Table of Contents

 

 

 

**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 period ended August 1,  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 asspecified in its charter.)

 

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

 

**(708) 867-6777**

(Registrant’s telephone number, includingarea code)  

 

**None**

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

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that theregistrant 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 September 1, 2009, registrant had 37,520,657shares of common stock outstanding.

 

 

 

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Tableof Contents

 

METHODEELECTRONICS, INC.

FORM 10-Q

August 1,2009

 

TABLEOF CONTENTS

 
| ** **         | ** **                                                                                                                            | **Page** |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I.       | FINANCIAL INFORMATION                                                                                                                 |     |
|               |                                                                                                                                  |     |
| Item 1.            | Financial  Statements                                                                                                                 |     |
|               |                                                                                                                                  |     |
|               | Condensed consolidated balance sheets as of August 1,  2009 (unaudited) and May 2, 2009                                     | 2        |
|               |                                                                                                                                  |     |
|               | Condensed consolidated statements of income/(loss) (unaudited)  – Three months ended August 1, 2009 and August 2, 2008 | 3        |
|               |                                                                                                                                  |     |
|               | Condensed consolidated statements of cash flows  (unaudited) – Three months ended August 1, 2009 and August 2, 2008    | 4        |
|               |                                                                                                                                  |     |
|               | Notes to condensed consolidated financial statements –  August 1, 2009                                                      | 5        |
|               |                                                                                                                                  |     |
| Item 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           | 19       |
|               |                                                                                                                                  |     |
| Item 3.            | Quantitative  and Qualitative Disclosure About Market Risk                                                                            | 32       |
|               |                                                                                                                                  |     |
| Item 4.            | Controls and  Procedures                                                                                                              | 32       |
|               |                                                                                                                                  |     |
| PART II.      | OTHER INFORMATION                                                                                                                     |     |
|               |                                                                                                                                  |     |
| Item 1.            | Legal Proceedings                                                                                                                     | 33       |
|               |                                                                                                                                  |     |
| Item 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                          | 33       |
|               |                                                                                                                                  |     |
| Item 5.            | Other Information                                                                                                                     | 33       |
|               |                                                                                                                                  |     |
| Item 6.            | Exhibits                                                                                                                              | 34       |
|               |                                                                                                                                  |     |
| SIGNATURES         | 35                                                                                                                                    |
|               |                                                                                                                                  |     |
| INDEX  TO EXHIBITS | 36                                                                                                                                    |

 

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Table ofContents

 

PART I -FINANCIAL INFORMATION

 

Item 1 - FinancialStatements

 

METHODEELECTRONICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                                                                                                                                           | ** ** | **As of**                | ** ** | **As of**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                           | ** ** | **August 1,  2009** | ** ** | **May 2,  2009** | ** ** |
| ** **                                                                                                                                                           | ** ** | **(Unaudited)**          | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                               | ** ** | ** **               | ** ** | ** **            | ** ** |
| CURRENT ASSETS                                                                                                                                                       |       |                     |       |                  |       |
| Cash and cash equivalents                                                                                                                                            |       | $                        | 57,052     |                  | $          | 54,030 |   |
| Accounts receivable, net                                                                                                                                             |       | 54,840                   |       | 60,406                |       |
| Inventories:                                                                                                                                                         |       |                     |       |                  |       |
| Finished products                                                                                                                                                    |       | 9,260                    |       | 11,865                |       |
| Work in process                                                                                                                                                      |       | 13,952                   |       | 10,765                |       |
| Materials                                                                                                                                                            |       | 19,011                   |       | 17,796                |       |
|                                                                                                                                                                 |       | 42,223                   |       | 40,426                |       |
| Deferred income taxes                                                                                                                                                |       | 4,954                    |       | 4,928                 |       |
| Refundable income taxes                                                                                                                                              |       | 14,864                   |       | 14,764                |       |
| Prepaid expenses and other current assets                                                                                                                            |       | 7,402                    |       | 6,692                 |       |
| TOTAL CURRENT ASSETS                                                                                                                                                 |       | 181,335                  |       | 181,246               |       |
|                                                                                                                                                                 |       |                     |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                                                        |       | 297,771                  |       | 289,084               |       |
| Less allowances for depreciation                                                                                                                                     |       | 228,080                  |       | 219,167               |       |
|                                                                                                                                                                 |       | 69,691                   |       | 69,917                |       |
|                                                                                                                                                                 |       |                     |       |                  |       |
| GOODWILL                                                                                                                                                             |       | 11,771                   |       | 11,771                |       |
| INTANGIBLE ASSETS, net                                                                                                                                               |       | 20,024                   |       | 20,501                |       |
| OTHER ASSETS                                                                                                                                                         |       | 22,544                   |       | 21,853                |       |
|                                                                                                                                                                 |       | 54,339                   |       | 54,125                |       |
| TOTAL ASSETS                                                                                                                                                         |       | $                        | 305,365    |                  | $          | 305,288 |   |
|                                                                                                                                                                 |       |                     |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                            |       |                     |       |                  |       |
|                                                                                                                                                                 |       |                     |       |                  |       |
| CURRENT LIABILITIES                                                                                                                                                  |       |                     |       |                  |       |
| Accounts payable                                                                                                                                                     |       | $                        | 25,099     |                  | $          | 24,495 |   |
| Other current liabilities                                                                                                                                            |       | 26,054                   |       | 29,023                |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                            |       | 51,153                   |       | 53,518                |       |
|                                                                                                                                                                 |       |                     |       |                  |       |
| OTHER LIABILITIES                                                                                                                                                    |       | 13,960                   |       | 13,561                |       |
| DEFERRED COMPENSATION                                                                                                                                                |       | 2,338                    |       | 3,308                 |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                            |       |                     |       |                  |       |
| Common stock, $0.50 par value, 100,000,000 shares  authorized, 38,315,225 and 38,290,776 shares issued as of August 1, 2009  and May 2, 2009, respectively |       | 19,158                   |       | 19,145                |       |
| Unearned common stock issuances                                                                                                                                      |       | (3,632                   | )          | (3,632                | )          |
| Additional paid-in capital                                                                                                                                           |       | 68,794                   |       | 68,506                |       |
| Accumulated other comprehensive income                                                                                                                               |       | 20,683                   |       | 15,675                |       |
| Treasury stock, 1,372,188 shares as of  August 1, 2009 and May 2, 2009                                                                                     |       | (11,495                  | )          | (11,495               | )          |
| Retained earnings                                                                                                                                                    |       | 140,942                  |       | 143,577               |       |
| TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’  EQUITY                                                                                                           |       | 234,450                  |       | 231,776               |       |
| Noncontrolling interest                                                                                                                                              |       | 3,464                    |       | 3,125                 |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                                      |       | 237,914                  |       | 234,901               |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                      |       | $                        | 305,365    |                  | $          | 305,288 |   |

 

See notes to condensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS) (Unaudited)

(in thousands,except per share data)

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **August 1,**     | ** ** | **August 2,** | ** ** |
| ** **                                                                | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                      |       |                   |       |   |   |
| INCOME                                                                    |       |                   |       |   |   |
| Net  sales                                                                |       | $                      | 89,776     |   | $ | 134,514 |   |
| Other                                                                     |       | 1,387                  |       | 733 |   |
|                                                                      |       | 91,163                 |       | 135,247 |   |
|                                                                      |       |                   |       |   |   |
| COSTS  AND EXPENSES                                                       |       |                   |       |   |   |
| Cost  of products sold                                                    |       | 70,909                 |       | 105,430 |   |
| Restructuring                                                             |       | 3,611                  |       | 4,917 |   |
| Selling  and administrative expenses                                      |       | 15,874                 |       | 16,398 |   |
|                                                                      |       | 90,394                 |       | 126,745 |   |
| Income  from operations                                                   |       | 769                    |       | 8,502 |   |
|                                                                      |       |                   |       |   |   |
| Interest  income/(expense), net                                           |       | (102                   | )          | 534 |   |
| Other  expense, net                                                       |       | (394                   | )          | (269 | ) |
|                                                                      |       |                   |       |   |   |
| Income  before income taxes                                               |       | 273                    |       | 8,767 |   |
| Income  tax expense                                                       |       | 286                    |       | 1,897 |   |
|                                                                      |       |                   |       |   |   |
| Net  income/(loss)                                                        |       | (13                    | )          | 6,870 |   |
| Less:  Net Income attributable to noncontrolling interest                 |       | (6                     | )          | (54 | ) |
|                                                                      |       |                   |       |   |   |
| NET  INCOME/(LOSS) ATTRIBUTABLE TO METHODE ELECTRONICS, INC.              |       | $                      | (19        | ) | $ | 6,816 |   |
|                                                                      |       |                   |       |   |   |
| Amounts  per common share attributable to Methode Electronics, Inc.: |       |                   |       |   |   |
|                                                                      |       |                   |       |   |   |
| Basic  net income/(loss)                                                  |       | $                      | —     |   | $ | 0.18 |   |
| Diluted  net income/(loss)                                                |       | $                      | —     |   | $ | 0.18 |   |
|                                                                      |       |                   |       |   |   |
| Cash  dividends:                                                          |       |                   |       |   |   |
| Common  stock                                                             |       | $                      | 0.07       |   | $ | 0.05 |   |
|                                                                      |       |                   |       |   |   |
| Weighted  average number of Common Shares outstanding:                    |       |                   |       |   |   |
| Basic                                                                     |       | 36,638                 |       | 37,198 |   |
| Diluted                                                                   |       | 36,638                 |       | 37,644 |   |

 

