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EX-32.1 - CERTIFICATION OF PERIODIC FINANCIAL REPORT - METHODE ELECTRONICS INCexhibit32-10xk042917.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - METHODE ELECTRONICS INCexhibit312-10xk042917.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - METHODE ELECTRONICS INCexhibit311-10xk042917.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - METHODE ELECTRONICS INCexhibit23-042917.htm
EX-21.1 - SUBSIDIARIES OF REGISTRANT - METHODE ELECTRONICS INCexhibit21-042917.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 29, 2017
Commission File Number 0-2816
METHODE ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
36-2090085
(State or other jurisdiction of
(IRS 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 
Securities registered pursuant to Section 12(b) of the Act: 
 
 
Name of each exchange
Title of each Class
 
on which registered
Common Stock, $0.50 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class) 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, an emerging growth company, or a smaller reporting company.
Large Accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
Emerging Growth Company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes   o    No   x
The aggregate market value of common stock, $0.50 par value, held by non-affiliates of the Registrant on October 29, 2016, based upon the average of the closing bid and asked prices on that date as reported by the New York Stock Exchange, was $1.1 billion.
Registrant had 36,787,301 shares of common stock, $0.50 par value, outstanding as of June 20, 2017.



DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders' meeting to be held September 14, 2017 are incorporated by reference into Part III of this Form 10-K.



METHODE ELECTRONICS, INC.
FORM 10-K
April 29, 2017

TABLE OF CONTENTS
 
  11
 
 
 
 
 
 
 
 
 



PART I
 
Item 1.  Business
 
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.
 
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 locations 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 and sensing technologies.  Our corporate headquarters is located in Chicago, Illinois. Our components are found in the primary end-markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical device, rail and other transportation industries.
 
We maintain our financial records on the basis of a fifty-two or fifty-three week fiscal year ending on the Saturday closest to April 30. Fiscal 2017, fiscal 2016 and fiscal 2015 all represented fifty-two weeks of results.
 
Segments.  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 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 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, construction, consumer, material handling, medical, military, mining, point-of-sale, and telecommunications markets.  Solutions include conductive polymers, 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. Through fiscal 2017, the Interface segment included our Connectivity reporting unit, which provided solutions for computer and networking markets, including connectors and custom cable assemblies. This reporting unit was shuttered at the end of fiscal 2017 due to market conditions.
 
The Power Products segment manufactures braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail solution, high-current low-voltage flexible power cabling systems and powder coated busbars that are used in various markets and applications, including aerospace, computers, industrial, power conversion, military, telecommunications, and transportation.
 
The Other segment is primarily made up of our medical device business, which includes Dabir Surfaces, 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. Through fiscal 2017, the Other segment included our Active Energy Solutions reporting unit, which provided inverters, battery systems and insulated-gate bipolar transistor solutions. Due to market conditions, this reporting unit was shuttered at the end of fiscal 2017. In fiscal 2015, the Other segment also included independent laboratories that provided services for qualification, testing and certification, and analysis of electronic and optical components. The independent laboratories were sold in fiscal 2015.
 
Financial results by segment are summarized in Note 12 to our consolidated financial statements.


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Sales.  The following table reflects the percentage of net sales of the segments of the Company for the last three fiscal years.
 
Year Ended
 
April 29,
2017
 
April 30,
2016
 
May 2,
2015
Automotive
77.5
%
 
76.0
%
 
71.3
%
Interface
15.6
%
 
17.4
%
 
18.3
%
Power Products
6.9
%
 
6.6
%
 
9.8
%
Other
%
 
%
 
0.6
%
 
Our sales activities are directed by sales managers who are supported by field application engineers and other engineering personnel who work with customers to design our products into their systems.  Our field application engineers also help us identify emerging markets and new products.  Our products are sold through in-house sales staff and through independent manufacturers’ representatives with offices throughout the world.  Information about our sales and operations in different geographic regions is summarized in Note 12 to our consolidated financial statements.  Sales are made primarily to OEMs, either directly or through their tiered suppliers, as well as to selling partners and distributors.
 
Sources and Availability of Materials.  The principal materials that we purchase include application-specific integrated circuits, coil and bar stock, ferrous and copper alloy sheets, glass, light-emitting diode ("LED") displays, plastic molding materials, precious metals, and silicon die castings.  All of these items are available from several suppliers and we generally rely on more than one supplier for each item. We normally do not carry inventories of raw materials or finished products in excess of those reasonably required to meet production and shipping schedules. We did not experience any significant price increases in fiscal 2017, fiscal 2016 and fiscal 2015. We experienced some lower costs for certain commodities, primarily the cost of resin-based products, in fiscal 2016 and fiscal 2015.
 
Patents.  The Company has been granted a number of patents in the U.S., Europe and Asia and has additional domestic and international patent applications pending related to our products and manufacturing processes. The Company's existing patents expire on various dates from 2017 to 2031. The Company seeks patents in order to protect the Company's interest in certain products and technologies, including our TouchSensor, magnetic torque sensing, medical devices and high-power distribution products. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or our ability to compete.
 
Seasonality.  A significant portion of our business is dependent upon the automotive sales and vehicle production schedules of our customers.  The automotive market is cyclical and depends on general economic conditions, interest rates, fuel prices and consumer spending patterns.
 
Material Customers.  During the fiscal year ended April 29, 2017, shipments to General Motors Corporation (“GM”) and Ford Motor Company (“Ford”), or their tiered suppliers, represented 49.6% and 9.3%, respectively, of consolidated net sales.  In general, these sales were for component parts used in particular vehicle models of the OEMs. Typically, our Ford and GM supply arrangements for each component part include a blanket purchase order and production releases. In general, a blanket purchase order is issued for each Ford or GM part as identified by the customer part number. Each such Ford or GM blanket purchase order accounted for less than 10.0% of our fiscal 2017 consolidated net sales. Each blanket purchase order includes standard terms and conditions, including price. In certain circumstances, we supply Ford or GM the requirements for a particular customer vehicle model for the life of the model, which can vary from three to seven years. Both Ford and GM order parts using production releases approved under the relevant blanket purchase order. The production releases are submitted by the various Ford or GM plants and include information regarding part quantities and delivery specifications.

Backlog. Our backlog of orders was approximately $203.2 million on April 29, 2017, and $137.5 million on April 30, 2016.  We expect that most of the backlog at April 29, 2017 will be shipped within fiscal 2018.
 
Competitive Conditions.  The markets in which we operate are highly competitive and characterized by rapid changes due to technological improvements and developments.  We compete with a large number of other manufacturers in each of our product areas; many of these competitors have greater resources and sales.  Price, service and product performance are significant elements of competition in the sale of our products.
 
Research and Development.  We maintain a research and development program involving a number of professional employees who devote a majority of their time to the enhancement of existing products and to the development of new products and processes.  Research and development costs primarily relate to product engineering and design and development expenses

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and are classified as a component of our costs of goods sold on the Company's Consolidated Statements of Income. Expenditures for such activities amounted to $27.8 million for both fiscal 2017 and fiscal 2016 and $24.5 million for fiscal 2015.
 
Environmental Matters.  Compliance with foreign, federal, state and local provisions regulating the discharge of materials into the environment has not materially affected our capital expenditures, earnings or our competitive position.  Currently, we do not have any environmental-related lawsuits or material administrative proceedings pending against us.  Further information as to environmental matters affecting us is presented in Note 8 to our consolidated financial statements.
 
Employees.  At April 29, 2017 and April 30, 2016, we had 4,464 and 4,345 employees, respectively.  We also, from time to time, employ part-time employees and hire independent contractors.  Our employees from our Malta and Mexico facilities, which account for approximately 67% of our total number of employees, are represented by collective bargaining agreements.  We have never experienced a work stoppage and we believe that our employee relations are good.
 
Segment Information and Foreign Sales.  Information about our operations by segment and different geographic region is summarized in Note 12 to our consolidated financial statements.
 
Available Information.  We are subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act") and file periodic reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site(www.sec.gov) that contains periodic reports, proxy and information statements and other information regarding Methode.
 
Our Company website address is www.methode.com. We use our website as a channel of distribution for important company information. Important information, including press releases, investor presentations and financial information regarding our Company, is routinely posted and accessible on the Investor Relations subpage of our website. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.   Also posted on our website are the Company’s Corporate Governance Guidelines, Code of Business Conduct, Anti-Corruption Policy and the charters of the Audit Committee, Compensation Committee, Nominating and Governance Committee and Technology Committee. Copies of these documents are also available free of charge by sending a request to Methode Electronics, Inc., 7401 West Wilson Avenue, Chicago, Illinois 60706, Attention: Investor Relations Department.  Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of them.
 
Certifications.  As required by the rules and regulations of the New York Stock Exchange (“NYSE”), we delivered to the NYSE a certification signed by our Chief Executive Officer, Donald W. Duda, certifying that Mr. Duda was not aware of any violation by the Company of the NYSE’s corporate governance listing standards as of September 13, 2016.
 
As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of our public disclosures are filed as exhibits to this annual report on Form 10-K.

Item 1A.  Risk Factors
 
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 dependent upon two large automotive customers and specific makes and models of automobiles.  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.
 

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Our business is 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 declared bankruptcy, our future results could be adversely affected.
 
During the year ended April 29, 2017, shipments to GM and Ford, or their tiered suppliers, represented 49.6% and 9.3%, respectively, of our consolidated net sales. The sales to GM primarily consisted of integrated center consoles for use in trucks and SUV's, and a shift in consumer preference for smaller or more fuel efficient vehicles could adversely affect our operating results. The supply arrangements with these customers generally provide for supplying the customers’ requirements for particular models, rather than for manufacturing a specific quantity of products. Such supply arrangements cover a period from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a Ford or GM supply arrangement for a model or a significant decrease in demand for one or more of these models could have a material adverse impact on our results of operations and financial condition. We also compete to supply products for successor models and are subject to the risk that Ford or GM will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition. The Company, from time to time, provides price concessions in connection with the awarding of new business.
 
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 components are found in the primary end-markets of the automotive, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries, appliances, consumer and industrial equipment markets, and medical device markets.  Key economic and market conditions which could impact the automotive industry include availability of affordable financing, fuel costs, consumer confidence and unemployment levels. Factors negatively affecting these industries also negatively affect our business, financial condition and operating results. Any adverse occurrence, including industry slowdown, recession, rising interest rates, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and operating results.
 
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.
The sales cycle for our automotive products, our largest industry segment, is lengthy because an automobile manufacturer must develop a high degree of assurance that the products it buys will meet customer needs, interface as easily as possible with the other parts of a vehicle and with the automobile manufacturer’s production and assembly process, and have minimal warranty, safety and service problems. As a result, from the time that a manufacturer develops a strong interest in our products, it normally will take several years before our products are available to consumers in that manufacturer’s vehicles.
In the automotive components industry, products typically proceed through five stages of research and development. Initial research on the product concept comes first, to assess its technical feasibility and economic costs and benefits. This stage often includes development of an internal prototype for the component supplier’s own evaluation. If the product appears feasible, the component supplier manufactures a functioning prototype to demonstrate and test the product’s features. These prototypes are then marketed and sold to automotive companies for testing and evaluation. If an automobile manufacturer shows interest in the product, it typically works with the component supplier to refine the product, then purchases second and subsequent generation engineering prototypes for further evaluation. Finally, the automobile manufacturer either decides to purchase the component for a production vehicle or terminates the program.
The time required to progress through these five stages to commercialization varies widely. Generally, the more a component must be integrated with other vehicle systems, the longer the process takes. Further, products that are installed by the factory usually require extra time for evaluation because other vehicle systems are affected, and a decision to introduce the product into the vehicle is not easily reversed. Because our automotive products affect other vehicle systems and are a factory-installed item, the process usually takes several years from conception to commercialization.
While we currently have active development programs with various OEMs for a variety of our products, no assurance can be given that our products will be implemented in any particular vehicles. During this development process, we derive minimal funding from prototype sales but generally obtain no significant revenue until mass production begins, which could

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have a material adverse effect on our liquidity. If our products are not selected after a lengthy development process, our results of operations and financial condition could be adversely affected.
Other automotive products that we develop are also likely to have a lengthy sales cycle. Because such technology is new and evolving, and because customers will likely require that any new product we develop pass certain feasibility and economic viability tests before committing to purchase, it is expected that any new products we develop will take some years before they are sold to customers, if at all.

