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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
__________________________________ 
FORM 10-Q
 (Mark One)
 
x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
for the quarterly period ended January 26, 2019
 
or
 
o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ______ to ______
 __________________________________ 
Commission file number 0-2816
 
METHODE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)

methodelog080115a12.gif
 
Delaware
 
36-2090085
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
8750 West Bryn Mawr Avenue, Suite 1000, Chicago, Illinois
 
60631-3518
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number, including area code) (708) 867-6777
 

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer.” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
Emerging Growth Company o
 
 


Table of Contents

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

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

At March 5, 2019, registrant had 36,986,952 shares of common stock outstanding.

Table of Contents

METHODE ELECTRONICS, INC.
FORM 10-Q
January 26, 2019

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I.        FINANCIAL INFORMATION
 
Item 1. Financial Statements
 

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except share and per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
Net Sales
 
$
246.9

 
$
228.0

 
$
734.3

 
$
659.3

 
 
 
 
 
 
 
 
 
Cost of Products Sold
 
182.6

 
167.9

 
539.1

 
481.6

 
 
 
 
 
 
 
 
 
Gross Profit
 
64.3

 
60.1

 
195.2

 
177.7

 
 
 
 
 
 
 
 
 
Selling and Administrative Expenses
 
32.8

 
22.5

 
110.3

 
83.3

Amortization of Intangibles
 
5.5

 
2.0

 
11.1

 
3.7

 
 
 
 
 
 
 
 
 
Income from Operations
 
26.0

 
35.6

 
73.8

 
90.7

 
 
 
 
 
 
 
 
 
Interest Expense, Net
 
3.2

 
0.3

 
5.0

 
0.3

Other Income, Net
 
(4.9
)
 
(3.8
)
 
(4.7
)
 
(2.6
)
 
 
 
 
 
 
 
 
 
Income before Income Taxes
 
27.7

 
39.1

 
73.5

 
93.0

 
 
 
 
 
 
 
 
 
Income Tax Expense (Benefit)
 
(3.0
)
 
63.4

 
4.5

 
72.6

 
 
 
 
 
 
 
 
 
Net Income (Loss)
 
$
30.7

 
$
(24.3
)
 
$
69.0

 
$
20.4

 
 
 
 
 
 
 
 
 
Basic and Diluted Income (Loss) per Common Share:
 
 

 
 

 
 
 
 
Basic
 
$
0.82

 
$
(0.65
)
 
$
1.84

 
$
0.54

Diluted
 
$
0.82

 
$
(0.65
)
 
$
1.83

 
$
0.54

 
 
 
 
 
 
 
 
 
Cash Dividends per Common Share
 
$
0.11

 
$
0.11

 
$
0.33

 
$
0.29

 
 
 
 
 
 
 
 
 
Weighted Average Number of Common Shares Outstanding:
 
 

 
 

 
 
 
 
Basic
 
37,405,550

 
37,292,934

 
37,387,181

 
37,275,041

Diluted
 
37,654,250

 
37,292,934

 
37,637,470

 
37,661,020

See notes to condensed consolidated financial statements.



2
Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in millions)
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
Net Income (Loss)
 
$
30.7

 
$
(24.3
)
 
$
69.0

 
$
20.4

 
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustment
 
3.2

 
32.2

 
(22.4
)
 
50.3

Comprehensive Income
 
$
33.9

 
$
7.9

 
$
46.6

 
$
70.7

See notes to condensed consolidated financial statements.

3
Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
 
 
January 26,
2019
 
April 28,
2018
 
 
(Unaudited)
 
 
Assets:
 
 

 
 

Current Assets:
 
 

 
 

Cash and Cash Equivalents
 
$
73.7

 
$
246.1

Accounts Receivable, Net
 
211.5

 
202.6

Inventories:
 
 
 
 

Finished Products
 
33.9

 
15.4

Work in Process
 
9.3

 
14.6

Materials
 
80.8

 
54.1

Total Inventories
 
124.0

 
84.1

Prepaid and Refundable Income Taxes
 
14.7

 
2.4

Prepaid Expenses and Other Current Assets
 
22.5

 
14.8

Total Current Assets
 
446.4

 
550.0

Property Plan and Equipment:
 
 
 
 
Land
 
3.6

 
0.8

Buildings and Building Improvements
 
74.7

 
69.2

Machinery and Equipment
 
390.3

 
364.7

Property, Plant and Equipment, Gross
 
468.6

 
434.7

Less: Allowances for Depreciation
 
279.5

 
272.5

Property, Plant and Equipment, Net
 
189.1

 
162.2

Other Assets:
 
 
 
 
Goodwill
 
236.8

 
59.2

Other Intangible Assets, Net
 
267.6

 
61.0

Cash Surrender Value of Life Insurance
 
8.6

 
8.2

Deferred Income Taxes
 
32.8

 
42.3

Pre-production Costs
 
32.5

 
20.5

Other
 
12.4

 
12.5

Total Other Assets
 
590.7

 
203.7

Total Assets
 
$
1,226.2

 
$
915.9

Liabilities and Shareholders' Equity:
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts Payable
 
$
88.6

 
$
89.5

Salaries, Wages and Payroll Taxes
 
21.4

 
22.8

Other Accrued Expenses
 
34.4

 
21.6

Short-term Debt
 
15.2

 
4.4

Income Tax Payable
 
16.8

 
18.7

Total Current Liabilities
 
176.4

 
157.0

Long-term Debt
 
287.7

 
53.4

Long-term Income Tax Payable
 
33.0

 
42.6

Other Liabilities
 
6.7

 
4.6

Deferred Income Taxes
 
38.9

 
18.3

Deferred Compensation
 
9.4

 
10.0

Total Liabilities
 
552.1

 
285.9

Shareholders' Equity:
 
 

 
 

Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,333,576 and 38,198,353 shares issued as of January 26, 2019 and April 28, 2018, respectively
 
19.2

 
19.1

Additional Paid-in Capital
 
148.2

 
136.5

Accumulated Other Comprehensive Income (Loss)
 
(8.5
)
 
13.9

Treasury Stock, 1,346,624 shares as of January 26, 2019 and April 28, 2018
 
(11.5
)
 
(11.5
)
Retained Earnings
 
526.7

 
472.0

Total Shareholders' Equity
 
674.1

 
630.0

Total Liabilities and Shareholders' Equity
 
$
1,226.2

 
$
915.9

See notes to condensed consolidated financial statements.

