METHODE ELECTRONICS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (“Quarterly Report”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, when made, our current views with respect to current events and financial performance. Such forward-looking statements are subject to many risks, uncertainties and factors relating to our operations and business environment, which may cause our actual results to be materially different from any future results, express or implied, by such forward-looking statements. All statements that address future operating, financial or business performance or our strategies or expectations are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “outlook” or “continue,” and other comparable terminology. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: • Impact from pandemics, such as the COVID-19 pandemic; • Dependence on the automotive and commercial vehicle industries; • Dependence on our supply chain, including semiconductor suppliers; • Dependence on a small number of large customers, including two large automotive customers; • Dependence on the availability and price of materials; • Failure to attract and retain qualified personnel; • Timing, quality and cost of new program launches; • Risks related to conducting global operations; • Ability to compete effectively; • Investment in programs prior to the recognition of revenue; • Ability to withstand pricing pressures, including price reductions; • Impact from production delays or cancelled orders; • Ability to successfully benefit from acquisitions and divestitures; • Ability to withstand business interruptions; • Breaches to our information technology systems; • Ability to keep pace with rapid technological changes; • Ability to protect our intellectual property; • Costs associated with environmental, health and safety regulations; • International trade disputes resulting in tariffs and our ability to mitigate tariffs; • Impact from climate change and related regulations; • Ability to avoid design or manufacturing defects; • Recognition of goodwill and long-lived asset impairment charges; • Ability to manage our debt levels and any restrictions thereunder; • Currency fluctuations; • Income tax rate fluctuations; • Judgments related to accounting for tax positions; • Adjustments to compensation expense for performance-based awards; • Timing and magnitude of costs associated with restructuring activities; and • Impact to interest expense from the replacement or modification of LIBOR. Additional details and factors are discussed under the caption “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended May 1, 2021. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Any forward-looking statements made by us speak only as of the date on which they are made. We are under no obligation to, and expressly disclaims any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise. 23 Table of Contents Overview We are a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. We design, engineer and produce mechatronic products for Original Equipment Manufacturers (“OEMs”) utilizing our broad range of technologies for user interface, light-emitting diode (“ LED”) lighting system, power distribution and sensor applications. Our solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment, consumer appliance and medical devices. Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical. COVID-19 Pandemic 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. We expect that the global health crisis caused by the COVID-19 pandemic will continue to negatively impact our business and results of operations for the foreseeable future. The extent of the impact will depend on a number of evolving and uncertain factors, including the duration and spread of COVID-19 (and its variants), the rate of vaccinations, actions taken by governmental authorities to further restrict business operations and social activity and impose travel restrictions, shifting consumer demand, the ability of our supply chain to deliver in a timely and cost-effective manner, the ability of our employees and manufacturing facilities to operate efficiently and effectively, the continued viability and financial stability of our customers and suppliers and future access to capital. We continue to focus on effectively managing the unprecedented challenges and uncertainties of the pandemic on a global basis. Management has prioritized the health and safety of our employees and their families. We adopted numerous safety procedures at our global facilities, including hygiene and disinfection protocols, testing and contact tracing, social distancing and wearing personal protective equipment. We implemented the sharing of best practices throughout our global facilities, resulting in effective and standardized safety guidelines and procedures, updated on a regular basis, promoting the health and safety of our employees. Global Supply Chain Disruptions 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 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. 24 Table of Contents Consolidated Results of Operations 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 Nine Months Ended (in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021 Net sales $ 291.6 $ 295.3 $ 874.9 $ 787.0 Cost of products sold 222.5 222.7 664.9 588.5 Gross profit 69.1 72.6 210.0 198.5 Selling and administrative expenses 34.5 32.4 98.5 89.8 Amortization of intangibles 4.8 4.8 14.4 14.5 Interest expense, net 0.7 1.3 2.9 4.3 Other income, net (4.4 ) (2.4 ) (7.1 ) (8.4 ) Income tax expense 4.1 4.6 15.3 7.1 Net income $ 29.4 $ 31.9 $ 86.0 $ 91.2 Net sales 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. dollar. Cost of products sold 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 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 23.7% 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 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. 25 Table of Contents 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 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. Stock-based compensation expense increased as our long-term incentive plan was not introduced until the second quarter of fiscal 2021. 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 $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 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 $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 $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 $7.6 million. These discrete tax benefits included tax credits earned and research deductions claimed in foreign jurisdictions. Excluding the discrete tax benefits, the effective tax rate would have been 15.5%. 