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

In connection with the awarding of new business, we obligate ourselves to deliver new products and services that are subject to our customers' timing, performance and quality demands. Additionally, we must effectively coordinate the activities of numerous suppliers in order for the program launches of certain of our products to be successful. Given the complexity of new program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp up of costs; however, our sales related to these new programs generally are dependent upon the timing and success of our customers' introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could adversely affect our financial condition, operating results and cash flows.

We are subject to continuing pressure to lower our prices.
 
Over the past several years we have experienced, and we expect to continue to experience, pressure to lower our prices. The Company, from time to time, provides price concessions in connection with the awarding of new business.
In order to maintain our profitability, we must strive to increase volumes and reduce our costs. Continuing pressures to reduce our prices could have a material adverse effect on our financial condition, results of operations and cash flows. 

A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating results.
 
Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in other currencies, mainly in Europe and China.  Our profitability is affected by movements of the U.S. dollar against other currencies in which we generate revenue and incur expenses, particularly the euro and Chinese yuan.  Significant fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitability 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.

International operations represent a significant portion of our business. Sales outside the United States represent a material amount of our net sales, and we expect net sales outside the United States to continue to represent a significant portion of our total net sales. Outside of the United States, we operate manufacturing facilities in China, Egypt, Malta and Mexico.

Our international operations subject us to extensive domestic and foreign regulations and expose us to a variety of domestic and foreign political, economic and other risks, including: changes in foreign or domestic government leadership; changes in foreign or domestic laws or regulations impacting our overall business model or restricting our ability to manufacture, purchase or sell our products; changes in domestic or foreign tax laws; changes in international trade and investment policies, including restrictions or taxes on the repatriation of dividends or other funds, new or higher tariffs, duties or customs (for example, on products imported from Mexico or China), new barriers to entry or domestic preference procurement requirements and changes to, or withdrawals from, free trade agreements; changes in foreign currency exchange rates and interest rates; economic downturns in foreign countries or geographic regions where we have significant operations, such as Mexico and China; significant changes in conditions in the countries in which we operate with the effect of competition from new market entrants and, in the United Kingdom, with passage of a referendum to discontinue membership in the European Union; impact of compliance with U.S. and other foreign countries’ export controls and economic sanctions; liabilities resulting from U.S. and foreign laws and regulations, including those related to the Foreign Corrupt Practices Act and certain other anti-corruption laws; differing labor regulations and union relationships; logistical and communications challenges; and differing protections for our intellectual property.

Any of these factors may have an adverse effect on our international operations which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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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.
We continue to develop our Dabir Surfaces medical device products, which are included in several ongoing clinical research and product evaluation studies. We will not be successful in marketing and selling these products to the medical community if we are unable to demonstrate the clinical efficacy, cost effectiveness and distinctive benefits of the products or if our customers prefer competitive products.
Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.
Our ability, and that of our suppliers, business partners and contract manufacturers, to make, move and sell products is critical to our success. Damage or disruption to our or their manufacturing or distribution capabilities due to weather, including any potential effects of climate change, natural disaster, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.

Changes in our effective tax rate may harm our results of operations.

A number of factors may increase our effective tax rate, which could reduce our net income, including:

the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits;
changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;
adjustments to income taxes upon finalization of tax returns;
increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill and intangible assets;
changes in available tax credits;
changes in tax laws or interpretation, including changes in the U.S. to the taxation of non-U.S. income and expenses;
changes in U.S. generally accepted accounting principles ("U.S. GAAP"); and
our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.

We are dependent on the availability and price of materials.
 
We require substantial amounts of materials, including application-specific integrated circuits, coil and bar stock, ferrous and copper alloy sheets, glass, LED displays, plastic molding materials, precious metals, and silicon die castings. The availability and prices of materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Any change in the availability of, or price for, these materials could materially adversely affect our results of operations and financial condition. 

Our gross margins are subject to fluctuations due to many factors.

A number of factors may impact our gross margins, including the following:

geographical and vertical market pricing mix;
changes in the mix of our prototyping and production-based business;
competitive pricing dynamics and customer mix;
pricing concessions; and
various manufacturing cost variables including product yields, package and assembly costs, provisions for excess and obsolete inventory and the absorption of manufacturing overhead.

Any significant decrease in our gross margins could adversely affect our business, financial condition and results of operations.


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

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. Since a significant portion of our operations are conducted at our international locations, a significant amount of cash and expected future cash flows are located outside of the U.S. As of April 29, 2017, approximately 99% of our cash and cash equivalents was held by our international subsidiaries. No provision has been made for income taxes on the undistributed net income of foreign operations, as we currently expect them to be indefinitely reinvested in our foreign operations. However, if we change our position and the cash is repatriated back to the U.S., it may create a tax liability which could have an adverse affect on our U.S. federal and state taxes and 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.
    
Weather conditions, natural disasters or other catastrophic events could cause significant disruptions in operations, including, specifically, disruptions at our manufacturing facilities or those of our major suppliers or customers. In turn, the quality, cost and volumes of the products we produce and sell could be unexpectedly, negatively affected, which will impact our sales and profitability.
    
War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on us, our suppliers, logistics providers, manufacturing partners and customers. Our business operations could be subject to interruption by power shortages, terrorist attacks and other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our products or make it difficult or impossible for us to produce and deliver products to our customers, or to receive components from our suppliers, thereby creating delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be negatively affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, and disruptions in the operations of our manufacturing partners and component suppliers. The majority of our research and development activities, our corporate headquarters, information technology systems, and other critical business operations, including certain component suppliers and manufacturing partners, are in locations that could be affected by natural disasters. In the event of a natural disaster, losses could be incurred and significant recovery time could be required to resume operations and our financial condition and operating results could be materially adversely affected. While we may purchase insurance policies to cover the direct economic impact experienced following a natural disaster occurring at one of our own facilities, there can be no assurance that such insurance policies will cover the full extent of our financial loss nor will they cover losses which are not economic in nature such as, for example, our reputation as a reliable supplier.

We may be unable to keep pace with rapid technological changes, which could adversely affect our business.
 
The technologies relating to some of our products have undergone, and are continuing to undergo, rapid and significant changes. Specifically, end-markets for electronic components and assemblies are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards.  These changes could render our existing products unmarketable before we can recover any or all of our research, development and other expenses. Furthermore, the life cycles of our products vary, may change and are difficult to estimate. If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and operating results could be materially adversely affected.

Our information technology (“IT”) systems could be breached.

We face certain security threats relating to the confidentiality and integrity of our IT systems. Despite implementation of security measures, our IT systems may be vulnerable to damage from computer viruses, cyber attacks and other unauthorized access, and these security breaches could result in a disruption to our operations. A material network breach of our IT systems could involve the theft of our and our customers' intellectual property or trade secrets which may be used by competitors to develop competing products. To the extent that any security breach results in a loss or damage to data, or inappropriate disclosure of confidential or proprietary information, it could cause significant damage to our reputation, affect our customer relations, lead to claims against us, increase our costs to protect against future damage and could result in a material adverse effect on our business and financial position.


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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.
 
Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to a variety of factors, including design or manufacturing errors, component failure or counterfeit parts. Product defects may result in delayed shipments and reduced demand for our products. We may be subject to increased costs due to warranty claims on defective products. Product defects may result in product liability claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death. We may be required to participate in a recall involving products that are, or are alleged to be, defective. We carry insurance for certain legal matters involving product liability, however, we do not have coverage for all costs related to product defects or recalls and the costs of such claims, including costs of defense and settlement, may exceed our available coverage.

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.
 
The markets in which we operate are highly competitive and characterized by rapid changes due to technological improvements and developments.  We compete with a large number of other manufacturers in each of our product areas; many of these competitors have greater resources and sales.  Price, service and product performance are significant elements of competition in the sale of our products.  Competition may intensify further if more companies enter the markets in which we operate. Our failure to compete effectively could materially adversely affect our business, financial condition and operating results.

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 have numerous United States and foreign patents and license agreements covering certain of our products and manufacturing processes.  Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology. Although we have been awarded, have filed applications for, or have been licensed under numerous patents in the United States and other countries, there can be no assurance concerning the degree of protection afforded by these patents or the likelihood that pending patents will be issued.  The loss of certain patents and trade secrets could adversely affect our sales, margins or profitability.
 
We have and may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringe on their intellectual property. These claims and any resulting lawsuit could subject us to liability for damages and invalidate our intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be required to cease marketing or selling certain products, pay a penalty for past infringement and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. We may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect us even if we are successful in the litigation.

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 have completed acquisitions and divestitures in the past and we may continue to seek acquisitions to grow our businesses. We may also divest operations to focus on our core businesses. We may fail to derive significant benefits from such transactions. Also, if we fail to achieve sufficient financial performance from an acquisition, certain long-lived assets, such as property, plant and equipment and intangible assets, could become impaired and result in the recognition of an impairment loss.

The success of our acquisitions depends on our ability to:

successfully execute the integration or consolidation of the acquired operations into our existing businesses;
develop or modify the financial reporting and information systems of the acquired entity to ensure overall financial integrity and adequacy of internal control procedures;
finance the acquisition;
identify and take advantage of cost reduction opportunities; and
further penetrate new and existing markets with the product capabilities we may acquire.

8


Integration of acquisitions may take longer than we expect and may never be achieved to the extent originally anticipated. Acquisitions may also increase our debt levels. This could result in lower than expected business growth or higher than anticipated costs. In addition, acquisitions or strategic divestitures may:

cause a disruption in our ongoing business;
cause dilution of our stock;
distract our managers; or
unduly burden other resources in our company.

We may be required to recognize additional impairment charges.

Pursuant to U.S. GAAP, we are required to make periodic assessments of goodwill, intangible assets and other long-lived assets to determine if they are impaired. We incurred impairment charges to write-off goodwill and intangible assets of $11.1 million in fiscal 2015. Disruptions to our business, end-market conditions, protracted economic weakness, unexpected significant declines in the operating results of reporting units, divestitures and enterprise value declines may result in impairment charges to goodwill and other asset impairments. Future impairment charges could substantially affect our reported results in these periods.

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.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve the transparency and accountability of the use by public companies in their products of minerals mined in certain countries and to prevent the sourcing of such “conflict” minerals. As a result, the SEC enacted annual disclosure and reporting requirements for public companies that use these minerals in their products, which apply to us. Under the rules, we are required to conduct due diligence to determine the source of any conflict minerals used in our products and to make annual disclosures which began in May 2014. Because our supply chain is broad-based and complex, we may not be able to easily verify the origins for all minerals used in our products. In addition, the rules may reduce the number of suppliers who provide components and products containing conflict-free minerals and thus may increase the cost of the components used in manufacturing our products and the costs of our products to us. Any increased costs and expenses may have a material adverse impact on our financial condition and results of operations. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which may place us at a competitive disadvantage, and our reputation may be harmed.

