Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

**x****      QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**for the quarterly period ended October 30,2010**

 

**or**

 

**o****         TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934.**

 

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**Commissionfile number 0-2816**

 

**METHODEELECTRONICS, INC.**

(Exact name of registrant asspecified in its charter.)

 

| **Delaware**                    | ** ** | **36-2090085**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

| **7401 West Wilson Avenue, Harwood  Heights, Illinois** | ** ** | **60706-4548** |
|--------------------------------------------------------------|------------|----------------|
| (Address of principal executive offices)                     |       | (Zip Code)     |

 

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

 

**None**

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

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

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

 

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

 

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

 

At December 7, 2010, registrant had 36,803,574 shares of commonstock outstanding.

 

 

 

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Table ofContents

 

METHODEELECTRONICS, INC.

FORM 10-Q

October 30,2010

 

TABLEOF CONTENTS

 
| ** **        | ** **                                                                                                                                      | **Page** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|              |                                                                                                                                            |     |
| PART I.      | FINANCIAL INFORMATION                                                                                                                           |     |
|              |                                                                                                                                            |     |
| Item 1.           | Financial Statements                                                                                                                            |     |
|              |                                                                                                                                            |     |
|              | Condensed  consolidated balance sheets as of – October 30, 2010 (unaudited) and  May 1, 2010                                     | 2        |
|              |                                                                                                                                            |     |
|              | Condensed  consolidated statements of operations (unaudited) – Three and six months  ended October 30, 2010 and October 31, 2009 | 3        |
|              |                                                                                                                                            |     |
|              | Condensed  consolidated statements of cash flows (unaudited) – Six months ended  October 30, 2010 and October 31, 2009           | 4        |
|              |                                                                                                                                            |     |
|              | Notes to condensed consolidated financial statements –  October 30, 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                                                                                      | 44       |
|              |                                                                                                                                            |     |
| Item 4.           | Controls and Procedures                                                                                                                         | 44       |
|              |                                                                                                                                            |     |
| PART II.     | OTHER INFORMATION                                                                                                                               |     |
|              |                                                                                                                                            |     |
| Item 1.           | Legal Proceedings                                                                                                                               | 44       |
|              |                                                                                                                                            |     |
| Item 6.           | Exhibits                                                                                                                                        | 45       |
|              |                                                                                                                                            |     |
| SIGNATURES        | 46                                                                                                                                              |
|              |                                                                                                                                            |     |
| INDEX TO EXHIBITS | 47                                                                                                                                              |

 

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1 - Financial Statements**

 

**METHODE ELECTRONICS, INC AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                                                                                                                             | ** ** | **As of**                 | ** ** | **As of**            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **October 30, 2010** | ** ** | **May 1, 2010** | ** ** |
| ** **                                                                                                                                                             | ** ** | **(Unaudited)**                | ** ** | ** **                | ** ** |
| ASSETS                                                                                                                                                                 |       |                           |       |                      |       |
|                                                                                                                                                                   |       |                           |       |                      |       |
| CURRENT ASSETS                                                                                                                                                         |       |                           |       |                      |       |
| Cash and cash equivalents                                                                                                                                              |       | $                              | 77,192     |                      | $          | 63,821 |   |
| Accounts receivable, net                                                                                                                                               |       | 80,599                         |       | 68,649                    |       |
| Inventories:                                                                                                                                                           |       |                           |       |                      |       |
| Finished products                                                                                                                                                      |       | 6,971                          |       | 5,487                     |       |
| Work in process                                                                                                                                                        |       | 8,351                          |       | 7,686                     |       |
| Materials                                                                                                                                                              |       | 19,404                         |       | 16,587                    |       |
|                                                                                                                                                                   |       | 34,726                         |       | 29,760                    |       |
| Deferred income taxes                                                                                                                                                  |       | 2,361                          |       | 2,272                     |       |
| Prepaid and refundable income taxes                                                                                                                                    |       | 13,998                         |       | 13,956                    |       |
| Prepaid expenses and other current assets                                                                                                                              |       | 6,700                          |       | 6,138                     |       |
| TOTAL CURRENT ASSETS                                                                                                                                                   |       | 215,576                        |       | 184,596                   |       |
|                                                                                                                                                                   |       |                           |       |                      |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                          |       | 291,074                        |       | 280,750                   |       |
| Less allowances for depreciation                                                                                                                                       |       | 229,557                        |       | 218,874                   |       |
|                                                                                                                                                                   |       | 61,517                         |       | 61,876                    |       |
|                                                                                                                                                                   |       |                           |       |                      |       |
| GOODWILL                                                                                                                                                               |       | 12,096                         |       | 12,096                    |       |
| INTANGIBLE ASSETS, net                                                                                                                                                 |       | 17,672                         |       | 18,811                    |       |
| PRE-PRODUCTION COSTS                                                                                                                                                   |       | 9,833                          |       | 11,984                    |       |
| OTHER ASSETS                                                                                                                                                           |       | 23,670                         |       | 21,460                    |       |
|                                                                                                                                                                   |       | 63,271                         |       | 64,351                    |       |
| TOTAL ASSETS                                                                                                                                                           |       | $                              | 340,364    |                      | $          | 310,823 |   |
|                                                                                                                                                                   |       |                           |       |                      |       |
| LIABILITIES AND EQUITY                                                                                                                                                 |       |                           |       |                      |       |
|                                                                                                                                                                   |       |                           |       |                      |       |
| CURRENT LIABILITIES                                                                                                                                                    |       |                           |       |                      |       |
| Accounts payable                                                                                                                                                       |       | $                              | 36,265     |                      | $          | 29,743 |   |
| Other current liabilities                                                                                                                                              |       | 27,896                         |       | 29,002                    |       |
| Short-term debt                                                                                                                                                        |       | 18,009                         |       | —                    |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                              |       | 82,170                         |       | 58,745                    |       |
|                                                                                                                                                                   |       |                           |       |                      |       |
| OTHER LIABILITIES                                                                                                                                                      |       | 11,339                         |       | 10,251                    |       |
| DEFERRED COMPENSATION                                                                                                                                                  |       | 2,216                          |       | 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 October 30,  2010 and May 1, 2010, respectively |       | 19,088                         |       | 19,075                    |       |
| Additional paid-in capital                                                                                                                                             |       | 66,533                         |       | 65,991                    |       |
| Accumulated other comprehensive income                                                                                                                                 |       | 21,762                         |       | 16,247                    |       |
| Treasury stock, 1,342,188 shares as of October 30,  2010 and May 1, 2010                                                                                     |       | (11,377                        | )          | (11,377                   | )          |
| Retained earnings                                                                                                                                                      |       | 145,216                        |       | 146,818                   |       |
| TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’  EQUITY                                                                                                        |       | 241,222                        |       | 236,754                   |       |
| Noncontrolling interest                                                                                                                                                |       | 3,417                          |       | 3,188                     |       |
| TOTAL EQUITY                                                                                                                                                           |       | 244,639                        |       | 239,942                   |       |
| TOTAL LIABILITIES AND EQUITY                                                                                                                                           |       | $                              | 340,364    |                      | $          | 310,823 |   |

 

See notes 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** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **October 30,**             | ** ** | **October 31,**           | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
| ** **                                                                | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| INCOME                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net sales                                                                 |       | $                                | 106,614    |                           | $          | 98,496 |   | $ | 204,899 |   | $ | 188,272 |   |
| Other                                                                     |       | 1,102                            |       | 1,072                          |       | 1,804 |   | 2,459 |   |
|                                                                      |       | 107,716                          |       | 99,568                         |       | 206,703 |   | 190,731 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| COSTS AND EXPENSES                                                        |       |                             |       |                           |       |   |   |   |   |
| Cost of products sold                                                     |       | 84,073                           |       | 77,784                         |       | 162,853 |   | 148,693 |   |
| Restructuring                                                             |       | (21                              | )          | 3,156                          |       | (21 | ) | 6,767 |   |
| Selling and administrative expenses                                       |       | 21,293                           |       | 16,413                         |       | 37,650 |   | 32,286 |   |
|                                                                      |       | 105,345                          |       | 97,353                         |       | 200,482 |   | 187,746 |   |
| Income from operations                                                    |       | 2,371                            |       | 2,215                          |       | 6,221 |   | 2,985 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Interest expense, net                                                     |       | 61                               |       | 45                             |       | 88 |   | 147 |   |
| Other (income)/expense, net                                               |       | 2,032                            |       | (143                           | )          | 1,183 |   | 252 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Income before income taxes                                                |       | 278                              |       | 2,313                          |       | 4,950 |   | 2,586 |   |
| Income tax expense                                                        |       | 768                              |       | 225                            |       | 1,410 |   | 511 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Net income/(loss)                                                         |       | (490                             | )          | 2,088                          |       | 3,540 |   | 2,075 |   |
| Less: Net income/(loss) attributable to noncontrolling  interest          |       | 23                               |       | 36                             |       | (12 | ) | 42 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| NET INCOME/(LOSS) ATTRIBUTABLE TO METHODE  ELECTRONICS, INC.         |       | $                                | (513       | )                              | $          | 2,052 |   | $ | 3,552 |   | $ | 2,033 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Amounts per common share attributable to Methode  Electronics, Inc.: |       |                             |       |                           |       |   |   |   |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                     |       | $                                | (0.01      | )                              | $          | 0.06 |   | $ | 0.10 |   | $ | 0.06 |   |
| Diluted                                                                   |       | $                                | (0.01      | )                              | $          | 0.06 |   | $ | 0.10 |   | $ | 0.06 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Cash dividends:                                                           |       |                             |       |                           |       |   |   |   |   |
| Common stock                                                              |       | $                                | 0.07       |                           | $          | 0.07 |   | $ | 0.14 |   | $ | 0.14 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Weighted average number of Common Shares  outstanding:                    |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                     |       | 37,058                           |       | 36,644                         |       | 37,051 |   | 36,641 |   |
| Diluted                                                                   |       | 37,058                           |       | 36,868                         |       | 37,282 |   | 36,823 |   |

 

See notes to condensed consolidated financial statements.

 

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**METHODE ELECTRONICS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **October 30, 2010** | ** ** | **October 31, 2009** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 3,540      |   | $ | 2,075 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Provision for depreciation                                                         |       | 6,647                          |       | 10,118 |   |
| Impairment of tangible assets                                                      |       | 1,299                          |       | 710 |   |
| Amortization of intangibles                                                        |       | 1,139                          |       | 1,123 |   |
| Amortization of stock awards and stock options                                     |       | 541                            |       | 507 |   |
| Changes in operating assets and liabilities                                        |       | (9,416                         | )          | 1,044 |   |
| Other                                                                              |       | 77                             |       | 48 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 3,827                          |       | 15,625 |   |
|                                                                               |       |                           |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                           |       |   |   |
| Purchases of property, plant and equipment                                         |       | (5,605                         | )          | (5,821 | ) |
| Purchase of investment                                                             |       | (750                           | )          | — |   |
| Acquisition of technology licenses                                                 |       | —                         |       | (181 | ) |
| Proceeds from life insurance policies                                              |       | 1,515                          |       | — |   |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (4,840                         | )          | (6,002 | ) |
|                                                                               |       |                           |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                           |       |   |   |
| Proceeds from exercise of stock options                                            |       | 13                             |       | — |   |
| Cash dividends                                                                     |       | (5,154                         | )          | (5,233 | ) |
| Borrowings                                                                         |       | 18,000                         |       | — |   |
| NET CASH PROVIDED BY/(USED IN) FINANCING  ACTIVITIES                               |       | 12,859                         |       | (5,233 | ) |
|                                                                               |       |                           |       |   |   |
| Effect of foreign currency exchange rate changes  on cash                          |       | 1,525                          |       | 1,854 |   |
|                                                                               |       |                           |       |   |   |
| INCREASE IN CASH AND CASH EQUIVALENTS                                              |       | 13,371                         |       | 6,244 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 63,821                         |       | 54,030 |   |
|                                                                               |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |       | $                              | 77,192     |   | $ | 60,274 |   |

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

October 30, 2010

 

**1.****            ****BASIS OFPRESENTATION**

 

Methode Electronics, Inc. was incorporated in 1946 as an Illinoiscorporation and reincorporated in Delaware in 1966.  As used herein, “we,” “us,” “our,” the “Company”or “Methode” means Methode Electronics, Inc. and its subsidiaries.  Our business is managed and our financialresults are reported on a segment basis, with those segments being Automotive,Interconnect, Power Products and Other. The condensed consolidated financial statements and related disclosuresas of October 30, 2010 and results of operations for the three months and sixmonths ended October 30, 2010 and October 31, 2009 are unaudited, pursuant tothe rules and regulations 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 infinancial statements prepared in accordance with U.S. GAAP have been condensedor omitted pursuant to such rules and regulations.  In our opinion, these financial statementsinclude all adjustments (consisting only of normal recurring adjustments)necessary for the fair statement of the results for the interim periods.  These financial statements should be read inconjunction with the financial statements included in our Form 10-K for theyear ended May 1, 2010 filed with the SEC on July 1, 2010.  Results may vary from quarter to quarter forreasons other than seasonality.

 

**2.****            ****RECENTLYADOPTED 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, anda higher 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” (formerly SFASNo. 166, “Accounting for Transfers of Financial Assets”). ASC 860 requiresmore information about transfers of financial assets and where companies havecontinuing exposure to the risk related to transferred financial assets. Iteliminates the concept of a qualifying special purpose entity, changes therequirements for derecognizing financial assets, and requires additionaldisclosure. This standard is effective for interim and annual periods beginningafter November 15, 2009. We adopted the provisions of the standard onMay 2, 2010, which did not have a material impact on our financialstatements.

 

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

 

**March 2009 Restructuring**

 

InMarch 2009, we announced restructuring initiatives to consolidate ourmanufacturing facilities to reduce costs. All of the March 2009 restructuring initiatives were complete as of theend of fiscal 2010.  At the

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

**3.****            ****RESTRUCTURINGS- Continued**

 

endof fiscal 2010, we had an accrued restructuring liability of $420 reflected inour current liabilities section of our condensed consolidated balancesheet.  There were no payments madeagainst this liability during the three months and six months ended October 30,2010, however, we do expect this liability to be paid out by the end of fiscal2011.