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Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in millions, except share data)
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income
 
Treasury
Stock
 
Retained Earnings
 
Total Shareholders Equity
Balance as of April 28, 2018
38,198,353

 
$
19.1

 
$
136.5

 
$
13.9

 
$
(11.5
)
 
$
472.0

 
$
630.0

Earned Portion of Restricted Stock Awards
135,223

 
0.1

 
(0.1
)
 
—

 
—

 
(1.7
)
 
(1.7
)
Stock-based Compensation Expense
—

 
—

 
1.9

 
—

 
—

 
—

 
1.9

Adoption of ASU 2014-09
—

 
—

 
—

 
—

 
—

 
0.1

 
0.1

Foreign Currency Translation Adjustments
—

 
—

 
—

 
(17.9
)
 
—

 
—

 
(17.9
)
Net Income
—

 
—

 
—

 
—

 
—

 
23.7

 
23.7

Cash Dividends on Common Stock
—

 
—

 
—

 
—

 
—

 
(4.1
)
 
(4.1
)
Balance as of July 28, 2018
38,333,576

 
$
19.2

 
$
138.3

 
$
(4.0
)
 
$
(11.5
)
 
$
490.0

 
$
632.0

Stock-based Compensation Expense
—

 
—

 
9.0

 
—

 
—

 
—

 
9.0

Foreign Currency Translation Adjustments
—

 
—

 
—

 
(7.7
)
 
—

 
—

 
(7.7
)
Net Income
—

 
—

 
—

 
—

 
—

 
14.6

 
14.6

Cash Dividends on Common Stock
—

 
—

 
—

 
—

 
—

 
(4.6
)
 
(4.6
)
Balance as of October 27, 2018
38,333,576

 
$
19.2

 
$
147.3

 
$
(11.7
)
 
$
(11.5
)
 
$
500.0

 
$
643.3

Stock-based Compensation Expense
—

 
—

 
0.9

 
—

 
—

 
—

 
0.9

Foreign Currency Translation Adjustments
—

 
—

 
—

 
3.2

 
—

 
—

 
3.2

Net Income
—

 
—

 
—

 
—

 
—

 
30.7

 
30.7

Cash Dividends on Common Stock
—

 
—

 
—

 
—

 
—

 
(4.0
)
 
(4.0
)
Balance as of January 26, 2019
38,333,576

 
$
19.2

 
$
148.2

 
$
(8.5
)
 
$
(11.5
)
 
$
526.7

 
$
674.1


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Table of Contents

 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income
 
Treasury
Stock
 
Retained Earnings
 
Total Shareholders Equity
Balance as of April 29, 2017
38,133,925

 
$
19.1

 
$
132.2

 
$
(25.7
)
 
$
(11.5
)
 
$
427.0

 
$
541.1

Earned Portion of Restricted Stock Awards
23,552

 
—

 
—

 
—

 
—

 
(0.2
)
 
(0.2
)
Stock-based Compensation Expense
—

 
—

 
4.1

 
—

 
—

 
—

 
4.1

Adoption of ASU 2016-09
—

 
—

 
—

 
—

 
—

 
2.7

 
2.7

Foreign Currency Translation Adjustments
—

 
—

 
—

 
24.6

 
—

 
—

 
24.6

Net Income
—

 
—

 
—

 
—

 
—

 
20.5

 
20.5

Cash Dividends on Common Stock
—

 
—

 
—

 
—

 
—

 
(3.4
)
 
(3.4
)
Balance as of July 29, 2017
38,157,477

 
$
19.1

 
$
136.3

 
$
(1.1
)
 
$
(11.5
)
 
$
446.6

 
$
589.4

Earned Portion of Restricted Stock Awards
24,000

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based Compensation Expense
—

 
—

 
3.1

 
—

 
—

 
—

 
3.1

Foreign Currency Translation Adjustments
—

 
—

 
—

 
(6.5
)
 
—

 
—

 
(6.5
)
Net Income
—

 
—

 
—

 
—

 
—

 
24.2

 
24.2

Cash Dividends on Common Stock
—

 
—

 
—

 
—

 
—

 
(3.4
)
 
(3.4
)
Balance as of October 28, 2017
38,181,477

 
$
19.1

 
$
139.4

 
$
(7.6
)
 
$
(11.5
)
 
$
467.4

 
$
606.8

Earned Portion of Restricted Stock Awards
3,543

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based Compensation Expense
—

 
—

 
(3.8
)
 
—

 
—

 
—

 
(3.8
)
Exercise of Options
8,333

 
—

 
0.2

 
—

 
—

 
—

 
0.2

Foreign Currency Translation Adjustments
—

 
—

 
—

 
32.2

 
—

 
—

 
32.2

Net Loss
—

 
—

 
—

 
—

 
—

 
(24.3
)
 
(24.3
)
Cash Dividends on Common Stock
—

 
—

 
—

 
—

 
—

 
(3.9
)
 
(3.9
)
Balance as of January 27, 2018
38,193,353

 
$
19.1

 
$
135.8

 
$
24.6

 
$
(11.5
)
 
$
439.2

 
$
607.2


See notes to condensed consolidated financial statements.

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Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in millions)
 
 
Nine Months Ended
 
 
January 26,
2019
 
January 27,
2018
Operating Activities:
 
 

 
 

Net Income
 
$
69.0

 
$
20.4

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 

 
 

Gain on Sale of Fixed Assets
 
(0.6
)
 
—

Gain on Sale of Licensing Agreement
 
—

 
(1.6
)
Depreciation of Property, Plant and Equipment
 
19.5

 
16.3

Amortization of Intangible Assets
 
11.1

 
3.7

Stock-based Compensation
 
11.7

 
3.3

Provision for Bad Debt
 
0.1

 
0.1

Change in Deferred Income Taxes
 
(0.5
)
 
(12.2
)
Changes in Operating Assets and Liabilities, Net of Acquisitions:
 
 
 
 
Accounts Receivable
 
12.2

 
5.9

Inventories
 
(10.9
)
 
(5.8
)
Prepaid Expenses and Other Assets
 
(16.4
)
 
14.6

Accounts Payable and Other Expenses
 
(30.9
)
 
42.4

Net Cash Provided by Operating Activities
 
64.3

 
87.1

Investing Activities:
 
 

 
 

Purchases of Property, Plant and Equipment
 
(37.0
)
 
(34.7
)
Acquisitions of Businesses, Net of Cash Acquired
 
(421.6
)
 
(129.9
)
Purchases of Technology Licenses, Net
 
—

 
(0.7
)
Sale of Business/Investment/Property
 
0.3

 
0.3

Net Cash Used in Investing Activities
 
(458.3
)
 
(165.0
)
Financing Activities:
 
 

 
 

Taxes Paid Related to Net Share Settlement of Equity Awards
 
(1.7
)
 
(0.3
)
Proceeds from Exercise of Stock Options
 
—

 
0.2

Cash Dividends
 
(12.7
)
 
(10.6
)
Proceeds from Borrowings
 
350.0

 
71.3

Repayment of Borrowings
 
(103.3
)
 
(3.0
)
Net Cash Provided by Financing Activities
 
232.3

 
57.6

Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents
 
(10.7
)
 
30.3

Increase (Decrease) in Cash and Cash Equivalents
 
(172.4
)
 
10.0

Cash and Cash Equivalents at Beginning of Year
 
246.1

 
294.0

Cash and Cash Equivalents at End of Period
 
$
73.7

 
$
304.0

See notes to condensed consolidated financial statements.



