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TMCNet:  METHODE ELECTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 28, 2013]

METHODE ELECTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement 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 communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes. Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believes to be insignificant may also adversely affect our financial condition or results of operations. 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 depend on a small number of large customers, specifically two large automotive customers. If we were to lose either of these customers or experienced a significant decline in the volume of products purchased by these customers, or if either of these customers declare bankruptcy, 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, we are susceptible to trends and factors affecting those industries.

• Downturns in the automotive industry or the bankruptcy of certain automotive customers could reduce the sales and profitability of our business.

• We have a significant amount of new product launches scheduled in fiscal 2013 and fiscal 2014. We can not assure that the new product launches will be timely, successful or profitable.

• 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.

• We face risks relating to our international operations, including political and economic instability, expropriation, or the imposition of government controls.

• We are dependent on the availability and price of materials.

• Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.

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

• We have not, and may not experience comparable increases in our gross margins as our sales increase due to a variety of factors, including, without limitation the following: 1.) changes in product mix; 2.) new program and product launch costs; 3.) increases in operating expenses; 4.) competitive pricing pressures; and 5.) decreases in volume.

• 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.

• 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 are subject to continuing pressure to lower our prices.

• We were awarded new North American automotive business in fiscal 2011 for programs that will not begin production until the first quarter of fiscal 2014. We anticipate that it will take a significant amount of our cash and resources to launch these programs.

18-------------------------------------------------------------------------------- Table of Contents • We currently have a significant amount of our cash located outside the U.S. and we may suffer adverse tax consequences if we repatriate this cash.

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

• 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 could suffer significant business interruptions, which could adversely affect our sales and operating results.

• The following factors may impact our income tax rate or impose additional liabilities: 1.) changes in the mix of earnings among countries with different tax rates; 2.) changes in our assessment of tax exposures; 3.) changes in the valuation of deferred tax assets and liabilities; 4.) changes in tax laws; and 5.) expiration of uncertain tax positions.

• We cannot ensure that acquired businesses will be successful or that we can implement and profit from any new applications of the acquired technology.

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

Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those foreseen in such forward-looking statements. These forward-looking statements speak only as of the date of this report. We do not intend to update any forward-looking statements, all of which are expressly qualified by the foregoing. See Part I - Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 28, 2012, for a further discussion regarding some of the reasons that actual results may be materially different from those we anticipate.

Overview We are a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Philippines, Singapore, Switzerland, the United Kingdom and the United States. We are a global designer and manufacturer of electronic and 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" of our Form 10-K for the fiscal year ended April 28, 2012.

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.

Delphi Settlement In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete with respect to the related technology. In exchange, the Company received a payment of $20.0 million, half of which was paid in October 2012 and half of which was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

Amended and Restated Credit Agreement On September 21, 2012, we entered into an amendment to our Amended and Restated Credit Agreement which increased the maximum principal amount of the credit facility from $75.0 million to $100.0 million, with an option to increase the principal amount by up to an additional $50.0 million, subject to customary conditions and approval of the lender(s) providing new commitment(s). The amendment also extended the maturity date from February 25, 2016 to September 21, 2017. The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio. At January 26, 2013, the interest rate on the credit facility is 1.5% plus LIBOR.

The Amended and Restated Credit Agreement is guaranteed by certain of our U.S.

subsidiaries.

19-------------------------------------------------------------------------------- Table of Contents Recent Transactions In September 2012, we acquired certain assets of Hetronic South Europe S.R.L.

for $1.4 million in cash, as well as the forgiveness of debt owed to the Company of $1.3 million, for total consideration of $2.7 million. We operate this business under the name Hetronic Italy. The business, located in Milan, Italy, is a market leader in industrial safety radio remote controls, primarily serving the Italian market. The accounts and transactions of Hetronic Italy have been included in the Hetronic Group in the Interconnect segment in the consolidated financial statements from the effective date of the acquisition.

In September 2011, we acquired certain assets and liabilities of Nypro Monterrey, S. de R.L. (Nypro Monterrey) from Nypro Inc. for $6.4 million. We operate this injection molding and painting business under the name Advanced Molding and Decoration, S.A. de C.V. (AMD), and it has become a part of our existing Monterrey manufacturing campus and the Automotive segment. AMD operates a state-of-the-art facility, which provides us with high-quality injection molding, painting and decorating capabilities.