 

Thetable below reflects the activity related to the March 2009 restructuring forthe three months and six months ended October 30, 2010:

 
| ** **                                                   | ** ** | **Other**  | ** ** |
|--------------------------------------------------------------|------------|------------|------------|
| ** **                                                   | ** ** | **Costs**  | ** ** |
|                                                         | ** ** | ** ** | ** ** |
| Accrued balance at May 1, 2010                               |       | $          | 420        |   |
|                                                         |       |       |       |
| Payments during the first and second quarter of  fiscal 2011 |       | —     |       |
| Accrued balance at October 30, 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 theJanuary 2008 restructuring initiatives were complete as of the end of fiscal2010.  At the end of fiscal 2010, we hadan accrued restructuring liability of $155 reflected in our current liabilitiessection of our condensed consolidated balance sheet.  There were $134 of payments made against thisliability during the three months ended July 31, 2010.  The remaining accrual balance of $21 wasreversed out to the income statement during the second quarter of fiscal2011.  The January 2008 accruedrestructuring balance is zero at the end of the second quarter of fiscal 2011.

 

The table below reflects the activity related to theJanuary 2008 restructuring for the three months and six months ended October30, 2010:
| ** **                                                 | ** ** | **One-Time  Employee  Severance** | ** ** | **Other  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 |   |
|                                                       |       |                              |       |             |       |      |       |
| Accrual reversal during  the second quarter of fiscal 2011 |       | (21                               | )          | —           |       | (21       | )          |
| Accrued balance at October  30, 2010                       |       | $                                 | —     |             | $          | —    |       | $ | — |   |

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

**4.****            ****COMPREHENSIVEINCOME/(LOSS)**

 

Thecomponents of our comprehensive income/(loss) for the three months and sixmonths ended October 30, 2010 and October 31, 2009 include net income/(loss)and adjustments to stockholders’ equity for foreign currency translations.  The foreign currency translation adjustmentwas due to exchange rate fluctuations in our foreign affiliates’ local currencyversus the U.S. dollar.

 

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

 
| ** **                 | ** ** | **Three Months Ended October 30, 2010** | ** ** | **Six Months Ended October 30, 2010** | ** ** |
|----------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                                                       | ** ** | **Methode**                                                    | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **                 | ** ** | **Total**                                                        | ** ** | **Shareholders**                                               | ** ** | **Interest** | ** ** | **Total** | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                       |       |                                                             |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net income/(loss)          |       | $                                                                | (490       | )                                                              | $          | (513 | ) | $ | 23 |   | $ | 3,540 |   | $ | 3,552 |   | $ | (12 | ) |
| Translation adjustment     |       | 6,557                                                            |       | 6,323                                                          |       | 234 |   | 5,782 |   | 5,515 |   | 267 |   |
| Total comprehensive income |       | $                                                                | 6,067      |                                                           | $          | 5,810 |   | $ | 257 |   | $ | 9,322 |   | $ | 9,067 |   | $ | 255 |   |

 
| ** **                 | ** ** | **Three Months Ended October 31, 2009** | ** ** | **Six Months Ended October 31, 2009** | ** ** |
|----------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                                                       | ** ** | **Methode**                                                    | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **                 | ** ** | **Total**                                                        | ** ** | **Shareholders**                                               | ** ** | **Interest** | ** ** | **Total** | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                       |       |                                                             |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net income                 |       | $                                                                | 2,088      |                                                           | $          | 2,052 |   | $ | 36 |   | $ | 2,075 |   | $ | 2,033 |   | $ | 42 |   |
| Translation adjustment     |       | 3,208                                                            |       | 3,192                                                          |       | 16 |   | 8,216 |   | 7,867 |   | 349 |   |
| Total comprehensive income |       | $                                                                | 5,296      |                                                           | $          | 5,244 |   | $ | 52 |   | $ | 10,291 |   | $ | 9,900 |   | $ | 391 |   |

 

**5.****            ****GOODWILLAND 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 and indefinite-livedassets annually in accordance with the ASC No. 350, “Intangibles — Goodwill andOther”.  The values assigned to goodwilland intangible 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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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

**5.****            ****GOODWILLAND INTANGIBLE ASSETS - Continued**

 

Thefollowing table shows the roll-forward of goodwill in the financial statementsfor the six months ended October 30, 2010 and October 31, 2009.  There was no activity for either periodpresented.

 
| ** **                                                    | ** ** | **Six Months Ended October 30, 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 October 30, 2010                                |       | $                                                              | 11,146     |   | $ | 950 |   | $ | 12,096 |   |

 
| ** **                                                    | ** ** | **Six Months Ended October 31, 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 October 31, 2009                                |       | $                                                              | 11,146     |   | $ | 625 |   | $ | 11,771 |   |

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**5.****            ****GOODWILLAND INTANGIBLE ASSETS - Continued**

 

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

 
| ** **                                   | ** ** | **As of October 30, 2010** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                                   | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| ** **                                   | ** ** | ** **                                     | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Amortization** | ** ** |
| ** **                                   | ** ** | **Gross**                                      | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Periods (Years)** | ** ** |
| Customer relationships and agreements        |       | $                                              | 14,995     |   | $ | 13,253 |   | $ | 1,742 |   | 13.2 |   |
| Trade names, patents and technology licenses |       | 23,774                                         |       | 7,918 |   | 15,856 |   | 12.7 |   |
| Covenants not to compete                     |       | 480                                            |       | 406 |   | 74 |   | 1.3 |   |
| Total                                        |       | $                                              | 39,249     |   | $ | 21,577 |   | $ | 17,672 |   |   |   |

 
| ** **                                   | ** ** | **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 |   |
| Trade names, 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 |   |   |   |

 

Theestimated aggregate amortization expense for the current fiscal year and eachof the four succeeding fiscal years is as follows:

 
|   |   | 2011 |   | $     | 2,335  |   |   |   |   |   |   |   |
|--------|--------|------|--------|-------|--------|--------|--------|--------|--------|--------|--------|--------|
|   |   | 2012 |   | 1,821 |   |   |   |   |   |   |   |
|   |   | 2013 |   | 1,444 |   |   |   |   |   |   |   |
|   |   | 2014 |   | 1,332 |   |   |   |   |   |   |   |
|   |   | 2015 |   | 1,243 |   |   |   |   |   |   |   |

 

As of October 30, 2010 and May 1, 2010, thepatents and technology licenses include $1,800 of trade names that are notsubject to amortization.

 

**6.****            ****INCOMETAXES**

 

AtOctober 30, 2010 and May 1, 2010, we had valuation allowances against ourdeferred tax assets of $56,183 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 existenceof sufficient taxable income within the carry-forward period available underthe tax 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

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**6.****            ****INCOMETAXES - Continued**

 

unableto forecast when there will be sufficient positive evidence for us to reversethe valuation allowances that we have recorded.

 

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** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **October 30,**             | ** ** | **October 31,** | ** ** |
| ** **                                    | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Income tax at statutory rate                  |       | $                                | 89         |   | $ | 797 |   |
| Effect of:                                    |       |                             |       |   |   |
| State income taxes, net of federal benefit    |       | 21                               |       | 62 |   |
| Foreign operations with lower statutory rates |       | (2,863                           | )          | (1,848 | ) |
| Valuation allowance                           |       | 3,749                            |       | 1,366 |   |
| Other, net                                    |       | (228                             | )          | (152 | ) |
| Income tax provision                          |       | $                                | 768        |   | $ | 225 |   |

 
| ** **                                    | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **October 30,**           | ** ** | **October 31,** | ** ** |
| ** **                                    | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Income tax at statutory rate                  |       | $                              | 1,737      |   | $ | 891 |   |
| Effect of:                                    |       |                           |       |   |   |
| State income taxes, net of federal benefit    |       | 47                             |       | 124 |   |
| Foreign operations with lower statutory rates |       | (5,699                         | )          | (2,741 | ) |
| Valuation allowance                           |       | 5,981                          |       | 2,402 |   |
| Other, net                                    |       | (656                           | )          | (165 | ) |
| Income tax provision                          |       | $                              | 1,410      |   | $ | 511 |   |

 

We recognize interest and penalties accrued related to the unrecognizedtax benefits in the provision for income taxes. During the six months ended October 30, 2010, we recognized $64 ininterest and zero in penalties.  We hadapproximately $758 accrued at October 30, 2010 for the payment of interest andpenalties.  The total unrecognized taxbenefit as of October 30, 2010 was $2,781.

 

The following table presents a reconciliation of the beginning andending amounts of 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 October 30, 2010                          |   | $      | 2,781  |   |

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**6.****            ****INCOMETAXES - Continued**

 

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.

 

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

 

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

 
| ** **                             | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **October 30,**           | ** ** | **October 31,** | ** ** |
| ** **                             | ** ** | **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 |   |

 

Infiscal 2011, we paid quarterly dividends of $2,576 and $2,578 on July 30, 2010and October 29, 2010, respectively.

 

OurBoard of Directors, on the recommendation of our Compensation Committee,adopted the Methode Electronics, Inc. 2010 Stock Plan (the “Stock Plan”).  The Stock Plan was approved by theshareholders at our annual meeting on October 14, 2010.

 

TheStock Plan permits a total of 2,000,000 shares of our common stock to beawarded to participants in the form of nonqualified stock options, incentivestock options, restricted stock, restricted stock units, stock appreciationrights, and performance share units, any of which may be performance-basedawards.  The Stock Plan is designed toallow for “performance-based compensation” under Section 162(m) of theCode.  As such, qualified awards payablepursuant to the Stock Plan should be deductible for federal income tax purposesunder most circumstances.

 

Presentand future directors, officers and key employees of our company or anysubsidiary shall be eligible to participate in the Stock Plan, as selected bythe Compensation Committee from time to time. The Compensation Committee will determine the type and amount of eachaward, as well as the terms and conditions, including any performance criteria,performance goals and performance period.

 

Asdisclosed in our fiscal 2010 Proxy Statement, for the fiscal 2011 equityawards, the Compensation Committee intends to grant our executive officersawards composed of performance-based restricted stock (RSAs) to vest based onperformance as of the end of fiscal 2015, stock options and time-basedrestricted stock units (RSUs).  In connection with the performance-basedRSAs, the Compensation Committee also intends to make RSA tandem cash bonusawards for above target performance to the executive officers.  The Compensation Committee granted stockoption awards during the second quarter of fiscal 2011 and intends to grant theRSA, RSU and RSA tandem cash bonus awards in the near future.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

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

 

**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 October 30,2010.  There was no remainingcompensation expense related to these options in the second quarter of fiscal2011.  Options to purchase 96,934 sharesof our common stock expired during the first six months 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 sixmonths ended October 30, 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 October 30, 2010 |       | 431,492                                       |       | $ | 9.44 |   |

 
| **Options Outstanding and  Exercisable at October 30, 2010** | ** ** |
|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** | **Avg.** | ** ** |
| **Range of**                                                                          | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining** | ** ** |
| **Exercise Prices**                                                                   | ** ** | **Shares** | ** ** | **Price** | ** ** | **Life (Years)** | ** ** |
| $5.72 - $7.69                                                                              |       | 148,125 |   | $ | 6.72 |   | 0.5 |   |
| $8.53 - $11.44                                                                             |       | 283,367 |   | 10.87 |   | 2.1 |   |
|                                                                                       |       | 431,492 |   | $ | 9.44 |   |   |   |

 

Theoptions outstanding had an intrinsic value of $390 at October 30,2010.  The intrinsic value represents thetotal pre-tax intrinsic value (the difference between the Company’s closingstock price on the last trading day of the second quarter of fiscal 2011 andthe exercise price, multiplied by the number of in-the-money options) thatwould have been received by the option holders had all option holders exercisedtheir options on October 30, 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.

 

Thefollowing tables summarize the stock option activity and related informationfor the stock options granted under the 2007 stock plan for the six monthsended October 30, 2010:

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

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

 
| ** **                           | ** ** | **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 October 30, 2010 |       | 720,500                                       |       | $ | 5.77 |   |

 
| **Options Outstanding  at October 30, 2010** | ** **  |
|------------------------------------------------------------------|-------------|
| ** **                                                       | ** **  | ** ** | ** ** | **Avg.** | ** ** |
| ** **                                                       | ** **  | ** ** | ** ** | **Remaining** | ** ** |
| **Exercise Price**                                          | ** **  | **Shares** | ** ** | **Life (Years)** | ** ** |
| $                                                                |  2.72  |   | 285,000 |   | 8.4 |   |
| $                                                                |  6.46  |   | 275,000 |   | 8.7 |   |
| $                                                                |  8.13  |   | 35,500 |   | 9.1 |   |
| $                                                                |  10.55 |   | 125,000 |   | 9.7 |   |

 

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 $2,692 at October 30, 2010.

 

Werecognized pre-tax compensation expense for stock options granted under the2007 plan of $169 and $127 for the three months ended October 30, 2010 andOctober 31, 2009, respectively.  Werecognized pre-tax compensation expense of $235 and $192 for the six monthsended October 30, 2010 and October 31, 2009, respectively.  We record the compensation expense related tothe stock options in the selling and administrative section of our condensedconsolidated statement of operations.

 

**Stock Options Granted Under the 2010 Stock Plan**

 

InOctober 2010, the Compensation Committee approved the grant of options topurchase 128,000 shares of our common stock to our executive officers.  The stock options have a ten-year term andwill vest 33.3% each year over a three-year period.   The exercise price is the closing price onthe date granted.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

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

 

Thefollowing tables summarize the stock option activity and related information forthe stock options granted under the 2010 stock plan for the six months ended October 30,2010:

 
| ** **                           | ** ** | **Summary of Option Activity** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | ** **                                    | ** ** | **Wtd. Avg.** | ** ** |
| ** **                           | ** ** | **Shares**                                    | ** ** | **Exercise Price** | ** ** |
| Outstanding at May 1, 2010      |       | —                                        |       | $ | — |   |
| Granted                              |       | 128,000                                       |       | 9.24 |   |
| Exercised                            |       | —                                        |       | — |   |
| Cancelled                            |       | —                                        |       | — |   |
| Outstanding at October 30, 2010 |       | 128,000                                       |       | $ | 9.24 |   |

 
| **Options Outstanding  at October 30, 2010** | ** ** |
|------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | **Avg.** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| **Exercise Price**                                          | ** ** | **Shares** | ** ** | **Life (Years)** | ** ** |
| $                                                                |  9.24 |   | 128,000 |   | 10.0 |   |
|                                                                  |            |  |  |  |  |  |

 

The options outstanding hadan intrinsic value of $6 at October 30, 2010.