See notes tocondensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 
| ** **                                                                                | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | **August 1, 2009** | ** ** | **August 2, 2008** | ** ** |
| OPERATING ACTIVITIES                                                                      |       |                    |       |   |   |
| Net income/(loss)                                                                         |       | $                       | (13        | ) | $ | 6,870 |   |
| Adjustments to reconcile net income/(loss) to net cash  provided by operating activities: |       |                    |       |   |   |
| Provision for depreciation                                                                |       | 5,038                   |       | 5,942 |   |
| Impairment of tangible assets                                                             |       | 710                     |       | — |   |
| Amortization of intangibles                                                               |       | 565                     |       | 1,372 |   |
| Amortization of stock awards and stock options                                            |       | 299                     |       | 792 |   |
| Changes in operating assets and liabilities                                               |       | 1,070                   |       | (3,722 | ) |
| Other                                                                                     |       | 19                      |       | 88 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |       |                    | 7,688      |   | 11,342 |   |
|                                                                                      |       |                    |       |   |   |
| INVESTING ACTIVITIES                                                                      |       |                    |       |   |   |
| Purchases of property, plant and equipment                                                |       | (3,266                  | )          | (3,340 | ) |
| Acquisition of technology licenses                                                        |       | (87                     | )          | (156 | ) |
| Other                                                                                     |       | —                  |       | 63 |   |
| NET CASH USED IN INVESTING ACTIVITIES                                                     |       |                    | (3,353     | ) | (3,433 | ) |
|                                                                                      |       |                    |       |   |   |
| FINANCING ACTIVITIES                                                                      |       |                    |       |   |   |
| Proceeds from exercise of stock options                                                   |       | —                  |       | 103 |   |
| Tax benefit from stock options and awards                                                 |       | —                  |       | 46 |   |
| Cash dividends                                                                            |       | (2,616                  | )          | (1,895 | ) |
| NET CASH USED IN FINANCING ACTIVITIES                                                     |       |                    | (2,616     | ) | (1,746 | ) |
|                                                                                      |       |                    |       |   |   |
| Effect of foreign currency exchange rate changes on  cash                                 |       | 1,303                   |       | 609 |   |
|                                                                                      |       |                    |       |   |   |
| INCREASE IN CASH AND CASH EQUIVALENTS                                                     |       |                    | 3,022      |   | 6,772 |   |
|                                                                                      |       |                    |       |   |   |
| Cash and cash equivalents at beginning of period                                          |       | 54,030                  |       | 104,716 |   |
|                                                                                      |       |                    |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |       |                    | $          | 57,052 |   | $ | 111,488 |   |

 

See notes to condensed consolidated financial statements.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

August 1, 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 its subsidiaries.  The condensed consolidated financialstatements and related disclosures as of August 1, 2009 and results ofoperations for the three months ended August 1, 2009 and August 2,2008 are unaudited, pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). The May 2, 2009 condensed consolidated balance sheet was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”).  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with U.S. GAAP have been condensed or omitted pursuantto such rules and regulations.  Inour opinion, these financial statements include all adjustments (consistingonly of normal recurring adjustments) necessary for the fair statement of theresults for the interim periods.  Thesefinancial statements should be read in conjunction with the financialstatements included in our latest Form 10-K for the year ended May 2,2009 filed with the SEC on July 2, 2009. Results may vary from quarter to quarter for reasons other thanseasonality.

 

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

 

In June 2009,the FASB issued Statement No. 168, The FASB “Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles”, (“StatementNo. 168”).  Statement No. 168 will become the single source ofauthoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”),superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”),Emerging Issues Task Force (“EITF”), and related accounting literature. Statement No. 168 reorganizes the thousands of GAAP pronouncementsinto roughly 90 accounting topics and displays them using a consistentstructure.  Also included is relevant Securities and Exchange Commissionguidance organized using the same topical structure in separate sections. Statement No. 168 will be effective for financial statements issuedfor reporting periods that end after September 15, 2009.  This willhave an impact on the Company’s financial statements since all futurereferences to authoritative accounting literature will be references inaccordance with Statement No. 168.

 

In June 2009,the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(“SFAS No. 167”).  SFAS No. 167is 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.  This standard is effective for interim andannual periods ending after November 15, 2009, which is our third quarterfiscal 2010, that ends on January 30, 2010.  The adoption of this standard will not have amaterial impact on our financial statements.

 

In June 2009,the FASB issued SFAS No. 166, “Accounting for Transfers of FinancialAssets” (“SFAS No. 166”).  SFAS No. 166is a revision to SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities”, and will require moreinformation about transfers of financial assets and where companies havecontinuing exposure to the risk related to 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 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 willnot have a material impact on our financial statements.

 

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

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements”, an Amendment of Accounting Research Bulletin No. 51,“Consolidated Financial Statements” (“SFAS No. 160”).  SFAS No. 160 establishes accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Itclarifies that a noncontrolling interest in a subsidiary is an ownershipinterest in the consolidated entity that should be reported as equity in theconsolidated financial

 

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METHODE ELECTRONICS, INC.AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts inthousands, except share data)

 

**3.****                                      RECENTLY ADOPTEDACCOUNTING PRONOUNCEMENTS - Continued**

 

statements.  We adopted SFAS No. 160 on May 3,2009.  As a result, we have reclassifiedfinancial statement line items within our condensed consolidated balance sheetand statement of income/(loss) for the prior period to conform with thisstandard.  Additionally, see Note 5 fordisclosure reflecting the impact of SFAS No. 160 on our reconciliation ofcomprehensive income.

 

In June 2008,the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities”.  FSP EITF 03-6-1 was issued to clarify thatunvested share-based payment awards with a right to receive non-forfeitabledividends are participating securities. This FSP also provides guidance on how to allocate earnings toparticipating securities and compute basic earnings per share using thetwo-class method.  FSP EITF 03-6-1 waseffective for fiscal years beginning after December 15, 2008.  We adopted FSP EITF 03-6-1 on May 3,2009.  The adoption of this FSP did nothave a material impact on our earnings per share calculations.

 

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

 

On May 3,2009, we adopted the provisions of Statement No. 141 (Revised 2007), “BusinessCombinations” (“Statement No. 141R”). Statement No. 141R establishesprinciples and requirements on how an acquirer recognizes and measures in itsfinancial statements identifiable assets acquired, liabilities assumed,noncontrolling interests in the acquiree, goodwill or gain from a bargainpurchase and accounting for transaction costs. Additionally, Statement No. 141Rdetermines what information must be disclosed to enable users of the financialstatements to evaluate the nature and financial effects of the business combination.The adoption of Statement No. 141R did not have an impact on ourconsolidated financial statements, but will have an impact on the accountingfor future business combinations.

 

In April 2009,the FASB issued three FSPs related to fair value measurements. The first, FSPFAS 157-4, “Determining Fair Value When the Volume and Level of Activity forthe Asset or Liability Have Significantly Decreased and IdentifyingTransactions That Are Not Orderly”, provides guidance on determining whether amarket is inactive and whether transactions in that market are distressed. Thesecond FSP issued, FSP FAS 115-2, FAS 124-2, 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, FSP FAS 107-1 and APB 28-1, “Interim Disclosures About FairValue of Financial Instruments”, requires that disclosures currently requiredunder SFAS No. 107, Disclosures about Fair Value of Financial Instruments,be presented for interim periods as well as annual periods. The Company adoptedthese FSPs during the first quarter of 2010. The adoption of these FSPs did nothave a material impact on the Company’s consolidated financial statements.

 

In May 2009,the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”).  SFAS No. 165 establishes generalstandards of accounting for, and disclosure of, events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  In particular, thisstatement sets forth:  (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in the financial statements and (3) thedisclosure that an entity should make about events or transactions thatoccurred after the balance sheet date. SFAS No. 165 was effective for the interim or annual financialperiods ending after June 15, 2009. We adopted SFAS No. 165 on August 1, 2009, and evaluatedsubsequent events through the time these financial statements were filed withthe Securities and Exchange 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 to reducecosts.  The restructuring is expected tobe completed during the second half of fiscal 2010.  We record the expense in the restructuringsection of our consolidated statement of income. As of August 1, 2009, wehave recorded a total of $9,204 of the restructuring charges.  We estimate that we will record additionalpre-tax restructuring charges in fiscal 2010 of between $2,300 and $3,900.

 

Duringthe fiscal quarter ended August 1, 2009, we recorded a restructuringcharge of $1,941, which consisted of $1,671 for employee severance and $270relating to other costs.  As of August 1,2009, we had an accrued restructuring liability of $186 reflected in thecurrent liabilities section of our consolidated balance sheet.  We expect this liability to be paid outduring fiscal 2010.

 

The table below reflectsthe March 2009 restructuring activity for the fiscal quarter ended August 1,2009.

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

 

**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 Interconnect restructuring is expected to becompleted during the current fiscal year. We record the expense in the restructuring section of our condensedconsolidated statement of income.  As of August 1,2009, we have recorded a total of $24,844 of the restructuring charges.  We estimate that we will record additionalpre-tax restructuring charges in fiscal 2010 of between $500 and $1,000.  During the first quarter of fiscal 2010, werecorded impairment charges on our fixed assets of $710 for the Automotivesegment.  Based on the rules of SFASNo. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”,(“SFAS No. 144”), we concluded that the future estimated cash flows didnot support the current net book values of the assets (before the impairmentadjustment) due to lower forecasted sales in the Automotive segment.  We continue to perform periodic impairmenttesting, and if indicators exist, we will record any charges incurred as perSFAS No. 144, in the period when impairment is incurred.

 

Duringthe three months ended August 1, 2009, we recorded a restructuring chargeof $1,670, which consisted of $180 for employee severance, $1,450 in impairmentsand accelerated depreciation and $40 relating to other costs.  As of August 1, 2009, we had an accruedrestructuring liability of $1,661 reflected in the current liabilities sectionof our consolidated balance sheet.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

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

 

The table below reflectsthe January 2008 restructuring activity for the fiscal quarter ended August 1,2009

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

 

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

 

The components ofour comprehensive income/(loss) for the three months ended August 1, 2009and August 2, 2008 include net income/(loss) and adjustments to stockholders’equity for foreign currency translations. The foreign currency translation adjustment was due to exchange ratefluctuations in our foreign affiliates’ local currency versus the U.S. dollar.

 

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

 
| ** **                  | ** ** | **Three Months Ended August 1, 2009** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | ** **                                 | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **                  | ** ** | **Total**                                  | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                        |       |                                       |       |   |   |   |   |
| Net  income/(loss)          |       | $                                          | (13        | ) | $ | (19 | ) | $ | 6 |   |
| Translation  adjustment     |       | 5,008                                      |       | 4,675 |   | 333 |   |
| Total  comprehensive income |       | $                                          | 4,995      |   | $ | 4,656 |   | $ | 339 |   |

 
| ** **                  | ** ** | **Three Months Ended August 2, 2008** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | ** **                                 | ** ** | **Methode** | ** ** | **Noncontrolling** | ** ** |
| ** **                  | ** ** | **Total**                                  | ** ** | **Shareholders** | ** ** | **Interest** | ** ** |
|                        |       |                                       |       |   |   |   |   |
| Net  income                 |       | $                                          | 6,870      |   | $ | 6,816 |   | $ | 54 |   |
| Translation  adjustment     |       | 1,735                                      |       | 1,509 |   | 226 |   |
| Total  comprehensive income |       | $                                          | 8,605      |   | $ | 8,325 |   | $ | 280 |   |

 

**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 SFAS No. 142, “Goodwill and Other Intangibles”(“SFAS No. 142”).  The valuesassigned to goodwill and intangible assets are normally based on estimates andjudgments regarding expectations for the success and life cycle of products andtechnologies acquired.  A severe declinein expectations could result in significant impairment charges, which couldhave a material adverse effect on our financial condition and results of operations.

