What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-03-03 compared with 2021-12-02 · 185 added, 173 removed, 175 unchanged (67% of the section changed)

54 unchanged sentences

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.

We continue to experience business interruptions, including customer shutdowns and increased material and logistics costs, labor shortages, 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.

We expect this semiconductor shortage to have a continued impact on our operating results and financial condition for the remainder of fiscal 2022.

Restructuring Actions

In the three months ended January 29, 2022, we initiated a restructuring plan to consolidate one of our operations within the Industrial segment in response to logistics issues and tariffs.

This action resulted in a facility shutdown and consolidation of activities into an existing location.

We recognized $3.1 million of restructuring costs and expect to incur an additional $0.2 million of restructuring costs related to this plan in the fourth quarter of fiscal 2022.

We may take additional restructuring actions in future periods based upon market conditions and industry trends.

In the three and nine months ended January 30, 2021, we initiated certain restructuring actions as a result of the COVID-19 pandemic.

These restructuring actions included facility consolidations and workforce reductions in the Automotive, Industrial and Interface segments.

In the three and nine months ended January 30, 2021, we recognized $0.7 million and $8.3 million of restructuring costs, respectively.

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:

The comparison of our historical results of operations for the three and nine months ended January 29, 2022 to the three and nine months ended January 30, 2021 is as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

(in millions)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

January 29, 2022

January 30, 2021

January 29, 2022

January 30, 2021

Cost of products sold

4 unchanged sentences

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.

Net sales decreased $3.7 million, or 1.3%, to $291.6 million in the three months ended January 29, 2022, compared to $295.3 million in the three months ended January 30, 2021.

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 in the three months ended January 29, 2022 included $8.6 million of premium freight cost recovery.

Net sales were unfavorably impacted by foreign currency translation of $2.0 million, primarily due to the strengthening of the U.S.

dollar, relative to the euro.

Net sales increased $87.9 million, or 11.2%, to $874.9 million in the nine months ended January 29, 2022, compared to $787.0 million in the nine months ended January 30, 2021.

The increase was primarily due to higher sales in the Automotive and Industrial segments.

The COVID-19 pandemic negatively impacted net sales in the first quarter of fiscal 2021.

Net sales were favorably impacted by foreign currency translation of $11.1 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 $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.

Cost of products sold decreased $0.2 million, or 0.1%, to $222.5 million (76.3% of net sales) in the three months ended January 29, 2022, compared to $222.7 million (75.4% of net sales) in the three months ended January 30, 2021.

The impact of foreign currency translation decreased cost of products sold by $1.5 million.

Excluding the impact of foreign currency translation, cost of products sold increased by $1.3 million, primarily due to higher material, logistics and other operating costs due in part to global supply chain disruptions and factory inefficiencies, and higher restructuring costs of $0.9 million.

Restructuring costs were $1.2 million in the three months ended January 29, 2022, compared to $0.3 million in the three months ended January 30, 2021.

Cost of products sold increased $76.4 million, or 13.0%, to $664.9 million (76.0% of net sales) in the nine months ended January 29, 2022, compared to $588.5 million (74.8% of net sales) in the nine months ended January 30, 2021.

The impact of foreign currency translation increased cost of products sold by $7.7 million.

Excluding the impact of foreign currency translation, cost of products sold increased by $68.7 million.

The increase was primarily due to higher material, logistics and other operating costs of $64.2 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.

Labor costs were higher as the nine months ended January 30, 2021 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic.

This was partially offset by lower restructuring costs of $3.8 million.

Restructuring costs were $1.2 million in the nine months ended January 29, 2022, compared to $5.0 million in the nine months ended January 30, 2021.

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.

Gross profit margin was 23.7% of net sales in the three months ended January 29, 2022, compared to 24.6% of net sales in the three months ended January 30, 2021.

The decrease was due to lower sales volumes and higher material and other costs associated with supply chain disruptions, partially offset by $2.9 million of premium freight cost recovery.

Gross profit margin was 24.0% of net sales in the nine months ended January 29, 2022, compared to 25.2% of net sales in the nine months ended January 30, 2021.

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.

Labor costs were higher as the nine months ended January 30, 2021 included the impact of temporary salary reductions and four-day work weeks in response to the COVID-19 pandemic.

