Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 
| **x** | ** ** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------|

 

**for the quarterly periodended October 31, 2009**

** **

**or**

 
| **o** | ** ** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|-------|------------|------------------------------------------------------------------------------------------------|

 

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**Commissionfile number 0-2816**

 

**METHODE ELECTRONICS, INC.**

 (Exact name of registrant as specified in itscharter.)

 

| **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)          |

 

**(708) 867-6777**

(Registrant’s telephone number, includingarea code) 

 

**None**

(Formername, former address, former fiscal year, 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 8, 2009, registrant had 37,520,657shares of common stock outstanding.

 

 

 

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Table of Contents

 

METHODEELECTRONICS, INC.

FORM 10-Q

October 31,2009

 

TABLEOF CONTENTS

 
| ** **                                           | ** **                                                                                                                                         | **Page** |
|------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I.   FINANCIAL  INFORMATION |                                                                                                                                               |
|                                                 |                                                                                                                                               |     |
| Item 1.                                              | Financial Statements                                                                                                                               |     |
|                                                 |                                                                                                                                               |     |
|                                                 | Condensed consolidated balance sheets as of  – October 31, 2009 (unaudited) and  May 2, 2009                                   | 2        |
|                                                 |                                                                                                                                               |     |
|                                                 | Condensed consolidated statements of income  (unaudited) – Three months and six months ended October 31, 2009 and  November 1, 2008 | 3        |
|                                                 |                                                                                                                                               |     |
|                                                 | Condensed consolidated statements of cash flows  (unaudited) – Six months ended October 31, 2009 and November 1,  2008              | 4        |
|                                                 |                                                                                                                                               |     |
|                                                 | Notes to condensed consolidated financial statements –  October 31, 2009                                                                 | 5        |
|                                                 |                                                                                                                                               |     |
| Item 2.                                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                        | 20       |
|                                                 |                                                                                                                                               |     |
| Item 3.                                              | Quantitative  and Qualitative Disclosure About Market Risk                                                                                         | 42       |
|                                                 |                                                                                                                                               |     |
| Item 4.                                              | Controls and  Procedures                                                                                                                           | 42       |
|                                                 |                                                                                                                                               |     |
| PART II.   OTHER  INFORMATION    |                                                                                                                                               |
|                                                 |                                                                                                                                               |     |
| Item 1.                                              | Legal Proceedings                                                                                                                                  | 43       |
|                                                 |                                                                                                                                               |     |
| Item 4.                                              | Submission of  Matters to a Vote of Security Holders                                                                                               | 43       |
|                                                 |                                                                                                                                               |     |
| Item 6.                                              | Exhibits                                                                                                                                           | 44       |
|                                                 |                                                                                                                                               |     |
| SIGNATURES                                           | 45                                                                                                                                                 |
|                                                 |                                                                                                                                               |     |
| INDEX TO  EXHIBITS                                   | 46                                                                                                                                                 |

 

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Table of Contents

 

PART I -FINANCIAL INFORMATION

 

Item 1 - FinancialStatements

 

METHODEELECTRONICS, INC AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                                                                                                                                            | ** ** | **As of**                      | ** ** | **As of**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **October 31, 2009** | ** ** | **May 2, 2009** | ** ** |
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**                | ** ** | ** **           | ** ** |
| ASSETS                                                                                                                                                                |       |                           |       |                 |       |
| CURRENT ASSETS                                                                                                                                                        |       |                           |       |                 |       |
| Cash and cash equivalents                                                                                                                                             |       | $                              | 60,274     |                 | $          | 54,030 |   |
| Accounts receivable, net                                                                                                                                              |       | 71,837                         |       | 60,406               |       |
| Inventories:                                                                                                                                                          |       |                           |       |                 |       |
| Finished products                                                                                                                                                     |       | 8,029                          |       | 11,865               |       |
| Work in process                                                                                                                                                       |       | 16,018                         |       | 10,765               |       |
| Materials                                                                                                                                                             |       | 17,207                         |       | 17,796               |       |
|                                                                                                                                                                  |       | 41,254                         |       | 40,426               |       |
| Deferred income taxes                                                                                                                                                 |       | 4,972                          |       | 4,928                |       |
| Refundable income taxes                                                                                                                                               |       | 9,073                          |       | 14,764               |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 6,375                          |       | 6,692                |       |
| TOTAL CURRENT ASSETS                                                                                                                                                  |       | 193,785                        |       | 181,246              |       |
|                                                                                                                                                                  |       |                           |       |                 |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                         |       | 297,484                        |       | 289,084              |       |
| Less allowances for depreciation                                                                                                                                      |       | 229,134                        |       | 219,167              |       |
|                                                                                                                                                                  |       | 68,350                         |       | 69,917               |       |
|                                                                                                                                                                  |       |                           |       |                 |       |
| GOODWILL                                                                                                                                                              |       | 11,771                         |       | 11,771               |       |
| INTANGIBLE ASSETS, net                                                                                                                                                |       | 19,583                         |       | 20,501               |       |
| OTHER ASSETS                                                                                                                                                          |       | 22,722                         |       | 21,853               |       |
|                                                                                                                                                                  |       | 54,076                         |       | 54,125               |       |
| TOTAL ASSETS                                                                                                                                                          |       | $                              | 316,211    |                 | $          | 305,288 |   |
|                                                                                                                                                                  |       |                           |       |                 |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                             |       |                           |       |                 |       |
| CURRENT LIABILITIES                                                                                                                                                   |       |                           |       |                 |       |
| Accounts payable                                                                                                                                                      |       | $                              | 31,075     |                 | $          | 24,495 |   |
| Other current liabilities                                                                                                                                             |       | 27,860                         |       | 29,023               |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                             |       | 58,935                         |       | 53,518               |       |
|                                                                                                                                                                  |       |                           |       |                 |       |
| OTHER LIABILITIES                                                                                                                                                     |       | 14,154                         |       | 13,561               |       |
| DEFERRED COMPENSATION                                                                                                                                                 |       | 2,305                          |       | 3,308                |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                             |       |                           |       |                 |       |
| Common stock, $0.50 par value, 100,000,000 shares  authorized, 38,315,225 and38,290,776 shares issued as of October 31, 2009 and May 2,  2009, respectively |       | 19,158                         |       | 19,145               |       |
| Unearned common stock issuances                                                                                                                                       |       | (3,632                         | )          | (3,632               | )          |
| Additional paid-in capital                                                                                                                                            |       | 69,001                         |       | 68,506               |       |
| Accumulated other comprehensive income                                                                                                                                |       | 23,891                         |       | 15,675               |       |
| Treasury stock, 1,372,188 shares as of  October 31, 2009 and May 2, 2009                                                                                    |       | (11,495                        | )          | (11,495              | )          |
| Retained earnings                                                                                                                                                     |       | 140,378                        |       | 143,577              |       |
| TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’  EQUITY                                                                                                            |       | 237,301                        |       | 231,776              |       |
| Noncontrolling interest                                                                                                                                               |       | 3,516                          |       | 3,125                |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                                       |       | 240,817                        |       | 234,901              |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                       |       | $                              | 316,211    |                 | $          | 305,288 |   |

 

See notes to condensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands,except per share data)

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                | ** ** | **October 31,**   | ** ** | **November 1,** | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| ** **                                                                | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| INCOME                                                                    |       |                   |       |                 |       |   |   |   |   |
| Net  sales                                                                |       | $                      | 98,496     |                 | $          | 121,304 |   | $ | 188,272 |   | $ | 255,818 |   |
| Other                                                                     |       | 1,072                  |       | 959                  |       | 2,459 |   | 1,692 |   |
|                                                                      |       | 99,568                 |       | 122,263              |       | 190,731 |   | 257,510 |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| COSTS  AND EXPENSES                                                       |       |                   |       |                 |       |   |   |   |   |
| Cost  of products sold                                                    |       | 77,784                 |       | 97,815               |       | 148,693 |   | 203,245 |   |
| Restructuring                                                             |       | 3,156                  |       | 6,284                |       | 6,767 |   | 11,201 |   |
| Selling  and administrative expenses                                      |       | 16,413                 |       | 18,537               |       | 32,286 |   | 34,934 |   |
|                                                                      |       | 97,353                 |       | 122,636              |       | 187,746 |   | 249,380 |   |
| Income/(loss)  from operations                                            |       | 2,215                  |       | (373                 | )          | 2,985 |   | 8,130 |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Interest  income/(expense), net                                           |       | (45                    | )          | 469                  |       | (147 | ) | 1,003 |   |
| Other  income/(expense), net                                              |       | 143                    |       | (610                 | )          | (252 | ) | (879 | ) |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Income/(loss)  before income taxes                                        |       | 2,313                  |       | (514                 | )          | 2,586 |   | 8,254 |   |
| Income  tax expense/(benefit)                                             |       | 225                    |       | (865                 | )          | 511 |   | 1,032 |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Net  income                                                               |       | 2,088                  |       | 351                  |       | 2,075 |   | 7,222 |   |
| Less:  Net Income attributable to noncontrolling interest                 |       | (36                    | )          | (113                 | )          | (42 | ) | (168 | ) |
| NET  INCOME ATTRIBUTABLE TO METHODE ELECTRONICS, INC.                     |       | $                      | 2,052      |                 | $          | 238 |   | $ | 2,033 |   | $ | 7,054 |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Amounts  per common share attributable to Methode Electronics, Inc.: |       |                   |       |                 |       |   |   |   |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Basic  net income                                                         |       | $                      | 0.06       |                 | $          | 0.01 |   | $ | 0.06 |   | $ | 0.19 |   |
| Diluted  net income                                                       |       | $                      | 0.06       |                 | $          | 0.01 |   | $ | 0.06 |   | $ | 0.19 |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Cash  dividends:                                                          |       |                   |       |                 |       |   |   |   |   |
| Common  stock                                                             |       | $                      | 0.07       |                 | $          | 0.07 |   | $ | 0.14 |   | $ | 0.12 |   |
|                                                                      |       |                   |       |                 |       |   |   |   |   |
| Weighted  average number of Common Shares outstanding:                    |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                     |       | 36,644                 |       | 37,068               |       | 36,641 |   | 37,120 |   |
| Diluted                                                                   |       | 36,868                 |       | 37,551               |       | 36,823 |   | 37,584 |   |

 

See notes tocondensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 
| ** **                                                                         | ** ** | **Six Months Ended**           | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **October 31, 2009** | ** ** | **November 1, 2008** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 2,075      |   | $ | 7,222 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Non-cash translation loss                                                          |       | —                         |       | 2,463 |   |
| Provision for depreciation                                                         |       | 10,118                         |       | 12,489 |   |
| Impairment of tangible assets                                                      |       | 710                            |       | 3,177 |   |
| Amortization of intangibles                                                        |       | 1,123                          |       | 3,052 |   |
| Amortization of stock awards and stock options                                     |       | 507                            |       | 1,605 |   |
| Changes in operating assets and liabilities                                        |       | 1,044                          |       | (1,160 | ) |
| Other                                                                              |       | 48                             |       | 567 |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                         |       |                           | 15,625     |   | 29,415 |   |
|                                                                               |       |                           |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                           |       |   |   |
| Purchases of property, plant and equipment                                         |       | (5,821                         | )          | (9,557 | ) |
| Acquisition of businesses                                                          |       | —                         |       | (56,785 | ) |
| Acquisition of technology licenses                                                 |       | (181                           | )          | (225 | ) |
| Other                                                                              |       | —                         |       | (209 | ) |
| NET CASH USED IN INVESTING  ACTIVITIES                                             |       |                           | (6,002     | ) | (66,776 | ) |
|                                                                               |       |                           |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                           |       |   |   |
| Repurchase of common stock                                                         |       | —                         |       | (5,137 | ) |
| Proceeds from exercise of stock options                                            |       | —                         |       | 110 |   |
| Tax benefit from stock options and awards                                          |       | —                         |       | 46 |   |
| Cash dividends                                                                     |       | (5,233                         | )          | (4,528 | ) |
| NET CASH USED IN FINANCING  ACTIVITIES                                             |       |                           | (5,233     | ) | (9,509 | ) |
|                                                                               |       |                           |       |   |   |
| Effect of foreign currency exchange rate changes on  cash                          |       | 1,854                          |       | (4,629 | ) |
|                                                                               |       |                           |       |   |   |
| INCREASE/(DECREASE) IN CASH  AND CASH EQUIVALENTS                                  |       |                           | 6,244      |   | (51,499 | ) |
|                                                                               |       |                           |       |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 54,030                         |       | 104,305 |   |
|                                                                               |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                        |       |                           | $          | 60,274 |   | $ | 52,806 |   |

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

October 31, 2009

 

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

 

Methode Electronics, Inc. was incorporated in 1946 as an Illinoiscorporation and reincorporated in Delaware in 1966. As used herein, “we”, “us”,“our”, the “Company” or “Methode” means Methode Electronics, Inc. and itssubsidiaries. The condensed consolidated financial statements and relateddisclosures as of October 31, 2009 and results of operations for the threemonths and six months ended October 31, 2009 and November 1, 2008 areunaudited, pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). The May 2, 2009 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 footnotedisclosures normally included in financial statements prepared in accordancewith U.S. GAAP have been condensed or omitted pursuant to such rules andregulations. In our opinion, these financial statements include all adjustments(consisting only of normal recurring adjustments) necessary for the fairstatement of the results for the interim periods. These financial statementsshould be read in conjunction with the financial statements included in ourlatest Form 10-K for the year ended May 2, 2009 filed with the SEC onJuly 2, 2009. Results may vary from quarter to quarter for reasons otherthan seasonality.

 

**2.****                                      RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

In September 2009,the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate 2009-13, “Multiple-Deliverable Revenue Arrangements,” which amends themultiple-element arrangement guidance under Accounting Standards Codification(ASC) No. 605, “Revenue Recognition.” This guidance amends the criteriafor separating consideration of products or services in multiple-deliverablearrangements. This guidance establishes a selling price hierarchy fordetermining the selling price of a deliverable, eliminates the residual methodof allocation, and requires that arrangement consideration be allocated at theinception of the arrangement to all deliverables using the relative sellingprice method. In addition, this guidance significantly expands requireddisclosures related to a vendor’s multiple-deliverable revenue arrangements. Thisguidance is effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010,which is our fiscal year 2012, that begins May 1, 2011. The adoption ofthis standard will not have a material impact on our financial statements.

 

In June 2009,the FASB issued ASC No. 810, “Consolidation” (“ASC No. 810”). ASC No. 810is intended 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 ending after November 15,2009, which is our third quarter fiscal 2010, that ends on January 30,2010. The adoption of this standard will not have a material impact on ourfinancial statements.

 

In June 2009,the FASB issued ASC No. 860, “Transfers and Servicing” (“ASC No. 860”).ASC No. 860 will require more information about transfers of financialassets, including companies that have continuing exposure to the risk relatedto transferred financial assets. It eliminates the concept of a qualifyingspecial purpose entity, changes the requirements for derecognizing financialassets, and requires additional disclosure. This standard is effective forinterim and annual periods ending after November 15, 2009, which is ourthird quarter fiscal 2010, that ends on January 30, 2010. The adoption ofthis standard will not have a material impact on our financial statements.

 

**3.****                                      RECENTLYADOPTED ACCOUNTING PRONOUNCEMENTS**

 

Effective October 31,2009, we adopted ASC No. 105, “Generally Accepted Accounting Principles”,the FASB Accounting Standards Codification (the Codification) and the Hierarchyof Generally Accepted Accounting Principles. The Codification is now the singlesource of authoritative GAAP for all non-governmental entities. TheCodification changes the referencing and organization of accounting guidance. Theissuance of ASC No. 105 will not change GAAP and therefore the adoption ofASC No. 105 will only affect how specific references to GAAP literatureare disclosed in the notes to our consolidated financial statements.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**3. RECENTLYADOPTED ACCOUNTING PRONOUNCEMENTS - Continued**

 

In December 2007,the FASB issued new guidance under ASC No. 810, “Consolidation,”, anAmendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”(“ASC No. 810”). ASC No. 810 establishes accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest ina subsidiary is an ownership interest in the consolidated entity that should bereported as equity in the consolidated financial statements. We adopted ASC No. 810on May 3, 2009. As a result, we have reclassified financial statement lineitems within our condensed consolidated balance sheet and statement of incomefor the prior period to conform with this standard. Additionally, see Note 5for disclosure reflecting the impact of ASC No. 810 on our reconciliationof comprehensive income.