 

We estimated the fair valueof our employee stock options on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

 
| ** **                             | ** ** | **Fiscal 2011** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **Grants**           | ** ** |
|                                   |       |                 |       |
| Average expected volatility            |       | 85.83                | %          |
| Average risk-free interest rate        |       | 0.60                 | %          |
| Dividend yield                         |       | 3.49                 | %          |
| Expected life of options               |       | 7.03 years           |       |
| Weighted-average grant-date fair value |       | $                    | 5.19       |   |
|                                        |            |                      |            |  |

 

Werecognized pre-tax compensation expense for stock options granted under the2010 plan of $8 for both the three months and six months ended October 30,2010.  We record the compensation expenserelated to the stock options in the selling and administrative section of ourcondensed 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 were subject to the same vesting schedule and other majorprovisions of the RSAs they replaced, except the shares for stock underlyingthe RSUs will not be issued and delivered until the earlier of: (1) thirtydays after the CEO’s date of termination of employment with the Company and allof its subsidiaries and affiliates; or (2) the last day of our fiscal yearin which the payment of common stock in satisfaction of the RSUs becomesdeductible to the Company under Section 162(m) of the InternalRevenue Code.  The RSUs are not entitledto voting rights or the payment of dividends.  The RSU’s are fully vested as of October 30, 2010.  As of October 30, 2010, no shares havebeen delivered pursuant to the RSUs.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

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

 

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 six months ended October 30,2010, the compensation committee awarded 24,000 restricted shares to ourindependent directors, all of which vested immediately upon grant.

 

Werecognized pre-tax compensation expense for RSAs of $22 and $81 for the threemonths ended October 30, 2010 and October 31, 2009,respectively.  We recognized pre-taxcompensation expense for RSAs of $298 and $316 for the six months ended October 30,2010 and October 31, 2009, respectively. We record the expense in the selling and administrative section of ourcondensed consolidated statement of operations.

 

The following table summarizes the RSA activity for the six monthsended October 30, 2010:

 
| ** **                                     | ** ** | **RSA**    | ** ** |
|------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Shares** | ** ** |
| Unvested and unissued at May 1, 2010      |       | 25,350     |       |
| Awarded                                        |       | 24,000     |       |
| Vested                                         |       | (24,000    | )          |
| Forfeited and Cancelled                        |       | (1,548     | )          |
| Unvested and unissued at October 30, 2010 |       | 23,802     |       |

 

The table below shows the Company’s unvested and unissued RSAs atOctober 30, 2010:

 
| ** ** | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **   | ** ** | **Probable**                   | ** ** | **Target**                     | ** ** |
|------------|------------|------------|------------|----------------------------------|------------|--------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **   | ** ** | **Unearned**                   | ** ** | **Unearned**                   | ** ** |
| **Grant**  | ** ** | ** ** | ** ** | ** **                       | ** ** | **Weighted** | ** ** | **Compensation**               | ** ** | **Compensation**               | ** ** |
| **Fiscal** | ** ** | ** ** | ** ** | ** **                       | ** ** | **Average**  | ** ** | **Expense at**            | ** ** | **Expense at**            | ** ** |
| **Year**   | ** ** | **RSAs**   | ** ** | **Vesting Period**          | ** ** | **Value**    | ** ** | **October 30, 2010** | ** ** | **October 30, 2010** | ** ** |
| 2008       |       | 666        |       | 3-year equal annual installments |       | $            | 11.74      |                           | —     |                           | —     |   |
| 2009       |       | 23,136     |       | 3-year equal annual installments |       | 10.64        |       | 45                             |       | 45                             |       |
|            |            |            |            |                                  |            |              |            |                                |            |                                |            |  |

 

At October 30, 2010, the aggregate unvested and unissued RSAs hada grant date weighted average fair value of $10.67 and a weighted averagevesting period of approximately six months.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

**8.****            ****NETINCOME/(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 applicable period.  Diluted income/(loss) per share is calculatedafter adjusting the denominator of the basic income/(loss) per sharecalculation for the effect of all potentially dilutive common sharesoutstanding during the period.

 

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

 
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                       | ** ** | **October 30,**             | ** ** | **October 31,**           | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
| ** **                                                                                       | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Numerator - net income/(loss) attributable to Methode  Electronics, Inc.                    |       | $                                | (513       | )                              | $          | 2,052 |   | $ | 3,552 |   | $ | 2,033 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Denominator:                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic loss per share-weighted average  shares                                    |       | 37,058                           |       | 36,644                         |       | 37,051 |   | 36,641 |   |
| Dilutive potential common shares-employee stock  options                                         |       | —                           |       | 224                            |       | 231 |   | 182 |   |
| Denominator for diluted loss per share adjusted weighted  average shares and assumed conversions |       | 37,058                           |       | 36,868                         |       | 37,282 |   | 36,823 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Net income/(loss) per share:                                                                     |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted                                                                                |       | $                                | (0.01      | )                              | $          | 0.06 |   | $ | 0.10 |   | $ | 0.06 |   |

 

Potential common shares have not beenincluded in the calculation of diluted net loss per share, as the effect wouldhave been anti-dilutive.  As of October 30,2010, options to purchase 395,867 shares of common stock at a weighted-averageexercise price of $10.84 per share were outstanding, but were not included inthe computation of net income per share because the exercise prices weregreater than the average market price of $9.29 for our common stock for thesecond quarter of fiscal 2011, and, therefore, the effect would have been anti-dilutive.  As of October 31, 2009, options topurchase 445,784 shares of common stock at a weighted-average exercise price of$11.72 per share were outstanding, but were not included in the computation ofnet income per share because the exercise prices were greater than the averagemarket price of $8.51 for our common stock for the second quarter of fiscal2010, and, therefore, the effect would have been anti-dilutive.

 

**9.****            ****SEGMENTINFORMATION**

 

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,geographic areas and major customers. An operating segment is defined as acomponent of an enterprise that engages in business activities from which itmay earn revenues and incur expenses, and about which separate financialinformation is regularly evaluated by the Chief Operating Decision Maker (“CODM”)in deciding how to allocate resources. The CODM, as defined by ASC No. 280, is the Company’s President andChief Executive Officer (“CEO”).

 

TheAutomotive segment supplies electronic and electromechanical devices andrelated products to

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

**9.****            ****SEGMENTINFORMATION - Continued**

 

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

 

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 areused in various markets and applications, including telecommunications,computers, transportation, industrial and power conversion, insulated gatebipolar transistor solutions, aerospace and military.

 

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

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies in our Form 10-K for the fiscalyear ended May 1, 2010.  We allocateresources to segments based on operating income. Transfers between segments arerecorded using internal transfer prices set by us.  The following table represents informationregarding our segments;

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

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

 
| ** **                          | ** ** | **Three Months Ended October 30, 2010** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Automotive**                                                   | ** ** | **Interconnect** | ** ** | **Power  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                           |       | $                                                                | 54,793     |   | $ | 36,813 |   | $ | 12,091 |   | $ | 3,284 |   | $ | 367 |   | $ | 106,614 |   |
| Transfers between segments          |       | —                                                           |       | (284 | ) | (70 | ) | (13 | ) | (367 | ) | — |   |
| Net sales to unaffiliated customers |       | $                                                                | 54,793     |   | $ | 36,529 |   | $ | 12,021 |   | $ | 3,271 |   | $ | — |   | $ | 106,614 |   |
|                                |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss)               |       | $                                                                | 55         |   | $ | 5,911 |   | $ | 1,120 |   | $ | (430 | ) | $ | — |   | $ | 6,656 |   |
|                                |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net             |       |                                                             |       |   |   |   |   |   |   |   |   | (6,378 | ) |
|                                |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes          |       |                                                             |       |   |   |   |   |   |   |   |   | $ | 278 |   |

 
| ** **                                            | ** ** | **Three Months Ended October 31, 2009** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Automotive**                                                   | ** ** | **Interconnect** | ** ** | **Power  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                                                | 56,193     |   | $ | 30,605 |   | $ | 9,412 |   | $ | 2,419 |   | $ | 133 |   | $ | 98,496 |   |
| Transfers between segments                            |       | —                                                           |       | (76 | ) | (30 | ) | (27 | ) | (133 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                                                | 56,193     |   | $ | 30,529 |   | $ | 9,382 |   | $ | 2,392 |   | $ | — |   | $ | 98,496 |   |
|                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                                                | 7,953      |   | $ | 1,616 |   | $ | 611 |   | $ | (749 | ) | $ | — |   | $ | 9,431 |   |
|                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (2,339                                                           | )          | (676 | ) | (141 | ) | — |   | — |   | (3,156 | ) |
|                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                                                | 5,614      |   | $ | 940 |   | $ | 470 |   | $ | (749 | ) | $ | — |   | $ | 6,275 |   |
|                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                                             |       |   |   |   |   |   |   |   |   | (3,962 | ) |
|                                                  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                                             |       |   |   |   |   |   |   |   |   | $ | 2,313 |   |

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

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

 
| ** **                          | ** ** | **Six Months Ended October 30, 2010** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                          | ** ** | **Automotive**                                                 | ** ** | **Interconnect** | ** ** | **Power  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                           |       | $                                                              | 104,075    |   | $ | 71,561 |   | $ | 23,716 |   | $ | 6,181 |   | $ | 634 |   | $ | 204,899 |   |
| Transfers between segments          |       | —                                                         |       | (436 | ) | (147 | ) | (51 | ) | (634 | ) | — |   |
| Net sales to unaffiliated customers |       | $                                                              | 104,075    |   | $ | 71,125 |   | $ | 23,569 |   | $ | 6,130 |   | $ | — |   | $ | 204,899 |   |
|                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss)               |       | $                                                              | 2,971      |   | $ | 9,527 |   | $ | 1,626 |   | $ | (1,003 | ) | $ | — |   | $ | 13,121 |   |
|                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net             |       |                                                           |       |   |   |   |   |   |   |   |   | (8,171 | ) |
|                                |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes          |       |                                                           |       |   |   |   |   |   |   |   |   | $ | 4,950 |   |

 
| ** **                                            | ** ** | **Six Months Ended October 31, 2009** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Automotive**                                                 | ** ** | **Interconnect** | ** ** | **Power  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                                              | 107,392    |   | $ | 55,345 |   | $ | 20,827 |   | $ | 5,126 |   | $ | 418 |   | $ | 188,272 |   |
| Transfers between segments                            |       | —                                                         |       | (127 | ) | (254 | ) | (37 | ) | (418 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                                              | 107,392    |   | $ | 55,218 |   | $ | 20,573 |   | $ | 5,089 |   | $ | — |   | $ | 188,272 |   |
|                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                                              | 13,463     |   | $ | 2,645 |   | $ | 1,464 |   | $ | (1,329 | ) | $ | — |   | $ | 16,243 |   |
|                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (4,958                                                         | )          | (1,446 | ) | (363 | ) | — |   | — |   | (6,767 | ) |
|                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                                              | 8,505      |   | $ | 1,199 |   | $ | 1,101 |   | $ | (1,329 | ) | $ | — |   | $ | 9,476 |   |
|                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                                           |       |   |   |   |   |   |   |   |   | (6,890 | ) |
|                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                                           |       |   |   |   |   |   |   |   |   | $ | 2,586 |   |

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts 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”)entered into a supply agreement pursuant to which Methode was to supply all ofDelphi’s requirements for the seat bladders used in Delphi’s occupant restraintsystem from October 1, 2008 through September 30, 2011.  On August 26, 2009, Delphi notified usthat effective September 10, 2009, our supply arrangement wasterminated.  We are contesting Delphi’sright to terminate this long-term supply arrangement and the parties areengaged in litigation regarding this supply agreement and our relatedintellectual property.

 

Asdescribed in more detail in Part I, Item 3 “Legal Proceedings” of ourAnnual Report on Form 10-K, for the fiscal year ended May 1,2010, in March 2010, DPH Holdings Corp., as successor to DelphiCorporation, served the Company with a complaint seeking to recover approximately$19,726 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.

 

In June 2006, the Company soldcertain unsecured claims it had against Delphi in Delphi’s bankruptcyproceeding to Credit Suisse for $3,137 pursuant to a Transfer Agreement. Theseclaims were subsequently assigned by Credit Suisse to Blue Angel Claims LLC (“BlueAngel”). On July 20, 2010, Blue Angel delivered a demand letter to theCompany contending that under the terms of the Transfer Agreement, theunsecured claims had been objected to by Delphi in the Delphi bankruptcyproceeding and therefore the Company owed Blue Angel $3,137 plus interest. TheCompany disagrees with Blue Angel’s position. On October 25, 2010, BlueAngel Claims, LLC filed a Complaint against Methode in the Supreme Court of theState of New York, County of New York, Index No. 651830/10, inconnection with this dispute.  TheCompany has not yet answered the complaint. While the Company has defenses to the complaint, a liability of $3,834,which represents the claim and accrued interest, was recorded during the secondquarter of fiscal 2011.

 

**11.          PRE-PRODUCTION COSTSRELATED TO LONG-TERM SUPPLY ARRANGEMENTS**

 

We incur pre-production tooling costs relatedto certain products produced for our customers under long-term supplyagreements.  We had $9,833 and $11,984 asof October 30, 2010 and May 1, 2010, respectively, of pre-productiontooling costs related to customer-owned tools for which reimbursement iscontractually guaranteed by the customer or for which the customer has provideda non-cancelable right to use the tooling. Net revenues and costs on projects are deferred and recognized over thelife of the related long-term supply agreement.

 

**12.          FAIR VALUEMEASUREMENTS**

 

ASC No. 820 defines fair value as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants.

 

ASC No. 820 also specifies a fair value hierarchy based upon theobservation of inputs in valuation techniques. Observable inputs (highest level) reflect market data obtained fromindependent sources, while unobservable inputs (lowest level) reflect internallydeveloped market assumptions.  Inaccordance with ASC No. 820, fair value measurements are classified underthe following hierarchy:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

**12.          FAIR VALUEMEASUREMENTS - Continued**

 

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

 

·               Level 2 — Quoted prices inactive markets for similar assets and liabilities, or other inputs that areobservable for the asset or liability, either directly or indirectly, forsubstantially the full term of the financial instrument.

 

·               Level 3 — Unobservableinputs that are supported by little or no market activity and that aresignificant 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.