Results of Operations for the Three Months Ended January 26, 2013 as Compared to the Three Months Ended January 28, 2012 Consolidated Results Below is a table summarizing results for the three months ended: (in millions) ("N/M" equals not meaningful) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 123.0 $ 112.0 $ 11.0 9.8 % Cost of products sold 102.9 92.7 10.2 11.0 % Gross margins 20.1 19.3 0.8 4.1 % Selling and administrative expenses 15.9 16.8 (0.9 ) (5.4 )% Interest income, net - (0.1 ) 0.1 N/M Other expense, net 0.1 0.6 (0.5 ) (83.3 )% Income tax expense 0.9 1.2 (0.3 ) (25.0 )% Net loss attributable to noncontrolling interest (0.1 ) - (0.1 ) N/M Net income attributable to Methode Electronics, Inc. $ 3.3 $ 0.8 $ 2.5 312.5 % January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 83.7 % 82.8 % Gross margins 16.3 % 17.2 % Selling and administrative expenses 12.9 % 15.0 % Interest income, net - % (0.1 )% Other expense, net 0.1 % 0.5 % Income tax expense 0.7 % 1.1 % Net loss attributable to noncontrolling interest (0.1 )% - % Net income attributable to Methode Electronics, Inc. 2.7 % 0.7 % Net Sales. Consolidated net sales increased $11.0 million, or 9.8%, to $123.0 million for the three months ended January 26, 2013, from $112.0 million for the three months ended January 28, 2012. The Automotive segment net sales increased $8.4 million, or 12.7%, to $74.3 million for the third quarter of fiscal 2013, from $65.9 million for the third quarter of fiscal 2012. The Interconnect segment net sales increased $2.3 million, or 7.8%, to $31.6 million for the third quarter of fiscal 20-------------------------------------------------------------------------------- Table of Contents 2013, compared to $29.3 million for the third quarter of fiscal 2012. The Power Products segment net sales decreased $0.2 million, or 1.5%, to $12.8 million for the third quarter of fiscal 2013, compared to $13.0 million for the third quarter of fiscal 2012. The Other segment net sales increased $0.3 million, or 7.7%, to $4.2 million for the third quarter of fiscal 2013, as compared to $3.9 million for the third quarter of fiscal 2012. Translation of foreign operations net sales for the three months ended January 26, 2013 decreased reported net sales by $0.2 million or 0.2% compared to the third quarter of fiscal 2012.

Cost of Products Sold. Consolidated cost of products sold increased $10.2 million, or 11.0%, to $102.9 million for the three months ended January 26, 2013, compared to $92.7 million for the three months ended January 28, 2012.

Consolidated cost of products sold as a percentage of sales was 83.7% for the third quarter of fiscal 2013, compared to 82.8% for the third quarter of fiscal 2012. In the third quarter of fiscal 2013 and fiscal 2012, the Automotive segment experienced costs in North America for design, development, and engineering of $1.8 million and $1.3 million, respectively, related to a new program scheduled to launch in this first quarter of fiscal 2014. In the third quarter of fiscal 2013 and fiscal 2012, our North American Automotive operations incurred third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program of $0.6 million and $1.8 million, respectively. The Interconnect segment experienced an increase in cost of products sold as a percentage of sales primarily related to manufacturing inefficiencies due to launch delays for a white goods program, which was expected to launch in the second quarter of fiscal 2013. The program is now expected to launch in the fourth quarter of fiscal 2013. Cost of products sold as a percentage of sales increased in the third quarter of fiscal 2013, due to the newly acquired Italian radio remote-control business, purchased in September 2012. The Power Products segment cost of products sold as a percentage of sales increased, primarily due to manufacturing inefficiencies due to lower sales volumes at our Asian operations as well as unfavorable sales mix within the segment. The Other segment cost of products sold as a percentage of sales decreased primarily related to lower material costs due to a lower percentage of purchased content as well as increased manufacturing efficiencies from our torque-sensing business.

Gross Margins. Consolidated gross margins increased $0.8 million, or 4.1%, to $20.1 million for the three months ended January 26, 2013, as compared to $19.3 million for the three months ended January 28, 2012. Gross margins as a percentage of net sales decreased to 16.3% for the three months ended January 26, 2013, compared to 17.2% for the three months ended January 28, 2012. Gross margins as a percentage of sales decreased primarily due to increased program and product launch costs in the Automotive segment. Gross margins were also negatively impacted by increased sales of automotive product that have higher material cost due to the high percentage of purchased content.

The Interconnect segment experienced a decrease in gross margins as a percentage of sales, primarily related to manufacturing inefficiencies as a result of launch delays for the white goods program. Gross margins as a percentage of sales were also negatively affected in the third quarter of fiscal 2013 due to the newly acquired Italian radio-remote control business and new product development in North America. Gross margins were also negatively impacted due to manufacturing inefficiencies related to lower sales volumes in the Power Products segment as well as unfavorable sales mix within the segment. Gross margins were favorably impacted in the Other segment related to increased sales and lower material costs in our torque-sensing business.

Selling and Administrative Expenses. Selling and administrative expenses decreased by $0.9 million, or 5.4%, to $15.9 million for the three months ended January 26, 2013, compared to $16.8 million for the three months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales decreased to 12.9% for the three months ended January 26, 2013 from 15.0% for the three months ended January 28, 2012. Legal expenses decreased $0.3 million, to $0.6 million for the third quarter of fiscal 2013, compared to $0.9 million for the second quarter of fiscal 2012. Selling and administrative expenses also decreased by $0.4 million due to lower stock award amortization expense.

Interest Income, Net. Interest income, net was zero for the three months ended January 26, 2013, compared to $0.1 for the three months ended January 28, 2012.

