METHODE ELECTRONICS INC - Annual Report: 2010 (Form 10-K)

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended May 1, 2010

 

Commission File Number 0-2816

 

METHODE ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

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

 

 

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

 

The aggregate market value of common stock, $0.50 par value, held by non-affiliates of the Registrant on October 31, 2009, based upon the average of the closing bid and asked prices on that date as reported by the New York Stock Exchange was $240.1 million.

 

Registrant had 38,146,646 shares of common stock, $0.50 par value, outstanding as of July 1, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement for the annual shareholders meeting to be held September 16, 2010 are incorporated by reference into Part III.

 

 

Table of Contents

 

METHODE ELECTRONICS, INC.

FORM 10-K

May 1, 2010

 

TABLE OF CONTENTS

 

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	4
Item 2.	Properties	8
Item 3.	Legal Proceedings	9
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	39
Item 9A.	Controls and Procedures	39
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	41
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
Item 13.	Certain Relationships and Related Transactions, and Director Independence	41
Item 14.	Principal Accounting Fees and Services	41
PART IV
Item 15.	Exhibits, Financial Statement Schedules	42

 

Table of Contents

 

PART I

 

Item 1.  Business

 

Methode Electronics, Inc. was incorporated in 1946 as an Illinois corporation and reincorporated in Delaware in 1966.  As used herein, “we,” “us,” “our,” the “Company” or “Methode” mean Methode Electronics, Inc. and its subsidiaries.

 

We are a global designer and manufacturer of electro-mechanical devices.  We design, manufacture and market devices employing electrical, radio remote control, electronic, wireless, sensing and optical technologies.  Our components are found in the primary end markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment markets, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), rail and other transportation industries.

 

Since January 2008, we’ve undertaken two separate restructuring initiatives to reposition our company to be more competitive in the marketplace.  Both restructuring initiatives were completed during fiscal 2010.  We have recorded a total of $25.7 million of costs related to the January 2008 restructuring, of which $2.5 million was recorded in fiscal 2010.  We have also recorded a total of $12.5 million of costs related to the March 2009 restructuring, of which $5.3 million was recorded in fiscal 2010.

 

We maintain our financial records on the basis of a fifty-two or fifty-three week fiscal year ending on the Saturday closest to April 30.  Due to the timing of our fiscal calendar, the fiscal years ended May 1, 2010 and May 2, 2009 represent 52 weeks of results and the fiscal year ended May 3, 2008 represents 53 weeks of results.

 

Segments.  Our business is managed and our financial results are reported on a segment basis, with those segments being Automotive, Interconnect, Power Products and Other.

 

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

 

The Interconnect segment provides a variety of copper and fiber-optic interconnect and interface solutions for the aerospace, appliance, commercial, computer, construction, consumer, material handling, medical, military, mining, networking, storage, and telecommunications markets.  Solutions include connectors, conductive polymer, thick film inks, custom cable assemblies, industrial safety radio remote controls, solid-state field effect interface panels, optical and copper transceivers, PC and express card packaging and terminators.  Services include the design and installation of fiber optic and copper infrastructure systems, and manufacturing active and passive optical components.

 

The Power Products segment manufactures braided flexible cables, current-carrying laminated bus devices, custom power-product assemblies, high-current low voltage flexible power cabling systems and powder coated bus bars that are used in various markets and applications, including aerospace, computers, industrial and power conversion, insulated gate bipolar transistor solutions, military, telecommunications, and transportation.

 

The Other segment includes a designer and manufacturer of magnetic torque sensing products, and independent laboratories that provide services for qualification testing and certification, and analysis of electronic and optical components.

 

Financial results by segment are summarized in Note 14 to the consolidated financial statements.

 

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Sales.  The following table reflects the percentage of net sales of the segments of the Company for the last three fiscal years.

 

		Year Ended
		May 1,		May 2,		May 3,
		2010		2009		2008
Automotive		53.4	%	57.2	%	65.7	%
Interconnect		33.3	%	30.8	%	24.7	%
Power Products		10.8	%	10.0	%	8.3	%
Other		2.5	%	1.9	%	1.3	%

 

Our sales activities are directed by sales managers who are supported by field application engineers and other engineering personnel who work with customers to design our products into their systems.  Our field application engineers also help us identify emerging markets and new products.  Our products are sold through in-house sales staff and through independent manufacturers’ representatives with offices throughout the world.  Information about our sales and operations in different geographic regions is summarized in Note 14 to the consolidated financial statements.  Sales are made primarily to OEMs, either directly or through their tiered suppliers as well as selling partners and distributors.

 

Sources and Availability of Materials.  Principal materials that we purchase include coil and bar stock, die castings, ferrous and copper alloy sheet, glass, plastic molding materials, precious metals, application-specific integrated circuits, light-emitting diode (LED) displays and silicon.  All of these items are available from several suppliers and we generally rely on more than one supplier for each item.  We have not experienced any significant shortages of raw materials and normally do not carry inventories of raw materials or finished products in excess of those reasonably required to meet production and shipping schedules.  We did not experience significant price increases in fiscal 2010 and 2009 for copper, precious metals and petroleum-based raw materials.  We did, however, experience significant price increases in fiscal 2008 related to those items.

 

Patents; Licensing Agreements.  We have numerous United States and foreign patents and license agreements covering certain of our products and manufacturing processes, several of which are considered significant to our business.   Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology. Although we have been awarded, have filed applications for, or have been licensed under numerous patents in the United States and other countries, there can be no assurance concerning the degree of protection afforded by these patents or the likelihood that pending patents will be issued.

 

Seasonality.  A significant portion of our business is dependent on automotive sales and the vehicle production schedules of our customers.  The automotive market is cyclical and depends on general economic conditions, interest rates, fuel prices and consumer spending patterns. Historically, our business was moderately seasonal as our North American automotive customers halt operations for approximately two weeks in July for model changeovers and for one to two weeks during the December holiday period.   During the second half of fiscal 2009 and the first quarter of fiscal 2010, we experienced additional customer plant shutdowns due to lower demand for their products.  If we continue to experience shutdowns in addition to July and December, future quarterly results may be affected.

 

Material Customers.  During the fiscal year ended May 1, 2010, shipments to Ford Motor Company (“Ford”) and General Motors Corporation (“GM”), or their tiered suppliers, each represented approximately 10% or greater of consolidated net sales and, in the aggregate, amounted to approximately 32.1% of consolidated net sales.  Such shipments included a wide variety of our automotive component products.

 

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Backlog. Our backlog of orders was approximately $59.3 million at May 1, 2010, and $66.7 million at May 2, 2009.  It is expected that most of the total backlog at May 1, 2010 will be shipped within fiscal 2011.

 

Competitive Conditions.  The markets in which we operate are highly competitive and characterized by rapid changes due to technological improvements and developments.  We compete with a large number of other manufacturers in each of our product areas; many of these competitors have greater resources and sales.  Price, service and product performance are significant elements of competition in the sale of our products.

 

Research and Development.  We maintain a research and development program involving a number of professional employees who devote a majority of their time to the development of new products and processes and the advancement of existing products.  Senior management of our Company participates directly in the program.  Expenditures for such activities amounted to $18.4 million, $22.0 million and $25.6 million for fiscal 2010, 2009 and 2008, respectively.

