Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 GAAP. You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included in this Annual Report. This discussion and analysis of our financial condition and results of operations also contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements because of a variety of factors, including those set forth under Item 1A, “Risk Factors” of this Annual Report. We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations.
Overview
Our Business
We are a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. We design, engineer and produce mechatronic products for OEMs utilizing our broad range of technologies for user interface, LED lighting system, power distribution and sensor applications.
Our solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment and consumer appliance. Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical. For more information regarding the business and products of these segments, see Item 1, “Business” of this Annual Report.
In the first quarter of fiscal 2024, we made the decision to initiate the discontinuation of the Dabir Surfaces business in the Medical segment. In October 2023, we sold certain assets of the Dabir Surfaces business, and no longer operate this business. For further information, see Note 3, “Acquisition and Disposition” to the consolidated financial statements included in this Annual Report.
On April 20, 2023, we acquired 92.2% of the outstanding shares of Nordic Lights. We acquired the remaining 7.8% of the outstanding shares of Nordic Lights in fiscal 2024. Accordingly, as of April 27, 2024, we own 100% of Nordic Lights. The results of operations of Nordic Lights are reported within the Industrial segment from the date of acquisition and were immaterial for fiscal 2023. See Note 3, “Acquisition and Disposition” to the consolidated financial statements in this Annual Report for further information.
On June 25, 2024, we announced the appointment of Jon DeGaynor as our new President and Chief Executive Officer, beginning July 15, 2024. Mr. DeGaynor, age 58, currently serves as non-employee Executive Chairman of Racing and Performance, Inc., an automotive performance systems supplier in the aftermarket space. He previously served as President and CEO of Stoneridge, Inc., a publicly traded global designer and manufacturer of highly engineered electrical and electronic systems, components, and modules for the automotive, commercial, off-highway and agricultural vehicle markets, from 2015 to 2023.
Trends Affecting Our Business
The following trends significantly impact the indicators discussed above, as well as our business and operating results. See the risk factors identified under Item 1A, “Risk Factors” of this Annual Report for more information.
Macroeconomic Conditions
The global economy continues to experience volatile disruptions including to the commodity, labor and transportation markets, arising from a combination of geopolitical events and various economic and financial factors. These disruptions have affected our operations and may continue to affect our business, financial condition and results of operations. As a result of continued inflation, we have implemented measures to mitigate certain adverse effects of higher costs. However, we have been unable to fully mitigate or pass through the increases in our costs to our customers, which will likely continue in the future.
Geopolitical Conditions
Russia’s invasion of Ukraine and the resulting economic sanctions imposed by the international community impacted the global economy and gave rise to potential global security issues that may adversely affect international business and economic conditions. Given our manufacturing operations in the Middle East and Asia, the continuation of the military conflict between Russia and Ukraine, the escalation or expansion of the Israel-Hamas war, or renewed terrorist attacks on Red Sea shipping, such as those by the Houthi, could lead to other supply chain disruptions, increased inflationary pressures, and volatility in global markets and industries that could negatively impact our operations. The full impact of the conflicts on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflicts and their impact on regional and global economic conditions. We will continue to monitor the conflicts and assess the related restrictions and other effects on our employees, customers, suppliers and business.
20
Table of Contents
Global Supply Chain Disruptions
Although we saw improvements in our supply chain in fiscal 2024, including easing of the worldwide semiconductor supply shortage, new supply chain disruptions may occur in the future. In addition, we have experienced, and may continue to experience, business interruptions, including customer shutdowns and increased material and logistics costs and labor shortages. We continue to work closely with suppliers and customers to minimize the potential adverse impact from global supply chain disruptions. However, if we are not able to mitigate any direct or indirect supply chain disruptions, this may have a material adverse impact on our financial condition, results of operations and cash flows.
Consolidated Results of Operations
A detailed comparison of our results of operations between fiscal 2023 and fiscal 2022 can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2023 Annual Report on Form 10-K filed with the SEC on June 27, 2023.
The table below compares our results of operations between fiscal 2024 and fiscal 2023:
Fiscal Year Ended
Selling and administrative expenses 160.9 154.9
Goodwill impairment 105.9 —
Amortization of intangibles 24.0 18.8
Interest expense, net 16.7 2.7
Other income, net (0.6 ) (2.4 )
Income tax (benefit) expense (4.8 ) 13.0
Net income attributable to redeemable noncontrolling interest — —
Net (loss) income attributable to Methode $ (123.3 ) $ 77.1
Net sales
Net sales decreased $65.1 million, or 5.5%, to $1,114.5 million in fiscal 2024, compared to $1,179.6 million in fiscal 2023. The decrease was primarily due to lower sales in the Automotive segment, partially offset by the acquisition of Nordic Lights, which contributed $85.1 million of net sales to the Industrial segment, and favorable foreign currency translation of $4.3 million. Net sales included customer cost recoveries from spot buys of materials and premium freight costs of $2.2 million in fiscal 2024, compared to $20.9 million in in fiscal 2023. Excluding the impact of Nordic Lights, foreign currency translation and customer cost recoveries, net sales decreased $135.8 million, or 11.7%.
Cost of products sold
Cost of products sold increased $20.2 million, or 2.2%, to $935.7 million (84.0% of net sales) in fiscal 2024, compared to $915.5 million (77.6% of net sales) in fiscal 2023. The acquisition of Nordic Lights and foreign currency translation accounted for $62.6 million and $3.0 million, respectively, of the increase. Excluding Nordic Lights and foreign currency translation, cost of products sold decreased $45.4 million. The decrease was primarily due to lower material costs as a result of a decrease in sales volumes, partially offset by higher wages, product launch costs, freight and restructuring and impairment charges. Restructuring and impairment charges included within cost of products sold were $1.7 million in fiscal 2024, compared to $0.4 million in fiscal 2023.
Gross profit margin
Gross profit margin was 16.0% of net sales in fiscal 2024, compared to 22.4% of net sales in fiscal 2023. The decrease in gross profit margin was primarily a result of lower sales and operational inefficiencies in the Automotive segment. The operational inefficiencies were caused mainly by planning deficiencies, inventory shortages, unrecoverable spot purchases and premium freight, and delayed shipments.
21
Table of Contents
Selling and administrative expenses
Selling and administrative expenses increased $6.0 million, or 3.9%, to $160.9 million (14.4% of net sales) in fiscal 2024, compared to $154.9 million (13.1% of net sales) in fiscal 2023. The acquisition of Nordic Lights and foreign currency translation accounted for $9.6 million and $1.7 million, respectively, of the increase. Excluding Nordic Lights and foreign currency translation, selling and administrative expenses decreased $5.3 million. The decrease was primarily due to lower acquisition costs related to Nordic Lights and lower stock-based compensation expense, partially offset by higher professional fees and restructuring and impairment charges. In fiscal 2024, acquisition costs for Nordic Lights were $0.5 million, compared to $6.8 million in fiscal 2023. Stock-based compensation expense was lower due to a $3.6 million reversal of expense due to forfeitures in fiscal 2024 and a reduction in the number of restricted stock units subject to expense in fiscal 2024. The increase in professional fees was due to higher audit and consulting fees. Restructuring and impairment charges included within selling and administrative expenses were $2.0 million in fiscal 2024, compared to $0.5 million in fiscal 2023.
Goodwill impairment
In fiscal 2024, we recognized goodwill impairment of $105.9 million in the Automotive segment. For further information, see Note 6, “Goodwill and Other Intangible Assets” to the consolidated financial statements included in this Annual Report.
Amortization of intangibles
Amortization of intangibles increased $5.2 million, or 27.7%, to $24.0 million in fiscal 2024, compared to $18.8 million in fiscal 2023. The increase was due to the recognition of amortization expense associated with the acquisition of Nordic Lights.
Interest expense, net
Interest expense, net was $16.7 million in fiscal 2024, compared to $2.7 million in fiscal 2023. The increase was due to higher borrowings and increased interest rates.
Other income, net
Other income, net was $0.6 million in fiscal 2024, compared to $2.4 million in fiscal 2023. The decrease was due to lower international government assistance, partially offset by net gains on sale of assets and lower foreign exchange losses.
In fiscal 2024, we received $0.5 million of international government assistance, compared to $9.7 million in fiscal 2023. Fiscal 2023 international government assistance includes $6.3 million related to the COVID-19 pandemic and $3.4 million related to maintaining certain employment levels.
The net gain on sale of assets included a $2.4 million gain on sale of the company aircraft and a $0.6 million loss on the sale of certain assets of Dabir Surfaces.
Net foreign exchange loss was $2.2 million in fiscal 2024, compared to $7.1 million in fiscal 2023. Net foreign exchange losses were lower in fiscal 2024 due to higher efficiency in our foreign currency balance sheet remeasurement hedging program. In addition, net foreign exchange loss in fiscal 2023 included the recognition of $2.1 million of a foreign exchange loss reclassified from accumulated other comprehensive income as the result of a reorganization of a foreign owned subsidiary.
Income tax (benefit) expense
Income tax benefit was $4.8 million in fiscal 2024, compared to income tax expense of $13.0 million in fiscal 2023. Our effective tax rate decreased to 3.7% in fiscal 2024, compared to 14.4% in fiscal 2023. In fiscal 2024, the effective tax rate was favorably impacted by pre-tax losses in operations, the amount of income earned in foreign jurisdictions with lower tax rates of $5.1 million and research and development expenditures of $1.5 million. These were partially offset by non-deductible goodwill impairments of $22.7 million, withholding taxes of $3.2 million, and U.S. tax on foreign income of $3.5 million of which global intangible low-tax income is the main component. In fiscal 2023, the effective income tax rate was favorably impacted by the amount of income earned in foreign jurisdictions with lower tax rates and a tax benefit of $7.3 million associated with the reorganization of a foreign owned subsidiary, partially offset by a reduction in foreign investment tax credits of $5.0 million and non-deductible acquisition costs of $1.4 million.