Item 1B. Unresolved Staff Comments

None


9


Item 2.  Properties
 
We operate the following manufacturing and other facilities, all of which we believe to be in good condition and adequate to meet our current and reasonably anticipated needs:  
Location
 
Use
 
Owned/
Leased
 
Approximate
Square Footage
Corporate:
 
 
 
 
 
 

Chicago, Illinois
 
Corporate Headquarters
 
Owned
 
15,000

 
 
 
 
 
 
 

Automotive Segment:
 
 
 
 
 
 

Monterrey, Mexico
 
Manufacturing
 
Leased
 
241,000

Mriehel, Malta
 
Manufacturing
 
Leased
 
226,090

Carthage, Illinois
 
Manufacturing
 
Owned
 
134,889

Cairo, Egypt
 
Manufacturing
 
Leased
 
120,954

Shanghai, China
 
Manufacturing
 
Leased
 
94,643

McAllen, Texas
 
Warehousing
 
Leased
 
65,303

Southfield, Michigan
 
Sales and Engineering Design Center
 
Owned
 
64,000

Zhenjiang, China
 
Manufacturing
 
Leased
 
23,560

Bangalore, India
 
Engineering Design Center
 
Leased
 
14,465

Beirut, Lebanon
 
Engineering Design Center
 
Leased
 
5,112

Gau-Algesheim, Germany
 
Sales and Engineering Design Center
 
Leased
 
4,047

London, UK
 
Sales and Administrative
 
Leased
 
1,629

 
 
 
 
 
 
 

Interface Segment:
 
 
 
 
 
 

Chicago, Illinois
 
Manufacturing
 
Owned
 
55,000

Monterrey, Mexico
 
Manufacturing
 
Leased
 
45,657

Mriehel, Malta
 
Manufacturing
 
Leased
 
32,500

Oklahoma City, Oklahoma
 
Manufacturing/Design Center
 
Leased
 
26,132

Wheaton, Illinois
 
Manufacturing
 
Leased
 
22,500

Shanghai, China
 
Manufacturing
 
Leased
 
9,000

Milan, Italy
 
Sales and Design
 
Leased
 
8,600

Harkingen, Switzerland
 
Sales and Engineering Design Center
 
Leased
 
4,166

Hong Kong
 
Sales and Administrative
 
Leased
 
1,885

Singapore
 
Sales and Administrative
 
Leased
 
1,250

Taiwan
 
Sales and Administrative
 
Leased
 
581

 
 
 
 
 
 
 
Power Products Segment:
 
 
 
 
 
 

Shanghai, China
 
Manufacturing
 
Leased
 
54,643

Rolling Meadows, Illinois
 
Manufacturing
 
Owned
 
52,000

Mriehel, Malta
 
Manufacturing
 
Leased
 
40,700

San Jose, California
 
Prototype and Design Center
 
Leased
 
2,925

 
 
 
 
 
 
 

Other Segment:
 
 
 
 
 
 

Chicago, Illinois
 
Manufacturing
 
Owned
 
48,000



10


Item 3.  Legal Proceedings
 
As of April 29, 2017, we were not involved in any material legal proceedings or any legal proceedings or material administrative proceedings with governmental authorities pertaining to the discharge of materials into the environment or otherwise.

Item 4.  Mine Safety Disclosures

Not Applicable

Executive Officers of the Registrant
 
Name
 
Age
 
Offices and Positions Held and Length of Service as Officer
Donald W. Duda
 
61

 
Chief Executive Officer since 2004 and President and Director since 2001.
 
 
 
 
 
John R. Hrudicka
 
53

 
Chief Financial Officer of the Company since 2016; prior thereto, served as Titan International, Inc. Chief Financial Officer from 2014 to 2016. Prior to that time, Chief Financial Officer at Elkay Manufacturing from 2006 to 2014.
 
 
 
 
 
Timothy R. Glandon
 
53

 
Vice President since 2006; General Manager, North American Automotive, from 2006 to 2015.
 
 
 
 
 
Joseph E. Khoury
 
53

 
Senior Vice President since 2015; prior thereto, Vice President and General Manager, European Operations since 2004.
 
 
 
 
 
Theodore P. Kill
 
66

 
President of Dabir Surfaces since September 2016 and Vice President, Worldwide Automotive Sales since 2006.

All executive officers are elected by the Board of Directors and serve a term of one year or until their successors are duly elected and qualified.

PART II 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is traded on the New York Stock Exchange. The following is a tabulation of high and low sales prices for the periods presented and cash dividends declared per share. 
 
 
 
 
 
Dividends
Declared
Per Share
 
 
 
 
High
 
Low
 
Fiscal Year ended April 29, 2017
 

 
 

 
 

First Quarter
$
35.91

 
$
27.13

 
$
0.09

Second Quarter
37.11

 
29.85

 
0.09

Third Quarter
44.05

 
30.25

 
0.09

Fourth Quarter
46.40

 
40.75

 
0.09

 
 
 
 
 
 
Fiscal Year ended April 30, 2016
 

 
 

 
 

First Quarter
$
49.00

 
$
25.01

 
$
0.09

Second Quarter
34.18

 
22.72

 
0.09

Third Quarter
37.25

 
23.83

 
0.09

Fourth Quarter
31.57

 
24.38

 
0.09

 
On June 15, 2017, the Board of Directors declared a dividend of $0.09 per share of common stock, payable on July 28, 2017, to holders of record on July 14, 2017. As of June 20, 2017, the number of record holders of our common stock was 434.

11


Item 6.  Selected Financial Data
 
The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and related notes included elsewhere in this report.  The Consolidated Statements of Income data for fiscal 2017, fiscal 2016 and fiscal 2015, and the Consolidated Balance Sheets data as of April 29, 2017 and April 30, 2016, are derived from, and are qualified by reference to, the Company’s audited consolidated financial statements included elsewhere in this report.  The Consolidated Statements of Income data for fiscal 2014 and fiscal 2013, and the Consolidated Balance Sheets data as of May 2, 2015, May 3, 2014 and April 27, 2013 are derived from audited consolidated financial statements not included in this report.
 
 
Fiscal Year Ended
(In Millions, Except Percentages and Per Share Amounts)
April 29, 2017 (1)
 
April 30, 2016 (2)
 
May 2, 2015 (3)
 
May 3, 2014 (53 weeks) (4)
 
April 27, 2013 (5)
Income Statement Data:
 

 
 

 
 

 
 

 
 

Net sales
$
816.5

 
$
809.1

 
$
881.1

 
$
772.8

 
$
519.8

Income before income taxes
115.9

 
110.9

 
120.8

 
75.9

 
37.9

Income tax expense/(benefit)
23.0

 
26.3

 
19.8

 
(20.3
)
 
(2.5
)
Net income attributable to Methode Electronics, Inc.
92.9

 
84.6

 
101.1

 
96.1

 
40.7

 
 
 
 
 
 
 
 
 
 
Per Common Share:
 

 
 

 
 

 
 

 
 

Basic net income
2.49

 
2.21

 
2.61

 
2.53

 
1.09

Diluted net income
2.48

 
2.20

 
2.58

 
2.51

 
1.08

Dividends
0.36

 
0.36

 
0.36

 
0.30

 
0.28

Book Value
14.53

 
12.61

 
11.82

 
10.21

 
7.71

 
 
 
 
 
 
 
 
 
 
Long-term Debt
27.0

 
57.0

 
5.0

 
48.0

 
43.5

Retained Earnings
427.0

 
358.6

 
356.5

 
269.2

 
184.4

Fixed Assets, Net
90.6

 
93.0

 
93.3

 
101.2

 
98.4

Total Assets
704.0

 
655.9

 
604.1

 
575.5

 
434.9

 
 
 
 
 
 
 
 
 
 
Return on Average Equity
18.6
%
 
18.2
%
 
23.5
%
 
28.2
%
 
15.0
%
Pre-tax Income as a Percentage of Sales
14.2
%
 
13.7
%
 
13.7
%
 
9.8
%
 
7.3
%
Net Income as a Percentage of Sales
11.4
%
 
10.5
%
 
11.3
%
 
12.4
%
 
7.8
%

(1) Fiscal 2017 includes $11.0 million of pre-tax legal expense relating to the Hetronic litigation. See Note 9 to our consolidated financial statements for more information. Fiscal 2017 also includes pre-tax exit costs for two reporting units of $2.3 million, pre-tax acquisition expenses of $1.5 million, primarily related to a potential acquisition we elected not to undertake, and income of $4.5 million for an international government grant for maintaining certain employment levels during the period. The results for fiscal 2017 include a tax benefit of $4.0 million for foreign investment tax credits, partially offset by a tax expense of $1.7 million on a dividend between foreign entities.
(2) Fiscal 2016 includes $9.9 million of pre-tax legal expense relating to the Hetronic litigation.
(3) Fiscal 2015 includes a $5.0 million tax benefit related to the release of a valuation allowance against deferred tax assets in Malta. Fiscal 2015 also includes a goodwill pre-tax impairment charge of $11.1 million, a pre-tax gain on the sale of a business of $7.7 million and $3.1 million of pre-tax legal expense relating to the Hetronic litigation.
(4) Fiscal 2014 includes a $31.7 million tax benefit related to the release of a valuation allowance against deferred tax assets in the U.S. Fiscal 2014 also includes an intangible asset pre-tax impairment charge of $1.7 million and a pre-tax gain on the sale of one of the Company's investments of $3.2 million.
(5) Fiscal 2013 includes $20.0 million of pre-tax income from the Delphi legal settlement. Fiscal 2013 also includes a pre-tax charge of $4.3 million related to the impairment of goodwill for our Eetrex reporting unit.



12


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 locations 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 and sensing 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.”
 
Our components are found in the primary end-markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), medical device, rail and other transportation industries.
 
Plan to Repurchase Common Stock

In September 2015, the Board of Directors authorized the repurchase of up to $100.0 million of the Company's outstanding common stock through September 1, 2017. The Company purchased 280,168 shares of outstanding common stock for $9.8 million in fiscal 2017 and 1,997,298 shares for $62.3 million in fiscal 2016. In total, the Company has purchased 2,277,466 shares of outstanding common stock for $72.1 million under the plan. The program may be suspended or terminated at any time.

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 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, and an affiliated company has filed a suit in front of the European Union Intellectual Property Office seeking to invalidate the company’s NOVA trademark in the EU. 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 April 29, 2017, the matter remains in the discovery stage.

We incurred legal fees of $11.0 million, $9.9 million and $3.1 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, related to the lawsuits. These amounts are included in the selling and administrative expenses in the Interface segment.

13


Results of Operations
 
Results of Operations for the Fiscal Year Ended April 29, 2017, as Compared to the Fiscal Year Ended April 30, 2016.
 
Consolidated Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 29,
2017
 
April 30,
2016
 
Net Change ($)
 
Net Change (%)
 
Net sales
$
816.5

 
$
809.1

 
$
7.4

 
0.9
 %
 
 
 
 
 
 
 
 
 
 
Cost of products sold
598.2

 
596.2

 
2.0

 
0.3
 %
 
 
 
 
 
 
 
 
 
 
Gross profit
218.3

 
212.9

 
5.4

 
2.5
 %
 
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
105.2

 
100.8

 
4.4

 
4.4
 %
 
Amortization of intangibles
2.3

 
2.4

 
(0.1
)
 
(4.2
)%
 
Interest income, net
(0.4
)
 
(0.7
)
 
0.3

 
N/M

*
Other income, net
(4.7
)
 
(0.5
)
 
(4.2
)
 
N/M

*
Income tax expense
23.0

 
26.3

 
(3.3
)
 
(12.5
)%
 
Net income attributable to Methode Electronics, Inc.
$
92.9

 
$
84.6


$
8.3

 
9.8
 %
 
 
 
 
 
 
 
 
 
 
Percent of sales:
April 29,
2017
 
April 30,
2016
 
 
 
 
 
Net sales
100.0
 %
 
100.0
 %
 
 
 
 
 
Cost of products sold
73.3
 %
 
73.7
 %
 
 
 
 
 
Gross margins
26.7
 %
 
26.3
 %
 
 
 
 
 
Selling and administrative expenses
12.9
 %
 
12.5
 %
 
 
 
 
 
Amortization of intangibles
0.3
 %
 
0.3
 %
 
 
 
 
 
Interest income, net
 %
 
(0.1
)%
 
 
 
 
 
Other income, net
(0.6
)%
 
(0.1
)%
 
 
 
 
 
Income tax expense
2.8
 %
 
3.3
 %
 
 
 
 
 
Net income attributable to Methode Electronics, Inc.
11.4
 %
 
10.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*N/M equals non meaningful
 
 
 
 
 
 
 
 
 
Net Sales.  Consolidated net sales increased $7.4 million, or 0.9%, to $816.5 million for the fiscal year ended April 29, 2017, from $809.1 million for the fiscal year ended April 30, 2016.  The Automotive segment's net sales increased $17.9 million, or 2.9%, to $632.2 million for fiscal 2017, from $614.3 million for fiscal 2016.  The Interface segment's net sales decreased $13.4 million, or 9.5%, to $127.4 million for fiscal 2017, compared to $140.8 million for fiscal 2016. The Power Products segment's net sales increased $2.8 million, or 5.2%, to $56.3 million for fiscal 2017, compared to $53.5 million for fiscal 2016. Translation of foreign operations' net sales for fiscal 2017 decreased net sales by $5.5 million, or 0.7%, compared to the average currency rates in fiscal 2016, primarily due to the strengthening of the U.S. dollar compared to the Chinese yuan and the euro.
 