 

Assets and liabilities recorded at fair value are valued using quotedmarket prices or under a market approach using other relevant informationgenerated by market transactions involving identical or comparable instrumentsand included in a table below which summarizes the fair value of assets andliabilities as of October 30, 2010:

 
| ** **                                        | ** ** | **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)                     |       | $                                              | 77,192     |   | $ | 77,192 |   | $ | — |   | $ | — |   |
| Assets related to deferred compensation plan      |       | $                                              | 3,870      |   | $ | — |   | $ | 3,870 |   | $ | — |   |
| Total assets at fair value                        |       | $                                              | 81,062     |   | $ | 77,192 |   | $ | 3,870 |   | $ | — |   |
|                                              |       |                                           |       |   |   |   |   |   |   |
| Liabilities:                                      |       |                                           |       |   |   |   |   |   |   |
| Liabilities related to deferred compensation plan |       | $                                              | 3,216      |   | $ | 3,216 |   | $ | — |   | $ | — |   |
| Total liabilities at fair value                   |       | $                                              | 3,216      |   | $ | 3,216 |   | $ | — |   | $ | — |   |

 

----

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

 

Fair Value of Other Financial Instruments. The carrying values of ourshort-term financial instruments, including cash and cash equivalents, accountsreceivable, accounts payable and short-term debt approximate their fair valuesbecause of the short maturity of these instruments.

 

**13.          DEBT**

 

We have an agreement with our primary bank for a revolving creditfacility to provide up to $75,000 of ready financing for general corporatepurposes, 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 October 30, 2010, we were in compliance with these covenants andhad net borrowings of $18,000 plus accrued interest of $9 against this creditfacility.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

***CautionaryStatement***

 

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 ouractual results and condition to differ materially from those projected inforward-looking statements.  Theforward-looking statements in this report are subject to the safe harborprotection provided under the securities laws and are made as of the date ofthis report.

 

·                  Wedepend on a small number of large customers, specifically two large automotivecustomers.  If we were to lose any ofthese customers or any of these customers significantly reduced theirpurchases, or if any of the customers declare bankruptcy, our future resultscould 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 those industries.

 

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

 

·                  We are dependent on the availability and price ofcomponents and raw materials as well as the risk of substituted or counterfeitcomponents.

 

·                  Our technology-based businesses and the markets in which weoperate are highly competitive.  If weare unable 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 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,Risk Factors of our Form 10-K for the fiscal year ended May 1, 2010,for a further discussion regarding some of the reasons that actual results maybe materially different from those we anticipate.

 

***Overview***

 

Weare a global manufacturer of component and subsystem devices with manufacturing,design and testing facilities in China, Czech Republic, Germany, India,Lebanon, Malta, Mexico, the Philippines, Singapore, Switzerland, the UnitedKingdom and the United States.  We are aglobal 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, networkingequipment, wireless and terrestrial voice/data systems), rail and othertransportation industries.

 

**Delphi Related Litigation**

 

OnSeptember 4, 2008, Methode and Delphi Automotive Systems LLC (“Delphi”)entered into a supply agreement pursuant to which Methode was to supply all ofDelphi’s requirements for the seat bladders used in Delphi’s occupant restraintsystem from October 1, 2008 through September 30, 2011.  On August 26, 2009, Delphi notified usthat effective September 10, 2009, our supply agreement wasterminated.  We are contesting Delphi’sright to terminate this long-term supply agreement and the parties are engagedin litigation regarding this supply agreement and our related intellectualproperty.

 

Asdescribed in more detail in Part I, Item 3 “Legal Proceedings” of ourAnnual Report on Form 10-K, for the fiscal year ended May 1,2010, in March 2010, DPH Holdings Corp., as successor to DelphiCorporation, served the Company with a complaint seekingto recover approximately $19.7 million in alleged preferencepayments that Delphi made to the Company within the 90-day preferenceperiod preceding Delphi’s bankruptcy filing.  The Company isseeking to dismiss the Delphi preference complaint based onviolations of due process and the Company possesses several othersubstantive defenses.

 

InJune 2006, the Company sold certain unsecured claims it had against Delphiin Delphi’s bankruptcy proceeding to Credit Suisse for $3.1 million pursuant toa Transfer Agreement. These claims were subsequently assigned by Credit Suisseto Blue Angel Claims LLC (“Blue Angel”). 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 Company disagrees with Blue Angel’s position. On October 25,2010, Blue Angel Claims, LLC filed a Complaint against Methode in the SupremeCourt of the State of New York, County of New York, Index No. 651830/10,in connection with this dispute.  TheCompany has not yet answered the complaint. While the Company has defenses to the complaint, a liability of $3.8million, which represents the claim and accrued interest, was recorded duringthe second quarter of fiscal 2011.

 

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**Business Outlook**

 

Ouroverall outlook for the remainder of fiscal 2011 is positive. Production levelsin China, Europe and North America in the first six months of fiscal 2011 werestronger than expected and demand appears to be based on fundamentalimprovements in those markets. The trends that have driven the recentsequential growth in all business segments are expected to continue. Through our restructuring activities initiated in prior years we have been ableto reduce our cost structure.  We expect increased sales volumes to resultin improved operating margins.  Duringfiscal 2010 and 2011, we experienced component shortages in our supply base,which has negatively affected our results.   The Company maintains apositive long-term outlook for its global business and is committed todeveloping new product solutions for our customers and making strategic capitalinvestments as it pursues its growth strategy.

 

Results may differ materially fromwhat is expressed or forecasted.  See “Item1A Risk Factors” of our Form 10-K, for the fiscal year ended May 1,2010.

 

**Results of Operations for the Three Months Ended October 30,2010 as Compared to the Three Months Ended October 31, 2009**

 

**ConsolidatedResults**

 

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                                                       | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                       | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                                                        |       | $                    | 106.6      |                 | $          | 98.5                |       | $                   | 8.1        |   | 8.2 | % |
| Other income                                                     |       | 1.1                  |       | 1.1                  |       | —              |       | 0.0                 | %          |
|                                                             |       | 107.7                |       | 99.6                 |       | 8.1                 |       | 8.1                 | %          |
|                                                             |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold                                            |       | 84.1                 |       | 77.8                 |       | 6.3                 |       | 8.1                 | %          |
|                                                             |       |                 |       |                 |       |                |       |                |       |
| Gross margins (including other income)                           |       | 23.6                 |       | 21.8                 |       | 1.8                 |       | 8.3                 | %          |
|                                                             |       |                 |       |                 |       |                |       |                |       |
| Restructuring                                                    |       | —               |       | 3.2                  |       | (3.2                | )          | N/M                 |       |
| Selling and administrative expenses                              |       | 21.2                 |       | 16.4                 |       | 4.8                 |       | 29.3                | %          |
| Interest expense, net                                            |       | 0.1                  |       | —               |       | 0.1                 |       | N/M                 |       |
| Other, net - (income)/expense                                    |       | 2.0                  |       | (0.1                 | )          | 2.1                 |       | N/M                 |       |
| Income tax expense                                               |       | 0.8                  |       | 0.2                  |       | 0.6                 |       | 300.0               | %          |
|                                                             |       |                 |       |                 |       |                |       |                |       |
| Net income/(loss) attributable to Methode Electronics, Inc. |       | $                    | (0.5       | )                    | $          | 2.1                 |       | $                   | (2.6       | ) | N/M |   |

 
| ** **                                                        | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**                                   | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                                                         |       | 100.0                | %          | 100.0                | %          |
| Other income                                                      |       | 1.0                  | %          | 1.1                  | %          |
| Cost of products sold                                             |       | 78.9                 | %          | 79.0                 | %          |
| Gross margins (including other income)                            |       | 22.1                 | %          | 22.1                 | %          |
| Restructuring                                                     |       | 0.0                  | %          | 3.2                  | %          |
| Selling and administrative expenses                               |       | 19.9                 | %          | 16.6                 | %          |
| Interest expense, net                                             |       | 0.1                  | %          | 0.0                  | %          |
| Other, net - (income)/expense                                     |       | 1.9                  | %          | -0.1                 | %          |
| Income tax expense                                                |       | 0.8                  | %          | 0.2                  | %          |
| Net income/(loss) attributable to Methode  Electronics, Inc. |       | -0.5                 | %          | 2.1                  | %          |

 

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*Net Sales*. Consolidated net sales increased $8.1 million, or 8.2%, to $106.6million for the three months ended October 30, 2010, from $98.5 millionfor the three months ended October 31, 2009.  Net sales for the three months ended October 31,2009 benefitted by $1.7 million, related to a one-time reversal of pricingcontingencies which were accrued over several years that were no longerrequired.  The Automotive segment netsales decreased $1.4 million, or 2.5%, to $54.8 million for the second quarterof fiscal 2011, from $56.2 million for the second quarter of fiscal 2010.  The Interconnect segment net sales increased$6.0 million, or 19.7%, to $36.5 million for the second quarter of fiscal 2011,compared to $30.5 million for the second quarter of fiscal 2010.  The Power Products segment net salesincreased $2.6 million, or 27.7%, to $12.0 million for the second quarter offiscal 2011, as compared to $9.4 million for the second quarter of fiscal2010.  The Other segment net salesincreased $0.9 million, or 37.5%, to $3.3 million for the second quarter offiscal 2011, as compared to $2.4 million for the second quarter of fiscal2010.  Translation of foreign operationsnet sales for the three months ended October 30, 2010 decreased reportednet sales by $1.8 million or 1.7% due to average currency rates in the secondquarter of fiscal 2011, compared to the average currency rates in the secondquarter of fiscal 2010.

 

*Other Income*.  Otherincome was $1.1 million for both the three months ended October 30, 2010and October 31, 2009.  Other incomeconsisted primarily of earnings from engineering design fees and royalties.

 

*Cost of Products Sold*.  Consolidated cost of products sold increased$6.3 million, or 8.1%, to $84.1 million for the three months ended October 30,2010, compared to $77.8 million for the three months ended October 31,2009.  Consolidated cost of products soldas a percentage of sales were 78.9% in the second quarter of fiscal 2011,compared to 79.0% in the second quarter of fiscal 2010.  Included in the cost of products sold for thethree months ended October 31, 2009 is $0.7 million of asset write-downsrelating to the termination of the Delphi supply agreement.  Included in cost of products sold areadditional provisions for environmental matters for three sites that are nolonger used in operations.  We recorded$0.5 million and $0.2 million for environmental matters for the three monthsended October 30, 2010 and October 31, 2009, respectively.  Also during the second quarter of fiscal2011, we recorded a negotiated program termination charge of $1.3 million forcertain products manufactured in our Malta facility and $0.4 million forcustomer cancellation of certain products manufactured in our U.S.facility.  In addition, we incurred $0.6million in additional costs due to vendor supply issues for new products thatbegan ramping up production during the second quarter of fiscal 2011.  The increases were substantially offset bycost efficiencies achieved in our Asian businesses, higher sales volumes aswell as a change in sales mix within the Interconnect segment in the secondquarter of fiscal 2011, as compared to the second quarter of fiscal 2010.

 

*Gross Margins (including other income). *Consolidated gross margins(including other income) increased $1.8 million, or 8.3%, to $23.6 million forthe three months ended October 30, 2010, as compared to $21.8 million forthe three months ended October 31, 2009. Gross margins (including other income) as a percentage of net sales were22.1% for both the three months ended October 30, 2010 and October 31,2009.  Gross margins (including otherincome) decreased due to the loss of the Delphi business, the one time pricingcontingency reversal in the second quarter of fiscal 2010, additional costsrelated to environmental matters, the customer negotiated cancellation andother customer cancellation charges, additional cost due to vendor supplyissues, which were offset by higher sales volumes, a favorable change in salesmix within the Interconnect segment and cost efficiencies from our Asianbusinesses, in the second quarter of fiscal 2011, as compared to the secondquarter of fiscal 2010.

 

*Restructuring*. During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the second quarterof fiscal 2010, we recorded a total restructuring charge of $3.2 million, whichconsisted of $1.8 million for employee severance, $0.1 million for accelerateddepreciation and $1.3 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$4.8 million, or 29.3%, to $21.2 million for the three months ended October 30,2010, compared to $16.4 million for the three months ended October 31,2009.  During the second quarter offiscal 2011, we recorded an expense of $3.8 million for litigation regardingunsecured claims sold to Blue Angel LLC in June 2006, related to theDelphi bankruptcy.  See the Overviewsection for more information regarding this matter.  In addition, selling and marketing expensesincreased in our North American and Asian automotive businesses, partiallyoffset by lower legal expenses related to the Delphi patent and supplyagreement litigation as well as lower commissions and professional fees in thesecond quarter of fiscal 2011, compared to the second quarter of fiscal2010.  The second quarter of fiscal 2011included income of $0.5 million and the second quarter of fiscal 2010 includedincome of $0.4 million for grants

 

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receivedat one of our foreign facilities. Selling and administrative expenses as a percentage of net salesincreased to 19.9% for the three months ended October 30, 2010 from 16.6%for the three months ended October 31, 2009.

 

*Interest Expense, Net*.  Interest expense, net was $0.1 million forthe three months ended October 30, 2010, compared to zero for the threemonths ended October 31, 2009. Interest income was $0.2 million for the three months ended October 30,2010, compared to $0.1 million for the three months ended October 31,2009.  The average cash balance was $63.2million during the three months ended October 30, 2010, as compared to$63.7 million during the three months ended October 31, 2009.  The average interest rate earned for thethree months ended October 30, 2010 was 1.17%, compared to 0.48% for thethree months ended October 31, 2009. Interest expense was $0.2 million for the three months ended October 30,2010, compared to $0.1 million for the three months ended October 31,2009.

 

*Other (Income)/Expense, Net*.  Other (income)/expense, net decreased $2.1million to an expense of $2.0 million for the three months ended October 30,2010, as compared to income of $0.1 million for the three months ended October 31,2009.  The second quarter of fiscal2010 included income of $0.3 million related to an enhanced cash fund.  All other amounts for both the second quarterof fiscal 2011 and the second quarter of fiscal 2010 relate to currency ratefluctuations.  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 $0.6 millionto $0.8 million for the three months ended October 30, 2010, compared to$0.2 million for the three months ended October 31, 2009.  The three months ended October 30, 2010relates to taxes on foreign profits.  Thethree months ended October 31, 2009 includes taxes on foreign profits of$0.1 million and $0.1 million related to non-Federal U.S. taxes.