Net (loss) income
Net loss was $123.3 million in fiscal 2024, compared to net income of $77.1 million in fiscal 2023. The acquisition of Nordic Lights contributed $3.9 million of net income and the impact of foreign currency translation increased net income by $0.3 million. Excluding Nordic Lights and foreign currency translation, net income decreased $204.3 million as a result of the reasons described above.
22
Table of Contents
Operating Segments
Automotive
Fiscal Year Ended
Net sales
Europe, the Middle East & Africa (“EMEA”) 216.2 231.2
As a percent of net sales 5.1 % 17.1 %
(Loss) income from operations $ (140.2 ) $ 67.0
As a percent of net sales (23.4 )% 9.1 %
Customer cost recoveries:
North America $ 0.1 $ 9.7
Net sales
Automotive segment net sales decreased $138.0 million, or 18.7%, to $598.2 million in fiscal 2024, compared to $736.2 million in fiscal 2023. Excluding foreign currency translation and customer cost recoveries, net sales decreased $127.7 million, or 17.7%.
Net sales in North America decreased $83.4 million, or 23.9%, to $265.6 million in fiscal 2024, compared to $349.0 million in fiscal 2023. Excluding customer cost recoveries, net sales decreased $73.8 million primarily due to lower sales volumes from program roll-offs, including a major center console program. Net sales in EMEA decreased $15.0 million, or 6.5%, to $216.2 million in fiscal 2024, compared to $231.2 million in fiscal 2023. The stronger euro, relative to the U.S. dollar, increased net sales in EMEA by $7.6 million. Excluding foreign currency translation and customer cost recoveries, net sales in EMEA decreased $19.8 million primarily due to lower sales volumes of sensor products. Net sales in Asia decreased $39.6 million, or 25.4%, to $116.4 million in fiscal 2024, compared to $156.0 million in fiscal 2023. The weaker Chinese renminbi, relative to the U.S. dollar, decreased net sales in Asia by $4.9 million. Excluding foreign currency translation and customer cost recoveries, net sales in Asia decreased $34.1 million primarily due to a program roll-off and lower overhead console sales volumes.
Gross profit
Automotive segment gross profit decreased $95.8 million, or 75.9%, to $30.4 million in fiscal 2024, compared to $126.2 million in fiscal 2023. Excluding the impact of foreign currency translation, gross profit decreased $96.7 million. Gross profit margins decreased to 5.1% in fiscal 2024, from 17.1% in fiscal 2023. The decrease in gross profit margins was due to lower sales volumes, increased costs for product launches, and operational inefficiencies in North America which led to planning deficiencies, inventory shortages, unrecoverable spot purchases and premium freight.
(Loss) income from operations
Automotive segment loss from operations was $140.2 million in fiscal 2024, compared to income from operations of $67.0 million in fiscal 2023. Loss from operations in fiscal 2024 includes goodwill impairment of $105.9 million. Excluding goodwill impairment and the impact of foreign currency translation, income from operations decreased $101.0 million. The decrease was primarily due to lower gross profit and slightly higher selling and administrative expenses. Selling and administrative expenses increased due to higher salary and incentive compensation expense, and outbound freight expense.
Industrial
Fiscal Year Ended
As a percent of net sales 29.9 % 33.2 %
Income from operations $ 88.8 $ 93.1
As a percent of net sales 19.3 % 24.2 %
Customer cost recoveries $ 0.8 $ 4.7
23
Table of Contents
Net sales
Industrial segment net sales increased $75.2 million, or 19.5%, to $460.1 million in fiscal 2024, compared to $384.9 million in fiscal 2023. The increase was primarily due to the acquisition of Nordic Lights, which contributed $85.1 million of net sales, and favorable foreign currency translation of $1.6 million, partially offset by lower customer cost recoveries from spot buys of materials and premium freight costs of $3.9 million. Excluding the impact of Nordic Lights, foreign currency translation and customer cost recoveries, net sales decreased $7.6 million, or 2.0%, primarily due to lower demand for power distribution products in the electric vehicle and data center markets and lower sales volumes of commercial vehicle lighting solutions products.
Gross profit
Industrial segment gross profit increased $9.9 million, or 7.7%, to $137.7 million in fiscal 2024, compared to $127.8 million in fiscal 2023. The increase was due to the acquisition of Nordic Lights, which contributed $22.5 million of gross profit, and $0.4 million of favorable foreign currency translation. Excluding the impact of Nordic Lights and foreign currency translation, gross profit decreased $13.0 million. Gross profit margins decreased to 29.9% in fiscal 2024, compared to 33.2% in fiscal 2023. Gross profit margins were impacted by lower sales volumes and higher operating expenses.
Income from operations
Industrial segment income from operations decreased $4.3 million, or 4.6%, to $88.8 million in fiscal 2024, compared to $93.1 million in fiscal 2023. The acquisition of Nordic Lights and favorable foreign currency translation accounted for $7.4 million and $0.2 million, respectively, of income from operations. Excluding Nordic Lights and the impact of foreign currency translation, income from operations decreased $11.9 million. The decrease was primarily due to lower gross profit, partially offset by slightly lower selling and administrative expenses. The decrease in selling and administrative expenses was primarily due to lower legal fees.
Interface
Fiscal Year Ended
As a percent of net sales 19.1 % 16.9 %
Income from operations $ 6.9 $ 5.5
As a percent of net sales 12.8 % 10.0 %
Customer cost recoveries $ 0.4 $ 2.2
Net sales
Interface segment net sales decreased $1.1 million, or 2.0%, to $53.8 million in fiscal 2024, compared to $54.9 million in fiscal 2023. Excluding customer cost recoveries, net sales increased $0.7 million, or 1.3%. The increase was primarily due to higher sales volumes of appliance products, partially offset by lower sales volumes of data solutions products.
Gross profit
Interface segment gross profit increased $1.0 million, or 10.8%, to $10.3 million in fiscal 2024, compared to $9.3 million in fiscal 2023. Gross profit margin increased to 19.1% in fiscal 2024, from 16.9% in fiscal 2023. The increase in gross profit margins was primarily due to higher sales volumes of appliance products.
Income from operations
Interface segment income from operations increased $1.4 million, or 25.5%, to $6.9 million in fiscal 2024, compared to $5.5 million in fiscal 2023. The increase was due to higher gross profit and lower selling and administrative expenses, primarily professional fees.
Medical
Fiscal Year Ended
Net sales $ 2.4 $ 3.6
Gross profit $ (0.2 ) $ (0.5 )
Loss from operations $ (3.0 ) $ (6.1 )
In the first quarter of fiscal 2024, we made the decision to initiate the discontinuation of the Dabir Surfaces business (which accounts for all of the Medical segment’s financial results). Towards the end of the second quarter of fiscal 2024, we sold certain assets of the Dabir Surfaces business and have now exited this business, which accounts for the variances in the table above.
24
Table of Contents
Financial Condition, Liquidity and Capital Resources
Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, dividends and stock repurchases. Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior secured credit agreement. We believe our liquidity position will be sufficient to fund our existing operations and current commitments for at least the next twelve months. However, if economic conditions remain impacted for longer than we expect due to supply chain disruptions, inflationary pressure or other geopolitical risks, or if we are unable to maintain compliance with our debt covenants, our liquidity position could be severely impacted.
At April 27, 2024, we had $161.5 million of cash and cash equivalents, of which $53.4 million was held in subsidiaries outside the U.S. Cash held by these subsidiaries is used to fund operational activities and can be repatriated, primarily through the payment of dividends and the repayment of intercompany loans, without creating material additional income tax expense.
Share Buyback Programs
On March 31, 2021, as subsequently amended on June 16, 2022, the Board of Directors authorized the purchase of up to $200.0 million of our outstanding common stock through June 14, 2024 (the “2021 Buyback Program”). On June 13, 2024, the Board of Directors authorized a new share buyback program, commencing on June 17, 2024, for the purchase of up to $200.0 million (the “2024 Buyback Program”) of our outstanding common stock through June 17, 2026. Purchases may be made on the open market, in private transactions or pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of April 27, 2024, a total of 3,417,961 shares had been purchased under the 2021 Buyback Program at a total cost of $133.1 million since the commencement of that program. As of April 27, 2024, $66.9 million remained available under the 2021 Buyback Program to repurchase shares. Upon adoption of the 2024 Buyback Program, no further repurchases will be made under the 2021 Buyback Program.
Amended Credit Agreement
On October 31, 2022, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the Lenders and other parties named therein. The Credit Agreement amended and restated the Amended and Restated Credit Agreement, dated September 12, 2018 and as previously amended (the “Prior Credit Agreement”), with Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders and other parties named therein. Among other things, the Credit Agreement (i) increased the multicurrency revolving credit commitments under the Prior Credit Agreement to $750 million (which commitments were subsequently reduced, as discussed below), (ii) refinanced in full and terminated the term loan facility under the Prior Credit Agreement, and (iii) made certain other changes to the covenants, terms, and conditions under the Prior Credit Agreement.
