Quarterly Report (10-q)

Date : 12/05/2019 @ 12:11PM
Source : Edgar (US Regulatory)
Stock : Methode Electronics Inc (MEI)
Quote : 34.07  -0.26 (-0.76%) @ 9:05PM
After Hours
Last Trade
Last $ 34.07 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
__________________________________ 
FORM 10-Q
 (Mark One)
 
      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
for the quarterly period ended October 26, 2019
or 
         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)

METHODELOG080115A15.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)
Securities registered pursuant to Section 12(b) of the Act: 
 
 
Name of each exchange
Title of each Class
Trading Symbol(s)
on which registered
Common Stock, $0.50 Par Value
MEI
New York Stock Exchange
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   No 
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   No 
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
 
Accelerated filer 
Non-accelerated filer 
 
Smaller reporting company 
Emerging Growth Company  
 
 
 




 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes 
  No 
At December 3, 2019, the registrant had 37,091,487 shares of common stock outstanding.



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

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I.        FINANCIAL INFORMATION
 
Item 1. Financial Statements
 

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
 
October 26,
2019
 
October 27,
2018
 
October 26,
2019
 
October 27,
2018
Net Sales
 
$
257.2

 
$
264.0

 
$
527.4

 
$
487.4

 
 
 
 
 
 
 
 
 
Cost of Products Sold
 
188.6

 
193.2

 
383.0

 
356.5

 
 
 
 
 
 
 
 
 
Gross Profit
 
68.6

 
70.8

 
144.4

 
130.9

 
 
 
 
 
 
 
 
 
Selling and Administrative Expenses
 
33.2

 
48.0

 
65.6

 
77.5

Amortization of Intangibles
 
4.7

 
3.7

 
9.5

 
5.6

 
 
 
 
 
 
 
 
 
Income from Operations
 
30.7

 
19.1

 
69.3

 
47.8

 
 
 
 
 
 
 
 
 
Interest Expense, Net
 
2.7

 
1.6

 
5.6

 
1.8

Other (Income) Expense, Net
 
(1.0
)
 
(0.1
)
 
(0.9
)
 
0.2

 
 
 
 
 
 
 
 
 
Income before Income Taxes
 
29.0

 
17.6

 
64.6

 
45.8

 
 
 
 
 
 
 
 
 
Income Tax Expense
 
5.2

 
3.0

 
12.5

 
7.5

 
 
 
 
 
 
 
 
 
Net Income
 
$
23.8

 
$
14.6

 
$
52.1

 
$
38.3

 
 
 
 
 
 
 
 
 
Basic and Diluted Income per Share:
 
 

 
 

 
 
 
 
Basic
 
$
0.63

 
$
0.39

 
$
1.39

 
$
1.02

Diluted
 
$
0.63

 
$
0.39

 
$
1.38

 
$
1.02

 
 
 
 
 
 
 
 
 
Cash Dividends per Share
 
$
0.11

 
$
0.11

 
$
0.22

 
$
0.22

See notes to condensed consolidated financial statements.


2


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
 
 
Three Months Ended
 
Six Months Ended
 
 
October 26,
2019
 
October 27,
2018
 
October 26,
2019
 
October 27,
2018
Net Income
 
$
23.8

 
$
14.6

 
$
52.1

 
$
38.3

 
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
 
(2.8
)
 
(7.7
)
 
(4.4
)
 
(25.6
)
Total Comprehensive Income
 
$
21.0

 
$
6.9

 
$
47.7

 
$
12.7

See notes to condensed consolidated financial statements.

3


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per-share data)
 
 
October 26,
2019
 
April 27,
2019
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

CURRENT ASSETS
 
 

 
 

Cash and Cash Equivalents
 
$
95.6

 
$
83.2

Accounts Receivable, Net
 
205.3

 
219.3

Inventories
 
133.8

 
116.7

Income Tax Receivable
 
12.0

 
14.3

Prepaid Expenses and Other Current Assets
 
18.7

 
20.0

TOTAL CURRENT ASSETS
 
465.4

 
453.5

LONG-TERM ASSETS
 
 
 
 
Property, Plant and Equipment, Net
 
198.1

 
191.9

Goodwill
 
233.6

 
233.3

Other Intangible Assets, Net
 
255.8

 
264.9

Operating Lease Assets, Net
 
28.6

 