7
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


1.    BASIS OF PRESENTATION
Methode Electronics, Inc. was incorporated in 1946 as an Illinois corporation and reincorporated in Delaware in 1966.  As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries.  Our business is managed, and our financial results are reported, on a segment basis.
Effective October 27, 2018, the Company reorganized the reportable segments to align to our new structure resulting from the acquisition of Grakon Parent, Inc. ("Grakon"). Prior to this reorganization, the Company's four reportable segments were Automotive, Power, Interface and Other. As a result of this change, the Company's four reportable segments are now Automotive, Industrial, Interface and Medical. Historical information has been revised to reflect the new reportable segments. Refer to Note 5, "Goodwill and Intangible Assets," and Note 9, "Segment Information," for further information.
The condensed consolidated financial statements and related disclosures as of January 26, 2019 and results of operations for the three and nine months ended January 26, 2019 and January 27, 2018 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The April 28, 2018 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.  In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods.  These financial statements should be read in conjunction with the financial statements included in our Form 10-K for the year ended April 28, 2018, filed with the SEC on June 21, 2018.  Results may vary from quarter-to-quarter for reasons other than seasonality.
2.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this update are intended to address a specific consequence of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. Tax Reform’s reduction of the U.S. federal corporate income tax rate. The ASU is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate is recognized. For Methode, the amendments in this update will be effective for our fiscal 2020, beginning on April 28, 2019. Management does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (ASC 842)," which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Accounting Standards Codification ("ASC") 842 supersedes the previous leases standard, ASC 840 Leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, which is our fiscal 2020, beginning on April 28, 2019. Prior to the issuance of ASU No. 2018-11, this ASU was required to be applied with a modified retrospective approach and required application of the new standard at the beginning of the earliest comparative period presented.

In July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." In issuing ASU No. 2018-11, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will elect this optional transition method to recognize a cumulative effect adjustment to the opening balance of retained earnings on April 27, 2019.


8
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

We are continuing to assess the accounting and disclosure impact of ASU 2016-02 and refine our processes for adoption on April 27, 2019. As part of our adoption of this standard, we have selected, and are currently in the process of implementing, a software solution to assist in managing our inventory of leases and in complying with the disclosure requirements of this standard. We expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under non-cancelable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations. Our minimum commitments under non-cancelable operating leases are not significantly different than those disclosed in our fiscal 2018 Form 10-K. Management does not expect the new standard will have a material impact on the Company’s consolidated results of operations or cash flows.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which created ASC 606 “Revenue from Contracts with Customers” (“ASC 606”) and supersedes the revenue recognition requirements in ASC 605 “Revenue Recognition” (“ASC 605”). The guidance in ASU No. 2014-09 and subsequently issued amendments outlines a comprehensive model for all entities to use in accounting for revenue arising from contracts with customers as well as required disclosures. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  The new standard requires additional disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers including significant judgments and changes in judgments. We adopted the new standard effective April 29, 2018 using the modified retrospective transition method with the cumulative effect recorded to the opening balance of retained earnings as of the date of adoption. See Note 3, "Revenue" for further details.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The new standard requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The standard was adopted by Methode on April 29, 2018 and did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” The amendments in this update provide guidance on eight specific cash flow presentation issues that have developed due to diversity in practice. The issues include, but are not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. The amendments in this ASU, where practicable, are to be applied retrospectively. The standard was adopted by Methode on April 29, 2018 and did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard was adopted by Methode on April 29, 2018 and did not have a material impact on our consolidated financial statements.
3.    REVENUE
The Company is a global manufacturer of component and subsystem devices whose components are found in the primary end-markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries. On April 29, 2018, we adopted ASC 606 along with the related amendments using a modified retrospective approach to all contracts open as of that date. Upon adoption, we recognized a $0.1 million increase to opening retained earnings. This adjustment was a result of modifying our revenue recognition pattern for highly customized goods with no alternative use to over time recognition instead of point in time and for deferring revenue related to material rights that we provide to our customers. The overall impact to our financial statements was immaterial. We have modified our controls to address the risks present under ASC 606.


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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

As we have adopted ASC 606 using the modified retrospective approach, our prior periods have not been restated, and as such they are presented under ASC 605. The impact of the changes in accounting policy on our fiscal 2019 is provided below.
 
 
Impact of Changes in Accounting Policy
 
 
Three Months Ended January 26, 2019
 
Nine Months Ended January 26, 2019
 
 
As Reported
 
Adjustments
 
Balance Under ASC 605
 
As Reported
 
Adjustments
 
Balance Under ASC 605
Net Sales
 
$
246.9

 
$
(0.5
)
 
$
247.4

 
$
734.3

 
$
(16.5
)
 
$
750.8

Cost of Products Sold
 
$
182.6

 
$
(0.5
)
 
$
183.1

 
$
539.1

 
$
(16.5
)
 
$
555.6

Total Inventories
 
 
 
 
 
 
 
$
124.0

 
$
(0.6
)
 
$
124.6

Contract Assets
 
 
 
 
 
 
 
$
0.9

 
$
0.9

 
$
—

Contract Liabilities
 
 
 
 
 
 
 
$
0.2

 
$
0.2

 
$
—

Retained Earnings
 
 
 
 
 
 
 
$
526.7

 
$
0.1

 
$
526.6

 
Revenue Accounting Policy:

In May 2014, the FASB issued ASC 606, which supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.

The Company adopted ASC 606 as of April 29, 2018 using the modified retrospective transition method. The cumulative effect of initially applying the new standard was recorded as an adjustment to the opening balance of retained earnings within our condensed consolidated balance sheets.  In accordance with the modified retrospective transition method, the historical information within the financial statements has not been restated and continues to be reported under the accounting standard in effect for those periods. As a result, the Company has disclosed the accounting policies in effect prior to April 29, 2018, as well as the policies it has applied starting April 29, 2018.

Periods prior to April 29, 2018
    
Revenue was recognized in accordance with ASC 605.  Revenue was recognized upon either shipment or delivery (depending on shipping terms) of product to customers and is recorded net of returns, allowances, customer discounts, and incentives.  Sales taxes collected from customers and remitted to governmental authorities were accounted for on a net (excluded from revenues) basis.

Periods commencing on or after April 29, 2018
        
The majority of our revenue is recognized at a point in time.  The Company has determined that the most definitive demonstration that control has transferred to a customer is physical shipment or delivery, depending on the contractual shipping terms, with the exception of consignment transactions. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon the customer’s usage.