 

In June 2008,the FASB issued ASC No. 260, “Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities” (“ASC No. 260”).ASC No. 260 was issued to clarify that unvested share-based payment awardswith a right to receive non-forfeitable dividends are participating securities.This ASC also provides guidance on how to allocate earnings to participatingsecurities and compute basic earnings per share using the two-class method. Weadopted ASC No. 260 on May 3, 2009. The adoption did not have amaterial impact on our earnings per share calculations.

 

In February 2008,the FASB issued new guidance under ASC No. 820, “Fair Value Measurementsand Disclosures,” (FASB Staff Position No. 157-2), which delays theeffective date of SFAS No. 157 for non-financial assets andliabilities, which are not measured at fair value on a recurring basis (atleast annually) until fiscal years beginning after November 15, 2008,which is our fiscal year 2010 that began May 3, 2009. The adoption of ASC No. 820 fornon-financial assets and liabilities did not have a material impact on ourcondensed consolidated financial statements.

 

On May 3,2009, we adopted the provisions of ASC No. 805-10, “Business Combinations”(“ASC No. 805-10”). ASC No. 805-10 establishes principles andrequirements on how an acquirer recognizes and measures in its financialstatements identifiable assets acquired, liabilities assumed, noncontrollinginterests in the acquiree, goodwill or gain from a bargain purchase andaccounting for transaction costs. Additionally, ASC No. 805-10 determineswhat information must be disclosed to enable users of the financial statementsto evaluate the nature and financial effects of the business combination. Theadoption of ASC No. 805-10 did not have an impact on our consolidatedfinancial statements, but will have an impact on the accounting for futurebusiness combinations.

 

In April 2009,the FASB issued three FASB Staff Positions, (“FSPs”) related to fair valuemeasurements. The first, FSP ASC No. 820, “Fair Value Measurements andDisclosures”, provides guidance on determining whether a market is inactive andwhether transactions in that market are distressed. The second FSP issued, ASC No. 320,“Investments — Debt and Equity Securities”, and EITF 99-20-2, “Recognition andPresentation of Other-Than-Temporary Impairments”, provides guidance on how toassess whether an asset has experienced an other-than-temporary impairment and,if so, where the impairment should be recorded in the financial statements. Thethird FSP issued, ASC No. 825, “Financial Instruments”, and ASC No. 270,“Interim Reporting”, requires that disclosures currently required under ASC No. 825,Disclosures about Fair Value of Financial Instruments, be presented for interimperiods as well as annual periods. The Company adopted these FSPs during thefirst quarter of 2010. The adoption of these FSPs did not have a materialimpact on the Company’s consolidated financial statements.

 

In May 2009,the FASB issued ASC No. 855, “Subsequent Events” (“ASC No. 855”). ASCNo. 855 establishes general standards of accounting for, and disclosureof, events that occur after the balance sheet date but before financialstatements are issued or are available to be issued. In particular, thisstatement sets forth: (1) the period after the balance sheet date duringwhich management of a reporting entity should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements, (2) the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in the financialstatements and (3) the disclosure that an entity should make about eventsor transactions that occurred after the balance sheet date. We adopted ASC No. 855on August 1, 2009 and the adoption did not have a material impact on ourfinancial statements. We evaluated subsequent events through December 9,2009, the time these financial statements were filed with the Securities andExchange Commission.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**4.****                                     ****RESTRUCTURING**

 

**March 2009 Restructuring**

 

InMarch 2009, we announced several additional restructuring actions tofurther reduce our exposure to the North American automotive industry and toconsolidate manufacturing facilities in lower cost regions. The restructuringis expected to be completed during the second half of fiscal 2010. We recordthe expense in the restructuring section of our condensed consolidatedstatement of income. As of October 31, 2009, we have recorded a total of$12,182 of restructuring charges related to this restructuring. We estimatethat we will record additional pre-tax restructuring charges in the second halfof fiscal 2010 of between $500 and $1,200.

 

Duringthe three months ended October 31, 2009, we recorded a restructuringcharge of $2,978, which consisted of $1,819 for employee severance and $1,159relating to other costs. During the six months ended October 31, 2009, werecorded a restructuring charge of $4,919, which consisted of $3,490 foremployee severance and $1,429 relating to other costs. As of October 31,2009, we had an accrued restructuring liability of $597 reflected in thecurrent liabilities section of our consolidated balance sheet. We expect thisliability to be paid out during fiscal 2010.

 

The table below reflectsthe March 2009 restructuring activity for the first and second quarter offiscal 2010:

 
| ** **                                          | ** ** | **One-Time**  | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Employee**  | ** ** | **Asset**       | ** ** | **Other**  | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Severance** | ** ** | **Write-Downs** | ** ** | **Costs**  | ** ** | **Total**  | ** ** |
| Accrued  balance at May 2, 2009                |       | $             | 140        |            | $          | —     |       | $          | —     |   | $ | 140 |   |
| First  quarter fiscal 2010 restructuring charges    |       | 1,671         |       | —          |       | 270        |       | 1,941      |       |
| First  quarter 2010 payments and asset write-downs  |       | (1,625        | )          | —          |       | (270       | )          | (1,895     | )          |
| Accrued  balance at August 1, 2009             |       | 186           |       | —          |       | —     |       | 186        |       |
|                                                |       |          |       |            |       |       |       |       |       |
| Second  quarter fiscal 2010 restructuring charges   |       | 1,819         |       | —          |       | 1,159      |       | 2,978      |       |
| Second  quarter 2010 payments and asset write-downs |       | (1,688        | )          | —          |       | (879       | )          | (2,567     | )          |
| Accrued  balance at October 31, 2009           |       | $             | 317        |            | $          | —     |       | $          | 280        |   | $ | 597 |   |

 

**January 2008 Restructuring**

 

In January 2008, we announced a restructuring of our U.S.-basedautomotive operations and a decision to discontinue producing certain legacyproducts in the Interconnect segment. The Automotive and Interconnectrestructuring is expected to be completed during the second half of fiscal2010. We record the expense in the restructuring section of our condensedconsolidated statement of income. As of October 31, 2009, we have recordedcharges totaling $25,022 related to this restructuring. We estimate that wewill record additional pre-tax restructuring charges in fiscal 2010 of between$500 and $1,000.

 

Duringthe three months ended October 31, 2009, we recorded a restructuringcharge of $178, which consisted of $88 for accelerated depreciation and $90related to other costs. During the six months ended October 31, 2009, werecorded a restructuring charge of $1,848, which consisted of $180 for employeeseverance, $1,538 in impairments and accelerated depreciation and $130 relatingto other costs. As of October 31, 2009, we had an accrued restructuringliability of $1,417 reflected in the current liabilities section of ourconsolidated balance sheet.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**4.****                                     ****RESTRUCTURING -Continued**

 

The table below reflects the January 2008 restructuring activityfor the first and second quarter of fiscal 2010:

 
| ** **                                          | ** ** | **One-Time**  | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Employee**  | ** ** | **Asset**       | ** ** | **Other**  | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Severance** | ** ** | **Write-Downs** | ** ** | **Costs**  | ** ** | **Total**  | ** ** |
| Accrued  balance at May 2, 2009                |       | $             | 1,849      |            | $          | —     |       | $          | —     |   | $ | 1,849 |   |
| First  quarter fiscal 2010 restructuring charges    |       | 180           |       | 1,450           |       | 40         |       | 1,670      |       |
| First  quarter 2010 payments and asset write-downs  |       | (368          | )          | (1,450          | )          | (40        | )          | (1,858     | )          |
| Accrued  balance at August 1, 2009             |       | 1,661         |       | —          |       | —     |       | 1,661      |       |
|                                                |       |          |       |            |       |       |       |       |       |
| Second  quarter fiscal 2010 restructuring charges   |       | —        |       | 88              |       | 90         |       | 178        |       |
| Second  quarter 2010 payments and asset write-downs |       | (244          | )          | (88             | )          | (90        | )          | (422       | )          |
| Accrued  balance at October 31, 2009           |       | $             | 1,417      |            | $          | —     |       | $          | —     |   | $ | 1,417 |   |

 

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

 

The components ofour comprehensive income/(loss) for the three and six months ended October 31,2009 and November 1, 2008 include net income and adjustments tostockholders’ equity for foreign currency translations. The foreign currencytranslation adjustment was due to exchange rate fluctuations in our foreignaffiliates’ local currency versus the U.S. dollar.

 

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

 
| ** **                 | ** ** | **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 |   |

 
| ** **               | ** ** | **Three Months Ended November 1, 2008** | ** ** | **Six Months Ended November 1, 2008** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | ** **                                   | ** ** | **Methode**                                | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **               | ** ** | **Total**                                    | ** ** | **Shareholders**                           | ** ** | **Interest** | ** ** | **Total** | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                     |       |                                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income               |       | $                                            | 351        |                                       | $          | 238 |   | $ | 113 |   | $ | 7,222 |   | $ | 7,054 |   | $ | 168 |   |
| Translation adjustment   |       | (16,181                                      | )          | (15,431                                    | )          | (750 | ) | (14,446 | ) | (13,922 | ) | (524 | ) |
| Total comprehensive loss |       | $                                            | (15,830    | )                                          | $          | (15,193 | ) | $ | (637 | ) | $ | (7,224 | ) | $ | (6,868 | ) | $ | (356 | ) |

 

**6.****                                     ****GOODWILL AND INTANGIBLE ASSETS**

 

We review our goodwill and other intangible assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof these assets may not be recoverable, and we also review our goodwillannually in accordance with ASC No. 350, “Intangibles — Goodwill and Other”.The values assigned to goodwill and intangible assets are normally based onestimates and judgments regarding expectations for the success and life cycleof products and technologies acquired. A severe decline in expectations couldresult in significant impairment charges, which could have a material adverseeffect on our financial condition and results of operations. We did not performimpairment testing on our goodwill and intangible assets during the secondquarter of fiscal 2010 because there were no additional indicators ofimpairment.

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**6.****                                     ****GOODWILL AND INTANGIBLE ASSETS - Continued**

 

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

 
| ** **                             | ** ** | **As of October 31, 2009** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| ** **                             | ** ** | ** **                      | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Amortization** | ** ** |
| ** **                             | ** ** | **Gross**                       | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Periods (Years)** | ** ** |
| Customer  relationships and agreements |       | $                               | 14,995     |   | $ | 12,889 |   | $ | 2,106 |   | 14.2 |   |
| Patents  and technology licenses       |       | 23,449                          |       | 6,096 |   | 17,353 |   | 13.2 |   |
| Covenants  not to compete              |       | 480                             |       | 356 |   | 124 |   | 2.3 |   |
| Total                                  |       | $                               | 38,924     |   | $ | 19,341 |   | $ | 19,583 |   |   |   |

 
| ** **                             | ** ** | **As of May 2, 2009** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Amortization** | ** ** |
| ** **                             | ** ** | **Gross**                  | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Periods (Years)** | ** ** |
| Customer  relationships and agreements |       | $                          | 14,995     |   | $ | 12,718 |   | $ | 2,277 |   | 14.7 |   |
| Patents  and technology licenses       |       | 23,244                     |       | 5,169 |   | 18,075 |   | 13.4 |   |
| Covenants  not to compete              |       | 480                        |       | 331 |   | 149 |   | 2.8 |   |
| Total                                  |       | $                          | 38,719     |   | $ | 18,218 |   | $ | 20,501 |   |   |   |

 

The estimated aggregate amortization expensefor fiscal 2010 and each of the four succeeding fiscal years is as follows:

 
| 2010 |   | $     | 2,240  |   |
|------|--------|-------|--------|--------|
| 2011 |   | 2,197 |   |
| 2012 |   | 1,685 |   |
| 2013 |   | 1,308 |   |
| 2014 |   | 1,195 |   |

 

As of October 31, 2009, the patents and technology licenses include$2,400 of trade names that are not subject to amortization.

 

**7.****                                     ****ACQUISITIONS**

 

On September 30, 2008, we acquired certain assets of Hetronic LLC(Hetronic) for $53,639 in cash. We also incurred $2,447 in transaction costs. Hetronicis a global leader in industrial safety radio remote controls with locations inthe U.S., Malta, the Philippines and Germany. Hetronic is represented in 45countries by direct sales associates, licensed partners, distributors andrepresentatives. Hetronic provides application specific and standard controlsto many different industries, such as agriculture, construction, materialhandling, military, mining and transportation.

 

Basedin part on a third-party valuation report, management determined that thetangible net assets acquired had a fair value of $20,533. The fair valuesassigned to intangible assets acquired were $12,170 for customer relationships,$2,700 for the trade name and trademarks, $1,450 for technology valuation, and$170 for non-competes, resulting in $19,063 of goodwill. The customerrelationships, technology valuation and non-compete agreements will be amortizedover 5 to approximately 12 years. The trade name and trademarks are not subjectto amortization but will be subject to periodic impairment testing. Theaccounts and transactions of Hetronic have been included in the Interconnectsegment in the consolidated financial statements from the effective date of theacquisition.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**7.****                                     ****ACQUISITIONS - Continued**

 

Atthe end of fiscal 2009, in accordance with ASC No. 350, “Intangibles —Goodwill and Other” and ASC No. 360, “Property, Plant, and Equipment”, itwas determined that the goodwill and intangible assets for Hetronic wereimpaired.  Therefore, in the fourthquarter of fiscal 2009, we recorded an impairment charge of $19,063 and $11,587for goodwill and intangible assets, respectively.

 

**8.****                                     ****INCOME TAXES**

 

AtOctober 31, 2009, we had valuation allowances against our deferred taxassets of $53,152.  In accordance withASC No. 740, “Income Taxes”, a valuation allowance is required to berecorded when it is more likely than not that deferred tax assets will not berealized.  Future realization depends onthe existence of sufficient taxable income within the carry-forward periodavailable under the tax law.  Sources offuture taxable income include future reversals of taxable temporarydifferences, future taxable income exclusive of reversing taxable differences,taxable income in carry-back years and tax planning strategies.  These sources of positive evidence ofrealizability must be weighed against negative evidence, such as cumulativelosses in recent years.

 

Informing a judgment about the future realization of our deferred tax assets, we consideredboth the positive and negative evidence of realizability and gave significantweight to the negative evidence from our recent cumulative loss.  We will continue to assess this situation andmake appropriate adjustments to the valuation allowance based on our evaluationof the positive and negative evidence existing at the time.  We are currently unable to forecast whenthere will be sufficient positive evidence for us to reverse the valuationallowances that we have recorded.

 

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.

 

We recognize interest and penalties accrued related to the unrecognizedtax benefits in the provision for income taxes. During the three months ended October 31, 2009, we recognized $42in interest and zero in penalties.  Wehad approximately $1,020 accrued at October 31, 2009 for the payment ofinterest.  The total unrecognized taxbenefit as of October 31, 2009 was $6,126.

 

We believe that it is reasonably possible that the total amount ofunrecognized tax benefits will change within the next twelve months.  We have certain tax return years subject tostatutes of limitation, which will close 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 $500 and$2,500.

 

The Company and all of its domestic subsidiaries file income taxreturns in the U.S. federal jurisdiction and various states.  Our foreign subsidiaries file income taxreturns in certain foreign jurisdictions since they have operations outside theU.S.  The Company and its subsidiariesare generally no longer subject to U.S. federal, state and local examinationsby tax authorities for years before fiscal 2006.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**9.****                                     ****COMMON STOCK AND STOCK-BASEDCOMPENSATION**

 

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

 
| ** **                              | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| ** **                              | ** ** | **2009**             | ** ** | **2008** | ** ** |
| ** **                              | ** ** | ** **           | ** ** | ** ** | ** ** |
| Balance  at the beginning of the period |       | 38,290,776           |       | 38,225,379 |   |
| Options  exercised                      |       | —               |       | 19,089 |   |
| Restricted  stock awards vested         |       | 24,449               |       | 38,607 |   |
| Balance  at the end of the period       |       | 38,315,225           |       | 38,283,075 |   |

 

Wepaid quarterly dividends of $2,616 on July 31, 2009 and October 30,2009.  We intend to retain the remainderof our earnings not used for dividend payments to provide funds for the operationand expansion of our business.  Our Boardof Directors approved a stock repurchase plan on September 18, 2008 torepurchase up to 3,000,000 shares.  Theplan expires at the end of fiscal 2010. There were no shares purchased during the first or second quarter offiscal 2010.