Deferred Tax Assets
 
34.1

 
34.3

Pre-production Costs
 
39.0

 
32.8

Other Long-term Assets
 
28.1

 
21.0

TOTAL LONG-TERM ASSETS
 
817.3

 
778.2

TOTAL ASSETS
 
$
1,282.7

 
$
1,231.7

 
 
 
 
 
LIABILITIES & SHAREHOLDERS' EQUITY
 
 

 
 

CURRENT LIABILITIES
 
 

 
 

Accounts Payable
 
$
97.1

 
$
91.9

Accrued Employee Liabilities
 
22.5

 
20.1

Other Accrued Expenses
 
27.8

 
33.9

Short-term Operating Lease Liability
 
6.5

 

Short-term Debt
 
15.2

 
15.7

Income Tax Payable
 
15.2

 
19.3

TOTAL CURRENT LIABILITIES
 
184.3

 
180.9

LONG-TERM LIABILITIES
 
 
 
 
Long-term Debt
 
259.9

 
276.9

Long-term Operating Lease Liability
 
22.8

 

Long-term Income Tax Payable
 
29.3

 
33.0

Other Long-term Liabilities
 
17.0

 
14.8

Deferred Tax Liabilities
 
36.8

 
36.4

TOTAL LONG-TERM LIABILITIES
 
365.8

 
361.1

TOTAL LIABILITIES
 
550.1

 
542.0

SHAREHOLDERS' EQUITY
 
 

 
 

Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,438,111 shares and 38,333,576 shares issued as of October 26, 2019 and April 27, 2019, respectively
 
19.2

 
19.2

Additional Paid-in Capital
 
154.4

 
150.4

Accumulated Other Comprehensive Loss
 
(18.0
)
 
(13.6
)
Treasury Stock, 1,346,624 shares as of October 26, 2019 and April 27, 2019
 
(11.5
)
 
(11.5
)
Retained Earnings
 
588.5

 
545.2

TOTAL SHAREHOLDERS' EQUITY
 
732.6

 
689.7

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,282.7

 
$
1,231.7

See notes to condensed consolidated financial statements.

4


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(in millions, except share data)
Three Months Ended October 26, 2019
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Loss
 
Treasury
Stock
 
Retained Earnings
 
Total Shareholders Equity
Balance as of July 27, 2019
38,438,111

 
$
19.2

 
$
152.9

 
$
(15.2
)
 
$
(11.5
)
 
$
568.9

 
$
714.3

Stock-based Compensation Expense

 

 
1.5

 

 

 

 
1.5

Foreign Currency Translation Adjustments

 

 

 
(2.8
)
 

 

 
(2.8
)
Net Income

 

 

 

 

 
23.8

 
23.8

Dividends on Common Stock

 

 

 

 

 
(4.2
)
 
(4.2
)
Balance as of October 26, 2019
38,438,111

 
$
19.2

 
$
154.4

 
$
(18.0
)
 
$
(11.5
)
 
$
588.5

 
$
732.6

Three Months Ended October 27, 2018
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Treasury
Stock
 
Retained Earnings
 
Total Shareholders Equity
Balance as of July 28, 2018
38,333,576

 
$
19.2

 
$
138.5

 
$
(4.0
)
 
$
(11.5
)
 
$
490.0

 
$
632.2

Stock-based Compensation Expense

 

 
8.8

 

 

 

 
8.8

Foreign Currency Translation Adjustments

 

 

 
(7.7
)
 

 

 
(7.7
)
Net Income

 

 

 

 

 
14.6

 
14.6

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


5


Six Months Ended October 26, 2019
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Loss
 
Treasury
Stock
 
Retained Earnings
 
Total Shareholders Equity
Balance as of April 27, 2019
38,333,576

 
$
19.2

 
$
150.4

 
$
(13.6
)
 
$
(11.5
)
 
$
545.2

 
$
689.7

Earned Portion of Restricted Stock, Net of Tax Withholding
104,535

 

 

 

 

 
(0.4
)
 
(0.4
)
Stock-based Compensation Expense

 

 
4.0

 

 

 

 
4.0

Foreign Currency Translation Adjustments

 

 

 
(4.4
)
 

 

 
(4.4
)
Net Income

 

 

 

 

 
52.1

 
52.1

Dividends on Common Stock

 

 

 

 

 
(8.4
)
 
(8.4
)
Balance as of October 26, 2019
38,438,111

 
$
19.2

 
$
154.4

 
$
(18.0
)
 
$
(11.5
)
 
