nine months ended:
February 1, January 26,
2020 2019
(Dollars in Millions) (40 Weeks) (39 Weeks) Net Change ($) Net Change (%)
Net Sales $ 195.8 $ 139.8 $ 56.0 40.1 %
Gross Profit $ 72.9 $ 44.5 $ 28.4 63.8 %
Income from Operations $ 44.8 $ 21.1 $ 23.7 112.3 %
Percent of sales:
Net Sales 100.0 % 100.0 %
Gross Profit 37.2 % 31.8 %
Income from Operations 22.9 % 15.1 %
Net Sales . Industrial segment net sales increased $56.0 million , or 40.1%, to
$195.8 million in the nine months ended February 1, 2020 , compared to $139.8
million in the nine months ended January 26, 2019 . The acquisition of Grakon
accounted for $59.8 million of the increase, while the impact of foreign
currency translation decreased net sales by $2.3 million . Excluding the
acquisition of Grakon and foreign currency translation, net sales decreased $1.5
million primarily due to lower sales volumes of radio remote control products,
partially offset by higher sales volumes of busbar products.
Gross Profit. Industrial segment gross profit increased $28.4 million , or 63.8%,
to $72.9 million in the nine months ended February 1, 2020 , compared to $44.5
million in the nine months ended January 26, 2019 . Gross profit margins
increased to 37.2% in the nine months ended February 1, 2020 , compared to 31.8%
in the nine months ended January 26, 2019 . The increase in gross profit margin
was primarily due to a favorable product mix relating to our Grakon business,
partially offset by reduced radio remote control sales volumes and net tariff
expense. Gross profit in the nine months ended January 26, 2019 also included
$5.6 million of purchase accounting adjustments related to the acquisition of
Grakon .
Income from Operations. Industrial segment income from operations increased
$23.7 million , or 112.3%, to $44.8 million in the nine months ended February 1,
2020 , compared to $21.1 million in the nine months ended January 26, 2019 . The
increase was primarily due to income from operations from Grakon , partially
offset by lower sales of our radio remote control products and the impact of
foreign currency translation.
Interface Segment Results
Below is a table summarizing results in the nine months ended:
February 1, January 26,
2020 2019
(Dollars in Millions) (40 Weeks) (39 Weeks) Net Change ($) Net Change (%)
Net Sales $ 39.7 $ 44.0 $ (4.3 ) (9.8 )%
Gross Profit $ 4.5 $ 6.6 $ (2.1 ) (31.8 )%
Income from Operations $ 0.7 $ 0.2 $ 0.5 250.0 %
Percent of sales:
Net Sales 100.0 % 100.0 %
Gross Profit 11.3 % 15.0 %
Income from Operations 1.8 % 0.5 %
Net Sales . Interface segment net sales decreased $4.3 million , or 9.8%, to $39.7
million in the nine months ended February 1, 2020 , compared to $44.0 million in
the nine months ended January 26, 2019 . The decrease was primarily due to lower
appliance product sales volumes.
Gross Profit. Interface segment gross profit decreased $2.1 million , or 31.8%,
to $4.5 million in the nine months ended February 1, 2020 , compared to $6.6
million in the nine months ended January 26, 2019 . Gross profit margin decreased
to
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11.3% in the nine months endedFebruary 1, 2020 , compared to 15.0% in the nine months endedJanuary 26, 2019 . The decrease in gross profit margin was primarily due to lower appliance product sales volumes. Income from Operations. Interface segment income from operations increased$0.5 million , or 250.0%, to$0.7 million in the nine months endedFebruary 1, 2020 , compared to$0.2 million in the nine months endedJanuary 26, 2019 . The increase was due to lower amortization of intangibles and the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, partially offset by lower gross profit. Medical Segment Results Below is a table summarizing results in the nine months ended:February 1 ,January 26, 2020 2019
(Dollars in Millions) (40 Weeks) (39 Weeks) Net Change ($)
Net Change (%) Net Sales$ 1.2 $ 0.7 $ 0.5 71.4 % Gross Profit$ (1.3 ) $ (2.1 ) $ 0.8 38.1 % Loss from Operations$ (4.9 ) $ (6.3 ) $ 1.4 22.2 %Net Sales . The Medical segment had$1.2 million of net sales in the nine months endedFebruary 1, 2020 , compared to$0.7 million in the nine months endedJanuary 26, 2019 . Higher sales were due to increased product acceptance. Gross Profit. Medical segment gross profit was a loss of$1.3 million in the nine months endedFebruary 1, 2020 , compared to a loss of$2.1 million in the nine months endedJanuary 26, 2019 . The improvement primarily relates to lower engineering costs and wages incurred during the period and higher sales volumes. Loss from Operations. Medical segment loss from operations decreased$1.4 million to$4.9 million in the nine months endedFebruary 1, 2020 , compared to$6.3 million in the nine months endedJanuary 26, 2019 . The decrease was due to lower selling and administrative expenses and an improvement in gross profit. Selling and administrative expenses were lower due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. In the nine months endedJanuary 26, 2019 , we incurred$0.9 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus$0.1 million of expenses incurred in the nine months endedFebruary 1, 2020 . Financial Condition, Liquidity and Capital Resources We believe our current world-wide cash balances together with expected future cash flows to be generated from operations and our committed credit facility will be sufficient to support current operations. A significant amount of cash and expected future cash flows are located outside of theU.S. Of the$79.9 million of cash and cash equivalents as ofFebruary 1, 2020 ,$69.7 million was held in subsidiaries outside theU.S. and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating material additional income tax expense. Cash flow is summarized below: Nine Months Ended February 1, January 26, 2020 2019 (Dollars in Millions) (40 Weeks) (39 Weeks) Operating activities: Net Income$ 93.3 $ 69.0 Non-cash Items 41.4 41.4 Changes in Operating Assets and Liabilities (52.1 ) (46.1 ) Net Cash Provided by Operating Activities 82.6 64.3 Net Cash Used in Investing Activities (34.4 ) (458.3 ) Net Cash (Used in) Provided by Financing Activities (49.7 ) 232.3 Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.8 ) (10.7 ) Net Decrease in Cash and Cash Equivalents (3.3 ) (172.4 ) Cash and Cash Equivalents at Beginning of the Year 83.2 246.1 Cash and Cash Equivalents at End of the Period$ 79.9 $ 73.7 35