Other Expense, Net. Other expense, net decreased $0.5 million, to $0.1 million for the three months ended January 26, 2013, compared to $0.6 million for the three months ended January 28, 2012. All amounts for both periods relate to currency rate fluctuations. The functional currencies of these operations are the British pound, Chinese yuan, Euro, Indian Rupee, Mexican peso, Singapore dollar and Swiss Franc. 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 Tax Expense. Income tax expense decreased $0.3 million, or 25.0%, to $0.9 million for the three months ended January 26, 2013, compared to $1.2 million for the three months ended January 28, 2012. Our effective income tax rate for the third quarter of fiscal 2013 and fiscal 2012 was 20.7% and 60.0%, respectively. The income tax expense for both the third quarter of fiscal 2013 and fiscal 2012 primarily relates to income taxes on foreign profits.

21-------------------------------------------------------------------------------- Table of Contents Net Income Attributable to Methode Electronics, Inc. Net income attributable to Methode Electronics, Inc. increased $2.5 million, to $3.3 million for the three months ended January 26, 2013, compared to $0.8 million for the three months ended January 28, 2012. The increase is primarily due to increased net sales, lower legal and stock award amortization expense, lower currency rate fluctuation expense, lower income taxes, partially offset with increased product development expense and increased costs related to manufacturing inefficiencies.

Operating Segments Automotive Segment Results Below is a table summarizing results for the three months ended: (in millions) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 74.3 $ 65.9 $ 8.4 12.7 % Cost of products sold 65.0 57.7 7.3 12.7 % Gross margins 9.3 8.2 1.1 13.4 % Selling and administrative expenses 6.0 7.0 (1.0 ) (14.3 )% Income from operations $ 3.3 $ 1.2 $ 2.1 175.0 % January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 87.5 % 87.6 % Gross margins 12.5 % 12.4 % Selling and administrative expenses 8.1 % 10.6 % Income from operations 4.4 % 1.8 % Net Sales. Automotive segment net sales increased $8.4 million, or 12.7%, to $74.3 million for the three months ended January 26, 2013, from $65.9 million for the three months ended January 28, 2012. Net sales increased $3.5 million, or 19.6%, in North America, to $21.4 million in the third quarter of fiscal 2013, compared to $17.9 million in the third quarter of fiscal 2012, primarily due to increased sales for our Ford Center Console Program and our transmission lead-frame assembly. Net sales increased in Europe by $6.2 million, or 22.3%, to $34.0 million in the third quarter of fiscal 2013, compared to $27.8 million in the third quarter of fiscal 2012, primarily due to new launches for our hidden switch product lines. Net sales in Asia decreased $1.3 million, or 6.4%, to $18.9 million in the third quarter of fiscal 2013, compared to $20.2 million in the third quarter of fiscal 2012, primarily due to the planned partial transfer of some of the transmission lead-frame assembly product from our China facility to our Mexico facility. The transmission lead-frame assembly is now being manufactured at both facilities. Translation of foreign operations net sales for the three months ended January 26, 2013 decreased reported net sales by $0.2 million, or 0.3%, compared to the third quarter of fiscal 2012.

Cost of Products Sold. Automotive segment cost of products sold increased $7.3 million, or 12.7%, to $65.0 million for the three months ended January 26, 2013, from $57.7 million for the three months ended January 28, 2012. The Automotive segment cost of products sold as a percentage of sales was 87.5% in the third quarter of fiscal 2013, compared to 87.6% in the third quarter of fiscal 2012.

In the third quarter of fiscal 2013 and fiscal 2012, the Automotive segment experienced costs for design, development, and engineering of $1.8 million and $1.3 million, respectively, at our North American facility, related to a program scheduled to launch in the first quarter of fiscal 2014. In both the third quarter of fiscal 2013 and 2012, our North American operations experienced third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program of $0.6 million and $1.8 million, respectively.

The increase in cost of products sold as a percentage of sales was also affected by increased sales of products that have a higher material cost due to the high percentage of purchased content during the third quarter of fiscal 2013.

22-------------------------------------------------------------------------------- Table of Contents Gross Margins. Automotive segment gross margins increased $1.1 million, or 13.4%, to $9.3 million for the three months ended January 26, 2013, as compared to $8.2 million for the three months ended January 28, 2012. The Automotive segment gross margins as a percentage of net sales were 12.5% for the three months ended January 26, 2013, as compared to 12.4% for the three months ended January 28, 2012. Gross margins were negatively impacted in the third quarter of fiscal 2013 due to increased sales of product that has higher material cost due to the high percentage of purchased content. Gross margins as a percentage of sales also decreased due to increased design, development, engineering and launch costs related to new programs and new product launches, partially offset by lower third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console program.

Selling and Administrative Expenses. Selling and administrative expenses decreased $1.0 million, or 14.3%, to $6.0 million for the three months ended January 26, 2013, compared to $7.0 million for the three months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales were 8.1% for the three months ended January 26, 2013 and 10.6% for the three months ended January 28, 2012. Selling and administrative expenses were lower in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012, primarily due to lower legal, bad debt expense, lower salary and severance expense, partially offset with higher travel expenses.

Income from Operations. Automotive segment income from operations increased $2.1 million to $3.3 million for the three months ended January 26, 2013, compared to $1.2 million for the three months ended January 28, 2012 due to increased sales, lower third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program, lower legal, salary, severance and bad debt expense, partially offset by increased design, development and engineering costs and increased sales of products that have a higher material cost due to the high percentage of purchased content.

