What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-02 compared with 2021-09-02 · 203 added, 142 removed, 145 unchanged (70% of the section changed)

45 unchanged sentences

Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical.

COVID-19 Pandemic Update

COVID-19 Pandemic Impact

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.

5 unchanged sentences

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.

Global Supply Chain Disruptions

While demand for our products improved in fiscal 2021, 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.

1 unchanged sentence

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

Consolidated Results of Operations

The comparison of our historical results of operations for the three and six months ended October 30, 2021 to the three and six months ended October 31, 2020 is as follows:

Three Months Ended

Six Months Ended

(in millions)

July 31, 2021

August 1, 2020

Net Change ($)

Net Change (%)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

Cost of products sold

3 unchanged sentences

Other income, net

Income tax expense (benefit)

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.

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.

Income tax expense

Net sales decreased $5.3 million, or 1.8%, to $295.5 million in the three months ended October 30, 2021, compared to $300.8 million in the three months ended October 31, 2020.

The decrease was primarily due to lower sales volumes in the Automotive segment, partially offset by higher sales volumes in the Industrial segment.

Net sales were favorably impacted by foreign currency translation of $2.8 million, primarily due to the strengthening of the Chinese renminbi, relative to the U.S.

N et sales increased $91.6 million , or 18.6% , to $583.3 million in the six months ended October 30, 2021 , compared to $491.7 million in the six months ended October 31, 2020 .

The increase was primarily due to higher sales in the Automotive and Industrial segments , which were negatively impacted by the COVID-19 pandemic in the first quarter of fiscal 2021.

Net sales were favorably impacted by foreign currency translation of $13.1 million, primarily due to the strengthening of the Chinese renminbi and euro , relative to the U.S.

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.

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.

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 .

Cost of products sold increased $6.3 million, or 2.9%, to $226.3 million (76.6% of net sales) in the three months ended October 30, 2021, compared to $220.0 million (73.1% of net sales) in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, cost of products sold increased by $4.3 million.

The increase was a result of higher material, logistics and other operating costs of $7.0 million due in part to global supply chain disruptions and factory inefficiencies.

This was partially offset by restructuring costs of $2.7 million recognized in the three months ended October 31, 2020.

Cost of products sold increased $76.6 million, or 20.9%, to $442.4 million (75.8% of net sales) in the six months ended October 30, 2021, compared to $365.8 million (74.4% of net sales) in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, cost of products sold increased by $67.4 million.

The increase was primarily due to higher material, logistics and other operating costs of $71.9 million as a result of higher sales volumes and the impact of global supply chain disruptions and factory inefficiencies.

Labor costs were higher as the six months ended October 31, 2020 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic.

This was partially offset by restructuring costs of $4.6 million recognized in the six months ended October 31, 2020.

Gross profit margin

Gross profit margin was 23.4% of net sales in the three months ended October 30, 2021, compared to 26.9% of net sales in the three months ended October 31, 2020.

The decrease was due to lower sales volumes and higher material and other costs associated with supply chain disruptions.

Gross profit margin was 24.2% of net sales in the six months ended October 30, 2021, compared to 25.6% of net sales in the six months ended October 31, 2020.

The decrease was due to higher material and other costs associated with supply chain disruptions, higher labor costs, partially offset by higher sales volumes.

Labor costs were higher as the six months ended October 31, 2020 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic.

Selling and administrative expenses

Selling and administrative expenses increased $0.4 million, or 1.3%, to $31.2 million (10.6% of net sales) in the three months ended October 30, 2021, compared to $30.8 million (10.2% of net sales) in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, selling and administrative expenses increased by $0.2 million.

The increase was primarily due to higher stock-based compensation expense and salary expense, partially offset by lower restructuring costs and professional fees.

Selling and administrative expenses increased $6.6 million, or 11.5%, to $64.0 million (11.0% of net sales) in the six months ended October 30, 2021, compared to $57.4 million (11.7% of net sales) in the six months ended October 31, 2020.

Excluding foreign currency translation, selling and administrative expenses increased by $5.6 million.

The increase was primarily due to higher stock-based compensation expense, salary expense and travel expense, partially offset by lower restructuring costs and professional fees.

Selling and administrative expenses as a percentage of net sales was higher in the six months ended October 31, 2020 as net sales was impacted by the COVID-19 pandemic.