 

**Stock Options GrantedUnder the 2000 and 2004 Stock Plans**

 

Thereare 589,909 stock options that were granted in previous years under the 2000and 2004 stock plans that are outstanding and exercisable as of October 31,2009.  There were 30,128 options thatexpired and 5,596 options were forfeited during the first half of fiscal2010.  There was no remainingcompensation expense relating to these options in the first half of fiscal2010.

 

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 31, 2009:

 
| ** **                            | ** ** | **Summary of Option Activity** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | ** **                     | ** ** | **Wtd. Avg.** | ** ** |
| ** **                            | ** ** | **Shares**                     | ** ** | **Exercise Price** | ** ** |
| Outstanding  at May 2, 2009      |       | 625,633                        |       | $ | 10.26 |   |
| Exercised                             |       | —                         |       | — |   |
| Forfeited  and Expired                |       | (35,724                        | )          | 8.58 |   |
| Outstanding  at October 31, 2009 |       | 589,909                        |       | $ | 10.47 |   |

 
| **Options Outstanding and  Exercisable at October 31, 2009** | ** ** |
|-------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** | **Avg.** | ** ** |
| **Range  of**                                                     | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining** | ** ** |
| **Exercise  Prices**                                              | ** ** | **Shares** | ** ** | **Price** | ** ** | **Life (Years)** | ** ** |
| $5.72  - $7.69                                                    |       | 154,125 |   | $ | 6.68 |   | 1.8 |   |
| $8.53  - $11.44                                                   |       | 303,085 |   | 10.86 |   | 1.8 |   |
| $12.11  - $17.66                                                  |       | 132,699 |   | 14.00 |   | 0.8 |   |
|                                                              |       | 589,909 |   | $ | 10.47 |   |   |   |

 

Theoptions outstanding had an intrinsic value of $100 at October 31,2009.  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 2010 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 31, 2009.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**9.****                                     ****COMMON STOCK AND STOCK-BASEDCOMPENSATION - Continued**

 

**Stock Options GrantedUnder the 2007 Stock Plan**

 

InMarch 2009, the Compensation Committee approved the grant of 285,000 stockoptions to our executive officers under the 2007 Stock Plan.  The March 2009 stock options vest on thethird anniversary of the date of grant. In July 2009, the Compensation Committee approved the grant of275,000 stock options to our executive officers and other members of managementunder the same plan.  The July 2009stock options vest one-third per year on each anniversary of the date ofgrant.  Both the March 2009 and July 2009stock option grants have a ten-year term.

 

Thefollowing tables summarize the stock option activity and related informationfor the stock options granted under the 2007 stock plan for the six monthsended October 31, 2009:

 
| ** **                            | ** ** | **Summary of Option Activity** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | ** **                     | ** ** | **Wtd. Avg.** | ** ** |
| ** **                            | ** ** | **Shares**                     | ** ** | **Exercise Price** | ** ** |
| Outstanding  at May 2, 2009      |       | 285,000                        |       | $ | 2.72 |   |
| Granted                               |       | 275,000                        |       | 6.46 |   |
| Exercised                             |       | —                         |       | — |   |
| Cancelled                             |       | —                         |       | — |   |
| Outstanding  at October 31, 2009 |       | 560,000                        |       | $ | 4.56 |   |

 
| **Options Outstanding  at October 31, 2009** | ** ** |
|---------------------------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **Avg.** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| **Exercise Price**                                | ** ** | **Shares** | ** ** | **Life (Years)** | ** ** |
| $                                                 |  2.72 |   | 285,000 |   | 9.3 |   |
| $                                                 |  6.46 |   | 275,000 |   | 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** | ** ** |
|-----------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                              | ** ** | **Grants**      | ** ** | **Grants**      | ** ** |
|                                    |       |            |       |            |       |
| Average  expected volatility            |       | 69.58           | %          | 87.31           | %          |
| Average  risk-free interest rate        |       | 1.39            | %          | 1.46            | %          |
| Dividend  yield                         |       | 2.26            | %          | 2.66            | %          |
| Expected  life of options               |       | 6.87 years      |       | 6.87 years      |       |
| Weighted-average  grant-date fair value |       | $               | 1.46       |            | $          | 3.97 |   |
|                                         |            |                 |            |                 |            |  |  |

 

**Restricted Stock Awards and Restricted Stock Units**

 

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

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**9.****                                     ****COMMON STOCK AND STOCK-BASEDCOMPENSATION - Continued**

 

At the end of fiscal 2009, 100,000 RSUswere cancelled due to the company not meeting specific revenue and performancegoals.   All further discussion of RSAsin this report includes the RSUs described above.

 

At May 3, 2009, the beginning of fiscal2010, there were 578,287 performance-based and time-based RSAsoutstanding.  The time-based RSAs vest inthree equal annual installments from the grant date.  All RSAs awarded to senior management areperformance-based and vest after three years if the recipient remains employedby the Company until that date and we have met certain revenue growth andreturn on invested capital targets.  Asof October 31, 2009, it was determined that based on the current economicenvironment, the performance-based shares granted in fiscal years 2008 and 2009are not expected to meet the revenue growth and return on invested capitaltargets.  All of the unvested RSAs are entitledto voting rights and to payment of dividends. During the six months ended October 31, 2009, we awarded 24,000restricted shares to our independent directors, all of which vested immediatelyupon grant.

 

Werecognized pre-tax compensation expense for RSAs of $81 and $811 in the threemonths ended October 31, 2009 and November 1, 2008,respectively.  We recognized pre-taxcompensation expense for RSAs of $316 and $1,603 in the six months ended October 31,2009 and November 1, 2008, respectively. We record the expense in the selling and administrative section of ourcondensed consolidated statement of income.

 

The following tablesummarizes the RSA activity for the six months ended October 31, 2009:

 
| ** **                         | ** ** | **Shares** | ** ** |
|------------------------------------|------------|------------|------------|
| Unvested  at May 2, 2009      |       | 578,287    |       |
| Awarded                            |       | 24,000     |       |
| Vested                             |       | (24,667    | )          |
| Forfeited                          |       | —     |       |
| Unvested  at October 31, 2009 |       | 577,620    |       |

 

The table below shows theCompany’s unvested RSAs at October 31, 2009:

 
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Probable**              | ** ** | **Target**                | ** ** |
|------------|------------|------------|------------|-----------------------------------|------------|--------------|------------|---------------------------|------------|---------------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Unearned**              | ** ** | **Unearned**              | ** ** |
| **Grant**  | ** ** | ** ** | ** ** | ** **                        | ** ** | **Weighted** | ** ** | **Compensation**          | ** ** | **Compensation**          | ** ** |
| **Fiscal** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Average**  | ** ** | **Expense at**            | ** ** | **Expense at**            | ** ** |
| **Year**   | ** ** | **RSAs**   | ** ** | **Vesting Period**                | ** ** | **Value**    | ** ** | **October 31, 2009** | ** ** | **October 31, 2009** | ** ** |
| 2006       |       | 125,000    |       | 3-year cliff  performanced-based  |       | $            | 12.42      |                      | $          | —                    |       | $ | — |   |
| 2007       |       | 834        |       | 3-year equal annual  installments |       | 11.07        |       | —                    |       | —                    |       |
| 2008       |       | 17,793     |       | 3-year equal annual  installments |       | 14.89        |       | 46                        |       | 46                        |       |
| 2008       |       | 149,730    |       | 3-year cliff  performanced-based  |       | 15.14        |       | —                    |       | 467                       |       |
| 2009       |       | 49,724     |       | 3-year equal annual  installments |       | 10.64        |       | 206                       |       | 206                       |       |
| 2009       |       | 234,539    |       | 3-year cliff  performanced-based  |       | 11.35        |       | —                    |       | 1,530                     |       |
|            |            |            |            |                                   |            |              |            |                           |            |                           |            |  |  |  |

 

At October 31, 2009,the aggregate unvested RSAs had a grant date weighted average fair value of$12.61 and a weighted average vesting period of approximately 10.5 months.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**10.****                              ****EARNINGSPER SHARE**

 

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

 

The following table setsforth the computation of basic and diluted earnings per share:

 
| ** **                                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                            | ** ** | **October 31,**   | ** ** | **November 1,** | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| ** **                                                                                            | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator  - net income attributable to Methode Electronics, Inc.                                |       | $                      | 2,052      |                 | $          | 238 |   | $ | 2,033 |   | $ | 7,054 |   |
|                                                                                                  |       |                   |       |                 |       |   |   |   |   |
| Denominator:                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Denominator  for basic earnings per share-weighted average shares                                     |       | 36,644                 |       | 37,068               |       | 36,641 |   | 37,120 |   |
| Dilutive  potential common shares-employee stock options                                              |       | 224                    |       | 483                  |       | 182 |   | 465 |   |
| Denominator  for diluted earnings per share adjusted weighted average shares and assumed  conversions |       | 36,868                 |       | 37,551               |       | 36,823 |   | 37,585 |   |
|                                                                                                  |       |                   |       |                 |       |   |   |   |   |
| Basic  and diluted net income per share:                                                              |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                 |       | $                      | 0.06       |                 | $          | 0.01 |   | $ | 0.06 |   | $ | 0.19 |   |
| Diluted                                                                                               |       | $                      | 0.06       |                 | $          | 0.01 |   | $ | 0.06 |   | $ | 0.19 |   |

 

Options to purchase445,784 shares of common stock at a weighted-average exercise price of $11.72 pershare were outstanding as of October 31, 2009 and options to purchase304,522 shares of common stock at a weighted-average exercise price of $12.54were outstanding as of November 1, 2008, but were not included in thecomputation of diluted earnings per share because the exercise prices weregreater than the average market price of the common stock and, therefore, theeffect would be antidilutive. 

 

**11.****                              ****SEGMENT INFORMATION**

 

Weare a global manufacturer of component and subsystem devices.  We design, manufacture and market devicesemploying electrical, electronic, wireless, sensing and opticaltechnologies.  Our components are foundin the primary end markets of the automotive, appliance, communications(including information processing and storage, networking equipment, wirelessand terrestrial voice/data systems), aerospace, rail and other transportationindustries; and the consumer and industrial equipment markets.

 

ASCNo. 280, “Segment Reporting” (“ASC No. 280”), establishes annualand interim reporting standards for an enterprise’s operating segments andrelated disclosures about its products, services, geographic areas and majorcustomers. An operating segment is defined as a component of an enterprise thatengages in business activities from which it may earn revenues and incurexpenses, and about which separate financial information is regularly evaluatedby the Chief Operating Decision Maker (“CODM”) in deciding how to allocateresources.  The CODM, as defined byASC No. 280, is the Company’s President and Chief Executive Officer.

 

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

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**11.****                              ****SEGMENT INFORMATION - Continued**

 

The Interconnect segment provides avariety of copper and fiber-optic interconnect and interface solutions for theappliance, computer, networking, telecommunications, storage, medical,military, aerospace, commercial, consumer markets and industrial equipmentmarkets.  Solutions include solid-statefield effect interface panels, wireless optical and copper transceivers,terminators, connectors, custom cable assemblies and conductive polymer and thickfilm inks.  Services include the designand installation of fiber optic and copper infrastructure systems, andmanufacture of active and passive optical components.

 

ThePower Products segment manufactures current-carrying devices, including custompower-product assemblies, laminated and powder coated bus bars, braidedflexible cables and high-current low voltage flexible power cabling systemsthat are used in various markets and applications, includingtelecommunications, computers, transportation, industrial and power conversion,insulated gate bipolar transistor solutions, aerospace and military.

 

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

 

The accounting policies of the segmentsare the same as those described in the summary of significant accountingpolicies.  See Note 1 in our Form 10-Kfor the fiscal year ended May 2, 2009 for more information regardingsignificant accounting policies.  Weallocate resources to and evaluate performance of segments based on operatingincome. Transfers between segments are recorded using internal transfer prices set by the Company.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**11****.****                              ****SEGMENT INFORMATION - Continued**

 
| ** **                                            | ** ** | **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 |   |

 
| ** **                                            | ** ** | **Three Months Ended November 1, 2008** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                            | ** ** | **Automotive**                               | ** ** | **Interconnect** | ** ** | **Power  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                            | 75,207     |   | $ | 32,146 |   | $ | 11,676 |   | $ | 2,556 |   | $ | 281 |   | $ | 121,304 |   |
| Transfers between segments                            |       | —                                       |       | (143 | ) | (112 | ) | (26 | ) | (281 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                            | 75,207     |   | $ | 32,003 |   | $ | 11,564 |   | $ | 2,530 |   | $ | — |   | $ | 121,304 |   |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                            | 10,528     |   | $ | (638 | ) | $ | 482 |   | $ | (750 | ) | $ | — |   | $ | 9,622 |   |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (4,351                                       | )          | (1,933 | ) | — |   | — |   | — |   | (6,284 | ) |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                            | 6,177      |   | $ | (2,571 | ) | $ | 482 |   | $ | (750 | ) | $ | — |   | $ | 3,338 |   |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                         |       |   |   |   |   |   |   |   |   | (3,852 | ) |
|                                                  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                              |       |                                         |       |   |   |   |   |   |   |   |   | $ | (514 | ) |

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**11****.****                              ****SEGMENT INFORMATION - Continued**

 
| ** **                                            | ** ** | **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 |   |

 
| ** **                                            | ** ** | **Six Months Ended November 1, 2008** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **Automotive**                             | ** ** | **Interconnect** | ** ** | **Power  Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                          | 159,940    |   | $ | 67,865 |   | $ | 23,810 |   | $ | 4,778 |   | $ | 575 |   | $ | 255,818 |   |
| Transfers between segments                            |       | —                                     |       | (275 | ) | (245 | ) | (55 | ) | (575 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                          | 159,940    |   | $ | 67,590 |   | $ | 23,565 |   | $ | 4,723 |   | $ | — |   | $ | 255,818 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                          | 24,126     |   | $ | 1,536 |   | $ | 1,284 |   | $ | (1,332 | ) | $ | — |   | $ | 25,614 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (7,514                                     | )          | (3,687 | ) | — |   | — |   | — |   | (11,201 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                          | 16,612     |   | $ | (2,151 | ) | $ | 1,284 |   | $ | (1,332 | ) | $ | — |   | $ | 14,413 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                       |       |   |   |   |   |   |   |   |   | (6,159 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                       |       |   |   |   |   |   |   |   |   | $ | 8,254 |   |

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**12.****                              ****CONTINGENCIES**

 

Certainlitigation arising in the normal 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. Legal Proceedings in this Form 10-Q, the ultimate resolution ofthese matters will not have a material adverse effect on our consolidatedfinancial statements.

 

**13.****                              ****PRE-PRODUCTIONCOSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS**

 

We incur pre-production tooling costs relatedto certain products produced for our customers under long-term supplyagreements.  We had $8,425 and $3,182 asof October 31, 2009 and May 2, 2009, 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. These amounts are included in our work-in-process inventory in thecondensed consolidated balance sheets. Net revenues and costs on projects are deferred and recognized over thelife of the related long-term supply agreement.

 

**14.****                              ****FAIRVALUE MEASUREMENTS**

 

ASC No. 820, “FairValue Measurements and Disclosures” (“ASC No. 820”) defines fair value as the exchange pricethat would be received for an asset or paid to transfer a liability (an exitprice) in the principal or most advantageous market for the asset or liabilityin an orderly transaction between market participants.

 

ASC No. 820also specifies a fair value hierarchy based upon the observation of inputs invaluation techniques.  Observable inputs(highest level) reflect market data obtained from independent sources, whileunobservable inputs (lowest level) reflect internally developed marketassumptions.  In accordance with ASC No. 820,fair value measurements are classified under the following hierarchy:

 

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

 

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

 

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

 

Assets andliabilities recorded at fair value are valued using quoted market prices orunder a market approach using other relevant information generated by markettransactions involving identical or comparable instruments and included in atable below that summarizes the fair value of assets and liabilities as of October 31,2009:

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**14.****                              ****FAIRVALUE MEASUREMENTS - Continued**

 
| ** **                                        | ** ** | **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)                     |       | $                               | 60,274     |   | $ | 60,274 |   | $ | — |   | $ | — |   |
| Assets related to deferred compensation plan      |       | $                               | 2,842      |   | $ | — |   | $ | 2,842 |   | $ | — |   |
| Total assets at fair value                        |       | $                               | 63,116     |   | $ | 60,274 |   | $ | 2,842 |   | $ | — |   |
|                                              |       |                            |       |   |   |   |   |   |   |
| Liabilities:                                      |       |                            |       |   |   |   |   |   |   |
| Liabilities related to deferred compensation plan |       | $                               | 2,796      |   | $ | 2,796 |   | $ | — |   | $ | — |   |
| Total liabilities at fair value                   |       | $                               | 2,796      |   | $ | 2,796 |   | $ | — |   | $ | — |   |

 

----

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

 

Fair Value ofOther Financial Instruments. The carrying values of our short-term financialinstruments, including cash and cashequivalents, accounts receivable and accounts payableapproximate their fair values because of the short maturity of theseinstruments.

