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EX-32.0 - CERTIFICATION OF PERIODIC FINANCIAL REPORT - METHODE ELECTRONICS INCmeiexhibit3201282017.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - METHODE ELECTRONICS INCmeiexhibit31201282017.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - METHODE ELECTRONICS INCmeiexhibit31101282017.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
__________________________________ 
FORM 10-Q
 (Mark One)
 
x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
for the quarterly period ended January 28, 2017
 
or
 
o         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 0-2816
 
METHODE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)

methodelog080115a05.gif
 
Delaware
 
36-2090085
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
7401 West Wilson Avenue, Chicago, Illinois
 
60706-4548
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number, including area code) (708) 867-6777
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
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 x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See definitions of “large accelerated filer” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

At February 28, 2017, registrant had 36,787,301 shares of common stock outstanding.



METHODE ELECTRONICS, INC.
FORM 10-Q
January 28, 2017

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
 
 
As of
 
As of
 
 
January 28,
2017
 
April 30,
2016
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

CURRENT ASSETS
 
 

 
 

Cash and cash equivalents
 
$
268.8

 
$
227.8

Accounts receivable, net
 
153.8

 
175.5

Inventories:
 
 
 
 

Finished products
 
11.2

 
11.9

Work in process
 
9.7

 
9.6

Materials
 
41.1

 
44.7

 
 
62.0

 
66.2

Deferred income taxes
 

 
11.8

Prepaid expenses and other current assets
 
14.5

 
14.9

TOTAL CURRENT ASSETS
 
499.1

 
496.2

PROPERTY, PLANT AND EQUIPMENT
 
327.6

 
325.9

Less allowances for depreciation
 
239.9

 
232.9

 
 
87.7

 
93.0

GOODWILL
 
1.6

 
1.7

INTANGIBLE ASSETS, net
 
7.2

 
8.9

PRE-PRODUCTION COSTS
 
17.0

 
9.5

DEFERRED INCOME TAXES
 
35.8

 
27.7

OTHER ASSETS
 
18.6

 
18.9

 
 
80.2

 
66.7

TOTAL ASSETS
 
$
667.0

 
$
655.9

LIABILITIES AND EQUITY
 
 

 
 

CURRENT LIABILITIES
 
 

 
 

Accounts payable
 
$
67.7

 
$
68.2

Other current liabilities
 
43.5

 
49.7

TOTAL CURRENT LIABILITIES
 
111.2

 
117.9

LONG-TERM DEBT
 
37.0

 
57.0

OTHER LIABILITIES
 
2.1

 
2.9

DEFERRED COMPENSATION
 
8.8

 
8.0

SHAREHOLDERS’ EQUITY
 
 

 
 

Common stock, $0.50 par value, 100,000,000 shares authorized, 38,133,925 and 38,181,985 shares issued as of January 28, 2017 and April 30, 2016, respectively
 
19.1

 
19.1

Additional paid-in capital
 
125.2

 
112.3

Accumulated other comprehensive loss
 
(32.1
)
 
(8.4
)
Treasury stock, 1,346,624 shares as of January 28, 2017 and April 30, 2016
 
(11.5
)
 
(11.5
)
Retained earnings
 
407.2

 
358.6

TOTAL EQUITY
 
507.9

 
470.1

TOTAL LIABILITIES AND EQUITY
 
$
667.0

 
$
655.9

 
See notes to condensed consolidated financial statements.

2


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
($ in millions, except per share data)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 

 
 

 
 
 
 
Net sales
 
$
195.6

 
$
184.6

 
$
596.7

 
$
596.3

 
 
 
 
 
 
 
 
 
Cost of products sold
 
142.2

 
137.0

 
433.7

 
444.2

 
 
 
 
 
 
 
 
 
Gross profit
 
53.4

 
47.6

 
163.0

 
152.1

 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
24.3

 
26.1

 
78.2

 
73.7

 
 
 
 
 
 
 
 
 
Income from operations
 
29.1

 
21.5

 
84.8

 
78.4

 
 
 
 
 
 
 
 
 
Interest income, net
 
(0.2
)
 
(0.2
)
 
(0.3
)
 
(0.7
)
Other income, net
 
(1.0
)
 
(1.0
)
 
(2.9
)
 
(1.5
)
 
 
 
 
 
 
 
 
 
Income before income taxes
 
30.3

 
22.7

 
88.0

 
80.6

 
 
 
 
 
 
 
 
 
Income tax expense
 
6.6

 
5.5

 
18.3

 
18.6

 
 
 
 
 
 
 
 
 
NET INCOME ATTRIBUTABLE TO METHODE ELECTRONICS, INC.
 
$
23.7

 
$
17.2

 
$
69.7

 
$
62.0

 
 
 
 
 
 
 
 
 
Amounts per common share attributable to Methode Electronics, Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
0.64

 
$
0.45

 
$
1.87

 
$
1.60

Diluted
 
$
0.63

 
$
0.45

 
$
1.86

 
$
1.60

Cash dividends:
 
 

 
 

 
 
 
 
Common stock
 
$
0.09

 
$
0.09

 
$
0.27

 
$
0.27

Weighted average number of Common Shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
37,217,302

 
38,159,789

 
37,297,757

 
38,662,487

Diluted
 
37,470,653

 
38,278,231

 
37,477,967

 
38,790,624

 
See notes to condensed consolidated financial statements.



3


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)

 
Three Months Ended
 
Nine Months Ended
 
January 28,
2017
 
January 30, 2016
 
January 28,
2017
 
January 30, 2016
 
 

 
 

 
 
 
 
Net income
$
23.7

 
$
17.2

 
$
69.7

 
$
62.0

 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(9.0
)
 
(7.2
)
 
(23.7
)
 
(15.3
)
Comprehensive income attributable to Methode Electronics, Inc.
$
14.7

 
$
10.0

 
$
46.0

 
$
46.7


See notes to consolidated financial statements.



4


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
 
 
 
Nine Months Ended
 
 
January 28,
2017
 
January 30,
2016
OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
69.7

 
$
62.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for depreciation
 
15.8

 
16.0

Amortization of intangibles
 
1.8

 
1.8

Amortization of stock awards and stock options
 
9.8

 
4.8

Changes in operating assets and liabilities
 
9.6

 
(0.8
)
Other
 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
106.7

 
83.8

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Purchases of property, plant and equipment
 
(13.2
)
 
(17.2
)
NET CASH USED IN INVESTING ACTIVITIES
 
(13.2
)
 
(17.2
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Taxes paid related to net share settlement of equity awards
 
(1.1
)
 
(7.6
)
Purchase of common stock
 
(9.8
)
 
(59.8
)
Proceeds from exercise of stock options
 
2.7

 
0.5

Tax benefit from stock option exercises
 
0.5

 
4.0

Cash dividends
 
(10.3
)
 
(10.2
)
Proceeds from borrowings
 

 
63.0

Repayment of borrowings
 
(20.0
)
 
(13.0
)
NET CASH USED IN FINANCING ACTIVITIES
 
(38.0
)
 
(23.1
)
 
 
 
 
 
Effect of foreign currency exchange rate changes on cash
 
(14.5
)
 
(9.3
)
 
 
 
 
 
INCREASE IN CASH AND CASH EQUIVALENTS
 
41.0

 
34.2

Cash and cash equivalents at beginning of period
 
227.8

 
168.1

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
268.8

 
$
202.3

 
See notes to condensed consolidated financial statements.