Stock-based compensation expense increased as our long-term incentive plan was not introduced until the second quarter of fiscal 2021.

Professional fees decreased due to lower Hetronic-related legal fees.

Salary and travel expense was lower in the six months ended October 31, 2020 as a result of actions we took in response to the COVID-19 pandemic which included temporary salary reductions and four-day work weeks (which ended in the second quarter of fiscal 2021) and the elimination of most business travel.

In the three and six months ended October 31, 2020, we recognized restructuring costs of $1.5 million and $3.0 million, respectively.

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.

Amortization of intangibles was $4.8 million and $9.6 million in the three and six months ended October 30, 2021, respectively, compared to $5.0 million and $9.7 million in the three and six months ended October 31, 2020, respectively.

Interest e xpense, n et

Interest expense, net was $1.1 million and $2.2 million in the three and six months ended October 30, 2021, respectively, compared to $1.4 million and $3.0 million in the three and six months ended October 31, 2020, respectively.

The decrease was due to lower average borrowings and a lower effective interest rate on outstanding borrowings.

Average borrowings were lower as the three and six months ended October 31, 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.

Other income, net was $0.9 million in the three months ended October 30, 2021, compared to $2.6 million in the three months ended October 31, 2020.

In the three months ended October 30, 2021, we received $2.1 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic, compared to $3.3 million in the three months ended October 31, 2020 .

Net foreign exchange losses were $1.2 million in the three months ended October 30, 2021, compared to $0.6 million in the three months ended October 31, 2020.

Other income, net was $2.7 million in the six months ended October 30, 2021, compared to $6.0 million in the six months ended October 31, 2020.

In the six months ended October 30, 2021, we received $4.0 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic, compared to $6.2 million in the six months ended October 31, 2020.

Net foreign exchange losses were $1.5 million in the six months ended October 30, 2021, compared to a net foreign exchange gain of $0.1 million in the six months ended October 31, 2020.

Income tax expense

Income tax expense was $5.5 million (16.7% effective tax rate) in the three months ended October 30, 2021, compared to $7.6 million (16.5% effective tax rate) in the three months ended October 31, 2020.

Our effective tax rate was relatively unchanged between periods.

Income tax expense was $11.2 million (16.5% effective tax rate) in the six months ended October 30, 2021, compared to $2.5 million (4.0% effective tax rate) in the six months ended October 31, 2020.

The lower effective tax rate in the six months ended October 31, 2020 was primarily due to discrete tax benefits recorded of $8.2 million.

These discrete tax benefits included tax credits earned and research deductions claimed in foreign jurisdictions.

Excluding the discrete tax benefits, the effective tax rate would have been 17.3%.

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

Three Months Ended

Six Months Ended

($ in millions)

July 31, 2021

August 1, 2020

Net Change ($)

Net Change (%)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

North America

As a percent of net sales

1 unchanged sentence

As a percent of 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.

Automotive segment net sales decreased $19.7 million, or 9.1%, to $196.0 million in the three months ended October 30, 2021, compared to $215.7 million in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, net sales decreased by $21.6 million.

Net sales in North America decreased $18.5 million to $99.3 million in the three months ended October 30, 2021 , compared to $117.8 million in the three months ended October 31, 2020 .

The decrease was due to lower sales volumes as a result of the worldwide semiconductor supply shortage which impacted demand from our automotive customers.

Net s ales in E MEA decreased $3.3 million to $54.9 million in the three months ended October 30, 2021 , compared to $58.2 million in the three months ended October 31, 2020 .

Excluding the impact of foreign currency translation, net sales in E MEA de crease d by $ 2 .

9 million as a result of lower sales volumes .

Net sales in Asia increased $2.1 million t o $41.8 million in the three months ended October 30, 2021 , compared to $39.7 million in the three months ended October 31, 2020 .

The stronger Chinese renminbi, relative to the U.S.

dollar, increased net sales in Asia by $ 2.3 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.

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 .

Excluding the impact of foreign currency translation, net sales in Asia de creased by $ 0.2 million .

Automotive segment net sales increased $51.0 million, or 15.0%, to $391.8 million in the six months ended October 30, 2021, compared to $340.8 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, net sales increased by $42.0 million.