Selling and a dministrative e xpenses

Selling and administrative expenses increased $2.1 million, or 6.5%, to $34.5 million (11.8% of net sales) in the three months ended January 29, 2022, compared to $32.4 million (11.0% of net sales) in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, selling and administrative expenses increased by $2.6 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.

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

Selling and administrative expenses increased $8.7 million, or 9.7%, to $98.5 million (11.3% of net sales) in the nine months ended January 29, 2022, compared to $89.8 million (11.4% of net sales) in the nine months ended January 30, 2021.

Excluding foreign currency translation, selling and administrative expenses increased by $8.1 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.

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

Salary and travel expense was lower in the nine months ended January 30, 2021 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 nine months ended January 29, 2022, we recognized restructuring costs of $1.9 million and $2.1 million, respectively, compared to $0.3 million and $3.3 million, respectively, in the three and nine months ended January 30, 2021.

Amortization of intangibles

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.

Amortization of intangibles was $4.8 million and $14.4 million in the three and nine months ended January 29, 2022, respectively, compared to $4.8 million and $14.5 million in the three and nine months ended January 30, 2021, respectively.

Interest expense, net

Interest expense, net was $0.7 million and $2.9 million in the three and nine months ended January 29, 2022, respectively, compared to $1.3 million and $4.3 million in the three and nine months ended January 30, 2021, 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.

Average borrowings were lower as the three and nine months ended January 30, 2021 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 $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.

Other income, net was $4.4 million in the three months ended January 29, 2022, compared to $2.4 million in the three months ended January 30, 2021.

In the three months ended January 29, 2022, we received $3.1 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic, compared to $2.7 million in the three months ended January 30, 2021 .

In addition, we received an international government grant of $1.1 million in the three months ended January 29, 2022.

Net foreign exchange losses were $0.3 million in the three months ended January 29, 2022, compared to $0.9 million in the three months ended January 30, 2021.

Other income, net was $7.1 million in the nine months ended January 29, 2022, compared to $8.4 million in the nine months ended January 30, 2021.

In the nine months ended January 29, 2022, we received $7.1 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic, compared to $8.9 million in the nine months ended January 30, 2021.

In addition, we received an international government grant of $1.1 million in the nine months ended January 29, 2022.

Net foreign exchange losses were $1.7 million in the nine months ended January 29, 2022, compared to $0.7 million in the nine months ended January 30, 2021.

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.

Income tax expense was $4.1 million (12.2% effective tax rate) in the three months ended January 29, 2022, compared to $4.6 million (12.6% effective tax rate) in the three months ended January 30, 2021.

The effective tax rate in the three months ended January 29, 2022 benefitted from discrete tax benefits of $2.2 million mainly from the reversal of valuation allowances related to certain loss carryforwards.

The effective tax rate in the three months ended January 30, 2021 benefitted from discrete tax benefits of $1.7 million mainly from foreign tax credits.

Income tax expense was $15.3 million (15.1% effective tax rate) in the nine months ended January 29, 2022, compared to $7.1 million (7.2% effective tax rate) in the nine months ended January 30, 2021.

The lower effective tax rate in the nine months ended January 30, 2021 was primarily due to discrete tax benefits recorded of $7.6 million.

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

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

January 29, 2022

January 30, 2021

January 29, 2022

January 30, 2021

North America

2 unchanged sentences

As a percent of net sales

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.

Automotive segment net sales decreased $15.1 million, or 7.2%, to $195.4 million in the three months ended January 29, 2022, compared to $210.5 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, net sales decreased by $13.5 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 .

Net sales in North America decreased $4.0 million to $103.7 million in the three months ended January 29, 2022, compared to $107.7 million in the three months ended January 30, 2021.

Net sales in North America included $2.0 million of premium freight cost recovery.

Net sales in Europe, the Middle East and Africa (“EMEA”) decreased $16.1 million to $44.0 million in the three months ended January 29, 2022, compared to $60.1 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, net sales in EMEA decreased by $13.3 million.

The decrease in both North America and EMEA was primarily due to lower sales volumes as a result of the worldwide semiconductor supply shortage which impacted demand from our automotive customers.

Net sales in Asia increased by $5.0 million to $47.7 million in the three months ended January 29, 2022, compared to $42.7 million in the three months ended January 30, 2021.

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

dollar, increased net sales in Asia by $1.2 million.

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 in Asia increased by $3.8 million primarily due to higher electric vehicle product sales volumes, partially offset by lower touchscreen product sales.

