Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q/A**

 

**Amendment #1**

 

| **(Mark  One)** |   |                                                                                                 |
|-----------------|--------|------------------------------------------------------------------------------------------------------|
| ** **      |   |                                                                                                 |
| x               |   | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**    |
|            |   | ** **                                                                                           |
|            |   | **For the quarterly period ended November 1,  2008**                                            |
|            |   | ** **                                                                                           |
| **or**          |
|            |   | ** **                                                                                           |
| o               |   | **Transition Report Pursuant to Section 13 or 15(d)****of the Securities Exchange Act of 1934** |

 

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**Commissionfile number 0-2816**

 

**METHODE ELECTRONICS, INC.**

(Exact name of registrant asspecified in its charter.)

 

| **Delaware**                                           | ** ** | **36-2090085**      |
|--------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                        |       | (I.R.S. Employer    |
| incorporation or organization)                         |       | Identification No.) |
|                                                   |       |                |
| **7401 West Wilson Avenue, Harwood Heights, Illinois** | ** ** | **60706-4548**      |
| (Address of principal executive offices)               |       | (Zip Code)          |

 

(Registrant’s telephone number, including area code)  **(708) 867-6777**

 

**None**

(Former name, former address, former fiscalyear, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x**  **No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or smaller reportingcompany.  See definitions of “acceleratedfiler”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer o |   | Accelerated filer x         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

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

 

At December 9, 2008, Registrant had 37,838,970shares of common stock outstanding.

 

 

 

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Table of Contents

 

METHODEELECTRONICS, INC.

FORM 10-Q/A

November 1,2008

 

TABLEOF CONTENTS

 
| ** **                                                            | **Page**                                                                                                                                     |
|-----------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| **PART I.      FINANCIAL  INFORMATION** |                                                                                                                                         |
| ** **                                                            |                                                                                                                                         |
|                                                                  | Explanatory Note                                                                                                                             | 3 |
|                                                                  |                                                                                                                                         |   |
| Item 1.                                                               | Financial Statements (unaudited)                                                                                                             |   |
|                                                                  |                                                                                                                                         |   |
|                                                                  | Condensed consolidated  balance sheets as of  November 1, 2008 and May 3, 2008                                                     | 4 |
|                                                                  |                                                                                                                                         |   |
|                                                                  | Condensed  consolidated statements of income – Three months and six months  ended November 1, 2008 and October 27,  2007 | 5 |
|                                                                  |                                                                                                                                         |   |
|                                                                  | Condensed  consolidated statements of cash flows – Six months ended  November 1, 2008 and October 27,  2007              | 6 |
|                                                                  |                                                                                                                                         |   |
|                                                                  | Notes to  condensed consolidated financial statements – November 1, 2008                                                           | 7 |
|                                                                  |                                                                                                                                         |   |
| Item 2.                                                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                  | 26 |
|                                                                  |                                                                                                                                         |   |
| PART II.     OTHER  INFORMATION         |                                                                                                                                         |
|                                                                  |                                                                                                                                         |
| Item 6.                                                               | Exhibits                                                                                                                                     | 45 |
|                                                                  |                                                                                                                                         |   |
| SIGNATURES                                                            | 46                                                                                                                                           |
|                                                                  |                                                                                                                                         |   |
| INDEX TO EXHIBITS                                                     | 47                                                                                                                                           |

 

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**EXPLANATORY NOTE:**

 

We are filingthis first amendment to our quarterly report on Form 10-Q for the sixmonths ended November 1, 2008 to restate our condensed consolidatedfinancial statements for the three and six months then ended.  In the course of preparing our financialstatements for our annual report on Form 10-K to be filed with theSecurities and Exchange Commission (“SEC”) for the fiscal year ended May 2,2009, we discovered an error related to unrealized currency exchange lossesarising from an intercompany loan between our corporate headquarters and one ofour foreign subsidiaries in conjunction with a recent acquisition of Hetronic,L.L.C., purchased on September 30, 2008. The loan amount was $20,858,304. Due to the U.S. Dollar increasing versus the Euro, from 0.6923 on September 30,2008 to 0.7850 on November 1, 2008, an unrealized currency loss of$2,463,140 should have been recorded during the second quarter.  The restatements to include this unrecordedcurrency loss have a significant impact to our previously reported condensedconsolidated balance sheets and condensed consolidated statement of income forthe three and six months ended November 1, 2008.  Note 2 of this Form 10-Q/A disclosespreviously reported results as well as the restated results in our unauditedCondensed Consolidated Financial Statements for the three and six months ended November 1,2008.

 

No attempt hasbeen made in the Form 10-Q/A to update disclosures presented in theoriginal Form 10-Q as filed except those items affected by the recognitionof the previously unrecorded loan currency loss.  Furthermore, this Form 10-Q/A does notreflect events occurring after the original filing except as disclosed in theoriginal Form 10-Q, including any changes to the exhibits affected bysubsequent events.  Therefore, theexhibits have not been included with this Form 10-Q/A with the exceptionof Exhibits 31.1, 31.2 and 32.1 new certificates by our principal executiveofficer and principal financial officer as required by Rule 13a-14promulgated under the Securities Exchange Act of 1934, as amended.  Accordingly, this Form 10-Q/A should beread in conjunction with our other filings made with the SEC subsequent to thefiling of the original Form 10-Q, including any amendments to thosefilings.

 

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PART I -FINANCIAL INFORMATION

 

Item 1 - FinancialStatements

          METHODE ELECTRONICS, INC ANDSUBSIDIARIES

          CONDENSED CONSOLIDATED BALANCE SHEETS

                (in thousands)

 
| ** **                                                                                                                                                            | ** ** | **Restated**              | ** **    | ** **           | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|---------------|----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **(Note 2)**              | ** **    | ** **           | ** ** |
| ** **                                                                                                                                                            | ** ** | **November 1, 2008** | ** **    | **May 3, 2008** | ** ** |
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**           | ** **    | ** **           | ** ** |
| ASSETS                                                                                                                                                                |       |                      |          |                 |       |
|                                                                                                                                                                  |       |                      |          |                 |       |
| CURRENT ASSETS                                                                                                                                                        |       |                      |          |                 |       |
| Cash and cash equivalents                                                                                                                                             |       | $                         | 52,806        |                 | $          | 104,305 |   |
| Accounts receivable, net                                                                                                                                              |       | 73,599                    |          | 85,805               |       |
| Inventories:                                                                                                                                                          |       |                      |          |                 |       |
| Finished products                                                                                                                                                     |       | 17,369                    |          | 15,384               |       |
| Work in process                                                                                                                                                       |       | 17,681                    |          | 20,715               |       |
| Materials                                                                                                                                                             |       | 32,993                    |          | 19,850               |       |
|                                                                                                                                                                  |       | 68,043                    |          | 55,949               |       |
| Deferred income taxes                                                                                                                                                 |       | 8,485                     |          | 8,730                |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 6,082                     |          | 6,028                |       |
| TOTAL CURRENT ASSETS                                                                                                                                                  |       | 209,015                   |          | 260,817              |       |
|                                                                                                                                                                  |       |                      |          |                 |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                         |       | 288,166                   |          | 308,264              |       |
| Less allowances for depreciation                                                                                                                                      |       | 207,762                   |          | 217,984              |       |
|                                                                                                                                                                  |       | 80,404                    |          | 90,280               |       |
|                                                                                                                                                                  |       |                      |          |                 |       |
| GOODWILL                                                                                                                                                              |       | 68,085                    |          | 54,476               |       |
| INTANGIBLE ASSETS, net                                                                                                                                                |       | 54,184                    |          | 41,282               |       |
| OTHER ASSETS                                                                                                                                                          |       | 26,144                    |          | 23,365               |       |
|                                                                                                                                                                  |       | 148,413                   |          | 119,123              |       |
|                                                                                                                                                                  |       | $                         |  437,832 |                 | $          | 470,220 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                             |       |                      |          |                 |       |
|                                                                                                                                                                  |       |                      |          |                 |       |
| CURRENT LIABILITIES                                                                                                                                                   |       |                      |          |                 |       |
| Accounts payable                                                                                                                                                      |       | $                         | 32,922        |                 | $          | 42,810 |   |
| Other current liabilities                                                                                                                                             |       | 25,654                    |          | 33,902               |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                             |       | 58,576                    |          | 76,712               |       |
|                                                                                                                                                                  |       |                      |          |                 |       |
| OTHER LIABILITIES                                                                                                                                                     |       | 17,211                    |          | 13,833               |       |
| DEFERRED COMPENSATION                                                                                                                                                 |       | 4,561                     |          | 6,890                |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                             |       |                      |          |                 |       |
| Common stock, $0.50 par value, 100,000,000 shares  authorized, 38,283,075 and38,225,379 shares issued as of November 1, 2008 and May 3,  2008, respectively |       | 19,141                    |          | 19,113               |       |
| Unearned common stock issuances                                                                                                                                       |       | (4,257                    | )             | (4,257               | )          |
| Additional paid-in capital                                                                                                                                            |       | 71,682                    |          | 69,953               |       |
| Retained earnings                                                                                                                                                     |       | 268,363                   |          | 265,838              |       |
| Accumulated other comprehensive income                                                                                                                                |       | 13,935                    |          | 28,381               |       |
| Treasury  stock, 1,342,588 and 702,708 shares as of November 1, 2008 and May 3, 2008,  respectively                                                                   |       | (11,380                   | )             | (6,243               | )          |
|                                                                                                                                                                  |       | 357,484                   |          | 372,785              |       |
|                                                                                                                                                                  |       | $                         |  437,832 |                 | $          | 470,220 |   |

 

See notes to condensed consolidated financialstatements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands,except per share data)

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **Restated**           | ** ** | ** **           | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **(Note 2)**           | ** ** | ** **           | ** ** | **(Note 2)** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **November 1,**   | ** ** | **October 27,** | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |
| ** **                                             | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| INCOME                                                 |       |                   |       |                 |       |   |   |   |   |
| Net  sales                                             |       | $                      | 121,304    |                 | $          | 133,239 |   | $ | 255,818 |   | $ | 258,248 |   |
| Other                                                  |       | 959                    |       | 527                  |       | 1,692 |   | 673 |   |
|                                                   |       | 122,263                |       | 133,766              |       | 257,510 |   | 258,921 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| COSTS  AND EXPENSES                                    |       |                   |       |                 |       |   |   |   |   |
| Cost  of products sold                                 |       | 97,815                 |       | 105,900              |       | 203,245 |   | 204,235 |   |
| Restructuring                                          |       | 6,284                  |       | —               |       | 11,201 |   | — |   |
| Selling  and administrative expenses                   |       | 18,650                 |       | 16,107               |       | 35,102 |   | 32,071 |   |
|                                                   |       | 122,749                |       | 122,007              |       | 249,548 |   | 236,306 |   |
| Income/(loss)  from operations                         |       | (486                   | )          | 11,759               |       | 7,962 |   | 22,615 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Interest  income, net                                  |       | 469                    |       | 611                  |       | 1,003 |   | 1,047 |   |
| Other,  net                                            |       | (610                   | )          | (941                 | )          | (879 | ) | (1,161 | ) |
| Income  before income taxes                            |       | (627                   | )          | 11,429               |       | 8,086 |   | 22,501 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income  taxes/(benefit)                                |       | (865                   | )          | 2,623                |       | 1,032 |   | 5,423 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| NET  INCOME                                            |       | $                      | 238        |                 | $          | 8,806 |   | $ | 7,054 |   | $ | 17,078 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Amounts  per common share:                             |       |                   |       |                 |       |   |   |   |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Basic  net income                                      |       | $                      | 0.01       |                 | $          | 0.24 |   | $ | 0.19 |   | $ | 0.46 |   |
| Diluted  net income                                    |       | $                      | 0.01       |                 | $          | 0.24 |   | $ | 0.19 |   | $ | 0.46 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Cash  dividends:                                       |       |                   |       |                 |       |   |   |   |   |
| Common  stock                                          |       | $                      | 0.07       |                 | $          | 0.05 |   | $ | 0.12 |   | $ | 0.10 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted  average number of Common Shares outstanding: |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | 37,068                 |       | 37,079               |       | 37,120 |   | 37,033 |   |
| Diluted                                                |       | 37,551                 |       | 37,467               |       | 37,584 |   | 37,476 |   |

 

See notes tocondensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 
| ** **                                                                         | ** ** | **Six Months Ended**      | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                         | ** ** | **Restated**              | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **(Note 2)**              | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **November 1, 2008** | ** ** | **October 27, 2007** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                      |       |   |   |
| Net income                                                                         |       | $                         | 7,054      |   | $ | 17,078 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                      |       |   |   |
| Non-cash translation loss                                                          |       | 2,463                     |       | — |   |
| Provision for depreciation                                                         |       | 12,489                    |       | 9,939 |   |
| Impairment of assets                                                               |       | 3,177                     |       | — |   |
| Amortization of intangibles                                                        |       | 3,052                     |       | 2,739 |   |
| Amortization of stock awards and stock options                                     |       | 1,605                     |       | 1,602 |   |
| Changes in operating assets and liabilities                                        |       | (1,160                    | )          | 10,587 |   |
| Other                                                                              |       | 735                       |       | 174 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 29,415                    |       | 42,119 |   |
|                                                                               |       |                      |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                      |       |   |   |
| Purchases of property, plant and equipment                                         |       | (9,557                    | )          | (10,082 | ) |
| Proceeds from sale of building                                                     |       | —                    |       | 960 |   |
| Acquisition of businesses                                                          |       | (56,785                   | )          | (7,350 | ) |
| Acquisition of technology licenses                                                 |       | (225                      | )          | (346 | ) |
| Joint venture dividend                                                             |       | —                    |       | (1,000 | ) |
| Other                                                                              |       | (209                      | )          | (346 | ) |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (66,776                   | )          | (18,164 | ) |
|                                                                               |       |                      |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                      |       |   |   |
| Repurchase of common stock                                                         |       | (5,137                    | )          | — |   |
| Proceeds from exercise of stock options                                            |       | 110                       |       | 1,145 |   |
| Tax benefit from stock options and awards                                          |       | 46                        |       | 190 |   |
| Cash dividends                                                                     |       | (4,528                    | )          | (3,781 | ) |
| NET CASH USED IN FINANCING ACTIVITIES                                              |       | (9,509                    | )          | (2,446 | ) |
|                                                                               |       |                      |       |   |   |
| Effect of foreign currency exchange rate changes on  cash                          |       | (4,629                    | )          | 1,250 |   |
|                                                                               |       |                      |       |   |   |
| INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                                   |       | (51,499                   | )          | 22,759 |   |
|                                                                               |       |                      |       |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 104,305                   |       | 60,091 |   |
|                                                                               |       |                      |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |       | $                         | 52,806     |   | $ | 82,850 |   |
|                                                                                    |            |                           |            |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

November 1, 2008

 

1.                                     BASISOF PRESENTATION

 

Methode Electronics, Inc. was incorporated in 1946 as an Illinoiscorporation and reincorporated in Delaware in 1966.  As used herein, “we”, “us”, “our”, the “Company”or “Methode” means Methode Electronics, Inc. and its subsidiaries.  The condensed consolidated financialstatements and related disclosures as of November 1, 2008 and results ofoperations for the three months and six months ended November 1, 2008 and October 27,2007 are unaudited, pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). The May 3, 2008 condensed consolidated balance sheet was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”).  Certaininformation and footnote disclosures normally included in the financialstatements prepared in accordance with U.S. GAAP have been condensed or omittedpursuant to such rules and regulations. In our opinion, these financial statements include all adjustments(consisting only of normal recurring adjustments) necessary for the fairstatement of the results for the interim periods.  These financial statements should be read inconjunction with the financial statements included in our latest Form 10-Kfor the year ended May 3, 2008 filed with the SEC on July 17,2008.  Results may vary from quarter toquarter for reasons other than seasonality.

 

2.                                     RESTATEMENTOF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

We have restated our balance sheet as of November 1,2008 and the related statement of income and cash flows.  Wediscovered an error related to unrealized currency exchange losses arising froman intercompany loan between our corporate headquarters and one of our foreignsubsidiaries in conjunction with a recent acquisition of Hetronic, L.L.C.,purchased on September 30, 2008. The loan amount was $20,858.  Dueto the U.S. Dollar increasing versus the Euro, from 0.6923 on September 30,2008 to 0.7850 on November 1, 2008, an unrealized currency loss of $2,463should have been recorded during the second quarter.

 

The effects of the restatement are as follows:

 

·                  Adjustment to the November 1,2008 condensed consolidated balance sheet decreases retained earnings by $2,463from $270,826 as previously reported, to $268,363 and increases the accumulatedother comprehensive income by $2,463 from $11,472 as previously reported, to$13,935.

 

·                  Adjustment to the threemonths ended November 1, 2008 condensed consolidated statement of incomedecreases other income by $2,463 from $1,853 as previously reported to anexpense of $610.  Net income for thethree months ended November 1, 2008 decreased $2,463 from $2,701 aspreviously reported to $238.  Basic anddiluted earnings per share both decreased $0.06, from $0.07 as previouslyreported to $0.01.

 

·                  Adjustment to the six monthsended November 1, 2008 condensed consolidated statement of incomedecreases other income by $2,463 from $1,584 as previously reported to anexpense of $879.  Net income for the sixmonths ended November 1, 2008 decreased $2,463 from $9,517 as previouslyreported to $7,054.  Basic earnings pershare decreased $0.07, from $0.26 as previously reported to $0.19.  Diluted earnings per share decreased $0.06,from $0.25 as previously reported to $0.19.