 

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

 

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

##### *** ***

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

 

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

 

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

 

·                  Our business is cyclical and seasonal in nature and further downturns in the automotive industry could reduce the sales and profitability of our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

****·********                 ********Becausewe currently derive approximately 57% of our revenues from the automotivesegment, oil prices could adversely affect future results.****

 

·                  We have and maycontinue to incur additional significant restructuring charges that willadversely affect our results of operations.

 

****·********                 ****If sales andearnings worsen, we could incur additional goodwill and other assetimpairments.

 

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****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 any forward-lookingstatements, all of which are expressly qualified by the foregoing.  See Part I — Item 1A, Risk Factors ofour latest Form 10-K for the fiscal year ended May 2, 2009, for afurther discussion regarding some of the reasons that actual results may bematerially different from those we anticipate.****

 

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

##### *** ***

Weare a global manufacturer of component and subsystem devices withmanufacturing, design and testing facilities in China, Czech Republic, Germany,India, Malta, Mexico, the Philippines, Singapore, the United Kingdom and theUnited States.  We are a global designerand manufacturer of electro-mechanical devices. We design, manufacture and market devices employing electrical, radioremote control, electronic, wireless, sensing and optical technologies.  Our business is managed on a segment basis,with those segments being Automotive, Interconnect, Power Products andOther.   For more information regardingthe business and products of these segments, see “Item 1. Business” of our Form 10-Kfor the fiscal year ended May 2, 2009.

 

Our components arefound in the primary end markets of the aerospace, appliance, automotive,consumer and industrial equipment markets, communications (includinginformation processing and storage, networking equipment, wireless andterrestrial voice/data systems), rail and other transportation industries.  Recent trends in the industries that we serveinclude:

 

·                  Automotiveindustry sales volume in the United States and European markets declinedsuddenly and substantially in fiscal 2009 and continues at historically lowlevels into the first half of fiscal 2010.

·                  Thedeteriorating condition of certain of our customers and the uncertainty as theyundergo restructuring initiatives, including in some cases, reorganizationunder bankruptcy laws.

·                  Decline in demand for new houses and theover-supply of new and existing houses.

·                  Demand for construction and material handlingequipment is cyclical and has been impacted by the weakness of the economy,availability of credit and higher interest rates.

 

Our business has been andwill likely continue to be materially adversely affected by the currenteconomic environment.  The disruptions inglobal financial and credit markets have significantly impacted global economicactivity and led to an economic recession. As a result of these disruptions, our customers and markets have beenadversely affected.  We have recentlyexperienced and continue to experience a drop in sales throughout all of ourbusinesses.  If we continue to experiencereduced demand because of these disruptions in the macroeconomic environment orother factors, our business, results of operations and financial conditioncould be materially adversely affected. If we are unable to successfully anticipate changing economic andfinancial conditions, we may be unable to effectively plan for and respond tothese changes and our business could be adversely affected.

 

On September 4,2008, Methode and Delphi Automotive Systems LLC (“Delphi”) entered into asupply agreement pursuant to which Methode was to supply all of Delphi’srequirements for the silicone 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 are engagedin litigation regarding this supply arrangement and our related intellectualproperty.

 

On September 30,2008, we acquired certain assets of Hetronic LLC (Hetronic) for $53.6 millionin cash.  We also incurred $2.4 millionin transaction costs related to the purchase. Hetronic is a global leader in industrial safety radio remote controlswith locations in the U.S., Malta, the Philippines and Germany.  Hetronic is represented in 45 countries bydirect sales associates, licensed partners, distributors andrepresentatives.  Hetronic providesapplication specific and standard controls to many different industries, suchas material handling, transportation, mining, military, agriculture andconstruction.

 

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In March 2009,we announced several additional restructuring actions to further reduce ourexposure to the North American automotive industry and to consolidatemanufacturing facilities in lower cost regions. After these actions, our principal manufacturing operations will be inChina, Malta and Mexico.  In addition, wereached an agreement with GM to have certain programs, scheduled for futureproduction at our Shanghai, China facility, transferred to an unrelatedGM-directed supplier and we reached agreement with Ford Motor Company to haveall production from our Reynosa, Mexico facility transferred to an unrelatedFord-directed supplier.  TouchSensormanufacturing, currently in west suburban Chicago, Illinois is in the processof moving to Monterrey, Mexico, and expects to complete the move by the end ofthe third quarter of fiscal 2010. Additionally, during the first quarter of fiscal 2010, our operations inShanghai, China were consolidated from three facilities to two.  We expect to complete the restructuringactions during the second half of fiscal 2010.

 

In March 2009,the total pre-tax charges were estimated to be between $16.0 million and $25.0million.  As of October 31, 2009, wehave recorded a total of $12.2 million of the charges.  We estimate that we will record additionalpre-tax restructuring charges in fiscal 2010 of between $0.5 million and $1.2million.

 

**BusinessOutlook**

 

We remain verycautious about fiscal 2010. The continuing effect of financial sector crisisand stagnant global economic conditions has caused uncertainty in the marketsin every geographic region we serve. We expect the unprecedented globaleconomic environment to continue to affect near-term results and to createdifficult business conditions.  Sales ofAutomotive segment products are expected to decline, as the effects of the “Cashfor Clunkers” programs both in the United States and Europe diminish. Delphirecently notified us that our long-term supply arrangement has been terminatedeffective September 10, 2009 and we ceased manufacturing on thatdate.  We are contesting Delphi’s rightto terminate this long-term supply arrangement and the parties are engaged inlitigation regarding this supply arrangement and our related intellectualproperty. The early termination of this agreement will adversely affect sales,profits and cash flow going forward.

 

In theInterconnect and Power Products segments visibility is low and forecasting isvery challenging. We expect continued volatility in these segments for thebalance of the fiscal year.  In ourInterconnect segment, sales from our Hetronic acquisition will be offset bysales lost due to our decision in fiscal 2008 and 2009 to exit certainunprofitable or marginally profitable North American Interconnect segmentlegacy businesses.

 

While we havetaken steps to restructure our businesses, ongoing operating margin improvementmay not be realized or sustainable until economic conditions begin to improvein the markets we serve.

 

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**Results of Operations for the Three Months Ended October 31,2009 as Compared to the Three Months Ended November 1, 2008.**

 

**ConsolidatedResults**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                                                 | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                                                 | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                                                 |       | $                    | 98.5       |                 | $          | 121.3          |       | $              | (22.8      | ) | -18.8 | % |
| Other  income                                              |       | 1.1                  |       | 1.0                  |       | 0.1            |       | 10.0           | %          |
|                                                       |       | 99.6                 |       | 122.3                |       | (22.7          | )          | -18.6          | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                                     |       | 77.8                 |       | 97.8                 |       | (20.0          | )          | -20.4          | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income)                    |       | 21.8                 |       | 24.5                 |       | (2.7           | )          | -11.0          | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Restructuring                                              |       | 3.2                  |       | 6.3                  |       | (3.1           | )          | -49.2          | %          |
| Selling  and administrative expenses                       |       | 16.4                 |       | 18.5                 |       | (2.1           | )          | -11.4          | %          |
| Interest  income, net                                      |       | —               |       | 0.4                  |       | (0.4           | )          | -100.0         | %          |
| Other  income/(expense), net                               |       | 0.1                  |       | (0.6                 | )          | 0.7            |       | -116.7         | %          |
| Income  taxes - expense/(benefit)                          |       | 0.2                  |       | (0.9                 | )          | 1.1            |       | -122.2         | %          |
| Net  income attributable to noncontrolling interest        |       | —               |       | 0.2                  |       | (0.2           | )          | -100.0         | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Net  income attributable to Methode Electronics, Inc. |       | $                    | 2.1        |                 | $          | 0.2            |       | $              | 1.9        |   | 950.0 | % |

 
| ** **                                                 | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**                                      | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                                 |       | 100.0                | %          | 100.0                | %          |       |       |       |       |
| Other  income                                              |       | 1.1                  | %          | 0.8                  | %          |       |       |       |       |
| Cost  of products sold                                     |       | 79.0                 | %          | 80.6                 | %          |       |       |       |       |
| Gross  margins (including other income)                    |       | 22.1                 | %          | 20.2                 | %          |       |       |       |       |
| Restructuring                                              |       | 3.2                  | %          | 5.2                  | %          |       |       |       |       |
| Selling  and administrative expenses                       |       | 16.6                 | %          | 15.3                 | %          |       |       |       |       |
| Interest  income, net                                      |       | 0.0                  | %          | 0.3                  | %          |       |       |       |       |
| Other  income/(expense), net                               |       | 0.1                  | %          | -0.5                 | %          |       |       |       |       |
| Income  taxes - expense/(benefit)                          |       | 0.2                  | %          | -0.7                 | %          |       |       |       |       |
| Net  income attributable to noncontrolling interest        |       | 0.0                  | %          | 0.2                  | %          |       |       |       |       |
| Net  income attributable to Methode Electronics, Inc. |       | 2.1                  | %          | 0.2                  | %          |       |       |       |       |

 

*Net Sales*.  Consolidated net sales decreased $22.8million, or 18.8%, to $98.5 million for the three months ended October 31,2009 from $121.3 million for the three months ended November 1, 2008.  The Automotive segment net sales declined $19.0million, or 25.3%, to $56.2 million for second quarter of fiscal 2010 from$75.2 million for the second quarter of fiscal 2009.  The decline is primarily attributable tolower sales to Delphi and Chrysler in the Automotive segment and the continuedsoftening of the global economic environment. Net sales benefited by $1.7 million for the three months ended October 31,2009 relating to a one-time reversal of pricing contingencies which wereaccrued over several years and are no longer required.  The Interconnect segment net sales decreased$1.5 million, or 4.7%, to $30.5 million for the second quarter of fiscal 2010as compared to $32.0 million for the second quarter of fiscal 2009.  The Power Products segment net salesdecreased $2.2 million, or 19.0%, to $9.4 million for the second quarter offiscal 2010 as compared to $11.6 million for the second quarter of fiscal2009.  The Other segment net salesdecreased $0.1 million, or 4.0%, to $2.4 million for the second quarter offiscal 2010, as compared to $2.5 million in the second quarter of fiscal2009.  Translation of foreign operationsnet sales in the

 

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three months ended October 31,2009 increased reported net sales by $0.3 million or 0.3% due to currency ratefluctuations.

 

*OtherIncome*.  Other incomeincreased $0.1 million, or 10.0%, to $1.1 million for the three months ended October 31,2009 from $1.0 million for three months ended November 1, 2008.  Other income consisted primarily of earningsfrom engineering design fees and royalties. The increase relates to engineering design fees in our Europeanautomotive market.

 

*Cost ofProducts Sold*. Consolidated cost of products sold decreased $20.0 million, or 20.4%, to$77.8 million for the three months ended October 31, 2009 compared to$97.8 million for the three months ended November 1, 2008.  The decrease is due to the lower salesvolumes.  Included in the cost ofproducts sold for the three months ended October 31, 2009 is $0.7 millionof asset write-downs relating to the termination of the Delphi supply arrangement.  Consolidated cost of products sold as apercentage of sales were 79.0% in the second quarter of fiscal 2010, comparedto 80.6% in the second quarter of fiscal 2009. Excluding the Delphi asset write-down and the $1.7 million reversal ofpricing contingencies included in net sales, consolidated cost of products soldas a percentage of sales were 79.6% for the second quarter of fiscal 2010.  The decrease relates to restructuring andconsolidation efforts that occurred in prior periods.

 

*GrossMargins (including other income). *Consolidatedgross margins (including other income) decreased $2.7 million, or 11.0%, to$21.8 million for the three months ended October 31, 2009 as compared to$24.5 million for the three months ended November 1, 2008.  Gross margins (including other income) as apercentage of net sales were 22.1% for the three months ended October 31,2009 as compared to 20.2% for the three months ended November 1,2008.  Excluding the Delphi assetwrite-down in cost of products sold and the $1.7 million reversal of pricingcontingencies included in net sales, consolidated gross margins (includingother income) as a percentage of sales were 21.5% for the second quarter offiscal 2010.  The increase relates tohigher other income in the second quarter of fiscal 2010 as well asrestructuring and consolidation efforts that occurred in prior periods.

 

*Restructuring*.  In March 2009, we announced additionalrestructuring actions to further reduce our exposure to the North Americanautomotive industry and to consolidatemanufacturing facilities in lower cost regions.  During the fiscal quarter ended October 31,2009, we recorded a restructuring charge of $3.0 million related to thisrestructuring initiative, which consisted of $1.8 million for employee severanceand $1.2 million relating to other costs. We expect the March 2009 restructuring to be completed in thesecond half of fiscal 2010.

 

In January 2008,we announced a restructuring of our U.S.-based automotive operations and thedecision to discontinue producing certain legacy products in the Interconnectsegment.  During the fiscal quarter endedOctober 31, 2009, we recorded a restructuring charge of $0.2 millionrelated to this restructuring initiative, which consisted of $0.1 million foraccelerated depreciation and $0.1 million relating to other costs.  During the fiscal quarter ended November 1,2008, we recorded a restructuring charge of $6.3 million, which consisted of$1.6 million for employee severance, $4.4 million for impairment and accelerateddepreciation, and $0.3 million relating to other costs.  We expect the January 2008 restructuringto be completed in the second half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses decreased $2.1 million, or 11.4%, to$16.4 million for the three months ended October 31, 2009 compared to$18.5 million for the three months ended November 1, 2008.  The decrease is due to lower intangible assetamortization expense and lower stock award amortization expense during thesecond quarter of fiscal 2010, partially offset by selling and administrativeexpenses from Hetronic, LLC, acquired in September 2008.  Inaddition, the selling and administrative expenses for the second quarter offiscal 2010 included $1.5 million in legal fees relating to the Delphi supplyarrangement dispute.  Selling andadministrative expenses as a percentage of net sales increased to 16.6% in thethree months ended October 31, 2009 from 15.3% for the three months ended November 1,2008.

 

*InterestIncome, Net*.  Interestincome, net decreased $0.4 million, or 100.0%, in the three months ended October 31,2009 to no interest income, net as compared to $0.4 million in the three monthsended November 1, 2008.  The averagecash balance was $63.8 million during the three months ended October 31,2009 as compared to $94.6 million during the three months ended November 1,2008.  The decrease in cash relatesprimarily to the Hetronic acquisition in the second quarter of fiscal2009.  The average interest rate earnedfor the three months

 

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ended October 31,2009 was 0.48% compared to 2.38% in the three months ended November 1,2008.  Interest expense was $0.1 millionfor both the three months ended October 31, 2009 and November 1,2008.

 

*OtherIncome/(Expense), Net*. Other income/(expense), net increased $0.7 million, or 116.7% to incomeof $0.1 million for the three months ended October 31, 2009 as compared toan expense of $0.9 million for the three months ended November 1,2008.  The three months ended October 31,2009 included a $0.4 million gain recorded from life insurance policies ownedby the Company in connection with an employee deferred compensation plan.  In addition,we recorded a gain of $0.3 million related to an enhanced cash fund (describedbelow), in the second quarter of fiscal 2010, compared to a loss of $0.5million in the second quarter of fiscal 2009. During the second quarter of fiscal 2009, we recorded $2.5 million ofunrealized currency exchange losses arising from an intercompany loan betweenour corporate headquarters and one of our foreign subsidiaries in conjunctionwith the acquisition of Hetronic.  Thefunctional currencies of these operations are the British pound, Chinese yuan,Czech koruna, Euro, Indian Rupee, Mexican peso and Singapore dollar.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

At August 1, 2009,approximately $2.4 million was invested in an enhanced cash fund sold asan alternative to traditional money-market funds. We have historically investeda portion of our on hand cash balances in this fund. These investments aresubject to credit, liquidity, market and interest rate risk. In December 2007,****the****fund was overwhelmedwith withdrawal requests from investors and was closed with a restrictionplaced upon the cash redemption ability of its holders. In September, we received our remainingprincipal in the fund. The balance in the fund as of October 31, 2009 waszero.

