METHODE ELECTRONICS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (“Quarterly Report”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, when made, our current views with respect to current events and financial performance. Such forward-looking statements are subject to many risks, uncertainties and factors relating to our operations and business environment, which may cause our actual results to be materially different from any future results, express or implied, by such forward-looking statements. All statements that address future operating, financial or business performance or our strategies or expectations are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “outlook” or “continue,” and other comparable terminology. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: • Impact from pandemics, such as the COVID-19 pandemic; • Dependence on the automotive and commercial vehicle industries; • Dependence on our supply chain, including semiconductor suppliers; • Dependence on a small number of large customers, including two large automotive customers; • Dependence on the availability and price of materials; • Failure to attract and retain qualified personnel; • Timing, quality and cost of new program launches; • Risks related to conducting global operations; • Ability to compete effectively; • Investment in programs prior to the recognition of revenue; • Ability to withstand pricing pressures, including price reductions; • Impact from production delays or cancelled orders; • Ability to successfully benefit from acquisitions and divestitures; • Ability to withstand business interruptions; • Breaches to our information technology systems; • Ability to keep pace with rapid technological changes; • Ability to protect our intellectual property; • Costs associated with environmental, health and safety regulations; • International trade disputes resulting in tariffs and our ability to mitigate tariffs; • Impact from climate change and related regulations; • Ability to avoid design or manufacturing defects; • Recognition of goodwill and long-lived asset impairment charges; • Ability to manage our debt levels and any restrictions thereunder; • Currency fluctuations; • Income tax rate fluctuations; • Judgments related to accounting for tax positions; • Adjustments to compensation expense for performance-based awards; • Timing and magnitude of costs associated with restructuring activities; and • Impact to interest expense from the replacement or modification of LIBOR. Additional details and factors are discussed under the caption “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended May 1, 2021. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Any forward-looking statements made by us speak only as of the date on which they are made. We are under no obligation to, and expressly disclaims any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise. Overview We are a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. We design, engineer and produce mechatronic products for Original Equipment Manufacturers (“OEMs”) utilizing our broad range of technologies for user interface, light-emitting diode (“ LED”) lighting system, power distribution and sensor applications. 20 Table of Contents Our solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment, consumer appliance and medical devices. Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical. COVID-19 Pandemic Update The COVID-19 pandemic and the ongoing measures to reduce its spread have negatively impacted the global economy, disrupted consumer and customer demand and global supply chains, and resulted in manufacturing inefficiencies and increased freight costs due to global capacity constraints. We expect that the global health crisis caused by the COVID-19 pandemic will continue to negatively impact our business and results of operations for the foreseeable future. The extent of the impact will depend on a number of evolving and uncertain factors, including the duration and spread of COVID-19 (and its variants), the rate of vaccinations, actions taken by governmental authorities to further restrict business operations and social activity and impose travel restrictions, shifting 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. We continue to focus on effectively managing the unprecedented challenges and uncertainties of the pandemic on a global basis. Management has prioritized the health and safety of our employees and their families. We adopted numerous safety procedures at our global facilities, including hygiene and disinfection protocols, testing and contact tracing, social distancing and wearing personal protective equipment. We implemented the sharing of best practices throughout our global facilities, resulting in effective and standardized safety guidelines and procedures, updated on a regular basis, promoting the health and safety of our employees. While demand for our products improved, the recovery in demand has had business interruptions, including increased material and logistics costs, and most significantly, impacts from the worldwide semiconductor supply shortage. The semiconductor supply shortage is due, in part, to increased demand across multiple industries, including the automotive industry, resulting in a slowdown in their production schedules. The semiconductor supply shortage is also impacting our supply chain and our