As of January 27, 2024, we were not in compliance with the original consolidated leverage ratio covenant contained in the Credit Agreement for the quarter ended January 27, 2024. On March 6, 2024, we entered into a First Amendment to Second Amended and Restated Credit Agreement (the “First Amendment”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other Lenders party thereto and other parties thereto. Among other things, the First Amendment (i) amended the consolidated leverage ratio covenant for the quarter ended January 27, 2024 and each subsequent fiscal quarter through the quarter ending October 26, 2024, (ii) amended certain interest rate provisions and (iii) waived any default or event of default that may have occurred due to the non-compliance with the consolidated leverage ratio covenant for the quarter ended January 27, 2024 that was in effect prior to the First Amendment. Following the effectiveness of the First Amendment, we were in compliance with the consolidated leverage ratio covenant for the quarter ended January 27, 2024.
25
Table of Contents
On July 9, 2024, we entered into a Second Amendment to Second Amended and Restated Credit Agreement and First Amendment to Second Amended and Restated Guaranty (the “Second Amendment”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other Lenders party thereto and other parties thereto. Among other things, the Second Amendment (i) reduced the revolving credit commitments from $750 million to $500 million, (ii) granted a security interest in substantially all of the personal property of the Company and our U.S. subsidiaries that are guarantors, including 100% of the equity interests of their respective U.S. subsidiaries and 65% of the equity interests of their respective foreign subsidiaries (or such greater amount to the extent such pledge could not reasonably cause adverse tax consequences), (iii) amended the consolidated interest coverage ratio covenant for the quarters ending July 27, 2024, October 26, 2024, January 25, 2025 and April 26, 2025, (iv) amended the consolidated leverage ratio covenant for the quarter ending July 27, 2024 and each subsequent fiscal quarter, (v) amended certain interest rate provisions, (vi) added a requirement to provide monthly financial statements to the lenders through the period ending July 25, 2025, (vii) decreased the general basket exceptions to certain covenants restricting certain Company investments, liens and indebtedness for specified periods of time, (viii) increased, for fiscal year 2025, the general basket exception to a covenant restricting certain Company dispositions of property, (ix) added an “anti-cash hoarding” requirement, applicable during the period from the effective date of the Second Amendment until the earlier to occur of (a) the delivery of financial statements and a compliance certificate for the fiscal quarter ending July 25, 2025 and (b) the delivery of compliance certificates for two consecutive fiscal quarters demonstrating that the our consolidated leverage ratio as of the last day of such fiscal quarters was less than 3.00:1.00, that if we have cash on hand (subject to certain exceptions) of more than $65 million for 10 consecutive business days, we shall prepay the indebtedness under the credit facility by the amount of such excess and (x) made certain other changes to the investment, restricted payment and indebtedness baskets. We were in compliance with the consolidated leverage ratio covenant and consolidated interest coverage ratio covenant for the quarter ended April 27, 2024, both prior to and after giving effect to the Second Amendment.
The Credit Agreement, as amended by the First Amendment and the Second Amendment, is referred to herein as the “Amended Credit Agreement.”
The Amended Credit Agreement provides for a secured multicurrency revolving credit facility of $500 million. In addition, the Amended Credit Agreement permits us to increase the revolving commitments and/or add one or more tranches of term loans under the Amended Credit Agreement from time to time by up to an amount equal to (i) $250 million plus (ii) an additional amount so long as the consolidated leverage ratio would not exceed 3.00:1.00 on a pro forma basis, subject to, among other things, the receipt of additional commitments from existing and/or new lenders. The Amended Credit Agreement matures on October 31, 2027.
As of April 27, 2024, the outstanding balance under the revolving credit facility was $333.0 million, which included $294.0 million (€275.0 million) of euro-denominated borrowings. The Amended Credit Agreement contains various representations and warranties, financial covenants (including covenants requiring us to maintain compliance with a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio, in each case as of the end of each fiscal quarter of the Company), restrictive and other covenants, and events of default. The covenants in the Amended Credit Agreement include an “anti-cash hoarding” requirement, as discussed above. As of April 27, 2024, we were in compliance with all the covenants in the Amended Credit Agreement, both prior to and after giving effect to the Second Amendment. For further information, see Note 10, “Debt” to the consolidated financial statements included in this Annual Report.
Although we currently anticipate, based on our current projections and analyses, that we will be in compliance with the financial covenants contained in the Amended Credit Agreement, no assurance can be given that we will be and remain in compliance with such covenants in the future. Factors that could increase our risk of future non-compliance include those identified in Item 1A, “Risk Factors” of this Annual Report.
26
Table of Contents
Cash Flows
Fiscal Year Ended
Operating activities:
Changes in operating assets and liabilities 23.8 (3.5 )
Net cash provided by operating activities 47.5 132.8
Net cash used in investing activities (17.5 ) (153.1 )
Net cash (used in) provided by financing activities (18.9 ) 3.2
Increase (decrease) in cash and cash equivalents 4.5 (15.0 )
Cash and cash equivalents at beginning of the period 157.0 172.0
Cash and cash equivalents at end of the period $ 161.5 $ 157.0
Operating activities
Net cash provided by operating activities decreased $85.3 million to $47.5 million in fiscal 2024, compared to $132.8 million in fiscal 2023. The decrease was due to lower net income adjusted for non-cash items, partially offset by higher cash inflows related to changes in operating assets and liabilities. The $23.8 million of cash inflows for operating assets and liabilities in fiscal 2024 was primarily due to lower accounts receivable, partially offset by higher inventory.
Investing activities
Net cash used in investing activities was $17.5 million in fiscal 2024, compared to $153.1 million in fiscal 2023. In fiscal 2023, we paid $114.6 million of cash, net of cash acquired, for the acquisition of Nordic Lights. Capital expenditures in fiscal 2024 were $50.2 million, compared to $42.0 million in fiscal 2023. We received $21.3 million of cash from the sale of assets in fiscal 2024 compared to $3.5 million in fiscal 2023. In fiscal 2024, we redeemed life insurance policies and received cash proceeds of $10.8 million.
Financing activities
Net cash used in financing activities was $18.9 million in fiscal 2024, compared to net cash provided by financing activities of $3.2 million in fiscal 2023. In fiscal 2024, we paid $13.7 million of cash for share repurchases, compared to $48.1 million in fiscal 2023. We paid cash dividends of $19.9 million in fiscal 2024, compared to $19.8 million in fiscal 2023. In fiscal 2024, we had net borrowings of $30.7 million, compared to $73.7 million in fiscal 2023. Fiscal 2023 net borrowings were primarily to fund the acquisition of Nordic Lights. In fiscal 2024, we paid $10.9 million to redeem a noncontrolling interest.
Contractual Obligations
The following table summarizes our significant known contractual cash obligations and commercial commitments as of April 27, 2024:
Payments Due By Period
(in millions) Total Less than 1 year 1-3 years 3-5 years More than 5 years
Finance leases $ 0.5 $ 0.2 $ 0.3 $ - $ —
(1) Assumes the outstanding borrowings under the revolving credit facility will be repaid upon maturity of the credit agreement in October 2027.
(2) Based on interest rates in effect as of April 27, 2024 (including the impact of interest rate swaps).
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined under SEC rules.
27
Table of Contents
Legal Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, weterminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties.
A trial with respect to the matter began in February 2020. During the trial, the defendants dismissed their one remaining counterclaim with prejudice. On March 2, 2020, the jury returned a verdict in favor of the Company. The verdict included approximately $102 million in compensatory damages and $11 million in punitive damages. On April 22, 2020, the District Court entered a permanent injunction barring defendants from selling infringing products and ordering them to return Hetronic’s confidential information. Defendants appealed entry of the permanent injunction. On May 29, 2020, the District Court held defendants in contempt for violating the permanent injunction and entered the final judgment. Defendants appealed entry of the final monetary judgment as well. The appeal of the permanent injunction and the appeal of the final judgment were consolidated into a single appeal before the U.S. Court of Appeals for the Tenth Circuit. On August 24, 2021, the Tenth Circuit issued a decision affirming the lower court’s ruling with the exception that it instructed the District Court to modify the injunction from the entire world to all of the countries in which Hetronic sells its products. On April 20 and 21, 2022, the District Court held a hearing related to modifying the injunction pursuant to the Tenth Circuit’s opinion, and the parties filed post-hearing briefs. The defendants also filed a petition for certiorari with the United States Supreme Court seeking to further appeal the extraterritorial application of the Lanham Act in this case. The Company opposed that petition. The Supreme Court requested the views of the Solicitor General on the petition for certiorari, and the Solicitor General recommended granting the petition. On November 4, 2022, the Supreme Court granted the petition. The Supreme Court heard arguments in this matter on March 21, 2023. On June 29, 2023, the Supreme Court vacated the Tenth Circuit’s August 2021 decision and remanded the matter back to the Tenth Circuit for further proceedings. On September 1, 2023, the Tenth Circuit requested supplemental briefing from the parties regarding the effect of the Supreme Court’s decision on the appeal and the proper course of further proceedings. That briefing was thereafter submitted, and the Tenth Circuit heard argument in this matter on January 24, 2024. On April 23, 2024, the Tenth Circuit issued an opinion affirming the District Court’s final judgment on the state law breach of contract and tort claims (this affirmed final judgment amount represents only approximately $22.5 million of the vacated original $113 million final judgment that had been entered in 2020) and remanding for further non-trial proceedings with respect to the appropriate remedies for the Lanham Act claims in light of the Supreme’s Court ruling that the Lanham Act does not apply extraterritorially. On May 17, 2024, the District Court held a status conference and requested further briefing from the parties about the appropriate remedies for the Lanham Act claims.
Like any judgment, particularly a judgment involving defendants outside of the United States, there is no guarantee that the Company will be able to collect all or any portion of the judgment. Furthermore, defendants Abitron Germany and Hetronic Germany filed for insolvency in German court in September and October 2023 respectively, and the Germany insolvency court then appointed a receiver. These insolvency proceedings could potentially adversely impact our ability to enforce or collect upon the judgment or portions of the judgment or otherwise pursue or enforce claims or rights against those defendants.
