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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 2, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 0-2816

METHODE ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2090085

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

 

8750 West Bryn Mawr Avenue, Suite 1000

 

Chicago, Illinois

60631-3518

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number (including area code):  (708) 867-6777

Securities registered pursuant to Section 12(b) of the Act:

 

 

Name of each exchange

Title of each Class

Trading Symbol(s)

on which registered

Common Stock, $0.50 Par Value

MEI

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, an emerging growth company, or a smaller reporting company.

Large Accelerated filer 

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes       No  

The aggregate market value of common stock, $0.50 par value, held by non-affiliates of the Registrant on October 26, 2019, based upon the closing price on that date as reported by the New York Stock Exchange, was $0.9 billion.

Registrant had 37,164,331 shares of common stock, $0.50 par value, outstanding as of June 16, 2020.

DOCUMENTS INCORPORATED BY REFERENCE


Portions of the registrant’s definitive Proxy Statement for the 2020 annual shareholders' meeting to be held on September 16, 2020 are incorporated by reference into Part III of this Form 10-K.

 


METHODE ELECTRONICS, INC.

FORM 10-K

 

TABLE OF CONTENTS

PART I

Item 1.

Business

4

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

18

Item 2.

Properties

18

Item 3.

Legal Proceedings

18

Item 4.

Mine Safety Disclosures

18

 

 

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

Item 6.

Selected Financial Data

22

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 8.

Financial Statements and Supplementary Data

35

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

35

Item 9A.

Controls and Procedures

35

Item 9B.

Other Information

36

 

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

37

Item 11.

Executive Compensation

37

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

37

Item 13.

Certain Relationships and Related Transactions, and Director Independence

38

Item 14.

Principal Accountant Fees and Services

38

 

 

 

PART IV

Item 15.

Exhibits, Financial Statement Schedules

39

Item 16.

Form 10-K Summary

40

 


Table of Contents

 

PART I

Item 1. Business

Description of Business

Methode Electronics, Inc. was incorporated in 1946 as an Illinois corporation and reincorporated in Delaware in 1966. As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries.

 

We are a global developer of custom engineered and application specific products and solutions with manufacturing,

design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the

Netherlands, Singapore, Switzerland, the United Kingdom and the United States. Our primary manufacturing facilities are

located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, Mexico. We design,

manufacture and market devices employing electrical, radio remote control, electronic, light-emitting diode ("LED") based lighting, wireless and sensing technologies. Our components are found in the primary end-markets of the aerospace, appliance, automotive, commercial vehicle, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries.

Impact of the COVID-19 Pandemic

The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impacts of COVID-19 at the beginning of our fourth quarter of fiscal 2020 at our China manufacturing facilities, which were initially closed for a few weeks after the Chinese New Year. Our manufacturing facilities in China resumed operations later in the fourth quarter of fiscal 2020, but at lower capacity utilization. However, the major impact to our business from the COVID-19 pandemic began in mid-March 2020, as our operations in North America and Europe were adversely impacted by many of our customers suspending their manufacturing operations due to the COVID-19 pandemic. As a result, net sales and production levels at our major North American and European manufacturing facilities were significantly reduced to well below capacity, thus impacting our results of operations during the fourth quarter of fiscal 2020.

In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety. These measures included the following:

 

 

Reduction of payroll costs through a combination of temporary salary reductions, four-day work weeks and furloughs;

 

Elimination of most business travel and restriction of visitors to our facilities;

 

Enhanced cleaning and disinfection procedures at our facilities, temperature checks for our workers before they enter our manufacturing facilities, promotion of social distancing at our facilities and requirements for employees to work from home where possible;

 

Reduction of capital expenditures;

 

Deferral of discretionary spending; and

 

The draw-down of $100.0 million available under our revolving credit facility in order to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets resulting from the COVID-19 pandemic.

The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on our customers, especially in the automotive and commercial vehicle markets. These future developments are outside of our control, are highly uncertain and cannot be predicted. If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require us to take further actions as it relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic will adversely impact our results for the first quarter of fiscal 2021, as well as the full fiscal year, and that impact could be material.

4


Table of Contents

 

Fiscal Year

We maintain our financial records on the basis of a 52 or 53-week fiscal year ending on the Saturday closest to April 30. Fiscal 2020 ended on May 2, 2020 and represented 53 weeks of results. Fiscal 2019 ended on April 27, 2019 and fiscal 2018 ended on April 28, 2018 and both represented 52 weeks of results.

Segments 

Our business is managed, and our financial results are reported, based on the following four segments: Automotive, Industrial, Interface and Medical. See Note 15, "Segment Information and Geographic Area Information," to our consolidated financial statements in this Annual Report for further information.

The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile original equipment manufacturers ("OEMs"), either directly or through their tiered suppliers. Our products include integrated center consoles, hidden switches, ergonomic switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system.

The Industrial segment manufactures external lighting solutions, industrial safety radio remote controls, braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail® solution, high-current low-voltage flexible power cabling systems and powder-coated busbars that are used in various markets and applications, including aerospace, commercial vehicles, computers, industrial, power conversion, military, telecommunications and transportation.

The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the appliance, commercial food service, construction, consumer, material handling, point-of-sale and telecommunications markets. Solutions include copper transceivers and solid-state field-effect consumer touch panels.

The Medical segment is made up of our medical device business, Dabir Surfaces, Inc. (“Dabir Surfaces”), our surface support technology aimed at pressure injury prevention. Dabir Surfaces has developed the technology for use by patients who are immobilized or otherwise at risk for pressure injuries, including patients undergoing long-duration surgical procedures.

 

Sales and Marketing

 

The majority of our sales activities are directed by sales managers who are supported by field application engineers and other technical personnel who work with customers to design our products into their systems. Our field application engineers also help us identify emerging markets and new products. Our products are primarily sold through our in-house sales staff. We also utilize independent manufacturers’ representatives with offices throughout the world.  Information about our sales and operations in different geographic regions is summarized in Note 15, "Segment Information and Geographic Area Information," to our consolidated financial statements in this Annual Report. Sales are made primarily to OEMs, either directly or through their tiered suppliers, as well as to selling partners and distributors.

The following table reflects the percentage of net sales by segment for the last three fiscal years.

 

 

 

Fiscal Year Ended

 

 

 

May 2,

2020

 

 

April 27,

2019

 

 

April 28,

2018

 

Automotive

 

 

69.5

%

 

 

73.4

%

 

 

80.3

%

Industrial

 

 

24.6

%

 

 

20.7

%

 

 

11.6

%

Interface

 

 

5.7

%

 

 

5.8

%

 

 

8.1

%

Medical

 

 

0.2

%

 

 

0.1

%

 

 

%

 

 

 

5


Table of Contents

 

Sources and Availability of Materials

 The principal materials that we purchase include application-specific integrated circuits, coil and bar stock, ferrous and copper alloy sheets, glass, LED displays, plastic molding resins, precious metals, and silicon die castings. All of these items are available from several suppliers and we generally rely on more than one supplier for each item.