ability to meet demand at some of our non-automotive customers. We expect this semiconductor shortage will likely have a continued impact on our operating results and financial condition in fiscal 2022. Results of Operations for the Three Months Ended July 31, 2021 compared to the Three Months Ended August 1, 2020 Three months ended (in millions) July 31, 2021 August 1, 2020 Net Change ($) Net Change (%) Net sales $ 287.8 100.0 % $ 190.9 100.0 % $ 96.9 50.8 % Cost of products sold 216.1 75.1 % 145.8 76.4 % 70.3 48.2 % Gross profit 71.7 24.9 % 45.1 23.6 % 26.6 59.0 % Selling and administrative expenses 32.8 11.4 % 26.6 13.9 % 6.2 23.3 % Amortization of intangibles 4.8 1.7 % 4.7 2.5 % 0.1 2.1 % Interest expense, net 1.1 0.4 % 1.6 0.8 % (0.5 ) (31.3 )% Other income, net (1.8 ) (0.6 )% (3.4 ) (1.8 )% 1.6 (47.1 )% Income tax expense (benefit) 5.7 2.0 % (5.1 ) (2.7 )% 10.8 (211.8 )% Net income $ 29.1 10.1 % $ 20.7 10.8 % $ 8.4 40.6 % Net sales . Net sales increased $96.9 million, or 50.8%, to $287.8 million in the three months ended July 31, 2021, compared to $190.9 million in the three months ended August 1, 2020. The impact of foreign currency translation increased net sales by $10.3 million, primarily due to the strengthening of the euro and Chinese renminbi, relative to the U.S. dollar. Excluding the impact of foreign currency translation, net sales increased by $86.6 million, primarily due to higher sales in the Automotive and Industrial segments. Cost of products sold . Cost of products sold increased $70.3 million, or 48.2%, to $216.1 million (75.1% of sales) in the three months ended July 31, 2021, compared to $145.8 million (76.4% of sales) in the three months ended August 1, 2020. The impact of foreign currency translation increased cost of products sold by $7.1 million. Excluding the impact of foreign currency translation, cost of products sold increased by $63.2 million primarily due to higher sales volumes and higher material and logistics costs. Labor costs were also higher as the three months ended August 1, 2020 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic. Gross profit. Gross profit increased $26.6 million, or 59.0%, to $71.7 million (24.9% of sales) in the three months ended July 31, 2021, compared to $45.1 million (23.6% of sales) in the three months ended August 1, 2020. The impact of foreign currency translation increased gross profit by $3.2 million. Excluding the impact of foreign currency translation, gross profit increased by $23.4 million. The increase was due to higher sales volumes compared to the three months ended August 1, 2020 which was negatively impacted by the COVID-19 pandemic. 21 Table of Contents Selling and a dministrative e xpenses . Selling and administrative expenses increased $6.2 million, or 23.3% , to $32.8 million ( 11.4% of sales) in the three months ended July 31, 2021 , compared to $26.6 million ( 13.9% of sales) in the three months ended August 1, 2020 . The impact of foreign currency translation increased selling and administrative expenses by $ 0. 8 million. Excluding the impact of foreign currency translation, selling and administrative expenses in creased by $ 5.4 million. The increase was primarily due to higher stock-based compensation expense and salary expense, partially offset by lower restructuring costs. Stock-based compensation expense increased by $ 3. 1 million as our long-term incentive plan was not introduced until the second quarter of fiscal 202 1. Salary expense was higher as the three months ended August 1, 2020 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic. In the three months ended August 1, 2020 , we recognized $ 1.5 million of restructuring costs . Amortization of intangibles . Amortization of intangibles was $4.8 million and $4.7 million in the three months ended July 31, 2021 and August 1, 2020, respectively. Interest expense, net. Interest expense, net was $1.1 million in the three months ended July 31, 2021, compared to $1.6 million in the three months ended August 1, 2020. The decrease was primarily due to lower average borrowings. Average borrowings were lower as the three months ended August 1, 2020 included the precautionary $100.0 million draw-down in March 2020, which was fully repaid in the third quarter of fiscal 2021. Other income, net. Other income, net was $1.8 million in the three months ended July 31, 2021, compared to $3.4 million in the three months ended August 1, 2020. In the three months ended July 31, 2021, we received $1.9 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic, compared to $2.9 million in the three months ended August 1, 2020. Net foreign exchange losses were $0.2 million in the three months ended July 31, 2021, compared to net foreign exchange gains of $0.7 million in the three months ended August 1, 2020. Income tax expense (benefit). Income tax expense was $5.7 million (16.4% effective tax rate) in the three months ended July 31, 2021, compared to an income tax benefit of $5.1 million in the three months ended August 1, 2020. The income tax benefit in the three months ended August 1, 2020 resulted in a negative effective tax rate of 32.7% which was primarily due to a benefit from tax credits claimed in a foreign jurisdiction of $6.6 million, additional beneficial tax attributes claimed of $1.2 million and income derived from foreign operations with lower statutory rates. Excluding the