We incurred legal fees of $2.5 million, $3.9 million and $3.3 million in fiscal 2024, fiscal 2023 and fiscal 2022, respectively, related to the lawsuits. These amounts are included in the selling and administrative expenses and as part of the Industrial segment.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that can affect amounts reported in the consolidated financial statements. In preparing our consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. To the extent that there are differences between these estimates and actual results, our consolidated financial statements may be materially affected. We believe that of the significant accounting policies described in Note 1, “Description of Business and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report, the following involve a significant level of estimation uncertainty.
Goodwill. As described in Note 1 to the consolidated financial statements in this Annual Report, goodwill is tested for impairment on at least an annual basis, or more frequently if a triggering event indicates that an impairment may exist. In qualitatively assessing impairment, the primary qualitative factors include, but are not limited to, the results of prior year fair value calculations, changes in our market capitalization, the reporting unit and overall financial performance, and macroeconomic and industry conditions. We consider the qualitative factors and weight of the evidence obtained to determine if it is more likely than not that a reporting unit’s fair value is less than the carrying amount.
28
Table of Contents
For the quantitative assessment, we utilize either of, or a combination of, the income approach and market approach to estimate the fair value of the reporting unit. The income approach uses a discounted cash flow method and the market approach uses valuation multiples observed for the reporting unit’s guideline public companies. The determination of discounted cash flows are based on management’s estimates of revenue growth rates and earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin, taking into consideration business and market conditions for the countries and markets in which the reporting unit operates. We calculate the discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry specific rates of return on debt and equity capital for a target industry capital structure, adjusted for risks associated with business size, geography and other factors specific to the reporting unit. Revenue growth rates and EBITDA margin, especially in the outer years of a forecast, involve a greater degree of uncertainty. Further, a future change in the discount rate, as a result of a change in economic conditions or otherwise, could result in the carrying values of the reporting units exceeding their respective fair values.
We performed our annual goodwill impairment analysis for each of our reporting units at the beginning of the fourth quarter of fiscal 2024. Based on this analysis, we determined that the fair value of each of our reporting units was in excess of its carrying value. However, as noted in Note 7 to the consolidated financial statements in this Annual Report, the fair value of the Nordic Lights and North American Automotive (“NAA”) reporting units exceeded their carrying value by less than 10%. As discussed below, the NAA reporting unit goodwill was fully impaired as of April 27, 2024. We performed a sensitivity analysis for the significant assumptions used in the goodwill impairment testing analysis for the Nordic Lights reporting unit. The sensitivities were calculated in isolation using the income approach and keeping all other assumptions constant. The cash flow sensitivities do not consider the offsetting impact of a lower discount rate assumption to reflect the reduced risk in estimated future cash flow growth used under the income approach or the related impacts on pricing multiples used under the market approach.
•
A hypothetical increase in the discount rate of 50 basis points would result in goodwill impairment of approximately $6.0 million; and
•
A hypothetical decrease in cash flows of 10% over the entire forecast period would result in goodwill impairment of approximately $14.0 million.
In addition to our annual goodwill impairment analysis, we identified impairment triggering events at interim evaluation dates in fiscal 2024, which were associated with a sustained decrease in our publicly quoted share price, market capitalization and lower than expected operating results. We quantitatively assessed certain reporting units which performed substantially below the forecast used in our last quantitative impairment test. The reporting units that were quantitatively assessed were NAA and European Automotive (“EA”), and we determined the carrying value of these reporting units exceeded their fair value. As a result, in fiscal 2024, we recognized a total non-cash goodwill impairment charge of $105.9 million ($99.8 million for NAA and $6.1 million for EA) that reflected a full impairment of the related goodwill balances.
Impairment of long-lived assets. We evaluate whether events and circumstances have occurred which indicate that the remaining estimated useful lives of our intangible assets, excluding goodwill, and other long-lived assets, may warrant revision or that the remaining balance of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset group over its fair value. Assumptions and estimates about future values and the remaining useful lives are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
Income taxes. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. When determining whether we will be able to realize deferred tax assets, judgment is used to evaluate the positive and negative evidence, including forecasting taxable income using historical and future operating results.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by assessing the adequacy of future expected taxable income, including the reversal of existing temporary differences, historical and projected operating results, and the availability of prudent and feasible tax planning strategies. As of April 27, 2024, we had a valuation allowance of $5.8 million. In the event our operating performance improves or deteriorates in a filing jurisdiction or entity, future assessments could conclude a smaller or larger valuation allowance will be needed. Due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate.
29
Table of Contents
Some or all of management’s judgments are subject to review by the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows. Further, if we are unable to generate sufficient future taxable income, there is a material change in the actual effective tax rates, a change to the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then we could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate.
Business combinations. As described in Note 1 to the consolidated financial statements in this Annual Report, we account for business combinations using the acquisition method of accounting whereby the identifiable assets and liabilities of the acquired business, as well as any noncontrolling interest in the acquired business, are recorded at their estimated fair values as of the date that we obtain control of the acquired business. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows and discount rates, among other items.
We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. The fair value determination requires a number of judgments, particularly around forecasted revenue growth rates, customer attrition, and discount rates. For example and as discussed in Note 3 to the consolidated financial statements in this Annual Report, we recorded a customer relationships intangible asset in connection with the Nordic Lights acquisition of $77.3 million. We performed a sensitivity analysis for the significant assumptions used in the measurement of the customer relationships intangible asset. The sensitivities were calculated in isolation using the income approach and keeping all other assumptions constant. The sensitivity for the customer attrition rate does not consider the offsetting impact of a lower discount rate assumption to reflect the reduced risk in estimated future cash flow growth used under the income approach.
•
A hypothetical increase in the discount rate of 100 basis points would result in a decrease in the valuation of approximately $6.3 million; and
•
A hypothetical increase in the expected customer attrition rate over the entire forecast period of approximately 250 basis points would result in a decrease in the valuation of approximately $15.7 million.
If actual results are materially different than the assumptions we used to determine fair value of the assets and liabilities acquired through a business combination, it is possible that adjustments to the carrying values of such assets and liabilities will have an impact on net income.
New Accounting Pronouncements
For more information regarding new applicable accounting pronouncements, see Note 1, “Description of Business and Summary of Significant Accounting Policies” to the consolidated financial statements included in this Annual Report.
30
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from foreign currency exchange, interest rates, and commodity prices, which could affect our operating results, financial position and cash flows. We manage a portion of these risks through use of derivative financial instruments in accordance with our policies. We do not enter into derivative financial instruments for speculative or trading purposes.
Foreign currency risk
We are exposed to foreign currency risk on sales, costs and assets and liabilities denominated in currencies other than the U.S. dollar. We seek to manage our foreign exchange risk largely through operational means, including matching revenue with same-currency costs and assets with same-currency liabilities. We currently transact business in eight primary currencies worldwide, of which the most significant are the U.S. dollar, the euro, the Chinese renminbi and the Mexican peso.
A portion of our balance sheet is exposed to foreign currency exchange rate fluctuations, which may result in non-operating foreign currency exchange gains or losses upon remeasurement. We use foreign currency forward contracts to provide an economic hedge against balance sheet exposure to certain monetary assets and liabilities denominated in currencies other than the functional currency of the subsidiary. The forward contracts have a maturity of less than three months and are not designated as hedging instruments. As of April 27, 2024, the notional value of these outstanding contracts was $110.9 million. These hedges are intended to reduce, but may not entirely eliminate, foreign currency exchange risk. The impact of a change in the foreign currency exchange rates on our foreign currency forward contracts will generally be offset against the gain or loss from the re-measurement of the underlying balance sheet exposure.
The translation of the assets and liabilities of our international subsidiaries is made using the foreign currency exchange rates as of the end of the reporting period. Translation adjustments are not included in determining net income but are included in accumulated other comprehensive income (loss) within shareholders’ equity on the consolidated balance sheets until a sale or substantially complete liquidation of the net investment in the international subsidiary takes place. As of April 27, 2024, the cumulative net currency translation adjustments decreased shareholders’ equity by $36.5 million. As described in Note 8, “Derivative Financial Instruments and Hedging Activities” to our consolidated financial statements included in this Annual Report, in order to manage certain translational exposure to the euro, we have designated euro-denominated borrowings of $294.0 million as a net investment hedge in our euro-denominated subsidiaries. We have also entered into a euro-denominated cross-currency swap which is designated as a net investment hedge in our euro-denominated subsidiaries. The effective portion of the gains or losses designated as net investment hedges are recognized within the cumulative translation adjustment component in the consolidated statements of comprehensive income to offset changes in the value of the net investment in these foreign currency-denominated operations.
Interest rate risk
We are exposed to interest rate risk on borrowings under our Credit Agreement which are based on variable rates. As of April 27, 2024, we had $333.0 million of borrowings under our Credit Agreement. We manage our interest rate exposures through the use of interest rate swaps to effectively convert a portion of our variable-rate debt to a fixed rate. The notional amount of our interest rate swaps was $141.3 million as of April 27, 2024. Based on borrowings outstanding under our Credit Agreement at April 27, 2024, net of the interest rate swaps, we estimate that a 1% increase in interest rates would result in increased annual interest expense of $1.5 million.