Intellectual Property

We have been granted a number of patents in the U.S., Europe and Asia and have additional domestic and international patent applications pending related to our products and manufacturing processes. Our existing patents expire on various dates from 2021 to 2040. We seek patents in order to protect our interest in certain products and technologies, including our TouchSensor field-effect touch technology, magneto-elastic torque sensing, medical devices and high-power distribution products. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or our ability to compete.

Seasonality

A significant portion of our business is dependent upon automotive and commercial vehicle industries. Consequently, our Automotive and Industrial segments may experience seasonal fluctuations based on the sales and the production schedules of our customers. The automotive and commercial vehicle markets are cyclical and depend on general economic conditions, interest rates, fuel prices and consumer spending patterns.

Major Customers 

During fiscal 2020, shipments to General Motors Corporation (“GM”) and Ford Motor Company (“Ford”), or their tiered suppliers, represented 26.8% and 10.7%, respectively, of consolidated net sales. In general, these sales were for component parts used in particular vehicle models of the OEMs. Typically, our GM and Ford supply arrangements for each component part include a blanket purchase order and production releases. In general, a blanket purchase order is issued for each GM or Ford part as identified by the customer part number. Each such GM or Ford blanket purchase order accounted for less than 10.0% of our fiscal 2020 consolidated net sales. Each blanket purchase order includes standard terms and conditions, including price. In certain circumstances, we supply GM or Ford the requirements for a particular customer vehicle model for the life of the model, which can vary from three to seven years. Both GM and Ford order parts using production releases approved under the relevant blanket purchase order. The production releases are submitted by the various GM or Ford plants and include information regarding part quantities and delivery specifications.

Backlog

We manufacture products based on a combination of specific order requirements and forecasts of our customers’ demand. For many of our OEM customers, especially in the automotive and commercial vehicle markets, we have long-term supply agreements where there is an expectation that we will supply products in future periods, however these agreements do not necessarily constitute firm orders and these OEM customers are not required to purchase any minimum amount of products from us. Firm orders are generally limited to authorized customer purchase orders which are typically based on customer release schedules. We fulfill these purchase orders as promptly as possible. The dollar amount of such purchase order releases on hand and not processed at any point in time is not believed to be significant based upon the time frame involved. Accordingly, backlog at any given time might not be a meaningful indicator of future revenue.

Competition

The markets in which we operate are highly competitive and characterized by rapid changes due to technological improvements and developments. We compete with a large number of other manufacturers in each of our product areas and many of these competitors have greater resources and sales. Price, service and product performance are significant elements of competition in the sale of our products.

Research and Development 

6


Table of Contents

 

We maintain a research and development program involving a number of professional employees who devote a majority of their time to the enhancement of existing products and to the development of new products and processes. Research and development costs primarily relate to product engineering and design and development expenses and are classified as a component of costs of products sold on our consolidated statements of income. Expenditures for such activities amounted to $34.9 million for fiscal 2020, $41.2 million for fiscal 2019 and $37.9 million for fiscal 2018.

Environmental Matters

Compliance with foreign, federal, state and local provisions regulating the discharge of materials into the environment has not materially affected our capital expenditures, earnings or our competitive position. Currently, we do not have any material environmental-related lawsuits or material administrative proceedings pending against us. Further information as to environmental matters affecting us is presented in Note 12, "Commitments and Contingencies," to our consolidated financial statements in this Annual Report.

Employees

At May 2, 2020 and April 27, 2019, we had 6,044 and 6,187 employees, respectively. We also, from time to time, employ part-time employees and hire independent contractors. Approximately 37% of our workforce are represented by collective bargaining agreements. These employees are primarily located at our Malta and Mexico facilities. We have never experienced a work stoppage and we believe that our employee relations are good.

Available Information

Through our internet website at www.methode.com, we make available, free of charge, copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,  amendments to those reports, and other filings with the Securities and Exchange Commission ("SEC"), as soon as reasonably practicable after they are filed or furnished to the SEC. Our filings are also available on the SEC’s website at www.sec.gov. Also posted on our website are our Corporate Governance Guidelines, Code of Business Conduct, Anti-Corruption Policy, Insider Trading Policy and the charters of the Audit Committee, Compensation Committee, Medical Products Committee, Nominating and Governance Committee and Technology Committee. Copies of these documents are also available free of charge by sending a request to Methode Electronics, Inc., 8750 West Bryn Mawr Avenue, Suite 1000, Chicago, Illinois 60631, Attention: Investor Relations Department. 

 

 

 

7


Table of Contents

 

Item 1A. Risk Factors

Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties. We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations. Our business is dependent upon two large automotive customers and specific makes and models of automobiles. Our results will be subject to many of the same risks that apply to the automotive, appliance, commercial vehicle, computer and communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes. Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believe to be insignificant may also adversely affect our financial condition or results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these factors could cause our actual results and condition to differ materially from those projected in forward-looking statements. The forward-looking statements in this report are subject to the safe harbor protection provided under the securities laws and are made as of the date of this report.

The effects of a pandemic or widespread outbreak of an illness, such as the COVID-19 pandemic, has had and could continue to have a material adverse impact on our business, results of operations and financial condition.

The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public widespread outbreak of an illness, poses the risk that we, our employees, our suppliers, our customers and others may be restricted or prevented from conducting business activities for indefinite or intermittent periods of time, including as a result of employee health and safety concerns, shutdowns, shelter in place orders, travel restrictions and other actions and restrictions that may be requested or mandated by governmental authorities.

While we have implemented measures to mitigate the impact of the COVID-19 pandemic, we expect our fiscal 2021 results of operations to be adversely affected by the COVID-19 pandemic. The extent of the impact on our business will depend on a number of evolving factors, including the duration and spread of the pandemic, as well as the possibility of the pandemic re-occurring, actions taken by governmental authorities to restrict certain business operations and social activity and impose travel restrictions, the impact of the pandemic on economic activity and whether recessionary conditions will persist, consumer demand, the ability of our supply chain to deliver in a timely and cost-effective manner, the ability of our employees and manufacturing facilities to operate efficiently and effectively, the continued viability and financial stability of our customers and suppliers and future access to capital, all of which remain uncertain. As a result, the magnitude and duration of the impact on our business, results of operations and financial condition cannot be determined at this time.

We derive a substantial portion of our revenues from customers in the automotive, commercial vehicle, appliance, computer and communications industries and are susceptible to trends and factors affecting those industries, including the COVID-19 pandemic.

Our components are found in the primary end-markets of the automotive, commercial vehicle, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries, appliances, consumer and industrial equipment markets, and medical device markets. Factors negatively affecting these industries also negatively affect our business, financial condition and results of operations. Any adverse occurrence, including industry slowdown, recession, rising interest rates, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and results of operations.

Our Automotive segment has been adversely impacted by disruptions caused to the global automotive industry by the COVID-19 pandemic. Global vehicle production has decreased, and some vehicle manufacturers have completely shut down manufacturing operations in some countries and regions, including the United States and Europe. As a result, we have

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experienced, and are likely to continue to experience, delays in the production and distribution of our products and the loss of sales. If the global economic effects caused by the COVID-19 pandemic continue or increase, overall customer demand may continue to decrease which could have a further adverse effect on our business, results of operations and financial condition.