 

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METHODEELECTRONICS, INC. AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollaramounts in thousands, except share data)

 

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

 

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

 
| ** **                             | ** ** | **As of August 1, 2009** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                             | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Remaining** | ** ** |
| ** **                             | ** ** | ** **                    | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Amortization** | ** ** |
| ** **                             | ** ** | **Gross**                     | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Periods (Years)** | ** ** |
| Customer  relationships and agreements |       | $                             | 14,995     |   | $ | 12,801 |   | $ | 2,194 |   | 14.4 |   |
| Patents  and technology licenses       |       | 23,332                        |       | 5,631 |   | 17,701 |   | 13.3 |   |
| Covenants  not to compete              |       | 480                           |       | 351 |   | 129 |   | 2.6 |   |
| Total                                  |       | $                             | 38,807     |   | $ | 18,783 |   | $ | 20,024 |   |   |   |

 
| ** **                             | ** ** | **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 aggregateamortization expense for fiscal 2010 and each of the four succeeding fiscalyears is as follows:

 
| 2010 |   | $     | 2,242  |   |
|------|--------|-------|--------|--------|
| 2011 |   | 2,191 |   |
| 2012 |   | 1,679 |   |
| 2013 |   | 1,302 |   |
| 2014 |   | 1,190 |   |

 

As of August 1, 2009, the patents and technology licenses include$2,400 of tradenames 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 alsoincurred $2,447 in transaction costs. 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 and construction.

 

Basedon a third-party valuation report, the tangible net assets acquired had a fairvalue of $20,533.  The fair valuesassigned to intangible assets acquired were $12,170 for customer relationships,$2,700 for the tradename and trademarks, $1,450 for technology valuation, and$170 for non-competes, resulting in $19,063 of goodwill.  The customer relationships, technologyvaluation and non-compete agreements will be amortized over 5 to approximately12 years.  The trade name and trademarksare not subject to amortization but will be subject to periodic impairmenttesting.  The accounts and transactionsof Hetronic have been included in the Interconnect segment in the consolidatedfinancial statements from the effective date of the acquisition.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

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

 

AtAugust 1, 2009, we had valuation allowances against our deferred taxassets of $52,298.  In accordance withFASB No. 109, “Accounting for Income Taxes”, a valuation allowance isrequired to be recorded when it is more likely than not that deferred taxassets will not be realized.  Futurerealization depends on the existence of sufficient taxable income within thecarry-forward period available under the tax law.  Sources of future taxable income includefuture reversals of taxable temporary differences, future taxable incomeexclusive of reversing taxable differences, taxable income in carry-back yearsand tax planning strategies.  Thesesources of positive evidence of realizability must be weighed against negativeevidence, such as cumulative losses in recent years.

 

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

 

Thevaluation allowance is associated with the deferred tax assets for thedifferences between book and tax that result from net operating losses (NOL),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 August 1, 2009, we recognized $43 ininterest and zero in penalties.  We hadapproximately $978 accrued at August 1, 2009 for the payment ofinterest.  The total unrecognized taxbenefit as of August 1, 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 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.

 

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

 

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

 

| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **August 1,**     | ** ** | **August 2,** | ** ** |
| ** **                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                    |       |                   |       |   |   |
| Balance  at the beginning of the period |       | 38,290,776             |       | 38,225,379 |   |
| Options  exercised                      |       | —                 |       | 18,189 |   |
| Restricted  stock awards vested         |       | 24,449                 |       | 38,397 |   |
| Balance  at the end of the period       |       | 38,315,225             |       | 38,281,965 |   |

 

Wepaid a quarterly dividend of $2,616 on July 31, 2009.  We intend to retain the remainder of ourearnings not used for dividend payments to provide funds for the operation andexpansion of our business.  Our Board of

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

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

 

Directorsapproved a stock repurchase plan on September 18, 2008 to repurchase up to3,000,000 shares.  The plan expires atthe end of fiscal 2010.  There were noshares purchased during the first quarter of fiscal 2010.

 

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

 

Thereare 595,505 stock options that were granted in previous years under the 2000and 2004 stock plans that are outstanding and exercisable as of August 1,2009.    There were 30,128 options thatexpired during the first quarter of fiscal 2010.  There was no remaining compensation expenserelating to these options in the first quarter of fiscal 2010.

 

Thefollowing tables summarize the stock option activity and related informationfor the stock options granted under the 2000 and 2004 stock plans for the threemonths ended August 1, 2009:

 

| ** **                          | ** ** | **Summary of Option Activity** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | ** **                     | ** ** | **Wtd. Avg.** | ** ** |
| ** **                          | ** ** | **Shares**                     | ** ** | **Exercise Price** | ** ** |
| Outstanding  at May 2, 2009    |       | 625,633                        |       | $ | 10.26 |   |
| Exercised                           |       | —                         |       | — |   |
| Forfeited                           |       | (30,128                        | )          | 8.08 |   |
| Outstanding  at August 1, 2009 |       | 595,505                        |       | $ | 10.48 |   |

 

| **Options Outstanding and**             | ** ** |
|-----------------------------------------|------------|
| **Exercisable at  August 1, 2009** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** | **Avg.** | ** ** |
| **Range of**                       | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Remaining** | ** ** |
| **Exercise Prices**                | ** ** | **Shares** | ** ** | **Price** | ** ** | **Life (Years)** | ** ** |
| $5.12  - $7.69                          |       | 154,125 |   | $ | 6.68 |   | 1.8 |   |
| $8.08  - $11.64                         |       | 306,620 |   | 10.85 |   | 1.8 |   |
| $12.11  - $17.66                        |       | 134,760 |   | 13.98 |   | 0.8 |   |
|                                    |       | 595,505 |   | $ | 10.48 |   |   |   |

 

Theoptions outstanding had an intrinsic value of $140 at August 1, 2009.

 

**Stock Options GrantedUnder the 2007 Stock Plan**

 

InMarch 2009, the Compensation Committee approved 285,000 stock optiongrants to our executive officers under the 2007 Stock Plan.  The March 2009 stock options vest on thethird anniversary from the date of grant. In July 2009, the Compensation Committee approved 275,000 stockoption grants to our executive officers and other management under the sameplan.  The July 2009 stock options veston one-third per year on each anniversary from the date of grant.  Both the March 2009 and July 2009stock option grants have a ten-year term.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

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

 

Thefollowing tables summarize the stock option activity and related informationfor the stock options granted under the 2007 stock plan for the three monthsended August 1, 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 August 1, 2009 |                       | 560,000                        |       | $ | 4.56 |   |
|                                |                       |                           |       |   |   |
| ** **                          | **Options Outstanding**    | ** **                     |
| ** **                          | **at August 1, 2009** | ** **                     |
| ** **                          | ** **                 | ** **                     | ** ** | ** ** | **Avg.** | ** ** |
| ** **                          | ** **                 | ** **                     | ** ** | ** ** | **Remaining** | ** ** |
| ** **                          | **Exercise  Price**        | ** **                     | **Shares** | ** ** | **Life (Years)** | ** ** |
|                                | $                          | 2.72                           |       | 285,000 |   | 9.6 |   |
|                                | $                          | 6.46                           |       | 275,000 |   | 9.9 |   |

 

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 its subsidiariesand affiliates; or (2) the last day of our fiscal year in which thepayment of common stock in satisfaction of the RSUs becomes deductible to theCompany under Section 162(m) of the Internal Revenue Code.  At the end of fiscal 2009, 100,000 RSUs werecancelled 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 August 1, 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 areentitled to voting rights and to payment of dividends.  During the three

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

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

 

months ended August 1, 2009, weawarded 24,000 restricted shares to our independent directors, all of whichvested immediately upon grant.

 

Werecognized pre-tax compensation expense for RSAs of $237 and $792 in the threemonths ended August 1, 2009 and August 2, 2008, respectively.  We record the expense in the selling andadministrative section of our condensed consolidated statement of income.

 

The following tablesummarizes the RSA activity for the three months ended August 1, 2009:

 
| ** **                       | ** ** | **Shares** | ** ** |
|----------------------------------|------------|------------|------------|
| Unvested  at May 2, 2009    |       | 578,287    |       |
| Awarded                          |       | 24,000     |       |
| Vested                           |       | (24,667    | )          |
| Forfeited                        |       | —     |       |
| Unvested  at August 1, 2009 |       | 577,620    |       |

 

The table belowshows the Company’s unvested RSAs at August 1, 2009:

 
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Probable**            | ** ** | **Target**              | ** ** |
|------------|------------|------------|------------|-----------------------------------|------------|--------------|------------|-------------------------|------------|-------------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **   | ** ** | **Unearned**            | ** ** | **Unearned**            | ** ** |
| **Grant**  | ** ** | ** ** | ** ** | ** **                        | ** ** | **Weighted** | ** ** | **Compensation**        | ** ** | **Compensation**        | ** ** |
| **Fiscal** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Average**  | ** ** | **Expense at**          | ** ** | **Expense at**          | ** ** |
| **Year**   | ** ** | **RSAs**   | ** ** | **Vesting Period**                | ** ** | **Value**    | ** ** | **August 1, 2009** | ** ** | **August 1, 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        |       | 68                      |       | 68                      |       |
| 2008       |       | 149,730    |       | 3-year cliff  performanced-based  |       | 15.14        |       | —                  |       | 700                     |       |
| 2009       |       | 49,724     |       | 3-year equal annual  installments |       | 10.64        |       | 264                     |       | 264                     |       |
| 2009       |       | 234,539    |       | 3-year cliff  performanced-based  |       | 11.35        |       | —                  |       | 1,781                   |       |
|            |            |            |            |                                   |            |              |            |                         |            |                         |            |  |  |  |

 

At August 1,2009, the aggregate unvested RSAs had a grant date weighted average fair valueof $12.61 and a weighted average vesting period of approximately 13 months.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**10.****         ****EARNINGS/(LOSS) PER SHARE**

 

Basicearnings/(loss) per share (EPS) is calculated by dividing net earnings/(loss)by the weighted average number of common shares outstanding for the applicableperiod.  Diluted EPS is calculated afteradjusting the numerator and the denominator of the basic EPS calculation forthe effect of all potential dilutive common shares outstanding during theperiod.