 

·                  Adjustmentto the six months ended November 1, 2008 condensed consolidated statementof cash flows decreases net income by $2,463, from $9,517 as previouslyreported to $7,054.  In addition, anon-cash charge of $2,463 was added back to the operating activities section ofthe condensed consolidated statement of cash flows.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

The effect of the adjustments discussed on theprevious page for the Condensed Consolidated Balance Sheet at November 1,2008 is illustrated below:

 

METHODE ELECTRONICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                                                                                                                                            | ** ** | **As Reported**           | ** **    | ** **     | ** ** | **Restated**              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|---------------|----------------|------------|---------------------------|------------|
|                                                                                                                                                                  | ** ** | **November 1, 2008** | ** **    | **Adjustment** | ** ** | **November 1, 2008** | ** ** |
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**           | ** **    | ** **     | ** ** | ** **                | ** ** |
| ASSETS                                                                                                                                                                |       |                      |          |           |       |                      |       |
| CURRENT ASSETS                                                                                                                                                        |       |                      |          |           |       |                      |       |
| Cash and cash equivalents                                                                                                                                             |       | $                         | 52,806        |           | $          | —                    |       | $ | 52,806 |   |
| Accounts receivable, net                                                                                                                                              |       | 73,599                    |          | —         |       | 73,599                    |       |
| Inventories:                                                                                                                                                          |       |                      |          |           |       |                      |       |
| Finished products                                                                                                                                                     |       | 17,369                    |          | —         |       | 17,369                    |       |
| Work in process                                                                                                                                                       |       | 17,681                    |          | —         |       | 17,681                    |       |
| Materials                                                                                                                                                             |       | 32,993                    |          | —         |       | 32,993                    |       |
|                                                                                                                                                                  |       | 68,043                    |          | —         |       | 68,043                    |       |
| Deferred income taxes                                                                                                                                                 |       | 8,485                     |          | —         |       | 8,485                     |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 6,082                     |          | —         |       | 6,082                     |       |
| TOTAL CURRENT ASSETS                                                                                                                                                  |       | 209,015                   |          | —         |       | 209,015                   |       |
|                                                                                                                                                                  |       |                      |          |           |       |                      |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                         |       | 288,166                   |          | —         |       | 288,166                   |       |
| Less allowances for depreciation                                                                                                                                      |       | 207,762                   |          | —         |       | 207,762                   |       |
|                                                                                                                                                                  |       | 80,404                    |          | —         |       | 80,404                    |       |
|                                                                                                                                                                  |       |                      |          |           |       |                      |       |
| GOODWILL                                                                                                                                                              |       | 68,085                    |          | —         |       | 68,085                    |       |
| INTANGIBLE ASSETS, net                                                                                                                                                |       | 54,184                    |          | —         |       | 54,184                    |       |
| OTHER ASSETS                                                                                                                                                          |       | 26,144                    |          | —         |       | 26,144                    |       |
|                                                                                                                                                                  |       | 148,413                   |          | —         |       | 148,413                   |       |
|                                                                                                                                                                  |       | $                         |  437,832 |           | $          | —                    |       | $ | 437,832 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                             |       |                      |          |           |       |                      |       |
|                                                                                                                                                                  |       |                      |          |           |       |                      |       |
| CURRENT LIABILITIES                                                                                                                                                   |       |                      |          |           |       |                      |       |
| Accounts payable                                                                                                                                                      |       | $                         | 32,922        |           | $          | —                    |       | $ | 32,922 |   |
| Other current liabilities                                                                                                                                             |       | 25,654                    |          | —         |       | 25,654                    |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                             |       | 58,576                    |          | —         |       | 58,576                    |       |
|                                                                                                                                                                  |       |                      |          |           |       |                      |       |
| OTHER LIABILITIES                                                                                                                                                     |       | 17,211                    |          | —         |       | 17,211                    |       |
| DEFERRED COMPENSATION                                                                                                                                                 |       | 4,561                     |          | —         |       | 4,561                     |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                             |       |                      |          |           |       |                      |       |
| Common stock, $0.50 par value, 100,000,000 shares  authorized, 38,283,075 and38,225,379 shares issued as of November 1, 2008 and May 3,  2008, respectively |       | 19,141                    |          | —         |       | 19,141                    |       |
| Unearned common stock issuances                                                                                                                                       |       | (4,257                    | )             | —         |       | (4,257                    | )          |
| Additional paid-in capital                                                                                                                                            |       | 71,682                    |          | —         |       | 71,682                    |       |
| Retained earnings                                                                                                                                                     |       | 270,826                   |          | (2,463         | )          | 268,363                   |       |
| Accumulated other comprehensive income                                                                                                                                |       | 11,472                    |          | 2,463          |       | 13,935                    |       |
| Treasury stock, 1,342,588 and 702,708 shares as of  November 1, 2008 and May 3, 2008, respectively                                                          |       | (11,380                   | )             | —         |       | (11,380                   | )          |
|                                                                                                                                                                  |       | 357,484                   |          | —         |       | 357,484                   |       |
|                                                                                                                                                                  |       | $                         |  437,832 |           | $          | —                    |       | $ | 437,832 |   |

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

The effect of theadjustments discussed above on the Condensed Consolidated Income Statement forthe three months ended as of November 1, 2008 is illustrated below.

 

METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands,except per share data)

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **As Reported**        | ** ** | ** ** | ** ** | **Restated** | ** ** |
| ** **                                            | ** ** | **November 1,**   | ** ** | ** ** | ** ** | **November 1,** | ** ** |
| ** **                                            | ** ** | **2008**               | ** ** | **Adjustment** | ** ** | **2008** | ** ** |
|                                                  |       |                   |       |   |   |   |   |
| INCOME                                                |       |                   |       |   |   |   |   |
| Net  sales                                            |       | $                      | 121,304    |   | $ | — |   | $ | 121,304 |   |
| Other                                                 |       | 959                    |       | — |   | 959 |   |
|                                                  |       | 122,263                |       | — |   | 122,263 |   |
|                                                  |       |                   |       |   |   |   |   |
| COSTS  AND EXPENSES                                   |       |                   |       |   |   |   |   |
| Cost  of products sold                                |       | 97,815                 |       | — |   | 97,815 |   |
| Restructuring                                         |       | 6,284                  |       | — |   | 6,284 |   |
| Selling  and administrative expenses                  |       | 18,650                 |       | — |   | 18,650 |   |
|                                                  |       | 122,749                |       | — |   | 122,749 |   |
| Income/(loss)  from operations                        |       | (486                   | )          | — |   | (486 | ) |
|                                                  |       |                   |       |   |   |   |   |
| Interest  income, net                                 |       | 469                    |       | — |   | 469 |   |
| Other,  net                                           |       | 1,853                  |       | (2,463 | ) | (610 | ) |
| Income  before income taxes                           |       | 1,836                  |       | (2,463 | ) | (627 | ) |
|                                                  |       |                   |       |   |   |   |   |
| Income  taxes/(benefit)                               |       | (865                   | )          | — |   | (865 | ) |
|                                                  |       |                   |       |   |   |   |   |
| NET  INCOME                                           |       | $                      | 2,701      |   | $ | (2,463 | ) | $ | 238 |   |
|                                                  |       |                   |       |   |   |   |   |
| Amounts  per common share:                            |       |                   |       |   |   |   |   |
|                                                  |       |                   |       |   |   |   |   |
| Basic  net income                                     |       | $                      | 0.07       |   | $ | (0.06 | ) | $ | 0.01 |   |
| Diluted  net income                                   |       | $                      | 0.07       |   | $ | (0.06 | ) | $ | 0.01 |   |
|                                                  |       |                   |       |   |   |   |   |
| Cash  dividends:                                      |       |                   |       |   |   |   |   |
| Common  stock                                         |       | $                      | 0.07       |   |   |   | $ | 0.07 |   |
|                                                  |       |                   |       |   |   |   |   |
| Weighted  average number ofCommon Shares outstanding: |       |                   |       |   |   |   |   |
| Basic                                                 |       | 37,068                 |       |   |   | 37,068 |   |
| Diluted                                               |       | 37,551                 |       |   |   | 37,551 |   |

 

See notes tocondensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

The effect of theadjustments discussed above on the Condensed Consolidated Income Statement forthe six months ended November 1, 2008 is illustrated below.

 

METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands,except per share data)

 
| ** **                                             | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **As Reported**      | ** ** | ** ** | ** ** | **Restated** | ** ** |
| ** **                                             | ** ** | **November 1,** | ** ** | ** ** | ** ** | **November 1,** | ** ** |
| ** **                                             | ** ** | **2008**             | ** ** | **Adjustment** | ** ** | **2008** | ** ** |
|                                                   |       |                 |       |   |   |   |   |
| INCOME                                                 |       |                 |       |   |   |   |   |
| Net  sales                                             |       | $                    | 255,818    |   | $ | — |   | $ | 255,818 |   |
| Other                                                  |       | 1,692                |       | — |   | 1,692 |   |
|                                                   |       | 257,510              |       | — |   | 257,510 |   |
|                                                   |       |                 |       |   |   |   |   |
| COSTS  AND EXPENSES                                    |       |                 |       |   |   |   |   |
| Cost  of products sold                                 |       | 203,245              |       | — |   | 203,245 |   |
| Restructuring                                          |       | 11,201               |       | — |   | 11,201 |   |
| Selling  and administrative expenses                   |       | 35,102               |       | — |   | 35,102 |   |
|                                                   |       | 249,548              |       | — |   | 249,548 |   |
| Income/(loss)  from operations                         |       | 7,962                |       | — |   | 7,962 |   |
|                                                   |       |                 |       |   |   |   |   |
| Interest  income, net                                  |       | 1,003                |       | — |   | 1,003 |   |
| Other,  net                                            |       | 1,584                |       | (2,463 | ) | (879 | ) |
| Income  before income taxes                            |       | 10,549               |       | (2,463 | ) | 8,086 |   |
|                                                   |       |                 |       |   |   |   |   |
| Income  taxes/(benefit)                                |       | 1,032                |       | — |   | 1,032 |   |
|                                                   |       |                 |       |   |   |   |   |
| NET  INCOME                                            |       | $                    | 9,517      |   | $ | (2,463 | ) | $ | 7,054 |   |
|                                                   |       |                 |       |   |   |   |   |
| Amounts  per common share:                             |       |                 |       |   |   |   |   |
|                                                   |       |                 |       |   |   |   |   |
| Basic  net income                                      |       | $                    | 0.26       |   | $ | (0.07 | ) | $ | 0.19 |   |
| Diluted  net income                                    |       | $                    | 0.25       |   | $ | (0.06 | ) | $ | 0.19 |   |
|                                                   |       |                 |       |   |   |   |   |
| Cash  dividends:                                       |       |                 |       |   |   |   |   |
| Common  stock                                          |       | $                    | 0.07       |   |   |   | $ | 0.07 |   |
|                                                   |       |                 |       |   |   |   |   |
| Weighted  average number of Common Shares outstanding: |       |                 |       |   |   |   |   |
| Basic                                                  |       | 37,120               |       |   |   | 37,120 |   |
| Diluted                                                |       | 37,584               |       |   |   | 37,584 |   |

 

See notes tocondensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

The effect of theadjustments discussed above on the condensedconsolidated cash flowstatement for the six monthsended as of November 1, 2008 is illustrated below.

 

METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 
| ** **                                                                         | ** ** | **Six Months Ended**      | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                         | ** ** | **As Reported**           | ** ** | ** ** | ** ** | **Restated** | ** ** |
| ** **                                                                         | ** ** | **November 1, 2008** | ** ** | **Adjustment** | ** ** | **November 1, 2008** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                      |       |   |   |   |   |
| Net income                                                                         |       | $                         | 9,517      |   | $ | (2,463 | ) | $ | 7,054 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                      |       |   |   |   |   |
| Non-cash translation loss                                                          |       | —                    |       | 2,463 |   | 2,463 |   |
| Provision for depreciation                                                         |       | 12,489                    |       | — |   | 12,489 |   |
| Impairment of assets                                                               |       | 3,177                     |       | — |   | 3,177 |   |
| Amortization of intangibles                                                        |       | 3,052                     |       | — |   | 3,052 |   |
| Amortization of stock awards and stock options                                     |       | 1,605                     |       | — |   | 1,605 |   |
| Changes in operating assets and liabilities                                        |       | (1,160                    | )          | — |   | (1,160 | ) |
| Other                                                                              |       | 735                       |       | — |   | 735 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 29,415                    |       | — |   | 29,415 |   |
|                                                                               |       |                      |       |   |   |   |   |
| INVESTING ACTIVITIES                                                               |       |                      |       |   |   |   |   |
| Purchases of property, plant and equipment                                         |       | (9,557                    | )          | — |   | (9,557 | ) |
| Proceeds from sale of building                                                     |       | —                    |       | — |   | — |   |
| Acquisition of businesses                                                          |       | (56,785                   | )          | — |   | (56,785 | ) |
| Acquisition of technology licenses                                                 |       | (225                      | )          | — |   | (225 | ) |
| Joint venture dividend                                                             |       | —                    |       | — |   | — |   |
| Other                                                                              |       | (209                      | )          | — |   | (209 | ) |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (66,776                   | )          | — |   | (66,776 | ) |
|                                                                               |       |                      |       |   |   |   |   |
| FINANCING ACTIVITIES                                                               |       |                      |       |   |   |   |   |
| Repurchase of common stock                                                         |       | (5,137                    | )          | — |   | (5,137 | ) |
| Proceeds from exercise of stock options                                            |       | 110                       |       | — |   | 110 |   |
| Tax benefit from stock options and awards                                          |       | 46                        |       | — |   | 46 |   |
| Cash dividends                                                                     |       | (4,528                    | )          | — |   | (4,528 | ) |
| NET CASH USED IN FINANCING ACTIVITIES                                              |       | (9,509                    | )          | — |   | (9,509 | ) |
|                                                                               |       |                      |       |   |   |   |   |
| Effect of foreign currency exchange rate changes on  cash                          |       | (4,629                    | )          | — |   | (4,629 | ) |
|                                                                               |       |                      |       |   |   |   |   |
| INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                                   |       | (51,499                   | )          | — |   | (51,499 | ) |
|                                                                               |       |                      |       |   |   |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 104,305                   |       | — |   | 104,305 |   |
|                                                                               |       |                      |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |       | $                         | 52,806     |   | — |   | $ | 52,806 |   |
|                                                                                    |            |                           |            |  |  |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

3.                                       RECENTACCOUNTING PRONOUNCEMENTS

 

We adopted Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) as of May 4, 2008 for financialassets and liabilities, and non-financial assets and liabilities that arerecognized or disclosed at fair value in the financial statements on arecurring basis. SFAS No. 157 defines fair value, establishes aframework for measuring fair value as required by other accounting pronouncementsand expands fair value measurement disclosures. The provisions of SFAS No. 157are applied prospectively upon adoption and did not have a material impact onour condensed consolidated financial statements. The disclosures required bySFAS No. 157 are included in Note 12, “Fair Value Measurements,”to our condensed consolidated financial statements.

 

In February 2008,the FASB issued FASB Staff Position No. 157-2, which delays the effectivedate of SFAS No. 157 for non-financial assets and liabilities, whichare not measured at fair value on a recurring basis (at least annually) untilfiscal years beginning after November 15, 2008, which is our fiscal year2010 that begins May 3, 2009.  Weare currently assessing the impact of adopting SFAS No. 157 for non-financialassets and liabilities on our condensed consolidated financial statements.

 

We adoptedSFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”)as of May 4, 2008. SFAS No. 159 permits entities to elect tomeasure many financial instruments and certain other items at fair value. Wedid not elect the fair value option for any assets or liabilities, which werenot previously carried at fair value. Accordingly, the adoption of SFAS No. 159had no impact on our condensed consolidated financial statements.

 

We adoptedEmerging Issues Task Force (EITF) No. 06-4, “Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements” (“EITF No. 06-4”) as of May 4,2008. EITF No. 06-4 requires that endorsement split-dollar lifeinsurance arrangements, which provide a benefit to an employee beyond thepostretirement period be recorded in accordance with SFAS No. 106, “Employer’sAccounting for Postretirement Benefits Other Than Pensions” or AccountingPrinciple Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967” based onthe substance of the agreement with the employee.  The adoption of EITF No. 06-4 had noimpact on our condensed consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”),a revision of SFAS No. 141, “Business Combinations.” SFAS No. 141Restablishes requirements for the recognition and measurement of acquiredassets, liabilities, goodwill and non-controlling interests. SFAS No. 141Ralso provides disclosure requirements related to business combinations.SFAS No. 141R is effective for fiscal years beginning after December 15,2008, which is our fiscal year 2010 that begins May 3, 2009. SFAS No. 141Rwill be applied prospectively to business combinations with an acquisition dateon or after the effective date.  Thisstatement will generally affect acquisitions occurring after the adoption date.