discrete tax benefits, the effective tax rate would have been 17.2%. Net income. Net income increased $8.4 million, or 40.6%, to $29.1 million in the three months ended July 31, 2021, compared to $20.7 million in the three months ended August 1, 2020. Net income increased as a result of the reasons described above and a favorable foreign currency translation of $1.9 million. Operating Segments Automotive Three months ended (in millions) July 31, 2021 August 1, 2020 Net Change ($) Net Change (%) Net sales $ 195.8 $ 125.1 $ 70.7 56.5 % Gross profit $ 41.7 $ 26.2 $ 15.5 59.2 % As a percent of net sales 21.3 % 20.9 % Income from operations $ 27.3 $ 15.3 $ 12.0 78.4 % As a percent of net sales 13.9 % 12.2 % Net sales . Automotive segment net sales increased $70.7 million, or 56.5%, to $195.8 million in the three months ended July 31, 2021, compared to $125.1 million in the three months ended August 1, 2020. The impact of foreign currency translation increased net sales by $7.1 million. Excluding the impact of foreign currency translation, net sales increased by $63.6 million. Net sales in the three months ended August 1, 2020 were negatively impacted by the COVID-19 pandemic, resulting in lower demand from our automotive customers, primarily in North America and Europe. Net sales in North America increased $22.8 million, or 29.9%, to $99.1 million in the three months ended July 31, 2021, compared to $76.3 million in the three months ended August 1, 2020. Net sales in Europe increased $29.0 million, or 100.7%, to $57.8 million in the three months ended July 31, 2021, compared to $28.8 million in the three months ended August 1, 2020. The stronger euro, relative to the U.S. dollar, increased net sales in Europe by $3.6 million. Excluding the impact of foreign currency translation, net sales in Europe increased by $25.4 million. Net sales in Asia increased $18.9 million, or 94.5%, to $38.9 million in the three months ended July 31, 2021, compared to $20.0 million in the three months ended August 1, 2020. The stronger Chinese renminbi, relative to the U.S. dollar, increased net sales in Asia by $3.5 million. Excluding foreign currency translation, net sales in Asia increased by $15.4 million primarily due to higher sales of electric vehicle products which shifted from North America to Asia. 22 Table of Contents Gross p rofit . Automotive segment gross profit increased $15.5 million, or 59.2% , to $41.7 million in the three months ended July 31, 2021 , compared to $26.2 million in the three months ended August 1, 2020 . The impact of foreign currency translation increased gross profit by $ 1.8 million. Excluding the impact of foreign currency translation, gross profit in creased by $1 3 .7 million. Automotive segment gross profit margins increased to 21.3% in the three months ended July 31, 2021 , compared to 20.9% in the three months ended August 1, 2020 . The in crease in gross profit margins was primarily due to higher sales, partially offset by higher costs for premium freight and factory inefficiencies resulting from supply chain disruptions due to the COVID-19 pandemic . Income from operations. Automotive segment income from operations increased $12.0 million, or 78.4%, to $27.3 million in the three months ended July 31, 2021, compared to $15.3 million in the three months ended August 1, 2020. The impact of foreign currency translation increased income from operations by $1.1 million. Excluding the impact of foreign currency translation, income from operations increased by $10.9 million. The increase was primarily due to higher gross profit, partially offset by higher selling and administrative expenses. Selling and administrative expenses were lower in the three months ended August 1, 2020 due to the impact of salary reductions and other cost saving measures in response to the COVID-19 pandemic. Industrial Three months ended (in millions) July 31, 2021 August 1, 2020 Net Change ($) Net Change (%) Net sales $ 78.5 $ 52.0 $ 26.5 51.0 % Gross profit $ 28.5 $ 16.4 $ 12.1 73.8 % As a percent of net sales 36.3 % 31.5 % Income from operations $ 20.2 $ 7.0 $ 13.2 188.6 % As a percent of net sales 25.7 % 13.5 % Net sales . Industrial segment net sales increased $26.5 million, or 51.0%, to $78.5 million in the three months ended July 31, 2021, compared to $52.0 million in the three months ended August 1, 2020. Foreign currency translation increased net sales by $3.2 million. Excluding foreign currency translation, net sales increased by $23.3 million primarily due to higher sales volumes of all product categories in the Industrial segment. Net sales in the three months ended August 1, 2020 for commercial vehicle lighting solutions and radio remote control devices were negatively impacted by the COVID-19 pandemic, resulting in lower demand from customers. Gross profit. Industrial segment gross profit increased $12.1 million, or 73.8%, to $28.5 million in the three months ended July 31, 2021, compared to $16.4 million in the three months ended August 1, 2020. Foreign currency translation increased gross profit by $1.4 million. Excluding foreign currency translation, gross profit increased by $10.7 million. Gross profit margins increased to 36.3% in the three months ended July 31, 2021, compared to 31.5% in the three months ended August 1, 2020. The increase in gross profit margins was primarily due to higher sales from commercial