 

The following table setsforth the computation of basic and diluted earnings/(loss) per share:

 
| ** **                                                                                                    | ** ** | **Three Months Ended**  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                    | ** ** | **August 1, 2009** | ** ** | **August 2, 2008** | ** ** |
|                                                                                                          |       |                    |       |   |   |
| Numerator  - net income/(loss) attributable to Methode Electronics, Inc.                                 |       | $                       | (19        | ) | $ | 6,816 |   |
|                                                                                                          |       |                    |       |   |   |
| Denominator:                                                                                                  |       |                    |       |   |   |
| Denominator  for basic earnings/(loss) per share-weighted-average shares                                      |       | 36,638                  |       | 37,198 |   |
| Dilutive  potential common shares-employee stock options                                                      |       | —                  |       | 446 |   |
| Denominator  for diluted earnings/(loss) per share adjusted weighted- average shares and  assumed conversions |       | 36,638                  |       | 37,644 |   |
|                                                                                                          |       |                    |       |   |   |
| Basic  and diluted net income/(loss) per share:                                                               |       |                    |       |   |   |
| Basic                                                                                                         |       | $                       | —     |   | $ | 0.18 |   |
| Diluted                                                                                                       |       | $                       | —     |   | $ | 0.18 |   |

 

Potential common shareshave not been included in the calculation of diluted net loss per share, as theeffect would be anti-dilutive.  As such,the numerator and demoninator used in computing both basic and diluted net lossper share for the three months ended August 1, 2009 are the same.  Options to purchase 286,624 shares of commonstock were outstanding at August 2, 2008 but were not included in thecomputation of diluted earnings/(loss) per share because the exercise price wasgreater than the average market price of the common shares;  therefore, the effect would have beenanti-dilutive. 

 

**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.

 

SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation” (“SFAS No. 131”), establishes annual and interimreporting standards for an enterprise’s operating segments and relateddisclosures about its products, services, geographic areas and major customers.An operating segment is defined as a component of an enterprise that engages inbusiness activities from which it may earn revenues and incur expenses, andabout which separate financial information is regularly evaluated by the ChiefOperating Decision Maker (“CODM”) in deciding how to allocate resources.  The CODM, as defined by SFAS No. 131,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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NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**11.          SEGMENTINFORMATION - 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 and consumer markets.  Solutions include solid-state field effectinterface panels, optical and copper transceivers, terminators, connectors,custom cable assemblies and conductive polymer and thick film inks.  Services include the design and installationof fiber optic and copper infrastructure systems, and manufacture of active andpassive optical components.

 

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

 

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

 

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

 

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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 August 1, 2009** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                 | ** ** | **Inter-** | ** ** | **Power** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Automotive**                             | ** ** | **Connect** | ** ** | **Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                          | 51,199     |   | $ | 24,741 |   | $ | 11,414 |   | $ | 2,707 |   | $ | 285 |   | $ | 89,776 |   |
| Transfers between segments                            |       | —                                     |       | (51 | ) | (224 | ) | (10 | ) | (285 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                          | 51,199     |   | $ | 24,690 |   | $ | 11,190 |   | $ | 2,697 |   | $ | — |   | $ | 89,776 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                          | 5,509      |   | $ | 1,031 |   | $ | 852 |   | $ | (580 | ) | $ | — |   | $ | 6,812 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (2,618                                     | )          | (771 | ) | (222 | ) | — |   | — |   | (3,611 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                          | 2,891      |   | $ | 260 |   | $ | 630 |   | $ | (580 | ) | $ | — |   | $ | 3,201 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                       |       |   |   |   |   |   |   |   |   | (2,928 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                       |       |   |   |   |   |   |   |   |   | $ | 273 |   |

 
| ** **                                            | ** ** | **Three Months Ended August 2, 2008** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                 | ** ** | **Inter-** | ** ** | **Power** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Automotive**                             | ** ** | **Connect** | ** ** | **Products** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                             |       | $                                          | 84,733     |   | $ | 35,718 |   | $ | 12,135 |   | $ | 2,223 |   | $ | 295 |   | $ | 134,514 |   |
| Transfers between segments                            |       | —                                     |       | (132 | ) | (134 | ) | (29 | ) | (295 | ) | — |   |
| Net sales to unaffiliated customers                   |       | $                                          | 84,733     |   | $ | 35,586 |   | $ | 12,001 |   | $ | 2,194 |   | $ | — |   | $ | 134,514 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) before restructuring charge     |       | $                                          | 13,650     |   | $ | 2,123 |   | $ | 802 |   | $ | (582 | ) | $ | — |   | $ | 15,993 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                         |       | (3,215                                     | )          | (1,702 | ) | — |   | — |   | — |   | (4,917 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Segment income (loss) including restructuring  charge |       | $                                          | 10,435     |   | $ | 421 |   | $ | 802 |   | $ | (582 | ) | $ | — |   | $ | 11,076 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Corporate expenses, net                               |       |                                       |       |   |   |   |   |   |   |   |   | (2,309 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       |                                       |       |   |   |   |   |   |   |   |   | $ | 8,767 |   |

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**12.          CONTINGENCIES**

 

Certain litigation arising in the normal course of business is pendingagainst us.  We are from time to timesubject to various legal actions and claims incidental to our business,including those arising out of alleged defects, breach of contracts,employment-related matters and environmental matters.  We consider insurance coverage andthird-party indemnification when determining required accruals for pendinglitigation and claims.  Although theoutcome of potential legal actions and claims cannot be determined, it is ouropinion, based on the information available, that we have adequate reserves forthese liabilities and that, other than the pending litigation with DelphiAutomotive Systems referenced in Part II Item 1.  Legal Proceedings in this Form 10-Q, theultimate resolution of these matters will not have a material adverse effect onour consolidated financial statements. 

 

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

 

We incur pre-production tooling costs relatedto certain products produced for our customers under long-term supplyagreements.  We had $6,974 and $3,182 asof fiscal periods ended August 1, 2009 and May 2, 2009, respectively,of pre-production tooling costs related to customer-owned tools for whichreimbursement is contractually guaranteed by the customer or for which thecustomer has provided a non-cancelable right to use the tooling.  These amounts are included in ourwork-in-process inventory in the condensed consolidated balance sheets.  Net revenues and costs on projects aredeferred and recognized over the life of the related long-term supplyagreement.

 

**14.          FAIR VALUEMEASUREMENTS**

 

SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) 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.

 

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

 

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

 

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

 

·               Level 3  – Unobservable inputsthat are supported by little or no market activity and that are significant tothe fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologiesand similar techniques that use 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:

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)

(Dollar amounts in thousands, except sharedata)

 

**14.          FAIR VALUEMEASUREMENTS - Continued**

 

Below is a table that summarizes the fairvalue of assets and liabilities as of August 1, 2009:

 
| ** **                                        | ** ** | **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)                     |       | $                               | 57,052     |   | $ | 55,200 |   | $ | 1,852 |   | $ | — |   |
| Assets related to deferred compensation plan      |       | $                               | 2,574      |   | $ | — |   | $ | 2,574 |   | $ | — |   |
| Total assets at fair value                        |       | $                               | 59,626     |   | $ | 55,200 |   | $ | 4,426 |   | $ | — |   |
|                                              |       |                            |       |   |   |   |   |   |   |
| Liabilities:                                      |       |                            |       |   |   |   |   |   |   |
| Liabilities related to deferred compensation plan |       | $                               | 2,628      |   | $ | 2,628 |   | $ | — |   | $ | — |   |
| Total liabilities at fair value                   |       | $                               | 2,628      |   | $ | 2,628 |   | $ | — |   | $ | — |   |

 

----

(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 these instruments.

 

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

 

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

 

Certain statements in this report are forward-lookingstatements that are subject to certain risks and uncertainties.  We undertake no duty to update any suchforward-looking statements to conform to actual results or changes in ourexpectations.  Our business is highlydependent upon two large automotive customers and specific makes and models ofautomobiles.  Our results will be subjectto many of the same risks that apply to the automotive, appliance, computer andtelecommunications industries, such as general economic conditions, interestrates, credit availability, consumer spending patterns and technologicalchanges.   Other factors, which mayresult in materially different results for future periods, include thefollowing 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.  The forward-lookingstatements in this report are subject to the safe harbor protection providedunder the securities laws.

 

·                  We depend on a small number of large customers, including two large automotive 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, construction, industrial safety radio remote control market, 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 you 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.

 

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

 

****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 be materiallydifferent from those we anticipate.****

 

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

 

Weare a global manufacturer of component and subsystem devices withmanufacturing, design and testing facilities in China, Czech Republic, Germany,India, 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 and second quarter 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, particularly as it impacts the automotive industry.  The recent disruptions in global financial andcredit markets have significantly impacted global economic activity and led toan economic recession.  As a result ofthese disruptions, our customers and markets have been adversely affected.  We have recently experienced and continue toexperience a drop in sales in all of our reporting segments.  If we continue to experience reduced demandbecause of these disruptions in the macroeconomic environment or other factors,our business, results of operations and financial condition could be materiallyadversely affected.  If we are unable tosuccessfully anticipate changing economic and financial conditions, we may beunable to effectively plan for and respond to these changes and our businesscould be adversely affected.

 

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.

 

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 to reduce costs.  After these actions, our principalmanufacturing operations will be in China, Malta and Mexico.  In addition, we decided to transfer certain newfuture GM business to other suppliers. This business was scheduled to be

 

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produced in our Shanghai,China automotive facility.  All FordMotor Company production at Methode’s Reynosa, Mexico, facility hassubstantially moved to another supplier. TouchSensor manufacturing, currently in west suburban Chicago, Illinoisis in the process of moving to Monterrey, Mexico, and expects to complete themove by the end of the third quarter of fiscal 2010.  Additionally, during the first quarter offiscal 2010, our operations in Shanghai, China were consolidated from threefacilities to two.  We expect to completethe restructuring actions during the second half of fiscal 2010.