 

In December 2007,the FASB issued SFAS No. 160, “Non-Controlling Interests inConsolidated Financial Statements an amendment of ARB No. 51” (“SFAS No. 160”).SFAS No. 160 establishes new standards for the accounting for andreporting of non-controlling interests (formerly minority interests) and forthe loss of control of partially owned and consolidated subsidiaries.SFAS No. 160 does not change the criteria for consolidating apartially owned entity. SFAS No. 160 is effective for fiscal yearsbeginning after December 15, 2008, which is our fiscal year 2010 thatbegins May 3, 2009. The provisions of SFAS No. 160 will beapplied prospectively upon adoption except for the presentation and disclosurerequirements, which will be applied retrospectively. We do not expect theadoption of SFAS No. 160 to have a material impact on our condensedconsolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of SFAS No. 133” (“SFAS No. 161”).SFAS No. 161 requires enhanced disclosures about an entity’sderivative and hedging activities and is effective for fiscal years and interimperiods beginning after November 15, 2008, which is our fiscal year 2010that begins May 3, 2009. We do not believe the adoption of SFAS No. 161will have a material impact on our condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

3.             RECENT ACCOUNTING PRONOUNCEMENTS - Continued

 

In April 2008,the FASB issued FASB Staff Position No. FAS 142-3, “Determination of theUseful Life of Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,“Goodwill and Other Intangible Assets.” This provision of FSP 142-3 will be effective for financial statementsissued for fiscal years beginning after December 15, 2008, which is ourfiscal year 2010 that begins May 3, 2009. Early adoption is prohibited. Since this guidance will be applied prospectively, on adoption, therewill be no impact to our financial position, results of operations or cashflows.

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS No 162”). SFAS No. 162 identifies the sources of accounting principles andthe framework for selecting the principles to be used in the preparation offinancial statements.  SFAS No. 162is effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board (“PCAOB”) amendments to AU Section 411, “TheMeaning of ‘Present Fairly in Conformity With Generally Accepted AccountingPrinciples’ “.  We do not believe theadoption of this standard will have a material impact on our condensedconsolidated financial statements.

 

4.                                       RESTRUCTURING

 

On January 24, 2008, we announced a restructuring of ourU.S.-based automotive operations and a decision to discontinue producingcertain legacy products in the Interconnect segment.  The Automotive and Interconnect restructuringis expected to be completed during fiscal 2010. We record the expense in the restructuring section of our condensedconsolidated statement of income. We estimate that we will record additionalpre-tax charges through fiscal 2010 of between $5,000 and $10,000, of which$2,000 to $3,000 will relate to the termination of approximately 550 employeesand the cost of one-time employee benefits, retention, COBRA and outplacementservices.  During the second quarter offiscal 2009, we recorded impairment charges on our fixed assets of $2,705 and$472 for the Automotive and Interconnect segments, respectively. Based on the rules ofSFAS No. 144, we concluded that the future estimated cash flows did notsupport the current net book values of the assets (before the impairmentadjustment) due to lower forecasted sales in the Automotive and Interconnectsegments.  We will continue to performperiodic impairment testing, if indicators exist,  and will record any charges incurred as perSFAS No. 144, ‘Accounting for the Impairment or Disposal of Long-LivedAssets, (“SFAS No. 144”)’ in the period when impairment is incurred.

 

Duringthe fiscal quarter ended November 1, 2008, we recorded a restructuringcharge of $6,284, which consisted of $1,609 for employee severance, $4,350 inimpairment and accelerated depreciation for buildings and improvements andmachinery and equipment and $325 relating to professional fees.  As of November 1, 2008, we had anaccrued restructuring liability of $5,297 reflected in the current liabilitiessection of our condensed consolidated balance sheet.  We expect the majority of this liability tobe paid out during fiscal 2010.

 

Duringthe six months ended November 1, 2008, we recorded a restructuring chargeof $11,201, which consisted of $4,430 for employee severance, $5,900 inimpairments and accelerated depreciation for buildings and improvements andmachinery and equipment, $153 in inventory write-downs and $718 relating toprofessional fees.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

The table below reflectsthe activity for restructuring as of November 1, 2008:

 
| ** **                                    | ** ** | **One-Time** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|--------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **Employee** | ** ** | **Asset**       | ** ** | **Other**  | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Benefits** | ** ** | **Write-Downs** | ** ** | **Costs**  | ** ** | **Total**  | ** ** |
|                                          |       |         |       |            |       |       |       |       |       |
| FY  2008 restructuring charges                |       | $            | 3,355      |            | $          | 1,346      |       | $          | 458        |   | $ | 5,159 |   |
| Payments  and asset write-downs               |       | (203         | )          | (1,346          | )          | (434       | )          | (1,983     | )          |
| Accrued  balance at May 3, 2008          |       | 3,152        |       | —          |       | 24         |       | 3,176      |       |
|                                          |       |         |       |            |       |       |       |       |       |
| First  Quarter FY 2009 restructuring charges  |       | 2,821        |       | 1,703           |       | 393        |       | 4,917      |       |
| Payments  and asset write-downs               |       | (1,556       | )          | (1,703          | )          | (417       | )          | (3,676     | )          |
| Accrued  balance at August 2, 2008       |       | 4,417        |       | —          |       | —     |       | 4,417      |       |
|                                          |       |         |       |            |       |       |       |       |       |
| Second  Quarter FY 2009 restructuring charges |       | 1,609        |       | 4,350           |       | 325        |       | 6,284      |       |
| Payments  and asset write-downs               |       | (729         | )          | (4,350          | )          | (325       | )          | (5,404     | )          |
| Accrued  balance at November 1, 2008     |       | 5,297        |       | —          |       | —     |       | 5,297      |       |
|                                               |            |              |            |                 |            |            |            |            |            |  |  |  |  |

 

5.                                       COMPREHENSIVEINCOME/(LOSS)

 

The components ofour comprehensive income/(loss) for the three months and six months ended November 1,2008 and October 27, 2007 include net income and adjustments tostockholders’ equity for foreign currency translations.  The foreign currency translation adjustmentwas due to exchange rate fluctuations in our foreign affiliates’ local currencyversus the U.S. dollar.

 

The following table presents details of our comprehensiveincome/(loss):

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Restated**           | ** ** | ** **           | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **(Note 2)**           | ** ** | ** **           | ** ** | **(Note 2)** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **November 1,**        | ** ** | **October 27,**      | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |
| ** **                         | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                   |       |                 |       |   |   |   |   |
| Net income                         |       | $                      | 238        |                 | $          | 8,806 |   | $ | 7,054 |   | $ | 17,078 |   |
| Translation  adjustment            |       | (16,181                | )          | 4,309                |       | (14,446 | ) | 4,061 |   |
| Total  comprehensive income/(loss) |       | $                      | (15,943    | )                    | $          | 13,115 |   | $ | (7,392 | ) | $ | 21,139 |   |

 

6.                                       GOODWILL ANDINTANGIBLE ASSETS

 

We review our goodwill and other intangible assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof these assets may not be recoverable, and we also review our goodwillannually in accordance with SFAS No. 142, Goodwill and Other Intangibles.  The values assigned to goodwill andintangible assets are normally based on estimates and judgments regardingexpectations for the success and life cycle of products and technologiesacquired.  A severe decline inexpectations could result in significant impairment charges, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

6.                                       GOODWILL ANDINTANGIBLE ASSETS - Continued

 

One potential indicator of goodwill and otherintangible asset impairment is whether our fair value, as measured by ourmarket capitalization, has remained below our net book value for a significantperiod of time.  During the second quarterof fiscal 2009, the lowest closing price of our common stock was $6.11, asreported by the New York Stock Exchange, which corresponds to a marketcapitalization of approximately $231,197, compared to our November 1, 2008net book value of approximately $357,484. Based on this event and general business declines, including theAutomotive segment, we performed “step one” of the goodwill impairment test inaccordance with paragraph 19 of SFAS No. 142, on the reporting units thathave goodwill as of November 1, 2008. Based on this test, we determined that the fair value was less than thecarrying value of the net assets for certain reporting units.  We have not yet completed “step two” of theimpairment test, and, as of the filing of this 10-Q, impairment is possible butis not reasonably estimable.  The amountof goodwill associated to these reporting units is $29,237.

 

In accordance with FASBStatement No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets, the Company records impairment losses on long-lived assets used inoperations when events and circumstances indicate that long-lived assets mightbe impaired and the undiscounted cash flows estimated to be generated by thoseassets are less than the carrying amounts of those assets. During the secondquarter of 2009, events and circumstances indicated that $15,192 million ofidentifiable intangible assets of the TouchSensor business might beimpaired.  However, the Company’sestimate of undiscounted cash flows indicated that such carrying amounts areexpected to be recovered.   Nonetheless, it is reasonably possible thatthe estimate of undiscounted cash flows may change in the near term resultingin the need to write down those assets to fair value.

 

On September 30, 2008, we acquired certain assets of Hetronic LLC(Hetronic) for $53,639 in cash.  We alsoincurred $2,367 in transaction costs related to the purchase.  Hetronic is a global leader in industrialsafety radio remote controls with locations in the U.S., Malta, the Philippinesand Germany.  Hetronic is represented in45 countries by direct sales associates, licensed partners, distributors andrepresentatives.  Hetronic providesapplication specific and standard controls to many different industries, suchas material handling, transportation, mining, military, agriculture andconstruction.

 

On a preliminary basis, based on a third-party valuation report, thetangible net assets acquired had a fair value of $27,265.  The fair values assigned to intangible assetsacquired were $11,430 for customer relationships, $2,700 for the trade name andtrademarks, $1,500 for technology valuation, and $260 for non-compete,resulting in $12,851 of goodwill.  Thecustomer relationships, technology valuation and non-compete will be amortizedover 5 to approximately 12 years.  Thetrade name and trademarks are not subject to amortization but will be subjectto periodic impairment testing.  Theaccounts and transactions of Hetronic have been included in the Interconnectsegment in the consolidated financial statements from the effective date of theacquisition.  Based on the nature of theHetronic business, a significant portion of their inventory is rawmaterial.  This is the primary reason whythe total company consolidated raw material inventory increased as of November 1,2008 as compared to April 28, 2008.

 

In connection with the Power Products segment’s acquisition of CablecoTechnologies in fiscal 2005, additional contingent consideration may be due ifcertain operational and financial targets are met.  Additional goodwill of up to $4,257 mayresult from future contingent payments for this acquisition.

 

On August 31, 2007, we acquired 100% of the assets of ValueEngineered Products, Inc. (VEP) for $5,750 in cash, plus transaction costsof $79.  VEP is a thermal managementsolutions provider, manufacturing heat sinks and related products forhigh-powered applications.  Thesecomponents complement our Power Products product offerings and, in someinstances, are joined with bus bars to aid thermal management of powersystems.  The terms of the acquisitionprovided for an additional payment of up to a maximum of $1,000 if salesreached specified targets during the twelve-month period following theclose.  The final payout was $758,recorded in the second quarter of fiscal 2009.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

6.                                       GOODWILL ANDINTANGIBLE ASSETS - Continued

 

Based on a third-party valuation report, the tangiblenet assets acquired in the VEP transaction had a fair value of $915.  The fair values assigned to intangible assetsacquired were $2,900 for customer relationships, $600 for trademarks, resultingin $2,172 of goodwill.  The customerrelationships acquired are being amortized over a period of approximately 16years, which began in September 2007. The trademark intangible assets are not subject to amortization but willbe subject to periodic impairment testing. The accounts and transactions of the acquired business have beenincluded in the Power Products segment in the consolidated financial statementsfrom the effective date of the acquisition.

 

The following tables present details ofthe Company’s intangible assets:

 
| ** **                             | ** ** | **As of November 1, 2008** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | ** **                      | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Gross**                       | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Customer  relationships and agreements |       | $                               | 52,517     |   | $ | 21,324 |   | $ | 31,193 |   |
| Patents  and technology licenses       |       | 29,077                          |       | 6,531 |   | 22,546 |   |
| Covenants  not to compete              |       | 2,740                           |       | 2,295 |   | 445 |   |
| Total                                  |       | $                               | 84,334     |   | $ | 30,150 |   | $ | 54,184 |   |

 
| ** **                             | ** ** | **As of May 3, 2008** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Gross**                  | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Customer  relationships and agreements |       | $                          | 41,324     |   | $ | 19,168 |   | $ | 22,156 |   |
| Patents  and technology licenses       |       | 24,692                     |       | 5,795 |   | 18,897 |   |
| Covenants  not to compete              |       | 2,480                      |       | 2,251 |   | 229 |   |
| Total                                  |       | $                          | 68,496     |   | $ | 27,214 |   | $ | 41,282 |   |

 

The intangible assets for customer relationshipsand agreements includes $1,840 and $2,278 as of November 1, 2008 and May 3,2008, respectively, of net value assigned to a supply agreement with DelphiCorporation.  Delphi is currentlyoperating under a bankruptcy petition filed on October 8, 2005.  We continue to supply product to Delphipost-petition pursuant to this supply agreement and have determined that thevalue of the supply agreement has not been impaired.

 

The estimated aggregate amortization expense forfiscal 2009 and each of the four succeeding fiscal years is as follows:

 
| 2009 |   | $     | 7,570  |   |
|------|--------|-------|--------|--------|
| 2010 |   | 8,496 |   |
| 2011 |   | 7,340 |   |
| 2012 |   | 5,671 |   |
| 2013 |   | 4,415 |   |

 

7.                                       INCOME TAXES

 

We recognize interest and penalties accrued related to the unrecognizedtax benefits in the provision for income taxes. During the three months and six months ended November 1, 2008, we recognized$75 and $42 in interest, respectively and zero in penalties.  We had approximately $901 for the payment ofinterest and zero for the payment of penalties accrued at November 1,2008.  The total unrecognized taxbenefits as of November 1, 2008 was $5,770.

 

We believe that it is reasonably possible that the total amount ofunrecognized tax benefits will change within the next twelve months.  We have certain tax return years subject tostatutes of limitation, which will close

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

7.                                       INCOME TAXES - Continued

 

withintwelve months of the end of the quarter. Unless challenged by tax authorities, the closure of those statutes oflimitation is expected to result in the recognition of uncertain tax positionsin the amount of $493.

 

The Company and all of its domestic subsidiaries file income taxreturns in the U.S. federal jurisdiction and various states.  Our foreign subsidiaries file income taxreturns in certain foreign jurisdictions since they have operations outside theU.S.  The Company and its subsidiariesare generally no longer subject to U.S. federal, state and local examinationsby tax authorities for years before fiscal year 2005.

 

8.                                       COMMON STOCK AND STOCK-BASED COMPENSATION

 

Thefollowing table sets forth the changes in the number of issued shares of commonstock during the six month period presented:

 
| ** **                              | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **November 1,**      | ** ** | **October 27,** | ** ** |
| ** **                              | ** ** | **2008**             | ** ** | **2007** | ** ** |
|                                    |       |                 |       |   |   |
| Balance at the  beginning of the period |       | 38,225,379           |       | 37,950,829 |   |
| Options exercised                       |       | 19,089               |       | 100,730 |   |
| Restricted stock  awards vested         |       | 38,607               |       | 46,967 |   |
| Balance at the  end of the period       |       | 38,283,075           |       | 38,098,526 |   |

 

Wepaid quarterly dividends of $2,633 and $1,895 on October 31, 2008 and August 1,2008, respectively.  We intend to retain theremainder of our earnings not used for dividend payments to provide funds forthe operation and expansion of our business. Our Board of Directors approved a stock repurchase plan on September 18,2008 to repurchase up to 3,000,000 shares. The plan expires at the end of fiscal 2010.  There were 639,880 shares purchased duringthe second quarter of fiscal 2009 at an average price of $8.03 per share.

 

Thefollowing tables summarize the stock option activity and related informationfor the six months ended November 1, 2008:

 
| ** **                            | ** ** | **Summary of Option Activity** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | ** **                     | ** ** | **Wtd. Avg.** | ** ** |
| ** **                            | ** ** | **Shares**                     | ** ** | **Exercise Price** | ** ** |
| Outstanding  at May 3, 2008      |       | 689,689                        |       | $ | 10.26 |   |
| Exercised                             |       | (19,089                        | )          | 5.90 |   |
| Forfeited                             |       | (15,921                        | )          | 11.68 |   |
| Outstanding  at November 1, 2008 |       | 654,679                        |       | 10.35 |   |
|                                       |            |                                |            |  |  |  |

 
| **Options Outstanding and**              | ** ** |
|------------------------------------------|------------|
| **Exercisable at November 1, 2008** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** | **Avg.** | ** ** |
| **Range of**                             | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining** | ** ** |
| **Exercise Prices**                      | ** ** | **Shares** | ** ** | **Price** | ** ** | **Life (Years)** | ** ** |
| $5.12  - $7.69                           |       | 161,025 |   | $ | 6.71 |   | 2.5 |   |
| $8.08  - $11.64                          |       | 353,305 |   | 10.58 |   | 2.4 |   |
| $12.11  - $17.66                         |       | 140,349 |   | 13.94 |   | 1.5 |   |
|                                     |       | 654,679 |   | 10.35 |   |   |   |
|                                          |            |  |  |  |  |  |  |  |

 

Theaggregate intrinsic value of all options outstanding at November 1, 2008was $142.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

8.                                       COMMONSTOCK AND STOCK-BASED COMPENSATION - Continued

 

Priorto June 21, 2007, we had three active stock plans, the Methode Electronics, Inc.1997 Stock Plan, the Methode Electronics, Inc. 2000 Stock Plan, and theMethode Electronics, Inc. 2004 Stock Plan. No options were granted under the Plans since the first quarter offiscal 2005.  As of November 1,2008, we had 654,679 unexercised stock options, all of which are fully vestedand have a term of ten years.   There isno remaining unrecognized compensation expense relating to the stock options.

 

In April 2007, 225,000 shares of commonstock subject to performance-based Restricted Stock Awards (RSAs) granted toour CEO in fiscal 2006 and 2007 were converted to Restricted Stock Units(RSUs).  The RSUs are subject to the samevesting schedule and other major provisions of the RSAs they replaced, exceptthe RSUs are not payable until the earlier of: (1) thirty days after theCEO’s date of termination of employment with the Company and all of itssubsidiaries and affiliates; or (2) the last day of our fiscal year inwhich the payment of common stock in satisfaction of the RSUs becomesdeductible to the Company under Section 162(m) of the InternalRevenue Code.  All further discussion ofRSAs in this report includes the RSUs described above.