Revenues associated with products which we believe have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over time basis.  In transition to ASC 606, the Company noted some customers ordered highly customized parts in which the Company was entitled to payment throughout the manufacturing process. In accordance with ASC 606, the Company has begun recognizing revenue over time for these customers as the performance obligation is satisfied. The Company believes the most faithful depiction of the transfer of goods to the customer is based on progress to date, which is typically smooth throughout the production process. As such, the Company recognizes revenue evenly over the production process through transfer of control to the customer.

In addition, customers typically negotiate annual price downs. Management has evaluated these price downs and determined that in some instances, these price downs give rise to a material right. In instances that a material right exists, a portion of the transaction price is allocated to the material right and recognized over the life of the contract.


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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Our warranties are standard, assurance-type warranties only. We do not offer any additional service or extended term warranties to our customers. As such, we continue to recognize warranty as an expense with accounting outside of the scope of ASC 606.

The Company has elected to treat shipping and handling costs as an activity necessary to fulfill the performance obligation to transfer product to the customer and not as a separate performance obligation. Shipping and handling costs are estimated at quarter end in proportion to revenue recognized for transactions where actual costs are not yet known.

Across all products, the amount of revenue recognized corresponds to the related purchase order. Revenue is adjusted for variable consideration (such as discounts) as described further below. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue.

The Company’s performance obligations are typically short-term in nature. As a result, the Company has elected the practical expedient that provides an exemption from the disclosure requirements regarding information about remaining performance obligations on contracts that have original expected durations of one year or less.

Costs to Fulfill/Obtain a Contract:

We incur pre-production tooling costs related to products produced for our customers under long-term supply agreements. We had $32.5 million and $20.5 million as of January 26, 2019 and April 28, 2018, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. These costs are capitalized and recognized into income upon acceptance. The Company concluded that pre-production tooling and engineering costs do not represent a promised good or service under ASC 606, and as such, reimbursements received are accounted for as a reimbursement of the expense, not revenue. This change resulted in tooling reimbursements of $0.5 million and $16.6 million being recorded into cost of products sold during the three and nine months ended January 26, 2019, respectively.

The Company has not historically incurred material costs to obtain a contract. In the instances that costs to obtain contracts are incurred, the Company will capitalize and amortize those over the life of the contract.

Contract Estimates:
    
Due to the nature of the work performed in completing certain performance obligations, the estimation of both total revenue and cost at completion includes a number of variables and requires significant judgment.

Estimating total contract revenue may require judgment as certain contracts contain pricing discount structures, early payment discounts or other provisions that can impact the transaction price. The Company generally estimates variable consideration utilizing the most likely amount to which we expect to be entitled. When the contract provides the customer with the right to return eligible products, the Company reduces revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns. The Company adjusts these estimates at the earlier of when the most likely amount of consideration that is expected to be received changes or when the consideration becomes fixed. Accordingly, an increase or decrease to revenue is recognized at that time. The Company has elected the practical expedient for significant financing components, allowing the Company to not adjust the promised amount of consideration for the effects of a financing component when payment terms are within one year from the time a performance obligation is satisfied. Our customers' payment terms are typically 30-45 days from the time control transfers.

Certain of the Company's contracts contain annual contractually-guaranteed price reductions that grant the customer the right to purchase products at decreased prices throughout the life of the contract. Most of these contractual price reductions are merely the result of efficiencies in the production process being passed down to our customers. For certain of these price reductions, however, the amount of the reduction cannot be attributed entirely to production efficiencies gained. In these cases, the annual price-downs are considered to be material rights as the customer, as part of their current contract, is purchasing an option that they would not have received without the contract to purchase future product. When a contract contains a material right, a portion of the transaction price is allocated to the material right for which revenue recognition is deferred until the customer exercises its option. The standalone selling price for a material right used to allocate the transaction price is determined at contract inception by calculating the portion of the option purchased relative to the estimated total amount of incremental value the customer will likely earn, based on historical data, customer forecast communications, current economic

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

information and industry trends. The standalone selling price of a material right is not adjusted prior to customer exercise or option expiration.

Estimating the total expected costs related to contracts also requires significant judgment. In cases where the Company is recognizing revenue over time, the requirement is to record a proportionate amount of the costs of production as well. As part of this process, management considers the progress towards completion of the performance obligation, the length of time necessary to complete the performance obligation and the historical costs incurred in the manufacture of similar products, among other variables.
    
The Company has elected the portfolio approach practical expedient to estimate the amount of revenue to recognize for certain contracts which require over time revenue recognition. Such contracts are grouped together either by revenue stream, customer or product. Each portfolio of contracts is grouped together based on having similar characteristics. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts. For each portfolio of contracts, the respective work in process and/or finished goods inventory balances are identified and the portfolio-specific margin is applied to estimate the pro-rata portion of revenue earned in relation to the costs incurred.

Adjustments due to any of the factors above to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. The resultant impacts from these changes in estimates are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on both current and prior periods.
 
Contract Balances:
    
The Company receives payment from customers based on the contractual billing schedule and specific performance requirements established in the contract. Billings are recorded as accounts receivable when an unconditional right to the contractual consideration exists. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. A contract liability exists when the Company has received consideration or the amount is due from the customer in advance of revenue recognition. Contract assets and contract liabilities are recognized in other current assets and other liabilities, respectively, in the Company's condensed consolidated balance sheets.

Unbilled Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized over time. The Company has determined that unbilled receivables were $0.8 million and $0.9 million as of April 29, 2018 and January 26, 2019, respectively. During the nine months ended January 26, 2019, $0.8 million of previously unbilled receivables were recorded into accounts receivable. There were no impairments of contract assets as of January 26, 2019.

Deferred Revenue (Contract Liabilities) - For certain of the price reductions offered by the Company, the amount of the reduction cannot be attributed entirely to production efficiencies gained. In these cases, the annual price-downs are considered to be material rights as the customer, as part of their current contract, are purchasing an option that they would not have received without the contract to purchase future product. When a contract contains a material right, a portion of the transaction price is allocated to the material right for which revenue recognition is deferred until the customer exercises its option. Deferred revenue was $0.2 million at both April 29, 2018 and January 26, 2019. No previously deferred revenue was recorded into revenue during the nine months ended January 26, 2019.

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Disaggregated Revenue Information:

The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods. Geographic net sales are determined based on our sales from our various operational locations.  Though revenue recognition patterns and contracts are generally consistent, the amount, timing and uncertainty of revenue and cash flows may vary in each reportable segment due to geographic and economic factors.
 