$
588.5

 
$
732.6

Six Months Ended October 27, 2018
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Loss
 
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, Net of Tax Withholding
135,223

 
0.1

 
(0.1
)
 

 

 
(1.7
)
 
(1.7
)
Stock-based Compensation Expense

 

 
10.9

 

 

 

 
10.9

Adoption of ASU 2014-09

 

 

 

 

 
0.1

 
0.1

Foreign Currency Translation Adjustments

 

 

 
(25.6
)
 

 

 
(25.6
)
Net Income

 

 

 

 

 
38.3

 
38.3

Dividends on Common Stock

 

 

 

 

 
(8.7
)
 
(8.7
)
Balance as of October 27, 2018
38,333,576

 
$
19.2

 
$
147.3

 
$
(11.7
)
 
$
(11.5
)
 
$
500.0

 
$
643.3


See notes to condensed consolidated financial statements.

6


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
 
 
Six Months Ended
 
 
October 26,
2019
 
October 27,
2018
OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
52.1

 
$
38.3

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

 
 

Change in Cash Surrender Value of Life Insurance
 
(0.3
)
 

Amortization of Debt Issuance Costs
 
0.3

 
0.2

Gain on Sale of Fixed Assets
 

 
(0.7
)
Gain on Sale of Business
 
(0.5
)
 

Depreciation
 
14.2

 
12.8

Amortization of Intangible Assets
 
9.5

 
5.6

Stock-based Compensation Expense
 
4.0

 
10.9

Provision for Bad Debt
 

 
0.1

Change in Deferred Income Taxes
 
0.4

 
(0.4
)
Changes in Operating Assets and Liabilities:
 
 
 
 
Accounts Receivable
 
10.7

 
(8.2
)
Inventories
 
(18.1
)
 
(5.2
)
Prepaid Expenses and Other Assets
 
(10.2
)
 
(13.2
)
Accounts Payable and Other Liabilities
 
5.7

 
(4.0
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
67.8

 
36.2

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Purchases of Property, Plant and Equipment
 
(26.8
)
 
(28.6
)
Acquisitions of Businesses, Net of Cash Acquired
 

 
(421.6
)
Sale of Business/Investment/Property
 
0.6

 
0.7

NET CASH USED IN INVESTING ACTIVITIES
 
(26.2
)
 
(449.5
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Taxes Paid Related to Net Share Settlement of Equity Awards
 
(0.4
)
 
(1.7
)
Repayments of Finance Leases
 
(0.3
)
 

Cash Dividends
 
(8.2
)
 
(8.6
)
Proceeds from Borrowings
 
26.4

 
348.0

Repayments of Borrowings
 
(44.2
)
 
(46.6
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
 
(26.7
)
 
291.1

Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents
 
(2.5
)
 
(13.0
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
12.4

 
(135.2
)
Cash and Cash Equivalents at Beginning of the Year
 
83.2

 
246.1

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
 
$
95.6

 
$
110.9

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
Cash Paid During the Period For:
 
 
 
 
Interest
 
$
5.6

 
$
1.6

Income Taxes, Net of Refunds
 
$
10.9

 
$
14.9

See notes to condensed consolidated financial statements.

7

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.    Description of Business and Summary of Significant Accounting Policies
Description of Business

Methode Electronics, Inc. (the "Company" or "Methode") is a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States. The Company's primary manufacturing facilities are located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, Mexico. The Company designs, manufactures and markets devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing technologies.

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements included in the Company's Form 10-K for the year ended April 27, 2019, filed with the SEC on June 20, 2019. Results may vary from quarter-to-quarter for reasons other than seasonality.

Financial Reporting Periods
The Company maintains its financial records on the basis of a 52 or 53 week fiscal year ending on the Saturday closest to April 30. The three months ended October 26, 2019 and October 27, 2018 were both 13-week periods, and the six months ended October 26, 2019 and October 27, 2018 were both 26-week periods.
Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from these estimates.

Change in Presentation

During the second quarter of fiscal 2019, the Company changed its reportable segments. Refer to Note 11 “Segment Information,” for further discussion on the impact of the change.

Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, "Description of Business and Summary of Significant Accounting Policies," to the consolidated financial statements included in the Company's Form 10-K for the year ended April 27, 2019. There have been no material changes to the significant accounting policies in the six months ended October 26, 2019 other than those noted below.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases,” which amended authoritative guidance on leases and is codified in Accounting Standards Codification ("ASC") 842. The amended guidance requires entities to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The FASB subsequently issued updates to provide clarification on specific topics, including adoption guidance, practical expedients and interim transition disclosure requirements.