Interconnect Segment Results Below is a table summarizing results for the three months ended: (in millions) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 31.6 $ 29.3 $ 2.3 7.8 % Cost of products sold 23.7 21.1 2.6 12.3 % Gross margins 7.9 8.2 (0.3 ) (3.7 )% Selling and administrative expenses 4.2 4.1 0.1 2.4 % Income from operations $ 3.7 $ 4.1 $ (0.4 ) (9.8 )% January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 75.0 % 72.0 % Gross margins 25.0 % 28.0 % Selling and administrative expenses 13.3 % 14.0 % Income from operations 11.7 % 14.0 % Net Sales. Interconnect segment net sales increased $2.3 million, or 7.8%, to $31.6 million for the three months ended January 26, 2013, from $29.3 million for the three months ended January 28, 2012. Net sales increased in North America by $2.7 million, or 12.9%, to $23.7 million in the third quarter of fiscal 2013, compared to $21.0 million in the third quarter of fiscal 2012, primarily due to stronger sales for data solution products and white goods. Net sales in Europe decreased $0.4 million, or 8.3%, to $4.4 million in the third quarter of fiscal 2013, compared to $4.8 million in the third quarter of fiscal 2012, 23-------------------------------------------------------------------------------- Table of Contents primarily due to lower radio remote control sales and lower sensor sales. Net sales in Asia were flat at $3.5 million for both the third quarter of fiscal 2013 and fiscal 2012.

Cost of Products Sold. Interconnect segment cost of products sold increased $2.6 million, or 12.3%, to $23.7 million for the three months ended January 26, 2013, compared to $21.1 million for the three months ended January 28, 2012.

Interconnect segment cost of products sold as a percentage of net sales increased to 75.0% for the three months ended January 26, 2013, compared to 72.0% for the three months ended January 28, 2012. The increase in cost of products sold as a percentage of sales is primarily related to manufacturing inefficiencies due to launch delays for a white goods program, which was expected to launch in the second quarter of fiscal 2013. The program is now expected to launch in the fourth quarter of fiscal 2013. Cost of products sold as a percentage of sales increased in the third quarter of fiscal 2013, due to the newly acquired Italian radio remote-control business, purchased in September 2012. In addition, cost of goods sold as a percentage of sales increased in the third quarter of fiscal 2013, due to new product development in North America.

Gross Margins. Interconnect segment gross margins increased $0.3 million, or 3.7%, to $7.9 million for the three months ended January 26, 2013, compared to $8.2 million for the three months ended January 28, 2012. Gross margins as a percentage of net sales decreased to 25.0% for the three months ended January 26, 2013, from 28.0% for the three months ended January 28, 2012. The decrease in gross margins as a percentage of sales is primarily related to manufacturing inefficiencies due to launch delays for the white goods program.

Gross margins as a percentage of sales were also negatively affected in the third quarter of fiscal 2013 due to the newly acquired Italian business and new product development in North America.

Selling and Administrative Expenses. Selling and administrative expenses increased slightly to $4.2 million for the three months ended January 26, 2013, compared to $4.1 million for the three months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales decreased to 13.3% for the three months ended January 26, 2013, from 14.0% for the three months ended January 28, 2012 due to higher sales volumes. The increase in selling and administrative expenses is primarily due to the newly acquired Italian radio remote-control business.

Income from Operations. Interconnect segment income from operations decreased $0.4 million, or 9.8%, to $3.7 million for the three months ended January 26, 2013, compared to $4.1 million for the three months ended January 28, 2012, primarily due to manufacturing inefficiencies due to launch delays, increased cost for the newly acquired business, partially offset with increased net sales.

24-------------------------------------------------------------------------------- Table of Contents Power Products Segment Results Below is a table summarizing results for the three months ended: (in millions) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 12.8 $ 13.0 $ (0.2 ) (1.5 )% Cost of products sold 10.7 10.8 (0.1 ) (0.9 )% Gross margins 2.1 2.2 (0.1 ) (4.5 )% Selling and administrative expenses 1.6 1.5 0.1 6.7 % Income from operations $ 0.5 $ 0.7 $ (0.2 ) (28.6 )% January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 83.6 % 83.1 % Gross margins 16.4 % 16.9 % Selling and administrative expenses 12.5 % 11.5 % Income from operations 3.9 % 5.4 % Net Sales. Power Products segment net sales decreased $0.2 million, or 1.5%, to $12.8 million for the three months ended January 26, 2013, compared to $13.0 million for the three months ended January 28, 2012. Net sales in North America were flat at $8.5 for both the third quarter of fiscal 2013 and fiscal 2012. Net sales increased for busbar and cabling products, offset by lower heat sink products. Net sales in Europe were flat at $0.6 million for both the third quarter of fiscal 2013 and fiscal 2012. Net sales in Asia decreased $0.2 million, or 5.1%, to $3.7 million for the third quarter of fiscal 2013, compared to $3.9 million for the third quarter of 2012, due to lower demand for busbar products.