Commodity price risk
We are exposed to commodity price risk primarily on our raw material purchases. These raw materials are not rare or unique to our industry. The cost of copper, resins, and other commodities, such as fuel and energy, has fluctuated in recent years due to changes in global supply and demand. Our gross margins could be affected if these types of costs continue to fluctuate. We actively manage these raw material costs through global sourcing initiatives and price increases on our products where possible. However, in the short-term, further increases in raw material costs can be very difficult to fully offset with price increases because of contractual agreements with our customers, which would unfavorably impact our gross margins.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data are filed within this Annual Report under Item 15, “Exhibits, Financial Statement Schedules.”
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
31
Table of Contents
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Interim Chief Executive Officer and our Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of April 27, 2024. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s applicable rules and forms. Based upon this evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of April 27, 2024 due to material weaknesses in internal control over financial reporting, as described below.
Notwithstanding the ineffectiveness of our disclosure controls and procedures due to the material weaknesses in our internal control over financial reporting as of April 27, 2024, we believe there are no material inaccuracies or omissions of material fact in this Form 10-K and, to the best of our knowledge, we believe that the consolidated financial statements in this Form 10-K fairly present in all material aspects our financial condition, results of operations and cash flows in conformity with GAAP.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our Interim Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of April 27, 2024, based on the guidelines established in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management identified a material weakness in its internal control over financial reporting associated with ineffective information technology general controls (ITGCs) over one of its information technology (IT) systems that is relevant to the preparation of the financial information at a substantial portion of the Company’s subsidiaries throughout the year ended April 27, 2024, which resulted in ineffective business process controls (automated and IT-dependent manual controls) that could result in misstatements potentially impacting significant financial statement accounts and disclosures. Specifically, management did not design and execute program change management controls to provide reasonable assurance that IT program changes affecting financial applications are authorized, tested, and implemented appropriately. As a result, business process controls (automated and IT-dependent manual controls) that are reliant on the affected ITGCs, or that use data produced from the affected systems, were deemed ineffective at April 27, 2024.
Management also identified a material weakness associated with ineffective controls over its impairment analyses for goodwill. Specifically, management did not retain sufficient contemporaneous documentation to demonstrate the operation of sufficiently precise review controls over certain significant assumptions used in the determination of fair value of its reporting units.
Management also identified a material weakness associated with ineffective controls related to the application of GAAP to non-routine events and conditions. Specifically, we did not design and maintain controls to properly evaluate all of the events and conditions relevant to the Company’s going concern evaluation, including the assessment and disclosure of management’s plans in accordance with GAAP.
Because of these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of April 27, 2024. Management reviewed the results of its assessment with the Audit Committee. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on our internal control over financial reporting. This report is included on page F-4 of this Annual Report.
Previously Reported Material Weakness
As previously reported in our Annual Report on Form 10-K for the year ended April 29, 2023, management had identified a material weakness in its control environment related to revenue at a business unit in our Automotive segment. Specifically, we did not maintain effective review, approval and validation controls over pricing data entered into the business unit's financial system and non-standard contract terms.
32
Table of Contents
Our management, under the oversight of the Audit Committee, implemented several measures as part of our remediation efforts that included, among other items, (1) executing a new control and enhancing the design and operating effectiveness of existing internal controls over the review, approval and validation of customer pricing data and non-standard contract terms; and (2) developing and deploying additional training programs around the operation and importance of internal controls. These measures have resulted in the remediation of the previously reported material weakness. However, to the degree that business process controls that were executed as part of our remediation efforts use data produced from the system affected by the ineffective ITGCs discussed above, those controls which use or rely upon that data are included in consideration of the ITGC material weakness described above.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
We and our Board of Directors treat the controls surrounding, and the integrity of, our financial statements with the utmost priority. Management is committed to the planning and implementation of remediation efforts to address control deficiencies and any other identified areas of risk. These remediation efforts are intended to both address the identified material weaknesses and to enhance our overall financial control environment. We will not consider the material weaknesses remediated until the enhanced controls are operational for a sufficient period of time and tested, enabling us to conclude that the enhanced controls are operating effectively.
We are committed to maintaining a strong internal control environment. Our remediation efforts will include, among other items, (1) enhancing the design and operating effectiveness of internal controls over IT change management, review of significant assumptions used in goodwill impairment analyses, and the application of GAAP to non-routine events and conditions; and (2) developing and deploying additional training programs around the operation and importance of these controls. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above.
Changes in Internal Control over Financial Reporting
Except for the remediation efforts implemented in connection with the previously reported material weakness described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Interim Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by a management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
33
Table of Contents
Item 9B. Other Information
Second Amendment to Second Amended and Restated Credit Agreement and First Amendment to Second Amended and Restated Guaranty
Because we are filing this Annual Report within four business days after the triggering event, we are making the following disclosure under this Item 9B, “Other Information” instead of filing a Current Report on Form 8-K under Item 1.01, Entry into a Material Definitive Agreement, and Item 2.03, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
On July 9, 2024, the Company entered into a Second Amendment to Second Amended and Restated Credit Agreement and First Amendment to Second Amended and Restated Guaranty (the “Second Amendment”) among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other Lenders party thereto and other parties thereto.
The Second Amendment amended the Company’s Second Amended and Restated Credit Agreement, dated as of October 31, 2022, and as previously amended pursuant to that certain First Amendment to Second Amended and Restated Credit Agreement, dated as of March 6, 2024 (which credit agreement, as previously amended by such first amendment, is referred to in this Item 9B, “Other Information” section of this Annual Report as the “Credit Agreement”), among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other Lenders party thereto and the other parties thereto. The Second Amendment, among other things:
(i) reduced the revolving credit commitments from $750 million to $500 million;
(ii) granted a security interest in substantially all of the personal property of the Company and its U.S. subsidiaries that are guarantors, including 100% of the equity interests of their respective U.S. subsidiaries and 65% of the equity interests of their respective foreign subsidiaries (or such greater amount to the extent such pledge could not reasonably cause adverse tax consequences);
(iii) amended the financial covenant that had required that the Company’s consolidated interest coverage ratio as of the end of each fiscal quarter not be less than 3.50:1.00 to instead require that the Company’s consolidated interest coverage ratio not be less than (a) 2.95:1.00 as of the end of the fiscal quarter ending July 27, 2024, (b) 2.45:1.00 as of the end of the fiscal quarter ending October 26, 2024, (c) 2.65:1.00 as of the end of the fiscal quarter ending January 25, 2025, (d) 3.15:1.00 as of the end of the fiscal quarter ending April 26, 2025 and (e) 3.50:1.00 as of the end of any fiscal quarter ending thereafter;
(iv) amended the financial covenant that had required (subject to certain exceptions) that the Company’s consolidated leverage ratio be no more than (a) 4.00:1.00 as of the end of the fiscal quarters ending July 27, 2024 and October 26, 2024 and (b) 3.25:1.00 as of the end of any fiscal quarter ending thereafter to instead require (subject to certain exceptions) that the Company’s consolidated leverage ratio be no more than (a) 4.60:1.00 as of the end of the fiscal quarter ending July 27, 2024, (b) 5.00:1.00 as of the end of the fiscal quarter ending October 26, 2024, (c) 5.00:1.00 as of the end of the fiscal quarter ending January 25, 2025, (d) 4.25:1.00 as of the end of the fiscal quarter ending April 26, 2025 and (e) 3.75:1.00 as of the end of any fiscal quarter ending thereafter;
(v) increased the interest rate during any period that the Company’s consolidated leverage ratio is greater than 4.50:1.00 until a compliance certificate is delivered showing a lower consolidated leverage ratio and provided that such increased interest rate shall in any event apply from the effective date of the Second Amendment until the compliance certificate is delivered for the fiscal quarter ending April 26, 2025, so that during those periods (a) loans denominated in US dollars will bear interest at either (x) an adjusted base rate plus 2.00% or (y) an adjusted term SOFR rate or term SOFR daily floating rate (in each case, as determined in accordance with the provisions of the Credit Agreement, as amended by the Second Amendment), in each case plus 3.00% and (b) loans denominated (I) in euros will bear interest at the Euro Interbank Offered Rate, (II) in pounds sterling will bear interest at the Sterling Overnight Index Average Reference Rate, (III) in Singapore dollars will bear interest at the Singapore Interbank Offered Rate, (IV) in Canadian dollars will bear interest at the forward-looking term rate based on the Canadian Overnight Repo Rate Average and (V) in Hong Kong dollars will bear interest at the Hong Kong Interbank Offered Rate (in each case, as determined in accordance with the provisions of the Credit Agreement, as amended by the Second Amendment), in each case plus 3.00%;
(vi) added a requirement to provide monthly financial statements to the lenders through the period ending on July 25, 2025;
(vii) decreased from $50 million to $25 million, for the period from the effective date of the Second Amendment to the date the Company’s financial statements are delivered for the fiscal quarter ending July 25, 2025, the general basket exceptions to certain covenants restricting certain Company investments, liens and indebtedness;
(viii) increased from 15% of consolidated tangible assets to 20% of consolidated tangible assets, for fiscal year 2025, the general basket exception to a covenant restricting certain Company dispositions of property;
34
Table of Contents
(ix) added an “anti-cash hoarding” requirement, applicable during the period from the effective date of the Second Amendment until the earlier to occur of (a) the delivery of financial statements and a compliance certificate for the fiscal quarter ending July 25, 2025 and (b) the delivery of compliance certificates for two consecutive fiscal quarters demonstrating that the Company’s consolidated leverage ratio as of the last day of such fiscal quarters was less than 3.00:1.00, that if the Company has cash on hand (subject to certain exceptions) of more than $65 million for 10 consecutive business days, the Company shall prepay the indebtedness under the credit facility by the amount of such excess; and
(x) amended the investment, restricted payment and indebtedness baskets (1) that had allowed for unlimited investments, restricted payments and indebtedness, as applicable, during the period to and including the date of reporting for the fiscal quarter ending on January 25, 2025, so long as the Company’s pro forma consolidated leverage ratio is no greater than 3.50:1.00 (or 3.00:1.00 in the case of restricted payments), to instead provide that such applicable period will be to and including the date of reporting for the fiscal quarter ending on July 25, 2025 (instead of January 25, 2025), and (2) that had allowed for unlimited investments, restricted payments and indebtedness, as applicable, after the date of reporting for the fiscal quarter ending on January 25, 2025, so long as the Company’s pro forma consolidated leverage ratio is at least 0.25:1.00 lower than the maximum ratio permitted under the applicable financial covenant, to instead provide that such applicable period will be after the date of reporting for the fiscal quarter ending on July 25, 2025 (instead of January 25, 2025).