 

During the second quarterof fiscal 2010, we recorded a gain of $0.3 million, of which $0.3 million wasfrom a realized loss on redemptions of $2.4 million, offset by a realized gainof $0.6 million.

 

*IncomeTaxes — Expense/(Benefit).* The effective income tax rate was 9.7% in the second quarter of fiscal2010 compared with a benefit of 168.3% in the second quarter of fiscal2009.  For the three months ended October 31,2009, we have a loss before income taxes in our U.S.-based businesses.  Normally, a tax benefit is recorded relatingto the net loss before income taxes, but due to the uncertainty of the futureutilization of the tax benefit by our U.S.-based businesses, a valuationallowance was recorded offsetting the tax benefit in accordance with ASC No. 740“Income Taxes” in the U.S.  See note 8for additional information.  Theeffective tax rates for both the second quarter of fiscal 2010 and 2009 reflectutilization of foreign investment tax credits and the effect of lower tax rateson income of the Company’s foreign operations and a higher percentage ofearnings at those foreign operations.

 

*NetIncome Attributable to Methode Electronics, Inc.*  Net income attributable to MethodeElectronics, Inc. increased $1.9 million, to $2.1 million for the threemonths ended October 31, 2009 as compared to $0.2 million for the threemonths ended November 1, 2008 due to the reversal of pricing contingenciesincluded in net sales, lower restructuring expenses, lower other expenses,lower costs due to prior restructuring and consolidation efforts, partiallyoffset by lower sales and increased income taxes.

 

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**OperatingSegments**

 

**AutomotiveSegment Results**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                    | 56.2       |                 | $          | 75.2           |       | $              | (19.0      | ) | -25.3 | % |
| Other  income                           |       | 1.0                  |       | 0.8                  |       | 0.2            |       | 25.0           | %          |
|                                    |       | 57.2                 |       | 76.0                 |       | (18.8          | )          | -24.7          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                  |       | 44.2                 |       | 60.2                 |       | (16.0          | )          | -26.6          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income) |       | 13.0                 |       | 15.8                 |       | (2.8           | )          | -17.7          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Restructuring                           |       | 2.3                  |       | 4.4                  |       | (2.1           | )          | -47.7          | %          |
| Selling  and administrative expenses    |       | 4.5                  |       | 5.0                  |       | (0.5           | )          | -10.0          | %          |
| Interest  income, net                   |       | —               |       | 0.2                  |       | (0.2           | )          | -100.0         | %          |
| Other  expense, net                     |       | (0.6                 | )          | (0.4                 | )          | (0.2           | )          | 50.0           | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Income  before income taxes             |       | $                    | 5.6        |                 | $          | 6.2            |       | $              | (0.6       | ) | -9.7 | % |

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**                   | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |       |       |       |       |
| Other  income                           |       | 1.8                  | %          | 1.1                  | %          |       |       |       |       |
| Cost  of products sold                  |       | 78.6                 | %          | 80.1                 | %          |       |       |       |       |
| Gross  margins (including other income) |       | 23.1                 | %          | 21.0                 | %          |       |       |       |       |
| Restructuring                           |       | 4.1                  | %          | 5.9                  | %          |       |       |       |       |
| Selling  and administrative expenses    |       | 8.0                  | %          | 6.6                  | %          |       |       |       |       |
| Interest  income, net                   |       | 0.0                  | %          | 0.3                  | %          |       |       |       |       |
| Other  expense, net                     |       | -1.1                 | %          | -0.5                 | %          |       |       |       |       |
| Income  before income taxes             |       | 10.0                 | %          | 8.2                  | %          |       |       |       |       |

 

*Net Sales*.  Automotive segment net sales decreased $19.0million, or 25.3%, to $56.2 million for the three months ended October 31,2009 from $75.2 million for the three months ended November 1, 2008.  Net sales to Delphi Corporation decreased$6.8 million, or 50.9%, to $6.6 million in the second quarter of 2010 ascompared to the second quarter of fiscal 2009 due to lower sales volumes andthe cancellation of the supply arrangement on September 10, 2009.  The Automotive segment net sales were alsonegatively impacted by planned lower Chrysler sales volumes of $0.4 million inthe second quarter of fiscal 2010, compared to $5.8 million in the secondquarter of fiscal 2009.  In addition, thedecline is attributable to the softening of the global economic environment,especially the effect on the North American automotive industry.  Net sales benefited by $1.7 million for thethree months ended October 31, 2009 relating to a one-time reversal ofpricing contingencies which were accrued for over several years and are nolonger required.    Net sales havedeclined by 49.3% in North America and net sales have increased by 3.0% inEurope and 29.4% in Asia in the second quarter of fiscal 2010 as compared tofiscal 2009.  Translation of foreignoperations net sales in the three months ended October 31, 2009 increasedreported net sales by $0.3 million, or 0.5%, due to currency rate fluctuations.

 

*OtherIncome*.  Other incomeincreased $0.2 million, or 25.0%, to $1.0 million for the three months ended October 31,2009 from $0.8 million for three months ended November 1, 2008.  Other income consisted primarily of earningsfrom engineering design fees and royalties. The increase relates to engineering design fees in our Europeanautomotive market.

 

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*Cost ofProducts Sold*. Automotive segment cost of products sold decreased $16.0 million, or26.6%, to $44.2 million for the three months ended October 31, 2009 from$60.2 million for the three months ended November 1, 2008.  The decrease primarily relates to lower salesvolumes.  Included in the cost of productssold for the three months ended October 31, 2009 is $0.7 million of assetwrite-downs relating to the termination of the Delphi supply arrangement.  The Automotive segment cost of products soldas a percentage of sales were 78.6% in the second quarter of fiscal 2010,compared to 80.1% in the second quarter of fiscal 2009.  Excluding the Delphi asset write-down and the$1.7 million reversal of pricing contingencies included in net sales,consolidated cost of products sold as a percentage of sales were 79.8% for thesecond quarter of fiscal 2010.  Thedecrease relates to restructuring and consolidation efforts that occurred inprior periods.

 

*GrossMargins (including other income). *Automotivesegment gross margins (including other income) decreased $2.8 million, or17.7%, to $13.0 million for the three months ended October 31, 2009 ascompared to $15.8 million for the three months ended November 1,2008.  The Automotive segment grossmargins (including other income) as a percentage of net sales were 23.1% forthe three months ended October 31, 2009 as compared to 21.0% for the threemonths ended November 1, 2008. Excluding the Delphi asset write-down in cost of products sold and the$1.7 million reversal of pricing contingencies included in net sales, the Automotivesegment gross margins (including other income) as a percentage of sales were22.0% for the second quarter of fiscal 2010. The increase relates to higher other income in the second quarter offiscal 2010 as well as restructuring and consolidation efforts that occurred inprior periods.

 

*Restructuring*.   In March 2009, we announced additionalrestructuring actions to further reduce our exposure to the North Americanautomotive industry and to consolidatemanufacturing facilities in lower cost regions.  During the fiscal quarter ended October 31,2009, we recorded a restructuring charge of $2.2 million related to thisrestructuring initiative, which consisted of $1.7 million for employeeseverance and $0.5 million relating to other costs.  We expect the March 2009 restructuringto be completed during the second half of fiscal 2010.

 

In January 2008,we announced a restructuring of our U.S.-based automotive operations.  During the fiscal quarter ended October 31,2009, the Automotive segment recorded a restructuring charge of $0.1 millionfor this restructuring initiative for accelerated depreciation.  During the fiscal quarter ended November 1,2008, the Automotive segment recorded a restructuring charge of $4.4 millionfor this restructuring initiative, which consisted of $1.1 million for employeeseverance, $3.0 million for impairment and accelerated depreciation and $0.3million for other costs.  We expect the January 2008restructuring to be completed during the second half of fiscal 2010.

 

*Selling andAdministrative Expenses*. Selling and administrative expenses decreased $0.5 million, or 10.0%, to$4.5 million for the three months ended October 31, 2009 compared to $5.0million for the three months ended November 1, 2008.  Selling and administrative expenses decreasedin the second quarter of fiscal 2010 compared to the second quarter of fiscal2009 due to restructuring and consolidations efforts, however, the secondquarter of fiscal 2010 includes $1.5 million of legal fees associated with theDelphi supply arrangement termination dispute. Selling and administrative expenses as a percentage of net sales were8.0% for the three months ended October 31, 2009 and 6.6% for the threemonths ended November 1, 2008.

 

*InterestIncome, Net*.  Netinterest income was zero in the three months ended October 1, 2009compared to $0.2 million in the three months ended November 1, 2008.

 

*OtherExpense, Net*.  Otherexpense, net was $0.6 million for the three months ended October 31, 2009as compared to $0.4 million for the three months ended November 1,2008.  During the second quarter offiscal 2009, we recorded $2.5 million of unrealized currency exchange lossesarising from an intercompany loan between our corporate headquarters and one ofour foreign subsidiaries in conjunction with the acquisition of Hetronic.  The functional currencies of these operationsare the British pound, Chinese yuan, Euro and the Mexican peso.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

*IncomeBefore Income Taxes. *Automotivesegment income before income taxes decreased $0.6 million, or 9.7%, to $5.6million for the three months ended October 31, 2009 compared to $6.2million for the three months ended November 1, 2008 due to lower salesvolumes, the asset write-down and legal fees relating to the termination

 

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of the Delphiarrangement, offset by lower currency exchange losses, the reversal of one-timepricing contingencies included in net sales, lower costs relating torestructuring and consolidation efforts and lower restructuring costs.

 

**InterconnectSegment Results**

** **

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                    | 30.5       |                 | $          | 32.0           |       | $              | (1.5       | ) | -4.7 | % |
| Other  income                           |       | —               |       | 0.1                  |       | (0.1           | )          | -100.0         | %          |
|                                    |       | 30.5                 |       | 32.1                 |       | (1.6           | )          | -5.0           | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                  |       | 23.4                 |       | 24.8                 |       | (1.4           | )          | -5.6           | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income) |       | 7.1                  |       | 7.3                  |       | (0.2           | )          | -2.7           | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Restructuring                           |       | 0.7                  |       | 1.9                  |       | (1.2           | )          | -63.2          | %          |
| Selling  and administrative expenses    |       | 5.7                  |       | 8.4                  |       | (2.7           | )          | -32.1          | %          |
| Interest  income                        |       | 0.1                  |       | 0.1                  |       | —         |       | 0.0            | %          |
| Other  income, net                      |       | 0.1                  |       | 0.4                  |       | (0.3           | )          | -75.0          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Income/(loss)  before income taxes      |       | $                    | 0.9        |                 | $          | (2.5           | )          | $              | 3.4        |   | -136.0 | % |

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|------------|------------|
| **Percent of sales:**                   | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |       |       |       |       |
| Other  income                           |       | 0.0                  | %          | 0.3                  | %          |       |       |       |       |
| Cost  of products sold                  |       | 76.7                 | %          | 77.5                 | %          |       |       |       |       |
| Gross  margins (including other income) |       | 23.3                 | %          | 22.8                 | %          |       |       |       |       |
| Restructuring                           |       | 2.3                  | %          | 5.9                  | %          |       |       |       |       |
| Selling  and administrative expenses    |       | 18.7                 | %          | 26.3                 | %          |       |       |       |       |
| Interest  income                        |       | 0.3                  | %          | 0.3                  | %          |       |       |       |       |
| Other  income, net                      |       | 0.3                  | %          | 1.3                  | %          |       |       |       |       |
| Income/(loss)  before income taxes      |       | 3.0                  | %          | -7.8                 | %          |       |       |       |       |

 

*Net Sales*.  Interconnect segment net sales decreased $1.5million, or 4.7%, to $30.5 million for the three months ended October 31,2009 from $32.0 million for the three months ended November 1, 2008.  Net sales were favorably impacted by theHetronic acquisition on September 30, 2008.  Excluding Hetronic, North American net salesdeclined 5.2%, Europe declined 36.7% and Asia declined 28.6% in the secondquarter of fiscal 2010 as compared to the second quarter of fiscal 2009.  The net sales decline was primarily due tothe softening of the global economy and restructuring of our Connector and Duelbusinesses during the fourth quarter of fiscal 2008 and the first quarter offiscal 2009.

 

*OtherIncome*.  Other incomewas zero for the three months ended October 31, 2009, compared to $0.1million for the three months ended November 1, 2008.  Other income consisted primarily of earningsfrom engineering design fees and royalties.

 

*Cost ofProducts Sold*. Interconnect segment cost of products sold decreased $1.4 million, or5.6%, to $23.4 million for the three months ended October 31, 2009compared to $24.8 million for the three months ended November 1,2008.  Interconnect segment cost ofproducts sold as a percentage of net sales decreased to 76.7% for

 

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the three monthsended October 31, 2009 compared to 77.5% for the three months ended November 1,2008.  The decrease in cost of productssold as a percentage of net sales primarily relates to restructuring efforts inprevious periods, partially offset by lower sales volumes in the second quarterof fiscal 2010 as compared to the second quarter of fiscal 2009.

 

*GrossMargins (including other income). *Interconnectsegment gross margins (including other income) decreased $0.2 million, or 2.7%,to $7.1 million for the three months ended October 31, 2009 as compared to$7.3 million for the three months ended November 1, 2008.  Gross margins (including other income) as apercentage of net sales increased to 23.3% for the three months ended October 31,2009 from 22.8% for the three months ended November 1, 2008.  The increase in gross margins (includingother income) as a percentage of net sales primarily relates to restructuringefforts in previous periods, partially offset by lower sales volumes and lowerother income in the second quarter of fiscal 2010 as compared to the secondquarter of fiscal 2009.

 

*Restructuring*.  In March 2009, we announced additionalrestructuring actions to consolidatemanufacturing facilities.  Duringthe fiscal quarter ended October 31, 2009, the Interconnect segmentrecorded a restructuring charge of $0.6 million related to this restructuringinitiative, which consisted of $0.2 million for employee severance and $0.4million for other costs.  We expect the March 2009restructuring to be completed during the second half of fiscal 2010.

 

In January 2008,we announced our decision to discontinue producing certain legacy products inthe Interconnect segment.  During thefiscal quarter ended October 31, 2009, the Interconnect segment recorded arestructuring charge of $0.1 million related to this restructuring initiativefor accelerated depreciation costs. During the fiscal quarter ended November 1, 2008, the Interconnectsegment recorded a restructuring charge of $1.9 million related to thisrestructuring initiative, which consisted of $0.6 million for employeeseverance and $1.3 million for impairment and accelerated depreciation.  We expect the January 2008 restructuringto be completed during the second half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses decreased $2.7 million, or 32.1%, to$5.7 million for the three months ended October 31, 2009 compared to $8.4million for the three months ended November 1, 2008.  Selling and administrative expenses are lowerdue to reduced intangible asset amortization expenses, partially offset byhigher selling and administrative expenses due to the Hetronic acquisition.  In addition, selling and administrativeexpenses (not including Hetronic) were lower due to the restructuring effortsundertaken in the first and second quarters of fiscal 2009.  Selling and administrative expenses as apercentage of net sales decreased to 18.7% in the three months ended October 31,2009 from 26.3% for the three months ended November 1, 2008.

 

*InterestIncome, Net*.  Interestincome, net was $0.1 million for both the three months ended October 31,2009 and November 1, 2008.

 

*OtherIncome, Net*.  Otherincome, net was $0.1 million for the three months ended October 31, 2009,compared to $0.4 million for the three months ended November 1, 2008.  The functional currencies of these operationsare the British pound, Czech koruna, Euro and Singapore dollar.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

*Income/(Loss)Before Income Taxes. *Interconnectincome/(loss) before income taxes increased $3.4 million to income of $0.9million for the three months ended October 31, 2009 compared to a loss of$2.5 million for the three months ended November 1, 2008 due to lowerintangible asset amortization expenses, lower cost selling and administrativeexpenses due to restructuring efforts, lower restructuring expenses, partiallyoffset by lower sales volumes and other income.