5

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)




1.             BASIS OF PRESENTATION
 
Methode Electronics, Inc. was incorporated in 1946 as an Illinois corporation and reincorporated in Delaware in 1966.  As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries.  Our business is managed and our financial results are reported on a segment basis, with those segments being Automotive, Interface, Power Products and Other.  The condensed consolidated financial statements and related disclosures as of January 28, 2017 and results of operations for the three months and nine months ended January 28, 2017 and January 30, 2016 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The April 30, 2016 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.  In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods.  These financial statements should be read in conjunction with the financial statements included in our Form 10-K for the year ended April 30, 2016, filed with the SEC on June 23, 2016.  Results may vary from quarter to quarter for reasons other than seasonality.
 
2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how cash receipts and cash payments are presented in the statement of cash flows. The ASU is effective for public entities for fiscal years beginning after December 15, 2017, which is our fiscal 2019, beginning on April 29, 2018. Early adoption is permitted. The amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new requirements on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiples provisions intended to simplify various aspects of the accounting for share-based payments. The amendments in this update are effective for annual periods beginning after December 15, 2016, which is our fiscal 2018, which will begin on April 30, 2017. The Company is currently evaluating the impact of the new requirements on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  The core principle is that a company should recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. There are two transition methods available under the new standard, either full retrospective or modified retrospective. The standard will be effective for us in the first quarter of fiscal 2019. Earlier adoption is permitted only for annual periods beginning after December 15, 2016. We are currently evaluating the impact this guidance will have on our consolidated financial statements. We have started our evaluation by establishing a project management team to analyze the impact of this standard by reviewing our current accounting policies and practices to identify potential differences that would result from the application of this standard.
 
In February 2016, the FASB issued ASU 2016-02 Leases, Accounting Standards Codification, ("ASC") 842, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognize based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, which is our fiscal 2020, beginning on April 28, 2019. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

6

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)



In January 2016, the FASB issued ASU 2016-01 Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this update are effective for fiscal years beginning after December 15, 2017, which is our fiscal 2019, beginning on April 29, 2018. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16 Business Combinations Simplifying the Accounting for Measurement-Period Adjustments. The standard requires that an acquirer recognize measurement-period adjustments in the period in which the adjustments are determined. The income effects of such measurement-period adjustments are to be recorded in the same period’s financial statements but calculated as if the accounting had been completed as of the acquisition date. The impact of measurement-period adjustments to earnings that relate to prior period financial statements are to be presented separately on the income statement or disclosed by line item. The amendments in this update are effective for fiscal years beginning after December 15, 2016, which is our fiscal 2018, which will begin on April 30, 2017. There is currently no impact to the Company expected upon adoption.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, which is our fiscal 2018, which will begin on April 30, 2017. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
    
In November 2015, the FASB issued ASU 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This guidance simplifies the balance sheet classification of deferred taxes. Current U.S. GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. This amendment simplifies the presentation to require that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction. The guidance was applied prospectively at the beginning of our current fiscal year which began on May 1, 2016. Prior period information was not adjusted. The adoption of this standard in fiscal 2017 did not have an impact on our consolidated financial statements. 

In May 2015, the FASB issued ASU 2015-7, Fair Value Measurement: Disclosure for Investments in Certain Entities that calculates net asset value per share (or its equivalents). This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net value asset per share. This new guidance was effective for interim and annual periods beginning after December 15, 2015. The adoption of this standard in fiscal 2017 did not have an impact on our consolidated financial statements. 
    

7

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


3.             GOODWILL AND INTANGIBLE ASSETS
 
We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and at least annually in accordance with ASC No. 350, Intangibles — Goodwill and Others.  The values assigned to goodwill and intangible assets are normally based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.  A severe decline in expectations could result in significant impairment charges, which could have a material adverse effect on our financial condition and results of operations.
    
    
The following table shows the roll-forward of goodwill in the financial statements as of January 28, 2017:
 
 
As of January 28, 2017
 
 
 
 
 
 
 
 
 
 
 
Power
 
 
 
 
Interface
 
Products
 
Total
Balance as of April 30, 2016
 
$
0.7

 
$
1.0

 
$
1.7

Foreign currency translation
 
(0.1
)
 

 
(0.1
)
Balance as of January 28, 2017
 
$
0.6

 
$
1.0

 
$
1.6


    
The following tables present details of the Company’s intangible assets:
 
 
As of January 28, 2017
 
 
 
 
 
 
 
 
Wtd. Avg.
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
Gross
 
Amortization
 
Net
 
Periods (Years)
Customer relationships and agreements
 
$
16.3

 
$
15.5

 
$
0.8

 
7.0
Trade names, patents and technology licenses
 
25.8

 
19.4

 
6.4

 
1.7
Covenants not to compete
 
0.1

 
0.1

 

 
0.7
Total
 
$
42.2

 
$
35.0

 
$
7.2

 
 
 
 
 
As of April 30, 2016
 
 
 
 
 
 
 
 
Wtd. Avg.
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
Gross
 
Amortization
 
Net
 
Periods (Years)
Customer relationships and agreements
 
$
16.3

 
$
15.3

 
$
1.0

 
7.8
Trade names, patents and technology licenses
 
25.8

 
17.9

 
7.9

 
2.4
Covenants not to compete
 
0.1

 
0.1

 

 
1.4
Total
 
$
42.2

 
$
33.3

 
$
8.9

 
 
 
The estimated aggregate amortization expense for the current fiscal year and each of the four succeeding fiscal years is as follows:
 
2017

$2.3
2018

$2.2
2019

$2.1
2020

$0.2
2021

$0.1
 
As of January 28, 2017 and April 30, 2016, the trade names, patents and technology licenses include $1.8 million of trade names that are not subject to amortization.

8

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)



4.             INCOME TAXES
 
The Company recognized an income tax provision of $6.6 million and $5.5 million for the three months ended January 28, 2017 and January 30, 2016, respectively. The Company's effective tax rate was 21.8% and 24.2% for the three months ended January 28, 2017 and January 30, 2016, respectively. The Company recognized an income tax provision of $18.3 million and $18.6 million for the nine months ended January 28, 2017 and January 30, 2016, respectively. The Company's effective tax rate was 20.8% and 23.1% for the nine months ended January 28, 2017 and January 30, 2016, respectively. The income tax provision for both the three months and nine months ended January 28, 2017 and January 30, 2016 is lower than the U.S. statutory rate primarily due to foreign investment tax credits and foreign operations with lower statutory rates.
 