 

*Net Income/(Loss) Attributable to Methode Electronics, Inc.*  Net income/(loss) attributableto Methode Electronics, Inc. decreased $2.6 million to a loss of $0.5million for the three months ended October 30, 2010, compared to income of$2.1 million for the three months ended October 31, 2009.  The decrease is primarily due to the BlueAngel unsecured claims expense, higher currency exchange costs, the one timepricing contingency reversal in the second quarter of fiscal 2010, additionalcosts related to environmental matters, customer negotiated cancellation andother customer cancellation costs, vendor supply costs and higher sales andmarketing expenses in North American and Asia, partially offset by norestructuring costs, higher net sales and gross profit in the second quarter offiscal 2011.

 

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**Operating Segments**

 

**Automotive Segment Results**

** **

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                             | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                             | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                              |       | $                    | 54.8       |                 | $          | 56.2                |       | $                   | (1.4       | ) | -2.5 | % |
| Other income                           |       | 1.1                  |       | 1.0                  |       | 0.1                 |       | 10.0                | %          |
|                                   |       | 55.9                 |       | 57.2                 |       | (1.3                | )          | -2.3                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold                  |       | 45.1                 |       | 44.2                 |       | 0.9                 |       | 2.0                 | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Gross margins (including other income) |       | 10.8                 |       | 13.0                 |       | (2.2                | )          | -16.9               | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Restructuring                          |       | —               |       | 2.3                  |       | (2.3                | )          | N/M                 |       |
| Selling and administrative expenses    |       | 9.2                  |       | 4.5                  |       | 4.7                 |       | 104.4               | %          |
| Interest income, net                   |       | (0.1                 | )          | —               |       | (0.1                | )          | N/M                 |       |
| Other expense, net                     |       | 1.6                  |       | 0.6                  |       | 1.0                 |       | 166.7               | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Income before income taxes             |       | $                    | 0.1        |                 | $          | 5.6                 |       | $                   | (5.5       | ) | -98.2 | % |

 
| ** **                             | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**        | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                              |       | 100.0                | %          | 100.0                | %          |
| Other income                           |       | 2.0                  | %          | 1.8                  | %          |
| Cost of products sold                  |       | 82.3                 | %          | 78.6                 | %          |
| Gross margins (including other income) |       | 19.7                 | %          | 23.1                 | %          |
| Restructuring                          |       | 0.0                  | %          | 4.1                  | %          |
| Selling and administrative expenses    |       | 16.8                 | %          | 8.0                  | %          |
| Interest income, net                   |       | -0.2                 | %          | 0.0                  | %          |
| Other expense, net                     |       | 2.9                  | %          | 1.1                  | %          |
| Income before income taxes             |       | 0.2                  | %          | 10.0                 | %          |

 

*Net Sales*.  Automotivesegment net sales decreased $1.4 million, or 2.5%, to $54.8 million for thethree months ended October 30, 2010, from $56.2 million for the threemonths ended October 31, 2009.  Netsales benefitted by $1.7 million for the three months ended October 31,2009, related to a one-time reversal of pricing contingencies which wereaccrued for over several years that were no longer required.  There were no sales to Delphi Corporation inthe second quarter of 2011, as compared to net sales of $6.6 million in thesecond quarter of fiscal 2010 due to the cancellation of the supply agreementon September 10, 2009.  Net salesincreased in Asia and Europe by 175.4% and 1.5%, respectively, however, netsales from North America declined by 64.3% in the second quarter of fiscal2011, compared to the second quarter of fiscal 2010.  Net sales also declined in North America by$5.4 million due to the planned transfer of production from our U.S. facilityto our facility in Shanghai, China in the third quarter of fiscal 2010 as wellas by $3.9 million due to the termination of production of certain Ford legacyproducts at our Reynosa, Mexico facility at the end of the second quarter offiscal 2010.  Translation of foreignoperations net sales for the three months ended October 30, 2010 decreasedreported net sales by $1.8 million, or 3.2%, due to average currency rates inthe second quarter of fiscal 2011, compared to the average currency rates inthe second quarter of fiscal 2010.

 

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*Other Income*.  Otherincome increased $0.1 million, or 10.0%, to $1.1 million for the three monthsended October 30, 2010, compared to $1.0 million for the three monthsended October 31, 2009.  Otherincome consisted primarily of earnings from engineering design fees androyalties.

 

*Cost of Products Sold*.  Automotive segment cost of products soldincreased $0.9 million, or 2.0%, to $45.1 million for the three months ended October 30,2010, from $44.2 million for the three months ended October 31, 2009.  Included in the cost of products sold for thethree months ended October 31, 2009 is $0.7 million of asset write-downs,related to the termination of the Delphi supply agreement.  The second quarter of fiscal 2011 includes acharge of $1.3 million for negotiated program termination costs for certainproducts manufactured in our Malta facility. In addition, we incurred $0.6 million in additional costs due to vendorsupply issues for new products that began ramping up production in NorthAmerica during second quarter of fiscal 2011. The Automotive segment cost of products sold as a percentage of saleswere 82.3% in the second quarter of fiscal 2011, compared to 78.6% in thesecond quarter of fiscal 2010.  Theincrease in cost of products sold as a percentage of sales were primarily dueto the loss of the Delphi business, the program termination costs, costsrelated to vendor supply issues and increasing cost on the remaining NorthAmerican business in the second quarter of fiscal 2011, compared to the secondquarter of fiscal 2010.  The increasingcosts as a percentage of sales in North America primarily relates to thedevelopment of new products which are expected to begin shipping in futureperiods.  The increase in costs ofproducts sold as a percentage of sales is partially offset by significantlyhigher sales volumes and cost improvements in Asia.

 

*Gross Margins (including other income). *Automotive segment gross margins(including other income) decreased $2.2 million, or 16.9%, to $10.8 million forthe three months ended October 30, 2010, as compared to $13.0 million forthe three months ended October 31, 2009. The Automotive segment gross margins (including other income) as apercentage of net sales were 19.7% for the three months ended October 30,2010, as compared to 23.1% for the three months ended October 31,2009.  Gross margins (including otherincome) as a percentage of sales decreased in the second quarter of fiscal2011, compared to the second quarter of fiscal 2010, due to loss of the Delphibusiness, the one-time pricing contingency reversal in the second quarter offiscal 2010, the negotiated program termination costs, costs related to thevendor supply issues, and increased costs relating to new product development.The losses were partially offset by improved gross margins (including otherincome) due to higher net sales volumes and cost improvements in Asia.

 

*Restructuring*.  During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the second quarterof fiscal 2010, we recorded a total restructuring charge of $2.3 million, whichconsisted of $1.7 million for employee severance, $0.1 million for accelerateddepreciation and $0.5 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$4.7 million, or 104.4%, to $9.2 million for the three months ended October 30,2010, compared to $4.5 million for the three months ended October 31,2009.  During the second quarter offiscal 2011, we recorded an expense of $3.8 million for litigation regardingunsecured claims sold to Blue Angel LLC in June 2006, related to theDelphi bankruptcy.  See the Overviewsection for more information regarding this matter.  Selling and marketing expenses increased inour North American and Asian automotive businesses, partially offset by lowerlegal expenses related to the Delphi patent and supply agreement litigation inthe second quarter of fiscal 2011, compared to the second quarter of fiscal2010.  The second quarter of fiscal 2011included income of $0.5 million and the second quarter of fiscal 2010 includedincome of $0.4 million for grants received at one of our foreignfacilities.  Selling and administrativeexpenses as a percentage of net sales were 16.8% for the three months ended October 30,2010 and 8.0% for the three months ended October 31, 2009.

 

*Interest Income, Net*.  Interest income, net was $0.1 million for thethree months ended October 30, 2010, as compared to zero for the threemonths ended October 31, 2009.

 

*Other Expense, Net*.  Other expense, net increased $1.0 million, to$1.6 million for the three months ended October 30, 2010, as compared to$0.6 million for the three months ended October 31, 2009.  All amounts for both the second quarter offiscal 2011 and the second quarter of fiscal 2010 relate to currency ratefluctuations.  The functional currenciesof these operations are the British pound, Chinese yuan, Euro and the Mexicanpeso.  Some foreign operations havetransactions denominated in currencies other than their functional currencies,primarily sales in U.S. dollars and Euros, creating exchange ratesensitivities.

 

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*Income**Before Income Taxes. *Automotive segment incomebefore income taxes decreased $5.5 million to $0.1 million for the three monthsended October 30, 2010, compared to $5.6 million for the three monthsended October 31, 2009 due to the Blue Angel unsecured claims charge, theone-time pricing contingency reversal in the second quarter of fiscal 2010,lower net sales and gross margins (including other income), increased costs fornew product development, higher selling and marketing expenses, higher currencyexchange rate expenses, negotiated program termination costs, partially offsetby no restructuring charges and lower legal expenses related to the Delphipatent and supply agreement litigation in the second quarter of fiscal 2011,compared to the second quarter of fiscal 2010.

 

**Interconnect Segment Results**

 

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                          | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                           |       | $                    | 36.5       |                 | $          | 30.5                |       | $                   | 6.0        |   | 19.7 | % |
|                                |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold               |       | 25.2                 |       | 23.4                 |       | 1.8                 |       | 7.7                 | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Gross margins                       |       | 11.3                 |       | 7.1                  |       | 4.2                 |       | 59.2                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Restructuring                       |       | —               |       | 0.7                  |       | (0.7                | )          | N/M                 |       |
| Selling and administrative expenses |       | 5.2                  |       | 5.7                  |       | (0.5                | )          | -8.8                | %          |
| Interest income, net                |       | (0.1                 | )          | (0.1                 | )          | —              |       | 0.0                 | %          |
| Other (income)/expense, net         |       | 0.3                  |       | (0.1                 | )          | 0.4                 |       | N/M                 |       |
|                                |       |                 |       |                 |       |                |       |                |       |
| Income before income taxes          |       | $                    | 5.9        |                 | $          | 0.9                 |       | $                   | 5.0        |   | 555.6 | % |

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**     | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                           |       | 100.0                | %          | 100.0                | %          |
| Cost of products sold               |       | 69.0                 | %          | 76.7                 | %          |
| Gross margins                       |       | 31.0                 | %          | 23.3                 | %          |
| Restructuring                       |       | 0.0                  | %          | 2.3                  | %          |
| Selling and administrative expenses |       | 14.2                 | %          | 18.7                 | %          |
| Interest income, net                |       | -0.3                 | %          | -0.3                 | %          |
| Other (income)/expense, net         |       | 0.8                  | %          | -0.3                 | %          |
| Income before income taxes          |       | 16.2                 | %          | 3.0                  | %          |

 

*Net Sales*. Interconnect segment net sales increased $6.0 million, or 19.7%, to$36.5 million for the three months ended October 30, 2010 from $30.5million for the three months ended October 31, 2009.  The increase was primarily driven by strongsales in our interface solutions and data solutions businesses.  Net sales increased 17.8%, 41.3% and 3.0% inNorth America, Europe and Asia, respectively, in the second quarter of fiscal2011, compared to the second quarter of fiscal 2010.

 

*Cost of Products Sold*.  Interconnect segment cost of products soldincreased $1.8 million, or 7.7%, to $25.2 million for the three months ended October 30,2010, compared to $23.4 million for the three months ended October 31,2009.  Interconnect segment cost ofproducts sold as a percentage of net sales decreased to 69.0% for the threemonths ended October 30, 2010, compared to 76.7% for the three monthsended October 31, 2009.  The decreaseis primarily due to sales mix within the segment as well as the overallincrease in net sales in the second quarter of fiscal 2011, compared to thesecond quarter of fiscal 2010.

 

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*Gross Margins. *Interconnect segment gross margins increased $4.2 million, or 59.2%, to$11.3 million for the three months ended October 30, 2010, as compared to$7.1 million for the three months ended October 31, 2009.  Gross margins as a percentage of net salesincreased to 31.0% for the three months ended October 30, 2010 from 23.3%for the three months ended October 31, 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 second quarter of fiscal 2011, compared tothe second quarter of fiscal 2010.

 

*Restructuring*. During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the second quarterof fiscal 2010, we recorded a total restructuring charge of $0.7 million, whichconsisted of $0.2 million for employee severance, $0.1 million for accelerateddepreciation and $0.4 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses decreased$0.5 million, or 8.8%, to $5.2 million for the three months ended October 30,2010, compared to $5.7 million for the three months ended October 31,2009.  Selling and administrativeexpenses decreased due to lower commissions in our Asian businesses in thesecond quarter of fiscal 2011, compared to the second quarter of fiscal2010.  Selling and administrativeexpenses as a percentage of net sales decreased to 14.2% for the three monthsended October 30, 2010, from 18.7% for the three months ended October 31,2009.

 

*Interest Income, Net*.  Interest income, net was $0.1 million forboth the three months ended October 30, 2010 and October 31, 2009.

 

*Other (Income)/Expense, Net*.  Other (income)/expense, net was an expense of$0.3 million for the three months ended October 30, 2010, compared toincome of $0.1 million for the three months ended October 31, 2009.  The increase is primarily due to theweakening U.S. dollar against the euro in the second quarter of fiscal 2011,compared to the second quarter of fiscal 2010. The functional currencies of these operations are the British pound,Czech koruna, Euro, 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 Before Income Taxes. *Interconnect segment incomebefore income taxes increased $5.0 million to $5.9 million for the three monthsended October 30, 2010, compared to $0.9 million for the three monthsended October 31, 2009 due to increased net sales and gross margins, norestructuring expenses and lower commissions expense in the second quarter of fiscal2011, compared to the second quarter of fiscal 2010.

 

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**Power Products Segment Results**

 

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

(in millions)

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                          | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                           |       | $                    | 12.0       |                 | $          | 9.4                 |       | $                   | 2.6        |   | 27.7 | % |
|                                |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold               |       | 9.5                  |       | 7.3                  |       | 2.2                 |       | 30.1                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Gross margins                       |       | 2.5                  |       | 2.1                  |       | 0.4                 |       | 19.0                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Restructuring                       |       | —               |       | 0.1                  |       | (0.1                | )          | N/M                 |       |
| Selling and administrative expenses |       | 1.3                  |       | 1.5                  |       | (0.2                | )          | -13.3               | %          |
| Other expense, net                  |       | 0.1                  |       | —               |       | 0.1                 |       | N/M                 |       |
|                                |       |                 |       |                 |       |                |       |                |       |
| Income before income taxes          |       | $                    | 1.1        |                 | $          | 0.5                 |       | $                   | 0.6        |   | 120.0 | % |

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**     | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                           |       | 100.0                | %          | 100.0                | %          |
| Cost of products sold               |       | 79.2                 | %          | 77.7                 | %          |
| Gross margins                       |       | 20.8                 | %          | 22.3                 | %          |
| Restructuring                       |       | 0.0                  | %          | 1.1                  | %          |
| Selling and administrative expenses |       | 10.8                 | %          | 16.0                 | %          |
| Other expense, net                  |       | 0.8                  | %          | 0.0                  | %          |
| Income before income taxes          |       | 9.2                  | %          | 5.3                  | %          |

 

*Net Sales*.  PowerProducts segment net sales increased $2.6 million, or 27.7%, to $12.0 millionfor the three months ended October 30, 2010, compared to $9.4 million forthe three months ended October 31, 2009. Net sales increased in the second quarter of fiscal 2011, as compared tothe second quarter of fiscal 2010 by 4.8% in North America and by 77.5% inAsia.  The increase was driven by higherdemand for our busbar products in Asia, as well as higher demand for ourbusbar, flexible cabling and heat sink products in North America.  We also began selling busbar products inEurope in the second quarter of fiscal 2011, which accounted for $0.6 million,compared to no sales in the second quarter of fiscal 2010.