 

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**PowerProducts Segment Results**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                    | 9.4        |                 | $          | 11.6           |       | $              | (2.2       | ) | -19.0 | % |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                  |       | 7.3                  |       | 9.5                  |       | (2.2           | )          | -23.2          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Gross  margins                          |       | 2.1                  |       | 2.1                  |       | —         |       | 0.0            | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Restructuring                           |       | 0.1                  |       | —               |       | 0.1            |       | 0.0            | %          |
| Selling  and administrative expenses    |       | 1.5                  |       | 1.5                  |       | —         |       | 0.0            | %          |
| Other  - expense                        |       | —               |       | (0.1                 | )          | 0.1            |       | -100.0         | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Income  before income taxes             |       | $                    | 0.5        |                 | $          | 0.5            |       | $              | —     |   | 0.0 | % |
|                                    |       |                 |       |                 |       |           |       |           |       |
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                   | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Cost  of products sold                  |       | 77.7                 | %          | 81.9                 | %          |           |       |           |       |
| Gross  margins (including other income) |       | 22.3                 | %          | 18.1                 | %          |           |       |           |       |
| Restructuring                           |       | 1.1                  | %          | 0.0                  | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 16.0                 | %          | 12.9                 | %          |           |       |           |       |
| Other  - expense                        |       | 0.0                  | %          | -0.9                 | %          |           |       |           |       |
| Income  before income taxes             |       | 5.3                  | %          | 4.3                  | %          |           |       |           |       |

 

*Net Sales*.  Power Products segment net sales decreased$2.2 million, or 19.0% to $9.4 million for the three months ended October 31,2009 compared to $11.6 million for the three months ended November 1,2008.  Net sales have declined in thesecond quarter of fiscal 2010 as compared to the second quarter of fiscal 2009by 26.6% in North America and 5.6% in Asia. The decline was driven by lower demand for our busbar, flexible cablingand heat sink products.

 

*Cost ofProducts Sold*.  PowerProducts segment cost of products sold decreased $2.2 million, or 23.2%, to$7.3 million for the three months ended October 31, 2009 compared to $9.5million for the three months ended November 1, 2008.  The Power Products segment cost of productssold as a percentage of sales decreased to 77.7% for the three months ended October 31,2009 from 81.9% for the three months ended November 1, 2008.  The decrease is due to restructuring andconsolidation efforts for our Power Products businesses in the U.S. during thefourth quarter of fiscal 2009 and the first quarter of fiscal 2010.

 

*GrossMargins.* PowerProducts segment gross margins were $2.1 million for both the three monthsended October 31, 2009 and November 1, 2008. Gross margins as apercentage of net sales increased to 22.3% for the three months ended October 31,2009 from 18.1% for the three months ended November 1, 2008.  The increase is due to restructuring andconsolidation efforts for our Power Products businesses in the U.S. during thefourth quarter of fiscal 2009 and the first quarter of fiscal 2010.

 

*Restructuring*.   In March 2009, we announcedrestructuring actions to consolidatemanufacturing facilities.  Duringthe fiscal quarter ended October 31, 2009, the Power Products segmentrecorded a restructuring charge of $0.1 million for other costs.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses was $1.5 million for both the threemonths ended October 31, 2009 and November 1, 2008.  Selling and administrative expenses as apercentage of net sales increased to 16.0% in the three months ended October 31,2009 from 12.9% for the three months ended November 1, 2008.

 

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*Other Expense.*  Other expense was zero for the three monthsended October 31, 2009, compared to $0.1 million for the three monthsended November 1, 2008.

 

*IncomeBefore Income Taxes. *PowerProducts income before income taxes was $0.5 million for both the three monthsended October 31, 2009 and November 1, 2008 due to lower salesvolumes, offset by lower costs due to prior restructuring and consolidationefforts.

 

**OtherSegment Results**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                           | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                           |       | $                    | 2.4        |                 | $          | 2.5            |       | $              | (0.1       | ) | -4.0 | % |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold               |       | 2.3                  |       | 2.6                  |       | (0.3           | )          | -11.5          | %          |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Gross  margins                       |       | 0.1                  |       | (0.1                 | )          | 0.2            |       | 0.0            | %          |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Selling  and administrative expenses |       | 0.8                  |       | 0.7                  |       | 0.1            |       | 14.3           | %          |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Loss  before income taxes            |       | $                    | (0.7       | )                    | $          | (0.8           | )          | $              | 0.1        |   | -12.5 | % |
|                                 |       |                 |       |                 |       |           |       |           |       |
| ** **                           | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                           |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Cost  of products sold               |       | 95.8                 | %          | 104.0                | %          |           |       |           |       |
| Gross  margins                       |       | 4.2                  | %          | -4.0                 | %          |           |       |           |       |
| Selling  and administrative expenses |       | 33.3                 | %          | 28.0                 | %          |           |       |           |       |
| Loss  before income taxes            |       | -29.2                | %          | -32.0                | %          |           |       |           |       |

 

*Net Sales*.  The Other segment net sales decreased $0.1million, or 4.0%, to $2.4 million for the three months ended October 31, 2009,compared to $2.5 million for the three months ended November 1, 2008.  Net sales from our torque-sensing businessincreased 7.6% in the second quarter of fiscal 2010 compared to the secondquarter of fiscal 2009.  Net sales fromour testing facilities decreased 11.1% in the second quarter of fiscal 2010compared to the second quarter of fiscal 2009.

 

*Cost ofProducts Sold*.  Othersegment cost of products sold decreased $0.3 million to $2.3 million for thethree months ended October 31, 2009 compared to $2.6 million for the threemonths ended November 1, 2008.  Thedecrease is due to a decrease in prototypes in our torque-sensing business inthe second quarter of fiscal 2010 compared to the second quarter of fiscal2009.  Cost of products sold as apercentage of sales decreased to 95.8% in the second quarter of fiscal 2010compared to 104.0% in the second quarter of fiscal 2009.

 

*GrossMargins. *The Othersegment gross margins were $0.1 million for the three months ended October 31,2009, compared to a loss of $0.1 million for the three months ended November 1,2008.  The decrease in net sales wereoffset by a decrease in prototypes in our torque-sensing business in the secondquarter of fiscal 2010 compared to the second quarter of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $0.1 million, or 14.3%, to$0.8 million for the three months ended October 31, 2009, compared to $0.7million for the three months ended November 1, 2008.  Selling and administrative expenses as apercentage of net sales increased to 33.3% in the three months ended October 31,2009 from 28.0% for the three months ended November 1, 2008.

 

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*LossBefore Income Taxes. *TheOther segment loss before income taxes decreased $0.1 to $0.7 million for thethree months ended October 31, 2009, compared to $0.8 million for thethree months ended November 1, 2008. The decrease in net sales was offset by the lower cost of products soldfor prototypes.  Selling andadministrative expenses increased in the second quarter of fiscal 2010 comparedto the second quarter of fiscal 2009.

 

**Results of Operations for the Six Months Ended October 31,2009 as Compared to the Six Months Ended November 1, 2008.**

 

**ConsolidatedResults**

 

Below is a tablesummarizing results for the six months ended:

(in millions)

 
| ** **                                                 | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                                                 | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                                                 |       | $                    | 188.3      |                 | $          | 255.8          |       | $              | (67.5      | ) | -26.4 | % |
| Other  income                                              |       | 2.5                  |       | 1.7                  |       | 0.8            |       | 47.1           | %          |
|                                                       |       | 190.8                |       | 257.5                |       | (66.7          | )          | -25.9          | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                                     |       | 148.7                |       | 203.2                |       | (54.5          | )          | -26.8          | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income)                    |       | 42.1                 |       | 54.3                 |       | (12.2          | )          | -22.5          | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Restructuring                                              |       | 6.8                  |       | 11.2                 |       | (4.4           | )          | -39.3          | %          |
| Selling  and administrative expenses                       |       | 32.3                 |       | 35.0                 |       | (2.7           | )          | -7.7           | %          |
| Interest  income/(expense), net                            |       | (0.1                 | )          | 1.0                  |       | (1.1           | )          | -110.0         | %          |
| Other  expense, net                                        |       | (0.3                 | )          | (0.9                 | )          | 0.6            |       | -66.7          | %          |
| Income  taxes - expense                                    |       | 0.5                  |       | 1.0                  |       | (0.5           | )          | -50.0          | %          |
| Net  income attributable to noncontrolling interest        |       | —               |       | 0.2                  |       | (0.2           | )          | -100.0         | %          |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| Net  income attributable to Methode Electronics, Inc. |       | $                    | 2.1        |                 | $          | 7.0            |       | $              | (4.9       | ) | -70.0 | % |
|                                                       |       |                 |       |                 |       |           |       |           |       |
| ** **                                                 | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                                      | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                                                 |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Other  income                                              |       | 1.3                  | %          | 0.7                  | %          |           |       |           |       |
| Cost  of products sold                                     |       | 79.0                 | %          | 79.4                 | %          |           |       |           |       |
| Gross  margins (including other income)                    |       | 22.4                 | %          | 21.2                 | %          |           |       |           |       |
| Restructuring                                              |       | 3.6                  | %          | 4.4                  | %          |           |       |           |       |
| Selling  and administrative expenses                       |       | 17.2                 | %          | 13.7                 | %          |           |       |           |       |
| Interest  income/(expense), net                            |       | -0.1                 | %          | 0.4                  | %          |           |       |           |       |
| Other  expense, net                                        |       | -0.2                 | %          | -0.4                 | %          |           |       |           |       |
| Income  taxes - expense                                    |       | 0.3                  | %          | 0.4                  | %          |           |       |           |       |
| Net  income attributable to noncontrolling interest        |       | 0.0                  | %          | 0.1                  | %          |           |       |           |       |
| Net  income attributable to Methode Electronics, Inc. |       | 1.1                  | %          | 2.7                  | %          |           |       |           |       |

 

*Net Sales*.  Consolidated net sales decreased $67.5million, or 26.4%, to $188.3 million for the six months ended October 31,2009 from $255.8 million for six months ended November 1, 2008.  The Automotive segment net sales declined$52.5 million or 32.8% to $107.4 million for first half of fiscal 2010 from$159.9 million for the first half of fiscal 2009.  The decline is primarily attributable tolower sales to Delphi and Chrysler in the Automotive segment and the continuedsoftening of the global economic environment. The Interconnect segment net sales decreased $12.4 million, or 18.3% to$55.2 million for the first half of fiscal 2010 as compared to $67.6 millionfor the first half of fiscal 2009.  ThePower Products segment net sales decreased $3.0 million, or 12.7% to $20.6

 

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million for the firsthalf of fiscal 2010 as compared to $23.6 million for the first half of fiscal2009.  The Other segment net salesincreased $0.4 million to $5.1 million for the first half of fiscal 2010, ascompared to $4.7 million in the first half of fiscal 2009.  Translation of foreign operations net salesin the six months ended October 31, 2009 decreased reported net sales by$1.6 million or 0.8% due to currency rate fluctuations.

 

*OtherIncome*.  Other incomeincreased $0.8 million, or 47.1%, to $2.5 million for the six months ended October 31,2009 from $1.7 million for the six months ended November 1, 2008.  Other income consisted primarily of earningsfrom engineering design fees and royalties. The increase relates to engineering design fees in our Europeanautomotive market.

 

*Cost ofProducts Sold*. Consolidated cost of products sold decreased $54.5 million, or 26.8%, to$148.7 million for the six months ended October 31, 2009 compared to$203.2 million for the six months ended November 1, 2008.  The decrease is due to the lower salesvolumes.  Consolidated cost of productssold as a percentage of sales were 79.0% in the first half of fiscal 2010,compared to 79.4% in the first half of fiscal 2009.  The decrease relates to restructuring andconsolidation efforts that occurred in prior periods.

 

*GrossMargins (including other income). *Consolidatedgross margins (including other income) decreased $12.2 million, or 22.5%, to$42.1 million for the six months ended October 31, 2009 as compared to$54.3 million for the six months ended November 1, 2008.  Gross margins (including other income) as apercentage of net sales were 22.4% for the six months ended October 31,2009 as compared to 21.2% for the six months ended November 1, 2008.  The increase relates to higher other incomein the second quarter of fiscal 2010 as well as restructuring and consolidationefforts that occurred in prior periods.

 

*Restructuring*.  In March 2009, we announced additionalrestructuring actions to further reduce our exposure to the North Americanautomotive industry and to consolidatemanufacturing facilities in lower cost regions.  During the first half of fiscal 2010, werecorded a restructuring charge of $5.0 million related to this restructuringinitiative, which consisted of $3.5 million for employee severance and $1.5million relating to other costs.  Weexpect the March 2009 restructuring to be completed in the second half offiscal 2010.

 

In January 2008,we announced a restructuring of our U.S.-based automotive operations and thedecision to discontinue producing certain legacy products in the Interconnectsegment.  During the first half of fiscal2010, we recorded a restructuring charge of $1.8 million related to thisrestructuring, which consisted of $0.2 million for employee severance, $1.5million for the impairment and accelerated depreciation and $0.1 millionrelating to other costs.  During thefirst half of fiscal 2009, we recorded a restructuring charge of $11.2 million,which consisted of $4.4 million for employee severance, $5.9 million forimpairment and accelerated depreciation, $0.2 million for inventory write-downsand $0.7 million relating to other costs. We expect the January 2008 restructuring to be completed in thesecond half of fiscal 2010.

 

*Selling andAdministrative Expenses*. Selling and administrative expenses decreased $2.7 million, or 7.7%, to$32.3 million for the six months ended October 31, 2009 compared to $35.0million for the six months ended November 1, 2008.  The decrease is due to lower intangible assetamortization expense and lower stock award amortization expense during thefirst half of fiscal 2010, partially offset by selling and administrativeexpenses from Hetronic, LLC, acquired in September 2008.  Inaddition, the selling and administrative expenses for the first half of fiscal2010 included $1.9 million in legal fees relating to the Delphi supplyarrangement dispute.  Selling andadministrative expenses as a percentage of net sales increased to 17.2% in thesix months ended October 31, 2009 from 13.7% for the six months ended November 1,2008.

 

*InterestIncome/(Expense), Net*. Net interest income decreased $1.1 million, or 110.0%, in the six monthsended October 31, 2009 to an expense of $0.1 million as compared to incomeof $1.0 million in the six months ended November 1, 2008.  The average cash balance was $62.4 millionduring the six months ended October 31, 2009 as compared to $105.3 millionduring the six months ended November 1, 2008.  The decrease in cash relates primarily to theHetronic acquisition in the second quarter of fiscal 2009.  The average interest rate earned for the sixmonths ended October 31, 2009 was 0.44% compared to 2.14% in the sixmonths ended November 1, 2008. Interest expense was $0.3 million and $0.1 million for the six monthsended October 31, 2009 and November 1, 2008, respectively.  The interest expense in the first half offiscal 2010 included $0.1 million of fees related to the amendment of our bankagreement.

 

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*OtherExpense, Net*.  Otherexpense, net was $0.3 million for the six months ended October 31, 2009 ascompared to $0.6 million for the six months ended November 1, 2008.  The increase is primarily due to theweakening of the U.S. dollar versus the Euro and Czech koruna during the firsthalf of fiscal 2010 as compared to the first half of fiscal 2009.  The six months ended October 31, 2009included a $0.4 million gain recorded from life insurance policies owned by theCompany in connection with an employee deferred compensation plan.  In addition, we recorded a gain of $0.6million related to an enhanced cash fund (described below), in the first half offiscal 2010, compared to a loss of $0.5million in the first half of fiscal 2009.  During the second half of fiscal 2009, werecorded $2.5 million of unrealized currency exchange losses arising from anintercompany loan between our corporate headquarters and one of our foreignsubsidiaries in conjunction with the acquisition of Hetronic, partially offsetby currency exchange gains recorded in the same period.  The functional currencies of these operationsare the British pound, Chinese yuan, Czech koruna, Euro, Indian Rupee, Mexicanpeso and Singapore dollar.  Some foreignoperations have transactions denominated in currencies other than theirfunctional currencies, primarily sales in U.S. dollars and Euros, creatingexchange rate sensitivities.