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Operating Activities Net cash provided by operating activities increased$18.3 million to$82.6 million in the nine months endedFebruary 1, 2020 , compared to$64.3 million in the nine months endedJanuary 26, 2019 . The increase was due to higher net income adjusted for non-cash items, partially offset by higher cash outflows related to changes in operating assets and liabilities. The$52.1 million of cash outflows for operating assets and liabilities in the nine months endedFebruary 1, 2020 was primarily due to lower accounts payable and other liabilities, higher prepaid expenses and other assets, higher accounts receivable and higher inventory. Investing Activities Net cash used in investing activities was$34.4 million in the nine months endedFebruary 1, 2020 , compared to$458.3 million in the nine months endedJanuary 26, 2019 . The activity in the nine months endedFebruary 1, 2020 primarily relates to purchases of property, plant and equipment. The activity in the nine months endedJanuary 26, 2019 primarily relates to the$421.6 million of cash used to purchaseGrakon and purchases of property, plant and equipment. Financing Activities Net cash used in financing activities was$49.7 million in the nine months endedFebruary 1, 2020 , compared to net cash provided by financing activities of$232.3 million in the nine months endedJanuary 26, 2019 . In the nine months endedFebruary 1, 2020 , we had net repayments on our borrowings of$36.6 million , compared to net borrowings of$246.7 million in the nine months endedJanuary 26, 2019 . The borrowings in the nine months endedJanuary 26, 2019 were primarily used to fund the acquisition ofGrakon . We paid dividends of$12.2 million in the nine months endedFebruary 1, 2020 , compared to$12.7 million in the nine months endedJanuary 26, 2019 . Credit Agreement OnSeptember 12, 2018 , we entered into a senior unsecured credit agreement that provided a$200.0 million revolving credit facility and a$250.0 million term loan. In addition, we have an option to increase the size of the senior unsecured credit agreement by up to an additional$200.0 million , subject to customary conditions and approval of the lenders providing new commitments. As ofFebruary 1, 2020 ,$244.5 million in principal was outstanding under the credit agreement. The term loan matures inSeptember 2023 and requires quarterly principal payments of$3.1 million over the five-year term, with the remaining balance due upon maturity. We were in compliance with all covenants under the credit agreement as ofFebruary 1, 2020 . Borrowings under our senior unsecured credit agreement bear interest at rates equal to the London Interbank Offered Rate ("LIBOR") plus an applicable margin. LIBOR is expected to be phased out by the end of 2021, which is before the maturity of our senior unsecured credit agreement. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate; however, we continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternative rate to replace LIBOR. The consequences of the discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our interest expense. Recent Accounting Pronouncements See Note 1, "Description of Business and Summary of Significant Accounting Policies" to the condensed consolidated financial statements included in Item 1. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined underSEC rules. 36
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Legal Matters For several years,Hetronic Germany-GmbH andHydronic-Steuersysteme-GmbH (the "Fuchs companies") served as our distributors forGermany ,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. OnJune 20, 2014 , we filed a lawsuit against the Fuchs companies in theFederal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants have filed counterclaims alleging breach of contract, interference with business relations and business slander. OnApril 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 inFebruary 2020 . During the trial, the defendants dismissed their one remaining counterclaim with prejudice. OnMarch 2, 2020 , the jury returned a verdict in our favor. The verdict included approximately$102 million in compensatory damages and$12 million in punitive damages. A final judgment has not yet been entered and is subject to post-trial motions and possible appeal. Once the judgment is final, we will work with counsel to collect on the judgment. Like any judgment, particularly any judgment involving defendants outside ofthe United States , there is no guarantee that we will be able to collect the judgment. In the nine months endedFebruary 1, 2020 andJanuary 26, 2019 , we incurred Hetronic-related legal fees of$3.3 million and$2.7 million , respectively. These amounts are included in the selling and administrative expenses in the Industrial segment. 37
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