 

Environmental Matters.  Compliance with foreign, federal, state and local provisions regulating the discharge of materials into the environment has not materially affected our capital expenditures, earnings or our competitive position.  Currently, we do not have any environmental related lawsuits or material administrative proceedings pending against us.  Further information as to environmental matters affecting us is presented in Note 9 to the consolidated financial statements.

 

Employees.  At May 1, 2010 and May 2, 2009, we had 2,315 and 2,876 employees, respectively.  We also from time to time employ part-time employees and hire independent contractors.  As of May 1, 2010 our employees from our Malta and Mexico facilities, which account for about 50% of the total number of employees, are represented by a collective bargaining agreement.  We have never experienced a work stoppage and we believe that our employee relations are good.

 

Segment Information and Foreign Sales.  Information about our operations by segment and in different geographic regions is summarized in Note 14 to the consolidated financial statements.

 

Available Information.  We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act) and file periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information.

 

Financial and other information can also be accessed on the investor section of our website at www.methode.com. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.   Also posted on our website are the Company’s Corporate Governance Guidelines, Code of Conduct and the charters of the Audit Committee, Compensation Committee, Nominating and Governance Committee and Technology Committee. Copies of these documents are also available free of charge by sending a request to Methode Electronics, Inc., 7401 West Wilson Avenue, Chicago, Illinois 60706, Attention: Investor Relations Department.  Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of them.

 

Certifications.  As required by the rules and regulations of the New York Stock Exchange (“NYSE”), we delivered to the NYSE a certification signed by our Chief Executive Officer, Donald W. Duda, certifying that Mr. Duda was not aware of any violation by the Company of the NYSE’s corporate governance listing standards as of October 20, 2009.

 

As required by the rules and regulations of the SEC, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of our public disclosures are filed as exhibits to this Annual Report on Form 10-K.

 

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Item 1A.  Risk Factors

 

Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties.  We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations.  Our business is highly dependent upon two large automotive customers and specific makes and models of automobiles.  Our results will be subject to many of the same risks that apply to the automotive, appliance, computer and telecommunications industries, such as general economic conditions, interest rates, consumer spending patterns and technological changes.   Other factors, which may result in materially different results for future periods, include the following risk factors.  These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these factors could cause our actual results and condition to differ materially from those projected in forward-looking statements.  The forward-looking statements in this report are subject to the safe harbor protection provided under the securities laws and are made as of the date of this report.  We undertake no duty to update any such forward-looking statements.

 

We depend on a small number of large customers, specifically two large automotive customers.  If we were to lose any of these customers or any of these customers volume of products purchased, or if any of the customers declare bankruptcy, our future results could be adversely affected.

 

During the year ended May 1, 2010, shipments to Ford and GM, or their tiered suppliers, each represented 10% or greater of consolidated net sales and, in the aggregate, amounted to approximately 32.1% of consolidated net sales.  The contracts we have entered into with many of our customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by Ford or GM could have a material adverse impact on our results of operations and financial condition. We also compete to supply products for successor models and are subject to the risk that Ford or GM will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition.

 

In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy.  Due to the financial stresses within the worldwide automotive industry, certain automakers and suppliers have already declared bankruptcy or may be susceptible to bankruptcy.

 

Because we derive a substantial portion of our revenues from customers in the automotive, appliance, computer and communications industries, we are susceptible to trends and factors affecting those industries.

 

Our components are found in the primary end markets of the automotive, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries, appliances and the consumer and industrial equipment markets.  Factors negatively affecting these industries and the demand for products also negatively affect our business, financial condition and operating results. In fiscal 2010 and 2009, we experienced slow-downs in all significant segments due to the recession.  Any adverse occurrence, including additional industry slowdown, recession, rising interest rates, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and operating results.

 

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

 

A large portion of our business is dependent on automotive sales and the vehicle production schedules of our customers.  The automotive market is cyclical and depends on general economic conditions, interest rates and consumer spending patterns.  Any significant reduction in vehicle production by our customers would have a material adverse effect on our business.  Traditionally, in prior fiscal years, our business was moderately seasonal as our North American automotive customers historically halt operations for approximately two weeks in July for model changeovers and one to two weeks during the December holiday period.   During the second half of fiscal 2009 and the first quarter of fiscal 2010, we experienced additional customer plant shutdowns due to lower demand

 

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for their products.  If we continue to experience shutdowns in addition to July and December, future quarterly results may be affected.

 

Our technology-based business and the markets in which we operate are highly competitive.  If we are unable to compete effectively, our sales will decline.

 

The markets in which we operate are highly competitive and characterized by rapid changes due to technological improvements and developments.  We compete with a large number of other manufacturers in each of our product areas; many of these competitors have greater resources and sales.  Price, service and product performance are significant elements of competition in the sale of our products.  Competition may intensify further if more companies enter the markets in which we operate. Our failure to compete effectively could materially adversely affect our business, financial condition and operating results.

 

We face risks relating to our international operations.

 

Because we have significant international operations, our operating results and financial condition could be adversely affected by economic, political, health, regulatory and other factors existing in foreign countries in which we operate. Our international operations are subject to inherent risks, which may adversely affect us, including: fluctuations in exchange rates; political and economic instability; expropriation, or the imposition of government controls; changes in government regulations; export license requirements; trade restrictions; earnings expatriation restrictions; exposure to different legal standards; less favorable intellectual property laws; health conditions and standards; currency controls; increases in duties and taxes; high levels of inflation or deflation; greater difficulty in collecting our accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing our international operations; limitations on insurance coverage against geopolitical risks, natural disasters and business operations; and  communication among and management of international operations. In addition, these same factors may also place us at a competitive disadvantage to some of our foreign competitors.

 

We may be unable to keep pace with rapid technological changes, which would adversely affect our business.

 

The technologies relating to some of our products have undergone, and are continuing to undergo, rapid and significant changes. Specifically, end markets for electronic components and assemblies are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards.  These changes could render our existing products unmarketable before we can recover any or all of our research, development and other expenses. Furthermore, the life cycles of our products vary, may change and are difficult to estimate. If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and operating results could be materially adversely affected.

 

Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services and liability claims against us.

 

Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or manufacturing errors or component failure. Product defects may result in delayed shipments and reduced demand for our products. We may be subject to increased costs due to warranty claims on defective products. Product defects may result in product liability claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death. We may be required to participate in a recall involving products that are, or are alleged to be, defective. We carry insurance for certain legal matters involving product liability, however, we do not have coverage for all costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed our available coverage.

 

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 have numerous United States and foreign patents and license agreements covering certain of our products and manufacturing processes, several of which are considered material to our business.  Our ability to

 

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compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology. Although we have been awarded, have filed applications for, or have been licensed under numerous patents in the United States and other countries, there can be no assurance concerning the degree of protection afforded by these patents or the likelihood that pending patents will be issued.  The loss of any significant patents and trade secrets could adversely affect our sales, margins, profitability and, as a result, share price.

 

We may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringe on their intellectual property. These claims and any resulting lawsuit could subject us to liability for damages and invalidate our intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be required to cease marketing or selling certain products, pay a penalty for past infringement and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. We may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect us even if we are successful in the litigation.

 

We are dependent on the availability and price of materials.