8

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


The Company adopted the standard on April 28, 2019, by applying the modified retrospective method without restatement of comparative periods' financial information, as permitted by the transition guidance. Accordingly, the Company has provided disclosures required by prior lease guidance for comparative periods. The adoption of this standard resulted in the recognition of right-of-use assets of $27.6 million and related lease obligations of $28.1 million as of April 28, 2019. The standard did not have a significant impact on the Company's operating results or cash flows.

The Company elected certain practical expedients, including the election not to reassess its prior conclusions about lease identification, lease classification and initial direct costs, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee. Lastly, the Company elected to recognize a right-of-use asset and related lease liability for leases with a lease term of 12 months or less for all classes of underlying assets. The Company determines if an arrangement contains a lease at inception. Operating lease expense is recognized on a straight-line basis over the lease term.

For purposes of calculating operating lease obligations under the standard, the Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company's leases do not contain material residual value guarantees or material restrictive covenants. The discount rate used to measure a lease obligation should be the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments. Refer to Note 3, "Leases," for additional information.

In February 2018, the FASB issued 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 allow 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 Company adopted ASU 2018-02 as of April 28, 2019 and the adoption had no impact on the Company’s consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The guidance in ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Management is currently assessing the impact of the new standard, but does not anticipate that the adoption of this standard will have a material impact on the manner in which it estimates the allowance for doubtful accounts on its trade accounts receivable.

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure
Framework – Changes to the Disclosure Requirements for Fair Value Measurement." The guidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the provisions of the updated guidance and assessing the impact on its consolidated financial statements.


9

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2.    Revenue
The majority of the Company's 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 the Company believes have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over time basis. 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.

The Company treats 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.

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 prepaid expenses and other current assets and other long-term liabilities, respectively, in the Company's condensed consolidated balance sheets.

Unbilled Receivables (Contract Assets) - Unbilled receivables were $0.9 million as of October 26, 2019 and $0.8 million as of April 27, 2019. In the six months ended October 26, 2019, $0.8 million of previously unbilled receivables were recorded into accounts receivable. There were no impairments of contract assets as of October 26, 2019.

Deferred Revenue (Contract Liabilities) - Deferred revenue was $0.3 million as of both October 26, 2019 and April 27, 2019. No previously deferred revenue was recorded into revenue in the six months ended October 26, 2019.

10

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 the Company's 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 October 26, 2019
(Dollars in Millions)
 
Auto
 
Industrial
 
Interface
 
Medical
 
Total
Geographic Net Sales:
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
84.2

 
$
40.6

 
$
11.8

 
$
0.3

 
$
136.9

Malta
 
27.2

 
7.6

 
0.1

 

 
34.9

Canada
 
22.6

 
5.3

 

 

 
27.9

China
 
20.7

 
7.0

 

 

 
27.7

Other
 
25.4

 
4.4

 

 

 
29.8

Total Net Sales
 
$
180.1

 
$
64.9

 
$
11.9

 
$
0.3

 
$
257.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
Goods Transferred at a Point in Time
 
$
168.7

 
$
64.9

 
$
11.9

 
$
0.3

 
$
245.8

Goods Transferred Over Time
 
11.4

 

 

 

 
11.4

Total Net Sales
 
$
180.1

 
$
64.9

 
$
11.9

 
$
0.3

 
$
257.2

 
 
Three Months Ended October 27, 2018
(Dollars in Millions)
 
Auto
 
Industrial
 
Interface
 
Medical
 
Total
Geographic Net Sales:
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
96.7

 
$
24.9

 
$
14.4

 
$
0.3

 
$
136.3

Malta
 
29.6

 
7.4

 

 

 
37.0

China
 
22.5

 
9.1

 
0.1

 

 
31.7

Canada
 
24.3

 
2.5

 

 

 
26.8

Other
 
28.5

 
3.5

 
0.2

 

 
32.2

Total Net Sales
 
$
201.6

 
$
47.4

 
$
14.7

 
$
0.3

 
$
264.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
Goods Transferred at a Point in Time
 
$
193.6

 
$
47.4

 
$
14.7

 
$
0.3

 
$
256.0

Goods Transferred Over Time
 
8.0

 

 

 