 

*Cost of Products Sold*.  Power Products segment cost of products soldincreased $2.2 million, or 30.1%, to $9.5 million for the three months ended October 30,2010, compared to $7.3 million for the three months ended October 31,2009.  The second quarter of fiscal 2011includes an inventory and equipment write-down charge of $0.4 million, relatingto a customer cancellation of certain products manufactured in our U.S.facility.  The Power Products segmentcost of products sold as a percentage of sales increased to 79.2% for the threemonths ended October 30, 2010, from 77.7% for the three months ended October 31,2009.  The increase in cost of productssold as a percentage of sales is due to the customer cancellation charge and increasedcosts due to new product development, partially offset by lower costs in ourAsian busbar business as well as our cabling business in the U.S. in the secondquarter of fiscal 2011, compared to the second quarter of fiscal 2010.

 

*Gross Margins.* Power Products segment gross margins increased$0.4 million, or 19.0%, to $2.5 million for the three months ended October 30,2010, compared to $2.1 million for the three months ended October 31,2009.  Gross margins as a percentage ofnet sales decreased to 20.8% for the three months ended October 30, 2010from 22.3% for the three months ended October 31, 2009.  The decrease in gross margins as a percentageof sales is due to the customer cancellation charge and increased costs due tonew product development, partially offset by lower costs in our Asian busbarbusiness as well as our cabling business in the U.S. in the second quarter offiscal 2011, compared to the second quarter of fiscal 2010.

 

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*Restructuring*.  During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the second quarter offiscal 2010, we recorded a restructuring charge of $0.1 million for othercosts.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses decreased$0.2 million, or 13.3%, to $1.3 million for the three months ended October 30,2010, compared to $1.5 million for the three months ended October 31,2009.  Selling and administrativeexpenses decreased due to lower selling and professional fees in our U.S.-basedbusbar and heat sink businesses in the second quarter of fiscal 2011, ascompared to the second quarter of fiscal 2010. ** **Selling and administrative expensesas a percentage of net sales decreased to 10.8% for the three months ended October 30,2010 from 16.0% for the three months ended October 31, 2009.

 

*Other Expense, Net*.  Other expense, net was $0.1 million for thethree months ended October 30, 2010, compared to zero for the three monthsended October 31, 2009.

 

*Income Before Income Taxes. *Power Products income beforeincome taxes increased $0.6 million, or 120.0%, to $1.1 million for the threemonths ended October 30, 2010, compared to $0.5 million for the threemonths ended October 31, 2009, due to higher net sales and gross margins,lower selling and professional fees, no restructuring charges, partially offsetby customer cancellation charges in the second quarter of fiscal 2011, comparedto the second quarter of fiscal 2010.

 

**Other Segment Results**

** **

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

(in millions)

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                          | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                           |       | $                    | 3.3        |                 | $          | 2.4                 |       | $                   | 0.9        |   | 37.5 | % |
|                                |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold               |       | 3.0                  |       | 2.3                  |       | 0.7                 |       | 30.4                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Gross margins                       |       | 0.3                  |       | 0.1                  |       | 0.2                 |       | 200.0               | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Selling and administrative expenses |       | 0.7                  |       | 0.8                  |       | (0.1                | )          | -12.5               | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Loss before income taxes            |       | $                    | (0.4       | )                    | $          | (0.7                | )          | $                   | 0.3        |   | -42.9 | % |

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**     | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                           |       | 100.0                | %          | 100.0                | %          |
| Cost of products sold               |       | 90.9                 | %          | 95.8                 | %          |
| Gross margins                       |       | 9.1                  | %          | 4.2                  | %          |
| Selling and administrative expenses |       | 21.2                 | %          | 33.3                 | %          |
| Loss before income taxes            |       | -12.1                | %          | -29.2                | %          |

 

*Net Sales*.  The Othersegment net sales increased $0.9 million, or 37.5%, to $3.3 million for thethree months ended October 30, 2010, compared to $2.4 million for thethree months ended October 31, 2009. Net sales from our torque-sensing business increased 109.9% in thesecond quarter of fiscal 2011, compared to the second quarter of fiscal2010.  Net sales from our testingfacilities were flat in the second quarter of fiscal 2011, compared to thesecond quarter of fiscal 2010.

 

*Cost of Products Sold*.  Other segment cost of products sold increased$0.7 million to $3.0 million for the three months ended October 30, 2010,compared to $2.3 million for the three months ended October 31, 2009. Costof products sold as a percentage of sales decreased to 90.9% in the secondquarter of fiscal 2011, compared to 95.8% in the second quarter of fiscal 2010.

 

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*Gross Margins. *The Other segment gross margins increased $0.2 million to $0.3 millionfor the three months ended October 30, 2010, compared to $0.1 million forthe three months ended October 31, 2009. The increase is due to the increased net sales in our torque-sensingbusiness in the second quarter of fiscal 2011, compared to the second quarterof 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 October 30,2010, compared to $0.8 million for the three months ended October 31,2009.  Selling and administrativeexpenses as a percentage of net sales decreased to 21.2% for the three monthsended October 30, 2010, from 33.3% for the three months ended October 31,2009.

 

*Loss Before Income Taxes. *The Other segment lossbefore income taxes decreased $0.3 million, or 42.9%, to $0.4 million for thethree months ended October 30, 2010, compared to $0.7 million for thethree months ended October 31, 2009. The loss decreased due to higher sales and gross profit from our torquesensing business as well as lower selling and administrative expenses in thesecond quarter of fiscal 2011, as compared to the second quarter of fiscal2010.

 

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**Results of Operations for the Six Months Ended October 30,2010 as Compared to the Six Months Ended October 31, 2009**

 

**ConsolidatedResults**

 

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                                                 | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                 | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                                                  |       | $                    | 204.9      |                 | $          | 188.3               |       | $                   | 16.6       |   | 8.8 | % |
| Other income                                               |       | 1.8                  |       | 2.5                  |       | (0.7                | )          | -28.0               | %          |
|                                                       |       | 206.7                |       | 190.8                |       | 15.9                |       | 8.3                 | %          |
|                                                       |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold                                      |       | 162.9                |       | 148.7                |       | 14.2                |       | 9.5                 | %          |
|                                                       |       |                 |       |                 |       |                |       |                |       |
| Gross margins (including other income)                     |       | 43.8                 |       | 42.1                 |       | 1.7                 |       | 4.0                 | %          |
|                                                       |       |                 |       |                 |       |                |       |                |       |
| Restructuring                                              |       | —               |       | 6.8                  |       | (6.8                | )          | N/M                 |       |
| Selling and administrative expenses                        |       | 37.5                 |       | 32.3                 |       | 5.2                 |       | 16.1                | %          |
| Interest expense, net                                      |       | 0.1                  |       | 0.1                  |       | —              |       | N/M                 |       |
| Other expense, net                                         |       | 1.2                  |       | 0.3                  |       | 0.9                 |       | N/M                 |       |
| Income tax expense                                         |       | 1.4                  |       | 0.5                  |       | 0.9                 |       | 180.0               | %          |
|                                                       |       |                 |       |                 |       |                |       |                |       |
| Net income attributable to Methode  Electronics, Inc. |       | $                    | 3.6        |                 | $          | 2.1                 |       | $                   | 1.5        |   | 71.4 | % |

 
| ** **                                                 | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**                            | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                                                  |       | 100.0                | %          | 100.0                | %          |
| Other income                                               |       | 0.9                  | %          | 1.3                  | %          |
| Cost of products sold                                      |       | 79.5                 | %          | 79.0                 | %          |
| Gross margins (including other income)                     |       | 21.4                 | %          | 22.4                 | %          |
| Restructuring                                              |       | 0.0                  | %          | 3.6                  | %          |
| Selling and administrative expenses                        |       | 18.3                 | %          | 17.2                 | %          |
| Interest expense, net                                      |       | 0.0                  | %          | 0.1                  | %          |
| Other expense, net                                         |       | 0.6                  | %          | 0.2                  | %          |
| Income tax expense                                         |       | 0.7                  | %          | 0.3                  | %          |
| Net income attributable to Methode  Electronics, Inc. |       | 1.8                  | %          | 1.1                  | %          |

 

*Net Sales*. Consolidated net sales increased $16.6 million, or 8.8%, to $204.9 millionfor the six months ended October 30, 2010, from $188.3 million for the sixmonths ended October 31, 2009.  Netsales benefitted by $1.7 million for the six months ended October 31,2009, related to a one-time reversal of pricing contingencies which wereaccrued over several years and were no longer required.  The Automotive segment net sales decreased$3.3 million, or 3.1%, to $104.1 million for the first half of fiscal 2011,from $107.4 million for the first half of fiscal 2010.  The Interconnect segment net sales increased$15.9 million, or 28.8%, to $71.1 million for the first half of fiscal 2011, ascompared to $55.2 million for the first half of fiscal 2010.  The Power Products segment net salesincreased $3.0 million, or 14.6%, to $23.6 million for the first half of fiscal2011, as compared to $20.6 million for the first half of fiscal 2010.  The Other segment net sales increased $1.0million, or 19.6%, to $6.1 million for the first half of fiscal 2011, as comparedto $5.1 million in the first half of fiscal 2010.  Translation of foreign operations net salesfor the six months ended October 30, 2010 decreased reported net sales by$3.6 million or 1.7% due to average currency rates in the first half of fiscal2011, compared to the average currency rates in the first half of fiscal 2010.

 

*Other Income*.  Otherincome decreased $0.7 million, or 28.0%, to $1.8 million for the six monthsended October 30, 2010, from $2.5 million for six months ended October 31,2009.  Other income consisted primarilyof

 

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earningsfrom engineering design fees and royalties. The decrease relates to lower engineering design fees from our Europeanautomotive market.

 

*Cost of Products Sold*.  Consolidated cost of products sold increased$14.2 million, or 9.5%, to $162.9 million for the six months ended October 30,2010, compared to $148.7 million for the six months ended October 31, 2009.  Consolidated cost of products sold as apercentage of sales were 79.5% in the first half of fiscal 2011, compared to79.0% in the first half of fiscal 2010. Included in the cost of products sold for the six months ended October 31,2009 is $0.7 million of asset write-downs related to the termination of theDelphi supply agreement.  Included incost of products sold are additional provisions for environmental matters forthree sites that are no longer used in operations.  We recorded $0.8 million and $0.3 million forenvironmental matters for first half of fiscal 2011 and the first half offiscal 2010, respectively.  Also duringthe first half of fiscal 2011, we recorded a negotiated program terminationcharge of $1.3 million for certain products manufactured in our Malta facilityand $0.4 million for customer cancellation of certain products manufactured inour U.S. facility.  In addition, weincurred $0.7 million in additional costs due to vendor supply issues for newproducts that began ramping up production during the first half of fiscal2011.  The increases were partiallyoffset by cost efficiencies experienced in our Asian businesses, higher salesvolumes as well as a change in sales mix within the Interconnect segment in thefirst half of fiscal 2011, as compared to the first half of fiscal 2010.

 

*Gross Margins (including other income). *Consolidated gross margins(including other income) increased $1.7 million, or 4.0%, to $43.8 million forthe six months ended October 30, 2010, as compared to $42.1 million forthe six months ended October 31, 2009. Gross margins (including other income) as a percentage of net sales were21.4% for the six months ended October 30, 2010, as compared to 22.4% forthe six months ended October 31, 2009. The decrease primarily relates to the loss of the Delphi business, theone-time reversal of pricing contingencies in the first half of fiscal 2010,the customer negotiated program cancellation and other customer cancellationcharges, additional costs related to environmental matters and costs due tovendor supply issues, partially offset by higher sales volumes, a favorablechange in sales in sales mix within the Interconnect segment and costefficiencies from our Asian businesses, in the first half of fiscal 2011, as comparedto the first half of fiscal 2010.

 

*Restructuring*. During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first half offiscal 2010, we recorded a total restructuring charge of $6.8 million, whichconsisted of $3.7 million for employee severance, $1.5 million for accelerateddepreciation and $1.6 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$5.2 million, or 16.1%, to $37.5 million for the six months ended October 30,2010, compared to $32.3 million for the six months ended October 31,2009.  During the first half of fiscal2011, we recorded an expense of $3.8 million for litigation regarding unsecuredclaims sold to Blue Angel LLC in June 2006, related to the Delphibankruptcy.  See the Overview section formore information regarding this matter. Selling and marketing expenses increased in our North American and Asianautomotive businesses, partially offset by lower commissions and professionalfees in the first half of fiscal 2011, compared to the first half of fiscal2010.  The first half of fiscal 2011 andthe first half of fiscal 2010 included income of $0.5 million and $0.4 million,respectively, for grants received at one of our foreign facilities.  Selling and administrative expenses as apercentage of net sales were 18.3% for the six months ended October 30,2010 and 17.2% for the six months ended October 31, 2009.

 

*Interest Expense, Net*.  Interest expense, net was $0.1 million forboth the six months ended October 30, 2010 and October 31, 2009.  Interest income was $0.3 million for the sixmonths ended October 30, 2010, compared to $0.1 million for the six monthsended October 31, 2009.  The averagecash balance was $64.0 million during the six months ended October 30,2010, as compared to $62.4 million during the six months ended October 31,2009.  The average interest rate earnedfor the six months ended October 30, 2010 was 2.15%, compared to 0.44% inthe six months ended October 31, 2009. Interest expense was $0.4 million for the six months ended October 30,2010, compared to $0.3 million for the six months ended October 31, 2009.