 

We require substantial amounts of materials, including petroleum-based products, glass, copper and precious metals, application-specific integrated circuits, light-emitting diode (LED) displays, and all materials we require are purchased from outside sources. The availability and prices of materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Any change in the supply of, or price for, these materials could materially affect our results of operations and financial condition.  We did not experience significant price increases in fiscal 2010 and 2009 for copper, precious metals and petroleum-based materials.  We did, however, experience significant price increases in fiscal 2008 related to those items.

 

We may acquire businesses or divest business operations. These transactions may pose significant risks and may materially adversely affect our business, financial condition and operating results.

 

We intend to explore opportunities to acquire other businesses or technologies that could complement, enhance or expand our current business or product lines or that might otherwise offer growth opportunities. Any transactions that we are able to identify and complete may involve a number of risks, including: the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or joint venture; possible adverse effects on our operating results during the integration process; and our possible inability to achieve the intended objectives of the transaction. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. We may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities, a reduction of cash or the incurrence of debt.

 

We have in the past, and may in the future, consider divesting certain business operations. Divestitures may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of operations in the affected business. Failure to timely complete a divestiture or to consummate a divestiture may negatively affect valuation of the affected business or result in restructuring charges.

 

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

 

Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in other currencies, mainly in Europe and China.  Our profitability is affected by movements of the U.S. dollar against the euro and Chinese yuan in which we generate revenue and incur expenses.  Significant long-term fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitability and financial condition.

 

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Unfavorable tax law changes may adversely affect results.

 

We are subject to income taxes in the U.S. and in various foreign jurisdictions.  Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions.  Our effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates or changes in the tax laws.

 

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

 

The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future.  The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are beyond our control, including, but not limited to:

 

·                 quarterly variations in our operating results and the operating results of other technology companies;

·                 actual or anticipated announcements of technical innovations or new products by us or our competitors;

·                 changes in analysts’ estimates of our financial performance or buy/sell recommendations;

·                 any acquisitions we pursue or complete;

·                 general conditions in the aerospace, appliance, automotive, consumer and industrial equipment markets, communications, rail and other transportation industries; and

·                 global economic and financial conditions.

 

In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for many companies and that often have been unrelated to the operating performance of such companies.  These broad market fluctuations and other factors have harmed and may harm the market price of our common stock.

 

We are subject to the risks of owning real property.

 

A majority of our real properties in the U.S. are owned by us.  Ownership of property is subject to the risks of owning real property, which may include:

 

·                 the possibility of environmental contamination and the costs associated with correcting any environmental problems;

·                 adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhood in which the property is located, or other factors;

·                 increased cash commitments for improving the current buildings;

·                 the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of fire, floods, or other natural disasters;

·                 rising real estate taxes; and

·                 the potential difficulty of selling the real property, if we chose to do so, due to the stagnant real estate market.

 

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Item 2.  Properties

 

We operate the following manufacturing and other facilities, all of which we believe to be in good condition and adequate to meet our current and reasonably anticipated needs:

 

				Owned/		Approximate
Location		Use		Leased		Square Footage
Chicago, Illinois		Corporate Headquarters		Owned		15,000
Automotive Segment:
Carthage, Illinois		Manufacturing		Owned		261,000
Mriehel, Malta		Manufacturing		Leased		209,000
Shanghai, China		Manufacturing		Leased		75,500
McAllen, Texas		Warehousing		Leased		38,000
Monterrey, Mexico		Manufacturing		Leased		36,000
Southfield, Michigan		Sales and Engineering Design Center		Owned		17,000
Gau-Algesheim, Germany		Sales and Engineering Design Center		Leased		6,800
Burnley, England		Engineering Design Center		Leased		5,900
Bangalore, India		Engineering Design Center		Leased		4,000
Sin El Fil, Lebanon		Engineering Design Center		Leased		2,300
Interconnect Segment:
Shanghai, China		Manufacturing		Leased		49,000
Richardson, Texas		Manufacturing		Leased		45,000
Chicago, Illinois		Manufacturing		Owned		38,400
Jihlava, Czech Republic		Manufacturing		Owned		36,000
Mosta, Malta		Manufacturing		Leased		32,500
Laguna, Philippines		Manufacturing		Leased		22,800
Wheaton, Illinois		Manufacturing		Leased		22,500
Oklahoma City, Oklahoma		Manufacturing/Design Center		Leased		19,800
San Jose, California		Sales and Design		Leased		7,250
Warsaw, Poland		Sales and Distribution		Leased		5,700
Limerick, Ireland		Sales and Distribution		Leased		4,700
Singapore		Sales and Administrative		Leased		3,000
Kiev, Ukraine		Sales and Distribution		Leased		900
Ljubljana, Slovenia		Sales and Distribution		Leased		400
Power Products Segment:
Shaghai, China		Manufacturing		Leased		60,000
Rolling Meadows, Illinois		Manufacturing		Owned		52,000
San Jose, California		Prototype and Design Center		Leased		7,250
Other Segment:
Palatine, Illinois		Test Laboratory		Owned		27,000
Hunt Valley, Maryland		Test Laboratory		Owned		16,000
Chicago, Illinois		Manufacturing		Owned		10,000

 

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Item 3.  Legal Proceedings

 

As of July 1, 2010, we were not involved in any material legal proceedings or any legal proceedings or material administrative proceedings with governmental authorities pertaining to the discharge of materials into the environment or otherwise.

 

In March 2010, DPH Holdings Corp. and certain of its affiliated debtors, as successors to Delphi Corporation and certain of its affiliates (“Delphi”), served the Company with a complaint seeking to avoid and recover approximately $19.7 million in alleged preference payments that Delphi made to the Company within the 90-day period preceding Delphi’s bankruptcy filing in October 2005 (the “Complaint”).  Delphi is pursuing similar preference complaints against approximately 175 other, unrelated third-parties.  The Complaint, dated September 28, 2007, was originally filed under seal with the United States Bankruptcy Court for the Southern District of New York (titled as Delphi Corporation, et al. v. Methode Electronics, Inc, Adversary Proceeding No. 07-2432) and pursuant to certain court orders, the Complaint was not unsealed and served upon the Company until March 2010.  The Company has filed a joinder to third-parties’ motions to dismiss the Delphi preference complaints based on violations of due process and other defenses connected to the unusual manner that Delphi filed and served the preference complaints.   Additionally, the Company possesses several other substantive defenses to the Complaint including, but not limited to, the affirmative defenses available under the Bankruptcy Code, statute of limitations, setoff, waiver and estoppel.   Although the ultimate liabilities resulting from this proceeding could be significant to the Company’s results of operations in the period recognized, management does not anticipate that they will have a material adverse effect on the Company’s consolidated financial position.