Cost of Products Sold.  Consolidated cost of products sold increased $2.0 million, or 0.3%, to $598.2 million for the fiscal year ended April 29, 2017, compared to $596.2 million for the fiscal year ended April 30, 2016.  Consolidated cost of products sold as a percentage of net sales decreased to 73.3% for fiscal 2017, compared to 73.7% for 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

14


commodity pricing adjustments of $1.0 million and $1.0 million for the reversal of accruals related to customer commercial issues resolved in fiscal 2017. The fiscal 2017 cost of goods sold was negatively impacted by $2.2 million due to exit costs for our Connectivity and Active Energy Solutions reporting units. Both businesses were shuttered due to market conditions. The Power Products segment experienced favorable change in cost of goods sold as a percentage of sales, primarily due to implemented overhead cost reductions in the U.S. and China. In fiscal 2016, the Interface segment experienced additional costs of $1.0 million, as well as inefficiencies, related to the move of the radio remote control operation from the Philippines to Egypt.
 
Gross Profit.  Consolidated gross profit increased $5.4 million, or 2.5%, to $218.3 million for the fiscal year ended April 29, 2017, as compared to $212.9 million for the fiscal year ended April 30, 2016.  Gross margins as a percentage of net sales increased to 26.7% for the fiscal year ended April 29, 2017, compared to 26.3% for the fiscal year ended April 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 in 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. 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. The fiscal 2017 gross margins were negatively impacted by exit costs related to the closure of our Connectivity and Active Energy Solutions reporting units. In fiscal 2016, the Interface segment experienced additional costs of $1.0 million, as well as inefficiencies, related to the move of the radio remote control operation from the Philippines to Egypt.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $4.4 million, or 4.4%, to $105.2 million for the fiscal year ended April 29, 2017, compared to $100.8 million for the fiscal year ended April 30, 2016.  Selling and administrative expenses as a percentage of net sales increased to 12.9% for the fiscal year ended April 29, 2017, from 12.5% for the fiscal year ended April 30, 2016. In fiscal 2017, expenses increased for stock award amortization expenses by $5.0 million, legal and other professional fees by $1.6 million and fees related to acquisition activity, primarily for a potential acquisition we elected not to undertake, by $1.5 million, partially offset by selling and fringe related expenses of $2.3 million and lower travel expenses of $1.5 million.
 
Interest Income, Net.  Interest income, net decreased $0.3 million, to $0.4 million for the fiscal year ended April 29, 2017, compared to $0.7 million for the fiscal year ended April 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 $4.2 million to $4.7 million for the fiscal year ended April 29, 2017, compared to $0.5 million for the fiscal year ended April 30, 2016. Fiscal 2017 includes $4.5 million for an international government grant for maintaining certain employment levels during the period. All other amounts for both fiscal 2017 and 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 $3.3 million, or 12.5%, to $23.0 million for the fiscal year ended April 29, 2017, compared to $26.3 million for the fiscal year ended April 30, 2016.  The Company's effective tax rate decreased to 19.9% in fiscal 2017, compared to 23.8% in fiscal 2016. The results for fiscal 2017 include a tax benefit of $4.0 million for foreign investment tax credits, partially offset by a tax expense of $1.7 million on a dividend between foreign entities
 
Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. increased $8.3 million, or 9.8%, to $92.9 million for the fiscal year ended April 29, 2017, compared to $84.6 million for the fiscal year ended April 30, 2016, primarily due to higher sales volumes, 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 expenses and lower tax expenses. Net income was unfavorably impacted by higher stock award amortization expense, exit costs, increased legal, acquisitions related expenses and professional fees.


15


Operating Segments
Automotive Segment Results
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 29,
2017
 
April 30,
2016
 
Net Change ($)
 
Net Change (%)
Net sales
$
632.2

 
$
614.3

 
$
17.9

 
2.9
%
 
 
 
 
 
 
 
 
Cost of products sold
449.4

 
443.6

 
5.8

 
1.3
%
 
 
 
 
 
 
 
 
Gross profit
182.8

 
170.7

 
12.1

 
7.1
%
 
 
 
 
 
 
 
 
Selling and administrative expenses
34.5

 
33.9

 
0.6

 
1.8
%
Income from operations
$
148.3

 
$
136.8

 
$
11.5

 
8.4
%
 
 
 
 
 
 
 
 
Percent of sales:
April 29,
2017
 
April 30,
2016
 
 
 
 
Net sales
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
71.1
%
 
72.2
%
 
 
 
 
Gross margins
28.9
%
 
27.8
%
 
 
 
 
Selling and administrative expenses
5.5
%
 
5.5
%
 
 
 
 
Income from operations
23.5
%
 
22.3
%
 
 
 
 

Net Sales.  Automotive segment net sales increased $17.9 million, or 2.9%, to $632.2 million for the fiscal year ended April 29, 2017, from $614.3 million for the fiscal year ended April 30, 2016.  Net sales increased in North America by $28.5 million, or 8.4%, to $369.4 million for fiscal 2017, compared to $340.9 million for fiscal 2016. Sales volumes increased for our GM Center Console program (with the launch of new platforms in the fourth quarter of fiscal 2016), user interface assemblies, and for transmission lead-frame assemblies. Sales volumes decreased $2.3 million for the Ford Center Console program. North American sales were negatively impacted by pricing concessions on certain products. Net sales decreased in Europe by $7.8 million, or 4.9%, to $151.9 million in fiscal 2017, compared to $159.7 million in fiscal 2016, primarily due to lower sales volumes of ignition switch products and decreased sales of customer funded tooling and design and development services. Europe experienced higher sales volumes of certain Integrated Center Panels and steering wheel switch products. Net sales in Asia decreased $2.8 million, or 2.5%, to $110.9 million in fiscal 2017, compared to $113.7 million in fiscal 2016. The Asian sales were negatively impacted by $3.7 million due to the strengthening of the U.S dollar as compared to the Chinese yuan. Sales volumes increased for linear position sensor products and transmission lead-frame assemblies, partially offset by lower sales volumes of steering-angle sensor products. Translation of foreign operations' total Automotive net sales for the fiscal year ended April 29, 2017 decreased by $5.5 million, or 0.9%, in fiscal 2017, compared to the average currency rates in fiscal 2016, primarily due to the strengthening of the U.S. dollar compared to the euro and the Chinese yuan.

Cost of Products Sold.  Automotive segment cost of products sold increased $5.8 million, or 1.3%, to $449.4 million for the fiscal year ended April 29, 2017, from $443.6 million for the fiscal year ended April 30, 2016.  The Automotive segment cost of products sold as a percentage of net sales decreased to 71.1% in fiscal 2017, compared to 72.2% in fiscal 2016.  The results for fiscal 2017 include $1.0 million of commodity pricing adjustments and the reversal of accruals of $1.0 million related to resolved customer commercial issues. In addition, the decrease is due to favorable commodity pricing of raw materials and the favorable currency impact on both the purchase of certain raw materials and labor costs, primarily in Mexico and China. Fiscal 2016 was favorably impacted by $1.3 million due to a refund of import duties from prior periods.
 
Gross Profit.  Automotive segment gross profit increased $12.1 million, or 7.1%, to $182.8 million for the fiscal year ended April 29, 2017, as compared to $170.7 million for the fiscal year ended April 30, 2016.  The Automotive segment gross margins as a percentage of net sales increased to 28.9% for the fiscal year ended April 29, 2017, as compared to 27.8% for the fiscal year ended April 30, 2016.  The gross profit for fiscal 2017 was favorably impacted by $1.0 million for commodity pricing adjustments and the reversal of accruals of $1.0 million related to resolved customer commercial issues. In addition, gross profit was favorably impacted due to favorable commodity pricing of raw materials and the favorable currency impact on both the purchase of certain raw materials and labor costs, primarily in Mexico and China. Fiscal 2016 was favorably impacted by $1.3 million due to a refund of import duties from prior periods.

16


Selling and Administrative Expenses.  Selling and administrative expenses increased $0.6 million, or 1.8%, to $34.5 million for the fiscal year ended April 29, 2017, compared to $33.9 million for the fiscal year ended April 30, 2016.  Selling and administrative expenses as a percentage of net sales remained constant at 5.5% for the fiscal year ended April 29, 2017, compared to the fiscal year ended April 30, 2016. The increase in expenses in fiscal 2017 is primarily due to higher stock award amortization expense, partially offset with lower bonus, commission and travel expenses.
    
Income from Operations.  Automotive segment income from operations increased $11.5 million, or 8.4%, to $148.3 million for the fiscal year ended April 29, 2017, compared to $136.8 million for the fiscal year ended April 30, 2016. Income from operations increased in fiscal 2017 due to increased sales volumes, commodity pricing adjustments and a one-time reversal of accruals related to 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 and lower bonus and travel expenses. Income from operations was negatively impacted in fiscal 2017 due to higher stock award amortization expenses.

Interface Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 29,
2017
 
April 30,
2016
 
Net Change ($)
 
Net Change (%)
Net sales
$
127.4

 
$
140.8

 
$
(13.4
)
 
(9.5
)%
 
 
 
 
 
 
 
 
Cost of products sold
100.8

 
107.9

 
(7.1
)
 
(6.6
)%
 
 
 
 
 
 
 
 
Gross profit
26.6

 
32.9

 
(6.3
)
 
(19.1
)%
 
 
 
 
 
 
 
 
Selling and administrative expenses
27.5

 
30.2

 
(2.7
)
 
(8.9
)%
Income/(loss) from operations
$
(0.9
)
 
$
2.7

 
$
(3.6
)
 
(133.3
)%
 
 
 
 
 
 
 
 
Percent of sales:
April 29,
2017
 
April 30,
2016
 
 
 
 
Net sales
100.0
 %
 
100.0
%
 
 
 
 
Cost of products sold
79.1
 %
 
76.6
%
 
 
 
 
Gross margins
20.9
 %
 
23.4
%
 
 
 
 
Selling and administrative expenses
21.6
 %
 
21.4
%
 
 
 
 
Income/(loss) from operations
(0.7
)%
 
1.9
%
 
 
 
 
 
Net Sales.  Interface segment net sales decreased $13.4 million, or 9.5%, to $127.4 million for the fiscal year ended April 29, 2017, from $140.8 million for the fiscal year ended April 30, 2016.  Net sales decreased in North America by $12.8 million, or 11.5%, to $98.1 million in fiscal 2017, compared to $110.9 million in fiscal 2016, primarily due to lower sales volumes of data solutions and appliance products. In addition, North American sales are down due to pricing concessions for certain data solutions products. Net sales in Europe decreased $0.5 million, or 1.9%, to $25.8 million in fiscal 2017, compared to $26.3 million in fiscal 2016, primarily due to lower sales volumes of our data solutions products. Net sales in Asia decreased $0.1 million, or 2.8%, to $3.5 million in fiscal 2017, compared to $3.6 million in fiscal 2016, primarily due to slightly lower sales volumes of legacy products.
 