The foregoing description of the Second Amendment does not purport to be complete and is qualified in its entirety by reference to the complete text of the Second Amendment, which is filed as Exhibit 10.44 to this Annual Report and is incorporated herein by reference.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
35
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item regarding our directors and corporate governance matters is incorporated by reference herein to the definitive proxy statement for our 2024 annual meeting under the captions “Proposal One Election of Directors” and “Corporate Governance.” The information required by this item regarding our executive officers appears as a supplementary item following Item 4 under Part I of this Annual Report. The information required by this item regarding compliance with Section 16(a) of the Exchange Act and information regarding our Audit Committee is incorporated by reference herein to the definitive proxy statement for our 2024 annual meeting under the captions “Delinquent Section 16(a) Reports” and “Audit Committee Matters,” respectively.
Our Board of Directors has adopted a Code of Business Conduct (the “Code”) that applies to our directors, our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, as well as other employees. The Code is publicly available on our website at www.methode.com. If we make any substantive amendments to the Code or grant any waiver, including any implicit waiver, from a provision of the Code to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K in accordance with applicable rules and regulations. The information contained on our website is not incorporated by reference into this Annual Report.
Our Board of Directors has adopted insider trading policies and procedures governing the purchase, sale and other dispositions of our securities by directors, officers and employees, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to us. Our insider trading policy has been filed as Exhibit 19 to this Annual Report. Our insider trading policy does not apply directly to repurchases of stock by the Company, but our practice in the past has generally been to follow the policy’s guidelines in connection with stock repurchases by effecting trades either during open window periods under the policy or through adoption, during an open window period, of a pre-arranged trading plan that satisfies the affirmative defense requirements of Rule 10b5-1 under the Exchange Act. We reserve the right to purchase securities outside of the scope of the insider trading policy subject to compliance with applicable laws.
Item 11. Executive Compensation
The information required by this item is incorporated by reference herein to the definitive proxy statement for our 2024 annual meeting under the captions “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Executive Compensation Tables”, “CEO Pay Ratio”, “Pay for Performance” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference herein to the definitive proxy statement for our 2024 annual meeting under the caption “Security Ownership.”
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of April 27, 2024. All outstanding awards relate to our common stock. Shares issued under all of the following plans may be from our treasury, newly issued or both.
Equity compensation plans not approved by security holders — — —
(1)
The weighted-average exercise price set forth in this column is calculated excluding outstanding restricted stock awards and restricted stock units, since recipients are not required to pay an exercise price to receive the shares subject to these awards.
36
Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference herein to the definitive proxy statement for our 2024 annual meeting under the captions “Corporate Governance” and “Transactions with Related Persons.”
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference herein to the definitive proxy statement for our 2024 annual meeting under the caption “Audit Committee Matters.”
37
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Consolidated Financial Statements.
Reference is made to the Index to Consolidated Financial Statements on Page F-1.
(2) Consolidated Financial Statement Schedule.
Reference is made to the Index to Financial Statement Schedule on Page F-1.
(3) Exhibits.
EXHIBIT INDEX
ExhibitNumber Description
38
Table of Contents
39
Table of Contents
19 Methode Electronics, Inc. Insider Trading Policy.
21 Subsidiaries of Methode Electronics, Inc.
23 Consent of Ernst & Young LLP.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
97 Methode Electronics, Inc. Incentive Compensation Recovery Policy.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema With Embedded Linkbases Document
* Management Compensatory Plan
** Indicates that the exhibit is being furnished with this report and not filed as part of it.
Item 16. Form 10-K Summary
None.
40
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
METHODE ELECTRONICS, INC.
(Registrant)
By: /s/ RONALD L.G. TSOUMAS
Ronald L.G. Tsoumas
Chief Financial Officer
(Principal Financial Officer)
Dated: July 11, 2024
41
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ WALTER J. ASPATORE Chairman of the Board July 11, 2024
Walter J. Aspatore
/s/ MARK D. SCHWABERO Vice Chairman of the Board July 11, 2024
Mark D. Schwabero
/s/ KEVIN NYSTROM Interim Chief Executive Officer July 11, 2024
Kevin Nystrom (Principal Executive Officer)
/s/ RONALD L.G. TSOUMAS Chief Financial Officer July 11, 2024
Ronald L.G. Tsoumas (Principal Financial Officer)
/s/ AMIT N. PATEL Chief Accounting Officer July 11, 2024
Amit N. Patel (Principal Accounting Officer)
/s/ DAVID P. BLOM Director July 11, 2024
David P. Blom
/s/ THERESE M. BOBEK Director July 11, 2024
Therese M. Bobek
/s/ BRIAN J. CADWALLADER Director July 11, 2024
Brian J. Cadwallader
/s/ BRUCE K. CROWTHER Director July 11, 2024
Bruce K. Crowther
/s/ DARREN M. DAWSON Director July 11, 2024
Darren M. Dawson
/s/ JANIE GODDARD Director July 11, 2024
Janie Goddard
/s/ MARY A. LINDSEY Director July 11, 2024
Mary A. Lindsey
/s/ ANGELO V. PANTALEO Director July 11, 2024
Angelo V. Pantaleo
42
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements: Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) F-2
Consolidated Balance Sheets — April 27, 2024 and April 29, 2023 F-5
Notes to Consolidated Financial Statements F-10
Consolidated Financial Statement Schedule:
Schedule II — Valuation and Qualifying Accounts F-39
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are immaterial and, therefore, have been omitted.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Methode Electronics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Methode Electronics, Inc. and Subsidiaries (the Company) as of April 27, 2024, and April 29, 2023, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended April 27, 2024, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 27, 2024 and April 29, 2023, and the results of its operations and its cash flows for each of the three years in the period ended April 27, 2024, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 27, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 11, 2024 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment of the Nordic Lights and North American Automotive Reporting Units
F-2
Table of Contents
Valuation of Customer Relationships Intangible Asset Acquired in the Nordic Lights Business Combination
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1966.
Chicago, Illinois
July 11, 2024
F-3
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Methode Electronics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Methode Electronics, Inc. and subsidiaries’ internal control over financial reporting as of April 27, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Methode Electronics, Inc. and Subsidiaries (the Company) has not maintained effective internal control over financial reporting as of April 27, 2024, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in internal control over financial reporting associated with ineffective information technology general controls (ITGCs) over one of its information technology (IT) systems that is relevant to the preparation of the financial information at a substantial portion of the Company’s subsidiaries, its impairment analyses for goodwill and the application of US generally accepted accounting principles to non-routine events and conditions. As a result of the ineffective ITGCs, business process controls (automated and IT-dependent manual controls) that are reliant on the ineffective ITGCs, or that use data produced from the affected system, were deemed ineffective at April 27, 2024.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2024 consolidated financial statements of the Company. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and this report does not affect our report dated July 11, 2024, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
July 11, 2024
F-4
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 161.5 $ 157.0
Income tax receivable 4.0 12.9
Prepaid expenses and other current assets 18.7 20.5
Assets held for sale 4.7 —
Long-term assets:
Property, plant and equipment, net 212.1 220.3
Operating lease right-of-use assets, net 26.7 28.4
Other long-term assets 21.6 37.7
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued employee liabilities 38.0 36.7
Other accrued liabilities 46.0 34.5
Short-term operating lease liabilities 6.7 6.8
Short-term debt 0.2 3.2
Income tax payable 8.1 8.1
Long-term liabilities:
Long-term operating lease liabilities 20.6 21.8
Long-term income tax payable 9.3 16.7
Other long-term liabilities 16.8 14.3
Deferred tax liabilities 28.7 41.8
Redeemable noncontrolling interest — 11.1
Shareholders' equity:
Accumulated other comprehensive loss (36.7 ) (19.0 )
See notes to consolidated financial statements.
F-5
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Fiscal Year Ended
Goodwill impairment 105.9 — —
Other income, net (0.6 ) (2.4 ) (10.3 )
Income tax (benefit) expense (4.8 ) 13.0 16.3
Net income attributable to redeemable noncontrolling interest — — —
Net (loss) income attributable to Methode $ (123.3 ) $ 77.1 $ 102.2
(Loss) income per share attributable to Methode:
See notes to consolidated financial statements.
F-6
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Fiscal Year Ended
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (16.7 ) 10.7 (42.0 )
Derivative financial instruments (1.0 ) (2.9 ) 9.1
Other comprehensive (loss) income (17.7 ) 7.8 (32.9 )
Comprehensive income attributable to redeemable noncontrolling interest — — —
Comprehensive (loss) income attributable to Methode $ (141.0 ) $ 84.9 $ 69.3
See notes to consolidated financial statements.