26 Table of Contents Operating Segments Automotive Three Months Ended Nine Months Ended ($ in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021 Net sales North America $ 103.7 $ 107.7 $ 302.1 $ 301.8 EMEA $ 44.0 $ 60.1 $ 156.7 $ 147.1 Asia $ 47.7 $ 42.7 $ 128.4 $ 102.4 Net sales $ 195.4 $ 210.5 $ 587.2 $ 551.3 Gross profit $ 39.3 $ 44.1 $ 118.2 $ 123.2 As a percent of net sales 20.1 % 21.0 % 20.1 % 22.3 % Income from operations $ 24.5 $ 29.6 $ 75.4 $ 83.7 As a percent of net sales 12.5 % 14.1 % 12.8 % 15.2 % Net sales 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 $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 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 $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 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. Gross profit 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 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 nine months ended January 29, 2022, compared to 22.3% in the nine months ended January 30, 2021. 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 restructuring costs of $5.0 million recognized in the nine months ended January 30, 2021. 27 Table of Contents 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 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. 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 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 $0.2 million in the nine months ended January 29, 2022. Industrial Three Months Ended Nine Months Ended ($ in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021 Net sales $ 80.0 $ 66.5 $ 239.2 $ 186.4 Gross profit $ 27.2 $ 24.7 $ 82.2 $ 65.5 As a percent of net sales 34.0 % 37.1 % 34.4 % 35.1 % Income from operations $ 17.7 $ 16.9 $ 56.7 $ 40.0 As a percent of net sales 22.1 % 25.4 % 23.7 % 21.5 % Net sales 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 nine months ended January 30, 2021 were negatively impacted from the COVID-19 pandemic. Gross profit 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 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 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 $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, 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. 28 Table of Contents 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 in crease was primarily due to higher gross profit . Selling and administrative expenses were unchanged. Interface Three Months Ended Nine Months Ended ($ in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021 Net sales $ 15.2 $ 17.6 $ 45.9 $ 47.4 Gross profit $ 2.8 $ 4.0 $ 9.5 $ 10.1 As a percent of net sales 18.4 % 22.7 % 20.7 % 21.3 % Income from operations $ 2.1 $ 3.2 $ 7.6 $ 7.4 As a percent of net sales 13.8 % 18.2 % 16.6 % 15.6 % Net sales 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. Gross profit 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 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. Medical Three Months Ended Nine Months Ended (in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021 Net sales $ 1.0 $ 0.7 $ 2.6 $ 1.9 Gross profit $ (0.5 ) $ — $ (0.9 ) $ (1.0 ) Loss from operations $ (1.6 ) $ (1.0 ) $ (4.6 ) $ (4.1 ) Net sales 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. 29 Table of Contents 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 $0.6 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 (“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 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. Share Buyback Program On March 31, 2021, the Board of Directors authorized the purchase of up to $100.0 million of our common stock. Such purchases may be made on the open market, in private transactions or pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of 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 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 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. 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 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. 30 Table of Contents Cash Flows Nine Months Ended (in millions) January 29, 2022 January 30, 2021 Operating activities: Net income $ 86.0 $ 91.2 Non-cash items 51.5 37.3 Changes in operating assets and liabilities (80.7 ) 15.3 Net cash provided by operating activities 56.8 143.8 Net cash used in investing activities (29.0 ) (20.0 ) Net cash used in financing activities (103.8 ) (127.8 ) Effect of foreign currency exchange rate changes on cash and cash equivalents (4.1 ) 5.4 (Decrease) increase in cash and cash equivalents (80.1 ) 1.4 Cash and cash equivalents at beginning of the period 233.2 217.3 Cash and cash equivalents at end of the period $ 153.1 $ 218.7 Operating activities 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 $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 $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 $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 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 See Note 1, “Description of Business and Summary of Significant Accounting Policies” to the condensed consolidated financial statements included in Item 1. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined under SEC rules. Legal Matters For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, we terminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. 31 Table of Contents A trial with respect to the matter began in February 2020. During the trial, the defendants dismissed their one remaining counterclaim with prejudice. On March 2, 2020, the jury returned a verdict in favor of the Company. The verdict included approximately $ 102 million in compensatory damages and $ 11 million in punitive damages. On April 22, 2020, the Court entered a permanent injunction barring defendants from selling infringing products and ordering them to return Hetronic’s confidential information. Defendants appealed entry of the permanent injunction. On May 29, 2020, the Court held defendants in contempt for violating the permanent injunction and entered the final judgment. Defendants appealed entry of the final monetary judgment as well. The appeal of the permanent injunction and the appeal of the final judgment were consolidated into a single appeal before the U.S. Court of Appeals for the Tenth Circuit. On August 24, 2021, the Tenth Circuit issued a decision affirming the lower court’s ruling with the exception that it 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 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.