5.             COMMON STOCK AND STOCK-BASED COMPENSATION
 
In fiscal 2016, the Compensation Committee of the Board of Directors authorized a new long-term incentive program for key employees consisting of performance-based Restricted Stock Awards (“RSAs”) and time-based Restricted Stock Units (“RSUs”). In the first quarter of fiscal 2017, the Compensation Committee awarded RSAs and RSUs to our new Chief Financial Officer under the long-term incentive program. He is eligible to earn 24,000 RSA shares at threshold performance, 48,000 shares at target performance and 72,000 shares for maximum performance. In addition, he was awarded 32,000 RSUs.

In the aggregate, the number of RSAs earned will vary based on performance relative to established goals for fiscal 2020 adjusted EBITDA, with 50% of the target shares earned for threshold performance (representing 411,000 shares), 100% of the target shares earned for target performance (representing 822,000 shares) and 150% of the target shares earned for maximum performance (representing 1,233,000 shares).

At the target level of performance, the expected expense for the RSAs over the five-year period will be $24.8 million. During the three months and nine months ended January 28, 2017, the Company recorded $1.4 million and $4.4 million, respectively, in compensation expense related to the RSAs. During the three months and nine months ended January 30, 2016, the Company recorded $1.2 million and $1.6 million, respectively, in compensation expense related to the RSAs.
    
As of January 28, 2017, the Company is recording the RSA compensation expense based on target performance. In future periods, if management makes a determination that exceeding the target is probable for fiscal 2020, a catch-up adjustment to compensation expense will be recorded in that period. In addition, if management makes a determination that it is not probable the Company will meet the target for fiscal 2020, a reversal of expense will be recorded in that period. These amounts could be material to the financial statements.

The Company also granted 608,000 RSUs to key employees. The RSUs are subject to a five-year vesting period, with 30% vesting on each of April 28, 2018 and April 27, 2019 and 40% vesting on May 2, 2020. The total expense for the RSUs is expected to be $18.5 million through 2020. During the three months and nine months ended January 28, 2017, the Company recorded $1.4 million and $4.2 million, respectively, of compensation expense related to the RSUs. During the three months and nine months ended January 30, 2016, the Company recorded $1.2 million and $1.6 million, respectively, in compensation expense related to the RSUs.

During the first quarter of fiscal 2017, the Company issued 27,000 shares of common stock to our independent directors, all of which vested immediately upon grant. We recorded $1.0 million of compensation expense related to these shares during the nine months ended January 28, 2017.


9

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


6.             NET INCOME PER SHARE
 
Basic net income per share is calculated by dividing net income attributable to Methode shareholders by the weighted average number of common shares outstanding for the applicable period.  Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive stock compensation awards outstanding during the period.
 
The following table sets forth the computation of basic and diluted net income per share:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
Numerator - net income attributable to Methode Electronics, Inc.
 
$
23.7

 
$
17.2

 
$
69.7

 
$
62.0

Denominator:
 

 

 
 
 
 
Denominator for basic net income per share-weighted average shares outstanding and vested/unissued restricted stock awards
 
37,217,302

 
38,159,789

 
37,297,757

 
38,662,487

Dilutive potential common shares-employee stock options, restricted stock awards and restricted stock units
 
253,351

 
118,442

 
180,210

 
128,137

Denominator for diluted net income per share
 
37,470,653

 
38,278,231

 
37,477,967

 
38,790,624

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.64

 
$
0.45

 
$
1.87

 
$
1.60

Diluted
 
$
0.63

 
$
0.45

 
$
1.86

 
$
1.60

 
For the nine months ended January 28, 2017, options to purchase 115,836 shares have been excluded in the computation of diluted net income per share because the exercise price was greater than the average market price for that period, and therefore, would have been anti-dilutive. For the three months and nine months ended January 30, 2016, options to purchase 138,500 shares have been excluded in the computation of diluted net income per share because the exercise price was greater than the average market price for those periods, and therefore, would have been anti-dilutive. RSAs for 822,000 shares have been excluded in the computation of diluted net income per share for both the three months and nine months ended January 28, 2017, as these awards are contingent on the Company's full year performance in fiscal 2020.

7.             SEGMENT INFORMATION
 
We are a global manufacturer of component and subsystem devices.  We design, manufacture and market devices employing electrical, electronic, wireless, sensing and optical technologies.  Our components are found in the primary end markets of the automotive, appliance, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries, and the consumer and industrial equipment markets.
 
ASC No. 280, “Segment Reporting” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. 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, as defined by ASC No. 280, is the Company’s President and Chief Executive Officer (“CEO”).

We have multiple operating segments that are aggregated in four reportable segments. Those segments are Automotive, Interface, Power Products and Other.

The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile Original Equipment Manufacturers ("OEMs"), either directly or through their tiered suppliers. Our products include integrated

10

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


center consoles, hidden switches, ergonomic switches, transmission lead frames and sensors which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system.
 
The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the aerospace, appliance, commercial food service, computer, construction, consumer, material handling, medical, military, mining, networking, point of sales, storage, and telecommunications markets.  Solutions include conductive polymers, connectors, custom cable assemblies, industrial safety radio remote controls, optical and copper transceivers, and solid-state field effect consumer touch panels. Services include the design and installation of fiber optic and copper infrastructure systems, and manufacturing active and passive optical components.
 
The Power Products segment manufactures braided flexible cables, current-carrying laminated bus devices, custom power-product assemblies, such as our PowerRail solution, high-current low voltage flexible power cabling systems and powder coated bus bars that are used in various markets and applications, including aerospace, computers, industrial and power conversion, military, telecommunications, and transportation.
 
The Other segment includes medical devices, inverters and battery systems and insulated gate bipolar transistor solutions. Our medical devices business includes Dabir Surfaces which is our surface support technology aimed at pressure ulcer prevention. Methode is developing the technology for use by patients who are immobilized or otherwise at risk for pressure ulcers, including patients undergoing long-duration surgical procedures.
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Form 10-K for the fiscal year ended April 30, 2016.  We allocate resources to segments based on operating income. Transfers between segments are recorded using internal transfer prices set by us.