 

Executive Officers of the Registrant

 

Name		Age		Offices and Positions Held and Length of Service as Officer
Donald W. Duda		54		Chief Executive Officer of the Company since 2004. President and Director of the Company since 2001. Prior thereto Mr. Duda was Vice President-Interconnect Group since March 2000. Prior thereto Mr. Duda was with Amphenol Corporation through November 1998 as General Manager of its Fiber Optic Products Division since 1988.
Douglas A. Koman		60		Chief Financial Officer of the Company since 2004. Vice President, Corporate Finance, of the Company since 2001. Prior thereto Mr. Koman was Assistant Vice President-Financial Analysis since December 2000. Prior thereto Mr. Koman was with Illinois Central Corporation through March 2000 as Controller since November 1997 and Treasurer since July 1991.
Thomas D. Reynolds		47		Chief Operating Officer, of the Company since June 24, 2010. Senior Vice President, Worldwide Automotive Operations, of the Company since 2006. Vice President and General Manager, North American Automotive Operations, of the Company since October 2001. Prior thereto Mr. Reynolds was with Donnelly Corporation through October 2001 as Senior Manager of Operations since 1999, and as Director of Transnational Business Unit from 1995 to 1999.
Timothy R. Glandon		46		Vice President and General Manager, North American Automotive, of the Company since 2006. Prior thereto Mr. Glandon was General Manager of Automotive Safety Technologies since 2001. Prior thereto Mr. Glandon was Vice President and General Manager with American Components, Inc. from 1996 to 2001.

 

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Joseph. E. Khoury		46		Vice President and General Manager, European Automotive, of the Company since 2004. Prior thereto Mr. Khoury was General Manager of Methode Electronics International, GMBH since 2000.
Theodore D. Kill		59		Vice President, Worldwide Automotive Sales, of the Company since August 2006. Prior thereto Mr. Kill was a principal with Kill and Associates from 2003 to 2006. Prior thereto Mr. Kill was a principal with Kill and Bolton Associates from 1995 to 2003.
Ronald L.G. Tsoumas		49		Controller and Treasurer of the Company since 2007. Prior thereto Mr. Tsoumas was Assistant Controller of the Company since July 1998.

 

All executive officers are elected by the Board of Directors and serve a term of one year or until their successors are duly elected and qualified.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The following is a tabulation of high and low sales prices for the periods indicated as reported by the New York Stock Exchange.

 

								Dividends
		Sales Price Per Share						Paid
		High			Low			Per Share
Fiscal Year ended May 1, 2010
First Quarter		$	8.18		$	5.28		$	0.07
Second Quarter		9.75			6.92			0.07
Third Quarter		12.75			6.99			0.07
Fourth Quarter		14.32			9.70			0.07
Fiscal Year ended May 2, 2009
First Quarter		$	12.51		$	9.50		$	0.05
Second Quarter		13.65			6.11			0.07
Third Quarter		9.66			4.45			0.07
Fourth Quarter		6.43			2.59			0.07

 

On June 24, 2010, the Board declared a dividend of $0.07 per share of common stock, payable on July 30, 2010, to holders of record on July 16, 2010.

 

As of June 30, 2010, the number of record holders of our common stock was 636.

 

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Equity Compensation Plan Information

 

The following table provides information about shares of our common stock that may be issued upon exercise of stock options or granting of stock awards under all of the existing equity compensation plans as of May 1, 2010.

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders		1,125,276		$	7.28		473,181
Equity compensation plans not approved by security holders		—		—			—
Total		1,125,276		$	7.28		473,181

 

Recent Sales of Unregistered Securities

 

In March 2010, we sold 30,000 shares of our common stock (the “Methode shares”) in exchange for the shares of Hetronic Asia Manufacturing & Trading Corporation (the “Hetronic shares”) held by each investor.  Methode also paid certain cash consideration for the Hetronic shares.  The Methode shares vest for each investor one-third per year over a period of three years ending on April 28, 2012, subject to certain events of forfeiture.

 

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Purchase of Equity Securities by the Company 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)		Per Share			or Programs (2)		Programs (2)
January 31, 2010 through February 27, 2010		218		$	10.99
February 28, 2010 through April 3, 2010
April 4, 2010 through May 1, 2010		10,487		$	11.10		—		—
		10,705		$	11.10		—		—

 

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

 

(2)  On September 18, 2008, the Board of Directors adopted a plan to repurchase up to 3 million shares of its common stock.  There were 669,480 shares purchased under the plan, however, no shares were purchased in fiscal 2010.  The plan expired on May 1, 2010.

 

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Item 6.  Selected Financial Data

 

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements and related notes included elsewhere in this report.  The consolidated statement of operations data for fiscal 2010, 2009 and 2008, and the consolidated balance sheet data as of May 1, 2010 and May 2, 2009, are derived from, and are qualified by reference to, the Company’s audited consolidated financial statements included elsewhere in this report.  The consolidated statement of operations data for fiscal 2007 and 2006, and the consolidated balance sheet data as of May 3, 2008, April 28, 2007 and April 29, 2006, are derived from audited consolidated financial statements not included in this report.  Due to the timing of our fiscal calendar, fiscal 2008 represents 53 weeks of results.  Fiscal 2010, 2009, 2007 and 2006 represent 52 weeks of results.

 

		Fiscal Year Ended
		May 1,			May 2,			May 3,			April 28,			April 29,
		2010			2009			2008 (53 wks)			2007			2006
		(In Millions, Except Percentages and Per Share Amounts)
Income Statement Data:
Net sales		$	373.1		$	425.6		$	551.1		$	448.4		$	421.6
Income/(loss) before income taxes and cumulative affect of accounting change		7.8		(1)	(110.5		)(2)	49.8		(3)	35.5		(4)	32.2		(5)
Income tax expense/(benefit)		(6.0		)(1)	1.7		(2)	9.7		(3)	9.8		(4)	15.3		(5)
Cumulative effect of accounting change		—			—			—			0.1			—
Net income/(loss) applicable to Methode Electronics, Inc.		13.7		(1)	(112.5		)(2)	39.8		(3)	26.1		(4)	17.0		(5)
Per Common Share:
Basic net income/(loss)		0.37		(1)	(3.05		)(2)	1.07		(3)	0.72		(4)	0.47		(5)
Diluted net income/(loss)		0.37		(1)	(3.05		)(2)	1.06		(3)	0.71		(4)	0.47		(5)
Dividends		0.28			0.26			0.20			0.20			0.20
Book Value		6.43			6.28			9.93			8.69			7.82
Long-term Debt		—			—			—			—			—
Retained Earnings		146.8			143.6			265.8			233.7			215.1
Fixed Assets (net)		61.9			69.9			90.3			86.9			90.5
Total Assets		310.8			305.3			470.2			411.7			374.6
Return on Average Equity		6.0		%(1)	-37.2		%(2)	11.4		%(3)	8.5		%(4)	5.9		%(5)
Pre-tax Income/(loss) as a Percentage of Sales		2.1		%(1)	-26.0		%(2)	9.0		%(3)	8.0		%(4)	7.7		%(5)
Net Income/(loss) as a Percentage of Sales		3.8		%(1)	-26.4		%(2)	7.2		%(3)	5.8		%(4)	4.0		%(5)

 

(1) Fiscal 2010 results include a pre-tax charge of $7.8 million relating to restructuring activities.  In addition, fiscal 2010 includes $5.8 million of pre-tax legal expense relating to the Delphi supply agreement and patent lawsuit.  Income tax includes a $8.4 million loss carry-back benefit related to losses in our U.S.-based businesses.

 

(2) Fiscal 2009 results include a pre-tax charge of $94.4 million relating to goodwill and other asset impairments.  In addition, fiscal 2009 results include a pre-tax charge of $25.3 million relating to restructuring activities.  The income tax expense includes a $28.0 million valuation charge related to the uncertainty of the future realization of our deferred tax assets.