 

At August 1, 2009,approximately $2.4 million was invested in an enhanced cash fund sold asan alternative to traditional money-market funds. We have historically investeda portion of our on hand cash balances in this fund. These investments aresubject to credit, liquidity, market and interest rate risk. In December 2007,****the****fund was overwhelmedwith withdrawal requests from investors and was closed with a restrictionplaced upon the cash redemption ability of its holders. In September, we received our remaining principalin the fund. The balance in the fund as of October 31, 2009 was zero.

 

For the first six monthsof fiscal 2010, we recorded a gain of $0.6 million, of which $0.4 million wasfrom a realized loss on redemptions of $3.5 million, offset by a realized gainof $1.0 million.

 

*IncomeTaxes - Expense.*  Theeffective income tax rate was 19.8% for the first half of fiscal 2010 comparedwith 12.5% for the first half of fiscal 2009. For the six months ended October 31, 2009, we have a loss beforeincome taxes in our U.S.-based businesses. Normally, a tax benefit is recorded relating to the net loss beforeincome taxes, but due to the uncertainty of the future utilization of the taxbenefit by our U.S.-based businesses, a valuation allowance was recorded offsettingthe tax benefit in accordance with ASC No. 740 “Income Taxes” in theU.S.  See note 8 for additionalinformation.  The effective tax rates forboth the first half of fiscal 2010 and 2009 reflect utilization of foreigninvestment tax credits and the effect of lower tax rates on income of theCompany’s foreign operations and a higher percentage of earnings at thoseforeign operations.

 

*NetIncome.*  Net incomedecreased $4.9 million, or 70.0%, to $2.1 million for the six months ended October 31,2009, compared to $7.0 million for the six months ended November 1, 2008,due to lower restructuring expenses, lower costs due to prior restructuring andconsolidation efforts, partially offset by lower sales, lower other expenses,lower interest income and increased income taxes.

 

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**OperatingSegments**

 

**AutomotiveSegment Results**

 

Below is a tablesummarizing results for the six months ended:

(in millions)

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                    | 107.4      |                 | $          | 159.9          |       | $              | (52.5      | ) | -32.8 | % |
| Other  income                           |       | 2.3                  |       | 1.3                  |       | 1.0            |       | 76.9           | %          |
|                                    |       | 109.7                |       | 161.2                |       | (51.5          | )          | -31.9          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                  |       | 86.0                 |       | 127.8                |       | (41.8          | )          | -32.7          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income) |       | 23.7                 |       | 33.4                 |       | (9.7           | )          | -29.0          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Restructuring                           |       | 5.0                  |       | 7.5                  |       | (2.5           | )          | -33.3          | %          |
| Selling  and administrative expenses    |       | 9.0                  |       | 9.1                  |       | (0.1           | )          | -1.1           | %          |
| Interest  income, net                   |       | —               |       | 0.3                  |       | (0.3           | )          | -100.0         | %          |
| Other  expense, net                     |       | (1.2                 | )          | (0.5                 | )          | (0.7           | )          | 140.0          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Income  before income taxes             |       | $                    | 8.5        |                 | $          | 16.6           |       | $              | (8.1       | ) | -48.8 | % |
|                                    |       |                 |       |                 |       |           |       |           |       |
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                   | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Other  income                           |       | 2.1                  | %          | 0.8                  | %          |           |       |           |       |
| Cost  of products sold                  |       | 80.1                 | %          | 79.9                 | %          |           |       |           |       |
| Gross  margins (including other income) |       | 22.1                 | %          | 20.9                 | %          |           |       |           |       |
| Restructuring                           |       | 4.7                  | %          | 4.7                  | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 8.4                  | %          | 5.7                  | %          |           |       |           |       |
| Interest  income, net                   |       | 0.0                  | %          | 0.2                  | %          |           |       |           |       |
| Other  expense, net                     |       | -1.1                 | %          | -0.3                 | %          |           |       |           |       |
| Income  before income taxes             |       | 7.9                  | %          | 10.4                 | %          |           |       |           |       |

 

*Net Sales*.  Automotive segment net sales decreased $52.5million, or 32.8%, to $107.4 million for the six months ended October 31,2009 from $159.9 million for the six months ended November 1, 2008.  Net sales to Delphi Corporation decreased$9.8 million, or 41.0%, to $14.1 million in the first half of fiscal 2010 ascompared to the first half fiscal 2009 due to lower sales volumes and thecancellation of the supply arrangement on September 10, 2009.  The Automotive segment net sales were alsonegatively impacted by planned lower Chrysler sales volumes of $1.0 million inthe first half of fiscal 2010, compared to $16.1 million in the first half offiscal 2009.  In addition, the decline isattributable to the softening of the global economic environment, especiallythe effect on the North American automotive industry.  Net sales benefited by $1.7 million for thethree months ended October 31, 2009 relating to a one-time reversal ofpricing contingencies which were accrued over several years and are no longerrequired.    Net sales have declined by48.5% in North America and 15.2% in Europe, and net sales have increased by15.2% in Asia in the first half of fiscal 2010 as compared to the first half offiscal 2009.  Translation of foreignoperations net sales in the three months ended October 31, 2009 decreasedreported net sales by $1.3 million, or 1.2%, due to currency rate fluctuations.

 

*OtherIncome*.  Other incomeincreased $1.0 million, or 76.9%, to $2.3 million for the six months ended October 31,2009 from $1.3 million for six months ended November 1, 2008.  Other income consisted primarily of earningsfrom engineering design fees and royalties. The increase relates to engineering design fees in our Europeanautomotive market.

 

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*Cost ofProducts Sold*. Automotive segment cost of products sold decreased $41.8 million, or32.7%, to $86.0 million for the six months ended October 31, 2009 from$127.8 million for the six months ended November 1, 2008.  The decrease primarily relates to lower salesvolumes.  Included in the cost ofproducts sold for the six months ended October 31, 2009 is $0.7 million ofasset write-downs relating to the termination of the Delphi supplyarrangement.  The Automotive segment costof products sold as a percentage of sales were 80.1% in the first half offiscal 2010, compared to 79.9% in the second first half of fiscal 2009.  Excluding the Delphi asset write-down in costof products sold and the $1.7 million reversal of pricing contingenciesincluded in net sales, consolidated cost of products sold as a percentage ofsales were 80.7% for the first half of fiscal 2010.  The increase reflects inefficiencies causedby automotive manufacturers extending plant shut-downs during the first quarterof fiscal 2010, partially offset by restructuring and consolidation efforts.

 

*GrossMargins (including other income). *Automotivesegment gross margins (including other income) decreased $9.7 million, or29.0%, to $23.7 million for the six months ended October 31, 2009 ascompared to $33.4 million for the six months ended November 1, 2008.  Gross margins (including other income) as apercentage of net sales increased to 22.1% for the six months ended October 31,2009 from 20.9% for the six months ended November 1, 2008.  Excluding the Delphi asset write-down in costof products sold and the $1.7 million reversal of pricing contingenciesincluded in net sales, the Automotive segment gross margins (including otherincome) as a percentage of sales were 21.5% for the first half of fiscal2010.  The increase relates to higherother income in the first half of fiscal 2010 as well as restructuring and consolidationefforts that occurred in prior periods, partially offset by inefficienciescaused by automotive manufacturers extending plant shut-downs during the firstquarter of fiscal 2010.

 

*Restructuring*.   In March 2009, we announced additionalrestructuring actions to further reduce our exposure to the North Americanautomotive industry and to consolidatemanufacturing facilities in lower cost regions.  During the first half of fiscal 2010, werecorded a restructuring charge of $3.2 million related to this restructuringinitiative, which consisted of $2.7 million for employee severance and $0.5million relating to other costs.  Weexpect the March 2009 restructuring to be completed during the second halfof fiscal 2010.

 

In January 2008,we announced a restructuring of our U.S.-based automotive operations.  During the first half of fiscal 2010, theAutomotive segment recorded a restructuring charge of $1.8 million for thisrestructuring initiative, which consisted of $0.2 million for employeeseverance, $1.5 million for the impairment and accelerated depreciation and$0.1 in other costs.  During the firsthalf of fiscal 2009, the Automotive segment recorded a restructuring charge of$7.5 million for this restructuring initiative, which consisted of $3.2 millionfor employee severance, $3.7 million for impairment and accelerateddepreciation and $0.6 million for other costs. We expect the January 2008 restructuring to be completed during thesecond half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses decreased $0.1 million, or 1.1%, to$9.0 million for the six months ended October 31, 2009 compared to $9.1million for the six months ended November 1, 2008.  Selling and Administrative expenses decreasedslightly in the first half of fiscal 2010 compared to the first half of fiscal2009 due to restructuring and consolidation efforts, however, the first half offiscal 2010 includes $1.9 million of legal fees associated with the Delphisupply arrangement termination dispute. Selling and administrative expenses as a percentage of net sales were8.4% for the six months ended October 31, 2009 and 5.7% for the six monthsended November 1, 2008.

 

*InterestIncome, Net*.  Netinterest income was zero in the first half of fiscal 2010, compared to $0.3million in the first half of fiscal 2009.

 

*OtherExpense, Net*.  Otherexpense, net increased $0.7 million, or 140.0%, to $1.2 million in the firsthalf of fiscal 2010, compared to $0.5 million in the first half of fiscal2009.  The increase is primarily due tothe weakening of the U.S. dollar versus the Euro during the first half offiscal 2010 as compared to the first half of fiscal 2009.  The functional currencies of these operationsare the British pound, Chinese yuan, Euro and the Mexican peso.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

*IncomeBefore Income Taxes. *Automotivesegment income before income taxes decreased $8.1 million, or 48.8%, to $8.5million for the six months ended October 31, 2009 compared to $16.6million for the six months

 

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ended November 1,2008 due to lower sales volumes, the asset write-down and legal fees relatingto the termination of the Delphi arrangement, offset by the reversal ofone-time pricing contingencies, lower costs relating to prior restructuring andconsolidation efforts and lower restructuring costs.

 

**InterconnectSegment Results**

 

Below is a tablesummarizing results for the six months ended:

(in millions)

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                    | 55.2       |                 | $          | 67.6           |       | $              | (12.4      | ) | -18.3 | % |
| Other  income                           |       | 0.1                  |       | 0.1                  |       | —         |       | 0.0            | %          |
|                                    |       | 55.3                 |       | 67.7                 |       | (12.4          | )          | -18.3          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                  |       | 41.9                 |       | 51.4                 |       | (9.5           | )          | -18.5          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Gross  margins (including other income) |       | 13.4                 |       | 16.3                 |       | (2.9           | )          | -17.8          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Restructuring                           |       | 1.4                  |       | 3.7                  |       | (2.3           | )          | -62.2          | %          |
| Selling  and administrative expenses    |       | 10.9                 |       | 15.3                 |       | (4.4           | )          | -28.8          | %          |
| Interest  income                        |       | 0.1                  |       | 0.2                  |       | (0.1           | )          | -50.0          | %          |
| Other  expense, net                     |       | —               |       | 0.3                  |       | (0.3           | )          | -100.0         | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Income/(loss)  before income taxes      |       | $                    | 1.2        |                 | $          | (2.2           | )          | $              | 3.4        |   | -154.5 | % |
|                                    |       |                 |       |                 |       |           |       |           |       |
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                   | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Other  income                           |       | 0.2                  | %          | 0.1                  | %          |           |       |           |       |
| Cost  of products sold                  |       | 75.9                 | %          | 76.0                 | %          |           |       |           |       |
| Gross  margins (including other income) |       | 24.3                 | %          | 24.1                 | %          |           |       |           |       |
| Restructuring                           |       | 2.5                  | %          | 5.5                  | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 19.7                 | %          | 22.6                 | %          |           |       |           |       |
| Interest  income                        |       | 0.2                  | %          | 0.3                  | %          |           |       |           |       |
| Other  expense, net                     |       | 0.0                  | %          | 0.4                  | %          |           |       |           |       |
| Income/(loss)  before income taxes      |       | 2.2                  | %          | -3.3                 | %          |           |       |           |       |

 

*Net Sales*.  Interconnect segment net sales decreased$12.4 million, or 18.3%, to $55.2 million for the six months ended October 31,2009 from $67.6 million for the six months ended November 1, 2008.  Net sales were favorably impacted by theHetronic acquisition on September 30, 2008.  Excluding Hetronic, North American net salesdeclined 26.1%, Europe declined 34.8% and Asia declined 43.0% in the first halfof fiscal 2010 as compared to the first half of fiscal 2009.  The net sales decline was primarily due to thesoftening of the global economy and restructuring of our Connector and Duelbusinesses during the fourth quarter of fiscal 2008 and the first quarter of fiscal2009.  Translation of foreign operationsnet sales in the six months ended October 31, 2009 decreased reported netsales by $0.3 million, or 0.5%, due to currency rate fluctuations.

 

*OtherIncome*.  Other incomewas $0.1 million for both the six months ended October 31, 2009 and November 1,2008.  Other income consisted primarilyof earnings from engineering design fees and royalties.

 

*Cost ofProducts Sold*. Interconnect segment cost of products sold decreased $9.5 million, or18.5%, to $41.9 million for the six months ended October 31, 2009 comparedto $51.4 million for the six months ended November 1, 2008.  Interconnect segment cost of products sold asa percentage of net sales decreased to 75.9% for

 

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the six monthsended October 31, 2009 compared to 76.0% for the six months ended November 1,2008.  The decrease in cost of productssold as a percentage of net sales primarily relates to restructuring efforts inprevious periods, partially offset by lower sales volumes in the first half offiscal 2010 as compared to the first half of fiscal 2009.

 

*GrossMargins (including other income). *Interconnectsegment gross margins (including other income) decreased $2.9 million, or17.8%, to $13.4 million for the six months ended October 31, 2009 as comparedto $16.3 million for the six months ended November 1, 2008.  Gross margins (including other income) as apercentage of net sales increased to 24.3% for the six months ended October 31,2009 from 24.1% for the six months ended November 1, 2008.  The increase in gross margins (includingother income) as a percentage of net sales primarily relates to restructuringefforts in previous periods, partially offset by lower sales volumes in thefirst half of fiscal 2010 as compared to the first half of fiscal 2009.

 

*Restructuring*.  In March 2009, we announced additionalrestructuring actions to consolidatemanufacturing facilities to reduce costs.  During the first half of fiscal 2010, theInterconnect segment recorded a restructuring charge of $1.3 million related tothis restructuring initiative, which consisted of $0.4 million for employeeseverance and $0.9 million for other costs. We expect the March 2009 restructuring to be completed during thesecond half of fiscal 2010.

 

In January 2008,we announced our decision to discontinue producing certain legacy products inthe Interconnect segment.  During thefirst half of fiscal 2010, the Interconnect segment recorded a restructuringcharge of $0.1 million for accelerated depreciation.  During the fiscal first half of fiscal 2009,we recorded a restructuring charge of $3.7 million, which consisted of $1.2million for employee severance, $2.2 million for impairment and accelerateddepreciation for buildings, building improvements and machinery and equipment,$0.2 million for inventory write-downs and $0.1 relating to professionalfees.  We expect the January 2008restructuring to be completed during the second half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses decreased $4.4 million, or 28.8%, to$10.9 million for the six months ended October 31, 2009 compared to $15.3million for the six months ended November 1, 2008.  Selling and administrative expenses are lowerdue to reduced intangible asset amortization expenses, partially offset byhigher selling and administrative expenses due to the Hetronicacquisition.  In addition, selling andadministrative expenses (not including Hetronic) were lower due to therestructuring efforts undertaken in the first and second quarters of fiscal2009.  Selling and administrativeexpenses as a percentage of net sales decreased to 19.7% in the six monthsended October 31, 2009 from 22.6% for the six months ended November 1,2008.

 

*InterestIncome, Net*.  Interestincome, net decreased $0.1 million, or 50%, to $0.1 million for the six monthsended October 31, 2009, compared to $0.2 million for the six months ended November 1,2008.

 

*OtherExpense, Net*.  Otherexpense, net was zero for the six months ended October 31, 2009, comparedto income of $0.3 for the six months ended November 1, 2008.  The functional currencies of these operationsare the British pound, Czech koruna, Euro and Singapore dollar.  Some foreign operations have transactionsdenominated in currencies other than their functional currencies, primarilysales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

*Income/(Loss)Before Income Taxes. *Interconnectincome/(loss) before income taxes increased $3.4 million, or 154.5%, to incomeof $1.2 million for the six months ended October 31, 2009 compared to aloss of $2.2 million for the six months ended November 1, 2008 due tolower intangible asset amortization expenses, lower selling and administrativeexpenses due to prior restructuring efforts, lower restructuring expenses,partially offset by lower sales volumes.

