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Methode Reports Q2 FY 2011 Results

CHICAGO — Methode Electronics, Inc. (NYSE: MEI), a global developer of custom engineered and application specific products and solutions, today announced financial results for the Fiscal 2011 second quarter ended October 30, 2010.

Methode's second-quarter Fiscal 2011 net sales increased $8.1 million, or 8.2 percent, to $106.6 million from $98.5 million in the second quarter of Fiscal 2010. Excluding the loss of sales to Delphi, which were $6.6 million, and planned lower legacy automotive products sales of $3.9 million in the second quarter of Fiscal 2010, sales in the 2011 period increased $18.6 million, or 21.1 percent.

In June 2006, the Company sold certain unsecured claims it had filed against Delphi in Delphi's bankruptcy proceeding to Credit Suisse for $3.1 million pursuant to a Transfer Agreement. These claims were subsequently assigned by Credit Suisse to Blue Angel. On July 20, 2010, Blue Angel delivered a demand letter to the Company contending that under the terms of the Transfer Agreement, the unsecured claims had been objected to recently by the debtor in the Delphi bankruptcy proceeding, and therefore the Company owed Blue Angel $3.1 million plus interest. On October 25, 2010, Blue Angel filed a complaint seeking $3.1 million plus applicable interest as set out in the Transfer Agreement. While the Company believes that it has certain defenses to the complaint, during the second quarter of Fiscal 2011, an expense of $3.8 million was recorded for these unsecured claims sold to Blue Angel, which includes interest.

Net income decreased to a loss of $0.5 million, or $0.01 per share, in the Fiscal 2011 period compared to income of $2.1 million, or $0.6 per share, in the same period of Fiscal 2010. The decrease is primarily due to the Blue Angel expense of $3.8 million, currency exchange loss of $2.0 million, a negotiated program termination charge of $1.3 million, vendor supply issue costs of $0.6 million, customer cancellation charges of $0.4 million, additional costs related to environmental matters of $0.3 million, as well as higher sales and marketing expenses in North American and Asia, partially offset by no restructuring costs and higher net sales and gross profit in the second quarter of Fiscal 2011 compared to the second quarter of Fiscal 2010.

Methode recorded no restructuring charges during the Fiscal 2011 second quarter compared to restructuring charges of $3.2 million ($2.6 million after-tax), or $0.07 per share, during the Fiscal 2010 second quarter. Additionally, net income in the Fiscal 2010 second quarter benefitted by $1.7 million ($1.2 million after-tax), or $0.03 per share, relating to a one-time reversal of pricing contingencies. Excluding the Blue Angel expense and the negotiated program termination charge in the Fiscal 2011 second quarter, the restructuring charges and the reversal of one-time pricing contingencies in the Fiscal 2010 period, Methode's net income was $4.6 million, or $0.12 per share, in the second quarter of Fiscal 2011 compared to $3.5 million, or $0.10 per share, in the same period of Fiscal 2010.

Consolidated gross margins (including other income) as a percentage of sales were 22.1 percent in both the Fiscal 2011 and Fiscal 2010 second quarters. Gross margins (including other income) were negatively impacted by the loss of the Delphi business, the negotiated program termination charge, the one-time pricing contingency reversal in the second quarter of Fiscal 2010, additional costs related to environmental matters, the customer cancellation charge, additional cost due to vendor supply issues, but were offset by higher sales volumes, a favorable change in sales mix within the Interconnect segment and cost efficiencies from the Company's Asian businesses, in the second quarter of fiscal 2011, as compared to the second quarter of fiscal 2010.

Selling and administrative expenses increased $4.8 million, or 29.3 percent, to $21.2 million in the Fiscal 2011 second quarter compared to $16.4 million in the prior-year second quarter due primarily to the Blue Angel expense and higher selling and marketing expenses in the North American and Asian Automotive segments as a result of higher sales, partially offset by lower legal expenses related to the Delphi patent and supply agreement litigation, as well as lower commission and professional fees in the Fiscal 2011 period compared to the Fiscal 2010 period.

In the second quarter of Fiscal 2011, income tax expense increased $0.6 million to $0.8 million compared to $0.2 million in the same period of Fiscal 2010. Taxes for both periods include taxes on foreign profits and non-Federal U.S. taxes.

Comparing the Automotive segment's second quarter of Fiscal 2011 to the same period of Fiscal 2010, net sales decreased 2.5 percent attributable to no net sales to Delphi compared to $6.6 million of sales to Delphi, and planned lower legacy automotive products sales of $3.9 million in the 2011 period. Excluding Delphi and legacy sales in both periods, net sales increased $9.1 million, or 19.9 percent.

Excluding the loss of sales to Delphi, the planned transfer of business to China in the third quarter of Fiscal 2010 and the loss of legacy automotive products sales, North American sales increased 40.0 percent. Excluding the planned transfer of business to China in the third quarter of Fiscal 2010, Asian sales increased 63.1 percent.

Gross margins (including other income) as a percentage of sales decreased to 19.7 percent from 23.1 percent due to the loss of higher margin sales to Delphi, the negotiated program termination charge, vendor supply issue costs, costs related to environmental matters, and increased costs relating to new product development, partially offset by improved Asian gross margins.

Income before income taxes decreased $5.5 million due to the Blue Angel unsecured claim, lower net sales and gross margins, increased costs for new product development, higher selling and marketing expenses and higher currency exchange costs offset by no restructuring charges and lower legal expenses.

Comparing the Interconnect segment's second quarter of Fiscal 2011 to the same period of Fiscal 2010, net sales increased 19.7 percent attributable to solid growth in the interface solutions and data solutions businesses. Net sales increased 17.8 percent, 41.3 percent and 3.0 percent in North America, Europe and Asia, respectively.

Gross margins as a percentage of sales increased to 31.0 percent from 23.3 percent due primarily to higher sales volume and sales mix.

Income before income taxes improved $5.0 million as a result of increased net sales and gross profit, no restructuring expense and lower overall commission expense.

Comparing the Power Products segment second quarter of Fiscal 2011 to the same period of Fiscal 2010 nNet sales improved 27.7 percent driven by higher busbar demand in Asia and higher busbar, flexible cabling and heat sink product demand in North America. Gross margins as a percentage of sales decreased to 20.8 percent from 22.3 percent due to customer cancellation charges of $0.4 million, as well as higher costs related to new product development, partially offset by lower costs for Asian busbar and U.S. cabling products.

Income before income taxes increased to $1.1 million due to higher net sales and gross margins, partially offset by customer cancellation charges.

Methode

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