 

In March 2009,the total pre-tax charges were estimated between $16.0 million and $25.0million.  As of August 1, 2009, wehave recorded a total of $9.2 million of the charges.  We estimate that we will record additionalpre-tax restructuring charges in fiscal 2010 between $2.3 million and $3.9million, of which $0.5 million will relate to the termination of approximately75 employees and the cost of one-time employee benefits, retention, COBRA andoutplacement services.

 

**BusinessOutlook**

 

We remain very cautious about fiscal 2010,expecting that it will be another challenging year. The financial sector crisisand stagnant global economic conditions have increased uncertainty in themarkets in every geographic region we serve. We expect the unprecedentedcurrent global economic environment to continue to affect near-term results andto create difficult conditions. Looking forward, visibility is low andforecasting is very challenging.  Salesof Automotive segment products are expected to decline, as our forecasted salesfrom North American and European automotive OEMs are lower. Additionally, wetook actions in fiscal 2008 and 2009 to exit certain unprofitable or marginallyprofitable North American automotive business. Sales of sensor pads for passiveoccupant-detection systems to Delphi Automotive Systems (“Delphi”) is expectedto decline due to a variety of factors, including lower North Americanautomotive volumes, and the replacement of current systems with newtechnology.  In addition, Delphi recentlynotified us that it is terminating our supply arrangement effective September 10,2009.  We are contesting Delphi’s rightto prematurely terminate this long-term supply arrangement and the parties areengaged in litigation regarding this supply arrangement and our related intellectualproperty.  If we are not successful inthis pending litigation, we believe demand for these sensor pads and ouroverall financial condition and results of operations will be materiallyadversely affected.  We expect salesdeclines in the Interconnect and Power Products segments, as well as, declinesin demand for information processing and networking equipment, construction,voice and data communications systems, consumer electronics, appliance,aerospace vehicles and industrial equipment to be stagnant.  In our Interconnect segment, sales from ourHetronic acquisition will be offset by sales lost due to our decision to exitcertain unprofitable component products in fiscal 2009.  While we have taken steps to restructure ourbusinesses, ongoing operating margin improvement will not be realized untileconomic conditions begin to improve in the markets we serve.

 

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**Results of Operations for the Three Months Ended August 1,2009 as Compared to the Three Months Ended August 2, 2008.**

 

**ConsolidatedResults**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                                                 | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                                                 | ** ** | **2009**           | ** ** | **2008**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                                                 |       | $                  | 89.8       |               | $          | 134.5          |       | $              | (44.7      | ) | -33.2 | % |
| Other  income                                              |       | 1.4                |       | 0.7                |       | 0.7            |       | 100.0          | %          |
|                                                       |       | 91.2               |       | 135.2              |       | (44.0          | )          | -32.5          | %          |
|                                                       |       |               |       |               |       |           |       |           |       |
| Cost  of products sold                                     |       | 70.9               |       | 105.4              |       | (34.5          | )          | -32.7          | %          |
|                                                       |       |               |       |               |       |           |       |           |       |
| Gross  margins (including other income)                    |       | 20.3               |       | 29.8               |       | (9.5           | )          | -31.9          | %          |
|                                                       |       |               |       |               |       |           |       |           |       |
| Restructuring                                              |       | 3.6                |       | 4.9                |       | (1.3           | )          | -26.5          | %          |
| Selling  and administrative expenses                       |       | 15.9               |       | 16.4               |       | (0.5           | )          | -3.0           | %          |
| Interest  income/(expense), net                            |       | (0.1               | )          | 0.5                |       | (0.6           | )          | -120.0         | %          |
| Other  expense, net                                        |       | (0.4               | )          | (0.2               | )          | (0.2           | )          | 100.0          | %          |
| Income  taxes - expense                                    |       | 0.3                |       | 1.9                |       | (1.6           | )          | -84.2          | %          |
| Net  income attributable to noncontrolling interest        |       | —             |       | 0.1                |       | (0.1           | )          | -100.0         | %          |
|                                                       |       |               |       |               |       |           |       |           |       |
| Net  income attributable to Methode Electronics, Inc. |       | $                  | —     |               | $          | 6.8            |       | $              | (6.8       | ) | -100.0 | % |

 
| ** **                                                 |   | **August 1,** |   | **August 2,** |   |   |   |   |   |
|------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|--------|--------|--------|--------|
| **Percent of sales:**                                      |   | **2009**           |   | **2008**           |   |   |   |   |   |
| Net  sales                                                 |   | 100.0              | %      | 100.0              | %      |   |   |   |   |
| Other  income                                              |   | 1.6                | %      | 0.5                | %      |   |   |   |   |
| Cost  of products sold                                     |   | 79.0               | %      | 78.4               | %      |   |   |   |   |
| Gross  margins (including other income)                    |   | 22.6               | %      | 22.2               | %      |   |   |   |   |
| Restructuring                                              |   | 4.0                | %      | 3.6                | %      |   |   |   |   |
| Selling  and administrative expenses                       |   | 17.7               | %      | 12.2               | %      |   |   |   |   |
| Interest  income/(expense), net                            |   | -0.1               | %      | 0.4                | %      |   |   |   |   |
| Other  expense, net                                        |   | -0.4               | %      | -0.1               | %      |   |   |   |   |
| Income  taxes - expense                                    |   | 0.3                | %      | 1.4                | %      |   |   |   |   |
| Net  income attributable to noncontrolling interest        |   | 0.0                | %      | 0.1                | %      |   |   |   |   |
| Net  income attributable to Methode Electronics, Inc. |   | 0.0                | %      | 5.1                | %      |   |   |   |   |

 

*Net Sales*.  Consolidated net sales decreased $44.7million, or 33.2%, to $89.8 million for the three months ended August 1,2009 from $134.5 million for three months ended August 2, 2008.  The Automotive segment net sales declined$33.5 million or 39.6% to $51.2 million for first quarter of fiscal 2010 from$84.7 million for the first quarter of fiscal 2009.  The decline is attributable to the continuedsoftening of the global economic environment, especially the direct effect onthe North American automotive industry. The Interconnect segment net sales decreased $10.9 million, or 30.6% to$24.7 million for the first quarter of fiscal 2010 as compared to $35.6 millionfor the first quarter of fiscal 2009. The Power Products segment net sales decreased $0.8 million, or 6.7% to$11.2 million for the first quarter of fiscal 2010 as compared to $12.0 millionfor the first quarter of fiscal 2009. The Other segment net sales increased $0.5 million to $2.7 million forthe first quarter of fiscal 2010, as compared to $2.2 million in the firstquarter of fiscal 2009.  Translation offoreign operations net sales in the three months ended August 1, 2009decreased reported net sales by $1.9 million or 2.0% due to currency ratefluctuations.

 

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*OtherIncome*.  Other incomeincreased $0.7 million, or 100.0%, to $1.4 million for the three months ended August 1,2009 from $0.7 million for three months ended August 2, 2008.  The increase relates to engineering designfees in our European automotive market. Other income consisted primarily of earnings from engineering designfees and royalties.

 

*Cost ofProducts Sold*. Consolidated cost of products sold decreased $34.5 million, or 32.7%, to$70.9 million for the three months ended August 1, 2009 compared to $105.4million for the three months ended August 2, 2008.  The decrease is due to the lower net salesvolumes.  Consolidated cost of productssold as a percentage of sales was 79.0% in the first quarter of fiscal 2010,compared to 78.4% in the first quarter of fiscal 2009.  The increase relates to lower sales volumesand segment sales mix in the first quarter of fiscal 2010 as compared to thefirst quarter of fiscal 2009.

 

*GrossMargins (including other income). *Consolidatedgross margins (including other income) decreased $9.5 million, or 31.9%, to$20.3 million for the three months ended August 1, 2009 as compared to$29.8 million for the three months ended August 2, 2008.  Gross margins (including other income) as apercentage of net sales was 22.6% for the three months ended August 1,2009 as compared to 22.2% for the three months ended August 2, 2008.  The increase relates to higher other incomein the first quarter of fiscal 2010, partially offset by higher cost due tolower sales volumes and segment sales mix.

 

*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 to reduce costs.  During the fiscal quarter ended August 1,2009, we recorded a restructuring charge of $1.9 million related to thisrestructuring initiative, which consisted of $1.7 million for employeeseverance and $0.2 million relating to other costs.

 

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 endedAugust 1, 2009, we recorded a restructuring charge of $1.7 million relatedto this restructuring, which consisted of $0.2 million for employee severance,$1.4 million for the impairment and accelerated depreciation and $0.1 millionrelating to other costs.  During thefiscal quarter ended August 2, 2008, we recorded a restructuring charge of$4.9 million, which consisted of $2.8 million for employee severance, $1.6million for accelerated depreciation , $0.1 million for inventory write-downand $0.4 million relating to other costs.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses decreased $0.5 million, or 3.0%, to$15.9 million for the three months ended August 1, 2009 compared to $16.4million for the three months ended August 2, 2008.  The decrease is due to lower intangible assetamortization expense and lower stock award amortization expense during thefirst quarter of fiscal 2010, partially offset by selling and administrativeexpenses from Hetronic, LLC, acquired in September 2008.  Sellingand administrative expenses as a percentage of net sales increased to 17.7% inthe three months ended August 1, 2009 from 12.2% for the three monthsended August 2, 2008.

 

*InterestIncome/(Expense), Net*. Net interest income/(expense) decreased $0.6 million, or 120.0%, in thethree months ended August 1, 2009 to an expense of $0.1 million ascompared to income of $0.5 million in the three months ended August 2,2008.  The average cash balance was $61.1million during the three months ended August 1, 2009 as compared to $116.0million during the three months ended August 2, 2008.  The decrease in cash relates primarily to theHetronic acquisition in the second quarter of fiscal 2009.  The average interest rate earned in the threemonths ended August 1, 2009 was 0.39% compared to 1.98% in the threemonths ended August 2, 2008.  Interestexpense was $0.2 million and $0.1 million for the three months ended August 1,2009 and August 1, 2008, respectively. The interest expense in the first quarter fiscal 2010 included $0.1million of fees related to the amendment of our bank agreement during thequarter.