 

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**PowerProducts Segment Results**

 

Below is a tablesummarizing results for the six months ended:

(in millions)

 
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                    | 20.6       |                 | $          | 23.6           |       | $              | (3.0       | ) | -12.7 | % |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold                  |       | 16.1                 |       | 19.2                 |       | (3.1           | )          | -16.1          | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Gross  margins                          |       | 4.5                  |       | 4.4                  |       | 0.1            |       | 2.3            | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Restructuring                           |       | 0.4                  |       | —               |       | 0.4            |       | 0.0            | %          |
| Selling  and administrative expenses    |       | 3.0                  |       | 2.9                  |       | 0.1            |       | 3.4            | %          |
| Other  - expense                        |       | —               |       | (0.2                 | )          | 0.2            |       | -100.0         | %          |
|                                    |       |                 |       |                 |       |           |       |           |       |
| Income  before income taxes             |       | $                    | 1.1        |                 | $          | 1.3            |       | $              | (0.2       | ) | -15.4 | % |
|                                    |       |                 |       |                 |       |           |       |           |       |
| ** **                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                   | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Cost  of products sold                  |       | 78.2                 | %          | 81.4                 | %          |           |       |           |       |
| Gross  margins (including other income) |       | 21.8                 | %          | 18.6                 | %          |           |       |           |       |
| Restructuring                           |       | 1.9                  | %          | 0.0                  | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 14.6                 | %          | 12.3                 | %          |           |       |           |       |
| Other  - expense                        |       | 0.0                  | %          | -0.8                 | %          |           |       |           |       |
| Income  before income taxes             |       | 5.3                  | %          | 5.5                  | %          |           |       |           |       |

 

*Net Sales*.  Power Products segment net sales decreased$3.0 million, or 12.7% to $20.6 million for the six months ended October 31,2009 compared to $23.6 million for the six months ended November 1,2008.  Net sales have declined in thefirst half of fiscal 2010 as compared to the first half of fiscal 2009 by 18.8%in North America and 8.3% in Asia.  Thedecline was driven by lower demand for our busbar, flexible cabling and heatsink products.

 

*Cost ofProducts Sold*.  PowerProducts segment cost of products sold decreased $3.1 million, or 16.1%, to$16.1 million for the six months ended October 31, 2009 compared to $19.2million for the six months ended November 1, 2008.  The Power Products segment cost of productssold as a percentage of sales decreased to 78.2% for the six months ended October 31,2009 from 81.4% for the six months ended November 1, 2008.  The decrease is due to restructuring and consolidationefforts for our Power Products businesses in the U.S. during the fourth quarterof fiscal 2009 and the first quarter of fiscal 2010.

 

*GrossMargins.* PowerProducts segment gross margins increased $0.1 million, or 2.3%, to $4.5 millionfor the six months ended October 31, 2009, compared to $4.4 million forthe six months ended November 1, 2008. Gross margins as a percentage ofnet sales increased to 21.8% for the six months ended October 31, 2009from 18.6% for the six months ended November 1, 2008.  The increase is due to restructuring andconsolidation efforts for our Power Products businesses in the U.S. during thefourth quarter of fiscal 2009 and the first quarter of fiscal 2010.

 

*Restructuring*.   In March 2009, we announcedrestructuring actions to consolidatemanufacturing facilities.  Duringthe first half of fiscal 2010, the Power Products segment recorded arestructuring charge of $0.4 million, which consisted of $0.1 million foremployee severance and $0.3 million relating to other costs.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $0.1 million, or 3.4%, to$3.0 million for the six months ended October 31, 2009 compared to $2.9million for the six months ended November 1, 2008.  Selling and administrative expenses increaseddue to slightly higher professional services fees during the first half offiscal 2010 as compared to the first half of fiscal 2009.  Selling and administrative expenses

 

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as a percentage ofnet sales increased to 14.6% in the six months ended October 31, 2009 from12.3% for the six months ended November 1, 2008.

 

*OtherExpense.*  Other expensewas zero for the six months ended October 31, 2009, compared to $0.2million for the six months ended November 1, 2008.

 

*IncomeBefore Income Taxes. *PowerProducts income before income taxes decreased $0.2 million, or 11.6%, to $1.1million for the six months ended October 31, 2009, compared to $1.3million for the six months ended November 1, 2008 due to lower salesvolumes, higher restructuring expenses, and higher professional fees, partiallyoffset by lower cost of products sold due to prior restructuring andconsolidation efforts.

 

**OtherSegment Results**

 

Below is a tablesummarizing results for the six months ended:

(in millions)

 
| ** **                           | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **2009**             | ** ** | **2008**             | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                           |       | $                    | 5.1        |                 | $          | 4.7            |       | $              | 0.4        |   | 8.5 | % |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Cost  of products sold               |       | 4.9                  |       | 4.6                  |       | 0.3            |       | 6.5            | %          |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Gross  margins                       |       | 0.2                  |       | 0.1                  |       | 0.1            |       | 100.0          | %          |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Selling  and administrative expenses |       | 1.5                  |       | 1.4                  |       | 0.1            |       | 7.1            | %          |
|                                 |       |                 |       |                 |       |           |       |           |       |
| Loss  before income taxes            |       | $                    | (1.3       | )                    | $          | (1.3           | )          | $              | (0.0       | ) | 0.0 | % |
|                                 |       |                 |       |                 |       |           |       |           |       |
| ** **                           | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                | ** ** | **2009**             | ** ** | **2008**             | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                           |       | 100.0                | %          | 100.0                | %          |           |       |           |       |
| Cost  of products sold               |       | 96.1                 | %          | 97.9                 | %          |           |       |           |       |
| Gross  margins                       |       | 3.9                  | %          | 2.1                  | %          |           |       |           |       |
| Selling  and administrative expenses |       | 29.4                 | %          | 29.8                 | %          |           |       |           |       |
| Loss  before income taxes            |       | -25.5                | %          | -27.7                | %          |           |       |           |       |

 

*Net Sales*.  The Other segment net sales increased $0.4million, or 8.5%, to $5.1 million for the six months ended October 31,2009, compared to $4.7 million for the six months ended November 1,2008.  Net sales from our torque-sensingbusiness increased 28.6% in the first half of fiscal 2010 compared to the firsthalf of fiscal 2009.  Net sales from ourtesting facilities were flat in the first half of fiscal 2010 compared to thefirst half of fiscal 2009.

 

*Cost ofProducts Sold*.  Other segmentcost of products sold increased $0.3 million, or 6.5%, to $4.9 million for thesix months ended October 31, 2009 compared to $4.6 million for the sixmonths ended November 1, 2008.  Theincrease is due to an increase in prototypes in our torque-sensing business inthe first half of fiscal 2010 compared to the first half of fiscal 2009.  Cost of products sold as a percentage ofsales decreased to 96.1% in the first half of fiscal 2010 compared to 97.9% inthe first half of fiscal 2009.

 

*GrossMargins. *The Othersegment gross margins increased $0.1 million, or 100.0%, to $0.2 million forthe six months ended October 31, 2009, compared to $0.1 million for thesix months ended November 1, 2008. The increase in net sales was offset by an increase in cost of productssold in the first half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $0.1 million, or 7.1%, to$1.5 million for the six months ended October 31, 2009, compared to $1.4million for the six months ended

 

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November 1,2008.  Selling and administrativeexpenses as a percentage of net sales decreased to 29.4% for the six monthsended October 31, 2009 from 29.8% for the three months ended November 1,2008.

 

*LossBefore Income Taxes. *TheOther segment loss before income taxes was $1.3 million for both the six monthsended October 31, 2009 and November 1, 2008.   The increase in net sales was offset by theincrease in cost of products sold in the first half of fiscal 2010 compared tothe first half of fiscal 2009.

 

**Liquidityand 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 31, 2009, we were in compliance with these covenants andhad no borrowings against this credit facility.

 

At August 1, 2009,approximately $2.4 million was invested in an enhanced cash fund sold asan alternative to traditional money-market funds. We have historically investeda portion of our on hand cash balances in this fund. These investments aresubject to credit, liquidity, market and interest rate risk. In December 2007,****the****fund was overwhelmedwith withdrawal requests from investors and was closed with a restrictionplaced upon the cash redemption ability of its holders. In September, we received our remainingprincipal in the fund. The balance in the fund as of October 31, 2009 waszero.

 

During the second quarterof fiscal 2010, we recorded a gain of $0.3 million, of which $0.3 million wasfrom a realized loss on redemptions of $2.4 million, offset by a realized gainof $0.6 million. For the first six months of fiscal 2010, we recorded a gain of$0.6 million, of which $0.4 million was from a realized loss on redemptions of $3.5million, offset by a realized gain of $1.0 million.

 

Netcash provided by operating activities decreased $13.8 million, or 46.9%, to$15.6 million for the first half of fiscal 2010 compared to $29.4 million inthe first half of fiscal 2009.  The decreasewas due to our net income decreasing $4.8 million to $2.2 million for the firsthalf of fiscal 2010, compared to net income of $7.0 million in the first halfof fiscal 2009.  In addition, non-cashcharge add-backs were unfavorable, due to lower depreciation and amortizationexpenses and non-cash translation expense, partially offset by favorablechanges in assets and liabilities in the first half of fiscal 2010 compared tothe first half of fiscal 2009.  The primaryfactor in the Company’s ability to generate cash from operations is our netincome. Additionally, cash flows from operations exceed net income becausenon-cash charges (depreciation, amortization of intangibles, restricted stockawards, and stock options) negatively impact net income but do not result inthe use of cash.  Similarly, non-cashcredits such as deferred income tax benefits increase net income but do notprovide cash.  Additional contributors oroffsets to cash flows from operations are working capital requirements.

 

Net cash used in investing activities decreased $60.8 million to $6.0million for the first half of fiscal 2010, compared to $66.8 million for thefirst half of fiscal 2009.  Purchases ofplant and equipment decreased $3.8 million, to $5.8 million for the first halfof fiscal 2010, compared to $9.6 million for the first half of fiscal2009.  In the first half of fiscal 2009,we acquired certain assets of Hetronic LLC (Hetronic) for $53.6 million incash.  We also incurred $2.4 million intransaction costs related to the purchase. Also in the first six months of fiscal 2009, we made a contingentpayment of $0.8 million related to the VEP acquisition.

 

Net cash used in financing activities was $5.2million for the first half of fiscal 2010, compared to $9.5 million for thefirst half of fiscal 2009.  We paid cashdividends of $5.2 million in the first half of fiscal 2010, compared to $4.5million in the first half of fiscal 2009. Our board of directors approved a stock repurchase plan in September 2008to purchase up to 3,000,000 shares.  Theplan expires May 1, 2010.  In thefirst half of fiscal 2009, we purchased 639,880 shares for $5.1 million.  There were no shares purchased in the firsthalf of fiscal 2010.

 

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**Off-Balance Sheet Arrangements**

 

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

 

**Item 3.    QuantitativeAnd Qualitative Disclosures About Market Risk**

 

Certainof our foreign operations enter into transactions in currencies other thantheir functional currency, primarily the U.S. dollar and the Euro.  A 10% change in foreign currency exchangerates from balance sheet date levels could impact our income before incometaxes by $3.2 million and $2.8 million for periods ended October 31, 2009and May 2, 2009, respectively.  Wealso have foreign currency exposure arising from the translation of our netequity investment in our foreign operations to U.S. dollars.  We generally view our investments in foreignoperations with functional currencies other than the U.S. dollar as long-term.  The currencies to which we are exposed arethe British pound, Chinese yuan, Czech koruna, Euro, Indian Rupee, Mexicanpeso, and Singapore dollar.  A 10% changein foreign currency exchange rates from balance sheet date levels could impactour net foreign investments by $11.9 million at October 31, 2009 and $10.8million at May 2, 2009.

 

**Item 4.    Controls And Procedures**

 

As of the end of the period covered by this quarterlyreport on Form 10-Q, we performed an evaluation under the supervision andwith the participation of the Company’s management, including our ChiefExecutive Officer and our Chief Financial Officer, of our “disclosure controlsand procedures” (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934).  The Company’s disclosure controlsand procedures are designed to ensure that the information required to bedisclosed by the Company in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’sapplicable rules and forms.  As a result of this evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of the period covered by this report, the Company’s disclosure controlsand procedures were effective.

 

Therehave been no changes in our internal control over financial reporting duringthe quarter ended October 31, 2009 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.    OTHERINFORMATION**

 

**Item 1.    Legal Proceedings.**

** **

On September 4,2008, Methode and Delphi Automotive Systems LLC (“Delphi”) entered into asupply arrangement pursuant to which Methode was to supply all of Delphi’srequirements for the silicone bladders used in Delphi’s occupant restraintsystem from October 1, 2008 through September 30, 2011.  Since October 23, 2008, we have beeninvolved in ongoing legal proceedings with Delphi, in Oakland County, Michigan,Circuit Court.    Delphi originallysought possession of certain Methode tooling drawings related to the sensor pads. In a letter dated August 26, 2009,Delphi provided us with a notice of termination of all purchase orders and theentire three-year agreement, effective September 10, 2009.  Because of these recent actions andconsistent with our continuing evaluation of the legal proceedings to which weare a party, we have determined that our litigation with Delphi is nowmaterial.

 

**Item 4.    SubmissionOf Matters To A Vote Of Security Holders**

** **

(a)   The 2009 Annual StockholdersMeeting of the Company was held on September 17, 2009.

 

(c)   Atthe Annual Stockholders Meeting, the common stockholders voted on the followinguncontested matters.

 

1.             Electionof the below named nominees to the Board of Directors of the Company:

 
| ** **              | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------------|------------|------------|------------|--------------|------------|
| Aspatore, Walter J.     |       | 31,814,204 |       | 3,310,549    |       |
| Batts, Warren L.        |       | 34,948,437 |       | 176,316      |       |
| Colgate, J. Edward      |       | 35,949,327 |       | 175,426      |       |
| Dawson, Darren M.       |       | 34,688,288 |       | 436,465      |       |
| Duda, Donald W.         |       | 34,672,536 |       | 452,217      |       |
| Goossen, Isabelle C.    |       | 33,180,244 |       | 1,944,509    |       |
| Hornung, Christopher J. |       | 34,942,799 |       | 181,954      |       |
| Shelton, Paul G.        |       | 32,962,524 |       | 2,162,229    |       |
| Skatoff, Lawrence B.    |       | 33,183,904 |       | 1,940,849    |       |

 

2.             Ratification ofErnst & Young LLP to serve as the Company’s independent registeredpublic accounting firm for the fiscal year ending May 1, 2010:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 33,138,233 |       | 1,926,893   |       | 59,627      |       |

 

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**Item 6.    Exhibits**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                              |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25                     |       | Amendment to Credit Agreement dated as of  November 2005 among Methode Electronics, Inc. as the Borrower, Bank  of America, N.A., as Administrative Agent and L/C Issuer, and The Other  Lenders Party Thereto (1) |
| 31.1                      |       | Rule 13a-14(a)/15d-14(a) Certification of Principal  Executive Officer                                                                                                                                             |
| 31.2                      |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Financial Officer                                                                                                                                             |
| 32                        |       | Certification of Periodic Financial Report Pursuant to  18 U.S.C. Section 1350                                                                                                                                          |

 

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| (1) |   | Previously  filed with Registrant’s Form 10-Q the three months ended October 31,  2005.  Referenced in this Form 10-Q  to correct a typographical error in our fiscal 2009 Form 10-K. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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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 8, 2009     |   |   |   |
|        |                           |  |  |  |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                              |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25                     |       | Amendment to Credit Agreement dated as of  November 2005 among Methode Electronics, Inc. as the Borrower, Bank  of America, N.A., as Administrative Agent and L/C Issuer, and The Other Lenders  Party Thereto (1) |
| 31.1                      |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Executive Officer                                                                                                                                             |
| 31.2                      |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Financial Officer                                                                                                                                             |
| 32                        |       | Certification of Periodic Financial Report Pursuant to  18 U.S.C. Section 1350                                                                                                                                          |

 

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| (1) |   | Previously  filed with Registrant’s Form 10-Q the three months ended October 31,  2005.  Referenced in this Form 10-Q  to correct a typographical error in our fiscal 2009 Form 10-K. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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