Our business is dependent on sales to GM and Ford. If we were to lose either of these customers or experienced a significant decline in the volume or price of products purchased by these customers, or if either of the customers declared bankruptcy, our future results could be adversely affected.

During fiscal 2020, sales to GM and Ford, or their tiered suppliers, represented 26.8% and 10.7%, respectively, of our consolidated net sales. The sales to GM primarily consisted of integrated center consoles for use in light trucks and SUV's, and a shift in consumer preference for smaller or more fuel-efficient vehicles could adversely affect our results of operations. The sales to Ford consist of ambient lighting, overhead consoles and other integrated modules, including control panels. The arrangements with these customers generally provide for supplying the customers’ requirements for particular models, rather than for manufacturing a specific quantity of products. Such supply arrangements cover a period from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a GM or Ford supply arrangement for a model or a significant decrease in demand for one or more of these models could have a material adverse impact on our results of operations and financial condition. We also compete to supply products for successor models and are subject to the risk that GM or Ford will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition.

In addition, our sales to GM and Ford, can be impacted by work stoppages, such the United Auto Workers (“UAW”) labor strike at GM in the fall of 2019. This labor strike at GM adversely impacted our results of operations in fiscal 2020.

International trade disputes could result in tariffs and other protectionist measures that could adversely affect our business.

Tariffs could increase the cost of our products and the components and raw materials that go into making them. These increased costs could adversely impact the gross profit margin that we earn on sales of our products. Tariffs could also make our products more expensive for customers, which could make our products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit our ability to offer our products and services. Political uncertainty surrounding international trade disputes and protectionist measures could also have a negative effect on consumer confidence and spending, which could adversely affect our business.

Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in "trade wars."

Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in "trade wars," which could increase costs for goods imported into the United States. This increase in costs may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or if trading partners limit their trade with the United States. If these consequences are realized, the volume of economic activity in the U.S., including demand for our products, may be materially reduced. Such a reduction may materially and adversely affect our sales and our business.

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

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

 

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We are subject to continuing pressure to lower our prices.

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

Failure to attract and retain qualified personnel could affect our results.

Our success, both generally and in connection with mergers and acquisitions, depends on our ability to attract, retain, and motivate a highly-skilled and diverse management team and workforce. Failure to ensure that we have the depth and breadth of personnel with the necessary skill set and experience could impede our ability to deliver growth objectives and execute our strategy. Competition for qualified employees among companies that rely heavily upon engineering and technology is at times intense, and the loss of qualified employees could hinder our ability to conduct research activities successfully and develop marketable products.

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

We continue to develop our Dabir Surfaces medical device products, which are included in several ongoing clinical research and product evaluation studies. We will not be successful in marketing and selling these products to the medical community if we are unable to demonstrate the clinical efficacy, cost effectiveness and distinctive benefits of the products or if our customers prefer competitive products.

A significant fluctuation between the U.S. dollar and other currencies could adversely impact our results of operations and financial condition.

We have currency exposures related to transactions denominated in currencies other than the local currencies of the countries in which we operate. Gains and losses resulting from the remeasurement of assets and liabilities in a currency other than the functional currency of our foreign subsidiaries are reported in current period income. In the future, unfavorable changes in exchange rate relationships between the functional currencies of our subsidiaries and their non-functional currency denominated assets and liabilities could have an adverse impact on our results of operations and financial condition. While we seek to manage our foreign exchange risk through operational means by matching revenue with same-currency costs, this may not always be effective. We currently do not use third-party derivative financial instruments to mitigate the risk of transactional currency fluctuations. As a result, significant fluctuations in relative currency values, in particular against the value of the U.S. dollar, could have an adverse effect on our results of operations and financial condition.

We are also subject to currency translation risk as we are required to translate the financial statements of our foreign subsidiaries to U.S. dollars. We report the effect of translation for our foreign subsidiaries with a functional currency other than the U.S. dollar as a separate component of stockholders' equity. Unfavorable changes in the exchange rate relationship between the U.S. dollar and the functional currencies of our foreign subsidiaries could have an adverse impact on our results of operations and financial condition.

A significant portion of our business activities are conducted in foreign countries, exposing us to additional risks that may not exist in the United States.

International operations represent a significant portion of our business. Sales outside the U.S. represent a material amount of our consolidated net sales, and we expect net sales outside the U.S. to continue to represent a significant portion of our consolidated net sales. Outside of the U.S., we operate manufacturing facilities in Belgium, Canada, China, Egypt, Malta, Mexico, the Netherlands and the United Kingdom.

Our international operations subject us to extensive domestic and foreign regulations and expose us to a variety of domestic and foreign political, economic and other risks, including:

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changes in international trade and investment policies, including restrictions or taxes on the repatriation of dividends or other funds, new or higher tariffs, duties or customs (for example, on products imported from Mexico or China), new barriers to entry or domestic preference procurement requirements and changes to, or withdrawals from, free trade agreements;

 

changes in foreign or domestic government leadership;

 

changes in foreign or domestic laws or regulations impacting our overall business model or restricting our ability to manufacture, purchase or sell our products;

 

changes in domestic or foreign tax laws;

 

changes in foreign currency exchange rates and interest rates;

 

economic downturns in foreign countries or geographic regions where we have significant operations, such as China, Egypt, Malta and Mexico;

 

significant changes in conditions in the countries in which we operate with the effect of competition from new market entrants;

 

uncertainty related to the United Kingdom’s withdrawal from the European Union;

 

impact of compliance with U.S. and other foreign countries’ export controls and economic sanctions;

 

liabilities resulting from U.S. and foreign laws and regulations, including those related to the Foreign Corrupt Practices Act and certain other anti-corruption laws;

 

differing labor regulations and union relationships;

 

logistical and communications challenges; and

 

differing protections for our intellectual property.

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

Our business is subject to costs associated with environmental, health and safety regulations.

Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our current and former operations and facilities have been, and are being, operated in compliance, in all material respects, with such laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. The operation of our manufacturing facilities entails risks in these areas, however, and there can be no assurance that we will not incur material costs or liabilities. In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or other pertinent requirements that may be adopted or imposed in the future by governmental authorities.

Should a catastrophic event or other significant business interruption occur at any of our facilities, we could face significant reconstruction or remediation costs, penalties, third party liability and loss of production capacity, which could adversely affect our business.

Weather conditions, natural disasters or other catastrophic events could cause significant disruptions in operations, including, specifically, disruptions at our manufacturing facilities or those of our major suppliers or customers. In turn, the quality, cost and volumes of the products we produce and sell could be unexpectedly, negatively affected, which would impact our results of operations and financial condition.