F-7
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except share data)
Stock-based compensation expense — — — 11.0 — — — 11.0
Exercise of stock options — 13,000 — 0.5 — — — 0.5
Other comprehensive loss — — — — (32.9 ) — — (32.9 )
Dividends on common stock — — — — — — (21.0 ) (21.0 )
Cancellation of restricted stock — (16,000 ) — — — — — —
Stock-based compensation expense — — — 10.5 — — — 10.5
Exercise of stock options — 40,000 — 1.5 — — — 1.5
Acquired redeemable noncontrolling interest 11.3 — — — — — — —
Other comprehensive income — — — — 7.8 — 7.8
Net income — — — — — — 77.1 77.1
Dividend declared to noncontrolling interest (0.2 ) — — — — — — —
Dividends on common stock — — — — — — (20.3 ) (20.3 )
Cancellation of restricted stock — (144,000 ) (0.1 ) 0.1 — — — —
Stock-based compensation expense — — — 2.6 — — — 2.6
Purchase of redeemable noncontrolling interest (11.1 ) — — — — — — —
Other comprehensive loss — — — — (17.7 ) — — (17.7 )
Dividends on common stock — — — — — — (19.7 ) (19.7 )
See notes to consolidated financial statements.
F-8
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Fiscal Year Ended
Operating activities:
Stock-based compensation expense 3.6 11.5 11.8
Change in cash surrender value of life insurance (1.2 ) 0.3 0.1
Amortization of debt issuance costs 0.8 0.7 0.7
(Gain) loss on sale of property, plant and equipment (1.9 ) 0.6 (0.3 )
Impairment of long-lived assets 2.3 0.7 3.1
Goodwill impairment 105.9 — —
Change in deferred income taxes (20.8 ) (4.6 ) (2.1 )
Changes in operating assets and liabilities:
Prepaid expenses and other assets 6.9 (25.4 ) 1.5
Net cash provided by operating activities 47.5 132.8 98.8
Investing activities:
Purchases of property, plant and equipment (50.2 ) (42.0 ) (38.0 )
Proceeds from redemption of life insurance 10.8 — —
Proceeds from settlement of net investment hedge 0.6 — —
Proceeds from disposition of assets 21.3 3.5 0.6
Acquisition of business, net of cash acquired — (114.6 ) —
Net cash used in investing activities (17.5 ) (153.1 ) (37.4 )
Financing activities:
Taxes paid related to net share settlement of equity awards (3.8 ) (0.5 ) (0.3 )
Repayments of finance leases (0.2 ) (0.4 ) (0.7 )
Debt issuance costs (1.1 ) (3.2 ) —
Proceeds from exercise of stock options — 1.5 0.5
Purchases of common stock (13.7 ) (48.1 ) (64.5 )
Purchase of redeemable noncontrolling interest (10.9 ) — —
Net cash (used in) provided by financing activities (18.9 ) 3.2 (114.6 )
Increase (decrease) in cash and cash equivalents 4.5 (15.0 ) (61.2 )
Cash and cash equivalents at beginning of the year 157.0 172.0 233.2
Cash and cash equivalents at end of the year $ 161.5 $ 157.0 $ 172.0
Supplemental cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 15.0 $ 25.6 $ 32.3
See notes to consolidated financial statements.
F-9
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.Description of Business and Summary of Significant Accounting Policies
Methode Electronics, Inc. (the “Company” or “Methode”) is a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. The Company designs, engineers and produces mechatronic products for Original Equipment Manufacturers (“OEMs”) utilizing its broad range of technologies for user interface, light-emitting diode (“LED”) lighting system, power distribution and sensor applications.
The Company’s solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment and consumer appliance.
Financial reporting periods. The Company maintains its financial records on the basis of a 52 or 53-week fiscal year ending on the Saturday closest to April 30. Fiscal 2024 ended on April 27, 2024, fiscal 2023 ended on April 29, 2023 and fiscal 2022 ended on April 30, 2022, and each represented 52 weeks of results.
Basis of presentation. The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts and operations of the Company and its wholly and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications. Certain prior period amounts have been reclassified to conform to the current year presentation.
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions are subject to an inherent degree of uncertainty and may change, as new events occur, and additional information is obtained. As a result, actual results may differ from previously estimated amounts, and such differences may be material to the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur.
Cash and cash equivalents. Cash and cash equivalents consist of cash and highly liquid investments with a maturity of three months or less. Highly liquid investments include money market funds which are classified within Level 1 of the fair value hierarchy. As of April 27, 2024 and April 29, 2023, the Company had a balance of $73.2 million and $1.3 million, respectively, in money market accounts.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are customer obligations due under normal trade terms and are presented net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on the current expected credit loss impairment model. The Company applies a historical loss rate based on historic write-offs to aging categories. The historical loss rate is adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary. The Company may also record a specific reserve for individual accounts when it becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer’s operating results or financial position. The allowance for doubtful accounts balance was $1.4 million and $1.3 million as of April 27, 2024 and April 29, 2023, respectively.
Concentration of credit risk. Financial assets that subject the Company to concentration of credit risk consist primarily of cash equivalents, derivative contracts, and accounts receivable. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. However, the balances with U.S. financial institutions often exceed the amount of insurance provided on such accounts by the Federal Deposit Insurance Corporation.
For accounts receivable, the Company is exposed to credit risk in the event of nonpayment by customers. The Company generally does not require collateral, but rather performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers’ current credit worthiness. The following customers in the Automotive segment accounted for more than 10% of net sales:
Fiscal Year Ended
Customer B * 10.8 % *
* less than 10%
At April 27, 2024 and April 29, 2023, no customer accounted for greater than 10% of the Company’s accounts receivable.
F-10
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories. Inventories are stated at the lower-of-cost or net realizable value. Cost is determined using the first-in, first-out method. Finished products and work-in-process inventories include direct material costs and direct and indirect manufacturing costs. The Company records reserves for inventory that may be obsolete or in excess of current and future market demand. See Note 5, “Inventory” for additional information.
Property, plant and equipment. Property, plant and equipment are recorded at cost less accumulated depreciation, with the exception of assets acquired through acquisitions, which are initially recorded at fair value. Equipment acquired under a finance lease is recorded at the present value of the future minimum lease payments. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 40 years for buildings and building improvements and 3 to 15 years for machinery and equipment. Costs of additions and major improvements are capitalized, whereas maintenance and repairs that do not improve or extend the life of the asset are charged to expense as incurred. See Note 6, “Property, Plant and Equipment” for additional information.
Assets held for sale. The Company classifies long-lived assets to be sold as held for sale in the period in which all of the required criteria under Accounting Standards Codification (“ASC”) 360 “Impairment or disposal of long-lived assets” are met. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon determining that a long-lived asset meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets as “Assets held for sale” on the consolidated balance sheets. Assets held for sale at April 27, 2024 are non-core assets in the Automotive and Corporate segments.
Business combinations. The Company accounts for business combinations using the acquisition method. The purchase price of an acquired business is allocated to its identifiable assets and liabilities based on estimated fair values. Determining the fair values of assets acquired and liabilities assumed requires management’s judgment, the utilization of independent appraisal firms and often involves the use of significant estimates and assumptions with respect to the timing and amount of future cash flows, market rate assumptions, actuarial assumptions, and appropriate discount rates, among other items. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date. See Note 3, “Acquisition and Disposition” for additional information.
Goodwill. Goodwill is not amortized but is tested for impairment on at least an annual basis as of the beginning of the fourth quarter each year, or more frequently if indicators of potential impairment exists. Goodwill is evaluated at the reporting unit level by comparing the fair value of the reporting unit with its carrying amount including goodwill. An impairment of goodwill exists if the carrying amount of the reporting unit exceeds its fair value. The impairment loss is the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to that reporting unit.
In performing the goodwill impairment test, the Company may first assess qualitative factors to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. See Note 7, “Goodwill and Other Intangible Assets” for additional information regarding the Company’s goodwill impairment assessment for fiscal 2024.
Amortizable intangible assets. Amortizable intangible assets consist primarily of fair values assigned to customer relationships and trade names. Amortization is recognized over the useful lives of the intangible assets, generally up to 20 years, using the straight-line method. See Note 7, “Goodwill and Other Intangible Assets” for additional information.
Impairment of long-lived assets. The Company evaluates whether events and circumstances have occurred which indicate that the remaining estimated useful lives of its intangible assets, excluding goodwill, and other long-lived assets, may warrant revision or that the remaining balance of such assets may not be recoverable. If impairment indicators exist, the Company performs an impairment analysis by comparing the undiscounted cash flows resulting from the use of the asset group to the carrying amount. If the carrying amount exceeds the undiscounted cash flows, an impairment loss is recognized based on the excess of the asset’s carrying amount over its fair value. See Note 4, “Restructuring and Asset Impairment Charges” for additional information.
Pre-production costs related to long-term supply arrangements. The Company incurs pre-production tooling costs related to products produced for its customers under long-term supply arrangements. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable by the customer. As of April 27, 2024 and April 29, 2023, the Company had $44.1 million and $36.1 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling.
F-11
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Costs for molds, dies and other tools used in products produced for its customers under long-term supply arrangements for which the Company has title are capitalized in property, plant and equipment and depreciated over the shorter of the life of the arrangement or over the estimated useful life of the assets. Company owned tooling was $14.0 million and $12.2 million as of April 27, 2024 and April 29, 2023, respectively.
Leases. The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company estimates the incremental borrowing rate to discount the lease payments based on information available at lease commencement. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company utilizes certain practical expedients, including the election not to reassess its prior conclusions about lease identification, lease classification and initial direct costs, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee. The Company elects to recognize a right-of-use asset and related lease liability for leases with a lease term of 12 months or less for all classes of underlying assets. Lease expense is recognized on a straight-line basis over the lease term. See Note 16, “Leases” for additional information.