 
 
Three Months Ended January 28, 2017
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
152.7

 
$
29.8

 
$
15.4

 
$
0.1

 
$
(2.4
)
 
$
195.6

Transfers between segments
 
(2.3
)
 

 

 

 
2.3

 

Net sales to unaffiliated customers
 
$
150.4

 
$
29.8

 
$
15.4

 
$
0.1

 
$
(0.1
)
 
$
195.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
36.9

 
$
1.3

 
$
3.2

 
$
(3.3
)
 
$
(9.0
)
 
$
29.1

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
(0.2
)
Other income, net
 
 
 
 
 
 
 
 
 
 
 
(1.0
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
30.3

 
 
 
Three Months Ended January 30, 2016
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
141.0

 
$
35.2

 
$
11.4

 
$
0.2

 
$
(3.2
)
 
$
184.6

Transfers between segments
 
(2.5
)
 
(0.4
)
 
(0.1
)
 
(0.1
)
 
3.1

 

Net sales to unaffiliated customers
 
$
138.5

 
$
34.8

 
$
11.3

 
$
0.1

 
$
(0.1
)
 
$
184.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
28.7

 
$
0.5

 
$
1.2

 
$
(2.1
)
 
$
(6.8
)
 
$
21.5

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
(0.2
)
Other income, net
 
 
 
 
 
 
 
 
 
 
 
(1.0
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
22.7








11

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)



 
 
Nine Months Ended January 28, 2017
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
467.9

 
$
95.6

 
$
40.0

 
$
2.1

 
$
(8.9
)
 
$
596.7

Transfers between segments
 
(6.3
)
 
(0.7
)
 
(0.1
)
 
(1.9
)
 
9.0

 

Net sales to unaffiliated customers
 
$
461.6

 
$
94.9

 
$
39.9

 
$
0.2

 
$
0.1

 
$
596.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
111.2

 
$
(0.1
)
 
$
7.7

 
$
(8.0
)
 
$
(26.0
)
 
$
84.8

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
(0.3
)
Other income, net
 
 
 
 
 
 
 
 
 
 
 
(2.9
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
88.0

 

 
 
Nine Months Ended January 30, 2016
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
459.1

 
$
105.4

 
$
39.6

 
$
0.3

 
$
(8.1
)
 
$
596.3

Transfers between segments
 
(6.3
)
 
(1.1
)
 
(0.5
)
 
(0.2
)
 
8.1

 

Net sales to unaffiliated customers
 
$
452.8

 
$
104.3

 
$
39.1

 
$
0.1

 
$

 
$
596.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
99.7

 
$
2.6

 
$
4.7

 
$
(6.2
)
 
$
(22.4
)
 
$
78.4

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
(0.7
)
Other income, net
 
 
 
 
 
 
 
 
 
 
 
(1.5
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
80.6


8.          CONTINGENCIES

Certain litigation arising in the normal course of business is pending against us.  We are 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.  We consider 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 our opinion, based on the information available, that we have 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. 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 seeking damages, as well as various forms of injunctive relief. The defendants have filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. As of January 28, 2017, the matter remains in the discovery stage.


12

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


9.          PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS
 
We incur pre-production tooling costs related to certain products produced for our customers under long-term supply agreements.  We had $17.0 million and $9.5 million as of January 28, 2017 and April 30, 2016, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling.  Engineering, testing and other costs incurred
in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a
customer contract. We had $6.0 million and $8.0 million as of January 28, 2017 and April 30, 2016, respectively, of Company owned pre-production tooling, which is capitalized within property, plant and equipment.
 
10.          DEBT AND CREDIT AGREEMENT
 
On November 18, 2016, the Company replaced the Amended and Restated Credit Agreement with a new Credit Agreement. At January 28, 2017, the interest rate on the credit facility was 1.25% plus LIBOR and we were in compliance with the covenants of the agreement. During the first nine months of fiscal 2017, we had no borrowings and payments of $20.9 million, which includes interest of $0.9 million, under this credit facility. As of January 28, 2017, there were outstanding balances against the credit facility of $37.0 million.  We believe the fair value approximates the carrying amount as of January 28, 2017.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement
 
Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties.  We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations.  Our business is highly dependent upon two large automotive customers and specific makes and models of vehicles.  Our results will be subject to many of the same risks that apply to the automotive, appliance, 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.

Our business is highly dependent on two large automotive customers. 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, or if either of the customers declare bankruptcy, our future results could be adversely affected.

Because we derive a substantial portion of our revenues from customers in the automotive, appliance, computer and communications industries, we are susceptible to trends and factors affecting those industries.

Our ability to market our automotive 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.

Our inability to effectively manage the timing, volume, quality and cost of new program launches could adversely affect our financial performance.

We are subject to continuing pressure to lower our prices.

A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating results.

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.


13


Our Dabir Surface medical device products are emerging technologies. Our ability to successfully market and sell these products will depend on acceptance by the medical community.

We have significant operations in Europe which may be adversely impacted by the continued economic challenges in Europe, including the impact of the referendum in the United Kingdom (“U.K.”) approving the exit of the U.K. from the European Union.

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.

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.

We are dependent on the availability and price of materials.

Our gross margins are subject to fluctuations due to many factors such as geographical and vertical market pricing mix, pricing concessions and various manufacturing cost variables.

We currently have a significant amount of our cash located outside the U.S.

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, costs associated with recalls, or liability claims against us.

Our technology-based business 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.

Any decision to strategically divest one or more current businesses or our inability to capitalize on prior or future acquisitions may adversely affect our business.

We may be required to recognize additional impairment charges.

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 withdrawal from or material modifications to NAFTA and certain other international trade agreements could adversely affect our business, financial condition and results of operations.

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 30, 2016 for further discussions regarding some of the reasons that actual results may be materially different from those we anticipate.
 

14


Overview
 
We are a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, Singapore, Switzerland, the United Kingdom and the United States. Our primary manufacturing facilities are located in Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Monterrey, Mexico. We design, manufacture and market devices employing electrical, radio remote control, electronic, wireless, sensing and optical technologies. Our business is managed on a segment basis, with those segments being Automotive, Interface, Power Products and Other.  For more information regarding the business and products of these segments, see “Item 1. Business.” of our Form 10-K for the fiscal year ended April 30, 2016.
 
Our components are found in the primary end markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment markets, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), rail and other transportation industries.
 
Plan to Repurchase Common Stock    

In September 2015, the Board of Directors authorized the repurchase of up to $100 million of the Company's outstanding common stock through September 1, 2017. The Company purchased 280,168 of outstanding common stock for $9.8 million in the first nine months of fiscal 2017, for a total of 2,277,466 shares of outstanding common stock for $71.8 million, under the plan. There were no purchases of outstanding stock during the three months ended January 28, 2017. The program may be suspended or terminated at any time.

Hetronic Litigation 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 seeking damages, as well as various forms of injunctive relief. The defendants have filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. As of January 28, 2017, the matter remains in the discovery stage.

We incurred Hetronic related legal fees of $1.8 million and $2.8 million in the third quarter of fiscal 2017 and the third quarter of fiscal 2016, respectively. For the first nine months of fiscal 2017 and the first nine months of fiscal 2016, we incurred Hetronic related legal fees of $9.0 million and $6.9 million, respectively. We incurred total fiscal year Hetronic related legal fees of $9.9 million and $3.1 million in fiscal 2016 and fiscal 2015, respectively. These amounts are included in the selling and administrative expenses in the Interface segment.