War, terrorism, geopolitical uncertainties, public health issues (such as the COVID-19 pandemic), and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on us, our suppliers, logistics providers, manufacturing partners and customers. Our business operations could be subject to interruption by power shortages, terrorist attacks and other hostile acts, labor disputes, and other events beyond our control. Such events could decrease demand for our products or make it difficult or impossible for us to produce and deliver products to our customers, or to receive components from our suppliers, thereby creating delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be negatively affected by shutdowns, shelter in place orders, more stringent travel restrictions, additional limitations in freight services,

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governmental actions limiting the movement of products between regions, and disruptions in the operations of our manufacturing partners and component suppliers. The majority of our research and development activities, our corporate headquarters, information technology systems, and other critical business operations, including certain component suppliers and manufacturing partners, are in locations that could be affected by natural disasters. In the event of a natural disaster, losses could be incurred and significant recovery time could be required to resume operations and our financial condition and operating results could be materially adversely affected. While we may purchase insurance policies to cover the direct economic impact experienced following a natural disaster occurring at one of our own facilities, there can be no assurance that such insurance policies will cover the full extent of our financial loss nor will they cover losses which are not economic in nature such as, for example, our reputation as a reliable supplier.

Impairment charges relating to our goodwill and long-lived assets could adversely affect our financial statements.

A significant portion of our long-term assets consists of goodwill and long-lived assets recorded as a result of past acquisitions. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of each of the individual assets exceeds its fair market value. If our analysis indicates that an individual asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the individual asset’s carrying value over its fair value.

In evaluating the potential for impairment of goodwill, we make assumptions regarding future operating performance, business trends, and market and economic conditions. Such analyses further require us to make certain assumptions about sales, operating margins, growth rates, and discount rates. Uncertainties are inherent in evaluating and applying these factors to the assessment of goodwill. We could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience business disruptions, unexpected significant declines in operating results, a divestiture of a significant component of our business, or declines in market capitalization.

We also continually evaluate whether events or circumstances have occurred that indicate our long-lived assets may be impaired. We use an estimate of the related undiscounted cash flow over the remaining life of the asset in measuring whether the asset is recoverable.

In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings that could adversely affect our financial condition and results of operations. The impact of the COVID-19 pandemic may adversely impact our future projections, which may increase the requirement to record an impairment.

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

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

The success of our acquisitions depends on our ability to:

 

 

successfully execute the integration or consolidation of the acquired operations into our existing businesses;

 

develop or modify the financial reporting and information systems of the acquired entity to ensure overall financial integrity and adequacy of internal control procedures;

 

finance the acquisition;

 

identify and take advantage of cost reduction opportunities; and

 

further penetrate new and existing markets with the product capabilities we may acquire.

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

 

 

cause a disruption in our ongoing business;

 

cause dilution of our common stock;

 

distract our management; or

 

unduly burden other resources in our company.

 

Our ability to market our automotive and commercial vehicle products is subject to a lengthy sales cycle, which requires significant investment prior to significant sales revenues, and there is no assurance that our products will be implemented in any particular vehicle.

 

The sales cycles for our automotive and commercial vehicle products are lengthy because the manufacturers must develop high degrees of assurance that the products they buy will meet customer needs, interface as easily as possible with the other parts of a vehicle and with the manufacturer’s production and assembly process, and have minimal warranty, safety and service problems. As a result, from the time that a manufacturer develops a strong interest in our products, it normally will take several years before our products are available to consumers in that manufacturer’s vehicles.

 

In the automotive components industry, products typically proceed through five stages of research and development. Initial research on the product concept comes first, to assess its technical feasibility and economic costs and benefits. This stage often includes development of an internal prototype for the component supplier’s own evaluation. If the product appears feasible, the component supplier manufactures a functioning prototype to demonstrate and test the product’s features. These prototypes are then marketed and sold to automotive companies for testing and evaluation. If an automobile manufacturer shows interest in the product, it typically works with the component supplier to refine the product, then purchases second and subsequent generation engineering prototypes for further evaluation. Finally, the automobile manufacturer either decides to purchase the component for a production vehicle or terminates the program.

 

The time required to progress through these five stages to commercialization varies widely. Generally, the more a component must be integrated with other vehicle systems, the longer the process takes. Further, products that are installed by the factory usually require extra time for evaluation because other vehicle systems are affected, and a decision to introduce the product into the vehicle is not easily reversed. Because our automotive products affect other vehicle systems and are a factory-installed item, the process usually takes several years from conception to commercialization.

 

While we currently have active development programs with various OEMs for a variety of our products, no assurance can be given that our products will be implemented in any particular vehicles. During this development process, we derive minimal funding from prototype sales but generally obtain no significant revenue until mass production begins, which could have a material adverse effect on our liquidity. If our products are not selected after a lengthy development process, our results of operations and financial condition could be adversely affected.

 

Other automotive and commercial vehicle products that we develop are also likely to have a lengthy sales cycle. Because such technology is new and evolving, and because customers will likely require that any new product we develop pass certain feasibility and economic viability tests before committing to purchase, it is expected that any new products we develop will take some years before they are sold to customers, if at all.

 

We are dependent on the availability and price of materials.

 

We require substantial amounts of materials, including application-specific integrated circuits, coil and bar stock, ferrous and copper alloy sheets, glass, LED displays, plastic molding materials, precious metals, and silicon die castings. The availability and prices of materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide

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price levels. Any change in the availability of, or price for, these materials could materially adversely affect our results of operations and financial condition.

 

Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.

 

Our ability, and that of our suppliers, business partners and contract manufacturers, to make, move and sell products is critical to our success. Damage or disruption to our or their manufacturing or distribution capabilities due to weather, including any potential effects of climate change, natural disaster, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.

 

Our judgments regarding the accounting for tax positions and the resolution of tax disputes may impact our results of operations and financial condition.

 

Significant judgment is required to determine our effective tax rate and evaluate our tax positions. We provide for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement criteria prescribed by applicable accounting standards. Fluctuations in federal, state and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may impact our effective tax rate and results of operations. Additionally, we are subject to audits in the various taxing jurisdictions in which we conduct business. Based on the status of these audits and the protocol of finalizing audits by the relevant tax authorities, it is not possible to estimate the impact of changes, if any, to previously recorded uncertain tax positions. Any negative or unexpected outcomes of these examinations and audits could have a material adverse impact on our results of operations and financial condition.

 

Changes in our effective tax rate may adversely impact our results of operations.

 

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

 

 

the jurisdictions in which profits are determined to be earned and taxed;

 

changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;

 

adjustments to income taxes upon finalization of tax returns;

 

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill and long-lived assets;

 

changes in available tax credits;

 

changes in tax laws or interpretation, including changes in the U.S. to the taxation of non-U.S. income and expenses; and

 

changes in U.S. generally accepted accounting principles ("GAAP").

 

We may be unable to keep pace with rapid technological changes, which could adversely affect our business.

 

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

 

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Our operations could be negatively impacted by service interruptions, data corruption or misuse, cyber-based attacks, or network security breaches.

 

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

 

Any such disruption or security breach, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the U.S. and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. Federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly changing nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. While we have secured cyber insurance to potentially cover certain risks associated with cyber incidents, there can be no assurance the insurance will be sufficient to cover any such liability.

 

The General Data Privacy Regulation (“GDPR”) of the European Union creates a range of compliance obligations applicable to the collection, use, retention, security, processing and transfer of personal data in the European Union. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the U.S., enhances enforcement authority and imposes large penalties for noncompliance.