Net sales in North America increased $4.3 million to $198.4 million in the six months ended October 30, 2021, compared to $194.1 million in the six months ended October 31, 2020.

The increase was due to the impact of the COVID-19 pandemic on sales volumes in the six months ended October 31, 2020.

Net sales in EMEA increased $25.7 million to $112.7 million in the six months ended October 30, 2021, compared to $87.0 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, net sales in EMEA increased by $22.4 million.

The increase was due to the impact of the COVID-19 pandemic on sales volumes in the six months ended October 31, 2020.

Net sales in Asia increased $21.0 million to $80.7 million in the six months ended October 30, 2021, compared to $59.7 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, Asia net sales increased by $15.3 million primarily due to higher electric vehicle product sales volumes, partially offset by lower touchscreen product sales.

Automotive segment gross profit decreased $15.7 million, or 29.7%, to $37.2 million in the three months ended October 30, 2021, compared to $52.9 million in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, gross profit decreased by $16.2 million.

Gross profit margins decreased to 19.0% in the three months ended October 30, 2021, compared to 24.5% in the three months ended October 31, 2020.

The decrease in gross profit margins was primarily due to lower sales volumes and higher material and other costs associated with supply chain disruptions, partially offset by lower restructuring costs.

In the three months ended October 31, 2020, gross profit included restructuring costs of $2.6 million.

Automotive segment gross profit decreased $0.2 million, or 0.3%, to $78.9 million in the six months ended October 30, 2021, compared to $79.1 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, gross profit decreased by $2.5 million.

Gross profit margins decreased to 20.1% in the six months ended October 30, 2021, compared to 23.2% in the six months ended October 31, 2020.

The decrease in gross profit margins was due to higher material and other costs associated with supply chain disruptions and product mix, partially offset by higher sales volumes and lower restructuring costs.

In the six months ended October 31, 2020, gross profit included restructuring costs of $4.5 million.

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.

Automotive segment income from operations decreased $15.2 million, or 39.2%, to $23.6 million in the three months ended October 30, 2021, compared to $38.8 million in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, income from operations decreased by $15.5 million.

The decrease was primarily due to lower gross profit, partially offset by lower selling and administrative expenses.

Selling and administrative expenses in the three months ended October 31, 2020 included restructuring costs of $1.3 million.

Automotive segment income from operations decreased $3.2 million, or 5.9%, to $50.9 million in the six months ended October 30, 2021, compared to $54.1 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, income from operations decreased by $4.8 million.

The decrease was primarily due to lower gross profit and higher selling and administrative expenses.

Selling and administrative expenses increased due to higher salary expense, partially offset by lower restructuring costs.

Salary expense was lower in the six months ended October 31, 2020 due to the impact of salary reductions and other cost saving measures in response to the COVID-19 pandemic.

Restructuring costs were $1.4 million in the six months ended October 31, 2020.

Three Months Ended

Six Months Ended

($ in millions)

July 31, 2021

August 1, 2020

Net Change ($)

Net Change (%)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

As a percent of net sales

1 unchanged sentence

As a percent of 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.

Industrial segment net sales increased $12.8 million, or 18.9%, to $80.7 million in the three months ended October 30, 2021, compared to $67.9 million in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, net sales increased by $11.9 million due to higher sales volumes from all product categories in the Industrial segment.

Net sales in the three months ended October 31, 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.

Industrial segment net sales increased $39.3 million, or 32.8%, to $159.2 million in the six months ended October 30, 2021, compared to $119.9 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, net sales increased by $35.2 million primarily due to higher sales volumes of all product categories in the Industrial segment.

Sales volumes in the six months ended October 31, 2020 were negatively impacted from the COVID-19 pandemic.

Industrial segment gross profit increased $2.1 million, or 8.6%, to $26.5 million in the three months ended October 30, 2021, compared to $24.4 million in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, gross profit increased by $1.8 million.

Gross profit margins decreased to 32.8% in the three months ended October 30, 2021, compared to 35.9% in the three months ended October 31, 2020.

The decrease in gross profit margins was primarily due to higher materials and logistics costs and product mix.

Industrial segment gross profit increased $14.2 million, or 34.8%, to $55.0 million in the six months ended October 30, 2021, compared to $40.8 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, gross profit increased by $12.6 million.

Gross profit margins slightly increased to 34.5% in the six months ended October 30, 2021, compared to 34.0% in the six months ended October 31, 2020.

