First-Quarter Fiscal 2010

Methode's first-quarter fiscal 2010 net sales decreased $44.7 million, or 33.2 percent, to $89.8 million from $134.5 million in the first quarter of fiscal 2009. Net income decreased $6.8 million to breakeven, or $0.00 per share, in the first quarter of fiscal 2010 compared to income of $6.8 million, or $0.18 per share, in the same period of fiscal 2009.

In January 2008, Methode announced a restructuring of its U.S.-based automotive operations and the decision to discontinue producing certain legacy products in the Interconnect segment. In March 2009, Methode announced several additional restructuring actions to further reduce its exposure to the North American automotive industry, and to reduce costs by consolidating facilities and migrating manufacturing to lower cost regions. Methode recorded restructuring charges during the fiscal 2010 first quarter of $3.6 million, before and after-tax, or $0.10 per share, and during the fiscal 2009 first quarter of $4.9 million ($3.3 million after-tax), or $0.09 per share. The Company expects to complete these restructuring activities during the second half of fiscal 2010 and estimates that it will record additional pre-tax charges in fiscal 2010 of between $2.8 million and $4.9 million.

The decrease in net income in the fiscal 2010 first quarter is due to lower sales attributable to the continuing softness of the global economic environment, especially the effect on the North American automotive market, as well as the planned exit of Chrysler and Ford North American business, partially offset by lower cost of products sold, restructuring charges, and selling and administrative expenses. Excluding restructuring charges, Methode's net income was $3.5 million, or $0.10 per share, in the first quarter of fiscal 2010 compared to net income of $10.1 million, or $0.27 per share, in the same period of fiscal 2009.

Consolidated cost of products sold decreased $34.5 million, or 32.7 percent, to $70.9 million in the fiscal 2010 first quarter, compared to $105.4 million in the same period of fiscal 2009. The decrease is due to lower sales volumes and the benefit of the Company's restructuring efforts to reduce costs. Cost of products sold as a percentage of sales was 79.0 percent and 78.4 percent in the first quarters of fiscal 2010 and 2009, respectively, as the result of lower sales volumes and segment sales mix in the first quarter of fiscal 2010 compared to the same quarter of fiscal 2009.

Consolidated gross margins as a percentage of sales increased to 22.6 percent in the fiscal 2010 first quarter from 22.2 percent in the comparable period of fiscal 2009 despite a 33.2 percent drop in sales, largely due to the restructuring actions previously taken to reduce the cost structure to an appropriate level as a result of the sustained change in the global economic environment.

In the Automotive segment, gross margins as a percentage of sales increased to 22.5 percent in the fiscal 2010 first quarter from 20.9 percent in the comparable period of fiscal 2009 despite a 39.6 percent drop in sales from period to period. Additionally, the Power Products segment gross margins improved to 21.0 percent in the first quarter of fiscal 2010 from 19.2 percent in the first quarter of fiscal 2009 notwithstanding a 6.7 percent decrease in sales. Gross margins as a percentage of sales in the Interconnect segment decreased to 25.1 percent from 25.6 percent in the first quarter of fiscal 2010 from the same period of fiscal 2009, as net sales fell 30.6 percent.

Selling and administrative expenses decreased $0.5 million, or 3.0 percent, to $15.9 million in the fiscal 2010 first quarter, as compared to $16.4 million in the prior-year period. The decrease relates to lower intangible asset amortization expense and lower stock award amortization expense during the first quarter of fiscal 2010, partially offset by selling and administrative expenses from Hetronic, which was acquired in September 2008. Due to the significant drop in sales experienced during the quarter, selling and administrative expenses as a percentage of sales increased to 17.7 percent in the first quarter of fiscal 2010, compared to 12.2 percent in the same period of fiscal 2009.

The effective income tax rate was an expense of 109.6 percent in the first quarter of fiscal 2010 compared to 21.6 percent in the same period of fiscal 2009. The higher effective tax rate in the fiscal 2010 first quarter was due to the restructuring charges and the slowing of business, causing a loss before income tax for the Company's U.S.-based businesses. Normally, a tax benefit is recorded relating to the net loss before income taxes, but due to the uncertainty of the future utilization of the tax benefit by the Company's U.S.-based businesses, a valuation allowance was recorded offsetting the tax benefit. Additionally, the tax rates for the first quarters of fiscal 2010 and fiscal 2009 reflect utilization of foreign investment tax credits and the effect of lower tax rates on income of the Company's foreign earnings and a higher percentage of earnings at those foreign operations.

Delphi Litigation

Delphi Automotive Systems ("Delphi") recently notified the Company that it is terminating its supply arrangement with the Company effective September 10, 2009. The Company is contesting Delphi's right to prematurely terminate this long-term supply arrangement, and the parties are engaged in litigation regarding this supply arrangement and the Company's intellectual property.

Management Comments

President and Chief Executive Officer Donald W.