 

At the beginning of fiscal year 2009, there were582,298 performance-based and time-based RSAs outstanding.  The time-based RSAs vest in three equalannual installments from the grant date. All RSAs awarded to senior management are performance-based and vestafter three years if the recipient remains employed by the Company until thatdate and we have met certain revenue growth and return on invested capitaltargets.  All of the unvested RSAs areentitled to voting rights and to payment of dividends.  During the six months ended November 1,2008, we awarded 340,665 restricted stock awards.  Of the shares granted, 24,000 shares vestimmediately upon grant, 256,565 are performance-based RSAs and 60,100 aretime-based RSAs.

 

Werecognized pre-tax compensation expense for RSAs of $1,603 and $1,591 in thesix months ended November 1, 2008 and October 27, 2007,respectively.  We record the expense inthe selling and administrative section of our condensed consolidated statementof income.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

8.             COMMON STOCK AND STOCK-BASEDCOMPENSATION - Continued

 

The following tablesummarizes the RSA activity for the six months ended November 1, 2008:

 
| ** **                         | ** ** | **Shares** | ** ** |
|------------------------------------|------------|------------|------------|
| Unvested  at May 3, 2008      |       | 582,298    |       |
| Awarded                            |       | 340,665    |       |
| Vested                             |       | (24,332    | )          |
| Forfeited                          |       | —     |       |
| Unvested  at November 1, 2008 |       | 898,631    |       |

 

The table below shows theCompany’s unvested RSAs at November 1, 2008:

 
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Probable**              | ** ** | **Target**                | ** ** |
|------------|------------|------------|------------|-----------------------------------|------------|--------------|------------|---------------------------|------------|---------------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Unearned**              | ** ** | **Unearned**              | ** ** |
| **Grant**  | ** ** | ** ** | ** ** | ** **                        | ** ** | **Weighted** | ** ** | **Compensation**          | ** ** | **Compensation**          | ** ** |
| **Fiscal** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Average**  | ** ** | **Expense at**            | ** ** | **Expense at**            | ** ** |
| **Year**   | ** ** | **RSAs**   | ** ** | **Vesting Period**                | ** ** | **Value**    | ** ** | **November 1, 2008** | ** ** | **November 1, 2008** | ** ** |
| 2006       |       | 832        |       | 3-year equal annual  installments |       | 10.84        |       | —                    |       | —                    |       |
| 2006       |       | 125,000    |       | 3-year cliff                      |       | 12.42        |       | —                    |       | —                    |       |
| 2007       |       | 24,757     |       | 3-year equal annual  installments |       | 7.87         |       | 27                        |       | 27                        |       |
| 2007       |       | 227,750    |       | 3-year cliff                      |       | 7.79         |       | 307                       |       | 307                       |       |
| 2008       |       | 38,954     |       | 3-year equal annual  installments |       | 14.97        |       | 218                       |       | 218                       |       |
| 2008       |       | 164,673    |       | 3-year cliff                      |       | 15.14        |       | 1,388                     |       | 1,388                     |       |
| 2009       |       | 60,100     |       | 3-year equal annual  installments |       | 11.35        |       | 509                       |       | 509                       |       |
| 2009       |       | 256,565    |       | 3-year cliff                      |       | 11.35        |       | 2,509                     |       | 2,509                     |       |

 

At November 1, 2008,the aggregate unvested RSAs had a weighted average fair value of $11.35 and aweighted average vesting period of approximately 16 months.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

9.                                       EARNINGS PERSHARE

 

Basic earnings pershare (EPS) is calculated by dividing net earnings by the weighted averagenumber of common shares outstanding for the applicable period.  Diluted EPS is calculated after adjusting thenumerator and the denominator of the basic EPS calculation for the effect ofall potential dilutive common shares outstanding during the period.

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 
| ** **                                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                            | ** ** | **Restated**           | ** ** | ** **           | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                                                                            | ** ** | **(Note 2)**           | ** ** | ** **           | ** ** | **(Note 2)** | ** ** | ** ** | ** ** |
| ** **                                                                                            | ** ** | **November 1,**   | ** ** | **October 27,** | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |
| ** **                                                                                            | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                  |       |                   |       |                 |       |   |   |   |   |
| Numerator  - net income                                                                               |       | $                      | 238        |                 | $          | 8,806 |   | $ | 7,054 |   | $ | 17,078 |   |
|                                                                                                  |       |                   |       |                 |       |   |   |   |   |
| Denominator:                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Denominator  for basic earnings per share-weighted average shares                                     |       | 37,068                 |       | 37,079               |       | 37,120 |   | 37,033 |   |
| Dilutive  potential common shares-employee and director stock options                                 |       | 483                    |       | 388                  |       | 465 |   | 443 |   |
| Denominator  for diluted earnings per share adjusted weighted average shares and assumed  conversions |       | 37,551                 |       | 37,467               |       | 37,584 |   | 37,476 |   |
|                                                                                                  |       |                   |       |                 |       |   |   |   |   |
| Basic  and diluted net income per share:                                                              |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                 |       | $                      | 0.01       |                 | $          | 0.24 |   | $ | 0.20 |   | $ | 0.46 |   |
| Diluted                                                                                               |       | $                      | 0.01       |                 | $          | 0.24 |   | $ | 0.19 |   | $ | 0.46 |   |

 

Options to purchase304,522 shares of common stock at a weighted-average exercise price of $12.54 pershare were outstanding as of November 1, 2008, but were not included inthe computation of diluted earnings per share because the exercise prices weregreater than the average market price of the common stock and, therefore, theeffect would be antidilutive.

 

10.                                 SEGMENT INFORMATION

 

We area global manufacturer of component and subsystem devices.  We design, manufacture and market devicesemploying electrical, radio remote control, electronic, wireless, sensing andoptical technologies.  Our components arefound in the primary end markets of the automotive, appliance, communications(including information processing and storage, networking equipment, wirelessand terrestrial voice/data systems), aerospace, rail and other transportationindustries, consumer and industrial equipment markets.

 

Wereport in four operating segments – Automotive, Interconnect, Power Productsand Other.  The Company’s systems are notdesigned to capture information by smaller product groups and it would beimpracticable to breakdown the Company’s sales into smaller product groups.

 

OnJanuary 24, 2008, we announced a restructuring of our U.S.-based automotiveoperations and a decision to discontinue producing certain legacy products inthe Interconnect segment.  During thethree months ended November 1, 2008, we recorded a restructuring charge of$4,351 and $1,933 for the Automotive and Interconnect segments,respectively.  During the six monthsended November 1, 2008, we recorded a restructuring charge of $7,514 and $3,687for the Automotive and Interconnect segments, respectively.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

10.                                SEGMENTINFORMATION - Continued

 

The Automotive segment supplieselectronic and electromechanical devices and related products to automobileOEMs, either directly or through their tiered suppliers, including controlswitches for electrical power and signals, connectors for electrical devices,integrated control components, switches and sensors that monitor the operationor status of a component or system, and packaging of electrical components.

 

The Interconnect segment provides avariety of copper and fiber-optic interconnect and interface solutions for theaerospace, appliance, commercial, computer, construction, consumer, materialhandling, medical, military, mining, networking, storage, andtelecommunications markets.  Solutionsinclude solid-state field effect interface panels, PC and express cardpackaging, industrial safety radio remote control, optical and coppertransceivers, terminators, connectors, custom cable assemblies and conductivepolymer and thick film inks.  Servicesinclude the design and installation of fiber optic and copper infrastructuresystems, and manufacturing of active and passive optical components.

 

ThePower Products segment manufactures current-carrying laminated bus devices,custom power-product assemblies; powder coated bus bars, braided flexiblecables and high-current low voltage flexible power cabling systems that areused in various markets and applications, including telecommunications,computers, transportation, industrial and power conversion, insulated gatebipolar transistor solutions, aerospace and military.

 

TheOther segment includes a designer and manufacturer of magnetic torque sensingproducts, and independent laboratories that provide services for qualificationtesting and certification, and analysis of electronic and optical components.

 

The accounting policies of the segmentsare the same as those described in the summary of significant accountingpolicies.  We allocate resources to andevaluate performance of segments based on operating income. Transfers betweensegments are recorded using internal transfer prices set by us.

 

The identifiableassets for the Automotive segment decreased $34,912 to $150,993 as of November 1,2008, compared to $185,905 as of May 3, 2008.  The decrease is primarily due to restructuringcharges for fixed assets and a general decrease in business.  The identifiable assets for the Interconnectsegment increased $47,694 to 182,106 as of November 1, 2008, compared to$134,412 as of May 3, 2008.  Theincrease is primarily due to the acquisition of Hetronic, which was funded byCorporate.

 

Below is a table of identifiable assets for each segmentas of November 1, 2008 and May 3, 2008:

 
| ** **                 | ** ** | **November 1, 2008** | ** ** | **May 3, 2008** | ** ** | **Net Change** | ** ** |
|----------------------------|------------|---------------------------|------------|----------------------|------------|----------------|------------|
| Automotive                 |       | 150,993                   |       | 185,905              |       | (34,912        | )          |
| Interconnect               |       | 182,106                   |       | 134,412              |       | 47,694         |       |
| Power  Products            |       | 36,977                    |       | 37,063               |       | (86            | )          |
| Other                      |       | 7,926                     |       | 7,332                |       | 594            |       |
| Corporate                  |       | 59,830                    |       | 105,508              |       | (45,678        | )          |
| Total  Identifiable Assets |       | 437,832                   |       | 470,220              |       | (32,388        | )          |

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

10.                                 SEGMENTINFORMATION - Continued

 

The table below presents informationabout our reportable segments:

 
| ** **                                            | ** ** | **Three Months Ended November 1, 2008** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                            | ** ** | **Restated**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(Note 2)**                                 | ** ** | ** ** | ** ** | **Power** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       | **Automotive**                               |       | **Inter-Connect** |   | **Distribution** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                             |       | $                                            | 75,207     |   | $ | 32,146 |   | $ | 11,676 |   | $ | 2,556 |   | $ | 281 |   | $ | 121,304 |   |
| Transfers between segments                            |       | —                                       |       | (143 | ) | (112 | ) | (26 | ) | (281 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                            | 75,207     |   | $ | 32,003 |   | $ | 11,564 |   | $ | 2,530 |   | $ | — |   | $ | 121,304 |   |
| Segment income (loss) before restructuring charge     |       | $                                            | 10,528     |   | $ | (638 | ) | $ | 482 |   | $ | (750 | ) | $ | — |   | $ | 9,622 |   |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (4,351                                       | )          | (1,933 | ) | — |   | — |   | — |   | (6,284 | ) |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                            | 6,177      |   | $ | (2,571 | ) | $ | 482 |   | $ | (750 | ) | $ | — |   | $ | 3,338 |   |
| Corporate expenses, net                               |       |                                         |       |   |   |   |   |   |   |   |   | (3,965 | ) |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                         |       |   |   |   |   |   |   |   |   | $ | (627 | ) |

 
| ** **                                            | ** ** | **Three Months Ended****October 27, 2007** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                  |       | ** **                                      |       | ** ** |   | **Power** |   | ** ** |   | ** ** |   | ** ** |   |
|                                                  |       | **Automotive**                                  |       | **Inter-Connect** |   | **Distribution** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                             |       | $                                               | 89,806     |   | $ | 30,472 |   | $ | 11,848 |   | $ | 1,587 |   | $ | 474 |   | $ | 133,239 |   |
| Transfers between segments                            |       | —                                          |       | (213 | ) | (246 | ) | (15 | ) | (474 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                               | 89,806     |   | $ | 30,259 |   | $ | 11,602 |   | $ | 1,572 |   | $ | — |   | $ | 133,239 |   |
| Segment income (loss) before restructuring charge     |       | $                                               | 13,300     |   | $ | 1,157 |   | $ | 2,129 |   | $ | (407 | ) | $ | — |   | $ | 16,179 |   |
|                                                  |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | —                                          |       | — |   | — |   | — |   | — |   | — |   |
|                                                  |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                               | 13,300     |   | $ | 1,157 |   | $ | 2,129 |   | $ | (407 | ) | $ | — |   | $ | 16,179 |   |
| Corporate expenses, net                               |       |                                            |       |   |   |   |   |   |   |   |   | (4,750 | ) |
|                                                  |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                            |       |   |   |   |   |   |   |   |   | $ | 11,429 |   |

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

10.                                 SEGMENTINFORMATION - Continued

 
| ** **                                            | ** ** | **Six  Months Ended November 1, 2008** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **Restated**                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(Note 2)**                                | ** ** | ** ** | ** ** | **Power** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       | **Automotive**                              |       | **Inter-Connect** |   | **Distribution** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                             |       | $                                           | 159,940    |   | $ | 67,865 |   | $ | 23,810 |   | $ | 4,778 |   | $ | 575 |   | $ | 255,818 |   |
| Transfers between segments                            |       | —                                      |       | (275 | ) | (245 | ) | (55 | ) | (575 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                           | 159,940    |   | $ | 67,590 |   | $ | 23,565 |   | $ | 4,723 |   | $ | — |   | $ | 255,818 |   |
| Segment income (loss) before restructuring charge     |       | $                                           | 24,126     |   | $ | 1,536 |   | $ | 1,284 |   | $ | (1,332 | ) | $ | — |   | $ | 25,614 |   |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (7,514                                      | )          | (3,687 | ) | — |   | — |   | — |   | (11,201 | ) |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                           | 16,612     |   | $ | (2,151 | ) | $ | 1,284 |   | $ | (1,332 | ) | $ | — |   | $ | 14,413 |   |
| Corporate expenses, net                               |       |                                        |       |   |   |   |   |   |   |   |   | (6,327 | ) |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                        |       |   |   |   |   |   |   |   |   | $ | 8,086 |   |

 
| ** **                                            | ** ** | **Six  Months Ended October 27, 2007** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
|                                                  |       | ** **                                  |       | ** ** |   | **Power** |   | ** ** |   | ** ** |   | ** ** |   |
|                                                  |       | **Automotive**                              |       | **Inter-Connect** |   | **Distribution** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                             |       | $                                           | 172,668    |   | $ | 62,058 |   | $ | 21,183 |   | $ | 3,261 |   | $ | 922 |   | $ | 258,248 |   |
| Transfers between segments                            |       | —                                      |       | (391 | ) | (501 | ) | (30 | ) | (922 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                           | 172,668    |   | $ | 61,667 |   | $ | 20,682 |   | $ | 3,231 |   | $ | — |   | $ | 258,248 |   |
| Segment income (loss) before restructuring charge     |       | $                                           | 25,042     |   | $ | 3,558 |   | $ | 3,978 |   | $ | (682 | ) | $ | — |   | $ | 31,896 |   |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | —                                      |       | — |   | — |   | — |   | — |   | — |   |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                           | 25,042     |   | $ | 3,558 |   | $ | 3,978 |   | $ | (682 | ) | $ | — |   | $ | 31,896 |   |
| Corporate expenses, net                               |       |                                        |       |   |   |   |   |   |   |   |   | (9,395 | ) |
|                                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                        |       |   |   |   |   |   |   |   |   | $ | 22,501 |   |

 

11.                                 CONTINGENCIES

 

Certain litigation arising in the normal course of business is pendingagainst us.  We are from time to timesubject to various legal actions and claims incidental to our business,including those arising out of alleged defects, breach of contracts,employment-related matters and environmental matters.  We consider insurance coverage andthird-party indemnification when determining required accruals for pendinglitigation and claims.  Although theoutcome of potential legal actions and claims cannot be determined, it is ouropinion, based on the information available, that we have adequate reserves for theseliabilities and that the ultimate resolution of these matters will not have amaterial effect on our consolidated financial statements.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

12.                                 PRE-PRODUCTIONCOSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS

 

We incur pre-production tooling costs relatedto certain products produced for our customers under long-term supplyagreements.  We had $8,039 and $8,211 asof fiscal periods ended November 1, 2008 and May 3, 2008,respectively, of pre-production tooling costs related to customer-owned toolsfor which reimbursement is contractually guaranteed by the customer or forwhich the customer has provided a non-cancelable right to use the tooling.  These amounts are included in ourwork-in-process inventory in the condensed consolidated balance sheets.  Net revenues and costs on projects aredeferred and recognized over the life of the related long-term supplyagreement.

 

13.                                 FAIRVALUE MEASUREMENTS

 

We adopted SFAS No. 157,“Fair Value Measurements” as of May 4, 2008.  SFAS No. 157 defines fair value as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants.

 

In February 2008,the FASB issued FASB Staff Position No. 157-2, which delays the effectivedate of SFAS No. 157 for non-financial assets and liabilities, whichare not measured at fair value on a recurring basis (at least annually) untilfiscal years beginning after November 15, 2008, which is our fiscal year2010 that begins May 3, 2009.  Weare currently assessing the impact of adopting SFAS No. 157 fornon-financial assets and liabilities on our condensed consolidated financialstatements.

 

SFAS No. 157also specifies a fair value hierarchy based upon the observation of inputs invaluation techniques.  Observable inputs(highest level) reflect market data obtained from independent sources, whileunobservable inputs (lowest level) reflect internally developed marketassumptions.  In accordance with SFAS No. 157,fair value measurements are classified under the following hierarchy:

 

·               Level 1 — Quoted prices in active markets for identical assets andliabilities.

 

·               Level 2 — Quoted prices in active markets for similar assets andliabilities, or other inputs that are observable for the asset or liability,either directly or indirectly, for substantially the full term of the financialinstrument.