 
Three Months Ended January 26, 2019
 
 
Auto
 
Industrial
 
Medical
 
Interface
 
Total
Geographic Net Sales:
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
80.7

 
$
33.8

 
$
0.1

 
$
13.3

 
$
127.9

Malta
 
26.7

 
7.0

 
—

 
0.1

 
33.8

China
 
20.5

 
9.6

 
—

 
—

 
30.1

Canada
 
21.1

 
5.5

 
—

 
—

 
26.6

Egypt
 
10.0

 
—

 
—

 
—

 
10.0

Belgium
 
7.2

 
—

 
—

 
—

 
7.2

Other
 
6.7

 
4.3

 
—

 
0.3

 
11.3

Total Net Sales
 
$
172.9

 
$
60.2

 
$
0.1

 
$
13.7

 
$
246.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
Goods Transferred at a Point in Time
 
$
165.7

 
$
60.2

 
$
0.1

 
$
13.7

 
$
239.7

Goods Transferred Over Time
 
7.2

 
—

 
—

 
—

 
7.2

Total Net Sales
 
$
172.9

 
$
60.2

 
$
0.1

 
$
13.7

 
$
246.9


 
 
Nine Months Ended January 26, 2019
 
 
Auto
 
Industrial
 
Medical
 
Interface
 
Total
Geographic Net Sales:
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
254.7

 
$
70.8

 
$
0.7

 
$
42.7

 
$
368.9

Malta
 
86.8

 
22.7

 
—

 
0.2

 
109.7

China
 
63.0

 
27.5

 
—

 
0.1

 
90.6

Canada
 
66.2

 
8.0

 
—

 
—

 
74.2

Egypt
 
35.6

 
—

 
—

 
—

 
35.6

Belgium
 
24.2

 
—

 
—

 
—

 
24.2

Other
 
19.3

 
10.8

 
—

 
1.0

 
31.1

Total Net Sales
 
$
549.8

 
$
139.8

 
$
0.7

 
$
44.0

 
$
734.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
Goods Transferred at a Point in Time
 
$
524.8

 
$
139.8

 
$
0.7

 
$
44.0

 
$
709.3

Goods Transferred Over Time
 
25.0

 
—

 
—

 
—

 
25.0

Total Net Sales
 
$
549.8

 
$
139.8

 
$
0.7

 
$
44.0

 
$
734.3


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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

4.    ACQUISITIONS
Fiscal 2019 Acquisition

Grakon Parent, Inc.

On September 12, 2018, we acquired 100% of the stock of Grakon for $421.6 million in cash, net of cash acquired. The business, headquartered in Seattle, Washington, is a manufacturer of custom designed lighting solutions and highly styled engineered components. Grakon’s manufacturing capabilities and products help diversify our product offerings and expand the Industrial segment, which is a key component of our strategic direction. The accounts and transactions of Grakon have been included in the Automotive and Industrial segments in the condensed consolidated financial statements from the effective date of the acquisition. For goodwill impairment testing purposes, Grakon has been included in the Company's North American Automotive and Grakon Industrial reporting units.

The Company has not yet completed the process of estimating the fair value of the assets acquired and liabilities assumed. Accordingly, the Company's preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as the Company completes the process, which would likely impact the Company's allocation of the purchase price to goodwill. Based on the Company's preliminary allocation of the purchase price, revised as of January 26, 2019, goodwill increased $2.9 million from the preliminary amount reported in the Company's condensed consolidated financial statements at October 27, 2018. The revised preliminary allocation of the purchase price to the fair values of the assets acquired and liabilities assumed were:
Cash
 
$
6.9

Accounts Receivable
 
36.1

Inventory
 
31.0

Prepaid Expenses and Other Current Assets
 
1.2

Other Intangible Assets
 
218.9

Goodwill
 
178.1

Pre-production Costs
 
1.5

Property, Plant and Equipment
 
16.2

Accounts Payable
 
(19.4
)
Salaries, Wages and Payroll Taxes
 
(4.4
)
Other Accrued Expenses
 
(7.2
)
Income Tax Payable
 
(0.7
)
Deferred Income Tax Liability
 
(29.7
)
Total Purchase Price
 
$
428.5


The following table presents details of the intangible assets acquired:
 
 
Fair Value at Date of Acquisition
 
Amortization Period
Customer Relationships and Agreements - Significant Customer
 
$
54.0

 
19.5 years
Customer Relationships and Agreements - All Other Customers
 
125.0

 
19.5 years
Technology Licenses
 
17.7

 
6.3 years
Trade Names
 
22.2

 
8.5 years
Total
 
$
218.9

 
 

The Company's results of operations for the three months ended January 26, 2019 was comprised of revenues of $46.9 million and net income of $4.4 million from Grakon. The Company's results of operations for the nine months ended January 26, 2019 included approximately four and a half months of the operating results of Grakon, which was comprised of revenues of $71.1 million and net income of $4.2 million.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Acquisition-related costs of $3.8 million and $15.3 million were incurred in relation to the acquisition of Grakon for the three and nine months ended January 26, 2019, respectively. Acquisition-related costs for the three months ended January 26, 2019 included $0.8 million of costs which have been reported in selling and administrative expenses and $3.0 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income. Acquisition-related costs for the nine months ended January 26, 2019 included $9.7 million of costs which have been reported in selling and administrative expenses and $5.6 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income.

Fiscal 2018 Acquisitions

Procoplast S.A.

On July 27, 2017, we acquired 100% of the stock of Procoplast S.A. ("Procoplast") for $22.2 million in cash, net of cash acquired. The business, located near the Belgian-German border, is an independent manufacturer of automotive assemblies. The accounts and transactions of Procoplast have been included in the Automotive segment in the consolidated financial statements from the effective date of the acquisition. For goodwill impairment testing purposes, Procoplast has been included in the Company's European Automotive reporting unit.

During the fourth quarter of fiscal 2018, the Company completed the allocation of the purchase price to the assets acquired and liabilities assumed. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed was:
Cash
 
$
1.3

Accounts Receivable
 
7.4

Inventory
 
3.5

Other Intangible Assets
 
19.2

Goodwill
 
6.8

Pre-production Costs
 
2.3

Property, Plant and Equipment
 
23.8

Accounts Payable
 
(4.9
)
Salaries, Wages and Payroll Taxes
 
(0.8
)
Other Accrued Expenses
 
(0.7
)
Income Tax Payable
 
(0.6
)
Short-term Debt
 
(3.2
)
Other Liabilities
 
(2.1
)
Long-term Debt
 
(20.6
)
Deferred Income Tax Liability
 
(7.9
)
Total Purchase Price
 
$
23.5


The following table presents details of the intangible assets acquired:
 
 
Fair Value at Date of Acquisition
 
Amortization Period
Customer Relationships and Agreements - Significant Customer
 
$
12.3

 
17.0 years
Customer Relationships and Agreements - All Other Customers
 
2.8

 
11.5 years
Technology Licenses
 
2.1

 
8.5 years
Trade Names
 
2.0

 
8.5 years
Total
 
$
19.2

 
 

No acquisition-related costs were incurred in relation to the acquisition of Procoplast for the three months ended January 27, 2018. Acquisition-related costs of $1.3 million were incurred in relation to the acquisition of Procoplast for the nine months ended January 27, 2018. Acquisition costs for the nine months ended January 27, 2018 included $1.1 million of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

costs which have been reported in selling and administrative expenses and $0.2 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income.