Cost of Products Sold.  Interface segment cost of products sold decreased $7.1 million, or 6.6%, to $100.8 million for the fiscal year ended April 29, 2017, compared to $107.9 million for the fiscal year ended April 30, 2016.  Interface segment cost of products sold as a percentage of net sales increased to 79.1% for the fiscal year ended April 29, 2017, compared to 76.6% for the fiscal year ended April 30, 2016.  The increase is primarily due to lower sales volumes, specifically data solutions products. Cost of products sold for fiscal 2017 includes exit costs of $1.1 million for our Connectivity reporting unit. The business was shuttered at the end of fiscal 2017 due to market conditions. The fiscal 2017 cost of goods sold was favorably impacted due to favorable commodity pricing of raw materials and a favorable currency impact on both the purchase of certain raw materials and labor costs, primarily in Mexico. Fiscal 2016 was unfavorably impacted due to additional costs and inefficiencies experienced related to the move of the radio remote control operation from the Philippines to Egypt. The

17


Company experienced moving costs, severance and redundant staffing of $1.0 million in addition to the manufacturing inefficiencies.

Gross Profit.  Interface segment gross profit decreased $6.3 million, or 19.1%, to $26.6 million for the fiscal year ended April 29, 2017, compared to $32.9 million for the fiscal year ended April 30, 2016.  Gross margins as a percentage of net sales decreased to 20.9% for the fiscal year ended April 29, 2017, from 23.4% for the fiscal year ended April 30, 2016.  The decrease is primarily due to lower sales volumes, specifically data solutions products. Gross profit was also negatively impacted by $1.1 million of exit costs. Gross profit was favorably impacted due to commodity pricing of raw materials and a favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations, primarily in Mexico. Fiscal 2016 was unfavorably impacted due to moving costs, severance and redundant staffing related to the move from the Philippines to Egypt.
 
Selling and Administrative Expenses.  Selling and administrative expenses decreased $2.7 million, or 8.9%, to $27.5 million for the fiscal year ended April 29, 2017, compared to $30.2 million for the fiscal year ended April 30, 2016.  Selling and administrative expenses as a percentage of net sales increased to 21.6% for the fiscal year ended April 29, 2017, from 21.4% for the fiscal year ended April 30, 2016. The decrease in selling and administrative expenses is primarily due to lower compensation, travel and advertising expenses, partially offset by increased legal fees and stock award amortization expenses.
 
Income/(loss) from Operations.  Interface segment income/(loss) from operations decreased $3.6 million, or 133.3%, to a loss of $0.9 million for the fiscal year ended April 29, 2017, compared to income of $2.7 million for the fiscal year ended April 30, 2016, primarily due to lower sales volumes, exit costs, higher legal fees and higher stock award amortization expense, partially offset with favorable commodity pricing of raw materials and the currency impact of labor related expenses, lower compensation related expenses, lower travel expenses and lower advertising expenses.

Power Products Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 29,
2017
 
April 30,
2016
 
Net Change ($)
 
Net Change (%)
Net sales
$
56.3

 
$
53.5

 
$
2.8

 
5.2
%
 
 
 
 
 
 
 
 
Cost of products sold
41.2

 
40.5

 
0.7

 
1.7
%
 
 
 
 
 
 
 
 
Gross profit
15.1

 
13.0

 
2.1

 
16.2
%
 
 
 
 
 
 
 
 
Selling and administrative expenses
3.6

 
3.6

 

 
%
Income from operations
$
11.5

 
$
9.4

 
$
2.1

 
22.3
%
 
 
 
 
 
 
 
 
Percent of sales:
April 29,
2017
 
April 30,
2016
 
 
 
 
Net sales
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
73.2
%
 
75.7
%
 
 
 
 
Gross margins
26.8
%
 
24.3
%
 
 
 
 
Selling and administrative expenses
6.4
%
 
6.7
%
 
 
 
 
Income from operations
20.4
%
 
17.6
%
 
 
 
 
 
Net Sales.  Power Products segment net sales increased $2.8 million, or 5.2%, to $56.3 million for the fiscal year ended April 29, 2017, compared to $53.5 million for the fiscal year ended April 30, 2016.  Net sales decreased in North America by $3.2 million, or 11.9%, to $23.6 million in fiscal 2017, compared to $26.8 million in fiscal 2016, primarily due to lower sales volumes of busbar products. Net sales in Europe decreased $0.4 million, or 5.3%, to $7.1 million in fiscal 2017, compared to $7.5 million in fiscal 2016, primarily due to lower sales of bypass switches, partially offset by higher sales volumes of busbar products. Net sales in Asia increased $6.4 million, or 33.3%, to $25.6 million in fiscal 2017, compared to $19.2 million in fiscal 2016, due to higher sales volumes of PowerRail® and other busbar products.
 
Cost of Products Sold.  Power Products segment cost of products sold increased $0.7 million, or 1.7%, to $41.2 million for the fiscal year ended April 29, 2017, compared to $40.5 million for the fiscal year ended April 30, 2016.  The Power

18


Products segment cost of products sold as a percentage of net sales decreased to 73.2% for the fiscal year ended April 29, 2017, from 75.7% for the fiscal year ended April 30, 2016.  The decrease primarily relates to higher sales volumes, favorable commodity pricing and implemented overhead cost reductions in the U.S. and China. In addition, our China operation experienced a favorable currency impact for both material and labor expenses due to the weakening Chinese yuan.
 
Gross Profit.  Power Products segment gross profit increased $2.1 million, or 16.2%, to $15.1 million in fiscal 2017, compared to $13.0 million in fiscal 2016.  Gross margins as a percentage of net sales increased to 26.8% for the fiscal year ended April 29, 2017 from 24.3% for the fiscal year ended April 30, 2016. The increase primarily relates to higher sales volumes, favorable commodity pricing and implemented overhead cost reductions in the U.S. and China. In addition, our China operation experienced a favorable currency impact for both material and labor expenses due to the weakening Chinese yuan.

Selling and Administrative Expenses.  Selling and administrative expenses remained constant at $3.6 million for both the fiscal year ended April 29, 2017 and the fiscal year ended April 30, 2016. Selling and administrative expenses as a percentage of net sales decreased to 6.4% for the fiscal year ended April 29, 2017, from 6.7% for the fiscal year ended April 30, 2016, primarily due to higher sales volumes.
 
Income From Operations.  Power Products segment income from operations increased $2.1 million, or 22.3%, to $11.5 million for the fiscal year ended April 29, 2017, compared to $9.4 million for the fiscal year ended April 30, 2016, due to increased sales volumes, overhead cost reductions and the favorable currency impact on material purchases.
 
Other Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 29,
2017
 
April 30,
2016
 
Net Change ($)
 
Net Change (%)
 
Net sales
$
0.3

 
$
0.3

 
$

 
%
 
 
 
 
 
 
 
 
 
 
Cost of products sold
6.5

 
4.3

 
2.2

 
51.2
%
 
 
 
 
 
 
 
 
 
 
Gross profit
(6.2
)
 
(4.0
)
 
(2.2
)
 
55.0
%
 
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
6.2

 
4.8

 
1.4

 
29.2
%
 
 
 
 
 
 
 
 
 
 
Loss from operations
$
(12.4
)
 
$
(8.8
)
 
$
(3.6
)
 
N/M

*
 
 
 
 
 
 
 
 
 
*N/M equals non meaningful
 
 
 
 
 
 
 
 
 
Net Sales.  The reporting units in this segment (including medical devices, inverters and battery systems) had minimal net sales in fiscal 2017 and fiscal 2016 due to the products being newly launched.
 
Cost of Products Sold.  Other segment cost of products sold was $6.5 million for the fiscal year ended April 29, 2017, compared to $4.3 million for the fiscal year ended April 30, 2016. Cost of products sold for fiscal 2017 includes exit costs of $1.2 million for our Active Energy Solutions (inverters and battery systems) reporting unit. The business was shuttered at the end of fiscal 2017 due to market conditions. In addition to the exit costs, the increase primarily relates to research and development initiatives for the medical device business.

Gross Profit.  The Other segment gross profit was a loss of $6.2 million and $4.0 million for the fiscal years ended April 29, 2017 and April 30, 2016, respectively. Gross profit was negatively impacted by $1.2 million of exit costs for our Active Energy Solutions reporting unit. In addition to the exit costs, the increased loss primarily relates to research and development initiatives for the medical device business.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $1.4 million, or 29.2%, to $6.2 million for the fiscal year ended April 29, 2017, compared to $4.8 million for the fiscal year ended April 30, 2016.  The increase primarily is due to higher outside professional fees and marketing expenses related to new product introductions for our medical device business.

19


Loss From Operations  The Other segment loss from operations increased $3.6 million to $12.4 million for the fiscal year ended April 29, 2017, compared to $8.8 million for the fiscal year ended April 30, 2016.  The increased loss relates to exit costs for our Active Energy Solutions reporting unit and higher outside professional fees, research and development costs and marketing expenses during fiscal 2017 for our medical device business.

Results of Operations for the Fiscal Year Ended April 30, 2016, as Compared to the Fiscal Year Ended May 2, 2015.
Consolidated Results
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 30,
2016
 
May 2,
2015
 
Net Change ($)
 
Net Change (%)
 
Net sales
$
809.1

 
$
881.1

 
$
(72.0
)
 
(8.2
)%
 
 
 
 
 
 
 
 
 
 
Cost of products sold
596.2

 
662.3

 
(66.1
)
 
(10.0
)%
 
 
 
 
 
 
 
 
 
 
Gross profit
212.9

 
218.8

 
(5.9
)
 
(2.7
)%
 
 
 
 
 
 
 
 
 
 
Impairment of goodwill and intangible assets

 
11.1

 
(11.1
)
 
N/M

*
Selling and administrative expenses
100.8

 
94.0

 
6.8

 
7.2
 %
 
Amortization of intangibles
2.4

 
1.5

 
0.9

 
60.0
 %
 
Gain from sale of business

 
(7.7
)
 
7.7

 
N/M

*
Interest income, net
(0.7
)
 
(0.7
)
 

 
 %
 
Other income, net
(0.5
)
 
(0.2
)
 
(0.3
)
 
N/M

*
Income tax expense
26.3

 
19.8

 
6.5

 
32.8
 %
 
Net income attributable to non controlling interest

 
(0.1
)
 
0.1

 
N/M

*
Net income attributable to Methode Electronics, Inc.
$
84.6

 
$
101.1

 
$
(16.5
)
 
(16.3
)%
 
 
 
 
 
 
 
 
 
 
Percent of sales:
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Net sales
100.0
 %
 
100.0
 %
 
 
 
 
 
Cost of products sold
73.7
 %
 
75.2
 %
 
 
 
 
 
Gross margins
26.3
 %
 
24.8
 %
 
 
 
 
 
Impairment of goodwill and intangible assets
 %
 
1.3
 %
 
 
 
 
 
Selling and administrative expenses
12.5
 %
 
10.7
 %
 
 
 
 
 
Amortization of intangibles
0.3
 %
 
0.2
 %
 
 
 
 
 
Gain from sale of business
 %
 
(0.9
)%
 
 
 
 
 
Interest income, net
(0.1
)%
 
(0.1
)%
 
 
 
 
 
Other income, net
(0.1
)%
 
 %
 
 
 
 
 
Income tax expense
3.3
 %
 
2.2
 %
 
 
 
 
 
Net income attributable to non controlling interest
 %
 
 %
 
 
 
 
 
Net income attributable to Methode Electronics, Inc.
10.5
 %
 
11.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*N/M equals non meaningful
 
 
 
 
 
 
 
 

     Net Sales.  Consolidated net sales decreased $72.0 million, or 8.2%, to $809.1 million for the fiscal year ended April 30, 2016, from $881.1 million for the fiscal year ended May 2, 2015.  The Automotive segment net sales decreased $14.1

20


million, or 2.2%, to $614.3 million for fiscal 2016, from $628.4 million for fiscal 2015, primarily due to lower sales volumes of the Ford Center Console program which substantially completed production at the end of fiscal 2015, unfavorable currency rate fluctuations and higher pricing concessions on certain products, partially offset by increased sales volumes for the GM Center Console program.   The Interface segment net sales decreased $20.9 million, or 12.9%, to $140.8 million for fiscal 2016, compared to $161.7 million for fiscal 2015, due to lower sales volumes of appliance and data solutions products, partially offset by increased sales volumes of radio remote control products.  The Power Products segment net sales decreased $32.2 million, or 37.6%, to $53.5 million for fiscal 2016, compared to $85.7 million for fiscal 2015, primarily due to lower sales volumes for PowerRail, cabling and busbar products. The Power Products net sales for fiscal 2016 include a gain on the sale of a building of $1.0 million and $1.5 million of customer contractual adjustments for minimum purchases. The Other segment had minimal sales for fiscal 2016 as the Company sold its Trace Laboratories operating units in the fourth quarter of fiscal 2015 and the remaining operating units in this segment, medical devices, inverters and battery systems, had minimal net sales for fiscal 2016 or fiscal 2015.  Translation of foreign operations net sales for the fiscal year ended April 30, 2016 decreased net sales by $10.5 million, or 1.3%, compared to the average currency rates for the fiscal year ended May 2, 2015, primarily due to the strengthening of the U.S. dollar, compared to the euro and Chinese yuan.
 