The increase in gross profit margins was due to higher sales volumes of commercial vehicle lighting solutions and radio remote control product sales.

This was partially offset by lower gross profit margins from busbar products.

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.

Industrial segment income from operations increased $2.7 million, or 16.8%, to $18.8 million in the three months ended October 30, 2021, compared to $16.1 million in the three months ended October 31, 2020.

Excluding the impact of foreign currency translation, income from operations increased by $2.5 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.

Selling and administrative expenses decreased primarily due to lower legal expenses.

Industrial segment income from operations increased $15.9 million, or 68.8%, to $39.0 million in the six months ended October 30, 2021, compared to $23.1 million in the six months ended October 31, 2020.

Excluding the impact of foreign currency translation, income from operations increased by $14.7 million.

The increase was primarily due to higher gross profit and lower selling and administrative expenses.

Selling and administrative expenses decreased primarily due to lower legal expenses and restructuring costs.

In the six months ended October 31, 2020, restructuring costs were $0.7 million.

Three Months Ended

Six Months Ended

($ in millions)

July 31, 2021

August 1, 2020

Net Change ($)

Net Change (%)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

As a percent of net sales

1 unchanged sentence

As a percent of 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.

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.

Interface segment net sales increased $1.6 million, or 9.8%, to $18.0 million in the three months ended October 30, 2021, compared to $16.4 million in the three months ended October 31, 2020.

Interface segment net sales increased $0.9 million, or 3.0%, to $30.7 million in the six months ended October 30, 2021, compared to $29.8 million in the six months ended October 31, 2020.

The increase was primarily due to higher sales volumes of legacy data solutions products, partially offset by lower sales volumes of appliance products, which were negatively impacted by a shortage of semiconductor chips.

Interface segment gross profit increased $1.4 million, or 38.9%, to $5.0 million in the three months ended October 30, 2021, compared to $3.6 million in the three months ended October 31, 2020.

Gross profit margins increased to 27.8% in the three months ended October 30, 2021, compared to 22.0% in the three months ended October 31, 2020.

The increase in gross profit margins was primarily due to higher sales volumes of legacy data solutions products.

Interface segment gross profit increased $0.6 million, or 9.8%, to $6.7 million in the six months ended October 30, 2021, compared to $6.1 million in the six months ended October 31, 2020.

Gross profit margins increased to 21.8% in the six months ended October 30, 2021, compared to 20.5% in the six months ended October 31, 2020.

The increase in gross profit margins was primarily due to higher sales volumes of legacy data solutions products.

Income from operations

Interface segment income from operations increased $1.3 million, or 41.9%, to $4.4 million in the three months ended October 30, 2021, compared to $3.1 million in the three months ended October 31, 2020.

The increase was primarily due to higher gross profit.

Interface segment income from operations increased $1.3 million, or 31.0%, to $5.5 million in the six months ended October 30, 2021, compared to $4.2 million in the six months ended October 31, 2020.

The increase was primarily due to higher gross profit and lower selling and administrative expenses .

Selling and administrative expenses were lower due to restructuring costs of $0.8 million recognized in the six months ended October 31, 2020.

Three Months Ended

Six Months Ended

(in millions)

July 31, 2021

August 1, 2020

Net Change ($)

Net Change (%)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

Loss from operations

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 in the Medical segment were unchanged in the three months ended October 30, 2021 compared to the three months ended October 31, 2020.

The Medical segment had net sales of $1.6 million in the six months ended October 30, 2021, compared to $1.2 million in the six months ended October 31, 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.

Medical segment gross profit was a loss of $0.4 in both the three months ended October 30, 2021 and October 31, 2020.

Medical segment gross profit was a loss of $0.4 million in the six months ended October 30, 2021, compared to a loss of $1.0 million in the six months ended October 31, 2020.

The improvement was due to higher net sales and lower research and development expenses.

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.

Medical segment loss from operations increased $0.3 million to $1.8 million in the three months ended October 30, 2021, compared to $1.5 million in the three months ended October 31, 2020.

The increase in the loss was due to higher selling and administrative expenses.

Medical segment loss from operations was $3.0 million in the six months ended October 30, 2021, compared to $3.1 million in the six months ended October 31, 2020.