 

*OtherExpense, Net*.  Otherexpense, net was $0.4 million for the three months ended August 1, 2009 ascompared to $0.2 million for the three months ended August 2, 2008.  The increase is primarily due to theweakening of the U.S. dollar versus the Euro and Czech koruna during the firstquarter of fiscal 2010 as compared to the first quarter of fiscal 2009.  The functional currencies of these operationsare the British pound, Chinese yuan, Czech koruna, Euro, Indian Rupee, Mexicanpeso and Singapore dollar.  Some foreignoperations have transactions

 

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denominated in currenciesother than their functional currencies, primarily sales in U.S. dollars andEuros, creating exchange rate sensitivities.

 

At August 1, 2009, approximately $2.4 million wasinvested in an enhanced cash fund sold as an alternative to traditionalmoney-market funds.  We have historicallyinvested a portion of our on hand cash balances in this fund.  These investments are subject to credit,liquidity, market and interest rate risk. Based on the information available to us, we have estimated the fairvalue of the fund at $0.763 per unit as of August 1, 2009.  During the quarter ended August 1, 2009,we recorded a gain of $0.3 million, of which $0.1 million was from a realizedloss on partial redemptions of $1.1 million, offset by an unrealized gain of$0.4 million.

 

*IncomeTaxes - Expense.*  Theeffective income tax rate was 109.6% in the first quarter of fiscal 2010compared with 21.6% in the first quarter of fiscal 2009.  Normally, a tax benefit is recorded relatingto the net loss before income taxes, but due to the uncertainty of the future utilizationof the tax benefit by our U.S.-based businesses, a valuation allowance wasrecorded offsetting the tax benefit in accordance with FASB No. 109 “Accountingfor Income Taxes” in the U.S.  See note 8for additional information.  The effectivetax rates for both the first 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 earnings and a higher percentage of earningsat those foreign operations.

 

*NetIncome/(Loss).*  Netincome/(loss) decreased $6.8 million to break-even for the three months ended August 1,2009 as compared to $6.8 million for the three months ended August 2, 2008due to lower sales volumes, partially offset by lower restructuring and sellingand administrative expenses.

 

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**OperatingSegments**

 

**AutomotiveSegment Results**

Below is a tablesummarizing results for the three months ended:

(in millions)

 

 
| ** **                              | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**           | ** ** | **2008**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                  | 51.2       |               | $          | 84.7           |       | $              | (33.5      | ) | -39.6 | % |
| Other  income                           |       | 1.2                |       | 0.6                |       | 0.6            |       | 100.0          | %          |
|                                    |       | 52.4               |       | 85.3               |       | (32.9          | )          | -38.6          | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Cost  of products sold                  |       | 40.9               |       | 67.6               |       | (26.7          | )          | -39.5          | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Gross  margins (including other income) |       | 11.5               |       | 17.7               |       | (6.2           | )          | -35.0          | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Restructuring                           |       | 2.6                |       | 3.2                |       | (0.6           | )          | -18.8          | %          |
| Selling  and administrative expenses    |       | 5.5                |       | 4.2                |       | 1.3            |       | 31.0           | %          |
| Interest  income, net                   |       | —             |       | 0.2                |       | (0.2           | )          | -100.0         | %          |
| Other  expense, net                     |       | (0.6               | )          | —             |       | (0.6           | )          | 0.0            | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Income  before income taxes             |       | $                  | 2.8        |               | $          | 10.5           |       | $              | (7.7       | ) | -73.3 | % |
|                                    |       |               |       |               |       |           |       |           |       |
| ** **                              | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**         | ** ** | **2009**           | ** ** | **2008**           | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0              | %          | 100.0              | %          |           |       |           |       |
| Other  income                           |       | 2.3                | %          | 0.7                | %          |           |       |           |       |
| Cost  of products sold                  |       | 79.9               | %          | 79.8               | %          |           |       |           |       |
| Gross  margins (including other income) |       | 22.5               | %          | 20.9               | %          |           |       |           |       |
| Restructuring                           |       | 5.1                | %          | 3.8                | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 10.7               | %          | 5.0                | %          |           |       |           |       |
| Interest  income, net                   |       | 0.0                | %          | 0.2                | %          |           |       |           |       |
| Other  expense, net                     |       | -1.2               | %          | 0.0                | %          |           |       |           |       |
| Income  before income taxes             |       | 5.5                | %          | 12.4               | %          |           |       |           |       |

 

*Net Sales*.  Automotive segment net sales decreased $33.5million, or 39.6%, to $51.2 million for the three months ended August 1,2009 from $84.7 million for the three months ended August 2, 2008.  The decline is attributable to the softeningof the global economic environment, especially the effect on the North Americanautomotive industry.  Net sales havedeclined in the first quarter of fiscal 2010 as compared to fiscal 2009 by47.8% in North America, 30.9% in Europe and 2.3% in Asia.  A large portion of the drop in sales is dueto the North American automotive manufacturers extending plant shut-downs thatoccurred during the first quarter of fiscal 2010.  The Automotive segment net sales were alsonegatively impacted by planned lower Chrysler sales volumes of $0.5 million inthe first quarter of fiscal 2010, compared to $10.0 million in the firstquarter of fiscal 2009.  Translation offoreign operations net sales in the three months ended August 1, 2009decreased reported net sales by $1.7 million, or 3.2%, due to currency ratefluctuations.

 

*OtherIncome*.  Other incomeincreased $0.6 million, or 100.0%, to $1.2 million for the three months ended August 1,2009 from $0.6 million for three months ended August 2, 2008.  The increase relates to engineering design feesin our European automotive market.  Otherincome consisted primarily of earnings from engineering design fees androyalties.

 

*Cost ofProducts Sold*. Automotive segment cost of products sold decreased $26.7 million to$40.9 million for the three months ended August 1, 2009 from $67.6 millionfor the three months ended August 2, 2008. The decrease primarily relates to lower sales volumes.  Automotive segment costs of products sold asa percentage of sales increased to 79.9% for the three months ended August 1,2009 from 79.8% for the three months ended August

 

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2, 2008.  The cost of products sold as a percent ofsales remained virtually unchanged due to restructuring efforts in previousperiods to help offset the current lower sales volumes.

 

*GrossMargins (including other income). *Automotivesegment gross margins (including other income) decreased $6.2 million, or35.0%, to $11.5 million for the three months ended August 1, 2009 ascompared to $17.7 million for the three months ended August 2, 2008.  Gross margins (including other income) as apercentage of net sales increased to 22.5% for the three months ended August 1,2009 from 20.9% for the three months ended August 2, 2008.  The increase in gross margins (includingother income) as a percentage of sales is due to higher other income as well asrestructuring efforts in previous periods to help offset lower sales volumes.

 

*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 to reduce costs.  During the fiscal quarter ended August 1,2009, the Automotive segment recorded a restructuring charge of $1.0 millionfor this restructuring initiative for employee severance.  We expect the restructuring to be completedduring 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 August 1,2009, the Automotive segment recorded a restructuring charge of $1.6 millionfor this restructuring initiative, which consisted of $0.2 million for employeeseverance, $1.4 million for the impairment and accelerated depreciation.  During the fiscal quarter ended August 2,2008, the Automotive segment recorded a restructuring charge of $3.2 millionfor this restructuring initiative, which consisted of $2.2 million for employeeseverance, $0.7 million for accelerated depreciation and  $0.3 million for other costs.  We expect the restructuring to be completedduring the second half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $1.3 million, or 31.0%, to$5.5 million for the three months ended August 1, 2009 compared to $4.2million for the three months ended August 2, 2008.  The increase is due to higher professionaland selling expenses during the first quarter of fiscal 2010.  Selling and administrative expenses as apercentage of net sales was 10.7% for the three months ended August 1,2009 and 5.0% for the three months ended August 2, 2008.

 

*InterestIncome, Net*.  Netinterest income was zero in the three months ended August 1, 2009 comparedto $0.2 million in the three months ended August 2, 2008.

 

*OtherExpense, Net*.  Otherexpense, net was $0.6 million for the three months ended August 1, 2009 ascompared to zero other expense, net for the three months ended August 2,2008.  The increase is primarily due tothe weakening of the U.S. dollar versus the Euro during the first quarter offiscal 2010 as compared to the first quarter 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 $7.7 million, or 73.3%, to $2.8million for the three months ended August 1, 2009 compared to $10.5million for the three months ended August 2, 2008 due to significantlylower sales volumes, increased professional and selling expenses, and increasedcurrency translation expenses, partially offset by lower restructuringexpenses.

 

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**InterconnectSegment Results**

 

Below is a tablesummarizing results for the three months ended:

(in millions)

** **
| ** **                              | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**           | ** ** | **2008**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                  | 24.7       |               | $          | 35.6           |       | $              | (10.9      | ) | -30.6 | % |
| Other  income                           |       | —             |       | 0.1                |       | (0.1           | )          | -100.0         | %          |
|                                    |       | 24.7               |       | 35.7               |       | (11.0          | )          | -30.8          | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Cost  of products sold                  |       | 18.5               |       | 26.6               |       | (8.1           | )          | -30.5          | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Gross  margins (including other income) |       | 6.2                |       | 9.1                |       | (2.9           | )          | -31.9          | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Restructuring                           |       | 0.8                |       | 1.7                |       | (0.9           | )          | -52.9          | %          |
| Selling  and administrative expenses    |       | 5.1                |       | 6.9                |       | (1.8           | )          | -26.1          | %          |
| Interest  income                        |       | —             |       | 0.1                |       | (0.1           | )          | -100.0         | %          |
| Other  expense, net                     |       | (0.1               | )          | (0.1               | )          | —         |       | 0.0            | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Income  before income taxes             |       | $                  | 0.2        |               | $          | 0.5            |       | $              | (0.3       | ) | -60.0 | % |
| ** **                              | ** ** | ** **         | ** ** | ** **         | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                              | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**                   | ** ** | **2009**           | ** ** | **2008**           | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0              | %          | 100.0              | %          |           |       |           |       |
| Other  income                           |       | 0.0                | %          | 0.3                | %          |           |       |           |       |
| Cost  of products sold                  |       | 74.9               | %          | 74.7               | %          |           |       |           |       |
| Gross  margins (including other income) |       | 25.1               | %          | 25.6               | %          |           |       |           |       |
| Restructuring                           |       | 3.2                | %          | 4.8                | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 20.6               | %          | 19.4               | %          |           |       |           |       |
| Interest  income                        |       | 0.0                | %          | 0.3                | %          |           |       |           |       |
| Other  expense, net                     |       | -0.4               | %          | -0.3               | %          |           |       |           |       |
| Income  before income taxes             |       | 0.8                | %          | 1.4                | %          |           |       |           |       |

 

*Net Sales*.  Interconnect segment net sales decreased$10.9 million, or 30.6%, to $24.7 million for the three months ended August 1,2009 from $35.6 million for the three months ended August 2, 2008.  Net sales were favorably impacted by theHetronic acquisition on September 30, 2008.  Excluding Hetronic, North American net salesdeclined 42.8%, Europe declined 40.9% and Asia declined 54.4% in the firstquarter of fiscal 2010 as compared to the first 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.  Translation of foreignoperations net sales in the three months ended August 1, 2009 decreasedreported net sales by $0.3 million, or 1.2%, due to currency rate fluctuations.