Cost of Products Sold.  Consolidated cost of products sold decreased $66.1 million, or 10.0%, to $596.2 million for the fiscal year ended April 30, 2016, compared to $662.3 million for the fiscal year ended May 2, 2015.  Consolidated cost of products sold as a percentage of net sales decreased to 73.7% for fiscal 2016, compared to 75.2% for fiscal 2015.  The Automotive segment experienced a decrease in cost of products sold as a percentage of net sales substantially due to favorable commodity pricing of raw materials and favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations. The Automotive segment cost of goods sold for fiscal 2016 includes a one-time reversal of accruals of $2.1 million related to customer commercial issues. The Interface segment experienced an increase in cost of products sold as a percentage of net sales primarily due to costs and inefficiencies experienced during the first quarter of fiscal 2016 related to the move of the radio remote control operation from the Philippines to Egypt. The Company experienced moving costs and severance and redundant staffing costs of $1.0 million in fiscal 2016 in addition to the manufacturing inefficiencies. The increase in the Interface segment was also due to lower sales volumes for appliance and data solutions products. The Power Products segment experienced an increase in cost of products sold as a percentage of net sales primarily due to decreased sales volumes.
 
Gross Profit.  Consolidated gross profit decreased $5.9 million, or 2.7%, to $212.9 million for the fiscal year ended April 30, 2016, as compared to $218.8 million for the fiscal year ended May 2, 2015.  Gross margins as a percentage of net sales increased to 26.3% for fiscal 2016, compared to 24.8% for fiscal 2015.  During the fiscal year ended April 30, 2016, favorable commodity pricing and the favorable currency impact on the purchase of certain raw materials and labor costs in our foreign operations in the Automotive segment was partially offset by higher pricing concessions on certain products in the Automotive segment and decreased sales volumes for the Interface and Power Products segments and additional costs and inefficiencies experienced during fiscal 2016 related to the move of the radio remote control operation from the Philippines to Egypt. Gross profit for fiscal 2016 was favorably impacted by the gain on the sale of a building, the one-time reversal of accruals related to customer commercial issues and customer contractual adjustments for minimum purchases.
 
Impairment of Goodwill. In fiscal 2015, management performed the annual impairment analysis of goodwill for our TouchSensor reporting unit and determined that the assets were impaired, resulting from a fourth quarter change in strategic direction. The Company recorded an impairment charge of $11.1 million related to these assets.

Selling and Administrative Expenses.  Selling and administrative expenses increased $6.8 million, or 7.2%, to $100.8 million for the fiscal year ended April 30, 2016, compared to $94.0 million for the fiscal year ended May 2, 2015.  Selling and administrative expenses as a percentage of net sales increased to 12.5% for fiscal 2016 from 10.7% for fiscal 2015. In fiscal 2016, expenses increased for legal and other professional fees by $8.9 million, wages, benefits and stock award compensation expense by $4.4 million, selling and other general expenses of $2.5 million, partially offset by decreased long-term incentive bonus expense of $9.0 million.
 
Amortization of Intangibles. Amortization of intangibles increased $0.9 million, or 60.0%, to $2.4 million for the fiscal year ended April 30, 2016, compared to $1.5 million for the fiscal year ended May 2, 2015. The increase relates to the Company shortening the estimated useful lives of some specific patents due to business conditions at the end of fiscal 2015.

Gain on the Sale of Business. During fiscal 2015, we sold our 100% ownership interest in our Trace Laboratories businesses for $11.7 million. The net assets of the businesses had a book value of $4.0 million. We recorded a pre-tax gain of $7.7 million, related to the sale of the net assets.


21


Interest Income, Net.  Interest income, net, was $0.7 million for both the fiscal year ended April 30, 2016 and for the fiscal year ended May 2, 2015.

Other Income, Net. Other income, net increased $0.3 million to $0.5 million for the fiscal year ended April 30, 2016, compared to $0.2 million for the fiscal year ended May 2, 2015. All amounts for both fiscal 2016 and fiscal 2015 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, euros and Chinese yuan, creating exchange rate sensitivities.

Income Tax Expense.  Income tax expense increased $6.5 million, or 32.8%, to $26.3 million for the fiscal year ended April 30, 2016, compared to $19.8 million for the fiscal year ended May 2, 2015.  The Company's effective tax rate increased to 23.7% for fiscal 2016, compared to 16.4% for fiscal 2015. Fiscal 2015 includes a $5.0 million tax benefit related to the release of a valuation allowance against deferred tax assets in Malta.
 
Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. decreased $16.5 million, or 16.3%, to $84.6 million for the fiscal year ended April 30, 2016, compared to $101.1 million for the fiscal year ended May 2, 2015, primarily due to lower sales volumes, higher pricing concessions on certain products, the additional costs and inefficiencies experienced related to the move of the radio remote control operation from the Philippines to Egypt, no sales or earnings due to the sale of Trace Laboratories and increased selling and administrative expenses and higher income tax expense, partially offset with no impairment charges in fiscal 2016, favorable commodity pricing of raw materials, favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations, the gain on the sale of a building, the one-time reversal of accruals related to customer commercial issues and customer contractual adjustments for minimum purchases.

Operating Segments
 
Automotive Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 30,
2016
 
May 2,
2015
 
Net Change ($)
 
Net Change (%)
Net sales
$
614.3

 
$
628.4

 
$
(14.1
)
 
(2.2
)%
 
 
 
 
 
 
 
 
Cost of products sold
443.6

 
471.0

 
(27.4
)
 
(5.8
)%
 
 
 
 
 
 
 
 
Gross profit
170.7

 
157.4

 
13.3

 
8.4
 %
 
 
 
 
 
 
 
 
Selling and administrative expenses
33.9

 
32.5

 
1.4

 
4.3
 %
Income from operations
$
136.8

 
$
124.9

 
$
11.9

 
9.5
 %
 
 
 
 
 
 
 
 
Percent of sales:
April 30,
2016
 
May 2,
2015
 
 
 
 
Net sales
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
72.2
%
 
75.0
%
 
 
 
 
Gross margins
27.8
%
 
25.0
%
 
 
 
 
Selling and administrative expenses
5.5
%
 
5.2
%
 
 
 
 
Income from operations
22.3
%
 
19.9
%
 
 
 
 

Net Sales.  Automotive segment net sales decreased $14.1 million, or 2.2%, to $614.3 million for the fiscal year ended April 30, 2016, from $628.4 million for the fiscal year ended May 2, 2015.  Net sales decreased in North America by $32.9 million, or 8.8%, to $341.0 million for fiscal 2016, compared to $373.9 million for fiscal 2015, primarily due to lower sales volumes of the Ford Center Console program which substantially completed production at the end of fiscal 2015. Sales of the GM Center Console program increased due to increased volumes, partially offset with higher pricing concessions. Sales volumes remained constant for our transmission lead-frame assemblies for fiscal 2016 as compared to fiscal 2015. Net sales increased in Europe by $1.8 million, or 1.1%, to $159.6 million for fiscal 2016, compared to $157.8 million for fiscal 2015,

22


primarily due to higher tooling sales, and higher sales volumes for hidden switch products, partially offset by unfavorable currency rate fluctuations. Net sales in Asia increased $17.0 million, or 17.6%, to $113.7 million for fiscal 2016, compared to $96.7 million for fiscal 2015, primarily due to higher sales volumes of our linear position sensor products and interior lighting products, partially offset with lower sales volumes of steering angle sensor and transmission lead-frame assemblies. Translation of foreign operations net sales for the fiscal year ended April 30, 2016 decreased reported net sales by $10.5 million, or 1.7%, for fiscal 2016, compared to the average currency rates for fiscal 2015, primarily due to the strengthening of the U.S. dollar, compared to the euro and the Chinese yuan.

Cost of Products Sold.  Automotive segment cost of products sold decreased $27.4 million, or 5.8%, to $443.6 million for the fiscal year ended April 30, 2016, from $471.0 million for the fiscal year ended May 2, 2015.  The Automotive segment cost of products sold as a percentage of net sales decreased to 72.2% for fiscal 2016, compared to 75.0% for fiscal 2015.  The decrease is substantially due to favorable commodity pricing of raw materials and favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations. The costs of goods sold for fiscal 2016 includes a $2.1 million reversal of accruals related to customer commercial issues.
 
Gross Profit.  Automotive segment gross profit increased $13.3 million, or 8.4%, to $170.7 million for the fiscal year ended April 30, 2016, as compared to $157.4 million for the fiscal year ended May 2, 2015.  The Automotive segment gross margins as a percentage of net sales increased to 27.8% for the fiscal year ended April 30, 2016, as compared to 25.0% for the fiscal year ended May 2, 2015.  The increase is substantially due to favorable commodity pricing of raw materials and favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations, partially offset by higher price concessions on certain products. Gross profit for fiscal 2016 was favorably impacted by the reversal of accruals related to certain customer commercial issues.
     
Selling and Administrative Expenses.  Selling and administrative expenses increased $1.4 million, or 4.3%, to $33.9 million for fiscal year ended April 30, 2016, compared to $32.5 million for the fiscal year ended May 2, 2015.  Selling and administrative expenses as a percentage of net sales increased to 5.5% for the fiscal year ended April 30, 2016, compared to 5.2% for the fiscal year ended May 2, 2015. The increase in expenses for fiscal 2016 is primarily due to higher stock award compensation expense, partially offset with lower long-term incentive bonus expenses.
    
Income from Operations.  Automotive segment income from operations increased $11.9 million, or 9.5%, to $136.8 million for the fiscal year ended April 30, 2016, compared to $124.9 million for the fiscal year ended May 2, 2015. Fiscal 2016 benefitted from favorable commodity pricing of raw materials and favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations and the reversal of accruals related to customer commercial issues, partially offset with lower sales volumes, higher pricing concessions on certain products and higher selling and administrative expenses.