Automotive segment net sales increased $35.9 million, or 6.5%, to $587.2 million in the nine months ended January 29, 2022, compared to $551.3 million in the nine months ended January 30, 2021.

Excluding the impact of foreign currency translation, net sales increased by $28.5 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.

Net sales in North America increased $0.3 million to $302.1 million in the nine months ended January 29, 2022, compared to $301.8 million in the nine months ended January 30, 2021.

Net sales in EMEA increased $9.6 million to $156.7 million in the nine months ended January 29, 2022, compared to $147.1 million in the nine months ended January 30, 2021.

Excluding the impact of foreign currency translation, net sales in EMEA increased by $9.1 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.

The increase was due to the impact of the COVID-19 pandemic on sales volumes in the nine months ended January 30, 2021.

Net sales in Asia increased $26.0 million to $128.4 million in the nine months ended January 29, 2022, compared to $102.4 million in the nine months ended January 30, 2021.

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

dollar, increased net sales in Asia by $6.9 million.

Excluding the impact of foreign currency translation, Asia net sales increased by $19.1 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.

Automotive segment gross profit decreased $4.8 million, or 10.9%, to $39.3 million in the three months ended January 29, 2022, compared to $44.1 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, gross profit decreased by $4.4 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.

Gross profit margins decreased to 20.1% in the three months ended January 29, 2022, compared to 21.0% in the three months ended January 30, 2021.

The decrease in gross profit margins was primarily due to lower sales volumes, partially offset by $2.0 million of premium freight cost recovery.

Automotive segment gross profit decreased $5.0 million, or 4.1%, to $118.2 million in the nine months ended January 29, 2022, compared to $123.2 million in the nine months ended January 30, 2021.

Excluding the impact of foreign currency translation, gross profit decreased by $6.8 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 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.

Gross profit margins decreased to 20.1% in the nine months ended January 29, 2022, compared to 22.3% in the nine months ended January 30, 2021.

Income from o perations

Automotive segment income from operations decreased $5.1 million, or 17.2%, to $24.5 million in the three months ended January 29, 2022, compared to $29.6 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, income from operations decreased by $5.2 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.

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

Selling and administrative expenses increased due to higher salary expense.

Automotive segment income from operations decreased $8.3 million, or 9.9%, to $75.4 million in the nine months ended January 29, 2022, compared to $83.7 million in the nine months ended January 30, 2021.

Excluding the impact of foreign currency translation, income from operations decreased by $9.7 million.

1 unchanged sentence

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.

Salary expense was lower in the nine months ended January 30, 2021 due to the impact of salary reductions and other cost saving measures in response to the COVID-19 pandemic.

Restructuring costs in selling and administrative expenses were $1.4 million in the nine months ended January 30, 2021, compared to $0.2 million in the nine months ended January 29, 2022.

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

January 29, 2022

January 30, 2021

January 29, 2022

January 30, 2021

As a percent of net sales

1 unchanged sentence

As a percent of net sales

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.

Industrial segment net sales increased $13.5 million, or 20.3%, to $80.0 million in the three months ended January 29, 2022, compared to $66.5 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, net sales increased by $13.9 million due to higher sales volumes from all product categories in the Industrial segment and $6.6 million of premium freight cost recovery.

Net sales in the three months ended January 30, 2021 for commercial vehicle lighting solutions were negatively impacted by supply chain disruptions, resulting in lower sales volumes.

Industrial segment net sales increased $52.8 million, or 28.3%, to $239.2 million in the nine months ended January 29, 2022, compared to $186.4 million in the nine months ended January 30, 2021.

Excluding the impact of foreign currency translation, net sales increased by $49.1 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.

Sales volumes in the nine months ended January 30, 2021 were negatively impacted from the COVID-19 pandemic.

Industrial segment gross profit increased $2.5 million, or 10.1%, to $27.2 million in the three months ended January 29, 2022, compared to $24.7 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, gross profit increased by $2.6 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.

Gross profit margins decreased to 34.0% in the three months ended January 29, 2022, compared to 37.1% in the three months ended January 30, 2021.

The decrease in gross profit margins was primarily due to higher materials and logistics costs, product mix and restructuring costs, partially offset by $0.9 million of premium freight cost recovery.

In the three months ended January 29, 2022, we recognized $1.2 million of restructuring costs.