 

(3) Fiscal 2008 results include a pre-tax charge of $5.2 million relating to a restructuring of our U.S.-based automotive operations and the decision to discontinue producing certain legacy products in the Interconnect segment.

 

(4) Fiscal 2007 results include a pre-tax and an after-tax restructuring charge of $2.0 million related to the closing of our Scotland automotive parts manufacturing plant and transfer of production lines from that facility to our automotive parts manufacturing facility in Malta.

 

(5) Fiscal 2006 results include $4.5 million of income tax expense related to the repatriation of $38.1 million

 

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of foreign earnings for which income taxes were not previously provided, and an after-tax charge of $1.5 million ($2.3 million pre-tax) related to receivables deemed to be impaired due to the Chapter 11 bankruptcy filing by Delphi.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in China, Czech Republic, Germany, Lebanon, Malta, Mexico, the Philippines, Singapore, the United Kingdom and the United States.  We are a global designer and manufacturer of electro-mechanical devices.  We design, manufacture and market devices employing electrical, radio remote control, electronic, wireless, sensing and optical technologies.  Our business is managed on a segment basis, with those segments being Automotive, Interconnect, Power Products and Other.   For more information regarding the business and products of these segments, see “Item 1. Business.”

 

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

 

Since January 2008, we’ve undertaken two separate restructuring initiatives to reposition our company to be more competitive in the marketplace.  Both restructuring actions were completed during fiscal 2010.  We have recorded a total of $25.7 million related to the January 2008 restructuring, of which $2.5 million was recorded in fiscal 2010.  We have also recorded a total of $12.5 million related to the March 2009 restructuring, of which $5.3 million was recorded in fiscal 2010.

 

On September 4, 2008, Methode and Delphi Automotive Systems LLC (“Delphi”) entered into a supply agreement pursuant to which Methode was to supply all of Delphi’s requirements for the seat bladders used in Delphi’s occupant restraint system from October 1, 2008 through September 30, 2011.  On August 26, 2009, Delphi notified us that effective September 10, 2009, our supply arrangement was terminated.  We are contesting Delphi’s right to terminate this long-term supply arrangement and the parties are engaged in litigation regarding this supply arrangement and our related intellectual property.

 

As described in more detail in Part I, Item 3 “Legal Proceedings” of this Annual Report on Form 10-K, in March 2010, DPH Holdings Corp., as successor to Delphi Corporation, served the Company with a complaint seeking to recover approximately $19.7 million in alleged preference payments that Delphi made to the Company within the 90-day preference period preceding Delphi’s bankruptcy filing.  The Company is seeking to dismiss the Delphi preference complaint based on violations of due process and the Company possesses several other substantive defenses.

 

Business Outlook

 

Due to the loss of the Delphi business and the exit of legacy Ford products in fiscal 2010, we expect a decline in our Automotive segment sales in fiscal 2011.  In addition, it is unclear in Europe what the impact will be with regard to the phase out of the “scrappage” incentives, which governments paid owners to trade in old cars to purchase new models.  It is also unclear what the current European debt crisis will have on our European businesses.  For our other businesses, if the economic conditions continue to stabilize, with no significant further deterioration, we expect modest sales growth during fiscal 2011 as compared to fiscal 2010.  The restructuring actions undertaken by us over the past three fiscal years, targeted at reducing our cost structure are expected to positively impact our future earnings and cash flows.  The additional operating cash flow generated by these cost savings will continue to be strategically deployed to strengthen our competitive position.

 

Results may differ materially from what is expressed or forecasted.  See “ Item 1A Risk Factors” herein.

 

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Results of Operations

 

Results of Operations for the Fiscal Year Ended May 1, 2010 as Compared to the Fiscal Year Ended May 2, 2009

 

Consolidated Results

 

Below is a table summarizing results for the years ended:

(in millions)

(Not meaningful equals “N/M”)

 

		May 1,			May 2,
		2010			2009			Net Change			Net Change
Net sales		$	373.1		$	425.6		$	(52.5	)	-12.3	%
Other income		4.5			3.2			1.3			40.6	%
		377.6			428.8			(51.2		)	-11.9	%
Cost of products sold		297.7			356.4			(58.7		)	-16.5	%
Gross margins (including other income)		79.9			72.4			7.5			10.4	%
Restructuring		7.8			25.3			(17.5		)	-69.2	%
Impairment of goodwill and other assets		—			94.4			(94.4		)	N/M
Selling and administrative expenses		62.4			57.2			5.2			9.1	%
Amortization of intangibles		2.3			6.9			(4.6		)	-66.7	%
Interest income/(expense), net		(0.1		)	1.4			(1.5		)	N/M
Other, net - income/(expense)		0.5			(0.5		)	1.0			N/M
Income taxes - expense/(benefit)		(6.0		)	1.7			(7.7		)	N/M
Net income attributable to noncontrolling interest		0.1			0.3			(0.2		)	-66.7	%
Net income/(loss) attributable to Methode Electronics, Inc.		$	13.7		$	(112.5	)	$	126.2		N/M

 

		May 1,		May 2,
Percent of sales:		2010		2009
Net sales		100.0	%	100.0	%
Other income		1.2	%	0.8	%
Cost of products sold		79.8	%	83.7	%
Gross margins (including other income)		21.4	%	17.0	%
Restructuring		2.1	%	5.9	%
Impairment of goodwill and other assets		0.0	%	22.2	%
Selling and administrative expenses		16.7	%	13.4	%
Amortization of intangibles		0.6	%	1.6	%
Interest income/(expense), net		0.0	%	0.3	%
Other, net - income/(expense)		0.1	%	-0.1	%
Income taxes - expense/(benefit)		-1.6	%	0.4	%
Net income attributable to noncontrolling interest		0.0	%	0.1	%
Net income/(loss) attributable to Methode Electronics, Inc.		3.7	%	-26.4	%

 

Net Sales.  Consolidated net sales decreased $52.5 million, or 12.3%, to $373.1 million for fiscal 2010 from $425.6 million for fiscal 2009.  The Automotive segment net sales declined $44.3 million or 18.2% to $199.3 million for fiscal 2010 from $243.6 million for fiscal 2009.  The decline is primarily attributable to lower sales to Delphi, Ford and Chrysler and the weak economic environment.  The Interconnect segment net sales decreased $6.9 million, or 5.3% to $124.1 million for fiscal 2010 as compared to $131.0 million for fiscal 2009.  The Power Products segment net sales decreased $2.3 million, or 5.4% to $40.4 million for 2010 as compared to $42.7 million for fiscal 2009.  The Other segment net sales increased $1.1 million, or 13.4%, to $9.3 million for fiscal 2010, as

 

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compared to $8.2 million for fiscal 2009.  Translation of foreign operations net sales for fiscal 2010 increased reported net sales by $1.0 million or 0.3% due to currency rate fluctuations.

 

Other Income.  Other income increased $1.3 million, or 40.6%, to $4.5 million for fiscal 2010 from $3.2 million for fiscal 2009.  Other income consisted primarily of earnings from engineering design fees and royalties.  The increase relates to engineering design fees in our European automotive business.