 

23


Interface Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 30,
2016
 
May 2,
2015
 
Net Change ($)
 
Net Change (%)
 
Net sales
$
140.8

 
$
161.7

 
$
(20.9
)
 
(12.9
)%
 
 
 
 
 
 
 
 
 
 
Cost of products sold
107.9

 
123.0

 
(15.1
)
 
(12.3
)%
 
 
 
 
 
 
 
 
 
 
Gross profit
32.9

 
38.7

 
(5.8
)
 
(15.0
)%
 
 
 
 
 
 
 
 
 
 
Impairment of goodwill

 
11.1

 
(11.1
)
 
N/M

*
Selling and administrative expenses
30.2

 
20.6

 
9.6

 
46.6
 %
 
Income from operations
$
2.7

 
$
7.0

 
$
(4.3
)
 
(61.4
)%
 
 
 
 
 
 
 
 
 
 
Percent of sales:
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Net sales
100.0
%
 
100.0
%
 
 
 
 
 
Cost of products sold
76.6
%
 
76.1
%
 
 
 
 
 
Gross margins
23.4
%
 
23.9
%
 
 
 
 
 
Impairment of goodwill
%
 
6.9
%
 
 
 
 
 
Selling and administrative expenses
21.4
%
 
12.7
%
 
 
 
 
 
Income from operations
1.9
%
 
4.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*N/M equals non meaningful
 
 
 
 
 
 
 
 
 
Net Sales.  Interface segment net sales decreased $20.9 million, or 12.9%, to $140.8 million for the fiscal year ended April 30, 2016, from $161.7 million for the fiscal year ended May 2, 2015.  Net sales decreased in North America by $17.9 million, or 13.9%, to $110.9 million for fiscal 2016, compared to $128.8 million for fiscal 2015, primarily due to lower sales volumes of appliance products and data solutions products, partially offset with higher radio remote control sales volumes. Net sales in Europe increased $2.3 million, or 9.6%, to $26.2 million for fiscal 2016, compared to $23.9 million for fiscal 2015, primarily due to higher radio remote control sales volumes, partially offset with lower data solutions products sales volumes. Net sales in Asia decreased $5.6 million, or 62.2%, to $3.4 million for fiscal 2016, compared to $9.0 million for fiscal 2015, primarily due to lower sales volumes of radio remote controls. The Philippine radio remote control operation was moved to Egypt during fiscal 2016.
 
Cost of Products Sold.  Interface segment cost of products sold decreased $15.1 million, or 12.3%, to $107.9 million for the fiscal year ended April 30, 2016, compared to $123.0 million for the fiscal year ended May 2, 2015.  Interface segment cost of products sold as a percentage of net sales increased to 76.6% for the fiscal year ended April 30, 2016, compared to 76.1% for the fiscal year ended May 2, 2015.  The increase in cost of products sold as a percentage of net sales is primarily due to additional costs and inefficiencies experienced during fiscal 2016 related to the move of the radio remote control operation from the Philippines to Egypt. The Company experienced moving costs and severance and redundant staffing costs of $1.0 million during fiscal 2016 in addition to manufacturing inefficiencies. Cost of products sold as a percentage of sales also increased in fiscal 2016 due to lower sales volumes for appliance and data solutions products.

Gross Profit.  Interface segment gross profit decreased $5.8 million, or 15.0%, to $32.9 million for the fiscal year ended April 30, 2016, compared to $38.7 million for the fiscal year ended May 2, 2015.  Gross margins as a percentage of net sales decreased to 23.4% for the fiscal year ended April 30, 2016, from 23.9% for the fiscal year ended May 2, 2015.  The decrease in gross margins as a percentage of net sales is primarily due to moving, severance and redundant staffing costs related to the move from the Philippines to Egypt and lower appliance and data solution products sales volumes.

Impairment of Goodwill. In fiscal 2015, management performed the annual impairment analysis of goodwill for our TouchSensor reporting unit and determined that the assets were impaired, resulting from a fourth quarter change in strategic direction. The Company recorded an impairment charge of $11.1 million related to these assets.

24


Selling and Administrative Expenses.  Selling and administrative expenses increased $9.6 million, or 46.6%, to $30.2 million for the fiscal year ended April 30, 2016, compared to $20.6 million for the fiscal year ended May 2, 2015.  Selling and administrative expenses as a percentage of net sales increased to 21.4% for the fiscal year ended April 30, 2016, from 12.7% for the fiscal year ended May 2, 2015. The increase in selling and administrative expenses is primarily due to increased legal expenses for the Hetronic litigation and intangible asset amortization expense.
 
Income from Operations.  Interface segment income from operations decreased $4.3 million, or 61.4%, to $2.7 million for the fiscal year ended April 30, 2016, compared to $7.0 million for the fiscal year ended May 2, 2015, primarily due to lower sales volumes, increased legal expenses, move and inefficiency expenses related to the move of the radio remote control operation, intangible asset amortization expense, partially offset with no impairment charges.

Power Products Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 30,
2016
 
May 2,
2015
 
Net Change ($)
 
Net Change (%)
Net sales
$
53.5

 
$
85.7

 
$
(32.2
)
 
(37.6
)%
 
 
 
 
 
 
 
 
Cost of products sold
40.5

 
57.9

 
(17.4
)
 
(30.1
)%
 
 
 
 
 
 
 
 
Gross profit
13.0

 
27.8

 
(14.8
)
 
(53.2
)%
 
 
 
 
 
 
 
 
Selling and administrative expenses
3.6

 
4.6

 
(1.0
)
 
(21.7
)%
Income from operations
$
9.4

 
$
23.2

 
$
(13.8
)
 
(59.5
)%
 
 
 
 
 
 
 
 
Percent of sales:
April 30,
2016
 
May 2,
2015
 
 
 
 
Net sales
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
75.7
%
 
67.6
%
 
 
 
 
Gross margins
24.3
%
 
32.4
%
 
 
 
 
Selling and administrative expenses
6.7
%
 
5.4
%
 
 
 
 
Income from operations
17.6
%
 
27.1
%
 
 
 
 
 
Net Sales.  Power Products segment net sales decreased $32.2 million, or 37.6%, to $53.5 million for the fiscal year ended April 30, 2016, compared to $85.7 million for the fiscal year ended May 2, 2015.  Net sales decreased in North America by $24.5 million, or 47.8%, to $26.8 million for fiscal 2016, compared to $51.3 million for fiscal 2015, primarily due to lower sales volumes of PowerRail products. Included in the North American net sales for fiscal 2016 is a $1.0 million gain on the sale of a building. Net sales in Europe decreased $3.7 million, or 33.0%, to $7.5 million for fiscal 2016, compared to $11.2 million for fiscal 2015, primarily due to lower sales volumes of a bypass switch. Included in the European net sales for fiscal 2016 is a $1.5 million customer contractual adjustment for minimum purchases. Net sales in Asia decreased $4.0 million, or 17.2%, to $19.2 million for fiscal 2016, compared to $23.2 million for fiscal 2015, primarily due to decreased sales volumes of busbar and cabling products.
 
Cost of Products Sold.  Power Products segment cost of products sold decreased $17.4 million, or 30.1%, to $40.5 million for the fiscal year ended April 30, 2016, compared to $57.9 million for the fiscal year ended May 2, 2015.  The Power Products segment cost of products sold as a percentage of net sales increased to 75.7% for the fiscal year ended April 30, 2016, from 67.6% for the fiscal year ended May 2, 2015.  The increase in cost of products sold as a percentage of net sales is primarily due to decreased sales volumes.
 
Gross Profit.  Power Products segment gross profit decreased $14.8 million, or 53.2%, to $13.0 million for fiscal 2016, compared to $27.8 million for fiscal 2015.  Gross margins as a percentage of net sales decreased to 24.3% for the fiscal year ended April 30, 2016 from 32.4% for the fiscal year ended May 2, 2015. The decrease in gross margins as a percentage of net sales is primarily due to decreased sales volumes. Gross profit was favorably impacted by the gain on a sale of a building and customer contractual adjustments for minimum purchases.


25


Selling and Administrative Expenses.  Selling and administrative expenses decreased $1.0 million, or 21.7%, to $3.6 million for the fiscal year ended April 30, 2016, compared to $4.6 million for the fiscal year ended May 2, 2015. The decrease is primarily due to lower commission and bonus expense in North America. Selling and administrative expenses as a percentage of net sales increased to 6.7% for the fiscal year ended April 30, 2016 from 5.4% for the fiscal year ended May 2, 2015, primarily due to lower sales volumes.
 
Income From Operations.  Power Products segment income from operations decreased $13.8 million, or 59.5%, to $9.4 million for the fiscal year ended April 30, 2016, compared to $23.2 million for the fiscal year ended May 2, 2015, due to decreased sales volumes, partially offset with a gain on the sale of a building, customer contractual adjustments for minimum purchases, lower commission and bonus expense.
 
Other Segment Results
 
Below is a table summarizing results for the fiscal years ended:
(Dollars in Millions)
April 30,
2016
 
May 2,
2015
 
Net Change ($)
 
Net Change (%)
 
Net sales
$
0.3

 
$
5.2

 
$
(4.9
)
 
(94.2
)%
 
 
 
 
 
 
 
 
 
 
Cost of products sold
4.3

 
7.0

 
(2.7
)
 
(38.6
)%
 
 
 
 
 
 
 
 
 
 
Gross profit
(4.0
)
 
(1.8
)
 
(2.2
)
 
122.2
 %
 
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
4.8

 
4.6

 
0.2

 
4.3
 %
 
 
 
 
 
 
 
 
 
 
Loss from operations
$
(8.8
)
 
$
(6.4
)
 
$
(2.4
)
 
N/M

*
 
 
 
 
 
 
 
 
 
Percent of sales:
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Net sales
100.0
 %
 
100.0
 %
 
 
 
 
 
Cost of products sold
1,433.3
 %
 
134.6
 %
 
 
 
 
 
Gross margins
(1,333.3
)%
 
(34.6
)%
 
 
 
 
 
Selling and administrative expenses
1,600.0
 %
 
88.5
 %
 
 
 
 
 
Loss from operations
(2,933.3
)%
 
(123.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*N/M equals non meaningful
 
 
 
 
 
 
 
 
 
Net Sales.  The Other segment net sales decreased $4.9 million, or 94.2%, to minimal sales for the fiscal year ended April 30, 2016, compared to $5.2 million for the fiscal year ended May 2, 2015. The decrease is primarily due to the sale of Trace Laboratories business in the fourth quarter of fiscal 2015. The remaining operating units in this segment, medical devices, inverters and battery systems, had minimal net sales for fiscal 2016 and fiscal 2015.
 
Cost of Products Sold.  Other segment cost of products sold decreased $2.7 million, or 38.6%, to $4.3 million for the fiscal year ended April 30, 2016, compared to $7.0 million for the fiscal year ended May 2, 2015. The decrease is primarily due to the sale of Trace Laboratories, partially offset with development costs in our medical devices, inverters and battery systems operating units.

Gross Profit.  The Other segment gross profit decreased $2.2 million, to a loss of $4.0 million for the fiscal year ended April 30, 2016, compared to a loss of $1.8 million for the fiscal year ended May 2, 2015. The decrease is primarily due to the sale of Trace Laboratories, partially offset with development costs in our medical devices, inverters and battery systems operating units.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $0.2 million, or 4.3%, to $4.8 million for the fiscal year ended April 30, 2016, compared to $4.6 million for the fiscal year ended May 2, 2015.  The increase is primarily due to increased headcount and professional fees in our medical devices, inverters and battery systems operating units, partially offset by the sale of Trace Laboratories businesses.

26


Loss From Operations  The Other segment loss from operations increased $2.4 million to $8.8 million for the fiscal year ended April 30, 2016, compared to $6.4 million for the fiscal year ended May 2, 2015.  The increased loss was primarily due to the sale of Trace Laboratories business, increased development expenses, professional fees and headcount.
 
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 the U.S. Of the $294.0 million of cash and cash equivalents as of April 29, 2017, $292.1 million was held in subsidiaries outside the U.S. Our foreign earnings continue to be indefinitely reinvested outside the U.S. and therefore not available to fund our domestic operations. We currently have minimal federal and state net operating loss carryforwards in the U.S. to reduce the cash tax obligation upon any future repatriation of funds.
 