Cost of Products Sold. Power Products segment cost of products sold decreased $0.1 million, or 0.9%, to $10.7 million for the three months ended January 26, 2013, compared to $10.8 million for the three months ended January 28, 2012.

The Power Products segment cost of products sold as a percentage of sales increased to 83.6% for the three months ended January 26, 2013, from 83.1% for the three months ended January 28, 2012. The increase in cost of products sold as a percentage of sales is primarily due to manufacturing inefficiencies due to lower sales volumes at our Asian operations as well as unfavorable sales mix within the segment.

Gross Margins. Power Products segment gross margins decreased $0.1 million, or 4.5%, to $2.1 million for the three months ended January 26, 2013, compared to $2.2 million for the three months ended January 28, 2012. Gross margins as a percentage of net sales decreased to 16.4% for the three months ended January 26, 2013 from 16.9% for the three months ended January 28, 2012. The decrease in gross margins as a percentage of sales is primarily due to manufacturing inefficiencies due to lower sales volumes at our Asian operations as well as unfavorable sales mix within the segment.

Selling and Administrative Expenses. Selling and administrative expenses increased $0.1 million, or 6.7%, to $1.6 million for the three months ended January 26, 2013, compared to $1.5 million for the three months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales increased to 12.5% for the three months ended January 26, 2013 from 11.5% for the three months ended January 28, 2012. Selling and administrative expenses increased slightly due to higher compensation expense in our European operation.

Income From Operations. Power Products segment income from operations decreased $0.2 million to $0.5 million for the three months ended January 26, 2013, compared to $0.7 million for the three months ended January 28, 2012, due to lower sales volumes, manufacturing inefficiencies, unfavorable sales mix and higher selling and administrative expenses in our European operation.

25-------------------------------------------------------------------------------- Table of Contents Other Segment Results Below is a table summarizing results for the three months ended: (in millions) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 4.2 $ 3.9 $ 0.3 7.7 % Cost of products sold 2.6 2.7 (0.1 ) (3.7 )% Gross margins 1.6 1.2 0.4 33.3 % Selling and administrative expenses 0.5 0.7 (0.2 ) (28.6 )% Income from operations $ 1.1 $ 0.5 $ 0.6 120.0 % January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 61.9 % 69.2 % Gross margins 38.1 % 30.8 % Selling and administrative expenses 11.9 % 17.9 % Income from operations 26.2 % 12.8 % Net Sales. The Other segment net sales increased $0.3 million, or 7.7%, to $4.2 million for the three months ended January 26, 2013, compared to $3.9 million for the three months ended January 28, 2012. Net sales from our torque-sensing business increased 28.3% in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012, primarily due to penetration in the e-bike and motorcycle markets. Net sales from our testing facilities decreased 14.3% due to lower counterfeit testing, reduced military testing and reduced environmental testing in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012.

Cost of Products Sold. Other segment cost of products sold decreased $0.1 million, or 3.7%, to $2.6 million for the three months ended January 26, 2013, compared to $2.7 million for the three months ended January 28, 2012. Cost of products sold as a percentage of net sales decreased to 61.9% in the third quarter of fiscal 2013, compared to 69.2% in the third quarter of fiscal 2012.

The decrease in cost of products sold as a percentage of sales is primarily due to lower material costs due to a lower percentage of purchased content as well as increased manufacturing efficiencies from our torque-sensing business.

Gross Margins. The Other segment gross margins increased $0.4 million, or 33.3%, to $1.6 million for the three months ended January 26, 2013, compared to $1.2 million for the three months ended January 28, 2012. The increase in gross margins as a percentage of net sales is primarily due to decreased material purchased content as well as increased manufacturing efficiencies from our torque-sensing business.

Selling and Administrative Expenses. Selling and administrative expenses decreased $0.2 million, or 28.6%, to $0.5 million for the three months ended January 26, 2013, compared to $0.7 million for the three months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales decreased to 11.9% for the three months ended January 26, 2013, from 17.9% for the three months ended January 28, 2012. Selling and administrative expenses decreased in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012, primarily due to lower legal expenses.

Income From Operations The Other segment income from operations improved $0.6 million, or 120.0%, to $1.1 million for the three months ended January 26, 2013, compared to $0.5 million for the three months ended January 28, 2012. The increase was primarily due to increased net sales, lower material purchased content and increased manufacturing efficiencies from our torque-sensing business as well as lower legal expenses.