vehicle lighting solutions and radio remote control devices. This was partially offset by lower gross profit margins from busbar products due to higher materials costs. Income from operations. Industrial segment income from operations increased $13.2 million, or 188.6%, to $20.2 million in the three months ended July 31, 2021, compared to $7.0 million in the three months ended August 1, 2020. Foreign currency translation increased income from operations by $1.3 million. Excluding foreign currency translation, income from operations increased by $11.9 million. The increase was primarily due to higher gross profit and lower selling and administrative expenses. Selling and administrative expenses were lower primarily due to lower legal expenses and restructuring costs. In the three months ended August 1, 2020, restructuring costs were $0.6 million. Interface Three months ended (in millions) July 31, 2021 August 1, 2020 Net Change ($) Net Change (%) Net sales $ 12.7 $ 13.4 $ (0.7 ) (5.2 )% Gross profit $ 1.7 $ 2.5 $ (0.8 ) (32.0 )% As a percent of net sales 13.4 % 18.7 % Income from operations $ 1.1 $ 1.1 $ — — As a percent of net sales 8.7 % 8.2 % Net sales . Interface segment net sales decreased $0.7 million, or 5.2%, to $12.7 million in the three months ended July 31, 2021, compared to $13.4 million in the three months ended August 1, 2020. The decrease was primarily due to lower sales volumes of appliance products and data solutions products, which were negatively impacted by a shortage of semiconductor chips. Gross profit. Interface segment gross profit decreased $0.8 million, or 32.0%, to $1.7 million in the three months ended July 31, 2021, compared to $2.5 million in the three months ended August 1, 2020. Gross profit margins decreased to 13.4% in the three months ended July 31, 2021, from 18.7% in the three months ended August 1, 2020. The decrease in gross profit margins was due to lower sales volumes and higher material costs. 23 Table of Contents Income from o perations. Interface segment income from operations was $1.1 million in the three months ended July 31, 2021 , unchanged from the three months ended August 1, 2020 . Lower gross profit of $0.8 million was offset by l ower selling and administrative expense s . Selling and administrative expenses decreased as the three months ended August 1, 2020 included $0.8 million of restructuring costs. Medical Three months ended (in millions) July 31, 2021 August 1, 2020 Net Change ($) Net Change (%) Net sales $ 0.8 $ 0.4 $ 0.4 100.0 % Gross profit $ - $ (0.6 ) $ 0.6 (100.0 )% Loss from operations $ (1.2 ) $ (1.6 ) $ 0.4 (25.0 )% Net sales . The Medical segment had net sales of $0.8 million in the three months ended July 31, 2021, compared to $0.4 million in the three months ended August 1, 2020. Net sales increased due to higher product demand. Gross profit. Medical segment gross profit was breakeven in the three months ended July 31, 2021, compared to a loss of $0.6 million in the three months ended August 1, 2020. The improvement was primarily due to higher net sales. Loss from operations. Medical segment loss from operations decreased $0.4 million, to $1.2 million in the three months ended July 31, 2021, compared to $1.6 million in the three months ended August 1, 2020. The improvement was due to higher gross profit, partially offset by higher selling and administrative expenses. Financial Condition, Liquidity and Capital Resources Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, dividends and share buybacks. Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior unsecured credit agreement. We believe our liquidity position will be sufficient to fund our existing operations and current commitments for at least the next twelve months. However, if economic conditions remain impacted for longer than we expect due to the COVID-19 pandemic, our liquidity position could be severely impacted. As of July 31, 2021, we had $207.9 million of cash and cash equivalents, of which $97.4 million was held in subsidiaries outside the U.S. Cash held by these subsidiaries is used to fund operational activities and can be repatriated, primarily through the payment of dividends and the repayment of intercompany loans, without creating material additional income tax expense. Share Buyback Program On March 31, 2021, the Board of Directors authorized the purchase of up to $100.0 million of our common stock. Such purchases may be made on the open market, in private transactions or pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of July 31, 2021, a total of 325,462 shares have been purchased at a total cost of $15.1 million since the commencement of the share buyback program. As of July 31, 2021, the dollar value of shares that remained available to be purchased under this share buyback program was approximately $84.9 million. Credit Agreement Our senior unsecured credit agreement provides for a $200.0 million revolving credit facility and a $250.0 million term loan. As of July 31, 2021, $8.7 million in principal was outstanding under the revolving credit facility and we have $191.3 million of availability under the revolving credit facility. As of July 31, 2021, $215.6 million in principal was outstanding under the term loan. 