Pacific Insight Electronics Corp.
    
On October 3, 2017, we acquired 100% of the outstanding common shares of Pacific Insight Electronics Corp. ("Pacific Insight") in a cash transaction for $108.7 million, net of cash acquired. Pacific Insight, headquartered in Vancouver, British Columbia, Canada, is a global solutions provider offering design, development, manufacturing and delivery of lighting and electronic products and full-service solutions to the automotive and commercial vehicle markets, and has manufacturing facilities in both Canada and Mexico. Its technology in LED-based ambient and direct lighting expands our presence within the automotive interior, as well as augments our efforts in overhead console and other areas. The accounts and transactions of Pacific Insight have been included in the Automotive segment in the consolidated financial statements from the effective date of the acquisition. For goodwill impairment testing purposes, Pacific Insight has been included in the Company's North American Automotive reporting unit.

During the fourth quarter of fiscal 2018, the Company completed the allocation of the purchase price to the assets acquired and liabilities assumed. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed was:
Cash
 
$
4.9

Accounts Receivable
 
18.3

Inventory
 
13.0

Prepaid Expenses and Other Current Assets
 
0.3

Income Taxes Receivable
 
1.2

Other Intangible Assets
 
40.1

Goodwill
 
50.4

Pre-production Costs
 
0.8

Property, Plant and Equipment
 
13.2

Accounts Payable
 
(7.9
)
Salaries, Wages and Payroll Taxes
 
(0.8
)
Other Accrued Expenses
 
(2.9
)
Short-term Debt
 
(0.8
)
Long-term Debt
 
(3.4
)
Deferred Income Tax Liability
 
(12.8
)
Total Purchase Price
 
$
113.6

    
The following table presents details of the intangible assets acquired:
 
 
Fair Value at Date of Acquisition
 
Amortization Period
Customer Relationships and Agreements - Automotive
 
$
22.6

 
11.0 years
Customer Relationships and Agreements - Commercial
 
9.6

 
13.0 years
Trade Names
 
6.2

 
7.5 years
Technology Licenses
 
1.7

 
5.5 years
Total
 
$
40.1

 
 

No acquisition-related costs were incurred in relation to the acquisition of Pacific Insight for the three months ended January 27, 2018. Acquisition-related costs of $5.5 million were incurred in relation to the acquisition of Pacific Insight for the nine months ended January 27, 2018. Acquisition-related costs for the nine months ended January 27, 2018 included $4.9 million of costs which have been reported in selling and administrative expenses and $0.6 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income.


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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

The following table presents unaudited supplemental pro forma results for the three and nine months ended January 26, 2019 and January 27, 2018, respectively, as if both the Grakon acquisition had occurred as of the beginning of fiscal 2018 and the Pacific Insight acquisition had occurred as of the beginning of fiscal 2017. The unaudited pro forma information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at such times. The unaudited pro forma results presented below primarily include amortization charges for acquired intangible assets, depreciation adjustments for property, plant and equipment that has been revalued, interest expense adjustments due to an increased debt level, adjustments for certain acquisition-related charges and related tax effects.
 
 
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
Revenues
 
$
249.5

 
$
261.2

 
$
805.7

 
$
804.6

Net Income
 
$
36.0

 
$
(23.9
)
 
$
91.4

 
$
28.8


5.    GOODWILL AND INTANGIBLE ASSETS
We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and at least annually in accordance with ASC No. 350, "Intangibles — Goodwill and Others."  The values assigned to goodwill and intangible assets are normally based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.  A severe decline in expectations could result in significant impairment charges, which could have a material adverse effect on our financial condition and results of operations.
Effective October 27, 2018, the Company reorganized the reportable segments within its business to align to its new structure resulting from the acquisition of Grakon. Prior to this reorganization, the Company's four reportable segments were Automotive, Power, Interface and Other. As a result of this change, the Company's four reportable segments are now Automotive, Industrial, Interface and Medical. Historical information has been revised to reflect the new reportable segments. Refer to Note 9, "Segment Information," for further information.
As part of the acquisition of Grakon in fiscal 2019, the Company recorded goodwill of $178.1 million, of which $39.4 million is deductible for income taxes. As part of the acquisitions of Procoplast and Pacific Insight in fiscal 2018, the Company recorded goodwill of $6.8 million and $50.4 million, respectively, none of which is deductible for income taxes. The following table shows the roll-forward of goodwill in the financial statements by segment as of January 26, 2019.
 
 
Automotive
 
Industrial
 
Total
Balance as of April 28, 2018
 
$
57.5

 
$
1.7

 
$
59.2

Goodwill Acquired
 
50.6

 
127.5

 
178.1

Foreign Currency Translation
 
(0.4
)
 
(0.1
)
 
(0.5
)
Balance as of January 26, 2019
 
$
107.7

 
$
129.1

 
$
236.8


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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

As part of the acquisition of Grakon in fiscal 2019, the Company acquired estimated intangible assets of $218.9 million. As part of the acquisitions of Procoplast and Pacific Insight in fiscal 2018, the Company acquired intangible assets of $19.2 million and $40.1 million, respectively. The following tables present details of the Company’s intangible assets.
 
 
As of January 26, 2019
 
 
Gross
 
Accumulated Amortization
 
Net
 
Wtd. Avg. Remaining Amortization Periods (Years)
Customer Relationships and Agreements
 
$
242.1

 
$
24.4

 
$
217.7

 
17.7
Trade Names, Patents and Technology Licenses
 
77.5

 
27.6

 
49.9

 
6.7
Total
 
$
319.6

 
$
52.0

 
$
267.6

 
 
 
 
As of April 28, 2018
 
 
Gross
 
Accumulated Amortization
 
Net
 
Wtd. Avg. Remaining Amortization Periods (Years)
Customer Relationships and Agreements
 
$
64.4

 
$
18.1

 
$
46.3

 
12.3
Trade Names, Patents and Technology Licenses
 
37.7

 
23.0

 
14.7

 
5.3
Total
 
$
102.1

 
$
41.1

 
$
61.0

 
 
The estimated aggregate amortization expense for the current fiscal year and each of the four succeeding fiscal years is as follows:
2019
 
$
16.5

2020
 
$
20.1

2021
 
$
20.0

2022
 
$
20.0

2023
 
$
20.0

As of January 26, 2019 and April 28, 2018, the trade names, patents and technology licenses include $1.8 million of trade names that are not subject to amortization.
6.    INCOME TAXES
The provision for income taxes for an interim period is based on an estimated effective income tax rate for the full fiscal year and applies that rate to ordinary year-to-date earnings or loss. The estimated annual effective income tax rate is determined excluding the effects of unusual or significant discrete items that are reported net of the related tax effects and in the period in which they occur. In addition, any effects of enacted tax law or rate changes as well as the Company’s ability to utilize various tax assets is recognized in the period in which the change occurs.