26-------------------------------------------------------------------------------- Table of Contents Results of Operations for the Nine Months Ended January 26, 2013 as Compared to the Nine Months Ended January 28, 2012 Consolidated Results Below is a table summarizing results for the nine months ended: (in millions) ("N/M" equals not meaningful) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 371.5 $ 338.7 $ 32.8 9.7 % Cost of products sold 307.7 278.6 29.1 10.4 % Gross margins 63.8 60.1 3.7 6.2 % Selling and administrative expenses 48.3 53.7 (5.4 ) (10.1 )% Income from settlement (20.0 ) - (20.0 ) N/M Interest income, net - (0.2 ) 0.2 N/M Other expense, net 0.6 0.8 (0.2 ) (25.0 )% Income tax expense 4.5 3.4 1.1 32.4 % Net loss attributable to noncontrolling interest (0.2 ) (0.2 ) - - % Net income attributable to Methode Electronics, Inc. $ 30.6 $ 2.6 $ 28.0 N/M January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 82.8 % 82.3 % Gross margins 17.2 % 17.7 % Selling and administrative expenses 13.0 % 15.9 % Income from settlement (5.4 )% - % Interest income, net - % (0.1 )% Other expense, net 0.2 % 0.2 % Income tax expense 1.2 % 1.0 % Net loss attributable to noncontrolling interest (0.1 )% (0.1 )% Net income attributable to Methode Electronics, Inc. 8.2 % 0.8 % Net Sales. Consolidated net sales increased $32.8 million, or 9.7%, to $371.5 million for the nine months ended January 26, 2013, from $338.7 million for the nine months ended January 28, 2012. The Automotive segment net sales increased $29.4 million, or 15.0%, to $225.5 million for the first nine months of fiscal 2013, from $196.1 million for the first nine months of fiscal 2012. The Interconnect segment net sales increased $3.4 million, or 3.6%, to $96.6 million for the first nine months of fiscal 2013, compared to $93.2 million for the first nine months of fiscal 2012. The Power Products segment net sales decreased $2.2 million, or 5.6%, to $37.4 million for the first nine months of fiscal 2013, compared to $39.6 million for the first nine months of fiscal 2012. The Other segment net sales increased $2.0 million, or 20.0%, to $12.0 million for the first nine months of fiscal 2013, as compared to $10.0 million for the first nine months of fiscal 2012. Translation of foreign operations net sales for the nine months ended January 26, 2013 decreased reported net sales by $4.6 million or 1.2% compared to the nine months ended January 28, 2012, primarily due to the weakening of the Euro compared to the U.S. dollar.

Cost of Products Sold. Consolidated cost of products sold increased $29.1 million, or 10.4%, to $307.7 million for the nine months ended January 26, 2013, compared to $278.6 million for the nine months ended January 28, 2012.

Consolidated cost of products sold as a percentage of sales was 82.8% for the first nine months of fiscal 2013, compared to 82.3% for the first nine months of fiscal 2012. In the first nine months of fiscal 2013, the Automotive segment experienced costs in North America for design, development, and engineering of $5.2 million related to a new program scheduled to launch in the first quarter of fiscal 2014. During the first nine months of fiscal 2012, our North American Automotive operations experienced 27-------------------------------------------------------------------------------- Table of Contents additional costs for design, development and engineering of $2.9 million for a program that launched in the third quarter of fiscal 2012, as well as the program scheduled to launch in the first quarter of fiscal 2013. In the first nine months of fiscal 2013 and fiscal 2012, our North American operations incurred third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program of $1.3 million and $3.1 million, respectively. The Interconnect segment experienced an increase in cost of products sold as a percentage of sales, primarily related to manufacturing inefficiencies as a result of launch delays for a white goods program, which was expected to launch in the second quarter of fiscal 2013. The program is now expected to launch in the fourth quarter of fiscal 2013. Cost of products sold as a percentage of sales increased in the first nine months of fiscal 2013, due to the newly acquired Italian radio remote-control business, purchased in September 2012. The Power Products segment cost of products sold as a percentage of net sales increased, primarily due to manufacturing inefficiencies due to lower sales volumes at our North American and Asian operations as well as unfavorable sales mix within the segment. The Other segment cost of products sold as a percentage of sales decreased primarily due to lower material costs due to a lower percentage of purchased content as well as increased manufacturing efficiencies from our torque-sensing business.

Gross Margins. Consolidated gross margins increased $3.7 million, or 6.2%, to $63.8 million for the nine months ended January 26, 2013, as compared to $60.1 million for the nine months ended January 28, 2012. Gross margins as a percentage of net sales decreased to 17.2% for the nine months ended January 26, 2013, compared to 17.7% for the nine months ended January 28, 2012. Gross margins as a percentage of sales decreased primarily due to increased program and product launch costs in the Automotive segment. Gross margins were also negatively impacted by increased sales of automotive product that have higher material cost due to the high percentage of purchased content. Gross margins were positively impacted in the first nine months of fiscal 2013 due to favorable adjustments for commodity pricing in the Automotive segment as well as lower third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program. Gross margins were negatively impacted by manufacturing inefficiencies due to launch delays in the Interconnect segment as well as lower sales volumes in the Power Products segment. Gross margins were favorably impacted in the Other segment due to increased net sales and lower material costs in our torque-sensing business.

Selling and Administrative Expenses. Selling and administrative expenses decreased by $5.4 million, or 10.1%, to $48.3 million for the nine months ended January 26, 2013, compared to $53.7 million for the nine months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales decreased to 13.0% for the nine months ended January 26, 2013 from 15.9% for the nine months ended January 28, 2012. In the second quarter of fiscal 2013, the Company reversed $1.1 million of various accruals related to a customer bankruptcy. Legal expenses decreased $1.3 million, to $3.2 million for the first nine months of fiscal 2013, compared to $4.5 million for the first nine months of fiscal 2012. Selling and administrative expenses also decreased in the first nine months of fiscal 2013 due to lower compensation, stock award amortization, travel, advertising and marketing, and professional fees of $3.0 million.