 

Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services and liability claims against us.

 

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

 

Reorganization activities may lead to additional costs and material adverse effects.

 

In the past, we have taken actions to restructure and optimize our production and manufacturing capabilities and efficiencies through relocations, consolidations, plant closings or asset sales. In the future, we may take additional restructuring actions including the consolidating, closing or selling of additional facilities. These actions could result in impairment charges and various charges for such items as idle capacity, disposition costs and severance costs, in addition to normal or attendant risks and uncertainties. We may be unsuccessful in any of our current or future efforts to restructure or consolidate our

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business. Plans to minimize or eliminate any loss of revenues during restructuring or consolidation may not be achieved. These activities may have a material adverse effect on our business, financial condition and results of operations.

 

Our technology-based businesses and the markets in which we operate are highly competitive. If we are unable to compete effectively, our sales could decline.

 

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

 

If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on another person’s intellectual property, our business, financial condition and operating results could be materially adversely affected.

 

We have numerous U.S. and foreign patents and license agreements covering certain of our products and manufacturing processes. Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology. Although we have been awarded, have filed applications for, or have been licensed under numerous patents in the U.S. and other countries, there can be no assurance concerning the degree of protection afforded by these patents or the likelihood that pending patents will be issued. The loss of certain patents and trade secrets could adversely affect our sales, margins or profitability.

 

We have and may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringe on their intellectual property. These claims and any resulting lawsuit could subject us to liability for damages and invalidate our intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be required to cease marketing or selling certain products, pay a penalty for past infringement and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. We may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect us even if we are successful in the litigation.

 

We cannot guarantee that the recently acquired Grakon businesses will be successful or that we can implement and profit from any new applications of the acquired technology.

 

We acquired Grakon Parent, Inc. (“Grakon”) on September 12, 2018. As a result, we now manufacture LED-based lighting in North America and Asia, which are expected to aid in our expansion in the automotive and commercial vehicle sectors. The markets for the products these companies produce are competitive and rapidly changing. If we do not keep pace with technological innovations in the industry, our products may not be competitive, and our revenue and operating results may suffer. Furthermore, while we intend to expand these businesses by integrating the acquired technologies into additional automotive and other applications, we can make no guarantee that such ventures will be successful or profitable.

 

Performance-based stock awards under our long-term incentive plan have required significant adjustments to compensation expense in our consolidated statements of income. Any future performance-based stock awards issued under our long-term incentive plan could require similar adjustments. The adjustments could be material our financial statements.

 

In general, performance-based stock-based compensation expense under our long-term incentive plans is ‎recognized over the vesting ‎period based on the projected probability of achievement of the ‎threshold, target or maximum performance level. In each ‎period, the stock-based compensation ‎expense may be adjusted, as necessary, in response to changes in

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our ‎forecast with ‎respect to the performance level. If required, we will record additional compensation ‎expense, or a reversal of compensation expense, relating to prior periods. The stock-based ‎compensation expense adjustments could be ‎material to the financial statements.‎

 

We have incurred a significant amount of indebtedness, and our level of indebtedness and restrictions under our indebtedness could adversely affect our operations and liquidity. The COVID-19 pandemic could also adversely impact our liquidity.

 

Our primary sources of liquidity are cash generated from operations and availability under our revolving credit facility. Our senior unsecured credit agreement consists of a $200.0 million revolving credit facility and a $250.0 million term loan. On March 23, 2020, we drew down $100.0 million under the revolving credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. As of May 2, 2020, $339.7 million in principal was outstanding under these financing arrangements and we had $91.4 million of availability remaining under the revolving credit facility. The term loan matures in September 2023 and requires quarterly principal payments of $3.1 million over the five-year term, with the remaining balance due upon maturity. The senior unsecured credit agreement provides for variable rates of interest based on the type of borrowing and our debt to EBITDA financial ratio and contains customary representations and warranties, financial covenants, restrictive covenants and events of default.

 

Further, the impacts of the COVID-19 pandemic have caused significant uncertainty and volatility in the credit markets. Our senior unsecured credit agreement provides an option to increase the size of our revolving credit facility and term loan by an additional $200.0 million, subject to customary conditions and approval of the lenders providing the new commitments. There can be no assurance that lenders will approve additional commitments under current circumstances. As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional capital and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, and our prospects.

 

Our senior unsecured credit agreement imposes various restrictions and covenants regarding the operation of our business, including covenants that require us to obtain the lenders’ consent before we can, among other things and subject to certain exceptions: (i) incur additional indebtedness or additional liens on our property; (ii) consummate certain acquisitions, dispositions, mergers or consolidations; (iii) make any material change in the nature of our business; (iv) enter into certain transactions with our affiliates; or (v) repurchase or redeem any outstanding shares of our common stock or pay cash dividends  to our stockholders when a default exists or certain financial covenants are not maintained.

 

The amount of our outstanding indebtedness could have an adverse effect on our operations and liquidity, including by, among other things: (i) making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions, because we may not have sufficient cash flows to make our scheduled debt payments; (ii) causing us to use a larger portion of our cash flows to fund interest and principal payments, thereby reducing the availability of cash to fund working capital, product development, capital expenditures and other business activities; (iii) making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market or industry conditions; and (iv) limiting our ability to borrow additional monies in the future to fund the activities and expenditures described above and for other general corporate purposes as and when needed, which could force us to suspend, delay or curtail business prospects, strategies or operations.

 

The replacement or modification of LIBOR as a reference rate could increase our interest expense in the future.

 

The London Inter-Bank Offered Rate (“LIBOR”) is expected to be phased out by the end of 2021. LIBOR is currently used as the reference rate on our senior unsecured credit agreement, which matures in September 2023. Currently, no replacement rate has been identified. The transition from LIBOR could result in higher interest expense than has historically been recognized.

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Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Our corporate headquarters is located in Chicago, Illinois. As of May 2, 2020, we leased or owned 42 operating facilities. We believe our space is in good condition and adequate to meet our current and reasonably anticipated future needs. The following table provides details regarding our significant properties as of May 2, 2020:

Location

 

Segment(s)

 

Use

 

Owned/

Leased

 

Approximate

Square Footage

 

Lontzen, Belgium

 

Automotive

 

Manufacturing and Warehousing

 

Owned

 

 

153,000

 

Dongguan, China

 

Automotive and Industrial

 

Manufacturing

 

Leased

 

 

197,000

 

Shanghai, China

 

Automotive and Industrial

 

Manufacturing

 

Leased

 

 

194,333

 

Cairo, Egypt

 

Automotive and Industrial

 

Manufacturing

 

Leased

 

 

176,780

 

Mriehel, Malta

 

Automotive and Industrial

 

Manufacturing

 

Leased

 

 

299,290

 

Fresnillo, Mexico

 

Automotive

 

Manufacturing

 

Leased

 

 

86,150

 

Monterrey, Mexico

 

Automotive, Industrial and Interface

 

Manufacturing

 

Leased

 

 

291,974

 

Santa Catarina Nuevo Léon, Mexico

 

Automotive

 

Manufacturing

 

Leased

 

 

128,038

 

McAllen, Texas

 

Automotive and Interface

 

Warehousing

 

Leased

 

 

93,647

 

Rolling Meadows, Illinois

 

Industrial

 

Manufacturing

 

Owned

 

 

89,000

 

Seattle, Washington

 

Automotive and Industrial

 

Warehousing

 

Leased

 

 

61,767

 

 

From time to time, we have and may become involved in various litigation matters, including administrative proceedings, regulatory proceedings, environmental matters, and commercial disputes. The impact and outcome of litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that could harm our business. We are not currently aware of any legal proceedings or claims to which we are a party or to which our property is subject that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

Item 4. Mine Safety Disclosures

Not Applicable

Supplementary Item: Information about our Executive Officers

Name

 

Age

 

 

Offices and Positions Held and Length of Service as Officer

Donald W. Duda

 

 

64

 

 

Chief Executive Officer since 2004 and President and Director since 2001.