15


Results of Operations for the Three Months Ended January 28, 2017 as Compared to the Three Months Ended January 30, 2016
 
Consolidated Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
(“N/M” equals not meaningful) 
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net Change
Net sales
 
$
195.6

 
$
184.6

 
$
11.0

 
6.0
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
142.2

 
137.0

 
5.2

 
3.8
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
53.4

 
47.6

 
5.8

 
12.2
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
24.3

 
26.1

 
(1.8
)
 
(6.9
)%
Interest income, net
 
(0.2
)
 
(0.2
)
 

 
 %
Other income, net
 
(1.0
)
 
(1.0
)
 

 
 %
Income tax expense
 
6.6

 
5.5

 
1.1

 
20.0
 %
Net income attributable to Methode Electronics, Inc.
 
$
23.7

 
$
17.2

 
$
6.5

 
37.8
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
January 28,
2017
 
January 30,
2016
 
 
 
 
Net sales
 
100.0
 %
 
100.0
 %
 
 
 
 
Cost of products sold
 
72.7
 %
 
74.2
 %
 
 
 
 
Gross margins
 
27.3
 %
 
25.8
 %
 
 
 
 
Selling and administrative expenses
 
12.4
 %
 
14.1
 %
 
 
 
 
Interest income, net
 
(0.1
)%
 
(0.1
)%
 
 
 
 
Other income, net
 
(0.5
)%
 
(0.5
)%
 
 
 
 
Income tax expense
 
3.4
 %
 
3.0
 %
 
 
 
 
Net income attributable to Methode Electronics, Inc.
 
12.1
 %
 
9.3
 %
 
 
 
 
 
Net Sales.  Consolidated net sales increased $11.0 million, or 6.0%, to $195.6 million for the three months ended January 28, 2017, from $184.6 million for the three months ended January 30, 2016.  The Automotive segment net sales increased $11.9 million, or 8.6%, to $150.4 million for the third quarter of fiscal 2017, from $138.5 million for the third quarter of fiscal 2016. The Interface segment net sales decreased $5.0 million, or 14.4%, to $29.8 million for the third quarter of fiscal 2017, compared to $34.8 million for the third quarter of fiscal 2016 and the Power Products segment net sales increased $4.1 million, or 36.3%, to $15.4 million for the third quarter of fiscal 2017, compared to $11.3 million for the third quarter of fiscal 2016.  Translation of foreign operations net sales for the three months ended January 28, 2017 decreased reported net sales by $1.8 million, or 0.9%, due to average currency rate fluctuations in the third quarter of fiscal 2017, compared to the third quarter of fiscal 2016, primarily due to the strengthening of the U.S. dollar compared to the Chinese yuan.
 
Cost of Products Sold.  Consolidated cost of products sold increased $5.2 million, or 3.8%, to $142.2 million for the three months ended January 28, 2017, compared to $137.0 million for the three months ended January 30, 2016.  Consolidated cost of products sold as a percentage of net sales was 72.7% for the third quarter of fiscal 2017, compared to 74.2% for the third quarter of fiscal 2016.  The Automotive, Interface and Power Products segments were all favorably impacted by the currency impact on material purchases and labor costs, partially offset with unfavorable commodity pricing of raw materials, primarily copper and some resin-based products. The Interface segment was impacted by an unfavorable sales mix of data solutions products.
 
Gross Profit.  Consolidated gross profit increased $5.8 million, or 12.2%, to $53.4 million for the three months ended January 28, 2017, as compared to $47.6 million for the three months ended January 30, 2016.  Gross margins as a percentage of

16


net sales increased to 27.3% for the three months ended January 28, 2017, compared to 25.8% for the three months ended January 30, 2016.  The Automotive, Interface and Power Products segments were all favorably impacted by the currency impact on material purchases and labor costs, partially offset with unfavorable commodity pricing of raw materials, such as copper and some resin-based products. The Interface segment was impacted by an unfavorable sales mix of data solutions products.
 
Selling and Administrative Expenses.  Selling and administrative expenses decreased by $1.8 million, or 6.9%, to $24.3 million for the three months ended January 28, 2017, compared to $26.1 million for the three months ended January 30, 2016.  Selling and administrative expenses as a percentage of net sales decreased to 12.4% for the three months ended January 28, 2017 from 14.1% for the three months ended January 30, 2016. In the third quarter of fiscal 2017, expenses decreased for legal and other professional fees by $1.5 million and travel and other selling expenses decreased by $0.3 million.
 
Interest Income, Net.  Interest income, net remained constant at $0.2 million for both the three months ended January 28, 2017 and for the three months ended January 30, 2016.

Other Income, Net. Other income, net remained constant at $1.0 million for both the three months ended January 28, 2017 and for the three months ended January 30, 2016. The third quarter of fiscal 2017 includes $1.5 million for an international government grant for maintaining certain employment levels during the period. All other amounts for both the third quarter of fiscal 2017 and the third quarter of fiscal 2016 relate to currency rate fluctuations. The functional currencies of these operations are the British pound, Chinese yuan, euro, Indian rupee, Mexican peso, Singapore dollar and Swiss franc. Some foreign operations have transactions denominated in currencies other than their functional currencies, primarily sales in U.S. dollars and euros, creating exchange rate sensitivities.

Income Tax Expense.  Income tax expense increased $1.1 million, or 20.0%, to $6.6 million for the three months ended January 28, 2017, compared to $5.5 million for the three months ended January 30, 2016.  The Company's effective tax rate decreased to 21.8% in the third quarter of fiscal 2017, compared to 24.2% in the third quarter of fiscal 2016. The decrease primarily relates to the composition of pre-tax income in regions with lower effective tax rates.
 
Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. increased $6.5 million, or 37.8%, to $23.7 million for the three months ended January 28, 2017, compared to $17.2 million for the three months ended January 30, 2016, primarily due to a favorable currency impact on material purchases and labor costs, an international government grant, higher sales volumes and lower legal and other professional fees as well as lower travel expenses. Net income was negatively impacted by unfavorable commodity pricing of certain raw materials and higher income tax expense.