Income From Settlement. In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete with respect to the related technology. In exchange, the Company received a payment of $20.0 million, half of which was paid in October 2012 and half of which was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

Other Expense, Net. Other expense, net increased $0.2 million, to $0.6 million for the nine months ended January 26, 2013, compared to $0.8 million for the nine months ended January 28, 2012. Other expense, net included income of $0.1 million for first nine months of fiscal 2012, related to life insurance policies in connection with an employee deferred compensation plan. The first nine months of fiscal 2012 also includes a gain of $0.3 million related to the acquisition of Advanced Molding and Decoration, purchased in September 2011. All other amounts for both the first nine months of fiscal 2013 and fiscal 2012, relate to currency rate fluctuations. The functional currencies of these operations are the British pound, Chinese yuan, Euro, Indian Rupee, Mexican peso, Singapore dollar and Swiss Franc. 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 Tax Expense. Income tax expense increased to $1.1 million, or 32.4%, to $4.5 million for the nine months ended January 26, 2013, compared to $3.4 million for the nine months ended January 28, 2012. Our effective income tax rate for both the first nine months of fiscal 2013 and fiscal 2012 was 12.9% and 58.3%, respectively. The income tax expense for the first nine months of fiscal 2013 primarily relates to income taxes on foreign profits. The income tax expense for the first nine months of fiscal 2012 relates to income taxes on foreign profits of $3.3 million and $0.9 million for foreign taxes on a foreign dividend. In addition, the first nine months of fiscal 2012 includes a benefit of $1.1 million relating to tax credits from our Malta facility.

28-------------------------------------------------------------------------------- Table of Contents Net Income Attributable to Methode Electronics, Inc. Net income attributable to Methode Electronics, Inc. increased $28.0 million, to $30.6 million for the nine months ended January 26, 2013, compared to $2.6 million for the nine months ended January 28, 2012. The increase is primarily due to income from the litigation settlement, higher sales volumes, one-time reversal of various accruals related to a customer bankruptcy, lower legal, compensation, travel, advertising and marketing expenses, and professional fees, lower third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program, partially offset with higher costs for design, development and engineering, manufacturing inefficiencies, costs related to launch delays and higher income tax expense.

Operating Segments Automotive Segment Results Below is a table summarizing results for the nine months ended: (in millions) ("N/M" equals not meaningful) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 225.5 $ 196.1 $ 29.4 15.0 % Cost of products sold 194.8 168.3 26.5 15.7 % Gross margins 30.7 27.8 2.9 10.4 % Selling and administrative expenses 18.3 21.1 (2.8 ) (13.3 )% Income from settlement (20.0 ) - (20.0 ) N/M Income from operations $ 32.4 $ 6.7 $ 25.7 N/M January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 86.4 % 85.8 % Gross margins 13.6 % 14.2 % Selling and administrative expenses 8.1 % 10.8 % Income from settlement (8.9 )% - % Income from operations 14.4 % 3.4 % Net Sales. Automotive segment net sales increased $29.4 million, or 15.0%, to $225.5 million for the nine months ended January 26, 2013, from $196.1 million for the nine months ended January 28, 2012. Net sales increased $27.8 million, or 63.0%, in North America, to $71.9 million in the first nine months of fiscal 2013, compared to $44.1 million in the first nine months of fiscal 2012, primarily due to increased sales for our Ford Center Console Program and our transmission lead-frame assembly. Net sales increased in Europe by $9.5 million, or 10.6%, to $99.4 million in the first nine months of fiscal 2013, compared to $89.9 million in the first nine months of fiscal 2012, primarily due to new launches for our hidden switch product lines. In the first nine months of fiscal 2013, the Automotive segment recorded $1.4 million of favorable commodity pricing adjustments for precious metals supplied to one customer in Europe. Net sales in Asia decreased $7.9 million, or 12.7%, to $54.2 million in the first nine months of fiscal 2013, compared to $62.1 million in the first nine months of fiscal 2012, primarily due to the planned partial transfer of some of the transmission lead-frame assembly product from our China facility to our Mexico facility. The transmission lead-frame assembly is now being manufactured at both facilities. Translation of foreign operations net sales for the nine months ended January 26, 2013 decreased reported net sales by $4.6 million, or 2.0%, compared to the first nine months of fiscal 2012, primarily due to the weakening of the Euro as compared to the U.S. dollar.

Cost of Products Sold. Automotive segment cost of products sold increased $26.5 million, or 15.7%, to $194.8 million for the nine months ended January 26, 2013, from $168.3 million for the nine months ended January 28, 2012. The Automotive segment cost of products sold as a percentage of sales was 86.4% in the first nine months of fiscal 2013, compared to 85.8% in the first nine months of fiscal 2012. In the first nine months of fiscal 2013, the Automotive segment experienced costs for 29-------------------------------------------------------------------------------- Table of Contents design, development, and engineering of $5.2 million at our North American facility, related to a program scheduled to launch in the first quarter of fiscal 2014. During the first nine months of fiscal 2012, our North American operations experienced costs for design, development and engineering of $2.9 million for a program that launched in the third quarter of fiscal 2012, as well as the program scheduled to launch in the first quarter of fiscal 2014. In both the first nine months of fiscal 2013 and fiscal 2012, our North American operations experienced third-party inspection costs, premium freight and over-time expenses related to the Ford Center Console Program of $1.3 million and $3.1 million, respectively. The increase in costs of products sold as a percentage of sales was also affected by increased sales of products that have a higher material cost due to the high percentage of purchased content during the first nine months of fiscal 2013.