 

·               Level 3 — Unobservable inputs that are supported by little or no marketactivity and that are significant to the fair value of the assets andliabilities.  This includes certainpricing models, discounted cash flow methodologies and similar techniques thatuse significant unobservable inputs.

 

The adoption ofSFAS No. 157 had no effect on our condensed consolidated financialposition or results of operations. Assets and liabilities recorded at fair value are valued using quotedmarket prices or under a market approach using other relevant informationgenerated by market transactions involving identical or comparable instrumentsand included:

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

13.                                 FAIRVALUE MEASUREMENTS - Continued

 

Below is a table that summarizes the fairvalue of assets and liabilities as of November 1, 2008:

 
| ** **                                   | ** ** | **Fair value measurement used** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | ** **                      | ** ** | **Quoted prices** | ** ** | **Quoted prices** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | **in active** | ** ** | **in active** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | **markets for** | ** ** | **markets for** | ** ** | **Other** | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | **identical** | ** ** | **similar** | ** ** | **unobservable** | ** ** |
| ** **                                   | ** ** | **Recorded**                    | ** ** | **instruments** | ** ** | **instruments** | ** ** | **inputs** | ** ** |
| ** **                                   | ** ** | **Value**                       | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                         |       |                            |       |   |   |   |   |   |   |
| Assets:                                      |       |                            |       |   |   |   |   |   |   |
|                                         |       |                            |       |   |   |   |   |   |   |
| Cash and Cash Equivalents (1)                |       | $                               | 52,806     |   | $ | 47,612 |   | $ | 5,194 |   | $ | — |   |
|                                         |       |                            |       |   |   |   |   |   |   |
| Assets Related to Deferred Compensation Plan |       | $                               | 2,467      |   | $ | — |   | $ | 2,467 |   | $ | — |   |
|                                         |       |                            |       |   |   |   |   |   |   |
| Total Assets at Fair Value                   |       | $                               | 55,273     |   | $ | 47,612 |   | $ | 7,661 |   | $ | — |   |
|                                         |       |                            |       |   |   |   |   |   |   |
| Liabilities:                                 |       |                            |       |   |   |   |   |   |   |
|                                         |       |                            |       |   |   |   |   |   |   |
| Deferred Compensation Plan                   |       | $                               | 2,241      |   | $ | 2,241 |   | $ | — |   | $ | — |   |
|                                         |       |                            |       |   |   |   |   |   |   |
| Total Liabilities at Fair Value              |       | $                               | 2,241      |   | $ | 2,241 |   | $ | — |   | $ | — |   |

 

----

(1) Includescash, money-market investments and certificates of deposit.

 

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Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

##### ***CautionaryStatement***

##### *** ***

Certain statements in this report areforward-looking statements that are subject to certain risks anduncertainties.  We undertake no duty toupdate any such forward-looking statements to conform to actual results orchanges in our expectations.  Ourbusiness is highly dependent upon two large automotive customers and specificmakes and models of automobiles.  Ourresults will be subject to many of the same risks that apply to the automotive,appliance, computer and telecommunications industries, such as general economicconditions, interest rates, credit availability, consumer spending patterns andtechnological changes.   Other factors,which may result in materially different results for future periods, includethe following risk factors.  These riskfactors should be considered in connection with evaluating the forward-lookingstatements contained in this report because these factors could cause ouractual results and condition to differ materially from those projected inforward-looking statements.  Theforward-looking statements in this report are subject to the safe harborprotection provided under the securities laws.

 

·                  Our business may be materially adversely affected by the current economic environment.  The recent disruptions in global financial and credit markets have significantly impacted global economic activity and lead to an economic recession.  As a result of these disruptions, our customers and markets have been adversely affected.  We have recently experienced a significant drop in sales in our Automotive segment.  If we experience reduced demand because of these disruptions in the macroeconomic environment, our business, results of operation and financial condition could be materially adversely affected.  If we are unable to successfully anticipate changing economic and financial conditions, we may be unable to effectively plan for and respond to these changes and our business could be adversely affected.

 

·                  We may record impairmentcharges which would adversely impact our results of operations.  We review our goodwill and other intangibleassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of these assets may not be recoverable, and we also reviewour goodwill annually in accordance with SFAS No. 142, Goodwill and OtherIntangibles.  The values assigned togoodwill and intangible assets are normally based on estimates and judgmentsregarding expectations for the success and life cycle of products andtechnologies acquired.  A severe declinein expectations, future cash flows, a change in strategic direction or ourmarket capitalization remaining below our net book value for a significantperiod of time could result in significant impairment charges, which could havea material adverse effect on our business, financial condition and results ofoperations.  Based on events and generalbusiness declines, especially in the Automotive segment, we performed “step one”of the goodwill impairment test in accordance with paragraph 19 of SFAS No. 142,on the reporting units that have goodwill as of November 1, 2008.  Based on this test, we determined that thefair value was less than the carrying value of the net assets for certainreporting units.  We have not yetcompleted “step two” of the impairment test, and, as of the filing of this10-Q, impairment is possible but is not reasonably estimable.  The amount of goodwill associated to thesereporting units is $29,237.

 

In accordance with FASBStatement No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets, the Company records impairment losses on long-lived assets used inoperations when events and circumstances indicate that long-lived assets mightbe impaired and the undiscounted cash flows estimated to be generated by thoseassets are less than the carrying amounts of those assets. During the secondquarter of 2009, events and circumstances indicated that $27,769 million ofidentifiable intangible assets of the TouchSensor business might beimpaired.  However, the Company’sestimate of undiscounted cash flows indicated that such carrying amounts areexpected to be recovered.   Nonetheless,it is reasonably possible that the estimate of undiscounted cash flows maychange in the near term resulting in the need to write down those assets tofair value.

 

·                  We may incur additionalsignificant restructuring charges that will adversely affect our results ofoperations.

 

·                  Our automotive customers have recently experienced severe declines in demand for their products.  Such factors as consumer preference, restricted liquidity and the availability of financing and increased cost of

 

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capital has negatively impacted their businesses.  This could cause them to decrease purchases of our products, further restructure their businesses or even reorganize under bankruptcy laws.

 

·                  We depend on a small number of large customers.  If we were to lose any of these customers or any of these customers decreased the number of orders it placed, our future results could be adversely affected.

 

****·********                 ********Ourbusiness is cyclical and seasonal in nature and further downturns in theautomotive industry could reduce the sales and profitability of our business.****

 

·                  Because we derive approximately 63% of our revenues from the automotive industry, the downturn and challenges faced by this industry may have a material adverse effect on our business, financial condition and operating results.

 

·                  Because we derive a substantial portion of our revenues from customers in the automotive, appliance, computer and communications industries, construction, industrial safety radio remote control market, we are susceptible to trends and factors affecting those industries.

 

****·********                 ********Becausewe derive approximately 63% of our revenues from the automotive segment, oilprices could adversely affect future results.****

 

****·********                 ********We aresubject to intense pricing pressures in the automotive industry.****

 

****·********                 ****We are dependent on the availability and price of raw materials.

 

****·********                 ********We facerisks relating to our international operations, including fluctuations in theU.S. dollar.****

 

****·********                 ********Ourtechnology-based business and the markets in which we operate are highlycompetitive.  If we are unable to competeeffectively, our sales will decline.****

 

****·********                 ********If weare unable to protect our intellectual property or we infringe, or are allegedto infringe, on another person’s intellectual property, our business, financialcondition and operating results could be materially adversely affected.****

 

·                  ****We maybe unable to keep pace with rapid technological changes, which would adverselyaffect our business.****

 

·                  ****Productswe manufacture may contain design or manufacturing defects that could result inreduced demand for our products or services and liability claims against us.****

 

·                  ****We mayacquire businesses or divest of various business operations. These transactionsmay pose significant risks and may materially adversely affect our business,financial condition and operating results.****

 

****·********                 ****We cannot assure you that the newly-acquired Hetronic business will besuccessful or that we can implement and profit from new applications of theacquired technology.

 

****Any such forward-looking statements are notguarantees of future performance and actual results, developments and businessdecisions may differ materially from those foreseen in such forward-lookingstatements.  These forward-lookingstatements speak only as of the date of the report, press release, statement,document, webcast or oral discussion in which they are made.  We do not intend to update anyforward-looking statement, all of which are expressly qualified by theforegoing.  See Part I — Item A,Risk Factors of our latest Form 10-K for the fiscal year ended May 3,2008, for a further discussion regarding some of the reasons that actualresults may be materially different from those we anticipate.****

 

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##### ***Overview***

##### *** ***

Weare a global manufacturer of component and subsystem devices withmanufacturing, design and testing facilities in the United States, Malta, Mexico,United Kingdom, Germany, Czech Republic, China, India, the Philippines andSingapore.  We design, manufacture andmarket devices employing electrical, electronic, wireless, sensing and opticaltechnologies and wireless remote controls. Our business is managed on a segment basis, with those segments beingAutomotive, Interconnect, Power Products and Other.   For more information regarding the businessand products of these segments, see “Item 1. Business” of our Form 10-Kfor the fiscal year ended May 3, 2008.

 

Our components arefound in the primary end markets of the automotive, information processing andnetworking equipment, construction, voice and data communication systems,consumer electronics, appliance, aerospace vehicles and industrial equipmentindustries.  Our products employelectronic and optical technologies to control and convey signals throughsensors, interconnections and controls. Recent trends in the industries that we serve include:

 

·                  continued customer migration tolower-cost Eastern European and Asian suppliers;

·                  growth of North American subsidiariesof foreign-based automobile manufacturers;

·                  rising raw material costs;

·                  the deteriorating financial conditionof certain of our customers and the uncertainty as they undergo restructuringinitiatives, including in some cases, reorganization under bankruptcy laws;

·                  increasing pressure by automobilemanufacturers on automotive suppliers to reduce selling prices;

·                  more supplier-funded design,engineering and tooling costs previously funded by the automobilemanufacturers;

·                  reduced production schedules fordomestic automobile manufacturers; rising interest rates and availability of credit; and

·                  decline in demand for lessfuel-efficient trucks and SUVs.

 

On September 30,2008, we acquired certain assets of Hetronic LLC (Hetronic) for $53,639 incash.  We also incurred $2,367 intransaction costs related to the purchase. Hetronic is a global leader in industrial safety radio remote controlswith locations in the U.S., Malta, the Philippines and Germany.  Hetronic is represented in 45 countries bydirect sales associates, licensed partners, distributors and representatives.  Hetronic provides application specific andstandard controls to many different industries, such as material handling,transportation, mining, military, agriculture and construction.

 

On March 30,2008, we acquired 100% of the assets of Tribotek, Inc for $1.8 million incash.  Tribotek designs, develops andmanufactures high current power connectors and power product systems forproducts such as power supplies, servers, rectifiers, inverters, robotics andautomated test equipment, in addition to various military and telecommunicationapplications.

 

On August 31,2007, we acquired 100% of the assets of Value Engineered Products, Inc.(VEP) for $5.8 million in cash.  VEP is athermal management solutions provider, manufacturing heat sinks and relatedproducts for high-powered applications. These components complement our Power Product offerings and, in someinstances, are joined with bus bars to aid thermal management of power systems.

 

OnJanuary 24, 2008, we announced a restructuring of our U.S.-basedautomotive operations and a decision to discontinue producing certain legacyelectronic Interconnect products.  TheAutomotive and Interconnect restructuring is expected to be completed duringfiscal 2010.  During the three monthsended November 1, 2008, we recorded a restructuring charge of $6,284,which consisted of $1,609 for employee severance, $4,350 in impairment andaccelerated depreciation for buildings and improvements and machinery andequipment, and $325 relating to professional fees.  During the six months ended November 1,2008, we recorded a restructuring charge of $11,201, which consisted of $4,430for employee severance, $5,900 in impairment and accelerated depreciation forbuildings and improvements and machinery and equipment, $153 in inventorywrite-downs and $718 relating to professional fees.  We record the expense in the restructuringsection of our consolidated statement of income. We estimate that we willrecord additional pre-tax charges through fiscal 2010 of between $5,000 and$10,000, of which $2,000 to $3,000 will relate to the termination of approximately550 employees and the cost of one-time employee benefits,

 

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retention,COBRA and outplacement services.   We will continue to perform periodicimpairment testing and will record any charges incurred as per SFAS No. 144,‘Accounting for the Impairment or Disposal of Long-Lived Assets’ in the periodwhen impairment is incurred.

 

**BusinessOutlook**

 

Recentmarket events, including an unfavorable global economic environment and awidening international credit crisis, are adversely impacting demand for ourcustomer’s products and will impact our operating results in the foreseeablefuture.  Our financial results will besubject to certain factors outside of our control.  We will continue to monitor industry andmarket conditions and intend to respond accordingly.  However, no assurance can be given regardingthe length or severity of the economic downturn and its impact on our futurefinancial results.

 

**Results of Operations for the Three Months Ended November 1,2008 as Compared to the Three Months Ended October 27, 2007**

 

**ConsolidatedResults**

** **

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                               | ** ** | **Restated**         | ** ** | ** **           | ** ** | ** **     | ** ** | ** **     | ** ** |
|------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                               | ** ** | **(Note 2)**         | ** ** | ** **           | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                               | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                               | ** ** | **2008**             | ** ** | **2007**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                               |       | $                    | 121.3      |                 | $          | 133.2          |       | $              | (11.9      | ) | -8.9 | % |
| Other  income                            |       | 1.0                  |       | 0.5                  |       | 0.5            |       | 100.0          | %          |
|                                     |       | 122.3                |       | 133.7                |       | (11.4          | )          | -8.5           | %          |
|                                     |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                   |       | 97.8                 |       | 105.9                |       | (8.1           | )          | -7.6           | %          |
|                                     |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income)  |       | 24.5                 |       | 27.8                 |       | (3.3           | )          | -11.9          | %          |
|                                     |       |                 |       |                 |       |           |       |           |       |
| Restructuring                            |       | 6.3                  |       | —               |       | 6.3            |       | 0.0            | %          |
| Selling  and administrative expenses     |       | 18.7                 |       | 16.1                 |       | 2.6            |       | 16.1           | %          |
| Interest  income, net - income/(expense) |       | 0.4                  |       | 0.6                  |       | (0.2           | )          | -33.3          | %          |
| Other,  net - income/(expense)           |       | (0.6                 | )          | (0.9                 | )          | 0.3            |       | -33.3          | %          |
| Income  taxes - (benefit)/expense        |       | (0.9                 | )          | 2.6                  |       | (3.5           | )          | -134.6         | %          |
|                                     |       |                 |       |                 |       |           |       |           |       |
| Net  income                              |       | $                    | 0.2        |                 | $          | 8.8            |       | $              | (8.6       | ) | -97.7 | % |

 
| ** **                              | ** ** | **Restated**         | ** ** | ** **           | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                              | ** ** | **(Note 2)**         | ** ** | ** **           | ** ** |
| ** **                              | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |
| **Percent  of sales:**                  | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |
| Other  income                           |       | 0.8                  | %          | 0.4                  | %          |
| Cost  of products sold                  |       | 80.6                 | %          | 79.5                 | %          |
| Gross  margins (including other income) |       | 20.2                 | %          | 20.9                 | %          |
| Restructuring                           |       | 5.2                  | %          | 0.0                  | %          |
| Selling  and administrative expenses    |       | 15.4                 | %          | 12.1                 | %          |
| Interest  income, net                   |       | 0.3                  | %          | 0.5                  | %          |
| Other,  net                             |       | -0.5                 | %          | -0.7                 | %          |
| Income  taxes                           |       | -0.7                 | %          | 2.0                  | %          |
| Net  income                             |       | 0.2                  | %          | 6.6                  | %          |

 

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*Net Sales*.  Consolidated net sales decreased $11.9million, or 8.9%, to $121.3 million for the three months ended November 1,2008 from $133.2 million for three months ended October 27, 2007.  The automotive segment net sales declined$14.6 million or 16.3% to $75.2 million in the second quarter of fiscal 2009from $89.8 million in the second quarter of fiscal 2008.  The decline is attributable to the softeningof the global economic environment, especially the direct effect on the NorthAmerican automotive industry.  Recently,the Detroit 3 automakers reported sales volume declines of between 30 to 40percent.  The Automotive segment netsales were negatively impacted by anticipated lower Chrysler sales, but, werealso negatively impacted by price increases of $2.2 million in the secondquarter of fiscal 2009, compared to $3.7 million in the second quarter offiscal 2008.  In July 2007, wedecided to exit production for certain Chrysler products at the expiration ofour manufacturing commitment, but, atthe request of the customer, agreed to produce until production was transferredto other suppliers.  The transfer of theChrysler product is expected to be completed by the end of the third quarter offiscal 2009.  The Interconnectsegment net sales increased $1.7 million, or 5.6% to $32.0 million in thesecond quarter of fiscal 2009 as compared to $30.3 million in the secondquarter of fiscal 2008.  The increase isprimarily due to the acquisition of Hetronic, purchased on September 30,2008.  Translation of foreign operationsnet sales in the three months ended November 1, 2008 increased reportednet sales by $0.8 million or 0.6% due to currency rate fluctuations.

 

*Other Income*.  Other income increased $0.5 million, or100.0%, to $1.0 million for the three months ended November 1, 2008 from$0.5 million for three months ended October 27, 2007.  Other income consisted primarily of earningsfrom engineering design fees and royalties.