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. We were in compliance with all covenants under the senior unsecured credit agreement as of July 31, 2021. For further information, see Note 8, “Debt” to the condensed consolidated financial statements included in this Quarterly Report. Borrowings under our senior unsecured credit agreement bear interest at rates equal to LIBOR plus an applicable margin. LIBOR is expected to be phased out by the end of 2021, which is before the maturity of our senior unsecured credit agreement. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate; however, we continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternative rate to replace LIBOR. The consequences of the discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our interest expense. 24 Table of Contents 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 future prospects. Cash Flows Three Months Ended (in millions) July 31, 2021 August 1, 2020 Operating activities: Net income $ 29.1 $ 20.7 Non-cash items 16.0 7.4 Changes in operating assets and liabilities (35.4 ) (11.7 ) Net cash provided by operating activities 9.7 16.4 Net cash used in investing activities (15.4 ) (11.6 ) Net cash used in financing activities (18.3 ) (13.0 ) Effect of exchange rate changes on cash and cash equivalents (1.3 ) 1.9 Decrease in cash and cash equivalents (25.3 ) (6.3 ) Cash and cash equivalents at beginning of the period 233.2 217.3 Cash and cash equivalents at end of the period $ 207.9 $ 211.0 Operating activities Net cash provided by operating activities decreased $6.7 million to $9.7 million in the three months ended July 31, 2021, from $16.4 million in the three months ended August 1, 2020. The decrease was due to higher cash outflows related to changes in operating assets and liabilities, partially offset by higher net income adjusted for non-cash items. The $35.4 million of cash outflows for operating assets and liabilities in the three months ended July 31, 2021 was primarily due to lower accounts payable and other liabilities and higher inventory and prepaid expenses and other assets, partially offset by lower accounts receivable. Investing activities Net cash used in investing activities was $15.4 million in the three months ended July 31, 2021, compared to $11.6 million in the three months ended August 1, 2020. Capital expenditures were $15.9 million and $11.6 million in the three months ended July 31, 2021 and August 1, 2020, respectively. We received $0.5 million of cash from the sale of property, plant and equipment in the three months ended July 31, 2021. Financing activities Net cash used in financing activities was $18.3 million in the three months ended July 31, 2021, compared to $13.0 million in the three months ended August 1, 2020. We paid cash dividends of $5.2 million in the three months ended July 31, 2021, compared to $5.0 million in the three months ended August 1, 2020. We increased our quarterly dividend from $0.11 per share to $0.14 per share in the three months ended July 31, 2021. In the three months ended July 31, 2021, we paid $0.3 million in taxes related to the net share settlement of equity awards compared to $3.9 million in the three months ended August 1, 2020. We also spent $8.4 million of cash for the purchase of shares under our share buyback program. In the three months ended July 31, 2021, we had net repayments on our borrowings of $4.7 million, compared to $4.1 million in the three months ended August 1, 2020. Recent Accounting Pronouncements See Note 1, “Description of Business and Summary of Significant Accounting Policies” to the condensed consolidated financial statements included in Item 1. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined under SEC rules. 25 Table of Contents Legal Matters For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, we terminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. A trial with respect to the matter began in February 2020. During the trial, the defendants dismissed their one remaining counterclaim with prejudice. On March 2, 2020, the jury returned a verdict in our favor. The verdict included approximately $102 million in compensatory damages and $11 million in punitive damages. On April 22, 2020, the Court entered a permanent injunction barring defendants from selling infringing products and ordering them to return Hetronic’s confidential information. Defendants appealed entry of the permanent injunction. On May 29, 2020, the Court held defendants in contempt for violating the permanent injunction and entered the final judgment. Defendants appealed entry of the final monetary judgment as well. The appeal of the permanent injunction and the appeal of the final judgment were consolidated into a single appeal before the U.S. Court of Appeals for the Tenth Circuit. On August 24, 2021, the Tenth Circuit issued a decision affirming the lower court’s ruling with the exception that it modified the injunction from the entire world to all of the countries in which Hetronic sells its products. It is possible that the defendants may seek to further appeal this decision and these matters. Like any judgment, particularly any judgment involving defendants outside of the United States, there is no guarantee that we will be able to collect the judgment. In the three months ended July 31, 2021 and August 1, 2020, we incurred Hetronic-related legal fees of $0.7 million and $1.9 million, respectively. These amounts are included in the selling and administrative expenses in the Industrial segment.