17


Operating Segments
 
Automotive Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net Change
Net sales
 
$
150.4

 
$
138.5

 
$
11.9

 
8.6
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
105.6

 
101.3

 
4.3

 
4.2
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
44.8

 
37.2

 
7.6

 
20.4
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
7.9

 
8.5

 
(0.6
)
 
(7.1
)%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
36.9

 
$
28.7

 
$
8.2

 
28.6
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
January 28,
2017
 
January 30,
2016
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
70.2
%
 
73.1
%
 
 
 
 
Gross margins
 
29.8
%
 
26.9
%
 
 
 
 
Selling and administrative expenses
 
5.3
%
 
6.1
%
 
 
 
 
Income from operations
 
24.5
%
 
20.7
%
 
 
 
 
 
Net Sales.  Automotive segment net sales increased $11.9 million, or 8.6%, to $150.4 million for the three months ended January 28, 2017, from $138.5 million for the three months ended January 30, 2016.  Net sales increased in North America by $11.2 million, or 15.3%, to $84.4 million in the third quarter of fiscal 2017, compared to $73.2 million in the third quarter of fiscal 2016. Sales volumes increased for both our GM Center Console program (with the launch of new platforms in fourth quarter of fiscal 2016), and for transmission lead-frame assemblies. Sales volumes decreased for the Ford Center Console program. North American sales were negatively impacted by pricing concessions on certain products. Net sales in Europe were relatively flat, decreasing by $0.3 million, or 0.8%, to $35.8 million in the third quarter of fiscal 2017, compared to $36.1 million in the third quarter of fiscal 2016, primarily due to unfavorable currency rate fluctuations and lower sales volumes of ignition switch products, partially offset with increased sales of volumes for certain Integrated Center Panels and steering wheel switch products. Net sales in Asia increased $1.0 million, or 3.4%, to $30.2 million in the third quarter of fiscal 2017, compared to $29.2 million in the third quarter of fiscal 2016, primarily due to higher sales volumes of our transmission lead-frame assemblies, interior dome lights and switch assemblies, partially offset with lower sales volumes of brake switch assemblies and steering angle sensor products. The Asia net sales for the third quarter of fiscal 2017 were negatively impacted due to unfavorable currency rate fluctuations. Translation of foreign operations net sales for the three months ended January 28, 2017 decreased reported net sales by $1.8 million, or 1.2%, due to average currency rates in the third quarter of fiscal 2017, compared to the average currency rates in the third quarter of fiscal 2016, primarily due to the strengthening of the U.S. dollar as compared to the euro and Chinese yuan.

Cost of Products Sold.  Automotive segment cost of products sold increased $4.3 million, or 4.2%, to $105.6 million for the three months ended January 28, 2017, compared to $101.3 million for the three months ended January 30, 2016.  The Automotive segment cost of products sold as a percentage of net sales decreased to 70.2% in the third quarter of fiscal 2017, compared to 73.1% in the third quarter of fiscal 2016.  The decrease is substantially due to the favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations, primarily in Mexico and China, partially offset with unfavorable commodity pricing of raw materials on certain products.
 
Gross Profit.  Automotive segment gross profit increased $7.6 million, or 20.4%, to $44.8 million for the three months ended January 28, 2017, as compared to $37.2 million for the three months ended January 30, 2016.  The Automotive segment gross margins as a percentage of net sales increased to 29.8% for the three months ended January 28, 2017, as compared to 26.9% for the three months ended January 30, 2016.  The increase is substantially due to the favorable currency impact on both

18


the purchase of certain raw materials and labor costs in our foreign operations, primarily in Mexico and China, partially offset with unfavorable commodity pricing of raw materials on certain products.
       
Selling and Administrative Expenses.  Selling and administrative expenses decreased $0.6 million, or 7.1%, to $7.9 million for the three months ended January 28, 2017, as compared to $8.5 million for the three months ended January 30, 2016.  Selling and administrative expenses as a percentage of net sales decreased to 5.3% for the three months ended January 28, 2017 from 6.1% for the three months ended January 30, 2016, primarily due to higher sales volumes. The decrease in expenses is primarily due to lower travel and general administrative expenses.
    
Income from Operations.  Automotive segment income from operations increased $8.2 million, or 28.6%, to $36.9 million for the three months ended January 28, 2017, compared to $28.7 million for the three months ended January 30, 2016. Income from operations for the third quarter of fiscal 2017 increased due to higher sales volumes, the favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations and lower travel and general administrative expenses, partially offset with higher commodity pricing on certain raw materials.

Interface Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net Change
Net sales
 
$
29.8

 
$
34.8

 
$
(5.0
)
 
(14.4
)%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
23.0

 
26.6

 
(3.6
)
 
(13.5
)%
 
 
 
 
 
 
 
 
 
Gross profit
 
6.8

 
8.2

 
(1.4
)
 
(17.1
)%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
5.5

 
7.7

 
(2.2
)
 
(28.6
)%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
1.3

 
$
0.5

 
$
0.8

 
160.0
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
January 28,
2017
 
January 30,
2016
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
77.2
%
 
76.4
%
 
 
 
 
Gross margins
 
22.8
%
 
23.6
%
 
 
 
 
Selling and administrative expenses
 
18.5
%
 
22.1
%
 
 
 
 
Income from operations
 
4.4
%
 
1.4
%
 
 
 
 
 
Net Sales.  Interface segment net sales decreased $5.0 million, or 14.4%, to $29.8 million for the three months ended January 28, 2017, from $34.8 million for the three months ended January 30, 2016.  Net sales decreased in North America by $4.2 million, or 15.7%, to $22.5 million in the third quarter of fiscal 2017, compared to $26.7 million in the third quarter of fiscal 2016, primarily due to lower sales volumes of data solutions, radio remote controls and appliance products. Net sales in Europe decreased $0.8 million, or 11.3%, to $6.3 million in the third quarter of fiscal 2017, compared to $7.1 million in the third quarter of fiscal 2016, primarily due to lower radio remote control and data solutions sales volumes. Net sales in Asia remained constant at $1.0 million for both the third quarter of fiscal 2017 and the third quarter of fiscal 2016.
 
Cost of Products Sold.  Interface segment cost of products sold decreased $3.6 million, or 13.5%, to $23.0 million for the three months ended January 28, 2017, compared to $26.6 million for the three months ended January 30, 2016.  Interface segment cost of products sold as a percentage of net sales increased to 77.2% for the three months ended January 28, 2017, compared to 76.4% for the three months ended January 30, 2016.  The increase is primarily due to lower sales volumes and sales mix, specifically data solutions products. The increase was partially offset by the favorable currency impact on both the purchase of certain raw materials and labor costs, primarily in Mexico.


19


Gross Profit.  Interface segment gross profit decreased $1.4 million, or 17.1%, to $6.8 million for the three months ended January 28, 2017, compared to $8.2 million for the three months ended January 30, 2016.  Gross margins as a percentage of net sales decreased to 22.8% for the three months ended January 28, 2017, compared to 23.6% for the three months ended January 30, 2016.  The decrease is primarily due to lower sales volumes, specifically data solutions products. The decrease was partially offset by the favorable currency impact on both the purchase of certain raw materials and labor costs, primarily in Mexico.
 