 

*Cost ofProducts Sold*. Consolidated cost of products sold decreased $8.1 million, or 7.6%, to$97.8 million for the three months ended November 1, 2008 from $105.9million for the three months ended October 27, 2007.  The decrease is due to the lower Automotivesegment net sales volumes, partially offset by higher Interconnect sales fromHetronic.  Consolidated cost of productssold as a percentage of sales was 80.6% for the three months ended November 1,2008 and 79.5% for the three months ended October 27, 2007.  The increase in cost of products sold as apercentage of net sales is due to lower sales volumes in the Automotive segmentand production costs for the Power Products segment, which is partially offsetby favorable cost for Hetronic, which has a lower cost of goods sold as apercentage of sales compared to other businesses.  The Automotive segment cost of products soldas a percentage of sales was favorably impacted by Chrysler price increasesduring the second quarter of fiscal 2008.

 

*GrossMargins (including other income). *Consolidatedgross margins (including other income) decreased $3.3 million, or 11.9%, to$24.5 million for the three months ended November 1, 2008 as compared to$27.8 million for the three months ended October 27, 2007.  Gross margins as a percentage of net saleswas 20.2% for the three months ended November 1, 2008 as compared to 20.9%for the three months ended October 27, 2007.  The decline in gross margins as a percentageof sales is due to the lower Automotive segment net sales, unfavorable productmix for the Power Products segment and the impact of the Chrysler priceincreases in the second quarter of fiscal 2008.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $2.6 million, or 16.1%, to$18.7 million for the three months ended November 1, 2008 compared to$16.1 million for the three months ended October 27, 2007.  The increase relates to the Hetronicacquisition, as well as higher amortization expense for the TouchSensor and VEPacquisitions, purchased on February 28, 2007 and August 31, 2007,respectively.  Selling and administrativeexpenses as a percentage of net sales increased to 15.4% in the three monthsended November 1, 2008 from 12.1% for the three months ended October 27,2007.

 

*Restructuring*.  On January 24, 2008, we announced arestructuring of our U.S.-based automotive operations and the decision todiscontinue producing certain legacy products in the Interconnect segment.  During the fiscal quarter ended November 1,2008, we recorded a restructuring charge of $6.3 million, which consisted of$1.6 million for employee severance, $4.4 million for impairment andaccelerated depreciation for buildings and improvements and machinery andequipment and $0.3 million relating to professional fees.

 

*InterestIncome, Net*.  Netinterest income decreased 33.3% in the three months ended November 1, 2008to $0.4 million as compared to $0.6 million in the three months ended October 27,2007.  The average cash balance was $94.6million during the three months ended November 1, 2008 as compared to$79.3 million during the three months ended October 27, 2007.  The average interest rate earned in the threemonths ended November 1, 2008 was

 

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2.38% compared to 3.35%in the three months ended October 27, 2007.  The portfolio was weighted more heavily totax-exempt investments in the second quarter of fiscal 2009 as compared to thesecond quarter of fiscal 2008.  Theaverage interest rate earned includes both taxable interest and tax-exemptmunicipal interest.  Interest expense was$0.1 million for both periods.

 

*Other,Net*.  As restated,Other, net was expense of  $0.6 millionfor the three months ended November 1, 2008 as compared to expense of $0.9million for the three months ended October 27, 2007.  During the second quarter of fiscal 2009, we recorded $2.5million of unrealized currency exchange losses arising from an intercompanyloan between our corporate headquarters and one of our foreign subsidiaries inconjunction with a recent acquisition of Hetronic, L.L.C., purchased on September 30,2008.  In addition, the U.S.dollar strengthened versus the Euro and Czech koruna during the second quarterof fiscal 2009 as compared to the second quarter of fiscal 2008.  The functional currencies of these operationsare the British pound, Chinese yuan, Czech koruna, Euro, Mexican peso andSingapore dollar.  Some foreignoperations have transactions denominated in currencies other than theirfunctional currencies, primarily sales in U.S. dollars and Euros, creatingexchange rate sensitivities.

 

At November 1,2008, approximately $5.9 million was invested in an enhanced cash fundsold as an alternative to traditional money-market funds. We have historicallyinvested a portion of our on hand cash balances in this fund. These investmentsare subject to credit, liquidity, market and interest rate risk. Based on the informationavailable to us, we have estimated the fair value of this fund at $0.882 perunit as of November 1, 2008. During the quarter ended November 1,2008 we recorded a loss of $0.5 million, of which $0.2 million was realized onpartial redemptions of $3.8 million, and $0.3 million was unrealized.

 

*IncomeTaxes.*  The effectiveincome tax rate was a benefit of 47.1% in the second quarter of fiscal 2009compared with an income tax expense of 23.0% in the second quarter of fiscal2008.  The income tax rate was a benefitin the second quarter of fiscal 2009 in our U.S.-based businesses due torestructuring charges and slowing of business, causing a loss before incometaxes.  In addition, the effective taxrates for both fiscal 2009 and 2008 reflect utilization of foreign investmenttax credits and the effect of lower tax rates on income of the Company’sforeign earnings and a higher percentage of earnings at those foreignoperations.

 

*NetIncome.*  As restated,net income decreased $8.6 million, or 97.7%, to $0.2 million for the threemonths ended November 1, 2008 as compared to $8.8 million for the threemonths ended October 27, 2007 due to the restructuring charges,  the softening of the global economicenvironment resulting in decreased sales and higher selling and administrativeexpenses and the unrealized currency exchange loss relating to the intercompanyloan.  Net income as a percentage ofsales decreased to 0.2% for the three months ended November 1, 2008 ascompared to 6.6% for the three months ended October 27, 2007.

 

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**OperatingSegments**

 

**AutomotiveSegment Results**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                                    | ** ** | **Restated**         | ** ** | ** **           | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                                    | ** ** | **(Note 2)**         | ** ** | ** **           | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **2008**             | ** ** | **2007**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                                    |       | $                    | 75.2       |                 | $          | 89.8           |       | $              | (14.6      | ) | -16.3 | % |
| Cost  of products sold                        |       | 60.2                 |       | 71.3                 |       | (11.1          | )          | -15.6          | %          |
| Gross  margins                                |       | 15.0                 |       | 18.5                 |       | (3.5           | )          | -18.9          | %          |
|                                          |       |                 |       |                 |       |           |       |           |       |
| Income  before income taxes and restructuring |       | $                    | 10.5       |                 | $          | 13.3           |       | $              | (2.8       | ) | -21.1 | % |
|                                          |       |                 |       |                 |       |           |       |           |       |
| Restructuring                                 |       | (4.4                 | )          | —               |       | (4.4           | )          | 0.0            | %          |
|                                          |       |                 |       |                 |       |           |       |           |       |
| Income  before income taxes                   |       | $                    | 6.1        |                 | $          | 13.3           |       | $              | (7.2       | ) | -54.1 | % |
|                                          |       |                 |       |                 |       |           |       |           |       |
|                                          |       | **Restated**         |       |                 |       |           |       |           |       |
| ** **                                    | ** ** | **(Note 2)**         | ** ** | ** **           | ** ** |           |       |           |       |
| ** **                                    | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**                         | ** ** | **2008**             | ** ** | **2007**             | ** ** |           |       |           |       |
| Net  sales                                    |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Cost  of products sold                        |       | 80.1                 | %          | 79.4                 | %          |           |       |           |       |
| Gross  margins                                |       | 19.9                 | %          | 20.6                 | %          |           |       |           |       |
| Income  before income taxes and restructuring |       | 14.0                 | %          | 14.8                 | %          |           |       |           |       |
| Restructuring                                 |       | -5.9                 | %          | 0.0                  | %          |           |       |           |       |
| Income  before income taxes                   |       | 8.1                  | %          | 14.8                 | %          |           |       |           |       |

 

*Net Sales*.  Automotive segment net sales decreased $14.6million, or 16.3%, to $75.2 million for the three months ended November 1,2008 from $89.8 million for the three months ended October 27, 2007.  The decline is attributable to the softeningof the global economic environment, especially the effect on the North Americanautomotive industry.  Recently, theDetroit 3 automakers reported volume declines of between 30 to 40 percent.  Net sales have declined in the second quarterof fiscal 2009 as compared to fiscal 2008 by 21.6% in North America, 10.1% inEurope and 11.1% in Asia.  The Automotivesegment net sales were negatively impacted by anticipated lower Chrysler sales,but, were also negatively impacted by price increases of $2.2 million in thesecond quarter of fiscal 2009, compared to $3.7 million in the second quarterof fiscal 2008.  In July 2007, wedecided to exit production for certain Chrysler products at the expiration ofour manufacturing commitment, but, atthe request of the customer, agreed to produce until production was transferredto other suppliers.  The transfer of theChrysler product is expected to be completed by the end of the third quarter offiscal 2009.  Translation offoreign operations net sales in the three months ended November 1, 2008increased reported net sales by $0.5 million, or 0.6%, due to currency ratefluctuations.

 

*Cost ofProducts Sold*. Automotive segment cost of products sold decreased $11.1 million to$60.2 million for the three months ended November 1, 2008 from $71.3 forthe three months ended October 27, 2007. The decrease relates to lower sales volumes.  Automotive segment costs of products sold asa percentage of sales increased to 80.1% for the three months ended November 1,2008 from 79.4% for the three months ended October 27, 2007.  Automotive segment cost of products sold as apercentage of sales was negatively impacted by the year-over-year sales volumedeclines in the Chrysler business in the second quarter of fiscal 2009 ascompared to the second quarter of fiscal 2008, as well as increased costs dueto overall lower production volumes.

 

*GrossMargins. *Automotivesegment gross margins decreased $3.5 million, or 18.9%, to $15.0 million forthe three months ended November 1, 2008 as compared to $18.5 million for thethree months ended October 27, 

 

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2007.  Gross margins as a percentage of net salesdecreased to 19.9% for the three months ended November 1, 2008 from 20.6%for the three months ended October 27, 2007.  The decrease in gross profit as a percentageof sales is primarily due to higher costs related to lower production volumesand the decline in sales volumes in the second quarter of fiscal 2009 ascompared to the second quarter of fiscal 2008.

 

*Restructuring*.   On January 24, 2008, we announced a restructuringof our U.S.-based automotive operations. During the fiscal quarter ended November 1, 2008, we recorded arestructuring charge of $4.4 million, which consisted of $1.1 million foremployee severance, $3.0 million for impairment and accelerated depreciationfor buildings, building improvements and machinery and equipment and  $0.3 million for professional fees.  We expect the restructuring to be completedduring fiscal 2010.

 

*IncomeBefore Income Taxes. *Asrestated, Automotive segment income before income taxes decreased $7.2 million,or 54.1%, to $6.1 million for the three months ended November 1, 2008compared to $13.3 million for the three months ended October 27, 2007 dueto restructuring expenses, lower sales volumes and the unrealized currencyexchange loss relating to the intercompany loan in the second quarter of fiscal2009 as compared to the second quarter of fiscal 2008.

 

**InterconnectSegment Results**

 

Below is a table summarizing results for the three months ended:

(in millions)

 
| ** **                                    | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                                    | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                                     |       | $               | 32.0       |            | $          | 30.3           |       | $              | 1.7        |   | 5.6 | % |
| Cost of products  sold                        |       | 23.2            |       | 23.6            |       | (0.4           | )          | -1.7           | %          |
| Gross margins                                 |       | 8.8             |       | 6.7             |       | 2.1            |       | 31.3           | %          |
|                                          |       |            |       |            |       |           |       |           |       |
| Income before  income taxes and restructuring |       | $               | (0.6       | )               | $          | 1.2            |       | $              | (1.8       | ) | -150.0 | % |
|                                          |       |            |       |            |       |           |       |           |       |
| Restructuring                                 |       | (1.9            | )          | —          |       | (1.9           | )          | 0.0            | %          |
|                                          |       |            |       |            |       |           |       |           |       |
| Income/(loss)  before income taxes            |       | $               | (2.5       | )               | $          | 1.2            |       | $              | (3.7       | ) | -308.3 | % |
|                                          |       |            |       |            |       |           |       |           |       |
| ** **                                    | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**                         | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                                     |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Cost of products  sold                        |       | 72.5            | %          | 77.9            | %          |           |       |           |       |
| Gross margins                                 |       | 27.5            | %          | 22.1            | %          |           |       |           |       |
| Income before  income taxes and restructuring |       | -1.9            | %          | 4.0             | %          |           |       |           |       |
| Restructuring                                 |       | -5.9            | %          | 0.0             | %          |           |       |           |       |
| Income/(loss)  before income taxes            |       | -7.8            | %          | 4.0             | %          |           |       |           |       |

 

*Net Sales*. Interconnect segment net sales increased$1.7 million, or 5.6%, to $32.0 million for the three months ended November 1,2008 from $30.3 million for the three months ended October 27, 2007.  Net sales were favorably impacted by theacquisition of Hetronic on September 30, 2008.  Excluding Hetronic, North American net salesdeclined 7.4% and Europe and Asia declined 1.2% in the second quarter of fiscal2009 as compared to the second quarter of fiscal 2008.  The North American net sales decline wasprimarily due to the restructuring of our Connector and Duel businesses duringthe fourth quarter of fiscal 2008 and the first quarter of fiscal 2009.  Translation of foreign operations net salesin the three months ended November 1, 2008 increased reported net sales by$0.3 million, or 1.0%, due to currency rate fluctuations.

 

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*Cost ofProducts Sold*. Interconnect segment cost of products sold decreased $0.4 million to$23.2 million for the three months ended November 1, 2008 compared to$23.6 million for the three months ended October 27, 2007.  Interconnect segment cost of products sold asa percentage of net sales decreased to 72.5% for the three months ended November 1,2008 compared to 77.9% for the three months ended October 27, 2007.  The decrease in cost of products sold as apercentage of net sales is primarily due to Hetronic, which has a lower cost ofgoods sold as a percentage of sales compared to the other Interconnectbusinesses.

 

*GrossMargins. *Interconnectsegment gross margins increased $2.1 million, or 31.3%, to $8.8 million for thethree months ended November 1, 2008 as compared to $6.7 million for thethree months ended October 27, 2007. Gross margins as a percentage of net sales increased to 27.5% for thethree months ended November 1, 2008 from 22.1% for the three months ended October 27,2007.  The increase in gross margins as apercentage of net sales is primarily due to Hetronic, which has higher grossmargins compared to the other Interconnect businesses.

 

*Restructuring*.  On January 24, 2008, we announced ourdecision to discontinue producing certain legacy products in the Interconnectsegment.  During the fiscal quarter endedNovember 1, 2008, we recorded a restructuring charge of $1.9 million,which consisted of $0.6 million for employee severance and $1.3 million forimpairment and accelerated depreciation for buildings, building improvementsand machinery and equipment.  We expectthe restructuring will be completed by the fourth quarter of fiscal 2009.

 

*Income/(Loss)Before Income Taxes. *Interconnectincome before income taxes decreased $3.7 million to a loss of $2.5 million forthe three months ended November 1, 2008 compared to income of $1.2 millionfor the three months ended October 27, 2007 due to restructuring chargesand $0.9 million of increased amortization expense.

 

**PowerProducts Segment Results**

 

Below is a table summarizing results for the threemonths ended:

(in millions)

 
| ** **                  | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                  | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                   |       | $               | 11.6       |            | $          | 11.6           |       | $              | —     |   | 0.0 | % |
| Cost of products  sold      |       | 9.5             |       | 8.5             |       | 1.0            |       | 11.8           | %          |
| Gross margins               |       | 2.1             |       | 3.1             |       | (1.0           | )          | -32.3          | %          |
|                        |       |            |       |            |       |           |       |           |       |
| Income before  income taxes |       | $               | 0.5        |            | $          | 2.1            |       | $              | (1.6       | ) | -76.2 | % |
|                        |       |            |       |            |       |           |       |           |       |
| ** **                  | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**       | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                   |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Cost of products  sold      |       | 81.9            | %          | 73.3            | %          |           |       |           |       |
| Gross margins               |       | 18.1            | %          | 26.7            | %          |           |       |           |       |
| Income before  income taxes |       | 4.3             | %          | 18.1            | %          |           |       |           |       |

 

*Net Sales*.  Power Products segment net sales were $11.6million for both the three months ended November 1, 2008 and the threemonths ended October 27, 2007.  Netsales from VEP, acquired on August 31, 2007 were offset by declines in theother Power Products businesses. Excluding VEP, Power Products net sales declined 2.6% in the secondquarter of fiscal 2009 as compared to the second quarter of fiscal 2008.

 

*Cost ofProducts Sold*.  PowerProducts segment cost of products sold increased $1.0 million, or 11.8%, to$9.5 million for the three months ended November 1, 2008 compared to $8.5million for the three months ended October 27, 2007.  The Power Products segment cost of productssold as a percentage of sales increased to 81.9% for the three months ended November 1,2008 from 73.3% for the three months ended October 27, 2007.   The increase is partially due to a productwhich reached end-of-life at the end of fiscal 2008 and had a lower cost as a

 

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percentage ofsales than the remaining sales during the second quarter of fiscal 2009.  In addition, we experienced unfavorableproduct mix in our busbar businesses, as well as, increased shipping anddistribution costs.

 

*GrossMargins.* PowerProducts segment gross margins decreased $1.0 million, or 32.3%, to $2.1million for the three months ended November 1, 2008 as compared to $3.1million for the three months ended October 27, 2007. Gross margins as apercentage of net sales decreased to 18.1% for the three months ended November 1,2008 from 26.7% for the three months ended October 27, 2007.  The decrease is due to a product whichreached end-of- life at the end of fiscal 2008 and had higher gross marginsthan the remaining sales and gross margins during the second quarter of fiscal2009.  In addition, we also experiencedunfavorable product mix and labor costs, as well as, shipping and distributioncosts.