 

*OtherIncome*.  Other incomewas zero for the three months ended August 1, 2009, compared to $0.1million for the three months ended August 2, 2008.  Other income consisted primarily of earningsfrom engineering design fees and royalties.

 

*Cost ofProducts Sold*. Interconnect segment cost of products sold decreased $8.1 million to$18.5 million for the three months ended August 1, 2009 compared to $26.6million for the three months ended August 2, 2008.  Interconnect segment cost of products sold asa percentage of net sales increased slightly to 74.9% for the three monthsended August 1, 2009 compared to 74.7% for the three months ended August 2,2008.  The slight increase in cost ofproducts sold as a percentage of net sales primarily relates to manufacturinginefficiencies due to lower sales volumes in the first quarter of fiscal 2010,partially offset by lower cost of products sold as a percentage of sales fromHetronic.

 

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*GrossMargins (including other income). *Interconnectsegment gross margins (including other income) decreased $2.9 million, or31.9%, to $6.2 million for the three months ended August 1, 2009 ascompared to $9.1 million for the three months ended August 2, 2008.  Gross margins (including other income) as apercentage of net sales decreased to 25.1% for the three months ended August 1,2009 from 25.6% for the three months ended August 2, 2008.  The decrease in gross margins (includingother income) as a percentage of net sales primarily relates to manufacturinginefficiencies due to lower sales volumes in the first quarter of fiscal 2010as compared to the first quarter of fiscal 2009, partially offset by grossmargins (including other income) from Hetronic.

 

*Restructuring*.  In March 2009, we announced additionalrestructuring actions to further reduce our exposure and to consolidate manufacturing facilities to reducecosts.  During the fiscal quarterended August 1, 2009, the Interconnect segment recorded a restructuringcharge of $0.7 million related to this restructuring initiative, whichconsisted of $0.6 million for employee severance and $0.1 million for othercosts.  We expect the restructuring to becompleted 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 August 1, 2009, the Interconnect segment recorded arestructuring charge of $0.1 million related to this restructuring initiative,for employee severance, accelerated depreciation and other costs.  During the fiscal quarter ended August 2,2008, the Interconnect segment recorded a restructuring charge of $1.7 millionrelated to this restructuring initiative, which consisted of $0.6 million foremployee severance, $0.9 million for accelerated depreciation and $0.2 forinventory write-downs.  We expect therestructuring will be completed during the second half of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses decreased $1.8 million, or 26.1%, to$5.1 million for the three months ended August 1, 2009 compared to $6.9million for the three months ended August 2, 2008.  Selling and administrative expenses are lowerdue to reduced intangible asset amortization expenses, partially offset byselling 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 increased to 20.6% in the three months ended August 1,2009 from 19.4% for the three months ended August 2, 2008.

 

*InterestIncome, Net*.  There wasno interest income, net in the three months ended August 1, 2009, comparedto $0.1 million in the three months ended August 2, 2008.

 

*Other Expense,Net*.  Other expense,net was $0.1 million for both the three months ended August 1, 2009 and August 2,2008.  The functional currencies of theseoperations are 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.

 

*IncomeBefore Income Taxes. *Interconnectincome before income taxes decreased $0.3 million to $0.2 million for the threemonths ended August 1, 2009 compared to $0.5 million for the three monthsended August 2, 2008 due to lower sales volumes, and higher cost ofproducts sold due to the lower sales volumes, partially offset by lowerrestructuring and selling and administrative expenses.

 

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**PowerProducts Segment Results**

** **

Below is a tablesummarizing results for the three months ended:

(in millions)

 
| ** **                              | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **2009**           | ** ** | **2008**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                              |       | $                  | 11.2       |               | $          | 12.0           |       | $              | (0.8       | ) | -6.7 | % |
|                                    |       |               |       |               |       |           |       |           |       |
| Cost  of products sold                  |       | 8.9                |       | 9.7                |       | (0.8           | )          | -8.2           | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Gross  margins                          |       | 2.3                |       | 2.3                |       | 0.0            |       | 2.1            | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Restructuring                           |       | 0.2                |       | —             |       | 0.2            |       | 0.0            | %          |
| Selling  and administrative expenses    |       | 1.5                |       | 1.4                |       | 0.1            |       | 7.1            | %          |
| Other  - expense                        |       | —             |       | (0.1               | )          | 0.1            |       | -100.0         | %          |
|                                    |       |               |       |               |       |           |       |           |       |
| Income  before income taxes             |       | $                  | 0.6        |               | $          | 0.8            |       | $              | (0.2       | ) | -18.9 | % |
|                                    |       |               |       |               |       |           |       |           |       |
| ** **                              | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**         | ** ** | **2009**           | ** ** | **2008**           | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                              |       | 100.0              | %          | 100.0              | %          |           |       |           |       |
| Cost  of products sold                  |       | 79.5               | %          | 80.8               | %          |           |       |           |       |
| Gross  margins (including other income) |       | 21.0               | %          | 19.2               | %          |           |       |           |       |
| Restructuring                           |       | 1.8                | %          | 0.0                | %          |           |       |           |       |
| Selling  and administrative expenses    |       | 13.4               | %          | 11.7               | %          |           |       |           |       |
| Other  - expense                        |       | 0.0                | %          | -0.8               | %          |           |       |           |       |
| Income  before income taxes             |       | 5.8                | %          | 6.7                | %          |           |       |           |       |

 

*Net Sales*.  Power Products segment net sales decreased$0.8 million, or 6.7% to $11.2 million for the three months ended August 1,2009 compared to $12.0 million for the three months ended August 2,2008.  Net sales have declined in thefirst quarter of fiscal 2010 as compared to fiscal 2009 by 11.4% in NorthAmerica and 11.1% in Asia.  The declinewas driven by lower demand for our busbar and heat sink products.

 

*Cost ofProducts Sold*.  PowerProducts segment cost of products sold decreased $0.8 million, or 8.2%, to $8.9million for the three months ended August 1, 2009 compared to $9.7 millionfor the three months ended August 2, 2008. The Power Products segment cost of products sold as a percentage ofsales decreased to 79.5% for the three months ended August 1, 2009 from80.8% for the three months ended August 2, 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 $2.3 million for both the three monthsended August 1, 2009 and the three months ended August 2, 2008. Grossmargins as a percentage of net sales increased to 21.0% for the three monthsended August 1, 2009 from 19.2% for the three months ended August 2,2008.  The increase is due torestructuring and consolidation efforts for our Power Products businesses in theU.S. during the fourth quarter of fiscal 2009 and the first quarter of fiscal2010.

 

*Restructuring*.   In March 2009, we announcedrestructuring actions to consolidatemanufacturing facilities to reduce costs.  During the fiscal quarter ended August 1,2009, the Power Products segment recorded a restructuring charge of $0.2million, which consisted of $0.1 million for employee severance and $0.1million relating to professional fees.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses increased $0.1 million, or 7.1%, to$1.5 million for the three months ended August 1, 2009 compared to $1.4million for the three months ended August 2, 2008.  Selling and administrative expenses increaseddue to higher professional services fees during the

 

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first quarter offiscal 2010.  Selling and administrativeexpenses as a percentage of net sales increased to 13.4% in the three monthsended August 1, 2009 from 11.7% for the three months ended August 2,2008.

 

*IncomeBefore Income Taxes. *PowerProducts income before income taxes decreased $0.2 million to $0.6 million forthe three months ended August 1, 2009 compared to $0.8 million for thethree months ended August 2, 2008 due to lower sales volumes, higherrestructuring expenses, and higher professional fees, partially offset by lowercost of products sold due to restructuring and consolidation efforts.

 

**OtherSegment Results**

** **

Below is a tablesummarizing results for the three months ended:

(in millions)

 

 
| ** **                           | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
|--------------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **2009**           | ** ** | **2008**           | ** ** | **Net Change** | ** ** | **Net Change** | ** ** |
| Net  sales                           |       | $                  | 2.7        |               | $          | 2.2            |       | $              | 0.5        |   | 22.7 | % |
|                                 |       |               |       |               |       |           |       |           |       |
| Cost  of products sold               |       | 2.5                |       | 2.0                |       | 0.5            |       | 25.0           | %          |
|                                 |       |               |       |               |       |           |       |           |       |
| Gross  margins                       |       | 0.2                |       | 0.2                |       | —         |       | 0.0            | %          |
|                                 |       |               |       |               |       |           |       |           |       |
| Selling  and administrative expenses |       | 0.8                |       | 0.8                |       | —         |       | 0.0            | %          |
|                                 |       |               |       |               |       |           |       |           |       |
| Loss  before income taxes            |       | $                  | (0.6       | )                  | $          | (0.6           | )          | $              | —     |   | 0.0 | % |
|                                 |       |               |       |               |       |           |       |           |       |
| ** **                           | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Percent of sales:**      | ** ** | **2009**           | ** ** | **2008**           | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net  sales                           |       | 100.0              | %          | 100.0              | %          |           |       |           |       |
| Cost  of products sold               |       | 92.6               | %          | 90.9               | %          |           |       |           |       |
| Gross  margins                       |       | 7.4                | %          | 9.1                | %          |           |       |           |       |
| Selling  and administrative expenses |       | 29.6               | %          | 36.4               | %          |           |       |           |       |
| Loss  before income taxes            |       | -22.2              | %          | -27.3              | %          |           |       |           |       |

 

*Net Sales*.  The Other segment net sales increased $0.5million, or 22.7%, to $2.7 million for the three months ended August 1,2009, compared to $2.2 million for the three months ended August 2,2008.  Net sales from our torque-sensingbusiness increased 59.0% in the first quarter of fiscal 2010 compared to thefirst quarter of fiscal 2009.  Net salesfrom our testing facilities increased 11.6% in the first quarter of fiscal 2010compared to the first quarter of fiscal 2009.