Ronald L.G. Tsoumas

 

 

59

 

 

Chief Financial Officer of the Company since 2018; prior thereto, served as Controller of the Company from 2007 to 2018.

Andrea J. Barry

 

 

57

 

 

Chief Human Resources Officer of the Company since 2017; prior thereto, served as CHRO for Wirtz Beverage Group from 2013 to 2016.

Michael S. Brotherton

 

 

43

 

 

President, Grakon from 2018 to June 2020; prior thereto, served as Vice President and General Manager, North American Automotive, from 2010 to 2018. On June 11, 2020, Mr. Brotherton ceased to be employed by the Company.

Timothy R. Glandon

 

 

56

 

 

Vice President since 2006; General Manager, North American Automotive, from 2006 to 2015.

Joseph E. Khoury

 

 

56

 

 

Chief Operating Officer of the Company since 2018; prior thereto, served as Senior Vice President since 2015, and as Vice President and General Manager of European Operations from 2004 to 2015.

Anil V. Shetty

 

 

54

 

 

President, Dabir Surfaces since 2018; prior thereto, Vice President and General Manager, Asia, from 2015, and Executive Managing Director, Asia from 2011 to 2015.

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Table of Contents

 

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

19


Table of Contents

 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the New York Stock Exchange under the symbol "MEI."  As of June 16, 2020, we had 382 holders of record of our common stock.

Dividends

While we currently expect that quarterly cash dividends will continue to be paid in the future, such payments are at the discretion of our Board of Directors and will depend upon many factors, including our results of operations and liquidity position.

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of this Annual Report for certain information relating to our equity compensation plans.

Stock Performance

The following graph shows the cumulative total stockholder return on our common stock over the period spanning May 2, 2015 to May 2, 2020, as compared with that of the NYSE Composite Index (“NYSE Index”) and a selected peer group of comparable, publicly traded companies that we have selected for purposes of this comparison. We have assumed that dividends have been reinvested and that $100 was invested on May 2, 2015. The stock price performance included in this graph is historical and not necessarily indicative of future stock price performance.

20


Table of Contents

 

 

May 2,

 

April 30,

 

April 29,

 

April 28,

 

April 27,

 

May 2,

 

Company/Index

2015

 

2016

 

2017

 

2018

 

2019

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Methode Electronics, Inc.

$

100.00

 

$

69.07

 

$

104.48

 

$

96.03

 

$

70.48

 

$

69.54

 

NYSE Index

 

100.00

 

 

98.56

 

 

113.24

 

 

126.27

 

 

137.77

 

 

122.55

 

Peer Group *

 

100.00

 

 

87.54

 

 

124.92

 

 

125.00

 

 

137.09

 

 

108.06

 

 

* The peer group consists of Belden Inc., CTS Corporation, Dorman Products, Inc., Franklin Electric Company, Inc., Gentherm Incorporated, Benchmark Electronics, Kemet Corporation, LCI Industries, Littelfuse, Inc., MTS Systems Corporation, OSI Systems, Inc., Rogers Corporation, Standard Motor Products, Inc., Stoneridge, Inc. and TTM Technologies, Inc.

 

 

21


Table of Contents

 

Item 6. Selected Financial Data

The following selected financial data were derived from our audited consolidated financial statements and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this Annual Report. Fiscal 2020 represented 53 weeks, while fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 represented 52 weeks.

 

 

 

Fiscal Year Ended

 

(In Millions, Except Per Share Amounts)

 

May 2,

2020 (1)

 

 

April 27,

2019 (2)

 

 

April 28,

2018 (3)

 

 

April 29,

2017 (4)

 

 

April 30,

2016 (5)

 

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

1,023.9

 

 

$

1,000.3

 

 

$

908.3

 

 

$

816.5

 

 

$

809.1

 

Income before Income Taxes

 

 

148.7

 

 

 

103.6

 

 

 

123.8

 

 

 

115.9

 

 

 

110.9

 

Income Tax Expense

 

 

25.3

 

 

 

12.0

 

 

 

66.6

 

 

 

23.0

 

 

 

26.3

 

Net Income

 

 

123.4

 

 

 

91.6

 

 

 

57.2

 

 

 

92.9

 

 

 

84.6

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Net Income

 

 

3.28

 

 

 

2.45

 

 

 

1.54

 

 

 

2.49

 

 

 

2.21

 

Diluted Net Income

 

 

3.26

 

 

 

2.43

 

 

 

1.52

 

 

 

2.48

 

 

 

2.20

 

Dividends

 

 

0.44

 

 

 

0.44

 

 

 

0.40

 

 

 

0.36

 

 

 

0.36

 

Book Value

 

 

20.84

 

 

 

18.43

 

 

 

16.82

 

 

 

14.53

 

 

 

12.61

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

217.3

 

 

 

83.2

 

 

 

246.1

 

 

 

294.0

 

 

 

227.8

 

Total Assets

 

 

1,370.6

 

 

 

1,231.7

 

 

 

915.9

 

 

 

704.0

 

 

 

655.9

 

Total Debt

 

 

352.1

 

 

 

292.6

 

 

 

57.8

 

 

 

27.0

 

 

 

57.0

 

Total Equity

 

 

783.4

 

 

 

689.7

 

 

 

630.0

 

 

 

541.1

 

 

 

470.1

 

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Provided by Operating Activities

 

 

140.6

 

 

 

102.0

 

 

 

117.8

 

 

 

145.2

 

 

 

110.7

 

Cash Used in Investing Activities

 

 

(44.5

)

 

 

(470.8

)

 

 

(179.0

)

 

 

(21.7

)

 

 

(21.6

)

Cash Provided by (Used in) Financing Activities

 

 

41.7

 

 

 

217.4

 

 

 

(12.7

)

 

 

(47.0

)

 

 

(28.7

)

 

(1)

Fiscal 2020 includes $5.4 million of pre-tax legal expense relating to the Hetronic litigation. Fiscal 2020 also includes income of $9.9 million for an international government grant for maintaining certain employment levels during the period and a $5.2 million stock-based compensation expense reversal related to RSA compensation expense.