 

*Other Expense, Net*.  Other expense, net increased $0.9 million toa $1.2 million for the six months ended October 30, 2010, compared to $0.3million for the six months ended October 31, 2009.  The first half offiscal 2011 included income of $1.2 million for life insurance polices inconnection with the deferred compensation plan. The first half of fiscal 2010 included income of $0.6 million related toan enhanced cash fund.  All other amountsfor

 

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boththe six months ended October 30, 2010 and October 31, 2009, relate tocurrency 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 $0.9 millionto $1.4 million for the six months ended October 30, 2010, compared to$0.5 million for the six months ended October 31, 2009.  The six months ended October 30, 2010relates to taxes on foreign profits.  Thesix months ended October 31, 2009 includes taxes on foreign profits of$0.2 million and $0.3 million related to non-Federal U.S. taxes.

 

*Net Income Attributable to Methode Electronics, Inc.*  Net income attributable toMethode Electronics, Inc. increased $1.5 million, or 71.4%, to $3.6million for the six months ended October 30, 2010, compared to $2.1million for the six months ended October 31, 2009.  The increase is primarily due higher netsales and gross margins, no restructuring expenses, gain from life insurancepolicy, partially offset by the Blue Angel unsecured claims charge, theone-time reversal of pricing contingencies in the first half of fiscal 2010,customer negotiated cancellation and other customer cancellation costs,additional costs related to environmental matters, vendor supply issue costs, higherdevelopment, selling and marketing expenses and higher tax expense in the firsthalf of fiscal 2011, compared to the first half of fiscal 2010.

 

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**Operating Segments**

 

**Automotive Segment Results**

** **

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                             | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                             | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                              |       | $                    | 104.1      |                 | $          | 107.4               |       | $                   | (3.3       | ) | -3.1 | % |
| Other income                           |       | 1.7                  |       | 2.3                  |       | (0.6                | )          | -26.1               | %          |
|                                   |       | 105.8                |       | 109.7                |       | (3.9                | )          | -3.6                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold                  |       | 85.5                 |       | 86.0                 |       | (0.5                | )          | -0.6                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Gross margins (including other income) |       | 20.3                 |       | 23.7                 |       | (3.4                | )          | -14.3               | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Restructuring                          |       | —               |       | 5.0                  |       | (5.0                | )          | N/M                 |       |
| Selling and administrative expenses    |       | 15.7                 |       | 9.0                  |       | 6.7                 |       | 74.4                | %          |
| Interest income, net                   |       | (0.1                 | )          | —               |       | (0.1                | )          | N/M                 |       |
| Other expense, net                     |       | 1.7                  |       | 1.2                  |       | 0.5                 |       | 41.7                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Income before income taxes             |       | $                    | 3.0        |                 | $          | 8.5                 |       | $                   | (5.5       | ) | -64.7 | % |

 
| ** **                             | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**        | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                              |       | 100.0                | %          | 100.0                | %          |
| Other income                           |       | 1.6                  | %          | 2.1                  | %          |
| Cost of products sold                  |       | 82.1                 | %          | 80.1                 | %          |
| Gross margins (including other income) |       | 19.5                 | %          | 22.1                 | %          |
| Restructuring                          |       | 0.0                  | %          | 4.7                  | %          |
| Selling and administrative expenses    |       | 15.1                 | %          | 8.4                  | %          |
| Interest income, net                   |       | -0.1                 | %          | 0.0                  | %          |
| Other expense, net                     |       | 1.6                  | %          | 1.1                  | %          |
| Income before income taxes             |       | 2.9                  | %          | 7.9                  | %          |

 

*Net Sales*.  Automotivesegment net sales decreased $3.3 million, or 3.1%, to $104.1 million for thesix months ended October 30, 2010, from $107.4 million for the six monthsended October 31, 2009.  Net salesbenefitted by $1.7 million for the six months ended October 31, 2009,related to a one-time reversal of pricing contingencies which were accrued overseveral years and were no longer required. There were no sales to Delphi Corporation in the first half of 2011, ascompared to net sales of $14.1 million in the first half of fiscal 2010 due tothe cancellation of the supply agreement on September 10, 2009.  Net sales increased in Asia and Europe by244.7% and 7.5%, respectively, however, net sales from North America declinedby 72.7% in the first half of fiscal 2011, compared to the first half of fiscal2010.  Net sales also declined in NorthAmerica by $10.3 million due to the planned transfer of production from ourU.S. facility to our facility in Shanghai, China in the third quarter of fiscal2010 as well as by $10.2 million due to the termination of production ofcertain Ford legacy products at our Reynosa, Mexico facility at the end of thesecond quarter of fiscal 2010. Translation of foreign operations net sales in the six months ended October 30,2010 decreased reported net sales by $3.6 million, or 3.3%, due to averagecurrency rates in the first half of fiscal 2011, compared to the averagecurrency rates in the first half of fiscal 2010.

 

*Other Income*.  Otherincome decreased $0.6 million, or 26.1%, to $1.7 million for the six monthsended October 30, 2010, from $2.3 million for six months ended October 31,2009.  Other income consisted primarilyof

 

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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 $0.5 million, or 0.6%, to $85.5 million for the six months ended October 30,2010, from $86.0 million for the six months ended October 31, 2009.  Included in the cost of products sold for thesix months ended October 31, 2009 is $0.7 million of asset write-downsrelating to the termination of the Delphi supply agreement.  The first half of fiscal 2011 includes acharge of $1.3 million for negotiated program termination costs for certainproducts manufactured in our Malta facility. In addition, we incurred $0.7 million in additional costs due to vendorsupply issues for new products that began ramping up production during thefirst half of fiscal 2011.  TheAutomotive segment cost of products sold as a percentage of sales were 82.1% inthe first half of fiscal 2011, compared to 80.1% in the first half of fiscal2010.  The increase in cost of productssold as a percentage of sales were primarily due to the loss of the Delphibusiness, increasing costs on the remaining North American business, customerprogram cancellation charges and vendor supply issue costs, partially offset byhigher sales volumes and improvements in cost of products sold in Asia.  The increasing costs of products sold as apercentage of sales in North America primarily relates to the development ofnew products which are expected to begin shipping in future periods.

 

*Gross Margins (including other income). *Automotive segment grossmargins (including other income) decreased $3.4 million, or 14.3%, to $20.3million for the six months ended October 30, 2010, as compared to $23.7million for the six months ended October 31, 2009.  The Automotive segment gross margins(including other income) as a percentage of net sales were 19.5% for the sixmonths ended October 30, 2010, as compared to 22.1% for the six monthsended October 31, 2009.  Grossmargins (including other income) as a percentage of sales decreased in thefirst half of fiscal 2011, compared to the first half of fiscal 2010, due toloss of the Delphi business, lower engineering design fees, the one-timereversal of pricing contingencies in the first half of fiscal 2010, increasedcosts relating to new product development, the negotiated program terminationcosts, and vendor supply issues. The losses were partially offset by improvedgross margins (including other income) in our Asian businesses, due to highersales volumes.

 

*Restructuring*.  During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first half offiscal 2010, we recorded a total restructuring charge of $5.0 million, whichconsisted of $2.9 million for employee severance, $1.5 million for accelerateddepreciation and $0.6 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses increased$6.7 million, or 74.4%, to $15.7 million for the six months ended October 30,2010, compared to $9.0 million for the six months ended October 31,2009.  During the first half of fiscal2011, we recorded an expense of $3.8 million for litigation regarding unsecuredclaims sold to Blue Angel LLC in June 2006, related to the Delphibankruptcy.  See the Overview section formore information regarding this matter. Selling and marketing expenses increased in our North American and Asianautomotive businesses in the first half of fiscal 2011, compared to the firsthalf of fiscal 2010.  The first half offiscal 2011 and the first half of fiscal 2010 included income of $0.5 millionand $0.4 million, respectively, for grants received at one of our foreignfacilities.  Selling and administrativeexpenses as a percentage of net sales were 15.1% for the six months ended October 30,2010 and 8.4% for the six months ended October 31, 2009.

 

*Interest Income, Net*.  Interest income, net was $0.1 million for thesix months ended October 30, 2010, compared to zero for the six monthsended October 31, 2009.

 

*Other Expense, Net*.  Other expense, net increased $0.5 million, or41.7%, to $1.7 million for the six months ended October 30, 2010, comparedto $1.2 million for the six months ended October 31, 2009.  All amounts for both the first half of fiscal2011 and the first half of fiscal 2010 relate to currency ratefluctuations.  The functional currenciesof these operations are the British pound, Chinese yuan, Euro and the Mexicanpeso.  Some foreign operations havetransactions denominated in currencies other than their functional currencies,primarily sales in U.S. dollars and Euros, creating exchange ratesensitivities.

 

*Income**Before Income Taxes. *Automotive segment incomebefore income taxes decreased $5.5 million or 64.7%, to $3.0 million for thesix months ended October 30, 2010, compared to $8.5 million for the sixmonths

 

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ended October 31, 2009 due to the Blue Angel unsecured claimscharge, lower sales and gross margins (including other income), the one-timereversal of pricing contingencies in the first half of fiscal 2010, higherselling and marketing expenses, increased development cost in North American,negotiated program termination costs and increased currency exchange expense,partially offset by no restructuring charges in the first half of fiscal 2011,compared to the first half of fiscal 2010.

 

**Interconnect Segment Results**

** **

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

(in millions)

(“N/M” equals not meaningful)

 
| ** **                             | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                             | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                              |       | $                    | 71.1       |                 | $          | 55.2                |       | $                   | 15.9       |   | 28.8 | % |
| Other income                           |       | 0.1                  |       | 0.1                  |       | —              |       | 0.0                 | %          |
|                                   |       | 71.2                 |       | 55.3                 |       | 15.9                |       | 28.8                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold                  |       | 50.5                 |       | 41.9                 |       | 8.6                 |       | 20.5                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Gross margins (including other income) |       | 20.7                 |       | 13.4                 |       | 7.3                 |       | 54.5                | %          |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Restructuring                          |       | —               |       | 1.4                  |       | (1.4                | )          | -100.0              | %          |
| Selling and administrative expenses    |       | 10.8                 |       | 10.9                 |       | (0.1                | )          | -0.9                | %          |
| Interest income                        |       | (0.1                 | )          | (0.1                 | )          | —              |       | 0.0                 | %          |
| Other expense, net                     |       | 0.5                  |       | —               |       | 0.5                 |       | N/M                 |       |
|                                   |       |                 |       |                 |       |                |       |                |       |
| Income before income taxes             |       | $                    | 9.5        |                 | $          | 1.2                 |       | $                   | 8.3        |   | 691.7 | % |

 
| ** **                             | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
|----------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Percent of sales:**        | ** ** | **2010**             | ** ** | **2009**             | ** ** |
| Net sales                              |       | 100.0                | %          | 100.0                | %          |
| Other income                           |       | 0.1                  | %          | 0.2                  | %          |
| Cost of products sold                  |       | 71.0                 | %          | 75.9                 | %          |
| Gross margins (including other income) |       | 29.1                 | %          | 24.3                 | %          |
| Restructuring                          |       | 0.0                  | %          | 2.5                  | %          |
| Selling and administrative expenses    |       | 15.2                 | %          | 19.7                 | %          |
| Interest income                        |       | -0.1                 | %          | -0.2                 | %          |
| Other expense, net                     |       | 0.7                  | %          | 0.0                  | %          |
| Income before income taxes             |       | 13.4                 | %          | 2.2                  | %          |

 

*Net Sales*. Interconnect segment net sales increased $15.9 million, or 28.8%, to$71.1 million for the six months ended October 30, 2010 from $55.2 millionfor the six months ended October 31, 2009. The increase was primarily driven by strong sales in our interfacesolutions and data solutions businesses. Net sales increased 31.3%, 40.4% and 3.4% in North America, Europe andAsia, respectively, in the first half of fiscal 2011, compared to the firsthalf of fiscal 2010.  Translation offoreign operations net sales in the six months ended October 30, 2010decreased reported net sales by $0.1 million, or 0.1%, due to average currencyrates in the first half of fiscal 2011, compared to the average currency ratesin the first half of fiscal 2010.

 

*Other Income*.  Otherincome was $0.1 million for both the six months ended October 30, 2010 andthe six months ended October 31, 2009.

 

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*Cost of Products Sold*.  Interconnect segment cost of products soldincreased $8.6 million, or 20.5%, to $50.5 million for the six months ended October 30,2010, compared to $41.9 million for the six months ended October 31,2009.  Interconnect segment cost ofproducts sold as a percentage of net sales decreased to 71.0% for the sixmonths ended October 30, 2010, compared to 75.9% for the six months ended October 31,2009.  The decrease is primarily due tosales mix within the segment as well as the overall increase in net sales inthe first half of fiscal 2011, compared to the first half of fiscal 2010.

 

*Gross Margins (including other income). *Interconnect segment grossmargins (including other income) increased $7.3 million, or 54.5%, to $20.7million for the six months ended October 30, 2010, as compared to $13.4million for the six months ended October 31, 2009.  Gross margins as a percentage of net salesincreased to 29.1% for the six months ended October 30, 2010, from 24.3%for the six months ended October 31, 2009. The increase in gross margins as a percentage of net sales primarilyrelates to higher sales volumes as well as a change in sales mix within thesegment in the first half of fiscal 2011, compared to the first half of fiscal2010.

 

*Restructuring*. During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first half offiscal 2010, we recorded a total restructuring charge of $1.4 million, whichconsisted of $0.4 million for employee severance, $0.1 million for accelerateddepreciation and $0.9 million for other costs.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses decreased$0.1 million, or 0.9%, to $10.8 million for the six months ended October 30,2010, compared to $10.9 million for the six months ended October 31,2009.  Selling and administrativeexpenses are slightly lower due to lower commissions in our Asian Interconnectbusinesses in the first half of fiscal 2011, compared to the first half of fiscal2010.  Selling and administrativeexpenses as a percentage of net sales decreased to 15.2% in the six monthsended October 30, 2010, from 19.7% for the six months ended October 31,2009.

 

*Interest Income, Net*.  Interest income, net was $0.1 million forboth the six months ended October 30, 2010 and October 31, 2009.

 

*Other Expense, Net*.  Other expense, net was $0.5 million for thesix months ended October 30, 2010, compared to zero for the six monthsended October 31, 2009.  Theincrease is primarily due to the weakening U.S. dollar against the euro in thefirst half of fiscal 2011, compared to the first half of fiscal 2010.  The functional currencies of these operationsare the British pound, Czech koruna, Euro, Singapore dollar and SwissFranc.  Some foreign operations havetransactions denominated in currencies other than their functional currencies,primarily sales in U.S. dollars and Euros, creating exchange ratesensitivities.