 

*Cost ofProducts Sold*.  Othersegment cost of products sold increased $0.5 million to $2.5 million for thethree months ended August 1, 2009 compared to $2.0 million for the threemonths ended August 2, 2008.  Theincrease is due to an increase in prototypes in our torque-sensing business inthe first quarter of fiscal 2010 compared to the first quarter of fiscal2009.  Cost of products sold as apercentage of sales increased to 92.6% in the first quarter of fiscal 2010compared to 90.9% in the first quarter of fiscal 2009.

 

*GrossMargins. *The Othersegment gross margins were $0.2 million for both the three months ended August 1,2009 and the three months ended August 2, 2008.  The increase in net sales was offset by anincrease in cost of products sold in the first quarter of fiscal 2010.

 

*Sellingand Administrative Expenses*. Selling and administrative expenses were $0.8 million for both the threemonths ended August 1, 2009 and August 1, 2008.  Selling and administrative expenses as apercentage of net sales decreased to 29.6% in the three months ended August 1,2009 from 36.4% for the three months ended August 2, 2008.

 

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*LossBefore Income Taxes. *TheOther segment loss before income taxes was $0.6 million for both the three monthsended August 1, 2009 and August 2, 2008.   The increase in net sales was offset by theincrease in cost of products sold in the first quarter of fiscal 2010 comparedto the first quarter 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 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 August 1, 2009, we were in compliance with these covenants andhad no borrowings against this credit facility.

 

AtAugust 1, 2009, approximately $2.4 million was invested in anenhanced cash fund sold as an alternative to traditional money-market funds. Wehave historically invested a portion of our on hand cash balances in this fund.These investments are subject to credit, liquidity, market and interest raterisk. In December 2007, the fund was overwhelmed with withdrawal requestfrom investors and was closed with a restriction placed upon the cashredemption ability of its holders.  Basedon the information available to us, we have estimated the fair value of thisfund at $0.763 per unit as of August 1, 2009. During the first quarter offiscal 2010 we recorded a gain of $0.3 million, of which, $0.1 million was froma realized loss on partial redemptions of $1.1 million, offset by an unrealizedgain of $0.4 million.

 

Todate, 88% of the fund has been liquidated. The latest information from fund management states that its goal is tohave 99% of the portfolio liquidated by December 2009.  Information and the markets relating to theseinvestments remain dynamic, and there may be further declines or increases inthe value of these investments, the value of the collateral held by theseentities, and the liquidity of our investments. To the extent we determine that there are further declines or increasesin fair value, we may recognize additional losses or gains in future periods.

 

Netcash provided by operating activities decreased $3.6 million, or 31.9%, to $7.7million for the first quarter of fiscal 2010 compared to $11.3 million in thefirst quarter of fiscal 2009.  Thedecrease was due to our net income decreasing $6.8 million to break-even in thefirst quarter of fiscal 2010, compared to net income of $6.8 million in thefirst quarter of fiscal 2009.  Inaddition, non-cash charge add-backs were unfavorable, partially offset byfavorable changes in assets and liabilities in the first quarter of fiscal 2010compared to the first quarter of fiscal 2009. The primary factor in the Company’s ability to generate cash fromoperations is our net income. Additionally, cash flows from operations exceednet income because non-cash charges (depreciation, amortization of intangibles,restricted stock awards, and stock options) negatively impact net income but donot result in the use of cash. Similarly, non-cash credits such as deferred income tax benefitsincrease net income but do not provide cash. Additional contributors or offsets to cash flows from operations areworking capital requirements.

 

Net cash used in investing activities was $3.4 million for both thefirst quarter of 2010 and 2009. Purchases of plant and equipment was $3.3 million for both the firstquarter of fiscal 2010 and 2009.

 

Net cash used in financing activities was $2.6million for the first quarter of fiscal 2010, compared to $1.7 million for thefirst quarter of fiscal 2009.  We paiddividends of $2.6 million in the first quarter of fiscal 2010, compared to $1.9million in the first quarter 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.    As ofthe end of our fiscal year 2009, we had purchased 639,880 of the 3,000,000shares.  There were no shares purchasedin the first quarter 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.  Quantitative And Qualitative DisclosuresAbout 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 $3.0 million and $2.8 million for periods ended August 1, 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 aslong-term.  The currencies to which weare exposed are the British pound, Chinese yuan, Czech koruna, Euro, IndianRupee, Mexican peso, and Singapore dollar. A 10% change in foreign currency exchange rates from balance sheet datelevels could impact our net foreign investments by $11.1 million at August 1,2009 and $10.8 million 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 August 1, 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.****                                                 LegalProceedings.**

** **

Since October 23, 2008,we have been involved in ongoing legal proceedings with Delphi AutomotiveSystems, LLC (“Delphi”), in Oakland County, Michigan, Circuit Court.  These legal proceedings involve variousaspects of our current three-year supply agreement with Delphi, under which weprovide silicone-filled bladders (the “sensor pads”) for use in Delphi’sPassive Occupant Detection System (PODS). Delphi originally sought possession of certain Methode tooling drawingsrelated to the sensor pads.  In a letterdated August 26, 2009, Delphi provided us with a notice of termination ofall purchase orders and the entire three-year agreement, effectiveSeptember 10, 2009.  We arecurrently seeking a preliminary injunction to prevent Delphi from prematurelyterminating our current three-year supply agreement.  If we are not successful in this pendinglitigation, we believe demand for these sensor pads and our overall financialcondition and results of operations will be materially adversely affected.Because of these recent actions and consistent with our continuing evaluationof the legal proceedings to which we are a party, we have determined that ourlitigation with Delphi is now material.

 

**Item 2.****                                                 UnregisteredSales Of Equity Securities And Use Of Proceeds**

 

**c)****                                     ****Purchase of equity securities by the issuer and affiliated purchasers.**

 
| ** **                                    | ** ** | ** **            | ** ** | ** **      | ** ** | **Total  Number of**       | ** ** | **Maximum  Number of**         | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **Total**             | ** ** | ** **      | ** ** | **Shares  Purchased as**   | ** ** | **Shares  that**               | ** ** |
| ** **                                    | ** ** | **Number  of**        | ** ** | **Average**     | ** ** | **Part of  Publicly** | ** ** | **May Yet  Be Purchased** | ** ** |
| ** **                                    | ** ** | **Shares**            | ** ** | **Price  Paid** | ** ** | **Announced  Plans**       | ** ** | **Under  the Plans or**        | ** ** |
| **Period**                                    | ** ** | **Purchased  (1)(2)** | ** ** | **Per  Share**  | ** ** | **or  Programs**           | ** ** | **Programs**                   | ** ** |
|                                          |       |                  |       |            |       |                       |       |                           |       |
| May 3, 2009 through May 30, 2009    |       | 218                   |       | $               | 4.62       |                       | —     |                           | —     |   |
|                                          |       |                  |       |            |       |                       |       |                           |       |
| May 31, 2009 through July 4, 2009   |       | —                |       | —          |       | —                     |       | —                         |       |
|                                          |       |                  |       |            |       |                       |       |                           |       |
| July 5, 2009 through August 1, 2009 |       | —                |       | —          |       | —                     |       | —                         |       |
|                                          |       | 218                   |       | $               | 4.62       |                       | —     |                           | 2,360,120  |   |

 

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(1) The amount represents the repurchase and cancellation of shares of common stockredeemed by the Company for the payment of minimum withholding taxes on thevalue of restricted stock awards vesting during the period.

 

(2) On September 18, 2008, the Company adopted a plan to repurchase up to 3million shares of its common stock.  The plan expires on May 1, 2010.  No shares were repurchased during the firstquarter of fiscal 2010.

 

**Item 5. ****Other Information**

 

On September 4,2008, Methode and Delphi Automotive Systems LLC (“Delphi”) entered into asupply agreement pursuant to which Methode will supply all of Delphi’srequirements for  the silicone bladdersused in Delphi’s occupant restraint system from October 1, 2008 through September 30,2011.  A copy of this agreement isattached as Exhibit 10.31 hereto. On August 26, 2009, Delphi notified us that it is terminating oursupply arrangement effective September 10, 2009.  We are contesting Delphi’s right toprematurely terminate this long-term supply arrangement and the parties areengaged in litigation regarding this supply arrangement and our relatedintellectual property.  If we are not successful in this pendinglitigation, we believe demand for these sensor pads and our overall financialcondition and results of operations will be materially adversely affected.

 

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**Item 6.****                                                 Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30               |       | Fourth Amendment and Waiver to Credit Agreement,  effective as of May 2, 2009, among the Company as the Borrower, Bank of  America, N.A. |
| 10.31               |       | Letter Agreements dated August 25, 2008 and  September 4, 2008 by and between Methode and Delphi Automotive Systems  LLC.           |
|                |       |                                                                                                                                          |
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Executive Officer                                                              |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification of  Principal Financial Officer                                                              |
| 32                  |       | Certification of Periodic Financial Report Pursuant to  18 U.S.C. Section 1350                                                           |

 

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**SIGNATURES**

 

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

 

 
|   |                   | METHODE ELECTRONICS, INC. |
|--------|------------------------|---------------------------|
|   |                   |                      |
|   |                   |                      |
|   |                   | By:                       | */s/ Douglas A. Koman* |
|   |                   |                      | Douglas  A. Koman |
|   |                   |                      | Chief  Financial Officer |
|   |                   |                      | (principal  financial officer) |
|   |                   |                      |
| Dated: | September 3, 2009 |                      |   |
|        |                        |                           |  |  |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30               |       | Fourth Amendment and Waiver to Credit Agreement,  effective as of May 2, 2009, among the Company as the Borrower, Bank of  America, N.A. |
| 10.31               |       | Letter Agreements dated August 25, 2008 and  September 4, 2008 by and between Methode and Delphi Automotive Systems  LLC.           |
|                |       |                                                                                                                                          |
| 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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