(2)

Fiscal 2019 includes $3.5 million of pre-tax legal expense relating to the Hetronic litigation. During fiscal 2019, we engaged in initiatives to reduce overall costs and improve operational profitability, which increased costs during the period by $6.9 million. Fiscal 2019 also includes pre-tax acquisition expenses of $15.4 million related to the acquisition of Grakon, income of $5.8 million for an international government grant for maintaining certain employment levels during the period and $7.4 million of stock-based compensation expense related to the re-estimation of RSA compensation expense based upon target levels of performance.

(3)

Fiscal 2018 includes $8.1 million of pre-tax legal expense relating to the Hetronic litigation. Fiscal 2018 also includes pre-tax acquisition expenses of $6.8 million related to the acquisitions of Procoplast and Pacific Insight, income of $7.3 million for an international government grant for maintaining certain employment levels during the period and a $6.0 million stock-based compensation benefit related to the re-estimation of RSA compensation expense based upon threshold levels of performance. The results for fiscal 2018 also includes a provisional estimated tax charge of $53.7 million as a result of U.S. Tax Reform and a tax benefit of $9.8 million for foreign investment tax credits.

(4)

Fiscal 2017 includes $11.0 million of pre-tax legal expense relating to the Hetronic litigation. Fiscal 2017 also includes pre-tax exit costs for two reporting units of $2.3 million, pre-tax acquisition expenses of $1.5 million, primarily related to a potential acquisition we elected not to undertake, and income of $4.5 million for an international government grant for maintaining certain employment levels during the period. The results for fiscal 2017 include a tax benefit of $4.0 million for foreign investment tax credits, partially offset by a tax expense of $1.7 million on a dividend between foreign entities.

(5)

Fiscal 2016 includes $9.9 million of pre-tax legal expense relating to the Hetronic litigation.

 

22


Table of Contents

 

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 U.S. GAAP. You should read the following discussion and analysis in conjunction with Item 6, “Selected Financial Data” and 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

We are a global developer of custom engineered and application specific products and solutions with manufacturing, design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States. Our primary manufacturing facilities are located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, Mexico. We design, manufacture and market devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing technologies.

Our business is managed, and our financial results are reported, based on the following four segments: Automotive, Industrial, Interface and Medical. For more information regarding the business and products of these segments, see “Item 1. Business” of this Annual Report.

Our components are found in the primary end-markets of the aerospace, appliance, automotive, commercial vehicle, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries.

 

Impact of COVID-19

 

The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impacts of COVID-19 at the beginning of our fourth quarter of fiscal 2020 at our China manufacturing facilities, which were initially closed for a few weeks after the Chinese New Year. Our manufacturing facilities in China resumed operations later in the fourth quarter of fiscal 2020, but at lower capacity utilization. However, the major impact to our business from the COVID-19 pandemic began in mid-March 2020, as our operations in North America and Europe were adversely impacted by many of our customers suspending their manufacturing operations due to the COVID-19 pandemic. As a result, net sales and production levels at our major North American and European manufacturing facilities were significantly reduced to well below capacity, thus impacting our results of operations during the fourth quarter of fiscal 2020.

 

In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety. These measures included the following:

 

 

Reduction of payroll costs through a combination of temporary salary reductions, four-day work weeks and furloughs;

 

Elimination of most business travel and restriction of visitors to our facilities;

 

Enhanced cleaning and disinfection procedures at our facilities, temperature checks for our workers before they enter our manufacturing facilities, promotion of social distancing at our facilities and requirements for employees to work from home where possible;

 

Reduction of capital expenditures;

 

Deferral of discretionary spending; and

 

The draw-down of $100.0 million available under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets resulting from the COVID-19 pandemic.

 

23


Table of Contents

 

The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on our customers, especially in the automotive and commercial vehicle markets. These future developments are outside of our control, are highly uncertain and cannot be predicted. If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require us to take further actions as it relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic will adversely impact our results for the first quarter of fiscal 2021, as well as the full fiscal year, and that impact could be material.

Grakon Transaction

On September 12, 2018, we acquired 100% of the stock of Grakon for $422.1 million in cash, net of cash acquired. The business, headquartered in Seattle, Washington, is a manufacturer of custom designed exterior lighting solutions and highly styled engineered components, with locations in Canada, China, the Netherlands and the United Kingdom. Grakon’s manufacturing capabilities and products help diversify our product offerings and expand the Industrial segment, which is a key component of our strategic direction. Grakon’s results have been included in the Automotive and Industrial segments from the effective date of the acquisition. Grakon’s results are included for the entire period in fiscal 2020 and only for seven and a half-months in fiscal 2019.

Results of Operations

 

We maintain our financial records on the basis of a 52- or 53-week fiscal year ending on the Saturday closest to April 30. For fiscal 2020, our accounting period included 53 weeks and ended on May 2, 2020. For fiscal 2019 and fiscal 2018, our accounting period included 52 weeks and ended on April 27, 2019 and April 28, 2018, respectively. The following discussions of comparative results among periods should be reviewed in this context.

 

A detailed comparison of our results of operations between fiscal 2019 and fiscal 2018 can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2019 Annual Report on Form 10-K filed with the SEC on June 20, 2019.

24


Table of Contents

 

Results of Operations for the Fiscal Year Ended May 2, 2020 compared to the Fiscal Year Ended April 27, 2019.

Consolidated Results

Below is a table summarizing results for the fiscal years ended:

 

 

 

May 2,

2020

 

 

April 27,

2019

 

 

Net Change

 

 

Net Change

 

(Dollars in Millions)

 

(53 Weeks)

 

 

(52 Weeks)

 

 

($)

 

 

(%)

 

Net Sales

 

$

1,023.9

 

 

$

1,000.3

 

 

$

23.6

 

 

 

2.4

%

Cost of Products Sold

 

 

741.0

 

 

 

734.5

 

 

 

6.5

 

 

 

0.9

%

Gross Profit

 

 

282.9

 

 

 

265.8

 

 

 

17.1

 

 

 

6.4

%

Selling and Administrative Expenses

 

 

116.8

 

 

 

142.9

 

 

 

(26.1

)

 

 

(18.3

)%

Amortization of Intangibles

 

 

19.0

 

 

 

16.1

 

 

 

2.9

 

 

 

18.0

%

Interest Expense, Net

 

 

10.1

 

 

 

8.3

 

 

 

1.8

 

 

 

21.7

%

Other Income, Net

 

 

(11.7

)

 

 

(5.1

)

 

 

(6.6

)

 

 

129.4

%

Income Tax Expense

 

 

25.3

 

 

 

12.0

 

 

 

13.3

 

 

 

110.8

%

Net Income

 

$

123.4

 

 

$

91.6

 

 

$

31.8

 

 

 

34.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 2,

2020

 

 

April 27,

2019

 

 

 

 

 

 

 

 

 

Percent of sales:

 

(53 Weeks)

 

 

(52 Weeks)

 

 

 

 

 

 

 

 

 

Net Sales

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

Cost of Products Sold

 

 

72.4

%

 

 

73.4

%

 

 

 

 

 

 

 

 

Gross Profit

 

 

27.6

%

 

 

26.6

%

 

 

 

 

 

 

 

 

Selling and Administrative Expenses

 

 