 
8.0

Total Net Sales
 
$
201.6

 
$
47.4

 
$
14.7

 
$
0.3

 
$
264.0


11

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 
 
Six Months Ended October 26, 2019
(Dollars in Millions)
 
Auto
 
Industrial
 
Interface
 
Medical
 
Total
Geographic Net Sales:
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
184.2

 
$
83.1

 
$
24.3

 
$
0.6

 
$
292.2

Malta
 
54.7

 
15.1

 
0.2

 

 
70.0

Canada
 
44.1

 
11.7

 

 

 
55.8

China
 
36.3

 
16.5

 

 

 
52.8

Other
 
47.0

 
9.3

 
0.3

 

 
56.6

Total Net Sales
 
$
366.3

 
$
135.7

 
$
24.8

 
$
0.6

 
$
527.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
Goods Transferred at a Point in Time
 
$
347.7

 
$
135.7

 
$
24.8

 
$
0.6

 
$
508.8

Goods Transferred Over Time
 
18.6

 

 

 

 
18.6

Total Net Sales
 
$
366.3

 
$
135.7

 
$
24.8

 
$
0.6

 
$
527.4


 
 
Six Months Ended October 27, 2018
(Dollars in Millions)
 
Auto
 
Industrial
 
Interface
 
Medical
 
Total
Geographic Net Sales:
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
174.0

 
$
37.0

 
$
29.4

 
$
0.6

 
$
241.0

Malta
 
60.1

 
15.7

 
0.1

 

 
75.9

China
 
42.5

 
17.9

 
0.1

 

 
60.5

Canada
 
45.1

 
2.5

 

 

 
47.6

Other
 
55.2

 
6.5

 
0.7

 

 
62.4

Total Net Sales
 
$
376.9

 
$
79.6

 
$
30.3

 
$
0.6

 
$
487.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
 
 
 
Goods Transferred at a Point in Time
 
$
359.1

 
$
79.6

 
$
30.3

 
$
0.6

 
$
469.6

Goods Transferred Over Time
 
17.8

 

 

 

 
17.8

Total Net Sales
 
$
376.9

 
$
79.6

 
$
30.3

 
$
0.6

 
$
487.4



3.    Leases

The Company leases real estate, automobiles and certain equipment under both operating and finance leases. The Company does not have any significant arrangements where it is the lessor. The majority of the Company's global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses and buildings. As of October 26, 2019, the Company's leases have remaining lease terms up to 11.8 years, some of which include optional renewals or terminations, which are considered in the Company’s assessments when such options are reasonably certain to be exercised. Any variable payments related to the lease will be recorded as lease expense when and as incurred. The Company’s lease payments are largely fixed. As of October 26, 2019, the operating leases that the Company has signed but have not yet commenced are immaterial.

In addition to the operating lease assets presented on the condensed consolidated balance sheets, assets under finance leases of $0.8 million are included in property, plant and equipment, net on the condensed consolidated balance sheets as of October 26, 2019. The finance lease obligation is split between other accrued expenses for the short-term portion and other long-term liabilities for the long-term portion on the condensed consolidated balance sheets. The Company had an immaterial amount of finance lease expense in the three and six months ended October 26, 2019.


12

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The components of lease expense were as follows:
(Dollars in Millions)
 
Three Months Ended October 26, 2019
 
Six Months Ended October 26, 2019
Lease Cost:
 
 
 
 
Operating Lease Cost
 
$
2.3

 
$
4.8

Variable Lease Cost
 
0.2

 
0.4

Total Lease Cost
 
$
2.5

 
$
5.2



Supplemental cash flow and other information related to operating leases was as follows:
(Dollars in Millions)
 
Six Months Ended October 26, 2019
Operating Cash Flows:
 
 
Cash Paid Related to Operating Lease Obligations
 
$
4.3

 
 
 
Non-cash Activity:
 
 
Right-of-use Assets Obtained in Exchange for Lease Obligations
 
$
5.1

 
 
 
Weighted-average Remaining Lease Term
 
5.8 years

Weighted-average Discount Rate
 
4.67
%


Maturities of operating lease liabilities as of October 26, 2019, are shown below:
(Dollars in Millions)
 
Operating Leases
Fiscal Year:
 
 
Remainder of 2020
 
$
4.2

2021
 
6.4

2022
 
5.9

2023
 
5.2

2024
 
4.0

Thereafter
 
8.0

Total Lease Payments
 
33.7

Less: Imputed Interest
 
(4.4
)
Present Value of Lease Liabilities
 
$
29.3




13

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Disclosures related to periods prior to the adoption of ASC 842