Selling and Administrative Expenses.  Selling and administrative expenses decreased $2.2 million, or 28.6%, to $5.5 million for the three months ended January 28, 2017, compared to $7.7 million for the three months ended January 30, 2016.  Selling and administrative expenses as a percentage of net sales decreased to 18.5% for the three months ended January 28, 2017, from 22.1% for the three months ended January 30, 2016. The decrease in selling and administrative expenses is due primarily to lower expenses for legal and other professional fees, bonus, commission, travel, advertising and general expenses.
 
Income from Operations.  Interface segment income from operations increased $0.8 million, or 160.0%, to $1.3 million for the three months ended January 28, 2017, compared to $0.5 million for the three months ended January 30, 2016, primarily due to the favorable currency impact on both the purchase of certain raw materials and labor costs and lower overall general and administrative expenses, partially offset with lower sales volumes.

Power Products Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net Change
Net sales
 
$
15.4

 
$
11.3

 
$
4.1

 
36.3
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
11.3

 
9.1

 
2.2

 
24.2
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
4.1

 
2.2

 
1.9

 
86.4
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
0.9

 
1.0

 
(0.1
)
 
(10.0
)%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
3.2

 
$
1.2

 
$
2.0

 
166.7
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
January 28,
2017
 
January 30,
2016
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
73.4
%
 
80.5
%
 
 
 
 
Gross margins
 
26.6
%
 
19.5
%
 
 
 
 
Selling and administrative expenses
 
5.8
%
 
8.8
%
 
 
 
 
Income from operations
 
20.8
%
 
10.6
%
 
 
 
 
 
Net Sales.  Power Products segment net sales increased $4.1 million, or 36.3%, to $15.4 million for the three months ended January 28, 2017, compared to $11.3 million for the three months ended January 30, 2016.  Net sales increased in North America by $1.3 million, or 29.5%, to $5.7 million in the third quarter of fiscal 2017, compared to $4.4 million in the third quarter of fiscal 2016, primarily due to increased sales volumes of PowerRail® and other busbar products. Net sales in Europe increased by $0.6 million, or 46.2%, to $1.9 million in the third quarter of fiscal 2017, compared to $1.3 million in the third quarter of fiscal 2016, primarily due to increased sales of bypass switches. Net sales in Asia increased $2.2 million, or 39.3%, to $7.8 million in the third quarter of fiscal 2017, compared to $5.6 million in the third quarter of fiscal 2016, primarily due to higher sales volumes of PowerRail® and other busbar products.
 
Cost of Products Sold.  Power Products segment cost of products sold increased $2.2 million, or 24.2%, to $11.3 million for the three months ended January 28, 2017, compared to $9.1 million for the three months ended January 30, 2016.  The Power Products segment cost of products sold as a percentage of net sales decreased to 73.4% for the three months ended

20


January 28, 2017, from 80.5% for the three months ended January 30, 2016.  The decrease primarily relates to higher sales volumes, a favorable currency impact for both material and labor expenses due to the weakening Chinese yuan as compared to the U.S. dollar, partially offset with unfavorable commodity pricing on certain raw materials.
 
Gross Profit.  Power Products segment gross profit increased $1.9 million, or 86.4%, to $4.1 million in the third quarter of fiscal 2017, compared to $2.2 million in the third quarter of fiscal 2016.  Gross margins as a percentage of net sales increased to 26.6% for the three months ended January 28, 2017 from 19.5% for the three months ended January 30, 2016. The increase primarily relates to higher sales volumes, a favorable currency impact for both material and labor expenses due to the weakening of the Chinese yuan as compared to the U.S. dollar, partially offset with unfavorable commodity pricing on certain raw materials.

Selling and Administrative Expenses.  Selling and administrative expenses decreased $0.1 million, or 10.0%, to $0.9 million for the three months ended January 28, 2017, compared to $1.0 million for the three months ended January 30, 2016.  Selling and administrative expenses as a percentage of net sales decreased to 5.8% for the three months ended January 28, 2017 from 8.8% for the three months ended January 30, 2016. Selling and administrative expenses decreased primarily due to lower travel and other selling expenses.
 
Income From Operations.  Power Products segment income from operations increased $2.0 million, or 166.7%, to $3.2 million for the three months ended January 28, 2017, compared to $1.2 million for the three months ended January 30, 2016, due to increased sales volumes and a favorable currency impact of material purchases, partially offset with higher commodity pricing of certain raw materials.

Other Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions) 
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net sales
 
$
0.1

 
$
0.1

 
$

 
 
 
 
 
 
 
 
 
Cost of products sold
 
1.7

 
0.9

 
0.8

 
 
 
 
 
 
 
 
 
Gross profit
 
(1.6
)
 
(0.8
)
 
(0.8
)
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
1.7

 
1.3

 
0.4

 
 
 
 
 
 
 
 
 
Loss from operations
 
$
(3.3
)
 
$
(2.1
)
 
$
(1.2
)
 
 
 
 
 
 
 
 
 
 
Net Sales.  The operating units in this segment, medical devices, inverters and battery systems, had minimal net sales in the third quarter of fiscal 2017 and in the third quarter of fiscal 2016 due to newly launched products.
 
Cost of Products Sold.  Other segment cost of products sold was $1.7 million for the three months ended January 28, 2017, compared to $0.9 million for the three months ended January 30, 2016. The increase primarily relates to research and development initiatives for the medical devices operating unit.

Gross Profit.  The Other segment gross profit was a loss of $1.6 million and $0.8 million for the three months ended January 28, 2017 and for the three months ended January 30, 2016, respectively.  The increased loss primarily relates to research and development initiatives for the medical devices operating unit.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $0.4 million, to $1.7 million for the three months ended January 28, 2017, compared to $1.3 million for the three months ended January 30, 2016. The increase primarily is due to higher outside professional fees and marketing expenses related to new product introductions.


21


Loss From Operations  The Other segment loss from operations increased $1.2 million, to $3.3 million for the three months ended January 28, 2017, compared to $2.1 million for the three months ended January 30, 2016. The increased loss relates to higher outside professional fees, research and development and marketing expenses in the third quarter of fiscal 2017.

Results of Operations for the Nine Months Ended January 28, 2017 as Compared to the Nine Months Ended January 30, 2016
 
Consolidated Results
 
Below is a table summarizing results for the nine months ended:
($ in millions)
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net Change
Net sales
 
$
596.7

 
$
596.3

 
$
0.4

 
0.1
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
433.7

 
444.2

 
(10.5
)
 
(2.4
)%
 
 
 
 
 
 
 
 
 
Gross profit
 
163.0

 
152.1

 
10.9

 
7.2
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
78.2

 
73.7

 
4.5

 
6.1
 %
Interest income, net
 
(0.3
)
 
(0.7
)
 
0.4

 
(57.1
)%
Other income, net
 
(2.9
)
 
(1.5
)
 
(1.4
)
 
93.3
 %
Income tax expense
 
18.3

 
18.6

 
(0.3
)
 
(1.6
)%
Net income attributable to Methode Electronics, Inc.
 