 

Cost of Products Sold.  Consolidated cost of products sold decreased $58.7 million, or 16.5%, to $297.7 million for fiscal 2010 compared to $356.4 million for fiscal 2009.  The decrease is due to the lower sales volumes.  Consolidated cost of products sold as a percentage of sales were 79.8% for fiscal 2010, compared to 83.7% for fiscal 2009.  The decrease relates to restructuring and consolidation efforts that were undertaken in prior periods to improve inefficiencies in the business.

 

Gross Margins (including other income).  Consolidated gross margins (including other income) increased $7.5 million, or 10.4%, to $79.9 million for fiscal 2010 compared to $72.4 million for fiscal 2009.  Gross margins (including other income) as a percentage of net sales were 21.4% for fiscal 2010 compared to 17.0% for fiscal 2009.  The increase relates to higher other income in fiscal 2010 as well as restructuring and consolidation efforts that were undertaken in prior periods.

 

Restructuring.  In March 2009, we announced additional restructuring actions to consolidate manufacturing facilities to reduce costs.  During fiscal 2010, we recorded a restructuring charge of $5.3 million related to this restructuring initiative, which consisted of $3.6 million for employee severance and $1.7 million relating to other costs.  During fiscal 2009, we recorded a restructuring charge of $7.3 million related to this restructuring initiative, which consisted of $0.1 for employee severance, $1.4 million for the impairment of fixed assets, $5.4 million for the impairment of customer funded tooling and $0.4 million for other costs.  All of the restructuring actions related to the March 2009 restructuring initiative are now complete.

 

In January 2008, we announced a restructuring of our U.S.-based automotive operations and the decision to discontinue producing certain legacy products in the Interconnect segment.  During fiscal 2010, we recorded a restructuring charge of $2.5 million related to this restructuring initiative, which consisted of $0.7 million for employee severance, $1.5 million for the impairment and accelerated depreciation and $0.3 million relating to other costs.  During fiscal 2009, we recorded a restructuring charge of $18.0 million related to this restructuring initiative, which consisted of $6.1 million for employee severance, $10.8 million for impairment and accelerated depreciation, $0.2 million for inventory write-downs and $0.9 million relating to other costs.  All of the restructuring actions related to the January 2008 restructuring initiative are now complete.

 

Impairment of Goodwill and Other Assets.  During fiscal 2009, in accordance with Accounting Standards Codification, (“ASC”) No. 350, “Intangibles-Goodwill and Other,” we performed goodwill impairment testing and concluded that goodwill was impaired.  Therefore, during fiscal 2009, we recorded a goodwill impairment charge of $25.8 million in our Automotive segment, $30.8 million in our Interconnect segment, $5.4 million in our Power Products segment and $1.2 million in our Other segment for a total of $63.2 million related to these assets.

 

Also during the third quarter of fiscal 2009, in accordance with ASC No. 360, “Property, Plant and Equipment,” it was determined that certain identifiable assets of our businesses were impaired.  Therefore, during fiscal 2009, we recorded an impairment charge of $4.6 million in our Automotive segment, $26.2 million in our Interconnect segment and $0.4 million in our Other segment for a total of $31.2 million related to these assets.

 

Selling and Administrative Expenses.  Selling and administrative expenses increased $5.2 million, or 9.1%, to $62.4 million for fiscal 2010 compared to $57.2 million for fiscal 2009.  The increase is due to $5.8 million in legal fees relating to the Delphi supply agreement and patent dispute.  In addition, selling and administrative expenses were negatively impacted by $1.4 million due to $0.8 million of stock-based compensation in fiscal 2010, compared to a net reversal of expense of $0.6 million in fiscal 2009.  The net reversal in fiscal 2009 was due to performance-based shares not meeting certain financial targets.  Selling and administrative expenses were lower by $2.0 million due to restructuring and consolidation efforts from previous periods.  Selling and administrative expenses as a percentage of net sales increased to 16.7% for fiscal 2010 from 13.4% for fiscal 2009.

 

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Amortization of Intangibles.  Amortization of intangibles decreased $4.6 million, or 66.7%, to $2.3 million for fiscal 2010, compared to $6.9 million for fiscal 2009.  The decrease is due to the impairment of certain intangible assets in fiscal 2009.

 

Interest Income/(Expense), Net.  Net interest income/(expense) decreased $1.5 million for fiscal 2010 to an expense of  $0.1 million as compared to income of $1.4 million for fiscal 2009.  The average cash balance in fiscal 2010 was $62.5 million compared to an average cash balance of $81.4 million for fiscal 2009.  The decrease in the average cash balance relates primarily to the Hetronic acquisition during the second quarter of fiscal 2009.  The average interest rate earned for fiscal 2010 was 0.59% compared to 2.22% for fiscal 2009.  Interest expense was $0.5 million and $0.4 million for fiscal 2010 and fiscal 2009, respectively.  The interest expense in fiscal 2010 includes $0.1 million of fees related to the amendment of our bank agreement.

 

Other Income/(Expense), Net.  Other income/(expense), net increased $1.0 million to income of $0.5 million for fiscal 2010 compared to an expense of $0.5 million for fiscal 2009.  Fiscal 2010 included a $1.1 million gain recorded from life insurance policies owned by the Company in connection with an employee deferred compensation plan.  During fiscal 2010, our net currency exchange losses increased due to the strengthening of the U.S. dollar versus the Euro and Czech koruna, resulting in exchange losses.  During fiscal 2009, we recorded $2.5 million of unrealized currency exchange losses arising from an intercompany loan between our corporate headquarters and one of our foreign subsidiaries in conjunction with the acquisition of Hetronic, partially offset by currency exchange gains recorded in the same period.  The functional currencies of these operations are the British pound, Chinese yuan, Czech koruna, euro, Indian rupee, Mexican peso and Singapore dollar.  Some foreign operations have transactions denominated in currencies other than their functional currencies, primarily sales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

During fiscal 2009 and the first half of fiscal 2010, we were invested in an enhanced cash fund sold as an alternative to traditional money-market funds.  At May 1, 2010 there was zero invested in the fund.  For fiscal 2010 we recorded a gain of $0.6 million, and for fiscal 2009 we recorded a loss of $1.2 million.

 

Income Taxes — Expense/(Benefit).  Income taxes — expense/(benefit) decreased by $7.7 million to a benefit of $6.0 million for fiscal 2010, compared to an expense of $1.7 million for fiscal 2009.  The $6.0 million for fiscal 2010, includes taxes on foreign profits of $0.5 million, book to income tax return expense adjustments of $2.9 million and other expense of $1.7 million.  In addition, a benefit of $3.2 million was recorded due to the settlement of uncertain tax positions and related interest from prior periods.  For the fiscal 2010, we have a loss before income taxes in our U.S.-based businesses.  Therefore, we recorded a tax carry-back benefit of $7.9 million in fiscal 2010.  The effective tax rates for both the fiscal 2010 and 2009 periods reflect utilization of foreign investment tax credits and the effect of lower tax rates on income of the Company’s foreign operations and a higher percentage of earnings at those foreign operations.