Total rent expense was $1.5 million and $3.1 million in the three and six months ended October 27, 2018, respectively. Future minimum lease payments for assets under operating leases as of April 27, 2019 were as follows:
(Dollars in Millions)
 
Operating Leases
Fiscal Years:
 
 
2020
 
$
7.8

2021
 
5.6

2022
 
4.9

2023
 
4.2

2024
 
3.3

Thereafter
 
8.4

Net Minimum Lease Payments
 
$
34.2



4.    Acquisition
Acquisition of Grakon

On September 12, 2018, the Company acquired 100% of the stock of Grakon Parent, Inc. ("Grakon") for $422.1 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 the Company's product offerings and expand the Industrial segment, which is a key component of the Company's 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.

During the second quarter of fiscal 2020, the Company completed the allocation of the purchase price to the assets acquired and liabilities assumed. Based on the final allocation, goodwill decreased $0.2 million from the preliminary amount reported in the Company's consolidated financial statements as of April 27, 2019. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed were:
(Dollars in Millions)
 
 
Cash
 
$
6.9

Accounts Receivable
 
36.1

Inventory
 
30.8

Prepaid Expenses and Other Current Assets
 
1.6

Other Intangible Assets
 
221.9

Goodwill
 
175.1

Pre-production Costs
 
1.5

Property, Plant and Equipment
 
16.2

Accounts Payable
 
(19.4
)
Accrued Employee Liabilities
 
(4.4
)
Other Accrued Expenses
 
(7.6
)
Income Tax Payable
 
(0.3
)
Deferred Income Tax Liability
 
(29.4
)
Total Purchase Price
 
$
429.0



14

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


The following table presents details of the intangible assets acquired:
(Dollars in Millions)
 
Fair Value at Date of Acquisition
 
Amortization Period
Customer Relationships and Agreements - Significant Customer
 
$
57.0

 
19.5 years
Customer Relationships and Agreements - All Other Customers
 
125.0

 
19.5 years
Technology Licenses
 
17.7

 
11.7 years
Trade Names
 
22.2

 
8.5 years
Total
 
$
221.9

 
 


Acquisition-related costs of $10.9 million and $11.5 million were incurred in relation to the acquisition of Grakon in the three and six months ended October 27, 2018, respectively. Acquisition-related costs for the three months ended October 27, 2018 included $8.3 million of costs which have been reported in selling and administrative expenses and $2.6 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income. Acquisition-related costs for the six months ended October 27, 2018 included $8.9 million of costs which have been reported in selling and administrative expenses and $2.6 million of costs which have been reported in costs of products sold on the condensed consolidated statements of income.

The following table presents unaudited supplemental pro forma results for the three and six months ended October 27, 2018 as if the Grakon acquisition had occurred as of the beginning of fiscal 2018. 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 acquisition had taken place at such time. 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)
(Dollars in Millions)
 
Three Months Ended October 27, 2018
 
Six Months Ended October 27, 2018
Net Sales
 
$
285.5

 
$
556.2

Net Income
 
$
26.1

 
$
55.8



5.    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.
 
 
Three Months Ended
 
Six Months Ended
(Dollars in Millions)
 
October 26,
2019
 
October 27,
2018
 
October 26,
2019
 
October 27,
2018
Income before Income Taxes
 
$
29.0

 
$
17.6

 
$
64.6

 
$
45.8

Income Tax Expense
 
$
5.2

 
$
3.0

 
$
12.5

 
$
7.5

Effective Tax Rate
 
17.9
%
 
17.0
%
 
19.3
%
 
16.4
%


The income tax provision in both the three and six months ended October 26, 2019 was lower than the U.S. statutory tax rate primarily due to foreign investment tax credits and foreign operations with lower statutory rates. The income tax provision in both the three and six months ended October 27, 2018 was lower than the U.S. statutory tax rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates and the deduction for stock-based compensation. 


15

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company's unrecognized income tax benefits were $5.2 million and $3.1 million as of October 26, 2019 and April 27, 2019, respectively. If any portion of the Company's unrecognized tax benefits is recognized, it could impact the Company's effective tax rate. The tax reserves are reviewed periodically and adjusted considering changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law.