$
69.7

 
$
62.0

 
$
7.7

 
12.4
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
January 28,
2017
 
January 30,
2016
 
 
 
 
Net sales
 
100.0
 %
 
100.0
 %
 
 
 
 
Cost of products sold
 
72.7
 %
 
74.5
 %
 
 
 
 
Gross margins
 
27.3
 %
 
25.5
 %
 
 
 
 
Selling and administrative expenses
 
13.1
 %
 
12.4
 %
 
 
 
 
Interest income, net
 
(0.1
)%
 
(0.1
)%
 
 
 
 
Other income, net
 
(0.5
)%
 
(0.3
)%
 
 
 
 
Income tax expense
 
3.1
 %
 
3.1
 %
 
 
 
 
Net income attributable to Methode Electronics, Inc.
 
11.7
 %
 
10.4
 %
 
 
 
 
 
Net Sales.  Consolidated net sales increased slightly by $0.4 million, or 0.1%, to $596.7 million for the nine months ended January 28, 2017, from $596.3 million for the nine months ended January 30, 2016.  The Automotive segment net sales increased $8.8 million, or 1.9%, to $461.6 million for the first nine months of fiscal 2017, from $452.8 million for the first nine months of fiscal 2016.  The Interface segment net sales decreased $9.4 million, or 9.0%, to $94.9 million for the first nine months of fiscal 2017, compared to $104.3 million for the first nine months of fiscal 2016 and the Power Products segment net sales increased $0.8 million, or 2.0%, to $39.9 million for the first nine months of fiscal 2017, compared to $39.1 million for the first nine months of fiscal 2016. Translation of foreign operations net sales for the first nine months of fiscal 2017 decreased net sales by $3.2 million, or 0.5%, compared to the average currency rates in the first nine months of fiscal 2016, primarily due to the strengthening of the U.S. dollar compared to the Chinese yuan and euro.
 
Cost of Products Sold.  Consolidated cost of products sold decreased $10.5 million, or 2.4%, to $433.7 million for the nine months ended January 28, 2017, compared to $444.2 million for the nine months ended January 30, 2016.  Consolidated cost of products sold as a percentage of net sales decreased to 72.7% for the first nine months of fiscal 2017, compared to 74.5% for the first nine months of fiscal 2016.  The Automotive, Interface and Power Products segments were all favorably impacted by commodity pricing of raw materials and a favorable currency impact on material purchases and labor costs. The Automotive segment was favorably impacted by both commodity pricing adjustments of $1.0 million and $1.0 million for the reversal of accruals related to customer commercial issues resolved during the first nine months of fiscal 2017. In the first nine months of fiscal 2016, the Interface segment experienced additional costs of $1.0 million and inefficiencies related to the move

22


of the radio remote control operation from the Philippines to Egypt. The Power Products segment experienced favorable cost of goods sold as a percentage of sales primarily due to implemented overhead cost reductions in the U.S. and China.
 
Gross Profit.  Consolidated gross profit increased $10.9 million, or 7.2%, to $163.0 million for the nine months ended January 28, 2017, as compared to $152.1 million for the nine months ended January 30, 2016.  Gross margins as a percentage of net sales increased to 27.3% for the nine months ended January 28, 2017, compared to 25.5% for the nine months ended January 30, 2016.  The Automotive segment was favorably impacted by both commodity pricing adjustments of $1.0 million and $1.0 million for the reversal of accruals related to customer commercial issues resolved during the first nine months of fiscal 2017. The Automotive, Interface and Power Products segments were all favorably impacted by commodity pricing of raw materials and a favorable currency impact on material purchases and labor costs. In the first nine months of fiscal 2016, the Interface segment experienced additional costs of $1.0 million and inefficiencies related to the move of the radio remote control operation from the Philippines to Egypt. The Power Products segment experienced favorable gross margins as a percentage of sales primarily due to implemented overhead cost reductions in the U.S. and China.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $4.5 million, or 6.1%, to $78.2 million for the nine months ended January 28, 2017, compared to $73.7 million for the nine months ended January 30, 2016.  Selling and administrative expenses as a percentage of net sales increased to 13.1% for the nine months ended January 28, 2017 from 12.4% for the nine months ended January 30, 2016. In the first nine months of fiscal 2017, expenses increased for stock award amortization expenses by $5.0 million, legal and other professional fees by $1.8 million, partially offset by lower travel expenses of $1.5 million and lower selling expenses of $0.8 million.
 
Interest Income, Net.  Interest income, net decreased $0.4 million, to $0.3 million for the nine months ended January 28, 2017, compared to $0.7 million for the nine months ended January 30, 2016. The decrease is primarily due to increased average debt levels during fiscal 2017 as compared to fiscal 2016.

Other Income, Net. Other income, net increased $1.4 million to $2.9 million for the nine months ended January 28, 2017, compared to $1.5 million for the nine months ended January 30, 2016. The first nine months of fiscal 2017 includes $3.0 million for an international government grant for maintaining certain employment levels during the period. All other amounts for both the first nine months of fiscal 2017 and the first first nine months of fiscal 2016 relate to currency rate fluctuations. The functional currencies of these operations are the British pound, Chinese yuan, euro, Indian rupee, Mexican peso, Singapore dollar and Swiss franc. Some foreign operations have transactions denominated in currencies other than their functional currencies, primarily sales in U.S. dollars and euros, creating exchange rate sensitivities.

Income Tax Expense.  Income tax expense decreased $0.3 million, or 1.6%, to $18.3 million for the nine months ended January 28, 2017, compared to $18.6 million for the nine months ended January 30, 2016.  The Company's effective tax rate decreased to 20.8% in the first nine months of fiscal 2017, compared to 23.1% in the first nine months of fiscal 2016. The decrease primarily relates to the composition of pre-tax income in regions with lower effective tax rates.
 
Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. increased $7.7 million, or 12.4%, to $69.7 million for the nine months ended January 28, 2017, compared to $62.0 million for the nine months ended January 30, 2016, primarily due to the favorable impact of commodity pricing adjustments and resolved customer commercial issues, favorable commodity pricing of raw materials and the favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations, an international government grant lower travel and tax expenses. Net income was unfavorably impacted by higher stock award amortization expense and increased legal and professional fees.


23


Operating Segments
 
Automotive Segment Results
 
Below is a table summarizing results for the nine months ended:
($ in millions)
 
 
January 28,
2017
 
January 30,
2016
 
Net Change
 
Net Change
Net sales
 
$
461.6

 
$
452.8

 
$
8.8

 
1.9
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
325.5

 
328.5

 
(3.0
)
 
(0.9
)%
 
 
 
 
 
 
 
 
 
Gross profit
 
136.1

 
124.3

 
11.8

 
9.5
 %