On November 18, 2016, the Company replaced its Amended and Restated Credit Agreement with a new Credit Agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders named therein (the “Credit Agreement”). In connection with the execution of the Credit Agreement, the Amended and Restated Credit Agreement dated as of February 25, 2011 by and among the Company, Bank of America, N.A., as administrative agent, and certain other financial institutions was terminated.
The Credit Agreement has a maturity date of November 18, 2021. The credit facility is in the maximum principal amount of $150.0 million, with an option to increase the principal amount by up to an additional $100.0 million, subject to customary conditions and approval of the lender(s) providing new commitment(s). The credit facility is available for general corporate purposes, including working capital and acquisitions.
The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio. The Credit Agreement is guaranteed by the Company’s wholly-owned U.S. subsidiaries. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default.
At April 29, 2017, the interest rate on the credit facility was 1.25% plus LIBOR. At April 29, 2017, we were in compliance with the covenants of the agreement. During fiscal 2017, we had no borrowings and made payments of $31.1 million, which included interest of $1.1 million under this credit facility. As of April 29, 2017, there were outstanding balances against the credit facility of $27.0 million. There was $123.0 million available to borrow under the credit facility as of April 29, 2017, which does not include the option to increase the principal amount. We believe the fair value approximates the carrying amount as of April 29, 2017.
Operating cash flow is summarized below (in millions):
 
Fiscal Year Ended
 
April 29,
2017
 
April 30,
2016
 
May 2,
2015
Net income
$
92.9

 
$
84.6

 
$
101.0

Depreciation and amortization
24.3

 
23.9

 
23.4

Changes in operating assets and liabilities
19.3

 
(12.7
)
 
(8.9
)
Other non-cash items
8.7

 
14.9

 
7.4

Cash flow from operations
$
145.2

 
$
110.7

 
$
122.9

 
Operating Activities — Fiscal 2017 Compared to Fiscal 2016
 
Net cash provided by operating activities increased $34.5 million to $145.2 million for fiscal 2017, compared to $110.7 million for fiscal 2016, primarily due to higher net income, the changes in deferred income taxes and the changes in operating assets and liabilities. The net changes in assets and liabilities resulted in the decreased cash use of $32.0 million, to cash provided of $19.3 million in fiscal 2017, compared to cash use of $12.7 million in fiscal 2016. The decreased cash use in fiscal 2017 compared to fiscal 2016 is primarily driven by lower inventory balances and the timing of payments to suppliers.


27


Operating Activities — Fiscal 2016 Compared to Fiscal 2015
 
Net cash provided by operating activities decreased $12.2 million to $110.7 million for fiscal 2016, compared to $122.9 million for fiscal 2015, primarily due to lower net income, decreased cash use from deferred income taxes and the changes in operating assets and liabilities. The net changes in assets and liabilities resulted in the increased cash use of $3.8 million, to $12.7 million in fiscal 2016, compared to cash use of $8.9 million in fiscal 2015. The increased cash use in fiscal 2016 compared to fiscal 2015 is primarily driven by the payment of bonuses and the timing of receivable collections, partially offset with a decrease in inventory levels.

Investing Activities — Fiscal 2017 Compared to Fiscal 2016
 
Net cash used in investing activities increased by $0.1 million, to $21.7 million in fiscal 2017, compared to $21.6 million in fiscal 2016. Purchases of property, plant and equipment decreased by $0.8 million, to $22.4 million in fiscal 2017, compared to $23.2 million in fiscal 2016. Purchases for both periods primarily relate to equipment purchases for new product launches and the replacement of some older equipment. We sold buildings for $0.7 million and $1.6 million in fiscal 2017 and fiscal 2016, respectively.
 
Investing Activities — Fiscal 2016 Compared to Fiscal 2015
 
Net cash used in investing activities increased by $10.3 million, to $21.6 million in fiscal 2016, compared to $11.3 million in fiscal 2015. Purchases of property, plant and equipment increased by $0.7 million, to $23.2 million in fiscal 2016, compared to $22.5 million in fiscal 2015. Purchases for both periods primarily relate to equipment purchases for new product launches. In fiscal 2016, we sold a building for $1.6 million. In addition, fiscal 2016 included a $1.1 million escrow payment related to the sale of our investment in Lumidigm. In fiscal 2015, we sold our interest in our Trace Laboratories businesses for $11.7 million. We received $11.2 million related to the sale, with the remaining $0.5 million held in escrow. The escrow amount was paid in fiscal 2017.

Financing Activities — Fiscal 2017 Compared to Fiscal 2016
 
Net cash used in financing activities increased $18.3 million to $47.0 million in fiscal 2017, compared to $28.7 million in fiscal 2016.  In fiscal 2017, the Company had net repayments against the credit facility of $30.0 million and in fiscal 2016, the Company had net borrowings of $52.0 million. We paid dividends of $13.7 million and $13.5 million, in fiscal 2017 and 2016, respectively. In September 2015, the board of directors authorized the repurchase of up to $100.0 million of the Company's outstanding stock through September 1, 2017. During fiscal 2017 and fiscal 2016, the Company repurchased shares worth $9.8 and $62.3 million, respectively, under the plan. Fiscal 2017 and fiscal 2016 includes $1.1 million and $7.7 million, respectively, of taxes paid related to net share settlement of equity awards. There were proceeds from the exercise of stock options of $2.7 million in fiscal 2017 and $0.6 million in fiscal 2016. Fiscal 2017 and fiscal 2016 includes $4.9 million and $2.2 million, respectively, of excess tax benefit on equity shares issued and stock options exercised during those periods.

Financing Activities — Fiscal 2016 Compared to Fiscal 2015
 
Net cash used by financing activities decreased $19.8 million to $28.7 million in fiscal 2016, compared to $48.5 million in fiscal 2015.  In fiscal 2016, the Company had net proceeds against the credit facility of $52.0 million and in fiscal 2015, the Company had net repayment of borrowings of $43.0 million. We paid dividends of $13.5 million and $13.8 million, in fiscal 2016 and 2015, respectively. During fiscal 2016, the Company's Board of Directors authorized the repurchase of up to $100.0 million of the Company's outstanding common stock through September 1, 2017. In fiscal 2016, the Company purchased $62.3 million, which includes $0.3 million in commissions, pursuant to the plan. Fiscal 2016 includes $7.7 million of taxes paid related to the net share settlement of equity awards, partially offset by $2.2 million of excess tax benefit on those shares as well as on stock options exercised during the fiscal year. There were proceeds from the exercise of stock options of $0.6 million in fiscal 2016, compared to $4.0 million in fiscal 2015.
    

28


Contractual Obligations
 
The following table summarizes contractual obligations and commitments, as of April 29, 2017 (in millions):
 
Payments Due By Period
 
Total
 
Less than
 1 year
 
1-3 years
 
4-5 years
 
More than
 5 years
Operating leases
$
11.4

 
$
4.0

 
$
6.2

 
$
1.2

 
$

Long-term debt
27.0

 

 
27.0

 

 

Purchase obligations
103.2

 
103.2

 

 

 

Deferred compensation
5.9

 
0.5

 
1.6

 
1.5

 
2.3

Total
$
147.5

 
$
107.7

 
$
34.8

 
$
2.7

 
$
2.3

 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements, other than the operating leases and purchase obligations noted in the preceding table.
 
Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.  We believe the following critical accounting policies affect our judgments and estimates used in the preparation of our consolidated financial statements.
 
Revenue Recognition.  We recognize revenue on product sales when (i) persuasive evidence of an agreement exists, (ii) the price is fixed or determinable, (iii) delivery has occurred or services have been rendered, and (iv) collection of the sales proceeds is reasonably assured.  Revenue from our product sales not requiring installation, net of trade discounts and estimated sales allowances, is recognized when title passes, which is generally upon shipment.  We do not have any additional obligations or customer acceptance provisions after shipment of such products.  We handle returns by replacing, repairing or issuing credit for defective products when returned. The Company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with a revenue-producing transaction between the Company and the Company’s customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. The Company reports the collection of these taxes on a net basis (excluded from revenues).
 
Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of customers, and other relevant information. Estimates of uncollectible amounts are revised each reporting period, and changes are recorded in the period they become known. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
Our revenues and accounts receivable are concentrated in a relatively small number of customers within the automotive industry.  A significant change in the liquidity or financial position of any one of these customers or a deterioration in the economic environment of the automotive industry, in general, could have a material adverse impact on the collectability of our accounts receivable and our future operating results, and additional allowances for doubtful accounts may be required.
 
Allowance for Excess and Obsolete Inventory.  Inventories are valued at the lower of cost or market value and have been reduced by allowances for excess and obsolete inventories. The estimated allowances are based on our review of inventories on hand compared to estimated future usage and sales, using assumptions about future product life cycles, product demand and market conditions.  If actual product life cycles, product demand and market conditions are less favorable than those projected by us, inventory write-downs may be required.

Goodwill and Indefinite-Lived Intangible Assets. Goodwill represents the excess of cost over fair market value of identifiable net assets acquired through business purchases. In accordance with Financial Accounting Standards Board,

29


("FASB"), Accounting Standards Codification, ("ASC"), Topic 350 - Intangibles-Goodwill and Other, we review goodwill for impairment on at least an annual basis by applying a fair-value-based test.

We evaluate goodwill using a qualitative assessment to determine whether it is more likely than not that the fair value of any reporting unit is less than its carrying amount. If we determine that the fair value of the reporting unit may be less than its carrying amount, we evaluate goodwill using a two-step impairment test. Otherwise, we conclude that no impairment is indicated and we do not perform the two-step impairment test.

Our qualitative screen includes an assessment of certain factors including, but not limited to, the results of prior year value calculations, the movement of our share price and market capitalization, the reporting unit and overall financial performance, and macroeconomic and industry conditions. After considering qualitative factors and other evidence obtained, we determine if it is more likely than not whether the reporting unit's fair value is less than the carrying amount. Although we believe the factors considered in the impairment analysis are reasonable, significant changes in any one of the assumptions used could produce a different result. If, after assessing the qualitative factors, we were to determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we would perform a two-step impairment test (a quantitative analysis). We may also elect to proceed directly to the two-step impairment analysis without considering such qualitative factors.

In the first step of the two-step impairment test, fair values are primarily established using a discounted cash flow methodology (specifically, the income and market approach). The determination of discounted cash flows is based on our long-range forecasts and requires assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels, and other market participant assumptions. The revenue growth rates included in the forecasts are our best estimates based on current and anticipated market conditions, and the profitability assumptions are projected based on current and anticipated cost structures. Long-range forecasting involves uncertainty which increases with each successive period. Key assumptions, such as revenue growth rates and profitability, especially in the outer years, involve a greater degree of uncertainty.

We perform our annual impairment assessment for goodwill and other indefinite-lived intangibles as of the first day of the fourth quarter and more frequently if indicators of impairment exist.

Income Taxes.  As part of the process of preparing our Consolidated Financial Statements, we are required to calculate income taxes in each of the jurisdictions in which we operate. The process involves determining actual current tax expense, along with assessing temporary differences resulting from the differing treatment of items for book and tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and tax planning strategies in assessing the need for the valuation allowance. 
    
The tax laws of Malta provide for investment tax credits of 30% of certain qualified expenditures.  Unused credits were $17.9 million as of April 29, 2017, of which $16.0 million can be carried forward indefinitely and $1.9 million expires in 2020.
 
Contingencies.  We are subject to various investigations, claims and legal and administrative proceedings covering a wide range of matters that arise in the ordinary course of business activities.  A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. For those matters that we can estimate a range of loss, we have established reserves at levels within that range to provide for the most likely scenario based upon available information.  The valuation of reserves for contingencies is reviewed on a quarterly basis to ensure that the Company is properly reserved. Reserve balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional reserves for emerging issues. While we believe that the current level of reserves is adequate, changes in the future could impact these determinations.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Certain of our foreign operations enter into transactions in currencies other than their functional currency, primarily the U.S. dollar and the euro.  A 10% change in foreign currency exchange rates from balance sheet date levels could have impacted our income before income taxes by $13.1 million and $8.7 million at April 29, 2017 and April 30, 2016, respectively.  We also have foreign currency exposure arising from the translation of our net equity investment in our foreign operations to U.S. dollars.  We generally view our investments in foreign operations with functional currencies other than the U.S. dollar as long-term.  The currencies to which we are exposed are the British pound, Chinese yuan, euro, Indian rupee, Mexican peso,

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Singapore dollar and Swiss franc.  A 10% change in foreign currency exchange rates from balance sheet date levels could have impacted our net foreign investm