 

*IncomeBefore Income Taxes. *PowerProducts segment income before income taxes decreased by $1.6 million or 76.2%to $0.5 million for the three months ended November 1, 2008 from $2.1million for the three months ended October 27, 2007 due to decreased salesof products which became end-of-life at the end of fiscal year 2008, highermaterial, labor and shipping costs, higher commission expense and expensesrelated to Tribotek, which was acquired on March 30, 2008.

 

**OtherSegment Results**

 

Below is a table summarizing results for the three months ended:

(in millions)

 
| ** **                | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|---------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                 |       | $               | 2.5        |            | $          | 1.6            |       | $              | 0.9        |   | 56.3 | % |
| Cost of products  sold    |       | 2.6             |       | 1.6             |       | 1.0            |       | 62.5           | %          |
| Gross margins             |       | (0.1            | )          | —          |       | (0.1           | )          | 0.0            | %          |
|                      |       |            |       |            |       |           |       |           |       |
| Loss before  income taxes |       | $               | (0.8       | )               | $          | (0.4           | )          | $              | (0.4       | ) | 100.0 | % |
|                      |       |            |       |            |       |           |       |           |       |
| ** **                | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**     | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                 |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Cost of products  sold    |       | 104.0           | %          | 100.0           | %          |           |       |           |       |
| Gross margins             |       | -4.0            | %          | 0.0             | %          |           |       |           |       |
| Loss before  income taxes |       | -32.0           | %          | -25.0           | %          |           |       |           |       |

 

*Net Sales*.  The Other segment net sales increased $0.9million to $2.5 million for the three months ended November 1, 2008 ascompared to $1.6 million for the three months ended October 27, 2007.  Net sales from our torque-sensing businessincreased 204.9% and net sales from our testing facilities increased 33.7% inthe second quarter of fiscal 2009 as compared to the second quarter of fiscal2008.

 

*Cost ofProducts Sold*.  Othersegment cost of products sold increased $1.0 million to $2.6 million for thethree months ended November 1, 2008 compared to $1.6 million for the threemonths ended October 27, 2007.  Themajority of the increase is due to continued investment initiatives in ourtorque-sensing business.

 

*GrossMargins. *The Othersegment gross margins decreased to a loss of $0.1 million for the three monthsended November 1, 2008, compared to break-even gross margins for the threemonths ended October 27, 2007. Gross margins slightly declined in the second quarter of fiscal 2009 dueto the increased investments in our torque-sensing business.

 

*LossBefore Income Taxes. *TheOther segment loss before income taxes was $0.8 million for the three monthsended November 1, 2008 compared to $0.4 million for the three months endedOctober 27, 2007.   The

 

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increase in theloss before income taxes is due to additional support staff for our NorthAmerican testing facilities, as well as, a new testing facility that was openedin Shanghai, China in the second quarter of fiscal 2009.

 

**Resultsof Operations for the Six Months Ended November 1, 2008 as Compared to theSix Months Ended October 27, 2007**

 

**ConsolidatedResults**

 

Below is a table summarizing results for the sixmonths ended:

(in millions)

 
| ** **                               | ** ** | **Restated**    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **     | ** ** |
|------------------------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                               | ** ** | **(Note 2)**    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                               | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                               | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                                |       | $               | 255.8      |            | $          | 258.3          |       | $              | (2.5       | ) | -1.0 | % |
| Other income                             |       | 1.7             |       | 0.7             |       | 1.0            |       | 142.9          | %          |
|                                     |       | 257.5           |       | 259.0           |       | (1.5           | )          | -0.6           | %          |
|                                     |       |            |       |            |       |           |       |           |       |
| Cost of products  sold                   |       | 203.2           |       | 204.2           |       | (1.0           | )          | -0.5           | %          |
|                                     |       |            |       |            |       |           |       |           |       |
| Gross margins  (including other income)  |       | 54.3            |       | 54.8            |       | (0.5           | )          | -0.9           | %          |
|                                     |       |            |       |            |       |           |       |           |       |
| Restructuring                            |       | 11.2            |       | —          |       | 11.2           |       | 0.0            | %          |
| Selling and  administrative expenses     |       | 35.2            |       | 32.1            |       | 3.1            |       | 9.7            | %          |
| Interest income,  net - income/(expense) |       | 1.0             |       | 1.0             |       | —         |       | 0.0            | %          |
| Other, net -  income/(expense)           |       | (0.9            | )          | (1.2            | )          | 0.3            |       | -25.0          | %          |
| Income taxes -  (benefit)/expense        |       | 1.0             |       | 5.4             |       | (4.4           | )          | -81.5          | %          |
|                                     |       |            |       |            |       |           |       |           |       |
| Net income                               |       | $               | 7.0        |            | $          | 17.1           |       | $              | (10.1      | ) | -59.1 | % |
|                                     |       |            |       |            |       |           |       |           |       |
| ** **                               | ** ** | **Restated**    | ** ** | ** **      | ** ** |           |       |           |       |
| ** **                               | ** ** | **(Note 2)**    | ** ** | ** **      | ** ** |           |       |           |       |
| ** **                               | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**                    | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                                |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Other income                             |       | 0.7             | %          | 0.3             | %          |           |       |           |       |
| Cost of products  sold                   |       | 79.4            | %          | 79.1            | %          |           |       |           |       |
| Gross margins  (including other income)  |       | 21.2            | %          | 21.2            | %          |           |       |           |       |
| Restructuring                            |       | 4.4             | %          | 0.0             | %          |           |       |           |       |
| Selling and  administrative expenses     |       | 13.8            | %          | 12.4            | %          |           |       |           |       |
| Interest income,  net                    |       | 0.4             | %          | 0.4             | %          |           |       |           |       |
| Other, net                               |       | -0.4            | %          | -0.5            | %          |           |       |           |       |
| Income taxes                             |       | 0.4             | %          | 2.1             | %          |           |       |           |       |
| Net income                               |       | 2.7             | %          | 6.6             | %          |           |       |           |       |

 

*Net Sales*.  Consolidated net sales decreased $2.5million, or 1.0%, to $255.8 million for the six months ended November 1,2008 from $258.3 million for six months ended October 27, 2007.  The automotive segment net sales declined$12.8 million or 7.4% to $159.9 million in the first half of fiscal 2009 from$172.7 million in the first half of fiscal 2008.  The decline is attributable to the softeningof the global economic environment, especially the effect on the North Americanautomotive industry.  The Automotivesegment net sales were negatively impacted by anticipated lower Chrysler sales,but, were also favorably impacted by price increases of $7.3 million in thefirst half of fiscal 2009, compared to $5.0 million in the first half of fiscal2008.  In July 2007, we decided toexit production for certain Chrysler products at the expiration of ourmanufacturing commitment, but, at therequest of the customer, agreed to produce until production was transferred toother suppliers.  Therefore, the firsthalf of fiscal 2009 had 6

 

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monthsof price increases and the first half of fiscal 2008 only had four months ofprice increases.  The transfer of theChrysler product is expected to be completed by the end of the third quarter offiscal 2009. The Interconnect segment net sales increased $5.9 million,or 9.6% to $67.6 million in the first half of fiscal 2009 as compared to $61.7million in the first half of fiscal 2008. The increase is primarily due to the acquisition of Hetronic, which waspurchased on September 30, 2008 and increased net sales in our TouchSensorbusiness, which launched a new product line for an existing customer in thefirst half of fiscal 2009.  The PowerProducts segment was favorably impacted by the VEP business that was acquiredon August 31, 2007.  Translation offoreign operations net sales in the six months ended November 1, 2008increased reported net sales by $4.7 million or 1.8% due to currency ratefluctuations.

 

*OtherIncome*.  Other incomeincreased $1.0 million, or 142.9%, to $1.7 million for the six months ended November 1,2008 from $0.7 million for six months ended October 27, 2007.  Other income consisted primarily of earningsfrom engineering design fees and royalties.

 

*Cost ofProducts Sold*. Consolidated cost of products sold decreased $1.0 million, or 0.5%, to$203.2 million for the six months ended November 1, 2008 from $204.2million for the six months ended October 27, 2007.  The decrease is due to the lower salesvolumes.  Consolidated cost of productssold as a percentage of sales was 79.4% for the six months ended November 1,2008 and 79.1% for the six months ended October 27, 2007.  The Automotive segment cost of products soldas a percentage of sales was impacted by favorable pricing from the Chryslerbusiness during the first half of fiscal 2009. Cost of products sold as a percentage of net sales is higher to due tolower sales volumes in the Automotive segment, unfavorable product mix andproduction costs for the Power Products segment, which is partially offset byfavorable costs for Hetronic, which has a lower cost of goods sold as apercentage of sales compared to other businesses.

 

*GrossMargins (including other income). *Consolidatedgross margins (including other income) decreased $0.5 million, or 0.9%, to$54.3 million for the six months ended November 1, 2008 as compared to$54.8 million for the six months ended October 27, 2007.  Gross margins as a percentage of net saleswere 21.2% for both the six months ended November 1, 2008 and the sixmonths ended October 27, 2007. Gross margins were  impacted byfavorable pricing and sales volumes related to the Chrysler business in thefirst half of fiscal 2009 compared to the first half of fiscal 2008, offset bylower automotive segment sales and unfavorable product mix and production costsfor the Power Products segment.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $3.1 million, or 9.7%, to$35.2 million for the six months ended November 1, 2008 compared to $32.1million for the six months ended October 27, 2007.  The increase relates to the Hetronicacquisition, as well as higher amortization expense for the TouchSensor and VEPacquisitions, purchased on February 28, 2007 and August 31, 2007,respectively.  In addition, managementpositions were filled for our testing facilities in the first half of fiscal2009, which were vacant in the first half of fiscal 2008.  Selling and administrative expenses as apercentage of net sales increased to 13.8% in the six months ended November 1,2008 from 12.4% for the six months ended October 27, 2007.

 

*Restructuring*.  On January 24, 2008, we announced arestructuring of our U.S.-based automotive operations and the decision todiscontinue producing certain legacy products in the Interconnect segment.  During the six months ended November 1,2008, we recorded a restructuring charge of $11.2 million, which consisted of$4.4 million for employee severance, $5.9 million for impairment andaccelerated depreciation for buildings and improvements and machinery andequipment, $0.2 million for inventory write-downs and $0.7 million relating toprofessional fees.

 

*InterestIncome, Net*.  Netinterest income was $1.0 million for both the six months ended November 1,2008 and six months ended October 27, 2007.  The average cash balance was $105.3 millionduring the six months ended November 1, 2008 as compared to $73.4 millionduring the six months ended October 27, 2007.  The average interest rate earned in the sixmonths ended November 1, 2008 was 2.14% compared to 3.32% in the six monthsended October 27, 2007.  Theportfolio was weighted more heavily to tax-exempt investments in the first halfof fiscal 2009 as compared to the first half of fiscal 2008.  The average interest rate earned includesboth taxable interest and tax-exempt municipal interest.  Interest expense was $0.1 million for bothperiods.

 

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*Other,Net*.  As restated,Other, net was an expense of $0.9 million for the six months ended November 1,2008, compared to an expense of $1.2 million for the six months ended October 27,2007.  During the second quarter offiscal 2009, werecorded $2.5 million of unrealized currency exchange losses arising from anintercompany loan between our corporate headquarters and one of our foreignsubsidiaries in conjunction with a recent acquisition of Hetronic, L.L.C.,purchased on September 30, 2008. In addition. the U.S. dollar strengthened versus the Euro and Czechkoruna during the second quarter of fiscal 2009 as compared to the secondquarter of fiscal 2008.  The functionalcurrencies of these operations are the British pound, Chinese yuan, Czechkoruna, Euro, Mexican peso and Singapore dollar.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

At November 1,2008, approximately $5.9 million was invested in an enhanced cash fundsold as an alternative to traditional money-market funds. We have historicallyinvested a portion of our on hand cash balances in this fund. These investmentsare subject to credit, liquidity, market and interest rate risk. Based on theinformation available to us, we have estimated the fair value of this fund at$0.8820 per unit as of November 1, 2008. During the first six months ofthe fiscal year, we recorded a loss of $0.5 million, of which $0.2 million wasrealized on partial redemptions of  $6.4million, and $0.3 was unrealized.

 

*IncomeTaxes.*  The effectiveincome tax rate was 9.8% in the first half of fiscal 2009 compared with 24.1%in the first half of fiscal 2008.  Theincome tax rate in the first half of fiscal 2009 benefited due to restructuringcharges and slowing business in our U.S. based businesses, causing a smallerincome before income taxes.  Theeffective tax rates for both fiscal 2009 and 2008 reflect utilization offoreign investment tax credits and the effect of lower tax rates on income ofthe Company’s foreign earnings and a higher percentage of earnings at thoseforeign operations.

 

*NetIncome.*  As restated,net income decreased $10.1 million, or 59.1%, to $7.0 million for the sixmonths ended November 1, 2008 as compared to $17.1 million for the sixmonths ended October 27, 2007 due to the restructuring charges and higherselling and administrative expenses, the unrealized currency exchange lossrelating to the intercompany loan, partially offset by automotive segment priceincreases.  Net income as a percentage ofsales decreased to 2.7% for the six months ended November 1, 2008 ascompared to 6.6% for the six months ended October 27, 2007.

 

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**OperatingSegments**

 

**AutomotiveSegment Results**

 

Below is a table summarizing results for the six months ended:

(in millions)

 
| ** **                                    | ** ** | **Restated**    | ** **  | ** **      | ** ** | ** **     | ** ** | ** **     | ** **  |
|-----------------------------------------------|------------|-----------------|-------------|-----------------|------------|----------------|------------|----------------|-------------|
| ** **                                    | ** ** | **(Note 2)**    | ** **  | ** **      | ** ** | ** **     | ** ** | ** **     | ** **  |
| ** **                                    | ** ** | **November 1,** | ** **  | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** **  |
| ** **                                    | ** ** | **2008**        | ** **  | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** **  |
| Net sales                                     |       | $               |  159.9 |            | $          |  172.7    |       | $              |  (12.8 | ) | -7.4 | % |
| Cost of products  sold                        |       | 127.8           |        | 137.8           |       | (10.0          | )          | -7.3           | %           |
| Gross margins                                 |       | 32.1            |        | 34.9            |       | (2.8           | )          | -8.0           | %           |
|                                          |       |            |        |            |       |           |       |           |        |
| Income before  income taxes and restructuring |       | $               | 24.1        |            | $          | 25.0           |       | $              | (0.9        | ) | -3.6 | % |
|                                          |       |            |        |            |       |           |       |           |        |
| Restructuring                                 |       | (7.5            | )           | —          |       | (7.5           | )          | 0.0            | %           |
|                                          |       |            |        |            |       |           |       |           |        |
| Income before  income taxes                   |       | $               | 16.6        |            | $          | 25.0           |       | $              | (8.4        | ) | -33.6 | % |
|                                          |       |            |        |            |       |           |       |           |        |
| ** **                                    | ** ** | **Restated**    | ** **  | ** **      | ** ** |           |       |           |        |
| ** **                                    | ** ** | **(Note 2)**    | ** **  | ** **      | ** ** |           |       |           |        |
| ** **                                    | ** ** | **November 1,** | ** **  | **October 27,** | ** ** |           |       |           |        |
| **Percent of sales:**                         | ** ** | **2008**        | ** **  | **2007**        | ** ** |           |       |           |        |
| Net sales                                     |       | 100.0           | %           | 100.0           | %          |           |       |           |        |
| Cost of products  sold                        |       | 79.9            | %           | 79.8            | %          |           |       |           |        |
| Gross margins                                 |       | 20.1            | %           | 20.2            | %          |           |       |           |        |
| Income before  income taxes and restructuring |       | 15.1            | %           | 14.5            | %          |           |       |           |        |
| Restructuring                                 |       | -4.7            | %           | 0.0             | %          |           |       |           |        |
| Income before  income taxes                   |       | 10.4            | %           | 14.5            | %          |           |       |           |        |

 

*Net Sales*.  Automotive segment net sales decreased $12.8million, or 7.4%, to $159.9 million for the six months ended November 1,2008 from $172.7 million for the six months ended October 27, 2007.  The decline is attributable to the softeningof the global economic environment, especially the effect on the North Americanautomotive industry.  Recently, theDetroit 3 automakers reported volume declines of between 30 to 40 percent.  North American net sales have declined in thefirst half of fiscal 2009 as compared to fiscal 2008 by 11.5%.  The Automotive segment net sales werenegatively impacted by anticipated lower Chrysler sales, but, were alsofavorably impacted by price increases of $7.3 million in the first half offiscal 2009, compared to $5.0 million in the first half of fiscal 2008.  In July 2007, we decided to exitproduction for certain Chrysler products at the expiration of our manufacturingcommitment, but, at the request of thecustomer, agreed to produce until production was transferred to othersuppliers.  Therefore, the first half offiscal 2009 had 6 months of price increases and the first half of fiscal 2008only had four months of price increases. The transfer of the Chrysler product is expected to be completed by theend of the third quarter of fiscal 2009. Excluding the Chrysler sales volume increases, North American netsales declined 18.3% in the first half of fiscal 2009 compared to the firsthalf of fiscal 2008.  Net sales declinedin Europe and Asia by 1.4% and 13.1%, respectively in the first half of fiscal2009 compared to the first half of fiscal 2008. Translation of foreign operations net sales in the six months ended November 1,2008 increased reported net sales by $3.9 million, or 2.2%, due to currencyrate fluctuations.