The slight improvement was due to higher gross profit, partially offset by higher selling and administrative expenses.

Selling and administrative expenses increased in both the three and six months ended October 30, 2021 due to higher travel and advertising expenses.

Financial Condition, Liquidity and Capital Resources

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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.

As of October 30, 2021, we had $177.2 million of cash and cash equivalents, of which $131.4 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.

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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.

As of October 30, 2021, a total of 1,132,978 shares have been purchased at a total cost of $49.9 million since the commencement of the share buyback program.

As of October 30, 2021, the dollar value of shares that remained available to be purchased under this share buyback program was approximately $50.1 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.

As of October 30, 2021, no principal was outstanding under the revolving credit facility and we have $200.0 million of availability under the revolving credit facility.

As of October 30, 2021, $212.5 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.

We were in compliance with all covenants under the senior unsecured credit agreement as of October 30, 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.

Certain USD LIBOR tenors are expected to be phased out by the end of 2021, with the remaining USD LIBOR tenors expected to be discontinued by June 2023.

We may also continue to make borrowings under the unsecured credit agreement at an alternate base rate in the event that LIBOR is unavailable regardless of whether a replacement or alternative rate has been determined.

The consequences of the discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our cost of borrowing.

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.

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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.

Three Months Ended

Six Months Ended

(in millions)

July 31, 2021

August 1, 2020

October 30, 2021

October 31, 2020

Operating activities:

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Effect of exchange rate changes on cash and cash equivalents

Decrease in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of the period

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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.

Net cash provided by operating activities decreased $20.0 million to $36.7 million in the six months ended October 30, 2021, compared to $56.7 million in the six months ended October 31, 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.

The $51.9 million of cash outflows for operating assets and liabilities in the six months ended October 30, 2021 was primarily due to higher inventory, prepaid expenses and other assets and lower other liabilities.

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.

Net cash used in investing activities was $20.7 million in the six months ended October 30, 2021, compared to $15.2 million in the six months ended October 31, 2020.

Capital expenditures were $21.3 million and $15.2 million in the six months ended October 30, 2021 and October 31, 2020, respectively.

We received $0.6 million of cash from the sale of property, plant and equipment in the six months ended October 30, 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.

Net cash used in financing activities was $69.7 million in the six months ended October 30, 2021, compared to $19.2 million in the six months ended October 31, 2020.

In the six months ended October 30, 2021, we used $42.5 million of cash for the purchase of shares under our share buyback program.

We paid cash dividends of $10.3 million in the six months ended October 30, 2021, compared to $9.1 million in the six months ended October 31, 2020.

We increased our quarterly dividend from $0.11 per share to $0.14 per share in the first quarter of fiscal 2022.

In the six months ended October 30, 2021, we paid $0.3 million in taxes related to the net share settlement of equity awards compared to $3.9 million in the six months ended October 31, 2020.

In the six months ended October 30, 2021, we had net repayments on our borrowings of $16.8 million, compared to $6.1 million in the six months ended October 31, 2020.

Recent Accounting Pronouncements

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During the trial, the defendants dismissed their one remaining counterclaim with prejudice.

On March 2, 2020, the jury returned a verdict in our favor.

On March 2, 2020, the jury returned a verdict in favor of the Company.

The verdict included approximately $102 million in compensatory damages and $11 million in punitive damages.

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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.

On August 24, 2021, the Tenth Circuit issued a decision affirming the lower court’s ruling with the exception that it instructed the District Court to modify the injunction from the entire world to all of the countries in which Hetronic sells its products.

The District Court has indicated that it will set a hearing related to modifying the injunction pursuant to the Tenth Circuit’s opinion.

The defendants have filed a motion with the United States Supreme Court seeking a 60-day extension to late January 2022 to determine if they will seek certiorari and, if so, to file their petition.

Like any judgment, particularly any judgment involving defendants outside of the United States, there is no guarantee that the Company will be able to collect the judgment.

In the three months ended October 30, 2021 and October 31, 2020 , we incurred Hetronic -related legal fees of $ 0.

3 million and $ 1 .

6 million , r espectively.

In the six months ended October 30, 2021 and October 31, 2020 , we incurred Hetronic -related legal fees of $ 1 .

0 million and $ 3 .

5 million , r espectively.

These amounts are included in the selling and administrative expenses in the Industrial segment.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis