Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 

**x****      Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**for the quarterly period ended July 31, 2010**

 

**or**

 

**o****         Transition ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.**

 

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**Commission file number 0-2816**

 

**METHODE ELECTRONICS, INC.**

(Exact name of registrant as specified 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 fiscal year, if changed since lastreport)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   Noo

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o   Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or smaller reporting company.  See definitions of “accelerated filer,” “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

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

 

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

 

AtAugust 31, 2010, registrant had 36,803,990 shares of common stockoutstanding.

 

 

 

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Table ofContents

 

METHODE ELECTRONICS, INC.

FORM 10-Q

July 31, 2010

 

TABLE OF CONTENTS

 
| ** **        | ** **                                                                                  | ** ** | **Page** |
|-------------------|---------------------------------------------------------------------------------------------|------------|----------|
|              |                                                                                        |       |     |
| PART I.      | FINANCIAL INFORMATION                                                                       |       |     |
|              |                                                                                        |       |     |
| Item 1.           | Financial Statements                                                                        |       |     |
|              |                                                                                        |       |     |
|              | Condensed  consolidated balance sheets as of                                                |       |     |
|              | –  July 31, 2010 (unaudited) and May 1, 2010                                 |       | 2        |
|              |                                                                                        |       |     |
|              | Condensed  consolidated statements of operations (unaudited)                                |       |     |
|              | – Three months  ended July 31, 2010 and August 1, 2009                       |       | 3        |
|              |                                                                                        |       |     |
|              | Condensed  consolidated statements of cash flows (unaudited)                                |       |     |
|              | – Three months  ended July 31, 2010 and August 1, 2009                       |       | 4        |
|              |                                                                                        |       |     |
|              | Notes to condensed consolidated financial statements –  July 31, 2010             |       | 5        |
|              |                                                                                        |       |     |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 22       |
|              |                                                                                        |       |     |
| Item 3.           | Quantitative  and Qualitative Disclosure About Market Risk                                  |       | 35       |
|              |                                                                                        |       |     |
| Item 4.           | Controls and  Procedures                                                                    |       | 35       |
|              |                                                                                        |       |     |
| PART II.     | OTHER INFORMATION                                                                           |       |     |
|              |                                                                                        |       |     |
| Item 1.           | Legal Proceedings                                                                           |       | 35       |
|              |                                                                                        |       |     |
| Item 6.           | Exhibits                                                                                    |       | 36       |
|              |                                                                                        |       |     |
| SIGNATURES        |                                                                                        | 37         |
|              |                                                                                        |       |
| INDEX TO EXHIBITS |                                                                                        | 38         |

 

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Table ofContents

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1 - Financial Statements**

 

**METHODE ELECTRONICS, INC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(in thousands)**

 
| ** **                                                                                                                                                          | ** ** | **As of**         | ** ** | **As of**       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                          | ** ** | **July 31, 2010** | ** ** | **May 1, 2010** | ** ** |
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**        | ** ** | ** **           | ** ** |
| ASSETS                                                                                                                                                              |       |                   |       |                 |       |
|                                                                                                                                                                |       |                   |       |                 |       |
| CURRENT ASSETS                                                                                                                                                      |       |                   |       |                 |       |
| Cash and cash equivalents                                                                                                                                           |       | $                      | 56,449     |                 | $          | 63,821 |   |
| Accounts receivable, net                                                                                                                                            |       | 75,617                 |       | 68,649               |       |
| Inventories:                                                                                                                                                        |       |                   |       |                 |       |
| Finished products                                                                                                                                                   |       | 8,175                  |       | 5,487                |       |
| Work in process                                                                                                                                                     |       | 6,642                  |       | 7,686                |       |
| Materials                                                                                                                                                           |       | 19,255                 |       | 16,587               |       |
|                                                                                                                                                                |       | 34,072                 |       | 29,760               |       |
| Deferred income taxes                                                                                                                                               |       | 2,249                  |       | 2,272                |       |
| Prepaid and refundable income taxes                                                                                                                                 |       | 13,886                 |       | 13,956               |       |
| Prepaid expenses and other current assets                                                                                                                           |       | 5,554                  |       | 6,138                |       |
| TOTAL CURRENT ASSETS                                                                                                                                                |       | 187,827                |       | 184,596              |       |
|                                                                                                                                                                |       |                   |       |                 |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                       |       | 280,300                |       | 280,750              |       |
| Less allowances for depreciation                                                                                                                                    |       | 220,780                |       | 218,874              |       |
|                                                                                                                                                                |       | 59,520                 |       | 61,876               |       |
|                                                                                                                                                                |       |                   |       |                 |       |
| GOODWILL                                                                                                                                                            |       | 12,096                 |       | 12,096               |       |
| INTANGIBLE ASSETS, net                                                                                                                                              |       | 18,256                 |       | 18,811               |       |
| PRE-PRODUCTION COSTS                                                                                                                                                |       | 12,402                 |       | 11,984               |       |
| OTHER ASSETS                                                                                                                                                        |       | 23,227                 |       | 21,460               |       |
|                                                                                                                                                                |       | 65,981                 |       | 64,351               |       |
| TOTAL ASSETS                                                                                                                                                        |       | $                      | 313,328    |                 | $          | 310,823 |   |
|                                                                                                                                                                |       |                   |       |                 |       |
| LIABILITIES AND EQUITY                                                                                                                                              |       |                   |       |                 |       |
|                                                                                                                                                                |       |                   |       |                 |       |
| CURRENT LIABILITIES                                                                                                                                                 |       |                   |       |                 |       |
| Accounts payable                                                                                                                                                    |       | $                      | 36,098     |                 | $          | 29,743 |   |
| Other current liabilities                                                                                                                                           |       | 23,560                 |       | 29,002               |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                           |       | 59,658                 |       | 58,745               |       |
|                                                                                                                                                                |       |                   |       |                 |       |
| OTHER LIABILITIES                                                                                                                                                   |       | 10,613                 |       | 10,251               |       |
| DEFERRED COMPENSATION                                                                                                                                               |       | 2,045                  |       | 1,885                |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                           |       |                   |       |                 |       |
| Common stock, $0.50 par value, 100,000,000 shares  authorized, 38,175,296 and 38,149,946 shares issued as of July 31, 2010  and May 1, 2010, respectively |       | 19,088                 |       | 19,075               |       |
| Additional paid-in capital                                                                                                                                          |       | 66,333                 |       | 65,991               |       |
| Accumulated other comprehensive income                                                                                                                              |       | 15,439                 |       | 16,247               |       |
| Treasury stock, 1,342,188 shares as of  July 31, 2010 and May 1, 2010                                                                                     |       | (11,377                | )          | (11,377              | )          |
| Retained earnings                                                                                                                                                   |       | 148,307                |       | 146,818              |       |
| TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’  EQUITY                                                                                                     |       | 237,790                |       | 236,754              |       |
| Noncontrolling interest                                                                                                                                             |       | 3,222                  |       | 3,188                |       |
| TOTAL EQUITY                                                                                                                                                        |       | 241,012                |       | 239,942              |       |
| TOTAL LIABILITIES AND EQUITY                                                                                                                                        |       | $                      | 313,328    |                 | $          | 310,823 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**METHODE ELECTRONICS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

**(in thousands, except per share data)**

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **July 31,**      | ** ** | **August 1,** | ** ** |
| ** **                                                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                                      |       |                   |       |   |   |
| INCOME                                                                    |       |                   |       |   |   |
| Net sales                                                                 |       | $                      | 98,285     |   | $ | 89,776 |   |
| Other                                                                     |       | 688                    |       | 1,387 |   |
|                                                                      |       | 98,973                 |       | 91,163 |   |
|                                                                      |       |                   |       |   |   |
| COSTS AND EXPENSES                                                        |       |                   |       |   |   |
| Cost of products sold                                                     |       | 79,529                 |       | 70,909 |   |
| Restructuring                                                             |       | —                 |       | 3,611 |   |
| Selling and administrative expenses                                       |       | 15,595                 |       | 15,874 |   |
|                                                                      |       | 95,124                 |       | 90,394 |   |
| Income from operations                                                    |       | 3,849                  |       | 769 |   |
|                                                                      |       |                   |       |   |   |
| Interest expense, net                                                     |       | (26                    | )          | (102 | ) |
| Other income/(expense), net                                               |       | 849                    |       | (394 | ) |
|                                                                      |       |                   |       |   |   |
| Income before income taxes                                                |       | 4,672                  |       | 273 |   |
| Income tax expense                                                        |       | 642                    |       | 286 |   |
|                                                                      |       |                   |       |   |   |
| Net Income/(loss)                                                         |       | 4,030                  |       | (13 | ) |
| Less: Net Income/(loss) attributable to  noncontrolling interest          |       | (35                    | )          | 6 |   |
|                                                                      |       |                   |       |   |   |
| NET INCOME/(LOSS) ATTRIBUTABLE TO METHODE  ELECTRONICS, INC.         |       | $                      | 4,065      |   | $ | (19 | ) |
|                                                                      |       |                   |       |   |   |
| Amounts per common share attributable to Methode  Electronics, Inc.: |       |                   |       |   |   |
| Basic                                                                     |       | $                      | 0.11       |   | $ | — |   |
| Diluted                                                                   |       | $                      | 0.11       |   | $ | — |   |
|                                                                      |       |                   |       |   |   |
| Cash dividends:                                                           |       |                   |       |   |   |
| Common stock                                                              |       | $                      | 0.07       |   | $ | 0.07 |   |
|                                                                      |       |                   |       |   |   |
| Weighted average number of Common Shares  outstanding:                    |       |                   |       |   |   |
| Basic                                                                     |       | 37,046                 |       | 36,863 |   |
| Diluted                                                                   |       | 37,290                 |       | 36,863 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**METHODE ELECTRONICS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

**(in thousands)**

 
| ** **                                                                                       | ** ** | **Three Months Ended**      | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                       | ** ** | **July 31, 2010** | ** ** | **August 1, 2009** | ** ** |
| OPERATING ACTIVITIES                                                                             |       |                        |       |   |   |
| Net income/(loss)                                                                                |       | $                           | 4,030      |   | $ | (13 | ) |
| Adjustments to reconcile net income/(loss) to net cash  (used)/provided by operating activities: |       |                        |       |   |   |
| Provision for depreciation                                                                       |       | 3,356                       |       | 5,038 |   |
| Impairment of tangible assets                                                                    |       | —                      |       | 710 |   |
| Amortization of intangibles                                                                      |       | 556                         |       | 565 |   |
| Amortization of stock awards and stock options                                                   |       | 342                         |       | 299 |   |
| Changes in operating assets and liabilities                                                      |       | (10,518                     | )          | 1,070 |   |
| Other                                                                                            |       | 22                          |       | 19 |   |
| NET CASH (USED)/PROVIDED  BY OPERATING ACTIVITIES                                                |       | (2,212                      | )          | 7,688 |   |
|                                                                                             |       |                        |       |   |   |
| INVESTING ACTIVITIES                                                                             |       |                        |       |   |   |
| Purchases of property, plant and equipment                                                       |       | (1,956                      | )          | (3,266 | ) |
| Purchase of investment                                                                           |       | (750                        | )          | — |   |
| Acquisition of technology licenses                                                               |       | —                      |       | (87 | ) |
| NET CASH USED IN INVESTING  ACTIVITIES                                                           |       | (2,706                      | )          | (3,353 | ) |
|                                                                                             |       |                        |       |   |   |
| FINANCING ACTIVITIES                                                                             |       |                        |       |   |   |
| Proceeds from exercise of stock options                                                          |       | 13                          |       | — |   |
| Cash dividends                                                                                   |       | (2,576                      | )          | (2,616 | ) |
| NET CASH USED IN FINANCING  ACTIVITIES                                                           |       | (2,563                      | )          | (2,616 | ) |
|                                                                                             |       |                        |       |   |   |
| Effect of foreign currency exchange rate changes  on cash                                        |       | 109                         |       | 1,303 |   |
|                                                                                             |       |                        |       |   |   |
| INCREASE/(DECREASE) IN  CASH AND CASH EQUIVALENTS                                                |       | (7,372                      | )          | 3,022 |   |
|                                                                                             |       |                        |       |   |   |
| Cash and cash equivalents at beginning of period                                                 |       | 63,821                      |       | 54,030 |   |
|                                                                                             |       |                        |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                                      |       | $                           | 56,449     |   | $ | 57,052 |   |

 

Seenotes to condensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

July 31,2010

 

**1.****                                    ****BASIS OF PRESENTATION**

 

MethodeElectronics, Inc. was incorporated in 1946 as an Illinois corporation andreincorporated in Delaware in 1966.  Asused herein, “we,” “us,” “our,” the “Company” or “Methode” means MethodeElectronics, Inc. and its subsidiaries. Our business is managed and our financial results are reported on asegment basis, with those segments being Automotive, Interconnect, PowerProducts and Other.  The condensedconsolidated financial statements and related disclosures as of July 31,2010 and results of operations for the three months ended July 31, 2010and August 1, 2009 are unaudited, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The May 1, 2010 condensed consolidatedbalance sheet was derived from audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in 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 Form 10-K forthe year ended May 1, 2010 filed with the SEC on July 1, 2010.  Results may vary from quarter to quarter forreasons other than seasonality.

 

**2.****                                    ****RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about FairValue Measurements.” ASU 2010-06 requires additional disclosures aboutfair value measurements including transfers in and out of Levels 1 and 2 and ahigher level of disaggregation for the different types of financialinstruments. For the reconciliation of Level 3 fair value measurements,information about purchases, sales, issuances and settlements are presentedseparately. This standard is effective for interim and annual reportingperiods beginning after December 15, 2009, with the exception of revisedLevel 3 disclosure requirements which are effective for interim and annualreporting periods beginning after December 15, 2010. Comparativedisclosures are not required in the year of adoption. We adopted the provisionsof the standard on May 2, 2010, which did not have a material impact onour financial statements.

 

InJune 2009, the FASB issued Accounting Standards Codification (“ASC”) 810, “Consolidation”,regarding the consolidation of variable interest entities (formerly SFASNo. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 isintended to improve financial reporting by providing additional guidance tocompanies involved with variable interest entities and by requiring additionaldisclosures about a company’s involvement in variable interest entities. Thisstandard is effective for interim and annual periods beginning afterNovember 15, 2009. We adopted the provisions of the standard onMay 2, 2010, which did not have a material impact on our financialstatements.

 

InJune 2009, the FASB issued ASC 860, “Transfers and Servicing” (formerlySFAS No. 166, “Accounting for Transfers of Financial Assets”). ASC 860requires more information about transfers of financial assets and wherecompanies have continuing exposure to the risk related to transferred financialassets. It eliminates the concept of a qualifying special purpose entity,changes the requirements for derecognizing financial assets, and requiresadditional disclosure. This standard is effective for interim and annual periodsbeginning after November 15, 2009. We adopted the provisions of thestandard on May 2, 2010, which did not have a material impact on ourfinancial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**3.****                                    ****RESTRUCTURINGS**

 

**March 2009 Restructuring**

 

InMarch 2009, we announced additional restructuring initiatives toconsolidate our manufacturing facilities to reduce costs.  All of the March 2009 restructuringinitiatives were complete as of the end of fiscal 2010.  At the end of fiscal 2010, we had an accruedrestructuring liability of $420 reflected in our current liabilities section ofour condensed consolidated balance sheet. There were no payments made against this liability during the threemonths ended July 31, 2010, however, we do expect this liability to bepaid out during fiscal 2011.

 

Thetable below reflects the activity related to the March 2009 restructuringfor the three months ended July 31, 2010;

 
| ** **                                       | ** ** | **Other**  | ** ** |
|--------------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **Costs**  | ** ** |
| ** **                                       | ** ** | ** ** | ** ** |
| Accrued balance at May 1, 2010              |       | $          | 420        |   |
|                                             |       |       |       |
| Payments during the first quarter of fiscal 2011 |       | —     |       |
| Accrued balance at July 31, 2010            |       | $          | 420        |   |

 

**January 2008 Restructuring**

 

InJanuary 2008, we announced a restructuring of our U.S.-based automotiveoperations and a decision to discontinue producing certain legacy products inthe Interconnect segment.  All of the January 2008restructuring initiatives were complete as of the end of fiscal 2010.  At the end of fiscal 2010, we had an accruedrestructuring liability of $155 reflected in our current liabilities section ofour condensed consolidated balance sheet. There were $134 of payments made against this liability during the threemonths ended July 31, 2010.  Weexpect the remaining liability to be paid out during fiscal 2011.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

The table below reflects the activity related to theJanuary 2008 restructuring for the three months ended July 31, 2010;

 
| ** **                                       | ** ** | **One-Time**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **Employee**  | ** ** | **Other**  | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Severance** | ** ** | **Costs**  | ** ** | **Total**  | ** ** |
| ** **                                       | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued balance at May 1, 2010              |       | $             | 117        |       | $          | 38         |       | $ | 155 |   |
|                                             |       |          |       |       |       |       |       |
| Payments during the first quarter of fiscal 2011 |       | (96           | )          | (38        | )          | (134       | )          |
| Accrued balance at July 31, 2010            |       | $             | 21         |       | $          | —     |       | $ | 21 |   |

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**4.****                                    ****COMPREHENSIVE INCOME/(LOSS)**

 

Thecomponents of our comprehensive income/(loss) for the three months ended July 31,2010 and August 1, 2009 include net income/(loss) 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.

 

Thefollowing table presents details of our comprehensive income/(loss)(unaudited):

 
| ** **                        | ** ** | **Three Months Ended July 31, 2010**  | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | ** **                                 | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **                        | ** ** | **Total**                                  | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                              |       |                                       |       |   |   |   |   |
| Net income/(loss)                 |       | $                                          | 4,030      |   | $ | 4,065 |   | $ | (35 | ) |
| Translation adjustment            |       | (775                                       | )          | (808 | ) | 33 |   |
| Total comprehensive income/(loss) |       | $                                          | 3,255      |   | $ | 3,257 |   | $ | (2 | ) |
|                              |       |                                       |       |   |   |   |   |
| ** **                        | ** ** | **Three Months Ended August 1, 2009** | ** ** |
| ** **                        | ** ** | ** **                                 | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **                        | ** ** | **Total**                                  | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                              |       |                                       |       |   |   |   |   |
| Net income/(loss)                 |       | $                                          | (13        | ) | $ | (19 | ) | $ | 6 |   |
| Translation adjustment            |       | 5,341                                      |       | 5,008 |   | 333 |   |
| Total comprehensive income        |       | $                                          | 5,328      |   | $ | 4,989 |   | $ | 339 |   |

 

**5.****                                    ****GOODWILL AND INTANGIBLE ASSETS**

 

Wereview our goodwill and other intangible assets for impairment whenever eventsor changes in circumstances indicate that the carrying amount of these assetsmay not be recoverable, and we also review our goodwill annually in accordancewith the Accounting Standards Codification No. 350, “Intangibles — Goodwill and Other” (“ASC No. 350”).  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 financial condition and results of operations.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**5.****                                    ****GOODWILL AND INTANGIBLE ASSETS  —Continued**

 

Thefollowing table shows the roll-forward of goodwill in the financial statementsfor the three months ended July 31, 2010 and August 1, 2009.  There was no activity for either periodpresented.

 
| ** **                                                    | ** ** | **Three Months Ended July 31, 2010**  | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                 | ** ** | **Power** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Interconnect**                           | ** ** | **Products** | ** ** | **Total** | ** ** |
| Balance as of May 1, 2010                                |       | $                                          | 11,146     |   | $ | 950 |   | $ | 12,096 |   |
|                                                          |       |                                       |       |   |   |   |   |
| Attributable to acquisitions                                  |       | —                                     |       | — |   | — |   |
| Adjustments due to earn-out                                   |       | —                                     |       | — |   | — |   |
| Adjustments due to finalization of purchase price allocation  |       | —                                     |       | — |   | — |   |
| Balance as of July 31, 2010                              |       | $                                          | 11,146     |   | $ | 950 |   | $ | 12,096 |   |
|                                                          |       |                                       |       |   |   |   |   |
| ** **                                                    | ** ** | **Three Months Ended August 1, 2009** | ** ** |
| ** **                                                    | ** ** | ** **                                 | ** ** | **Power** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Interconnect**                           | ** ** | **Products** | ** ** | **Total** | ** ** |
| Balance as of May 2, 2009                                |       | $                                          | 11,146     |   | $ | 625 |   | $ | 11,771 |   |
|                                                          |       |                                       |       |   |   |   |   |
| Attributable to acquisitions                                  |       | —                                     |       | — |   | — |   |
| Adjustments due to earn-out                                   |       | —                                     |       | — |   | — |   |
| Adjustments due to finalization of purchase price  allocation |       | —                                     |       | — |   | — |   |
| Balance as of August 1, 2009                             |       | $                                          | 11,146     |   | $ | 625 |   | $ | 11,771 |   |

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**5.****                                    ****GOODWILL AND INTANGIBLE ASSETS  —Continued**

 

Thefollowing tables present details of the Company’s intangible assets:

 
| ** **                                                                                                | ** ** | **As of July 31, 2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                                                                                                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| ** **                                                                                                | ** ** | ** **                   | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Amortization** | ** ** |
|                                                                                                      | ** ** | **Gross**                    | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Periods (Years)** | ** ** |
| Customer relationships and agreements                                                                     |       | $                            | 14,995     |   | $ | 13,154 |   | $ | 1,841 |   | 13.4 |   |
| Patents and technology licenses                                                                           |       | 23,774                       |       | 7,445 |   | 16,329 |   | 12.9 |   |
| Covenants not to compete                                                                                  |       | 480                          |       | 394 |   | 86 |   | 1.6 |   |
| Total                                                                                                     |       | $                            | 39,249     |   | $ | 20,993 |   | $ | 18,256 |   |   |   |
|                                                                                                      |       |                         |       |   |   |   |   |   |   |
| ** **                                                                                                | ** ** | **As of May 1, 2010**   | ** ** |
| ** **                                                                                                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                                                                                                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| ** **                                                                                                | ** ** | ** **                   | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Amortization** | ** ** |
|                                                                                                      | ** ** | **Gross**                    | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Periods (Years)** | ** ** |
| Customer relationships and agreements                                                                     |       | $                            | 14,995     |   | $ | 13,066 |   | $ | 1,929 |   | 13.7 |   |
| Patents and technology licenses                                                                           |       | 23,774                       |       | 6,991 |   | 16,783 |   | 13.0 |   |
| Covenants not to compete                                                                                  |       | 480                          |       | 381 |   | 99 |   | 1.8 |   |
| Total                                                                                                     |       | $                            | 39,249     |   | $ | 20,438 |   | $ | 18,811 |   |   |   |
|                                                                                                      |       |                         |       |   |   |   |   |   |   |
| The estimated aggregate amortization expense for  each of the five succeeding fiscal years is as follows: |       |
|                                                                                                      |       |                         |       |   |   |   |   |   |   |
|                                                                                                      | 2011       |                         | $          | 2,208 |   |   |   |   |   |   |   |   |
|                                                                                                      | 2012       |                         | 1,701      |   |   |   |   |   |   |   |   |
|                                                                                                      | 2013       |                         | 1,324      |   |   |   |   |   |   |   |   |
|                                                                                                      | 2014       |                         | 1,212      |   |   |   |   |   |   |   |   |
|                                                                                                      | 2015       |                         | 1,123      |   |   |   |   |   |   |   |   |

 

As of July 31, 2010 and May 1, 2010, thepatents and technology licenses include $2,400 of trade names that are notsubject to amortization.

 

**6.****                                    ****INCOME TAXES**

 

AtJuly 31, 2010 and May 1, 2010, we had valuation allowances againstour deferred tax assets of $50,455 and $48,402, respectively.  In accordance with ASC No. 740, “IncomeTaxes,” a valuation allowance is required to be recorded when it is more likelythan not that deferred tax assets will not be realized.  Future realization depends on the existence ofsufficient taxable income within the carry-forward period available under thetax laws.  Sources of future taxableincome include future reversals of taxable temporary differences, futuretaxable income exclusive of reversing taxable differences, taxable income incarry-back years and tax planning strategies. These sources of positive evidence of realizability must be weighedagainst negative evidence, such as cumulative losses in recent years.

 

Informing a judgment about the future realization of our deferred tax assets, weconsidered both the positive and negative evidence of realizability and gavesignificant weight to the negative evidence from our recent cumulativeloss.  We will continue to assess thissituation and make appropriate adjustments to the valuation allowance based onour evaluation of the positive and negative evidence existing at the time.  We are currently unable to forecast whenthere will be sufficient positive evidence for us to reverse the valuationallowances that we have recorded.

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**6.****                                    ****INCOME TAXES - Continued**

 

Thevaluation allowance is associated with the deferred tax assets for thedifferences between book and tax that result from net operating losses (NOLs),foreign investment tax credits with unlimited carryovers generated in thecurrent and prior years and temporary differences which become deductible whenthe related asset is recovered or related liability is settled.

 

Areconciliation of the consolidated provisions for income taxes to amountsdetermined by applying the prevailing statutory federal income tax rate topre-tax earnings is as follows:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **July 31,**      | ** ** | ** ** | ** ** | **August 1,** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **2010**               | ** ** | ** ** | ** ** | **2009** | ** ** | ** ** | ** ** |
| Income tax at statutory rate                  |       | $                      | 1,648      |   | 35.0 | % | $ | 94 |   | 35.0 | % |
| Effect of:                                    |       |                   |       |   |   |   |   |   |   |
| State income taxes, net of federal benefit    |       | 26                     |       | 0.6 |   | 62 |   | 23.1 |   |
| Foreign operations with lower statutory rates |       | (2,836                 | )          | (60.3 | ) | (893 | ) | (334.2 | ) |
| Foreign losses with no tax benefit            |       | 179                    |       | 3.8 |   | 115 |   | 43.0 |   |
| Valuation allowance                           |       | 2,053                  |       | 43.6 |   | 921 |   | 344.8 |   |
| Other, net                                    |       | (428                   | )          | (9.1 | ) | (13 | ) | (6.9 | ) |
| Income tax provision                          |       | $                      | 642        |   | 13.6 | % | $ | 286 |   | 104.8 | % |

 

Werecognize interest and penalties accrued related to the unrecognized taxbenefits in the provision for income taxes. During the three months ended July 31, 2010, we recognized $30 ininterest and zero in penalties.  We hadapproximately $736 accrued at July 31, 2010 for the payment of interestand penalties.  The total unrecognizedtax benefit as of July 31, 2010 was $2,781.

 

Thefollowing table presents a reconciliation of the beginning and ending amountsof unrecognized tax benefits:

 
| Balance at May 1, 2010                          |   | $      | 2,782  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Increases for positions related to the current  year |   | — |   |
| Decreases for positions related to the prior years   |   | (1     | )      |
| Settlements                                          |   | — |   |
| Lapsing of statutes of limitations                   |   | — |   |
| Balance at July 31, 2010                        |   | $      | 2,781  |   |

 

Webelieve that it is reasonably possible that the total amount of unrecognizedtax benefits will change within the next twelve months.  We have certain tax return years subject tostatutes of limitation, which will close within twelve months of the end of thequarter.  Unless challenged by taxauthorities, the closure of those statutes of limitation is expected to resultin the recognition of uncertain tax positions in the range of between $300 and$2,600.

 

TheCompany and all of its domestic subsidiaries file income tax returns in theU.S. federal jurisdiction and various states. Our foreign subsidiaries file income tax returns in certain foreignjurisdictions since they have operations outside the U.S.  The Company and its subsidiaries aregenerally no longer subject to U.S. federal, state and local examinations bytax authorities for all years except fiscal 2010, fiscal 2009 and fiscal 2006.

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**7****.****                                    ****COMMON STOCK AND STOCK-BASED COMPENSATION**

 

Thefollowing table sets forth the changes in the number of issued shares of commonstock during the three-month periods presented:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **July 31,**      | ** ** | **August 1,** | ** ** |
| ** **                             | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                   |       |                   |       |   |   |
| Balance at the beginning of the period |       | 38,149,946             |       | 38,290,776 |   |
| Options exercised                      |       | 1,350                  |       | — |   |
| Restricted stock awards vested         |       | 24,000                 |       | 24,449 |   |
| Balance at the end of the period       |       | 38,175,296             |       | 38,315,225 |   |

 

Wepaid a quarterly dividend of $2,576 on July 31, 2010.

 

**Stock Options Granted Under the 2000 and 2004 Stock Plans**

 

Optionsto purchase 431,492 shares of our common stock were granted in previous yearsunder the 2000 and 2004 stock plans and are outstanding and exercisable as of July 31,2010.  Options to purchase 96,934 sharesof our common stock expired during the first three months of fiscal 2011.  There was no remaining compensation expenserelating to these options in the first quarter of fiscal 2011.

 

Thefollowing tables summarize the stock option activity and related informationfor the stock options granted under the 2000 and 2004 stock plans for the threemonths ended July 31, 2010:

 
| ** **                        | ** ** | **Summary of Option Activity** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | ** **                     | ** ** | **Wtd. Avg.** | ** ** |
| ** **                        | ** ** | **Shares**                     | ** ** | **Exercise Price** | ** ** |
| Outstanding at May 1, 2010   |       | 529,776                        |       | $ | 10.10 |   |
| Exercised                         |       | (1,350                         | )          | 9.57 |   |
| Forfeited and Expired             |       | (96,934                        | )          | 13.03 |   |
| Outstanding at July 31, 2010 |       | 431,492                        |       | $ | 9.44 |   |

 
| **Options Outstanding and**           | ** ** |
|---------------------------------------|------------|
| **Exercisable at July 31, 2010** | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** | **Avg.** | ** ** |
| **Range of**                          | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining** | ** ** |
| **Exercise Prices**                   | ** ** | **Shares** | ** ** | **Price** | ** ** | **Life (Years)** | ** ** |
| $5.72 - $7.69                         |       | 148,125 |   | $ | 6.72 |   | 0.8 |   |
| $8.53 - $11.44                        |       | 283,367 |   | 10.87 |   | 2.3 |   |
|                                  |       | 431,492 |   | $ | 9.44 |   |   |   |

 

Theoptions outstanding had an intrinsic value of $637 at July 31, 2010.  The intrinsic value represents the totalpre-tax intrinsic value (the difference between the Company’s closing stockprice on the last trading day of the first quarter of fiscal 2011 and theexercise price, multiplied by the number of in-the-money options) that wouldhave been received by the option holders had all option holders exercised theiroptions on July 31, 2010.

 

**Stock Options Granted Under the 2007 Stock Plan**

 

InJuly 2010, the Compensation Committee approved the grant of options topurchase 125,000 shares of our common stock to some members of the managementteam.  The stock options vest on thethird anniversary of the date of grant.  The exercise price is the closing price on the date granted.

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**7****.****                                    ****COMMON STOCK AND STOCK-BASED COMPENSATION - Continued**

 

Thefollowing tables summarize the stock option activity and related informationfor the stock options granted under the 2007 stock plan for the three monthsended July 31, 2010:

 
| ** **                        | ** ** | **Summary of Option Activity** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | ** **                                    | ** ** | **Wtd. Avg.** | ** ** |
| ** **                        | ** ** | **Shares**                                    | ** ** | **Exercise Price** | ** ** |
| Outstanding at May 1, 2010   |       | 595,500                                       |       | $ | 4.77 |   |
| Granted                           |       | 125,000                                       |       | 10.55 |   |
| Exercised                         |       | —                                        |       | — |   |
| Cancelled                         |       | —                                        |       | — |   |
| Outstanding at July 31, 2010 |       | 720,500                                       |       | $ | 5.77 |   |

 
| **Options Outstanding**   | ** ** |
|---------------------------|------------|
| **at July 31, 2010** | ** ** |
| ** **                | ** ** | ** ** | ** ** | **Avg.** | ** ** |
| ** **                | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| **Exercise Price**        | ** ** | **Shares** | ** ** | **Life (Years)** | ** ** |
| $                         | 2.72       |   | 285,000 |   | 8.6 |   |
| $                         | 6.46       |   | 275,000 |   | 8.9 |   |
| $                         | 8.13       |   | 35,500 |   | 9.4 |   |
| $                         | 10.55      |   | 125,000 |   | 10.0 |   |

 

Weestimated the fair value of our employee stock options on the date of grantusing the Black-Scholes option-pricing model with the following assumptions:

 
| ** **                             | ** ** | **Fiscal 2009** | ** ** | **Fiscal 2010** | ** ** | **Fiscal 2011** | ** ** |
|----------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                             | ** ** | **Grants**      | ** ** | **Grants**      | ** ** | **Grants**      | ** ** |
|                                   |       |            |       |            |       |            |       |
| Average expected volatility            |       | 69.58           | %          | 86.88           | %          | 85.59           | %          |
| Average risk-free interest rate        |       | 1.39            | %          | 1.43            | %          | 1.09            | %          |
| Dividend yield                         |       | 2.26            | %          | 2.77            | %          | 3.63            | %          |
| Expected life of options               |       | 6.87 years      |       | 6.87 years      |       | 7.03 years      |       |
| Weighted-average grant-date fair value |       | $               | 1.46       |            | $          | 4.02            |       | $ | 5.88 |   |
|                                        |            |                 |            |                 |            |                 |            |  |  |  |

 

Theoptions outstanding had an intrinsic value of $3,536 at July 31,2010.  The intrinsic value represents thetotal pre-tax intrinsic value (the difference between the Company’s closingstock price on the last trading day of the first quarter of fiscal 2011 and theexercise price, multiplied by the number of in-the-money options) that wouldhave been received by the option holders had all option holders exercised theiroptions on July 31, 2010.

 

Werecognized pre-tax compensation expense for stock options granted under the2007 plan of $66 and $65 in the three months ended July 31, 2010 and August 1,2009, respectively.  We record thecompensation expense related to the stock options in the selling andadministrative section of our condensed consolidated statement of operations.

 

**Restricted Stock Awards and Restricted Stock Units**

 

InApril 2007, 225,000 shares of common stock subject to performance-basedRestricted Stock Awards (RSAs) granted to our CEO in fiscal 2006 and 2007 wereconverted to Restricted Stock Units (RSUs). The RSUs

 

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(Dollaramounts in thousands, except share data)

 

weresubject to the same vesting schedule and other major provisions of the RSAsthey replaced, except the RSUs are not payable until the earlier of:(1) thirty days after the CEO’s date of termination of employment with theCompany and all of its subsidiaries and affiliates; or (2) the last day ofour fiscal year in which the payment of common stock in satisfaction of theRSUs becomes deductible to the Company under Section 162(m) of theInternal Revenue Code.  The RSUs are notentitled to voting rights or the payment of dividends.   The RSU’s are fully vested but not issued asof July 31, 2010.

 

AtMay 2, 2010, the beginning of fiscal 2011, there were 25,350 shares ofcommon stock subject to time-based RSAs outstanding.  The time-based RSAs vest in three equalannual installments from the grant date. All of the unvested RSAs are entitled to voting rights and to payment ofdividends.  During the three months endedJuly 31, 2010, we awarded 24,000 restricted shares to our independentdirectors, all of which vested immediately upon grant.

 

Werecognized pre-tax compensation expense for RSAs of $276 and $237 for the threemonths ended July 31, 2010 and August 1, 2009, respectively.  We record the expense in the selling andadministrative section of our condensed consolidated statement of operations.

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

Thefollowing table summarizes the RSA activity for the three months ended July 31,2010:

 
| ** **                             | ** ** | **RSA**    | ** ** |
|----------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **Shares** | ** ** |
| Unvested and unissued at May 1, 2010   |       | 25,350     |       |
| Awarded                                |       | 24,000     |       |
| Vested                                 |       | (24,000    | )          |
| Forfeited and Cancelled                |       | (882       | )          |
| Unvested and unissued at July 31, 2010 |       | 24,468     |       |

 

Thetable below shows the Company’s unvested and unissued RSAs at July 31, 2010:

 
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Probable**      | ** ** | **Target**        | ** ** |
|------------|------------|------------|------------|-----------------------------------|------------|--------------|------------|-------------------|------------|-------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Unearned**      | ** ** | **Unearned**      | ** ** |
| **Grant**  | ** ** | ** ** | ** ** | ** **                        | ** ** | **Weighted** | ** ** | **Compensation**  | ** ** | **Compensation**  | ** ** |
| **Fiscal** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Average**  | ** ** | **Expense at**    | ** ** | **Expense at**    | ** ** |
| **Year**   | ** ** | **RSAs**   | ** ** | **Vesting Period**                | ** ** | **Value**    | ** ** | **July 31, 2010** | ** ** | **July 31, 2010** | ** ** |
| 2008       |       | 666        |       | 3-year  equal annual installments |       | $            | 11.74      |              | —     |              | —     |   |
| 2009       |       | 23,802     |       | 3-year  equal annual installments |       | 10.61        |       | 67                |       | 67                |       |
|            |            |            |            |                                   |            |              |            |                   |            |                   |            |  |

 

AtJuly 31, 2010, the aggregate unvested and unissued RSAs had a grant dateweighted average fair value of  $10.33and a weighted average vesting period of approximately nine months.

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**8.****                                     ****NET INCOME/(LOSS) PER SHARE**

 

Basicnet income/(loss) per share is calculated by dividing net income/(loss) by theweighted average number of common shares outstanding for the applicableperiod.  Diluted income/(loss) per shareis calculated after adjusting the numerator and the denominator of the basicincome/(loss) per share calculation for the effect of all potentially dilutivecommon shares outstanding during the period.

 

The following table sets forth the computation of basic and diluted netincome/(loss) per share:

 
| ** **                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **July 31,**           | ** ** | **August 1,** | ** ** |
| ** **                                                                                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Numerator - net income/(loss) attributable to                                                                 |       |                   |       |   |   |
| Methode Electronics, Inc.                                                                                     |       | $                      | 4,065      |   | $ | (19 | ) |
|                                                                                                          |       |                   |       |   |   |
| Denominator:                                                                                                  |       |                   |       |   |   |
| Denominator for basic net income/(loss) per  share-weighted average shares                                    |       | 37,046                 |       | 36,863 |   |
| Dilutive potential common shares-employee stock  options                                                      |       | 244                    |       | — |   |
| Denominator for diluted net income/(loss) per  share adjusted weighted average shares and assumed conversions |       | 37,290                 |       | 36,863 |   |
|                                                                                                          |       |                   |       |   |   |
| Net income/(loss) per share:                                                                                  |       |                   |       |   |   |
| Basic and diluted                                                                                             |       | $                      | 0.11       |   | $ | — |   |

 

As of July 31, 2010, options to purchase 395,867shares of common stock at a weighted-average exercise price of $10.84 per sharewere outstanding, but were not included in the computation of net income pershare because the exercise prices were greater than the average market price of$10.37 for our common stock for the first quarter of fiscal 2011, and,therefore, the effect would have been anti-dilutive.  As of August 1, 2009, options to purchaseshares of common stock have not been included in the calculation of diluted netloss per share, as the effect would have been anti-dilutive.

 

**9.****                                     ****SEGMENT INFORMATION**

 

We are a global manufacturer of component andsubsystem devices.  We design,manufacture and market devices employing electrical, electronic, wireless,sensing and optical technologies.  Ourcomponents are found in the primary end markets of the automotive, appliance,communications (including information processing and storage, networkingequipment, wireless and terrestrial voice/data systems), aerospace, rail andother transportation industries; and the consumer and industrial equipmentmarkets.

 

ASC No. 280, “Segment Reporting” (“ASC No. 280”),establishes annual and interim reporting standards for an enterprise’soperating segments and related disclosures about its products, services, geographicareas and major customers. An operating segment is defined as a component of anenterprise that engages in business activities from which it may earn revenuesand incur expenses, and about which separate financial information is regularlyevaluated by the Chief Operating Decision Maker (“CODM”) in deciding how toallocate resources.  The CODM, as definedby ASC No. 280, is the Company’s President and Chief Executive Officer (“CEO”).

 

TheAutomotive segment supplies electronic and electromechanical devices andrelated products to automobile OEMs, either directly or through their tieredsuppliers, including control switches for electrical power and signals,connectors for electrical devices, integrated control components, switches andsensors that monitor the operation or status of a component or system, andpackaging of electrical components.

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**9.****                                     ****SEGMENT INFORMATION - Continued**

 

TheInterconnect segment provides a variety of copper and fiber-optic interconnectand interface solutions for the appliance, computer, networking,telecommunications, storage, medical, military, aerospace, commercial andconsumer markets.  Solutions includesolid-state field effect interface panels, PC and express card packaging,optical and copper transceivers, terminators, connectors, custom cableassemblies and conductive polymer and thick film inks.  Services include the design and installationof fiber optic and copper infrastructure systems, and manufacture of active andpassive 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 are usedin various markets and applications, including telecommunications, computers,transportation, industrial and power conversion, insulated gate bipolartransistor 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.

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies in our Form 10-K for the fiscal yearended May 1, 2010.  We allocate resourcesto segments based on operating income. Transfers between segments are recordedusing internal transfer prices set by us. The table below represents information regarding our segments;

 

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NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**9****.****                                     ****SEGMENT INFORMATION - Continued**

 
| ** **                                            | ** ** | **Three Months Ended July 31, 2010**  | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | ** **                            | ** ** | ** ** | ** ** | **Power** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Automotive**                        | ** ** | **Interconnect** | ** ** | **Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                     | 49,282     |   | $ | 34,748 |   | $ | 11,625 |   | $ | 2,897 |   | $ | 267 |   | $ | 98,285 |   |
| Transfers between segments                            |       | —                                |       | (152 | ) | (77 | ) | (38 | ) | (267 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                     | 49,282     |   | $ | 34,596 |   | $ | 11,548 |   | $ | 2,859 |   | $ | — |   | $ | 98,285 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss)                                 |       | $                                     | 2,822      |   | $ | 3,681 |   | $ | 506 |   | $ | (573 | ) | $ | — |   | $ | 6,436 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                  |       |   |   |   |   |   |   |   |   | (1,764 | ) |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                  |       |   |   |   |   |   |   |   |   | $ | 4,672 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                            | ** ** | **Three Months Ended August 1, 2009** | ** ** |
| ** **                                            | ** ** | ** **                            | ** ** | ** ** | ** ** | **Power** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Automotive**                        | ** ** | **Interconnect** | ** ** | **Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                     | 51,199     |   | $ | 24,741 |   | $ | 11,414 |   | $ | 2,707 |   | $ | 285 |   | $ | 89,776 |   |
| Transfers between segments                            |       | —                                |       | (51 | ) | (224 | ) | (10 | ) | (285 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                     | 51,199     |   | $ | 24,690 |   | $ | 11,190 |   | $ | 2,697 |   | $ | — |   | $ | 89,776 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                     | 5,509      |   | $ | 1,031 |   | $ | 852 |   | $ | (580 | ) | $ | — |   | $ | 6,812 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (2,618                                | )          | (771 | ) | (222 | ) | — |   | — |   | (3,611 | ) |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                     | 2,891      |   | $ | 260 |   | $ | 630 |   | $ | (580 | ) | $ | — |   | $ | 3,201 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                  |       |   |   |   |   |   |   |   |   | (2,928 | ) |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                  |       |   |   |   |   |   |   |   |   | $ | 273 |   |
|                                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**10.          CONTINGENCIES**

 

Certain litigation arising in thenormal course of business is pending against us.  We are from time to time subject to variouslegal actions and claims incidental to our business, including those arisingout of alleged defects, breach of contracts, employment-related matters andenvironmental matters.  We considerinsurance coverage and third-party indemnification when determining requiredaccruals for pending litigation and claims. Although the outcome of potential legal actions and claims cannot bedetermined, it is our opinion, based on the information available, that we haveadequate reserves for these liabilities.

 

**Delphi Related Litigation**

 

OnSeptember 4, 2008, Methode and Delphi Automotive Systems LLC (“Delphi”) enteredinto a supply agreement pursuant to which Methode was to supply all of Delphi’srequirements for the seat bladders used in Delphi’s occupant restraint systemfrom October 1, 2008 through September 30, 2011.  On August 26, 2009, Delphi notified us thateffective September 10, 2009, our supply arrangement was terminated.  We are contesting Delphi’s right to terminatethis long-term supply arrangement and the parties are engaged in litigationregarding this supply agreement and our related intellectual property.

 

Asdescribed in more detail in Part I, Item 3 “Legal Proceedings” of our AnnualReport on Form 10-K, for the fiscal year ended May 1, 2010, in March 2010,DPH Holdings Corp., as successor to Delphi Corporation, served theCompany with a complaint seeking to recover approximately $19,726 millionin alleged preference payments that Delphi made to the Company withinthe 90-day preference period preceding Delphi’s bankruptcyfiling.  The Company is seeking to dismiss theDelphi preference complaint based on violations of due processand the Company possesses several other substantive defenses.

 

In June 2006, the Company soldcertain unsecured claims it had filed against Delphi in Delphi’s bankruptcyproceeding to Credit Suisse for $3,137 pursuant to a Transfer Agreement.  These claims were subsequently assigned byCredit Suisse to Blue Angel Claims LLC (“Blue Angel”).  On July 20, 2010, Blue Angel delivered ademand letter to the Company contending that under the terms of the TransferAgreement, the unsecured claims had been objected to by Delphi in the DelphiBankruptcy proceeding and therefore the Company owed Blue Angel $3,137 plusinterest.  The Company disagrees withBlue Angel’s position as to Delphi’s actions regarding the Company’s unsecuredclaims and the interpretation of the Transfer Agreement.

 

**11.          PRE-PRODUCTION COSTS RELATED TOLONG-TERM SUPPLY ARRANGEMENTS**

 

We incur pre-production tooling costs related tocertain products produced for our customers under long-term supply agreements.  We had $12,402 and $11,984 as of July 31, 2010and May 1, 2010, respectively, of pre-production tooling costs related tocustomer-owned tools for which reimbursement is contractually guaranteed by thecustomer or for which the customer has provided a non-cancelable right to usethe tooling.  Net revenues and costs onprojects are deferred and recognized over the life of the related long-termsupply agreement.

 

**12.          FAIR VALUE MEASUREMENTS**

 

ASCNo. 820 defines fair value as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants.

 

ASCNo. 820 also specifies a fair value hierarchy based upon the observation ofinputs in valuation techniques. Observable inputs (highest level) reflect market data obtained fromindependent sources, while unobservable inputs (lowest level) reflectinternally developed market assumptions. In accordance with ASC No. 820, fair value measurements are classifiedunder the following hierarchy:

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**12.          FAIR VALUE MEASUREMENTS - Continued**

 

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

 

·                  Level 2 —Quoted prices in active markets for similar assets and liabilities, or otherinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument.

 

·                  Level 3 —Unobservable inputs that are supported by little or no market activity and thatare significant to the fair value of the assets and liabilities.  This includes certain pricing models,discounted cash flow methodologies and similar techniques that use significantunobservable inputs.

 

Assetsand liabilities recorded at fair value are valued using quoted market prices orunder a market approach using other relevant information generated by markettransactions involving identical or comparable instruments and included in atable below that summarizes the fair value of assets and liabilities as of July31, 2010:

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 
| ** **                                        | ** ** | **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)                     |       | $                               | 56,449     |   | $ | 56,449 |   | $ | — |   | $ | — |   |
| Assets related to deferred compensation plan      |       | $                               | 3,806      |   | $ | — |   | $ | 3,806 |   | $ | — |   |
| Total assets at fair value                        |       | $                               | 60,255     |   | $ | 56,449 |   | $ | 3,806 |   | $ | — |   |
|                                              |       |                            |       |   |   |   |   |   |   |
| Liabilities:                                      |       |                            |       |   |   |   |   |   |   |
| Liabilities related to deferred compensation plan |       | $                               | 3,018      |   | $ | 3,018 |   | $ | — |   | $ | — |   |
| Total liabilities at fair value                   |       | $                               | 3,018      |   | $ | 3,018 |   | $ | — |   | $ | — |   |

 

----

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

 

FairValue of Other Financial Instruments. The carrying values of our short-termfinancial instruments, including cash and cash equivalents, accounts receivableand accounts payable approximate their fair values because of the shortmaturity of these instruments.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

***Cautionary Statement***

 

Certainstatements in this report are forward-looking statements that are subject tocertain risks and uncertainties.  Weundertake no duty to update any such forward-looking statements to conform toactual results or changes in our expectations. Our business is highly dependent upon two large automotive customers andspecific makes and models of automobiles. Our results will be subject to many of the same risks that apply to theautomotive, appliance, computer and telecommunications industries, such asgeneral economic conditions, interest rates, 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 our actualresults 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 and are made as of the date of thisreport.

 

·                  We depend on a small number of large customers,specifically two large automotive customers. If we were to lose any of these customers or any of these customersreduced their purchases, or if any of the customers declare bankruptcy, ourfuture results could be materially adversely affected.

 

·                  Because we derive a substantial portion of our revenuesfrom customers in the automotive, appliance, computer and communicationsindustries, we are susceptible to trends and factors affecting thoseindustries.

 

·                  Our business is cyclical and seasonal in nature and furtherdownturns in the automotive industry could reduce the sales and profitabilityof our business.

 

·                  Our technology-based businesses and the markets in which weoperate are highly competitive.  If we areunable to compete effectively, our sales or profits could decline.

 

·                  We face risks relating to our international operations, includingpolitical and economic instability, expropriation, or the imposition ofgovernment controls.

 

·                  We may be unable to keep pace with rapid technologicalchanges, which could adversely affect our business.

 

·                  Products we manufacture may contain design or manufacturingdefects that could result in reduced demand for our products or services andliability claims against us.

 

·                  If we are unable to protect our intellectual property or weinfringe, or are alleged to infringe, on another person’s intellectualproperty, our business, financial condition and operating results could bematerially adversely affected.

 

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

 

·                  We may acquire businesses or divest of various businessoperations. These transactions may pose significant risks and may materiallyadversely affect our business, financial condition and operating results.

 

·                  A significant fluctuation between the U.S. dollar and other currenciescould adversely impact our operating results.

 

·                  Unfavorable tax law changes may adversely affect results.

 

·                  The future trading price of our common stock could be subject to widefluctuations in response to a variety of factors.

 

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·                  We are subject to the risks of owning real property, such as rising realestate taxes, adverse changes in the value of the properties and increased cashcommitments for improving current buildings.

 

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 statements, all of which are expressly qualified by theforegoing.  See Part I — Item 1A, RiskFactors of our Form 10-K for the fiscal year ended May 1, 2010, for a furtherdiscussion regarding some of the reasons that actual results may be materiallydifferent from those we anticipate.

 

***Overview***

 

Weare a global manufacturer of component and subsystem devices withmanufacturing, design and testing facilities in China, Czech Republic, Germany,India, Lebanon, Malta, Mexico, the Philippines, Singapore, Switzerland, theUnited Kingdom and the United States.  Weare a global designer and manufacturer of electro-mechanical devices.  We design, manufacture and market devicesemploying electrical, radio remote control, electronic, wireless, sensing andoptical technologies.  Our business ismanaged on a segment basis, with those segments being Automotive, Interconnect,Power Products and Other.   For moreinformation regarding the business and products of these segments, see “Item 1.Business.” of our Form 10-K for the fiscal year ended May 1, 2010.

 

Ourcomponents are found in the primary end markets of the aerospace, appliance,automotive, construction, consumer and industrial equipment markets, communications(including information processing and storage, networking equipment, wirelessand terrestrial voice/data systems), rail and other transportation industries.

 

OnSeptember 4, 2008, Methode and Delphi Automotive Systems LLC (“Delphi”) enteredinto a supply agreement pursuant to which Methode was to supply all of Delphi’srequirements for the seat bladders used in Delphi’s occupant restraint systemfrom October 1, 2008 through September 30, 2011.  On August 26, 2009, Delphi notified us thateffective September 10, 2009, our supply arrangement was terminated.  We are contesting Delphi’s right to terminatethis long-term supply agreement and the parties are engaged in litigationregarding this supply agreement and our related intellectual property.

 

Asdescribed in more detail in Part I, Item 3 “Legal Proceedings” of our AnnualReport on Form 10-K, for the fiscal year ended May 1, 2010, in March 2010,DPH Holdings Corp., as successor to Delphi Corporation, served theCompany with a complaint seeking to recover approximately$19.7 million in alleged preference payments that Delphi made to theCompany within the 90-day preference period preceding Delphi’s bankruptcyfiling.  The Company is seeking to dismiss theDelphi preference complaint based on violations of due processand the Company possesses several other substantive defenses.

 

InJune 2006, the Company sold certain unsecured claims it had filed againstDelphi in Delphi’s bankruptcy proceeding to Credit Suisse for $3.1 millionpursuant to a Transfer Agreement.  Theseclaims were subsequently assigned by Credit Suisse to Blue Angel Claims LLC (“BlueAngel”).  On July 20, 2010, Blue Angeldelivered a demand letter to the Company contending that under the terms of theTransfer Agreement, the unsecured claims had been objected to by Delphi in theDelphi Bankruptcy proceeding and therefore the Company owed Blue Angel $3.1million plus interest.  The Companydisagrees with Blue Angel’s position as to Delphi’s actions regarding theCompany’s unsecured claims and the interpretation of the Transfer Agreement.

 

**Business Outlook**

 

Dueto the loss of the Delphi business and the exit of legacy Ford products infiscal 2010, we expect a decline in our Automotive segment sales in fiscal2011.  Even though our Europeanautomotive business was strong in the first quarter of fiscal 2011, we areunable to determine the impact of the phase out of the government sponsored “scrappage”incentive programs, which paid

 

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ownersto trade in old cars and purchase new models. It is also unclear what impact the current European debt crisis willhave on our European businesses.  For ourother segments, if the economic conditions continue to stabilize, with nosignificant further deterioration, we expect modest sales growth during fiscal2011 as compared to fiscal 2010.  Therestructuring actions undertaken by us over the past three fiscal years,targeted at reducing our cost structure are expected to positively impact ourfuture earnings and cash flows.

 

Results may differ materially fromwhat is expressed or forecasted.  See “Item 1A Risk Factors” of our Form 10-K, for the fiscal year ended May 1, 2010.

 

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Table of Contents

 

**Results of Operations for the Three Months Ended July 31,2010 as Compared to the Three Months Ended August 1, 2009**

 

**ConsolidatedResults**

 

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                                                 | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                                                 | ** ** | **2010**          | ** ** | **2009**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                                                  |       | $                 | 98.3       |               | $          | 89.8           |       | $              | 8.5        |   | 9.5 | % |
| Other income                                               |       | 0.7               |       | 1.4                |       | (0.7           | )          | -50.0          | %          |
|                                                       |       | 99.0              |       | 91.2               |       | 7.8            |       | 8.6            | %          |
|                                                       |       |              |       |               |       |           |       |           |       |
| Cost of products sold                                      |       | 79.5              |       | 70.9               |       | 8.6            |       | 12.1           | %          |
|                                                       |       |              |       |               |       |           |       |           |       |
| Gross margins (including other income)                     |       | 19.5              |       | 20.3               |       | (0.8           | )          | -3.9           | %          |
|                                                       |       |              |       |               |       |           |       |           |       |
| Restructuring                                              |       | —            |       | 3.6                |       | (3.6           | )          | N/M            |       |
| Selling and administrative expenses                        |       | 15.6              |       | 15.9               |       | (0.3           | )          | -1.9           | %          |
| Interest expense, net                                      |       | —            |       | (0.1               | )          | 0.1            |       | N/M            |       |
| Other, net - income/(expense)                              |       | 0.8               |       | (0.4               | )          | 1.2            |       | N/M            |       |
| Income tax expense                                         |       | 0.6               |       | 0.3                |       | 0.3            |       | 100.0          | %          |
|                                                       |       |              |       |               |       |           |       |           |       |
| Net income attributable to Methode  Electronics, Inc. |       | $                 | 4.1        |               | $          | —         |       | $              | 4.1        |   | N/M |   |

 
| ** **                                                 | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**                            | ** ** | **2010**          | ** ** | **2009**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                  |       | 100.0             | %          | 100.0              | %          |       |       |       |       |
| Other income                                               |       | 0.7               | %          | 1.6                | %          |       |       |       |       |
| Cost of products sold                                      |       | 80.9              | %          | 79.0               | %          |       |       |       |       |
| Gross margins (including other income)                     |       | 19.8              | %          | 22.6               | %          |       |       |       |       |
| Restructuring                                              |       | 0.0               | %          | 4.0                | %          |       |       |       |       |
| Selling and administrative expenses                        |       | 15.9              | %          | 17.7               | %          |       |       |       |       |
| Interest expense, net                                      |       | 0.0               | %          | -0.1               | %          |       |       |       |       |
| Other, net - income/(expense)                              |       | 0.8               | %          | -0.4               | %          |       |       |       |       |
| Income tax expense                                         |       | 0.6               | %          | 0.3                | %          |       |       |       |       |
| Net income attributable to Methode  Electronics, Inc. |       | 4.2               | %          | 0.0                | %          |       |       |       |       |

 

*Net Sales*.  Consolidatednet sales increased $8.5 million, or 9.5%, to $98.3 million for the threemonths ended July 31, 2010 from $89.8 million for the three months ended August 1,2009.  The Automotive segment net salesdecreased $1.9 million, or 3.7%, to $49.3 million for the first quarter offiscal 2011 from $51.2 million for the first quarter of fiscal 2010.  The Interconnect segment net sales increased$9.9 million, or 40.1%, to $34.6 million for the first quarter of fiscal 2011as compared to $24.7 million for the first quarter of fiscal 2010.  The Power Products segment net salesincreased $0.3 million, or 2.7%, to $11.5 million for the first quarter offiscal 2011 as compared to $11.2 million for the first quarter of fiscal2010.  The Other segment net sales increased$0.1 million, or 3.7%, to $2.8 million for the first quarter of fiscal 2011, ascompared to $2.7 million in the first quarter of fiscal 2010.  Translation of foreign operations net salesfor the three months ended July 31, 2010 decreased reported net sales by$1.8 million or 2.0% due to average currency rates in the first quarter offiscal 2011, compared to the average currency rates in the first quarter offiscal 2010.

 

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*Other Income*.  Otherincome decreased $0.7 million, or 50.0%, to $0.7 million for the three monthsended July 31, 2010 from $1.4 million for three months ended August 1,2009.  Other income consisted primarilyof earnings from engineering design fees and royalties.  The decrease relates to lower engineeringdesign fees from our European automotive market.

 

*Cost of Products Sold*.  Consolidated cost of products sold increased$8.6 million, or 12.1%, to $79.5 million for the three months ended July 31,2010, compared to $70.9 million for the three months ended August 1,2009.  Consolidated cost of products soldas a percentage of sales were 80.9% in the first quarter of fiscal 2011,compared to 79.0% in the first quarter of fiscal 2010.  The increase relates primarily to theAutomotive segment’s development of new products in North America, which areexpected to begin shipping in future periods, as well as higher manufacturingcosts due to lower sales volumes in our U.S-based Power Products businesses.The increases were partially offset by lower cost of products sold as apercentage of sales in our Interconnect segment due to a variation in sales mixwithin the segment in the first quarter of fiscal 2011, as compared to thesales mix in the first quarter of fiscal 2010.

 

*Gross Margins (including other income). *Consolidated gross margins(including other income) decreased $0.8 million, or 3.9%, to $19.5 million forthe three months ended July 31, 2010 as compared to $20.3 million for thethree months ended August 1, 2009. Gross margins (including other income) as a percentage of net sales were19.8% for the three months ended July 31, 2010 as compared to 22.6% forthe three months ended August 1, 2009. The decrease primarily relates to the loss of the Delphi business,higher design and overhead costs in our U.S.-based Automotive and PowerProducts businesses, as well as lower engineering design fees in the firstquarter of fiscal 2011, compared to the first quarter of fiscal 2010.

 

*Restructuring*. During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first quarter offiscal 2010, we recorded a total restructuring charge of $3.6 million, whichconsisted of $1.9 for employee severance, $1.4 for accelerated depreciation and$0.3 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses decreased$0.3 million, or 1.9%, to $15.6 million for the three months ended July 31,2010, compared to $15.9 million for the three months ended August 1,2009.  The decrease is primarily due tolower bonus, legal fees unrelated to the Delphi litigation, and otherprofessional fees in the first quarter of fiscal 2011, compared to the firstquarter of fiscal 2010.  This waspartially offset by higher legal expenses related to the Delphi supplyagreement and patent dispute.  The Delphirelated legal fees in first quarter of fiscal 2011 were $1.5 million, comparedto $0.4 million in the first quarter of fiscal 2010.  Selling and administrative expenses as apercentage of net sales decreased to 15.9% for the three months ended July 31,2010 from 17.7% for the three months ended August 1, 2009.

 

*Interest Expense, Net*.  Interest expense, net was zero for the threemonths ended July 31, 2010, compared to $0.1 million for the three monthsended August 1, 2009.  Interestincome was $0.2 million for the three months ended July 31, 2010, compared to$0.3 million for the three months ended August 1, 2009.  The average cash balance was $63.4 millionduring the three months ended July 31, 2010 as compared to $61.1 millionduring the three months ended August 1, 2009.  The average interest rate earned for thethree months ended July 31, 2010 was 1.01%, compared to 0.39% in the threemonths ended August 1, 2009. Interest expense was $0.2 million for both the three months ended July 31,2010 and August 1, 2009.

 

*Other Income/(Expense), Net*.  Other income/(expense), net increased $1.2million to income of $0.8 million for the three months ended July 31, 2010as compared to an expense of $0.4 million for the three months ended August 1,2009.  The income of $0.8 million for the threemonths ended July 31, 2010 included income of $1.2 million for life insurancepolices in connection with an employee deferred compensation plan.  The loss of $0.4 million for the three monthsended August 1, 2009 included income of $0.3 million related to anenhanced cash fund.  All other amountsfor both the three months ended July 31, 2010 and August 1, 2009,relate to currency rate fluctuations.  The functional currencies ofthese operations are the British pound, Chinese yuan, Czech koruna, Euro, IndianRupee, Mexican peso, Singapore dollar and Swiss Franc.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

*Income Tax Expense.*  Income tax expense increased by $0.3 millionto $0.6 million for the three months ended July 31, 2010, compared to $0.3million for the three months ended August 1, 2009.  The three months ended 

 

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July 31, 2010 includes taxes on foreign profits of $0.5 millionand $0.1 million related to Non-Federal U.S. taxes.  The three months ended August 1, 2009includes taxes on foreign profits of $0.2 million and $0.1 million related tonon-Federal U.S. taxes.

 

*Net Income Attributable to Methode Electronics, Inc.*  Net income attributable toMethode Electronics, Inc. was $4.1 million for the three months ended July 31,2010, compared to break-even for the three months ended August 1,2009.  The increase is primarily due tothe absence of any restructuring expenses, gain from life insurance policy, andfavorable selling and administrative expenses, partially offset by lowerengineering design fees and higher tax expenses in the first quarter of fiscal2011, compared to the first quarter of fiscal 2010.

 

**Operating Segments**

 

**Automotive Segment Results**

** **

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                              | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2010**          | ** ** | **2009**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                 | 49.3       |               | $          | 51.2           |       | $              | (1.9       | ) | -3.7 | % |
| Other  income                           |       | 0.7               |       | 1.2                |       | (0.5           | )          | -41.7          | %          |
|                                    |       | 50.0              |       | 52.4               |       | (2.4           | )          | -4.6           | %          |
|                                    |       |              |       |               |       |           |       |           |       |
| Cost  of products sold                  |       | 39.9              |       | 40.9               |       | (1.0           | )          | -2.4           | %          |
|                                    |       |              |       |               |       |           |       |           |       |
| Gross  margins (including other income) |       | 10.1              |       | 11.5               |       | (1.4           | )          | -12.2          | %          |
|                                    |       |              |       |               |       |           |       |           |       |
| Restructuring                           |       | —            |       | 2.6                |       | (2.6           | )          | N/M            |       |
| Selling  and administrative expenses    |       | 7.2               |       | 5.5                |       | 1.7            |       | 30.9           | %          |
| Other  expense, net                     |       | (0.1              | )          | (0.6               | )          | 0.5            |       | N/M            |       |
|                                    |       |              |       |               |       |           |       |           |       |
| Income  before income taxes             |       | $                 | 2.8        |               | $          | 2.8            |       | —         |       | 0.0 | % |
|                                         |            |                   |            |                    |            |                |            |                |            |  |  |  |

 
| ** **                             | ** ** | **July 31,** | ** ** | **August 1,** | ** ** |
|----------------------------------------|------------|-------------------|------------|--------------------|------------|
| **Percent of sales:**                  | ** ** | **2010**          | ** ** | **2009**           | ** ** |
| Net sales                              |       | 100.0             | %          | 100.0              | %          |
| Other income                           |       | 1.4               | %          | 2.3                | %          |
| Cost of products sold                  |       | 80.9              | %          | 79.9               | %          |
| Gross margins (including other income) |       | 20.5              | %          | 22.5               | %          |
| Restructuring                          |       | 0.0               | %          | 5.1                | %          |
| Selling and administrative expenses    |       | 14.6              | %          | 10.7               | %          |
| Other expense, net                     |       | -0.2              | %          | -1.2               | %          |
| Income before income taxes             |       | 5.7               | %          | 5.5                | %          |

 

*Net Sales*.  Automotivesegment net sales decreased $1.9 million, or 3.7%, to $49.3 million for thethree months ended July 31, 2010 from $51.2 million for the three monthsended August 1, 2009.  There were nonet sales to Delphi Corporation in the first quarter of 2011 as compared to netsales of $7.5 million in the first quarter of fiscal 2010 due to thecancellation of the supply agreement on September 10, 2009.  Offsetting the Delphi sales loss, sales fromour European and Asian markets were stronger in the first quarter of fiscal2011, compared to the first quarter of fiscal 2010.  Net sales declined by 79.8% in North America.  Excluding the loss of the Delphi business andthe business transferred to China, net sales declined by 60.1% in NorthAmerica.  However, net sales increased by15.3% in Europe and 358.2% in Asia in the first quarter of fiscal 2011, ascompared to the first quarter of fiscal 2010. A portion of Asia’s growth benefited from the planned transfer ofproduction from our U.S. facility to our 

 

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facility in Shanghai, China in the third quarter of fiscal 2010.  Excluding the transferred business, thegrowth in China was 161.4%.  Translationof foreign operations net sales in the three months ended July 31, 2010decreased reported net sales by $1.7 million, or 3.4%, due to average currencyrates in the first quarter of fiscal 2011, compared to the average currencyrates in the first quarter of fiscal 2010.

 

*Other Income*.  Otherincome decreased $0.5 million, or 41.7%, to $0.7 million for the three monthsended July 31, 2010, from $1.2 million for three months ended August 1,2009.  Other income consisted primarilyof earnings from engineering design fees and royalties.  The decrease relates to lower engineeringdesign fees in our European automotive business.

 

*Cost of Products Sold*.  Automotive segment cost of products solddecreased $1.0 million, or 2.4%, to $39.9 million for the three months ended July 31,2010 from $40.9 million for the three months ended August 1, 2009.  The Automotive segment cost of products soldas a percentage of sales were 80.9% in the first quarter of fiscal 2011,compared to 79.9% in the first quarter of fiscal 2010.  The increase in cost of goods sold as apercentage of sales were primarily due to the loss of the Delphi business andincreasing cost on the remaining North American business, partially offset byhigher sales volumes and improvements in cost of goods sold as a percentage ofsales in Europe and Asia.  The increasingcosts as a percentage of sales in North America primarily relates to the developmentof new products which are expected to begin shipping in future periods.

 

*Gross Margins (including other income). *Automotive segment grossmargins (including other income) decreased $1.4 million, or 12.2%, to $10.1million for the three months ended July 31, 2010 as compared to $11.5million for the three months ended August 1, 2009.  The Automotive segment gross margins(including other income) as a percentage of net sales were 20.5% for the threemonths ended July 31, 2010 as compared to 22.5% for the three months endedAugust 1, 2009.  Gross margins(including other income) as a percentage of sales decreased in the firstquarter of fiscal 2011, compared to the first quarter of fiscal 2010, due toloss of the Delphi business, lower engineering design fees, and increased costsrelating to new product development. The losses were partially offset byimproved gross margins (including other income) in our European and Asianbusinesses, due to higher sales volumes.

 

*Restructuring*.  During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first quarter offiscal 2010, we recorded a total restructuring charge of $2.6 million, whichconsisted of $1.2 for employee severance and $1.4 for accelerated depreciation.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$1.7 million, or 30.9%, to $7.2 million for the three months ended July 31,2010, compared to $5.5 million for the three months ended August 1,2009.  The increase is primarily due toincreased legal fees associated with the Delphi supply agreement terminationand patent dispute.  During the firstquarter of fiscal 2011, there were $1.5 million of legal fees, compared to $0.4million in the first quarter of fiscal 2010. In addition, selling and marketing expenses increased in our NorthAmerican automotive businesses in the first quarter of fiscal 2011, compared tothe first quarter of fiscal 2010. Selling and administrative expenses as a percentage of net sales were14.6% for the three months ended July 31, 2010 and 10.7% for the threemonths ended August 1, 2009.

 

*Other Expense, Net*.  Other expense, net was $0.1 million for thethree months ended July 31, 2010 as compared to $0.6 million for the threemonths ended August 1, 2009.  Thefunctional currencies of these operations are the British pound, Chinese yuan,Euro and the Mexican peso.  Some foreignoperations have transactions denominated in currencies other than theirfunctional currencies, primarily sales in U.S. dollars and Euros, creatingexchange rate sensitivities.

 

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*Income**Before Income Taxes. *Automotive segment incomebefore income taxes was $2.8 million for both the three months ended July 31,2010 and August 1, 2009 due to lower sales and gross margins (includingother income), higher legal expenses, offset by no restructuring charges andlower currency exchange rate expenses in the first quarter of fiscal 2011,compared to the first quarter of fiscal 2010.

 

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**Interconnect Segment Results**

** **

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                          | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-------------------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                          | ** ** | **2010**          | ** ** | **2009**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                           |       | $                 | 34.6       |               | $          | 24.7           |       | $              | 9.9        |   | 40.1 | % |
|                                |       |              |       |               |       |           |       |           |       |
| Cost of products sold               |       | 25.4              |       | 18.5               |       | 6.9            |       | 37.3           | %          |
|                                |       |              |       |               |       |           |       |           |       |
| Gross margins                       |       | 9.2               |       | 6.2                |       | 3.0            |       | 48.4           | %          |
|                                |       |              |       |               |       |           |       |           |       |
| Restructuring                       |       | —            |       | 0.8                |       | (0.8           | )          | N/M            |       |
| Selling and administrative expenses |       | 5.4               |       | 5.1                |       | 0.3            |       | 5.9            | %          |
| Interest income                     |       | 0.1               |       | —             |       | 0.1            |       | N/M            |       |
| Other expense, net                  |       | (0.2              | )          | (0.1               | )          | (0.1           | )          | N/M            |       |
|                                |       |              |       |               |       |           |       |           |       |
| Income before income taxes          |       | $                 | 3.7        |               | $          | 0.2            |       | $              | 3.5        |   | N/M |   |

 
| ** **                          | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-------------------|------------|--------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**     | ** ** | **2010**          | ** ** | **2009**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                           |       | 100.0             | %          | 100.0              | %          |       |       |       |       |
| Cost of products sold               |       | 73.4              | %          | 74.9               | %          |       |       |       |       |
| Gross margins                       |       | 26.6              | %          | 25.1               | %          |       |       |       |       |
| Restructuring                       |       | 0.0               | %          | 3.2                | %          |       |       |       |       |
| Selling and administrative expenses |       | 15.6              | %          | 20.6               | %          |       |       |       |       |
| Interest income                     |       | 0.3               | %          | 0.0                | %          |       |       |       |       |
| Other expense, net                  |       | -0.6              | %          | -0.4               | %          |       |       |       |       |
| Income before income taxes          |       | 10.7              | %          | 0.8                | %          |       |       |       |       |

 

*Net Sales*. Interconnect segment net sales increased $9.9 million, or 40.1%, to$34.6 million for the three months ended July 31, 2010 from $24.7 millionfor the three months ended August 1, 2009. The increase was primarily driven by strong sales in our interfacesolutions and data solutions businesses. Net sales increased 48.9%, 39.5% and 3.9% in North American, Europe andAsia, respectively, in the first quarter of fiscal 2011, compared to the firstquarter of fiscal 2010.

 

*Cost of Products Sold*.  Interconnect segment cost of products soldincreased $6.9 million, or 37.3%, to $25.4 million for the three months ended July 31,2010, compared to $18.5 million for the three months ended August 1,2009.  Interconnect segment cost ofproducts sold as a percentage of net sales decreased to 73.4% for the threemonths ended July 31, 2010, compared to 74.9% for the three months ended August 1,2009.  The decrease is primarily due tosales mix within the segment as well as the overall increase in net sales inthe first quarter of fiscal 2011, compared to the first quarter of fiscal 2010.

 

*Gross Margins. *Interconnect segment gross margins increased $3.0 million, or 48.4%, to$9.2 million for the three months ended July 31, 2010, as compared to $6.2million for the three months ended August 1, 2009, primarily due to highersales volumes.  Gross margins as apercentage of net sales increased to 26.6% for the three months ended July 31,2010 from 25.1% for the three months ended August 1, 2009.  The increase in gross margins as a percentageof net sales primarily relates to higher sales volumes as well as a change insales mix within the segment in the first quarter of fiscal 2011, compared tothe first quarter of fiscal 2010.

 

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*Restructuring*. During fiscal 2010, we completed all of our planned restructuring initiatives.  During the first quarter of fiscal 2010, werecorded a total restructuring charge of $0.8 million, which consisted of $0.7for employee severance and $0.1 for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$0.3 million, or 5.9%, to $5.4 million for the three months ended July 31,2010, compared to $5.1 million for the three months ended August 1,2009.  Selling and administrativeexpenses are higher due to higher commissions, patent maintenance fees andadvertising expenses in the first quarter of fiscal 2011, compared to the firstquarter of fiscal 2010.  Selling andadministrative expenses as a percentage of net sales decreased to 15.6% in thethree months ended July 31, 2010 from 20.6% for the three months ended August 1,2009.

 

*Interest Income, Net*.  Interest income, net was $0.1 million for thethree months ended July 31, 2010, compared to zero for the three monthsended August 1, 2009.

 

*Other Expense, Net*.  Other expense, net was $0.2 million for thethree months ended July 31, 2010, compared to $0.1 million for the threemonths ended August 1, 2009.  Thefunctional currencies of these operations are the British pound, Czech koruna,Euro, Singapore dollar and Swiss Franc. Some foreign operations have transactions denominated in currenciesother than their functional currencies, primarily sales in U.S. dollars andEuros, creating exchange rate sensitivities.

 

*Income Before Income Taxes. *Interconnect segment incomebefore income taxes increased $3.5 million to $3.7 million for the three monthsended July 31, 2010, compared to $0.2 million for the three months ended August 1,2009 due to increased net sales and gross profit, and no restructuringexpenses, partially offset by higher commission, advertising and patent legalfees in the first quarter of fiscal 2011, compared to the first quarter offiscal 2010.

 

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**PowerProducts Segment Results**

 

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

(in millions)

 
| ** **                           | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **2010**          | ** ** | **2009**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                           |       | $                 | 11.5       |               | $          | 11.2           |       | $              | 0.3        |   | 2.7 | % |
|                                 |       |              |       |               |       |           |       |           |       |
| Cost  of products sold               |       | 9.2               |       | 8.9                |       | 0.3            |       | 3.4            | %          |
|                                 |       |              |       |               |       |           |       |           |       |
| Gross  margins                       |       | 2.3               |       | 2.3                |       | —         |       | 0.0            | %          |
|                                 |       |              |       |               |       |           |       |           |       |
| Restructuring                        |       | —            |       | 0.2                |       | (0.2           | )          | -100.0         | %          |
| Selling  and administrative expenses |       | 1.8               |       | 1.5                |       | 0.3            |       | 20.0           | %          |
|                                 |       |              |       |               |       |           |       |           |       |
| Income  before income taxes          |       | $                 | 0.5        |               | $          | 0.6            |       | $              | (0.1       | ) | -16.7 | % |

 
| ** **                           | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**      | ** ** | **2010**          | ** ** | **2009**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                           |       | 100.0             | %          | 100.0              | %          |       |       |       |       |
| Cost  of products sold               |       | 80.0              | %          | 79.5               | %          |       |       |       |       |
| Gross  margins                       |       | 20.0              | %          | 20.5               | %          |       |       |       |       |
| Restructuring                        |       | 0.0               | %          | 1.8                | %          |       |       |       |       |
| Selling  and administrative expenses |       | 15.7              | %          | 13.4               | %          |       |       |       |       |
| Income  before income taxes          |       | 4.3               | %          | 5.4                | %          |       |       |       |       |

 

*Net Sales*.  PowerProducts segment net sales increased $0.3 million, or 2.7% to $11.5 million forthe three months ended July 31, 2010, compared to $11.2 million for thethree months ended August 1, 2009. Net sales have decreased in the first quarter of fiscal 2011 as comparedto the first quarter of fiscal 2010 by 17.9% in North America and increased by79.1% in Asia.  The increase was drivenby higher demand for our busbar products in Asia, offset by lower demand forour busbar, flexible cabling and heat sink products in North America.

 

*Cost of Products Sold*.  Power Products segment cost of products soldincreased $0.3 million, or 3.4%, to $9.2 million for the three months ended July 31,2010, compared to $8.9 million for the three months ended August 1,2009.  The Power Products segment cost ofproducts sold as a percentage of sales increased to 80.0% for the three monthsended July 31, 2010 from 79.5% for the three months ended August 1,2009.  The increase in cost of productssold as a percentage of sales is due to lower sales volumes in our U.S.-basedbusbar and heat sink businesses in the first quarter of fiscal 2011, comparedto the first quarter of fiscal 2010.

 

*Gross Margins.* Power Products segment gross margins were $2.3million for both the three months ended July 31, 2010 and August 1,2009.  Gross margins as a percentage ofnet sales decreased to 20.0% for the three months ended July 31, 2010 from20.5% for the three months ended August 1, 2009.  The decrease in gross margins as a percentageof sales is due to lower sales volumes in our U.S.-based busbar and heat sinkbusinesses in the first quarter of fiscal 2011, compared to the first quarterof fiscal 2010.

 

*Restructuring*.  During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first quarter offiscal 2010, we recorded a restructuring charge of $0.2 million, whichconsisted of $0.1 million for employee severance and $0.1 million relating toprofessional fees.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$0.3 million, or 20.0%, to $1.8 million for the three months ended July 31,2010, compared to $1.5 million for the three months ended August 1,2009.  Selling and administrativeexpenses increased due to increased selling and professional fees in ourU.S.-based busbar and heat sink businesses in the first quarter of fiscal 2011,as compared to the first quarter 

 

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of fiscal 2010.  Selling andadministrative expenses as a percentage of net sales increased to 15.7% in thethree months ended July 31, 2010 from 13.4% for the three months ended August 1,2009.

 

*Income Before Income Taxes. *Power Products income beforeincome taxes decreased $0.1 million, or 16.7%, to $0.5 million for the threemonths ended July 31, 2010, compared to $0.6 million for the three monthsended August 1, 2009, due to higher selling and professional fess,slightly offset with no restructuring charges in the first quarter of fiscal2011, compared to the first quarter of fiscal 2010.

 

**Other Segment Results**

** **

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

(in millions)

 
| ** **                           | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **2010**          | ** ** | **2009**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                           |       | $                 | 2.8        |               | $          | 2.7            |       | $              | 0.1        |   | 3.7 | % |
|                                 |       |              |       |               |       |           |       |           |       |
| Cost  of products sold               |       | 2.7               |       | 2.5                |       | 0.2            |       | 8.0            | %          |
|                                 |       |              |       |               |       |           |       |           |       |
| Gross  margins                       |       | 0.1               |       | 0.2                |       | (0.1           | )          | -50.0          | %          |
|                                 |       |              |       |               |       |           |       |           |       |
| Selling  and administrative expenses |       | 0.7               |       | 0.8                |       | (0.1           | )          | -12.5          | %          |
|                                 |       |              |       |               |       |           |       |           |       |
| Loss  before income taxes            |       | $                 | (0.6       | )                  | $          | (0.6           | )          | $              | —     |   | 0.0 | % |

 
| ** **                           | ** ** | **July 31,** | ** ** | **August 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**      | ** ** | **2010**          | ** ** | **2009**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                           |       | 100.0             | %          | 100.0              | %          |       |       |       |       |
| Cost  of products sold               |       | 96.4              | %          | 92.6               | %          |       |       |       |       |
| Gross  margins                       |       | 3.6               | %          | 7.4                | %          |       |       |       |       |
| Selling  and administrative expenses |       | 25.0              | %          | 29.6               | %          |       |       |       |       |
| Loss  before income taxes            |       | -21.4             | %          | -22.2              | %          |       |       |       |       |

 

*Net Sales*.  The Othersegment net sales increased $0.1 million, or 3.7%, to $2.8 million for thethree months ended July 31, 2010, compared to $2.7 million for the threemonths ended August 1, 2009.  Netsales from our torque-sensing business increased 68.9% in the first quarter offiscal 2011, compared to the first quarter of fiscal 2010.  Net sales from our testing facilitiesdecreased 22.2% in the first quarter of fiscal 2011, compared to the firstquarter of fiscal 2010.

 

*Cost of Products Sold*.  Other segment cost of products sold increased$0.2 million to $2.7 million for the three months ended July 31, 2010,compared to $2.5 million for the three months ended August 1, 2009.  The increase is due to an increase inprototypes in our torque-sensing business in the first quarter of fiscal 2011,compared to the first quarter of fiscal 2010. Cost of products sold as a percentage of sales increased to 96.4% in thefirst quarter of fiscal 2011, compared to 92.6% in the first quarter of fiscal2010.

 

*Gross Margins. *The Other segment gross margins decreased $0.1 million to $0.1 millionfor the three months ended July 31, 2010, compared to $0.2 million for thethree months ended August 1, 2009. The increase in net sales were offset by an increase in prototypes inour torque-sensing business in the first quarter of fiscal 2011, compared tothe first quarter of fiscal 2010.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses decreased$0.1 million, or 12.5%, to $0.7 million for the three months ended July 31,2010, compared to $0.8 million for the three months ended August 1,2009.  Selling and administrative expensesas a percentage of net sales decreased to 25.0% in the three months ended July 31,2010 from 29.6% for the three months ended August 1, 2009.

 

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*Loss Before Income Taxes. *The Other segment lossbefore income taxes was $0.6 million for both the three months ended July 31,2010 and August 1, 2009.  The firstquarter of fiscal 2011 as compared to the first quarter of fiscal 2010,increased sales and lower selling and administrative expenses were offset byhigher prototype expenses in our torque-sensing business.

 

**Liquidity and Capital Resources**

 

Wehave historically financed our cash requirements through cash flows fromoperations.  Our future capitalrequirements will depend on a number of factors, including our future net salesand the timing and rate of expansion of our business.  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.

 

Wehave an agreement with our primary bank for a revolving credit facility toprovide up to $75.0 million of ready financing for general corporate purposes,including acquisition opportunities that may become available.  The bank credit agreement, which expires on January 31,2011, requires maintenance of certain financial ratios and a minimum net worthlevel. At July 31, 2010, we were in compliance with these covenants andhad no borrowings against this credit facility.

 

**CashFlow Operating Activities**

 

Netcash used/provided by operating activities decreased $9.9 million to a cash useof $2.2 million for the three months ended July 31, 2010, compared to cashprovided of $7.7 million for the three months ended August 1, 2009. Our net income increased to $4.0 million for the three months ended July 31,2010, compared to break-even for the three months ended August 1,2009.  The non-cash add-back for depreciationand impairment of tangible assets decreased $2.4 million, to $3.4 million inthe first quarter of fiscal 2011, compared to $5.7 million in the first quarterof fiscal 2010.  The changes in operating assets and liabilities decreasedby $11.6 million, to cash used of $10.5 million in the first quarter of fiscal2011, compared to cash provided of $1.1 million for the first quarter of fiscal2010.  Accounts receivable was a use ofcash of $6.9 million due to timing of sales, billings for pre-production tooling,as well as slower collections for some specific customers in the first quarterof fiscal 2011.  The additional use ofcash for the changes in assets and liabilities relates to bonus payments of$2.7 million and tax payments for a foreign entity of $1.9 million, offsetpartially by cash provided of $0.8 million for accounts payable and $0.2million for other items.

 

**CashFlow Investing Activities**

 

Netcash used in investing activities decreased $0.7 million to $2.7 million forthe three months ended July 31, 2010, compared to $3.4 million for thethree months ended August 1, 2009. Purchases of property, plant and equipment was $2.0 million in the firstquarter of fiscal 2011, compared to $3.3 million in the first quarter of fiscal2010.  We invested $0.8 million in a newbusiness in the first quarter of fiscal 2011.

 

**CashFlow Financing Activities**

 

Net cash used in financing activities was $2.6million relating to cash dividends paid for both the three months ended July 31,2010 and August 1, 2009.

 

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**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.

 

**Item 3. Quantitative And Qualitative Disclosures About Market Risk**

 

Certainof our foreign operations enter into transactions in currencies other thantheir functional currency, primarily the U.S. dollar and the Euro.  A 10% change in foreign currency exchangerates from balance sheet date levels could impact our income before incometaxes by $4.7 million for both the three months ended July 31, 2010 and May 1,2010.  We also have foreign currencyexposure arising from the translation of our net equity investment in ourforeign operations to U.S. dollars.  Wegenerally view our investments in foreign operations with functional currenciesother than the U.S. dollar as long-term. The currencies to which we are exposed are the British pound, Chineseyuan, Czech koruna, Euro, Indian Rupee, Mexican peso, and Singaporedollar.  A 10% change in foreign currencyexchange rates from balance sheet date levels could impact our net foreigninvestments by $15.2 million at July 31, 2010 and $12.8 million at May 1,2010.

 

**Item 4. Controls And Procedures**

 

Asof the end of the period covered by this quarterly report on Form 10-Q, weperformed an evaluation under the supervision and with the participation of theCompany’s management, including our Chief Executive Officer and our ChiefFinancial Officer, of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934).  The Company’sdisclosure controls and procedures are designed to ensure that the informationrequired to be disclosed by the Company in the reports that we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s applicable rules and forms.  As a result of thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this report, the Company’sdisclosure controls and procedures were effective.

 

Therehave been no changes in our internal control over financial reporting duringthe quarter ended July 31, 2010 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.        OTHER INFORMATION**

 

Item1.    Legal Proceedings.

 

Seeour fiscal 2010 Form 10-K filed on July 1, 2010 for a description ofcurrent legal matters.  There have beenno material developments since the Form 10-K was filed.

 

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| **Item 6.**               | ** ** | **Exhibits**                                                                        |
|---------------------------|------------|-------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                          |
| **Exhibit   Number** | ** ** | **Description**                                                                     |
| 3.1                       |       | Form of Methode Electronics, Inc. Amended  and Restated By-Laws (1)       |
| 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 |

 

----

| (1) |   | Previously filed with Registrant’s Form 8-K/A  filed August 10, 2010, and incorporated herein by reference. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------|

 

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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: September 2, 2010 |                           |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                     |
|---------------------------|------------|-------------------------------------------------------------------------------------|
| 3.1                       |       | Form of Methode Electronics, Inc. Amended  and Restated By-Laws (1)       |
| 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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| (1) |   | Previously filed with Registrant’s Form 8-K/A  filed August 10, 2010, and incorporated herein by reference. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------|

 

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