 

*Cost ofProducts Sold*. Automotive segment cost of products sold decreased $10.0 million to$127.8 million for the six months ended November 1, 2008 from $137.8 forthe six months ended October 27, 2007. The decrease relates to lower sales volumes.  Automotive segment costs of products sold asa percentage of sales decreased to 79.9% for the six months ended November 1,2008 from 79.8% for the six months ended October 27, 2007.  Automotive segment cost of products sold as apercentage of sales was impacted by favorable Chrysler sales price increases inthe first half of fiscal 2009 as compared to the first half of fiscal2008.  The favorable sales price offsethigher production cost due to lower volumes in the first half of fiscal 2009 ascompared to the same period last year.

 

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*GrossMargins. *Automotivesegment gross margins decreased $2.8 million, or 8.0%, to $32.1 million for thesix months ended November 1, 2008 as compared to $34.9 million for the sixmonths ended October 27, 2007. Gross margins as a percentage of net sales decreased to 20.1% for thesix months ended November 1, 2008 from 20.2% for the six months ended October 27,2007.  Automotive segment gross marginsas a percentage of sales was impacted by favorable Chrysler sales priceincreases in the first half of fiscal 2009 as compared to the first half offiscal 2008.  The favorable sales priceincreases offset higher production cost due to lower volumes in the first halfof fiscal 2009 as compared to the same period last year.

 

*Restructuring*.   On January 24, 2008, we announced arestructuring of our U.S.-based automotive operations.  During the fiscal half year ended November 1,2008, we recorded a restructuring charge of $7.5 million, which consisted of$3.2 million for employee severance, $3.7 million for impairment andaccelerated depreciation for buildings, building improvements and machinery andequipment and  $0.6 million for professionalfees.  We expect the restructuring to becompleted during fiscal 2010.

 

*IncomeBefore Income Taxes. *Asrestated, Automotive segment income before income taxes decreased $8.4 million,or 33.6%, to $16.6 million for the six months ended November 1, 2008compared to $25.0 million for the six months ended October 27, 2007 due torestructuring expenses, decreased net sales, higher production costs, theunrealized currency exchange loss relating to the intercompany loan, partiallyoffset by the price increases.

 

**InterconnectSegment Results**

 

Below is a table summarizing results for the six months ended:

(in millions)

 
| ** **                                    | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                                    | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                                     |       | $               | 67.6       |            | $          | 61.7           |       | $              | 5.9        |   | 9.6 | % |
| Cost of products  sold                        |       | 49.8            |       | 47.3            |       | 2.5            |       | 5.3            | %          |
| Gross margins                                 |       | 17.8            |       | 14.4            |       | 3.4            |       | 23.6           | %          |
|                                          |       |            |       |            |       |           |       |           |       |
| Income before  income taxes and restructuring |       | $               | 1.5        |            | $          | 3.6            |       | $              | (2.1       | ) | -58.3 | % |
|                                          |       |            |       |            |       |           |       |           |       |
| Restructuring                                 |       | (3.7            | )          | —          |       | (3.7           | )          | 0.0            | %          |
|                                          |       |            |       |            |       |           |       |           |       |
| Income/(loss)  before income taxes            |       | $               | (2.2       | )               | $          | 3.6            |       | $              | (5.8       | ) | -161.1 | % |
|                                          |       |            |       |            |       |           |       |           |       |
| ** **                                    | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**                         | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                                     |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Cost of products  sold                        |       | 73.7            | %          | 76.7            | %          |           |       |           |       |
| Gross margins                                 |       | 26.3            | %          | 23.3            | %          |           |       |           |       |
| Income before  income taxes and restructuring |       | 2.2             | %          | 5.8             | %          |           |       |           |       |
| Restructuring                                 |       | -5.5            | %          | 0.0             | %          |           |       |           |       |
| Income before  income taxes                   |       | -3.3            | %          | 5.8             | %          |           |       |           |       |

 

*Net Sales*.  Interconnect segment net sales increased $5.9million, or 9.6%, to $67.6 million for the six months ended November 1,2008 from $61.7 million for the six months ended October 27, 2007.  Net sales were favorably impacted by theacquisition of Hetronic on September 30, 2008.  Excluding Hetronic, North American net salesincreased 2.8%, Asia increased 15.0% and Europe declined 4.8% in the first halfof fiscal 2009 as compared to the first half of fiscal 2008.  The European net sales decline was primarilydue to our Optical businesses.

 

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Translation offoreign operations net sales in the six months ended November 1, 2008increased reported net sales by $0.8 million, or 1.3%, due to currency ratefluctuations.

 

*Cost ofProducts Sold*. Interconnect segment cost of products sold increased $2.5 million to$49.8 million for the six months ended November 1, 2008 compared to $47.3million for the six months ended October 27, 2007.  The majority of the increase is due to highernet sales.  Interconnect segment cost ofproducts sold as a percentage of net sales decreased to 73.7% for the sixmonths ended November 1, 2008 compared to 76.7% for the six months ended October 27,2007.  The decrease in cost of productssold as a percentage of net sales is due primarily to Hetronic, which has alower cost of goods sold as a percentage of sales compared to the otherInterconnect businesses.

 

*GrossMargins. *Interconnectsegment gross margins increased $3.4 million, or 23.6%, to $17.8 million forthe six months ended November 1, 2008 as compared to $14.4 million for thesix months ended October 27, 2007. Gross margins as a percentage of net sales increased to 26.3% for thesix months ended November 1, 2008 from 23.3% for the six months ended October 27,2007.  The increase in gross margins as apercentage of net sales is due primarily to Hetronic, which has higher grossmargins compared to the other Interconnect businesses.

 

*Restructuring*.  On January 24, 2008, we announced ourdecision to discontinue producing certain legacy products in the Interconnectsegment.  During the fiscal first halfended November 1, 2008, we recorded a restructuring charge of $3.7million, which consisted of $1.2 million for employee severance, $2.2 millionfor impairment and accelerated depreciation for buildings, buildingimprovements and machinery and equipment, $0.2 million for inventorywrite-downs and $0.1 relating to professional fees.  We expect the restructuring to be completedby the fourth quarter of fiscal 2009.

 

*Income/(Loss)Before Income Taxes. *Interconnectincome before income taxes decreased $5.8 million, or 161.1%, to a loss of $2.2million for the six months ended November 1, 2008 compared to income of$3.6 million for the six months ended October 27, 2007 due torestructuring, $1.5 million of increased amortization expense, partially offsetby higher gross margins.

 

**PowerProducts Segment Results**

 

Below is a table summarizing results for the six months ended:

(in millions)

 
| ** **                  | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                  | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                   |       | $               | 23.6       |            | $          | 20.7           |       | $              | 2.9        |   | 14.0 | % |
| Cost of products  sold      |       | 19.2            |       | 15.0            |       | 4.2            |       | 28.0           | %          |
| Gross margins               |       | 4.4             |       | 5.7             |       | (1.3           | )          | -22.8          | %          |
|                        |       |            |       |            |       |           |       |           |       |
| Income before  income taxes |       | $               | 1.3        |            | $          | 4.0            |       | $              | (2.7       | ) | -67.5 | % |
|                        |       |            |       |            |       |           |       |           |       |
| ** **                  | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent  of sales:**      | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                   |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Cost of products  sold      |       | 81.4            | %          | 72.5            | %          |           |       |           |       |
| Gross margins               |       | 18.6            | %          | 27.5            | %          |           |       |           |       |
| Income before  income taxes |       | 5.5             | %          | 19.3            | %          |           |       |           |       |

 

*Net Sales*.  Power Products segment net sales increased$2.9 million to $23.6 million for the six months ended November 1, 2008from $20.7 million for the six months ended October 27, 2007.  Net sales were favorably impacted by the VEPacquisition on August 31, 2007. Excluding VEP, Power Products net sales increased 8.2% in the secondquarter of fiscal 2009 as compared to the second quarter of fiscal 2008 due tostrong net sales from our Asian operation.

 

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*Cost of ProductsSold*.  Power Productssegment cost of products sold increased $4.2 million, or 28.0%, to $19.2million for the six months ended November 1, 2008 compared to $15.0million for the six months ended October 27, 2007.  The Power Products segment cost of productssold as a percentage of sales increased to 81.4% for the six months ended November 1,2008 from 72.5% for the six months ended October 27, 2007.   The increase is partially due to a productwhich reached end-of-life at the end of fiscal 2008 and had a lower cost as apercentage of sales than the remaining sales during the first half of fiscal2009.  In addition, we experienced anunfavorable product mix in our busbar businesses, as well as, increased shippingand distribution costs.

 

*GrossMargins.* PowerProducts segment gross margins decreased $1.3 million, or 22.8%, to $4.4million for the six months ended November 1, 2008 as compared to $5.7million for the six months ended October 27, 2007. Gross margins as apercentage of net sales decreased to 18.6% for the six months ended November 1,2008 from 27.5% for the six months ended October 27, 2007.  The decrease is due to a product whichreached end-of-life at the end of fiscal 2008 and had higher gross margins thanthe remaining sales and gross margins during the first half of fiscal2009.  We also experienced an unfavorableproduct mix, labor costs, as well as, shipping and distribution costs.

 

*IncomeBefore Income Taxes. *PowerProducts segment income before income taxes decreased by $2.7 million or 67.5%to $1.3 million for the six months ended November 1, 2008 from $4.0million for the six months ended October 27, 2007 due to decreased salesof products which became end-of-life at the end of fiscal year 2008, highermaterial, labor and shipping costs, higher commission expense and expensesrelated to Tribotek, which was acquired on March 30, 2008.

 

**OtherSegment Results**

 

Below is a table summarizing results for the six months ended:

(in millions)

 
| ** **                | ** ** | **November 1,** | ** ** | **October 27,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|---------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| ** **                | ** ** | **2008**        | ** ** | **2007**        | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                 |       | $               | 4.7        |            | $          | 3.2            |       | $              | 1.5        |   | 46.9 | % |
| Cost of products  sold    |       | 4.6             |       | 3.1             |       | 1.5            |       | 48.4           | %          |
| Gross margins             |       | 0.1             |       | 0.1             |       | 0.0            |       | 0.0            | %          |
|                      |       |            |       |            |       |           |       |           |       |
| Loss before  income taxes |       | $               | (1.3       | )               | $          | (0.7           | )          | $              | (0.6       | ) | 85.7 | % |
|                      |       |            |       |            |       |           |       |           |       |
| ** **                | ** ** | **November 1,** | ** ** | **October 27,** | ** ** |           |       |           |       |
| **Percent of sales:**     | ** ** | **2008**        | ** ** | **2007**        | ** ** |           |       |           |       |
| Net sales                 |       | 100.0           | %          | 100.0           | %          |           |       |           |       |
| Cost of products  sold    |       | 97.9            | %          | 96.9            | %          |           |       |           |       |
| Gross margins             |       | 2.1             | %          | 3.1             | %          |           |       |           |       |
| Loss before  income taxes |       | -27.7           | %          | -21.9           | %          |           |       |           |       |

 

*Net Sales*.  The Other segment net sales increased $1.5 millionto $4.7 million for the six months ended November 1, 2008 as compared to$3.2 million for the six months ended October 27, 2007.  Net sales from our torque-sensing businessincreased 214.3% and net sales from our testing facilities increased 21.7% inthe first half of fiscal 2009 as compared to the first half of fiscal 2008.

 

*Cost ofProducts Sold*.  Othersegment cost of products sold increased $1.5 million to $4.6 million for thesix months ended November 1, 2008 compared to $3.1 million for the sixmonths ended October 27, 2007.  Themajority of the increase is due to continued investment initiatives in ourtorque-sensing business.

 

*GrossMargins. *The Othersegment gross margins were $0.1 million for both the six months ended November 1,2008 and October 27, 2007.  Grossmargins were flat in the first half of fiscal 2009 due to the

 

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increased salesfor both the torque-sensing business and the testing facilities, offset byincreased investments in our torque-sensing business.

 

*LossBefore Income Taxes. *TheOther segment loss before income taxes was $1.3 million for the six monthsended November 1, 2008 compared to $0.7 million for the six months ended October 27,2007.   The increase in the loss beforeincome taxes is due to additional support staff for our North American testingfacilities as well as a new testing facility that was opened in Shanghai, Chinain the second quarter of fiscal 2009.

 

**Liquidityand Capital Resources**

 

Wehave historically financed our cash requirements through cash flows fromoperations.  We are currently pursuingopportunities to expand our business through acquisitions.  If we are successful, our cash position willbe reduced.  Our future capitalrequirements will depend on a number of factors, including our future net salesand the timing and the severity of the current global economic crisis and thefinancial and business problems of major customers.  We believe our current cash balances togetherwith the cash flow expected to be generated from future domestic and foreignoperations will be sufficient to support current operations.  We have an agreement with our primary bankfor a committed $75.0 million revolving credit facility to provide readyfinancing for general corporate purposes, including acquisition opportunitiesthat may become available.  The bankcredit agreement, which expires on January 31, 2011, requires maintenanceof certain financial ratios and a minimum net worth level.  At November 1, 2008, the Company was incompliance with these covenants and there were no borrowings against thiscredit facility.

 

At November 1, 2008,approximately $5.9 million was invested in an enhanced cash fund sold asan alternative to traditional money-market funds. We have historically investeda portion of our on hand cash balances in this fund. These investments aresubject to credit, liquidity, market and interest rate risk. In December 2007,****the****fund was overwhelmedwith withdrawal requests from investors and was closed with a restrictionplaced upon the cash redemption ability of its holders. Based on the information available tous, we have estimated the fair value of this fund at $0.8820 per unit as of November 1,2008. During the second quarter, we recorded a loss of $0.5 million, of which$0.2 million was realized on partial redemptions of $3.8 million, and $0.3million was unrealized. For the first six months of the fiscal year, werecorded a loss of $0.5 million, of which $0.2 million was realized on partialredemptions of $6.4 million, and  $0.3million was unrealized.

 

Thelatest information from fund management states that its goal is to have 83% ofthe portfolio liquidated by December 2008 and 90% by June 2009.Information and the markets relating to these investments remain dynamic, andthere may be further declines in the value of these investments, the value ofthe collateral held by these entities, and the liquidity of our investments. Tothe extent we determine that there is a further decline in fair value, we mayrecognize additional losses in future periods.

 

Asrestated, net cash provided by operating activities decreased $12.7 million, or30.2%, to $29.4 million for the first six months of fiscal 2009 compared to$42.1 million in the first six months of fiscal 2008.  As restated, our net income decreased $10.1million, or 59.1%, to $7.0 million in the first six months of fiscal 2009compared to $17.1 million for the first six months of fiscal 2008.  In the first quarter of fiscal 2008, wereceived a significant prepayment from a customer for products that weredelivered during the fiscal year.  Theprimary factor in the Company’s ability to generate cash from operations is ournet income.  Additionally, cash flows from operations exceed net incomebecause non-cash charges (depreciation, amortization of intangibles, restrictedstock awards, and stock options) negatively impact net income but do not resultin the use of cash.  Similarly, non-cashcredits such as deferred income tax benefits increase net income but do notprovide cash.  Additional contributors oroffsets to cash flows from operations are working capital requirements.

 

Net cash used in investing activities during the first six months offiscal 2009 was $66.8 million compared to $18.2 million for the first sixmonths of fiscal 2008.  Purchases ofplant and equipment was $9.6 million and $10.1 million for the first six monthsof fiscal 2009 and 2008, respectively. On September 30, 2008, we acquired certain assets of Hetronic LLC(Hetronic) for $53.6 million in cash.  Wealso incurred $2.4 million in transaction costs related to the purchase.  In the first six months of fiscal 2009, wemade a contingent payment of $0.8 million related to the VEP acquisition.  In the first six months of fiscal 2008, wemade a contingent payment of $0.3 million

 

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** **

relatedto the acquisition of Cableco Technologies.  In the first six months of fiscal 2008, a dividend payment of $1.0million was paid relating to our automotive joint venture.

 

Net cash used in financing activities during the first six months infiscal 2009 was $9.5 million compared with $2.4 million in the first six monthsof fiscal 2008.  Our Board of Directorsapproved a stock repurchase plan on September 18, 2008 to repurchase up to3,000,000 shares.  There were 639,880shares purchased for $5.1 million during the second quarter of fiscal 2009 atan average price of $8.03 per share. Proceeds from the exercise of stock options decreased $1.0 million to$0.1 million for the first six months of fiscal 2009 as compared to $1.0 millionin the first six months of fiscal 2008. In addition, cash dividends increased $0.8 million in the first sixmonths of fiscal 2009 to $4.5 million, compared to $3.8 million in the firstsix months of fiscal 2008.  In September 2008,the Board of Directors announced that the dividend increased from $0.05 pershare to $0.07 per share for the second quarter fiscal 2009 payout.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements, other than operating leases andpurchase obligations entered into in the normal course of business.

 

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PART II.         OTHER INFORMATION

 

Item6.          Exhibits

 
| **Exhibit  Number** | ** ** | **Description**                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------|
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Executive Officer    |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Financial Officer    |
| 32                  |       | Certification of Periodic Financial Report Pursuant to  18 U.S.C. Section 1350 |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | METHODE ELECTRONICS, INC. |
|--------|---------------------------|
|   |                      |
|   |                      |   |
|   | By:                       | */s/ Douglas A. Koman* |
|   |                      | Douglas A. Koman |
|   |                      | Chief Financial Officer |
|   |                      | (principal financial officer) |
|   |                      |   |
| Dated: | June 29, 2009        |   |   |   |
|        |                           |  |  |  |

 

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INDEX TO EXHIBITS

 
| **Exhibit  Number** | ** ** | **Description**                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------|
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Executive Officer    |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Financial Officer    |
| 32                  |       | Certification of Periodic Financial Report Pursuant to  18 U.S.C. Section 1350 |

 

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