Industrial segment gross profit increased $16.7 million, or 25.5%, to $82.2 million in the nine months ended January 29, 2022, compared to $65.5 million in the nine months ended January 30, 2021.

Excluding the impact of foreign currency translation, gross profit increased by $15.1 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.

Gross profit margins decreased to 34.4% in the nine months ended January 29, 2022, compared to 35.1% in the nine months ended January 30, 2021.

The decrease in gross profit margins was due to lower gross profit margins from busbar products and the recognition of $1.2 million of restructuring costs.

Income from operations

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.

Industrial segment income from operations increased $0.8 million, or 4.7%, to $17.7 million in the three months ended January 29, 2022, compared to $16.9 million in the three months ended January 30, 2021.

Excluding the impact of foreign currency translation, income from operations increased by $0.9 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.

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.

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

Selling and administrative expenses increased primarily due to restructuring costs, partially offset by lower legal expenses.

Restructuring costs in selling and administrative expense were $1.9 million in the three months ended January 29, 2022.

Industrial segment income from operations increased $16.7 million, or 41.7% , to $56.7 million in the nine months ended January 29, 2022 , compared to $40.0 million in the nine months ended January 30, 2021 .

Excluding the impact of foreign currency translation, income from operations increased by $ 1 5.4 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.

The in crease was primarily due to higher gross profit .

Selling and administrative expenses were unchanged.

Three Months Ended

Six Months Ended

Nine Months Ended

($ in millions)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

January 29, 2022

January 30, 2021

January 29, 2022

January 30, 2021

As a percent of net sales

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As a percent of net sales

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.

Interface segment net sales decreased $2.4 million, or 13.6%, to $15.2 million in the three months ended January 29, 2022, compared to $17.6 million in the three months ended January 30, 2021.

Interface segment net sales decreased $1.5 million, or 3.2%, to $45.9 million in the nine months ended January 29, 2022, compared to $47.4 million in the nine months ended January 30, 2021.

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

Interface segment gross profit decreased $1.2 million, or 30.0%, to $2.8 million in the three months ended January 29, 2022, compared to $4.0 million in the three months ended January 30, 2021.

Gross profit margins decreased to 18.4% in the three months ended January 29, 2022, compared to 22.7% in the three months ended January 30, 2021.

The decrease in gross profit margins was primarily due to lower sales volumes of appliance products, partially offset by higher sales volumes of legacy data solutions products.

Interface segment gross profit decreased $0.6 million, or 5.9%, to $9.5 million in the nine months ended January 29, 2022, compared to $10.1 million in the nine months ended January 30, 2021.

Gross profit margins decreased to 20.7% in the nine months ended January 29, 2022, compared to 21.3% in the nine months ended January 30, 2021.

The decrease in gross profit margins was primarily due to lower sales volumes of appliance products, partially offset by 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.

Interface segment income from operations decreased $1.1 million, or 34.4%, to $2.1 million in the three months ended January 29, 2022, compared to $3.2 million in the three months ended January 30, 2021.

The decrease was primarily due to lower gross profit.

Interface segment income from operations increased $0.2 million, or 2.7%, to $7.6 million in the nine months ended January 29, 2022, compared to $7.4 million in the nine months ended January 30, 2021.

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

Selling and administrative expenses were lower due to restructuring costs of $0.8 million recognized in the nine months ended January 30, 2021.

Three Months Ended

Six Months Ended

Nine Months Ended

(in millions)

October 30, 2021

October 31, 2020

October 30, 2021

October 31, 2020

January 29, 2022

January 30, 2021

January 29, 2022

January 30, 2021

Loss from operations

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.

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.

Medical segment net sales increased $0.3 million to $1.0 million in the three months ended January 29, 2022, compared to $0.7 million in the three months ended January 30, 2021.

Medical segment net sales increased $0.7 million to $2.6 million in the nine months ended January 29, 2022, compared to $1.9 million in the nine months ended January 30, 2021.

The increase was due to higher product demand.

Gross p rofit

Medical segment gross profit was a loss of $0.5 million in the three months ended January 29, 2022 compared to break-even in the three months ended January 30, 2021.

Medical segment gross profit was a loss of $0.9 million in the nine months ended January 29, 2022, compared to a loss of $1.0 million in the nine months ended January 30, 2021.

Gross profit was impacted by higher material costs which offset the increase in net sales in the three months ended January 29, 2022.

Loss from operations

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.

Medical segment loss from operations increased $0.6 million to $1.6 million in the three months ended January 29, 2022, compared to $1.0 million in the three months ended January 30, 2021.

The increase in the loss was due to lower gross profit.

Medical segment loss from operations increased $0.5 million to $4.6 million in the nine months ended January 29, 2022, compared to $4.1 million in the nine months ended January 30, 2021.

The increase in the loss was due to higher selling and administrative expenses, primarily higher advertising expenses and professional fees.

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.

Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior unsecured credit agreement (“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 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.

As of January 29, 2022, we had $153.1 million of cash and cash equivalents, of which $95.4 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 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.

As of January 29, 2022, a total of 1,593,139 shares have been purchased at a total cost of $71.2 million since the commencement of the share buyback program.

As of January 29, 2022, the dollar value of shares that remained available to be purchased under this share buyback program was approximately $28.8 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 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.

Our Credit Agreement provides for a $200.0 million revolving credit facility and a $250.0 million term loan.

As of January 29, 2022, no principal was outstanding under the revolving credit facility and we have $200.0 million of availability under the revolving credit facility.

As of January 29, 2022, $209.4 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 October 30, 2021.

We were in compliance with all covenants under the Credit Agreement as of January 29, 2022.

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.

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.

On December 10, 2021, we entered into a First Amendment to the Credit Agreement (“First Amendment”).

The First Amendment amended and restated the Credit Agreement to provide, among other things, that upon the occurrence of certain events, the interest rate calculation method will generally transition from the London Interbank Offered Rate (“LIBOR”) to an alternate reference rate, including the Secured Overnight Financing Rate (“SOFR”) for U.S.

dollar denominated borrowings.

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.

Our 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.

Six Months Ended

Nine Months Ended

(in millions)

October 30, 2021

October 31, 2020

January 29, 2022

January 30, 2021

Operating activities:

4 unchanged sentences

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Effect of foreign currency exchange rate changes on cash and cash equivalents

(Decrease) increase in cash and cash equivalents

2 unchanged sentences

Operating activities

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.

Net cash provided by operating activities decreased $87.0 million to $56.8 million in the nine months ended January 29, 2022, compared to $143.8 million in the nine months ended January 30, 2021.

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 $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.

The $80.7 million of cash outflows for operating assets and liabilities in the nine months ended January 29, 2022 was primarily due to higher inventory (as a result of global supply chain and logistics disruptions), prepaid expenses and other assets and lower other liabilities.

Investing activities

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.

Net cash used in investing activities was $29.0 million in the nine months ended January 29, 2022, compared to $20.0 million in the nine months ended January 30, 2021.

Capital expenditures were $29.6 million and $20.1 million in the nine months ended January 29, 2022 and January 30, 2021, respectively.

We received $0.6 million of cash from the sale of property, plant and equipment in the nine months ended January 29, 2022.

Financing activities

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.

Net cash used in financing activities was $103.8 million in the nine months ended January 29, 2022, compared to $127.8 million in the nine months ended January 30, 2021.

In the nine months ended January 29, 2022, we used $63.9 million of cash for the purchase of shares under our share buyback program.

We paid cash dividends of $15.4 million in the nine months ended January 29, 2022, compared to $13.2 million in the nine months ended January 30, 2021.

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.

In the nine months ended January 29, 2022, we paid $0.3 million in taxes related to the net share settlement of equity awards compared to $3.9 million in the nine months ended January 30, 2021.

In the nine months ended January 29, 2022, we had net repayments on our borrowings of $24.2 million.

In the nine months ended January 30, 2021, we had net repayments on our borrowings of $110.4 million, which included the repayment of the $100.0 million precautionary draw-down on our Credit Agreement in March 2020.

Recent Accounting Pronouncements

20 unchanged sentences

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.

The District Court set a hearing related to modifying the injunction pursuant to the Tenth Circuit’s opinion for April 19 and 20, 2022 .

The defendants filed a petition for certiorari with the United States Supreme Court seeking to further appeal the extraterritorial application of the Lanham Act in this case .

Hetronic intends to oppose that petition.

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 January 29, 2022 and January 30, 2021, we incurred Hetronic-related legal fees of $0.5 million and $1.3 million, respectively.

In the nine months ended January 29, 2022 and January 30, 2021, we incurred Hetronic-related legal fees of $1.5 million and $4.8 million, respectively.

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