11.4

%

 

 

14.3

%

 

 

 

 

 

 

 

 

Amortization of Intangibles

 

 

1.9

%

 

 

1.6

%

 

 

 

 

 

 

 

 

Interest Expense, Net

 

 

1.0

%

 

 

0.8

%

 

 

 

 

 

 

 

 

Other Income, Net

 

 

(1.1

)%

 

 

(0.5

)%

 

 

 

 

 

 

 

 

Income Tax Expense

 

 

2.5

%

 

 

1.2

%

 

 

 

 

 

 

 

 

Net Income

 

 

12.1

%

 

 

9.2

%

 

 

 

 

 

 

 

 

 

Net Sales. Consolidated net sales increased by $23.6 million, or 2.4%, to $1,023.9 million in fiscal 2020, compared to $1,000.3 million in fiscal 2019. The acquisition of Grakon increased net sales by $76.2 million, while the impact of foreign currency translation decreased net sales by $13.9 million. The weaker euro and Chinese renminbi impacted foreign currency translation. Excluding the acquisition of Grakon and foreign currency translation, net sales decreased by $38.7 million, primarily due to the adverse impacts from the UAW labor strike at GM and the negative impact of the COVID-19 pandemic on net sales during our fourth fiscal quarter.

Cost of Products Sold. Consolidated cost of products sold increased by $6.5 million, or 0.9%, to $741.0 million (72.4% of sales) in fiscal 2020, compared to $734.5 million (73.4% of sales) in fiscal 2019. The acquisition of Grakon increased cost of products sold by $46.4 million, while the impact of foreign currency translation decreased cost of products sold by $8.7 million. Excluding the acquisition of Grakon and foreign currency translation, cost of products sold decreased by $31.2 million, primarily due to lower sales volumes. Consolidated cost of products sold in fiscal 2019 included $5.6 million of purchase accounting adjustments related to Grakon inventory and $2.8 million of costs related to initiatives to reduce overall costs and improve operational profitability.

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Table of Contents

 

Gross Profit. Gross profit increased by $17.1 million, or 6.4%, to $282.9 million (27.6% of sales) in fiscal 2020, compared to $265.8 million (26.6% of sales) in fiscal 2019. The acquisition of Grakon increased gross profit by $29.8 million, while the impact of foreign currency translation decreased gross profit by $5.2 million. Excluding the acquisition of Grakon and foreign currency translation, gross profit decreased by $7.5 million, primarily due to lower sales in the Automotive segment as a result of the UAW labor strike at GM and lower sales of radio remote control products in the Industrial segment, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019. Gross profit was also negatively impacted in our fourth fiscal quarter by the negative impact of the COVID-19 pandemic on net sales.

Selling and Administrative Expenses. Selling and administrative expenses decreased by $26.1 million, or 18.3%, to $116.8 million (11.4% of sales) in fiscal 2020, compared to $142.9 million (14.3% of sales) in fiscal 2019. The impact of foreign currency translation decreased selling and administrative expenses by $1.3 million, which was partially offset by the acquisition of Grakon which increased selling and administrative expenses by $1.1 million. Excluding foreign currency translation and the acquisition of Grakon, selling and administrative expenses decreased by $25.9 million. The decrease was primarily due to lower stock-based compensation expense, professional fees and salaries. Stock-based compensation expense decreased by $13.7 million, as fiscal 2020 included a $5.2 million reversal of stock-based compensation expense related to prior years, while fiscal 2019 included a $7.4 million accrual adjustment expense related to prior years. For further information, see Note 13, "Shareholders Equity,” to the consolidated financial statements included in this Annual Report. Professional fees were higher in fiscal 2019 primarily due to transaction costs associated with the acquisition of Grakon. Salaries were lower in fiscal 2020 due to lower incentive compensation expense and actions taken with respect to salaries as a result of the COVID-19 pandemic. In addition, in fiscal 2020, we realized benefits from initiatives taken in fiscal 2019 to reduce overall costs and improve operational profitability. In fiscal 2019, we incurred $4.0 million of expenses related to initiatives to reduce overall costs and improve operational profitability versus $1.2 million of expenses incurred in fiscal 2020.

Amortization of Intangibles. Amortization of intangibles increased by $2.9 million, or 18.0%, to $19.0 million in fiscal 2020, compared to $16.1 million in fiscal 2019. The increase was due to amortization expense related to the Grakon acquisition, partially offset by lower amortization expense in the Interface segment.

Interest Expense, Net. Interest expense, net was $10.1 million in fiscal 2020, compared to $8.3 million in fiscal 2019. The increase was due to higher average borrowings in fiscal 2020 compared to fiscal 2019, partially offset by lower average interest rates.

Other Income, Net. Other income, net increased by $6.6 million to $11.7 million in fiscal 2020, compared to $5.1 million in fiscal 2019. The increase was primarily due to higher income from international government grants of $11.6 million in fiscal 2020 compared to $5.8 million in fiscal 2019. Approximately $1.7 million of the international government grants relates to assistance provided with respect to the COVID-19 pandemic. The remaining $9.9 million of international government grants in fiscal 2020 relate to maintaining certain employment levels. In fiscal 2020, we sold assets related to a previously closed business and recognized a gain on sale of $0.5 million. In addition, net foreign exchange losses were $3.1 million in fiscal 2020, compared to $1.4 million in fiscal 2019.

Income Tax Expense. Income tax expense increased by $13.3 million, or 110.8%, to $25.3 million in fiscal 2020, compared to $12.0 million in fiscal 2019. Our effective tax rate increased to 17.0% in fiscal 2020, compared to 11.6% in fiscal 2019. The increase was primarily related to the higher pre-tax income from the Grakon acquisition in fiscal 2020 and an increase in tax reserves. The effective tax rate in fiscal 2019 was lower primarily due to a tax benefit related to the finalization of the transition tax from U.S. Tax Reform and investment tax credits generated from a non-U.S. location.

Net Income. Net income increased by $31.8 million, or 34.7%, to $123.4 million in fiscal 2020, compared to $91.6 million in fiscal 2019. Net income increased as a result of the reasons described above.

26


Table of Contents

 

Operating Segments

Automotive Segment Results

Below is a table summarizing results for the fiscal years ended:

 

 

 

May 2,

2020

 

 

April 27,

2019

 

 

Net Change

 

 

Net Change

 

(Dollars in Millions)

 

(53 Weeks)

 

 

(52 Weeks)

 

 

($)

 

 

(%)

 

Net Sales

 

$

712.1

 

 

$

734.7

 

 

$

(22.6

)

 

 

(3.1

)%

Gross Profit

 

$

178.2

 

 

$

188.3

 

 

$

(10.1

)

 

 

(5.4

)%

Income from Operations

 

$

124.4

 

 

$

126.3

 

 

$

(1.9

)

 

 

(1.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 2,

2020

 

 

April 27,

2019

 

 

 

 

 

 

 

 

 

Percent of sales:

 

(53 Weeks)

 

 

(52 Weeks)

 

 

 

 

 

 

 

 

 

Net Sales

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

Gross Profit

 

 

25.0

%

 

 

25.6

%