 

Net Income/(Loss) Attributable to Methode Electronics, Inc.  Net income/(loss) attributable to Methode Electronics, Inc. increased $126.2 million to net income of $13.7 million for fiscal 2010, compared to a net loss of $112.5 million for fiscal 2009, primarily due to zero goodwill and other asset write-offs for fiscal 2010 versus $94.4 million in write-offs for fiscal 2009.  Income taxes were favorable by $7.7 million in fiscal 2010 compared to fiscal 2009, related to a tax loss carry-back for our U.S.-based businesses.  In addition, restructuring charges, amortization expense and other expense were lower as well as lower overall manufacturing costs due to restructuring efforts.  In addition, fiscal 2010 selling and administrative expenses were higher due to the Delphi supply agreement and patent litigation.

 

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Operating Segments

 

Automotive Segment Results

 

Below is a table summarizing results for the years ended:

(in millions)

(Not meaningful equals “N/M”)

 

		May 1,			May 2,
		2010			2009			Net Change			Net Change
Net sales		$	199.3		$	243.6		$	(44.3	)	-18.2	%
Other income		3.9			2.5			1.4			56.0	%
		203.2			246.1			(42.9		)	-17.4	%
Cost of products sold		166.7			206.0			(39.3		)	-19.1	%
Gross margins (including other income)		36.5			40.1			(3.6		)	-9.0	%
Restructuring		5.6			19.3			(13.7		)	-71.0	%
Impairment of goodwill and other assets		—			30.5			(30.5		)	N/M
Selling and administrative expenses		19.6			14.6			5.0			34.2	%
Interest, net - income		0.1			—			0.1			N/M
Other, net - income/(expense)		(0.2		)	0.3			(0.5		)	N/M
Income/(loss) before income taxes		$	11.2		$	(24.0	)	$	35.2		N/M

 

		May 1,		May 2,
Percent of sales:		2010		2009
Net sales		100.0	%	100.0	%
Other income		2.0	%	1.0	%
Cost of products sold		83.6	%	84.6	%
Gross margins (including other income)		18.3	%	16.5	%
Restructuring		2.8	%	7.9	%
Impairment of goodwill and other assets		0.0	%	12.5	%
Selling and administrative expenses		9.8	%	6.0	%
Interest income, net		0.1	%	0.0	%
Other, net - income/(expense)		-0.1	%	0.1	%
Income/(loss) before income taxes		5.6	%	-9.9	%

 

Net Sales.  Automotive segment net sales decreased $44.3 million, or 18.2%, to $199.3 million for fiscal 2010 from $243.6 million for fiscal 2009.  Net sales to Delphi Corporation decreased $27.1 million, or 65.8%, to $14.1 million for fiscal 2010 compared to $41.2 million for fiscal 2009 due to the cancellation of the supply agreement on September 10, 2009.  The Automotive segment net sales were also negatively impacted by planned lower Chrysler sales volumes of $1.0 million for fiscal 2010, compared to $14.8 million for fiscal 2009.  In addition, the decline is attributable to the softness of the U.S. economic environment.  Net sales declined by 60.2% in North America and increased by 19.8% and 154.2% in Europe and Asia, respectively for fiscal 2010 compared to fiscal 2009.  Translation of foreign operations net sales for fiscal 2010 increased reported net sales by $1.0 million, or 0.5%, due to currency rate fluctuations.

 

Other Income.  Other income increased $1.4 million, or 56.0%, to $3.9 million for fiscal 2010 from $2.5 million for fiscal 2009.  Other income consisted primarily of earnings from engineering design fees and royalties.  The increase relates to engineering design fees in our European automotive business.

 

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Cost of Products Sold.  Automotive segment cost of products sold decreased $39.3 million, or 19.1%, to $166.7 million for fiscal 2010 from $206.0 million for fiscal 2009.  The decrease primarily relates to lower sales volumes.  Included in the cost of products sold for fiscal 2010 is $0.7 million of asset write-downs relating to the termination of the Delphi supply agreement.  The Automotive segment cost of products sold as a percentage of sales were 83.6% for fiscal 2010, compared to 84.6% for fiscal 2009.  The decrease relates to restructuring and consolidation efforts in previous periods, partially offset by inefficiencies caused by automotive manufacturers extending plant shut-downs during the first quarter of fiscal 2010.

 

Gross Margins (including other income).  Automotive segment gross margins (including other income) decreased $3.6 million, or 9.0%, to $36.5 million for fiscal 2010, compared to $40.1 million for fiscal 2009.  Gross margins (including other income) as a percentage of net sales increased to 18.3% for fiscal 2010 from 16.5% for fiscal 2009.  The increase relates to higher other income for fiscal 2010 as well as restructuring and consolidation efforts that occurred in prior periods, partially offset by inefficiencies caused by automotive manufacturers extending plant shut-downs during the first quarter of fiscal 2010.

 

Restructuring.   During fiscal 2010, we recorded a restructuring charge of $3.3 million related to our March 2009 restructuring initiative, which consisted of $2.7 million for employee severance and $0.6 million relating to other costs.  During fiscal 2009, we recorded a restructuring charge of $6.5 million, which consisted of  $1.0 million for impairment and accelerated depreciation for buildings and improvements and machinery and equipment and $5.4 million for customer funded tooling and $0.1 million in forfeited security deposits related to the cancellation of the new GM business.  All of the restructuring actions related to the March 2009 restructuring initiatives are now complete.

 

During fiscal 2010, the Automotive segment recorded a restructuring charge of $2.3 million for our January 2008 restructuring initiative, which consisted of $0.7 million for employee severance, $1.4 million for the impairment and accelerated depreciation for machinery and equipment and $0.2 in other costs.  During fiscal 2009, we recorded a restructuring charge of $12.8 million, which consisted of $4.7 million for employee severance, $7.4 million for impairment and accelerated depreciation for buildings, building improvements and machinery and equipment and $0.7 million for other costs.  All of the restructuring actions related to the January 2008 restructuring initiatives are now complete.

 

Impairment of Goodwill and Other Assets.  During the third quarter of fiscal 2009, in accordance with ASC No. 350, “Intangibles - Goodwill and Other,” we performed goodwill impairment testing and concluded that goodwill was impaired.  Therefore, during fiscal 2009, we recorded a goodwill impairment charge of $30.5 million in our Automotive segment related to these assets.

 

Selling and Administrative Expenses.  Selling and administrative expenses increased $5.0 million, or 34.2%, to $19.6 million for fiscal 2010 compared to $14.6 million for fiscal 2009.  Selling and administrative expenses increased in fiscal 2010 is due to $5.8 million of legal fees associated with the Delphi supply agreement termination and patent litigation, partially offset by restructuring and consolidation efforts.  Selling and administrative expenses as a percentage of net sales were 9.8% for the fiscal 2010 and 6.0% for fiscal 2009.

 

Interest Income, Net.  Net interest income was $0.1 million for fiscal 2010 compared to zero in fiscal 2009.

 

Other Income/(Expense), Net.  Other income/(expense), net decreased $0.5 million to an expense of $0.2 million for fiscal 2010 compared to income of $0.3 million for fiscal 2009.  The decrease is primarily due to the strengthening of the U.S. dollar versus the Euro during fiscal 2010 compared to fiscal 2009.  The functional currencies of these operations are the British pound, Chinese yuan, Euro and the Mexican peso.  Some foreign operations have transactions denominated in currencies other than their functional currencies, primarily sales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

Income/(Loss) Before Income Taxes.  Automotive segment income/(loss) before income taxes increased $35.2 million to income of $11.2 million for fiscal 2010 compared to a loss of $24.0 million for fiscal 2009 due to zero goodwill and intangible asset write-off for fiscal 2010 versus $30.5 million in write-offs for fiscal 2009, lower restructuring expenses, lower costs relating to prior restructuring and consolidation efforts, offset by lower sales and gross margins (including other income) and legal fees relating to the termination of

 

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the Delphi supply agreement.