The Company recognized an income tax benefit of $3.0 million and an income tax expense of $63.4 million for the three months ended January 26, 2019 and January 27, 2018, respectively. The Company’s effective tax rate was (10.4)% and 162.1% for the three months ended January 26, 2019 and January 27, 2018, respectively. The Company recognized an income tax provision of $4.5 million and $72.6 million for the nine months ended January 26, 2019 and January 27, 2018, respectively. The Company’s effective tax rate was 6.1% and 78.1% for the nine months ended January 26, 2019 and January 27, 2018, respectively.

The income tax provision for both the three and nine months ended January 26, 2019 is lower than the U.S. statutory tax rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates, and a discrete tax adjustment of $7.5 million. The discrete tax adjustment is primarily related to the finalization of the transition tax associated with U.S. tax reform, foreign tax credits related to dividend repatriation, and the release of a tax reserve. The income tax provision for both the three and nine months ended January 27, 2018 is higher than the U.S. statutory tax rate primarily due to the transition tax and the impact of revaluing deferred taxes due to the change in the federal tax rate from U.S. Tax Reform.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


On December 22, 2017, the SEC staff issued Staff Accounting Bulletin ("SAB") 118 to provide certain guidance in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a one-year measurement period to finalize the effects associated with U.S. Tax Reform. The Company recognized a provisional tax expense estimate of $56.8 million related to the deemed repatriated earnings and the revaluation of deferred taxes in its consolidated financial statements for the quarter ended January 27, 2018. Adjustments made to the provisional amounts allowed under SAB 118 were identified and recorded as described in the following paragraph.

In the fourth quarter ended April 28, 2018, the Company recognized a $3.1 million discrete tax benefit for the deemed repatriated earnings and the revaluation of deferred taxes to the provisional tax impacts of the U.S. Tax Reform. In the third quarter ended January 26, 2019, the Company recognized a $4.8 million discrete tax benefit from the re-measurement of the deemed repatriated foreign earnings associated with U.S. Tax Reform. These adjustments included changes in interpretations and assumptions the Company made, additional regulatory guidance that was issued, and actions the Company took as a result of U.S. Tax Reform.

Due to the enactment of U.S. Tax Reform, repatriations of foreign earnings will generally not be subject to U.S. federal income tax but may be subject to other taxes such as withholding tax or state income tax. Indefinite reinvestment is determined by management’s intentions concerning the future operations and liquidity needs of the Company. Most of these earnings have been reinvested in non-U.S. business operations. However, due to U.S. Tax Reform, substantially all prior unrepatriated foreign earnings were subject to U.S. tax. Accordingly, we expect to have the ability to repatriate those earnings without incremental U.S. federal tax cost. We have also changed our intent regarding certain cash repatriations. However, substantially all prior undistributed earnings from foreign subsidiaries are indefinitely reinvested. A determination of the potential deferred taxes related to these undistributed earnings or any other basis differences is not practicable.

7.    COMMON STOCK AND STOCK-BASED COMPENSATION
Restricted Stock Awards ("RSAs")
In fiscal 2016, the Compensation Committee of the Board of Directors authorized a new long-term incentive program (the “LTIP”) for key employees consisting of performance-based restricted stock awards (“RSAs”) and time-based restricted stock units (“RSUs”). Additionally, in the first quarter of fiscal 2019, the Compensation Committee awarded a maximum of 11,625 RSAs to an additional key member of management under the LTIP.
In the aggregate, the number of RSAs earned will vary based on performance relative to established goals for fiscal 2020 EBITDA, with 50% of the target shares earned for threshold performance (representing 332,543 shares), 100% of the target shares earned for target performance (representing 665,085 shares) and 150% of the target shares earned for maximum performance (representing 997,628 shares). Starting in the third quarter of fiscal 2018 and ending with the first quarter of fiscal 2019, the Company had been recording the RSA compensation expense based on threshold performance. Prior thereto, the Company had been recording the RSA compensation expense based on target performance.
Per ASC 718 accounting guidance, management is required in each reporting period to determine the fiscal 2020 EBITDA level that is "probable" (70% confidence) for which a performance condition will be achieved. Due to the expected accretive nature of the Grakon acquisition on fiscal 2020 results, management determined during the second quarter of fiscal 2019 that it was probable that the Company will meet the fiscal 2020 target consolidated EBITDA performance level of $221.0 million.
At the target level of performance, the expected expense for the RSAs is $22.1 million through fiscal 2020. In the three and nine months ended January 26, 2019, the Company recorded $0.6 million and $9.7 million, respectively, in compensation expense related to the RSAs based on target performance. The $9.7 million in compensation expense recorded in the nine months ended January 26, 2019 is inclusive of $7.4 million in compensation expense, which was the result of changing the estimated level of performance from threshold to target levels in the second quarter. In the three and nine months ended January 27, 2018, the Company recorded a net reversal of compensation expense of $5.4 million and $2.2 million, respectively, related to the RSAs based on threshold performance. These amounts are inclusive of a $6.0 million compensation expense reversal in the third quarter of fiscal 2018, which was the result of changing the estimated level of performance from target to threshold levels.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

In future reporting periods, if management makes a determination that exceeding the target level is probable for fiscal 2020, an appropriate adjustment to compensation expense will be recorded in that period. In addition, if management makes a determination that it is not probable the Company will meet the target level for fiscal 2020, a reversal of compensation expense will be recorded in that period. The adjustments could be material to the financial statements.
Restricted Stock Units ("RSUs")
In the first quarter of fiscal 2019, the Compensation Committee awarded 7,750 RSUs to an additional key member of Methode management. In the aggregate, the Company has granted 646,675 RSUs to key employees, of which 329,497 are still unvested and outstanding. The RSUs are subject to a vesting period, with 30% vested on April 28, 2018, 30% vesting on April 27, 2019 and 40% vesting on May 2, 2020. The total expense for the RSUs is expected to be $17.0 million through fiscal 2020. During the three and nine months ended January 26, 2019, the Company recorded $0.2 million and $1.1 million, respectively, of compensation expense related to the RSUs. During the three and nine months ended January 27, 2018, the Company recorded $1.5 million and $4.5 million, respectively, in compensation expense related to the RSUs.
Director Awards
During the first quarter of fiscal 2019, the Company issued 24,000 shares of common stock to our independent directors, all of which vested immediately upon grant. We recorded $0.9 million of compensation expense related to these shares during the nine months ended January 26, 2019.