6.     Balance Sheet Components

Inventories

Inventories are stated at the lower-of-cost or net realizable value. Cost is determined using the first-in, first-out method. Finished products and work-in-process inventories include direct material costs and direct and indirect manufacturing costs. The Company records reserves for inventory that may be obsolete or in excess of current and future market demand. A summary of inventories is shown below:
(Dollars in Millions)
 
October 26,
2019
 
April 27,
2019
Raw Materials
 
$
80.4

 
$
67.1

Work in Process
 
11.8

 
9.4

Finished Products
 
41.6

 
40.2

Total Inventories
 
$
133.8

 
$
116.7



Property, Plant and Equipment
    
Property, plant and equipment is stated at cost. Maintenance and repair costs are expensed as incurred. Depreciation is calculated using the straight-line method using estimated useful lives of 5 to 40 years for buildings and building improvements and 3 to 15 years for machinery and equipment. A summary of property, plant and equipment is shown below:
(Dollars in Millions)
 
October 26,
2019
 
April 27,
2019
Land
 
$
3.4

 
$
3.7

Buildings and Building Improvements
 
83.9

 
81.2

Machinery and Equipment
 
404.2

 
390.7

Total Property, Plant and Equipment, Gross
 
491.5

 
475.6

Less: Accumulated Depreciation
 
293.4

 
283.7

Property, Plant and Equipment, Net
 
$
198.1

 
$
191.9


 
Depreciation expense was $7.2 million and $6.3 million in the three months ended October 26, 2019 and October 27, 2018, respectively. Depreciation expense was $14.2 million and $12.8 million in the six months ended October 26, 2019 and October 27, 2018, respectively. As of October 26, 2019 and April 27, 2019, capital expenditures recorded in accounts payable totaled $1.5 million and $6.4 million, respectively.

Pre-Production Tooling Costs Related to Long-term Supply Arrangements
The Company incurs pre-production tooling costs related to certain products produced for its customers under long-term supply arrangements. As of October 26, 2019 and April 27, 2019, the Company had $39.0 million and $32.8 million, 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. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a customer contract. As of October 26, 2019 and April 27, 2019, the Company had $16.3 million and $15.0 million, respectively, of Company owned pre-production tooling, which is capitalized within property, plant and equipment.

16

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7.    Goodwill and Intangible Assets
Goodwill
The following table shows goodwill by segment:
(Dollars in Millions)
 
October 26,
2019
 
April 27,
2019
Automotive
 
$
106.3

 
$
106.3

Industrial
 
127.3

 
127.0

Total
 
$
233.6

 
$
233.3


Intangible Assets
The following tables present details of the Company's identifiable intangible assets:
 
October 26, 2019
(Dollars in Millions)
Gross
 
Accumulated
Amortization
 
Net
 
Wtd. Avg. Remaining
Amortization
Periods (Years)
Definite-lived Intangible Assets:
 
 
 
 
 
 
 
Customer Relationships and Agreements
$
244.8

 
$
34.3

 
$
210.5

 
17.0
Trade Names, Patents and Technology Licenses
75.6

 
32.1

 
43.5

 
7.9
Total Definite-lived Intangible Assets
320.4

 
66.4

 
254.0

 
 
Indefinite-lived Intangible Assets:
 
 
 
 
 
 
 
Trade Names, Patents and Technology Licenses
1.8

 

 
1.8

 
 
Total Indefinite-lived Intangible Assets
1.8

 

 
1.8

 
 
Total Intangible Assets
$
322.2

 
$
66.4

 
$
255.8

 
 
 
 
April 27, 2019
(Dollars in Millions)
Gross
 
Accumulated
Amortization
 
Net
 
Wtd. Avg. Remaining
Amortization
Periods (Years)
Definite-lived Intangible Assets:
 
 
 
 
 
 
 
Customer Relationships and Agreements
$
244.5

 
$
27.7

 
$
216.8

 
17.4
Trade Names, Patents and Technology Licenses
75.5

 
29.2

 
46.3

 
8.4
Total Definite-lived Intangible Assets
320.0

 
56.9

 
263.1

 
 
Indefinite-lived Intangible Assets:
 
 
 
 
 
 
 
Trade Names, Patents and Technology Licenses
1.8

 

 
1.8

 
 
Total Indefinite-lived Intangible Assets
1.8

 

 
1.8

 
 
Total Intangible Assets
$
321.8

 
$
56.9

 
$
264.9

 
 

 

17

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Based on the current amount of intangible assets subject to amortization, the estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
 