 

*Income Before Income Taxes. *Interconnect segment incomebefore income taxes increased $8.3 million to $9.5 million for the six monthsended October 30, 2010, compared to $1.2 million for the six months ended October 31,2009, due to increased net sales and gross profit, no restructuring expenses,and lower commissions in the first half of fiscal 2011, compared to the firsthalf of fiscal 2010.

 

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** **

**Power Products Segment Results**

** **

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

(in millions)

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                          | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                           |       | $                    | 23.6       |                 | $          | 20.6                |       | $                   | 3.0        |   | 14.6 | % |
|                                |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold               |       | 18.8                 |       | 16.1                 |       | 2.7                 |       | 16.8                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Gross margins                       |       | 4.8                  |       | 4.5                  |       | 0.3                 |       | 6.7                 | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Restructuring                       |       | —               |       | 0.4                  |       | (0.4                | )          | N/M                 |       |
| Selling and administrative expenses |       | 3.1                  |       | 3.0                  |       | 0.1                 |       | 3.3                 | %          |
| Other expense, net                  |       | 0.1                  |       | —               |       | 0.1                 |       | N/M                 |       |
|                                |       |                 |       |                 |       |                |       |                |       |
| Income before income taxes          |       | $                    | 1.6        |                 | $          | 1.1                 |       | $                   | 0.5        |   | 45.5 | % |

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |   |   |   |   |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|--------|--------|--------|--------|
| **Percent of sales:**     | ** ** | **2010**             | ** ** | **2009**             | ** ** |   |   |   |   |
| Net sales                           |       | 100.0                | %          | 100.0                | %          |   |   |   |   |
| Cost of products sold               |       | 79.7                 | %          | 78.2                 | %          |   |   |   |   |
| Gross margins                       |       | 20.3                 | %          | 21.8                 | %          |   |   |   |   |
| Restructuring                       |       | 0.0                  | %          | 1.9                  | %          |   |   |   |   |
| Selling and administrative expenses |       | 13.1                 | %          | 14.6                 | %          |   |   |   |   |
| Other expense, net                  |       | 0.4                  | %          | 0.0                  | %          |   |   |   |   |
| Income before income taxes          |       | 6.8                  | %          | 5.3                  | %          |   |   |   |   |

 

*Net Sales*.  PowerProducts segment net sales increased $3.0 million, or 14.6% to $23.6 millionfor the six months ended October 30, 2010, compared to $20.6 million forthe six months ended October 31, 2009. Net sales have decreased in the first half of fiscal 2011, as comparedto the first half of fiscal 2010 by 8.0% in North America and net salesincreased by 78.2% in Asia.  The increasewas driven by higher demand for our busbar products in Asia, offset by lowerdemand for our busbar, flexible cabling and heat sink products in North America.  We also began selling busbar products inEurope in the first half of fiscal 2011, which accounted for $1.2 million innet sales, compared to no net sales in the first half of fiscal 2010.

 

*Cost of Products Sold*.  Power Products segment cost of products soldincreased $2.7 million, or 16.8%, to $18.8 million for the six months ended October 30,2010, compared to $16.1 million for the six months ended October 31,2009.  The Power Products segment cost ofproducts sold as a percentage of sales increased to 79.7% for the six monthsended October 30, 2010, from 78.2% for the six months ended October 31,2009.  The first half of fiscal 2011includes an inventory and equipment charge of $0.4 million, relating to thecustomer cancellation of certain products manufactured in our U.S.facility.  The increase in the cost ofproducts sold as a percentage of sales is primarily due to the customercancellation charge as well as increased costs due to new product development,partially offset with lower costs in our Asian business.

 

*Gross Margins.* Power Products segment gross margins increased$0.3 million, or 6.7%, to $4.8 million for the six months ended October 30,2010, compared to $4.5 million for the three months ended October 31,2009.  Gross margins as a percentage ofnet sales decreased to 20.3% for the six months ended October 30, 2010from 21.8% for the six months ended August 1, 2009.  The decrease in gross margins as a percentageof sales is primarily due to the customer cancellation charge as well asincreased costs due to new product development, partially offset with lowercosts in our Asian business.

 

*Restructuring*.  During fiscal 2010, we completed all of our planned restructuringinitiatives.  During the first half offiscal 2010, we recorded a restructuring charge of $0.4 million, which consisted of $0.1 million for employeeseverance and $0.3 million relating to other costs.

 

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*Selling and Administrative Expenses*.  Selling and administrative expenses increased$0.1 million, or 3.3%, to $3.1 million for the six months ended October 30,2010, compared to $3.0 million for the six months ended October 31,2009.  Selling and administrativeexpenses increased slightly due to increased selling and professional fees inour U.S.-based busbar and heat sink businesses in the first half of fiscal2011, as compared to the first half of fiscal 2010.  Selling and administrative expenses as apercentage of net sales decreased to 13.1% in the six months ended October 30,2010, from 14.6% for the six months ended October 31, 2009.

 

*Other Expense, Net*.  Other expense, net was $0.1 million for thesix months ended October 30, 2010, compared to zero for the six monthsended October 31, 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. *Power Products income beforeincome taxes increased $0.5 million, or 45.5%, to $1.6 million for the sixmonths ended October 30, 2010, compared to $1.1 million for the six monthsended October 31, 2009, due to higher net sales and gross profit, norestructuring charges, partially offset with customer cancellation charges andhigher costs for our U.S. busbar products, higher selling and administrativeexpenses and higher currency exchange expenses in the first half of fiscal2011, compared to the first half of fiscal 2010.

 

**Other Segment Results**

** **

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

(in millions)

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** | ** **          | ** ** | ** **          | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|
| ** **                          | ** ** | **2010**             | ** ** | **2009**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net sales                           |       | $                    | 6.1        |                 | $          | 5.1                 |       | $                   | 1.0        |   | 19.6 | % |
|                                |       |                 |       |                 |       |                |       |                |       |
| Cost of products sold               |       | 5.7                  |       | 4.9                  |       | 0.8                 |       | 16.3                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Gross margins                       |       | 0.4                  |       | 0.2                  |       | 0.2                 |       | 100.0               | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Selling and administrative expenses |       | 1.4                  |       | 1.5                  |       | (0.1                | )          | -6.7                | %          |
|                                |       |                 |       |                 |       |                |       |                |       |
| Loss before income taxes            |       | $                    | (1.0       | )                    | $          | (1.3                | )          | $                   | 0.3        |   | -23.1 | % |

 
| ** **                          | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |   |   |   |   |
|-------------------------------------|------------|----------------------|------------|----------------------|------------|--------|--------|--------|--------|
| **Percent of sales:**     | ** ** | **2010**             | ** ** | **2009**             | ** ** |   |   |   |   |
| Net sales                           |       | 100.0                | %          | 100.0                | %          |   |   |   |   |
| Cost of products sold               |       | 93.4                 | %          | 96.1                 | %          |   |   |   |   |
| Gross margins                       |       | 6.6                  | %          | 3.9                  | %          |   |   |   |   |
| Selling and administrative expenses |       | 23.0                 | %          | 29.4                 | %          |   |   |   |   |
| Loss before income taxes            |       | -16.4                | %          | -25.5                | %          |   |   |   |   |

 

*Net Sales*.  The Othersegment net sales increased $1.0 million, or 19.6%, to $6.1 million for the sixmonths ended October 30, 2010, compared to $5.1 million for the six monthsended October 31, 2009.  Net salesfrom our torque-sensing business increased 89.3% in the first half of fiscal2011, compared to the first half of fiscal 2010.  Net sales from our testing facilitiesdecreased 12.8% in the first half of fiscal 2011, compared to the first half offiscal 2010.

 

*Cost of Products Sold*.  Other segment cost of products sold increased$0.8 million to $5.7 million for the six months ended October 30, 2010,compared to $4.9 million for the six months ended October 31, 2009.  Cost of

 

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products sold as a percentage of sales decreased to 93.4% in the firsthalf of fiscal 2011, compared to 96.1% in the first half of fiscal 2010.

 

*Gross Margins. *The Other segment gross margins increased $0.2 million to $0.4 millionfor the six months ended October 30, 2010, compared to $0.2 million forthe six months ended October 31, 2009. Gross margins as a percentage of sales increased to 6.6% in the firsthalf of fiscal 2011, compared to 3.9% in the first half of fiscal 2010.

 

*Selling and Administrative Expenses*.  Selling and administrative expenses decreased$0.1 million, or 6.7%, to $1.4 million for the six months ended October 30,2010, compared to $1.5 million for the six months ended October 31,2009.  Selling and administrativeexpenses as a percentage of net sales decreased to 23.0% in the six monthsended October 30, 2010 from 29.4% for the six months ended October 31,2009.

 

*Loss Before Income Taxes. *The Other segment lossbefore income taxes decreased $0.3 million, or 23.1%, to $1.0 million for thesix months ended October 30, 2010, compared to $1.3 million for the sixmonths ended October 31, 2009, due to increased sales and gross profit andlower selling and administrative expenses.

 

**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 October 30, 2010, we were in compliance with these covenants andhad net borrowings of $18.0 million plus accrued interest against this creditfacility.

 

**CashFlow Operating Activities**

 

Netcash provided by operating activities decreased $11.8 million to $3.8 millionfor the six months ended October 30, 2010, compared to $15.6 million forthe six months ended October 31, 2009.  Our net income increased to$3.5 million for the six months ended October 30, 2010, compared to $2.1million for the six months ended October 31, 2009.  The non-cash add-back for depreciation andimpairment of tangible assets decreased $2.9 million, to $7.9 million in thefirst half of fiscal 2011, compared to $10.8 million in the first half offiscal 2010.  The changes in operating assets and liabilities decreased by$10.0 million, to cash used of $9.0 million in the first half of fiscal 2011,compared to cash provided of $1.0 million for the first half of fiscal2010.  Accounts receivable was a use ofcash of $11.3 million due to timing of sales, billings for pre-productiontooling, as well as slower collections for some specific customers in the firsthalf of fiscal 2011.  The additional useof cash for the changes in assets and liabilities relates to tax payments toforeign entities, offset by the Blue Angel unsecured claims accrual  in the first half of fiscal 2011, compared tothe first half of fiscal 2010.

 

**CashFlow Investing Activities**

 

Netcash used in investing activities decreased $1.2 million to $4.8 million forthe six months ended October 30, 2010, compared to $6.0 million for thesix months ended October 31, 2009. Purchases of property, plant and equipment was $5.6 million in the firsthalf of fiscal 2011, compared to $5.8 million in the first half of fiscal2010.  We invested $0.8 million in a newbusiness in the first half of fiscal 2011. In the first half of fiscal 2011, we received $1.5 million for life insurance proceeds inconnection with the deferred compensation plan.

 

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**CashFlow Financing Activities**

 

Net cash (used)/provided for financing activitiesincreased $18.1 million to cash provided of $12.9 million in the first half offiscal 2011, compared to a cash use of $5.2 million for the first half offiscal 2010.  In the first half of fiscal2011, we had net borrowings against our credit line of $18.0 million, comparedto no borrowings in the first half of fiscal 2010.  We paid dividends of $5.2 million for boththe first half of fiscal 2011 and the first half of fiscal 2010.

 

**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 QualitativeDisclosures 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 $6.7 million as of October 30, 2010 and $4.7 million as of 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 $16.5 million at October 30, 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 October 30, 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 ofcertain legal matters.  After the Form 10-Kwas filed, on September 7, 2010, the bankruptcy court dismissed thepreference claim complaint against Methode without prejudice to Delphi’s filinga motion for leave to amend by September 7, 2010.  Delphi filed a motion for leave to amend itspreference complaint against Methode on September 7, 2010.  (See Overview Section for moreinformation regarding this matter).

 

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**Item6.          Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------|
| 3.1                 |       | Form of Methode Electronics, Inc. Amended  and Restated By-Laws (1)                    |
| 10.1                |       | Form of Methode Electronics, Inc. 2010 Cash  Incentive Plan (2)                        |
| 10.2                |       | Form of Methode Electronics, Inc. 2010 Stock  Plan (2)                                 |
| 10.3                |       | Methode Electronics, Inc. Non-Qualified Stock  Option Form Award Agreement (2)         |
| 10.4                |       | Methode Electronics, Inc. Performance Based  Restricted Stock Form Award Agreement (3) |
| 10.5                |       | Methode Electronics, Inc. Restricted Stock Unit  Form Award Agreement (3)              |
| 10.6                |       | Methode Electronics, Inc. RSA Tandem Cash Award  Form Agreement (3)                    |
| 10.7                |       | Methode Electronics, Inc. Cash Bonus  Form Award Agreement (3)                         |
| 10.8                |       | Methode Electronics, Inc. Form of Amendment  to Change in Control Agreement (3)        |
| 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. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Previously filed with Registrant’s Form 8-K filed  October 20, 2010, and incorporated herein by reference.  |
| (3) |   | Previously filed with Registrant’s Form 8-K filed  November 12, 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: | December 9, 2010          |   |   |
|        |                                |  |  |  |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------|
| 3.1                 |       | Form of Methode Electronics, Inc. Amended  and Restated By-Laws (1)                    |
| 10.1                |       | Form of Methode Electronics, Inc. 2010 Cash  Incentive Plan (2)                        |
| 10.2                |       | Form of Methode Electronics, Inc. 2010 Stock  Plan (2)                                 |
| 10.3                |       | Methode Electronics, Inc. Non-Qualified Stock  Option Form Award Agreement (2)         |
| 10.4                |       | Methode Electronics, Inc. Performance Based  Restricted Stock Form Award Agreement (3) |
| 10.5                |       | Methode Electronics, Inc. Restricted Stock Unit  Form Award Agreement (3)              |
| 10.6                |       | Methode Electronics, Inc. RSA Tandem Cash Award  Form Agreement (3)                    |
| 10.7                |       | Methode Electronics, Inc. Cash Bonus  Form Award Agreement (3)                         |
| 10.8                |       | Methode Electronics, Inc. Form of Amendment  to Change in Control Agreement (3)        |
| 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. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Previously filed with Registrant’s Form 8-K filed  October 20, 2010, and incorporated herein by reference.  |
| (3) |   | Previously filed with Registrant’s Form 8-K filed  November 12, 2010, and incorporated herein by reference. |

 

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