 

Interconnect Segment Results

 

Below is a table summarizing results for the years ended:

(in millions)

(Not meaningful equals “N/M”)

 

		May 1,			May 2,
		2010			2009			Net Change			Net Change
Net sales		$	124.1		$	131.0		$	(6.9	)	-5.3	%
Other income		0.1			0.2			(0.1		)	-50.0	%
		124.2			131.2			(7.0		)	-5.3	%
Cost of products sold		88.6			99.7			(11.1		)	-11.1	%
Gross margins (including other income)		35.6			31.5			4.1			13.0	%
Restructuring		1.6			5.5			(3.9		)	-70.9	%
Impairment of goodwill and other assets		—			56.9			(56.9		)	N/M
Selling and administrative expenses		23.0			31.0			(8.0		)	-25.8	%
Interest income		0.2			0.5			(0.3		)	-60.0	%
Other, net - income/(expense)		(0.9		)	0.7			(1.6		)	N/M
Income/(loss) before income taxes		$	10.3		$	(60.7	)	$	71.0		N/M

 

		May 1,		May 2,
Percent of sales:		2010		2009
Net sales		100.0	%	100.0	%
Other income		0.1	%	0.2	%
Cost of products sold		71.4	%	76.1	%
Gross margins (including other income)		28.7	%	24.0	%
Restructuring		1.3	%	4.2	%
Impairment of goodwill and other assets		0.0	%	43.4	%
Selling and administrative expenses		18.5	%	23.7	%
Interest income		0.2	%	0.4	%
Other, net - income/(expense)		-0.7	%	0.5	%
Income/(loss) before income taxes		8.3	%	-46.3	%

 

Net Sales.  Interconnect segment net sales decreased $6.9 million, or 5.3%, to $124.1 million for fiscal 2010 from $131.0 million for fiscal 2009.  Net sales were favorably impacted by the Hetronic acquisition on September 30, 2008.  European net sales increased 21.7% and North American and Asia declined 5.1% and 28.2%, respectively for fiscal 2010 as compared to fiscal 2009.  The net sales decline in North America and Asia was primarily due to the restructuring of our legacy Interconnect segment businesses, which included exiting certain businesses during the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009.  There was no impact to net sales for fiscal 2010 compared to fiscal 2009 due to currency rate fluctuations.

 

Other Income.  Other income was $0.1 million for fiscal 2010, compared to $0.2 million for fiscal 2009.  Other income consisted primarily of earnings from engineering design fees and royalties.

 

Cost of Products Sold.  Interconnect segment cost of products sold decreased $11.1 million, or 11.1%, to $88.6 million for fiscal 2010 compared to $99.7 million for fiscal 2009.  Interconnect segment cost of products sold as a percentage of net sales decreased to 71.4% for fiscal 2010 compared to 76.1% for fiscal 2009.  The decrease in cost of products sold as a percentage of net sales primarily relates to restructuring efforts undertaken in previous

 

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periods, partially offset by lower sales volumes in fiscal 2010 as compared to fiscal 2009.

 

Gross Margins (including other income).  Interconnect segment gross margins (including other income) increased $4.1 million, or 13.0%, to $35.6 million for fiscal 2010 as compared to $31.5 million for fiscal 2009.  Gross margins (including other income) as a percentage of net sales increased to 28.7% for fiscal 2010 from 24.0% for fiscal 2009.  The increase in gross margins (including other income) as a percentage of net sales primarily relates to restructuring efforts undertaken in previous periods, partially offset by lower sales volumes for fiscal 2010 compared to fiscal 2009.

 

Restructuring.  During fiscal 2010, the Interconnect segment recorded a restructuring charge of $1.4 million related to our March 2009 restructuring initiative, which consisted of $0.7 million for employee severance and $0.7 million for other costs.  During fiscal 2009, we recorded a restructuring charge of $0.3 million, which consisted of  $0.1 million for employee severance and $0.2 million relating to professional fees.  All of the restructuring actions related to the March 2009 restructuring initiatives are now complete.

 

During fiscal 2010, the Interconnect segment recorded a restructuring charge of $0.2 million related to our January 2008 restructuring initiative, which consisted of $0.2 million in accelerated depreciation.  During fiscal 2009, we recorded a restructuring charge of $5.2 million, which consisted of $1.4 million for employee severance, $3.4 million for impairment and accelerated depreciation for buildings, building improvements and machinery and equipment, $0.2 million for inventory write-downs and $0.2 million relating to other costs.

 

Impairment of Goodwill and Other Assets.  During the third quarter of fiscal 2009, in accordance with ASC No. 350, “Intangibles - Goodwill and Other,” we performed goodwill impairment testing and concluded that goodwill was impaired.  Therefore, during fiscal 2009, we recorded a goodwill impairment charge of $30.8 million in our Interconnect segment related to these assets.

 

Also during fiscal 2009, in accordance with ASC No. 360, “Property, Plant and Equipment,” it was determined that certain identifiable assets of our Interconnect businesses were impaired.  Therefore, during fiscal 2009, we recorded an impairment charge of $26.1 million for these assets.

 

Selling and Administrative Expenses.  Selling and administrative expenses decreased $8.0 million, or 25.8%, to $23.0 million for fiscal 2010 compared to $31.0 million for fiscal 2009.  Selling and administrative expenses are lower due to reduced intangible asset amortization expenses, partially offset by higher selling and administrative expenses due to the Hetronic acquisition.  In addition, selling and administrative expenses (not including Hetronic) were lower due to the restructuring efforts undertaken in the first and second quarters of fiscal 2009.  Selling and administrative expenses as a percentage of net sales decreased to 18.5% for fiscal 2010 from 23.7% for fiscal 2009.

 

Interest Income, Net.  Interest income, net decreased $0.3 million, or 60.0%, to $0.2 million for fiscal 2010, compared to $0.5 million for fiscal 2009.

 

Other Income/(Expense), Net.  Other income/(expense), net decreased $1.6 million, to an expense of $0.9 million for fiscal 2010, compared to income of $0.7 million for fiscal 2009  The functional currencies of these operations are the British pound, Czech koruna, Euro and Singapore dollar.  Some foreign operations have transactions denominated in currencies other than their functional currencies, primarily sales in U.S. dollars and Euros, creating exchange rate sensitivities.

 

Income/(Loss) Before Income Taxes.  Interconnect segment income/(loss) before income taxes increased $71.0 million to income of $10.3 million for fiscal 2010 compared to a loss of $60.7 million for fiscal 2009 due to zero goodwill and intangible asset write-off for fiscal 2010 versus $56.9 million in write-offs for fiscal 2009.  In addition, income/(loss) before income taxes increased due to lower intangible asset amortization expenses, lower selling and administrative expenses due to prior restructuring efforts, lower restructuring expenses, partially offset by lower sales and gross margins (including other income).

 

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