(Dollars in Millions)
 
Fiscal Year:
 
Remainder of 2020
$
9.6

2021
19.0

2022
19.0

2023
19.0

2024
18.6

Thereafter
168.8

Total
$
254.0



8.     Debt

The following table summarizes components of the Company's debt:
(Dollars in Millions)
 
October 26,
2019
 
April 27,
2019
Revolving Credit Facility
 
$
24.6

 
$
35.0

Term Loan
 
237.5

 
243.7

Other Debt
 
15.6

 
16.8

Unamortized Debt Issuance Costs
 
(2.6
)
 
(2.9
)
Total Debt
 
275.1

 
292.6

Less: Current Maturities
 
(15.2
)
 
(15.7
)
Total Long-term Debt
 
$
259.9

 
$
276.9


Revolving Credit Facility/Term Loan

On September 12, 2018, the Company entered into a five-year Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., as Administrative Agent, and Wells Fargo Bank, N.A. The Credit Agreement amends and restates the credit agreement, dated November 18, 2016, among the Company, Bank of America, N.A. and Wells Fargo Bank, N.A. The Credit Agreement consists of a senior unsecured revolving credit facility (“Revolving Credit Facility”) of $200.0 million and a senior unsecured term loan (“Term Loan”) of $250.0 million. In addition, the Company has an option to increase the size of the Revolving Credit Facility and Term Loan by up to an additional $200.0 million, subject to customary conditions and approval of the lenders providing new commitments. The Credit Agreement is guaranteed by the Company’s wholly-owned U.S. subsidiaries. For the Term Loan, the Company is required to make quarterly principal payments of 1.25% of the original Term Loan ($3.1 million) through maturity, with the remaining balance due on September 12, 2023.
    
Outstanding borrowings under the Credit Agreement bear interest at variable rates based on the type of borrowing and the Company’s debt to EBITDA financial ratio, as defined. The interest rate on outstanding borrowings under the Credit Agreement was 3.32% at October 26, 2019. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. As of October 26, 2019, the Company was in compliance with all the covenants in the Credit Agreement.

Other Debt

The Company’s subsidiary, Procoplast, has debt that consists of 17 notes with maturities ranging from 2020 to 2031. The weighted-average interest rate was approximately 1.52% at October 26, 2019 and $2.7 million of the debt was classified as short-term.


18

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

9.    Stock-based Compensation
The Company has granted stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock awards to employees and non-employee directors under the Methode Electronics, Inc. 2014 Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”) and the Methode Electronics, Inc. 2007 Stock Plan (“2007 Plan”). The Company’s stockholders approved the 2014 Plan in September 2014. The Company can no longer make grants under the 2010 Plan or 2007 Plan. The number of shares of common stock originally authorized under the 2014 Plan is 3,000,000, less one share for every one share of common stock issued or issuable pursuant to awards made after May 3, 2014 under the 2007 Plan or 2010 Plan.

Restricted Stock Awards

The RSAs granted under the 2014 Plan are performance-based awards that are scheduled to vest at the end of fiscal 2020 based on the achievement of an EBITDA hurdle. The number of shares ultimately earned could range from 0% to 150% of the target award based on the achievement of the EBITDA performance condition. The fair value of the RSAs granted was based on the closing stock price on the date of grant. All non-vested RSAs accrue dividend equivalents, which are subject to vesting and paid in cash upon release. Accrued dividends are forfeitable to the extent that the underlying awards do not vest.

Per ASC 718, "Compensation - Stock Compensation," compensation expense is recognized for these awards over the vesting period based on the projected probability (70% confidence) of achievement of the EBITDA hurdle in fiscal 2020. In each period, the stock-based compensation expense may be adjusted, as necessary, in response to any changes in the Company’s forecast with respect to achieving the fiscal 2020 EBITDA hurdle. Prior to the second quarter of fiscal 2019, the Company was recognizing stock-based compensation at threshold. During the second quarter of fiscal 2019, the Company determined that the target hurdle would be achieved based on the recent acquisition of Grakon and adjusted its stock-based compensation expense for these awards. The result was an additional expense of $7.4 million. The Company is currently recognizing stock-based compensation at target.

The following table summarizes the RSA activity under the 2014 Plan in the six months ended October 26, 2019:
 
RSA Shares
 
Wtd. Avg. Grant Date Fair Value
Non-vested and Unissued at April 27, 2019
1,031,408

 
$