Derivative financial instruments. The Company uses derivative financial instruments, including swaps and forward contracts, to manage exposures to changes in currency exchange rates and interest rates. The Company does not enter into or hold derivative financial instruments for trading or speculative purposes. See Note 8, “Derivative Financial Instruments and Hedging Activities” for additional information.
Redeemable noncontrolling interest. The Company reports noncontrolling interests in the mezzanine (“temporary equity”) section, between liabilities and equity, of the consolidated balance sheets, to the extent that such noncontrolling interests have redemption features that are not solely within the control of the Company. The carrying amount of the redeemable noncontrolling interest, initially valued at fair value as part of acquisition accounting, is adjusted each reporting period to equal the greater of the (i) redemption value or (ii) carrying value of the noncontrolling interest, adjusted each reporting period for income or loss attributable to the noncontrolling interest and any distributions made to date. See Note 3, “Acquisition and Disposition” for additional information.
Income taxes. Income taxes are calculated using the asset and liability method, under which deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income. In determining whether an uncertain tax position exists, the Company determines, based solely on its technical merits, whether the tax position is more likely than not to be sustained upon examination, and if so, a tax benefit is measured on a cumulative probability basis that is more likely than not to be realized upon the ultimate settlement. In determining the provision for income taxes for financial statement purposes, the Company makes certain estimates and judgments which affect its evaluation of the carrying value of its deferred tax assets, as well as its calculation of certain tax liabilities. See Note 11, “Income Taxes” for additional information.
Revenue recognition. Revenue is recognized in accordance with ASC 606, “Revenue from Contracts with Customers.”Revenue ismeasured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. From time to time, customers may negotiate annual price downs. Management has evaluated these price downs and determined that in some instances, these price downs give rise to a material right. In instances that a material right exists, a portion of the transaction price is allocated to the material right and recognized over the life of the contract.
Across all products, the amount of revenue recognized corresponds to the related purchase order and is adjusted for variable consideration (such as discounts). Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue.
The Company’s performance obligations are typically short-term in nature. As a result, the Company has elected the practical expedient that provides an exemption from the disclosure requirements regarding information about remaining performance obligations on contracts that have original expected durations of one year or less. See Note 2, “Revenue” for further information.
Shipping and handling fees and costs. Shipping and handling fees billed to customers are included in net sales, and the related costs are included in selling and administrative expense.
F-12
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring expense. Restructuring expense includes costs directly associated with exit or disposal activities. Such costs include employee severance and termination benefits, asset impairment charges, contract termination fees, and other exit or disposal costs. Employee termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable. Asset impairment charges relate to the impairment of ROU lease assets and equipment. Contract termination costs are recorded when notification of termination is given to the other party. See Note 4, “Restructuring and Asset Impairment Charges” for additional information.
Foreign currency translation. The functional currencies of the majority of the Company’s foreign subsidiaries are their local currencies. The results of operations of these foreign subsidiaries are translated into U.S. dollars using average monthly rates, while the assets and liabilities are translated using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains and losses arising from transactions denominated in a currency other than the functional currency, except certain long-term intercompany transactions, are included in the consolidated statements of operations in other income, net. Net foreign exchange losses were $2.2 million, $7.1 million and $1.9 million for fiscal 2024, fiscal 2023 and fiscal 2022, respectively.
Government incentives and grants. From time to time, the Company receives government grants in the form of cash grants and other incentives in return for past or future compliance with certain conditions. The Company accounts for funds received from government grants by analogy to International Accounting Standards 20, “Accounting for Government Grants and Disclosure of Government Assistance.”Accordingly, the Company recognizes government grants in the consolidated statements of operations when there is reasonable assurance that it will comply with the conditions associated with the grant and the grants will be received.
Government grants are recorded in the consolidated financial statements in accordance with their purpose as a reduction of expenses, a reduction of asset costs, or other income. Incentives related to specific operating activities are offset against the related expense in the period the expense is incurred. The Company recorded $0.5 million and $9.7 million of government grants as other income, net in fiscal 2024 and fiscal 2023, respectively. The Company recorded $0.3 million and $0.6 million of government grants as a reduction of cost of goods sold and selling and administrative expense in fiscal 2024 and fiscal 2023, respectively.
Some government grants are paid over a period of years and are recorded at amortized cost on the consolidated balance sheets. As of April 27, 2024 and April 29, 2023, grant receivables outstanding were $12.3 million and $17.8 million, respectively. The short-term and long-term portion of grant receivables are recorded on the consolidated balance sheets within accounts receivable, net and other long-term assets, respectively.
Research and development costs. Costs associated with the enhancement of existing products and the development of new products are charged to expense when incurred. Research and development expenses primarily relate to product engineering and design and development expenses and are classified as a component of cost of goods sold on the consolidated statements of operations. Research and development costs were $49.1 million, $35.0 million and $35.7 million for fiscal 2024, fiscal 2023 and fiscal 2022, respectively.
Stock-based compensation. The Company recognizes compensation expense for the cost of awards of equity compensation using a fair value method in accordance with ASC 718, “Stock-based Compensation.” See Note 13, “Shareholders’ Equity” for additional information.
Product warranty. The Company’s warranties are standard, assurance-type warranties only. The Company does not offer any additional service or extended term warranties to its customers. As such, warranty obligations are accrued when its probable that a liability has been incurred and the related amounts are reasonably estimable.
Related party transactions. The Company identifies related party transactions for disclosure in accordance with ASC 850, “Related Party Disclosures.” See Note 17, “Related Party Transactions” for additional information.
Fair value measurement. ASC 820, “Fair Value Measurement,” provides a framework for measuring fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy under ASC 820 requires an entity to maximize the use of observable inputs. The Company groups assets and liabilities at fair value in three levels as follows:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities;
•
Level 2 - Observable inputs for similar assets or liabilities adjusted for terms specific to the asset or liability;
•
Level 3 - Unobservable inputs in which little or no market activity exists, requiring the Company to develop its own assumptions that market participants would use to value the asset or liability.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes to the observability of valuation inputs may result in a reclassification of levels for certain assets and liabilities within the fair value hierarchy.
F-13
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values because of the short maturity of these instruments.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, “Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured at the acquisition date in accordance with ASC 606, as if the acquirer had originated the contracts. Prior to the issuance of this ASU, contract assets and liabilities were recognized at fair value on the acquisition date. The Company adopted this ASU in the first quarter of fiscal 2024 on a prospective basis. The adoption of this ASU did not have a material impact on its consolidated financial statements or related disclosures and is only applicable to future business acquisitions.
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis. ASU 2023-07 will become effective for the Company’s annual reports beginning in fiscal 2025, and interim period reports beginning in the first quarter of fiscal 2026 on a retrospective basis. Early adoption is permitted. The adoption of this ASU will result in increased disclosures for the Company’s segments.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU No. 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income tax paid. ASU No. 2023-09 will become effective for the Company in the first quarter of fiscal 2026 and will be applied on a prospective basis, with a retrospective option. Early adoption is permitted. The Company is currently evaluating the impact of the ASU on its income tax disclosures.
Recent Securities and Exchange Commission Final Rules Not Yet Effective
In March 2024, the SEC adopted new rules that will require registrants to disclose certain climate-related information in their annual reports and registration statements. The Company will be subject to the applicable requirements of the final rule in its Annual Report on Form 10-K for the year ended May 1, 2027. In April 2024, the SEC exercised its discretion to stay these rules pending the completion of judicial review of consolidated petitions challenging the validity of the rules. The Company is currently evaluating the impact of these rules in light of those legal challenges.
Note 2.Revenue
The Company generates revenue from manufacturing of products for customers in diversified global markets under multi-year programs. Typically, these programs do not contain a firm commitment by the customer for volume or price and do not reach the level of a performance obligation until the Company receives either a purchase order and/or a materials release from the customer for a specific quantity at a specified price, at which point an enforceable contract exists. Contracts may also provide for annual price reductions over the production life of a program, and prices may be adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors.
The majority of the Company’s revenue is recognized at a point in time. The Company has determined that the most definitive demonstration that control has transferred to a customer is physical shipment or delivery, depending on the contractual shipping terms, except for consignment transactions. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon the customer’s usage. The Company’s revenue also includes customer cost recoveries, which represent reimbursements the Company receives from customers for incremental costs associated with spot purchases of raw materials and premium freight incurred in fulfilling its performance obligation to the customer. Given these cost recoveries are generally negotiated after contract inception, the Company accounts for these cost recoveries as a modification to the existing contract. The Company recognizes cost recoveries as revenue when (or as) the remaining performance obligations per the contract are satisfied, or on the modification date if all performance obligations under the contract have been previously satisfied.
Revenue associated with products which the Company believes have no alternative use (such as highly customized parts), and where the Company has an enforceable right to payment, are recognized on an over time basis. Revenue is recognized based on progress to date, which is typically even over the production process through transfer of control to the customer.
The Company’s payment terms with its customers are typically 30-45 days from the time control transfers. As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606 to not assess whether a contract has a significant financing component.
F-14
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Costs to fulfill/obtain a contract
The Company incurs pre-production tooling costs related to products produced for customers under long-term supply arrangements. These costs are capitalized and recognized into income upon acceptance. The Company concluded that pre-production tooling and engineering costs do not represent a promised good or service under ASC 606, and as such, reimbursements received are accounted for as a reimbursement of the expense, not revenue.
The Company has not historically incurred material costs to obtain a contract. In the instances that costs to obtain contracts are incurred, the Company will capitalize and amortize those over the life of the contract.
Contract balances