8.    NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the applicable period.  Diluted net income (loss) per share is calculated after adjusting the denominator of the basic net income (loss) per share calculation for the effect of all potentially dilutive stock compensation awards outstanding during the period.
The following table sets forth the computation of basic and diluted net income (loss) per share:
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
Numerator - Net Income (Loss)
 
$
30.7

 
$
(24.3
)
 
$
69.0

 
$
20.4

Denominator:
 
 
 
 
 
 
 
 
Denominator for Basic Net Income (Loss) per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Awards
 
37,405,550

 
37,292,934

 
37,387,181

 
37,275,041

Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units
 
248,700

 
—

 
250,289

 
385,979

Denominator for Diluted Net Income (Loss) per Share
 
37,654,250

 
37,292,934

 
37,637,470

 
37,661,020

 
 
 
 
 
 
 
 
 
Net Income (Loss) per Share:
 
 

 
 

 
 
 
 
Basic
 
$
0.82

 
$
(0.65
)
 
$
1.84

 
$
0.54

Diluted
 
$
0.82

 
$
(0.65
)
 
$
1.83

 
$
0.54

For both the three and nine months ended January 26, 2019, 101,668 options have been excluded in the computation of diluted net income per share because the average market price was lower than the exercise price for the period. RSAs for 665,085 and 570,818 shares have been excluded in the computation of diluted net income per share for the three and nine months ended January 26, 2019, respectively, as these awards are contingent on the Company's full-year performance in fiscal 2020.
For the three months ended January 27, 2018, potential dilutive shares have been excluded in the computation of diluted net loss per share, as the effect would have been anti-dilutive. For the nine months ended January 27, 2018, no options have been excluded in the computation of diluted net income per share because the average market price was greater than the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

exercise price for the period. RSAs for 423,038 shares have been excluded in the computation of diluted net income per share for the nine months ended January 27, 2018, as these awards are contingent on the Company's full-year performance in fiscal 2020.
9.    SEGMENT INFORMATION
     We are a global manufacturer of component and subsystem devices.  We design, manufacture and market devices employing electrical, electronic, wireless, sensing and optical technologies.  Our components are found in the primary end-markets of the automotive, appliance, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), consumer and industrial equipment, aerospace, rail and other transportation industries.
 ASC No. 280, “Segment Reporting” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources.  The CODM, as defined by ASC No. 280, is the Company’s President and Chief Executive Officer (“CEO”).
Effective October 27, 2018, the Company reorganized the reportable segments within its business to align to its new structure resulting from the acquisition of Grakon. Prior to this reorganization, the Company's four reportable segments were Automotive, Power, Interface and Other. As a result of this change, the Company's four reportable segments are now Automotive, Industrial, Interface and Medical. Historical information has been revised to reflect the new reportable segments. Refer to Note 5, "Goodwill and Intangible Assets," for further information.
A summary of the significant reportable segment changes is as follows:
•
Grakon's automotive business has been included in the Automotive segment, while Grakon's non-automotive business has been included in the Industrial segment.
•
The busbar business, previously included in the Power segment, is now part of the Industrial segment.
•
The radio-remote control business, previously included in the Interface segment, is now part of the Industrial segment.
•
The medical devices business, previously included in the Other segment, now makes up the Medical segment.

The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile OEMs, either directly or through their tiered suppliers. Our products include integrated center consoles, hidden switches, ergonomic switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system.
    
The Industrial segment manufactures external lighting solutions, industrial safety radio remote controls, braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail® solution, high-current low-voltage flexible power cabling systems and powder-coated busbars that are used in various markets and applications, including aerospace, computers, industrial, power conversion, military, telecommunications and transportation.
    
The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the appliance, commercial food service, construction, consumer, material handling, medical, point-of-sale and telecommunications markets.  Solutions include optical and copper transceivers and solid-state field-effect consumer touch panels.

The Medical segment is made up of our medical device business, Dabir Surfaces, our surface support technology aimed at pressure injury prevention. Methode is developing the technology for use by patients who are immobilized or otherwise at risk for pressure injuries, including patients undergoing long-duration surgical procedures.
     
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Form 10-K for the fiscal year ended April 28, 2018, with the exception of accounting policies for revenue, which can be found in Note 3, "Revenue," in this Form 10-Q.  We allocate resources to segments based on operating income. Transfers between segments are recorded using internal transfer prices set by us.

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

The tables below present information about our reportable segments.
 
 
Three Months Ended January 26, 2019
 
 
Automotive
 
Industrial
 
Interface
 
Medical
 
Eliminations/Corporate
 
Consolidated
Net Sales
 
$
174.0

 
$
60.9

 
$
13.8

 
$
0.1

 
$
(1.9
)
 
$
246.9

Transfers between Segments
 
(1.1
)
 
(0.7
)
 
(0.1
)
 
—

 
1.9

 
—

Net Sales to Unaffiliated Customers
 
$
172.9

 
$
60.2

 
$
13.7

 
$
0.1

 
$
—

 
$
246.9

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) from Operations
 
$
27.0

 
$
8.9

 
$
—

 
$
(1.7
)
 
$
(8.2
)
 
$
26.0

Interest Expense, Net
 
 
 
 
 
 
 
 
 
 
 
3.2

Other Income, Net
 
 
 
 
 
 
 
 
 
 
 
(4.9
)
Income before Income Taxes
 
 
 
 
 
 
 
 
 
 
 
$
27.7

 
 
Three Months Ended January 27, 2018
 
 
Automotive
 
Industrial
 
Interface
 
Medical
 
Eliminations/Corporate
 
Consolidated
Net Sales
 
$
187.7

 
$
25.5

 
$
17.7

 
$
0.1

 
$
(3.0
)
 
$
228.0

Transfers between Segments
 
(2.8
)
 
—

 
(0.1
)
 
—

 
2.9

 
—

Net Sales to Unaffiliated Customers
 
$
184.9

 
$
25.5

 
$
17.6

 
$
0.1

 
$
(0.1
)
 
$
228.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) from Operations
 
$
39.4

 
$
3.2

 
$
1.6

 
$
(2.3
)
 
$
(6.3
)
 
$
35.6

Interest Expense, Net
 
 
 
 
 
 
 
 
 
 
 
0.3

Other Income, Net
 
 
 
 
 
 
 
 
 
 
 
(3.8
)
Income before Income Taxes
 
 
 
 
 
 
 
 
 
 
 
$
39.1

 
 
Nine Months Ended January 26, 2019
 
 
Automotive
 
Industrial
 
Interface
 
Medical
 
Eliminations/Corporate
 
Consolidated
Net Sales
 
$
555.0

 
$
141.8

 
$
44.2

 
$
0.7

 
$
(7.4
)
 
$
734.3

Transfers between Segments
 
(5.2
)
 
(2.0
)
 
(0.2
)
 
—

 
7.4

 
—

Net Sales to Unaffiliated Customers
 
$
549.8

 
$
139.8

 
$
44.0

 
$