Gross Margins. Automotive segment gross margins increased $2.9 million, or 10.4%, to $30.7 million for the nine months ended January 26, 2013, as compared to $27.8 million for the nine months ended January 28, 2012. The Automotive segment gross margins as a percentage of net sales were 13.6% for the nine months ended January 26, 2013, as compared to 14.2% for the nine months ended January 28, 2012. Gross margins were negatively impacted in the first nine months of fiscal 2013 due to increased sales of product that has higher material cost due to the current high percentage of purchased content. Gross margins as a percentage of sales also decreased due to increased design, development, engineering and launch costs related to new programs and new product launches.

Gross margins were favorably impacted by the favorable commodity pricing adjustments in the first nine months of fiscal 2013 as well as lower costs for third-party inspection, premium freight and over-time expenses related to the Ford Center Console program.

Selling and Administrative Expenses. Selling and administrative expenses decreased $2.8 million, or 13.3%, to $18.3 million for the nine months ended January 26, 2013, compared to $21.1 million for the nine months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales were 8.1% for the nine months ended January 26, 2013 and 10.8% for the nine months ended January 28, 2012. In the second quarter of fiscal 2013, the Company reversed $1.1 million of various accruals related to a customer bankruptcy. Legal fees decreased $1.0 million, to $1.8 million for the first nine months of fiscal 2013, compared to $2.8 million for the first nine months of fiscal 2012. In addition, Selling and administrative expenses were also lower by $0.6 million due to lower headcount from European operations in the first nine months of fiscal 2013, compared to the first nine months of fiscal 2012.

Income From Settlement. In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete with respect to the related technology. In exchange, the Company received a payment of $20.0 million, half of which was paid in October 2012 and half of which was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

Income from Operations. Automotive segment income from operations increased $25.7 million to $32.4 million for the nine months ended January 26, 2013, compared to $6.7 million for the nine months ended January 28, 2012 due to income from the litigation settlement, increased sales, the favorable commodity pricing adjustments, lower legal and other selling and administrative expenses and lower costs for third-party inspection, premium freight and over-time expenses related to the Ford Center Console program, partially offset with higher design, development and engineering expenses.

30-------------------------------------------------------------------------------- Table of Contents Interconnect Segment Results Below is a table summarizing results for the nine months ended: (in millions) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 96.6 $ 93.2 $ 3.4 3.6 % Cost of products sold 70.9 67.7 3.2 4.7 % Gross margins 25.7 25.5 0.2 0.8 % Selling and administrative expenses 13.0 13.4 (0.4 ) (3.0 )% Income from operations $ 12.7 $ 12.1 $ 0.6 5.0 % January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 73.4 % 72.6 % Gross margins 26.6 % 27.4 % Selling and administrative expenses 13.5 % 14.4 % Income from operations 13.1 % 13.0 % Net Sales. Interconnect segment net sales increased $3.4 million, or 3.6%, to $96.6 million for the nine months ended January 26, 2013, from $93.2 million for the nine months ended January 28, 2012. Net sales increased in North America by $7.6 million, or 12.2%, to $69.8 million in the first nine months of fiscal 2013, compared to $62.2 million in the first nine months of fiscal 2012, primarily due to stronger sales for data solution products and white goods. Net sales in Europe decreased $2.2 million, or 12.0%, to $16.1 million in the first nine months of fiscal 2013, compared to $18.3 million in the first nine months of fiscal 2012, primarily due to weaker radio remote control sales and lower sensor sales. Net sales in Asia decreased $2.0 million, or 15.7%, to $10.7 million in the first nine months of fiscal 2013, compared to $12.7 million in the first nine months of fiscal 2012, primarily due to weaker radio remote control sales as well as certain legacy products resulting from the planned exit of a product line.

Cost of Products Sold. Interconnect segment cost of products sold increased $3.2 million, or 4.7%, to $70.9 million for the nine months ended January 26, 2013, compared to $67.7 million for the nine months ended January 28, 2012.

Interconnect segment cost of products sold as a percentage of net sales increased to 73.4% for the nine months ended January 26, 2013, compared to 72.6% for the nine months ended January 28, 2012. The increase in cost of products sold as a percentage of net sales is primarily related to manufacturing inefficiencies due to launch delays for the white goods program, which was expected to launch in the second quarter of fiscal 2013. The program is now expected to launch in the fourth quarter of fiscal 2013.

Gross Margins. Interconnect segment gross margins increased $0.2 million, or 0.8%, to $25.7 million for the nine months ended January 26, 2013, compared to $25.5 million for the nine months ended January 28, 2012. Gross margins as a percentage of net sales decreased to 26.6% for the nine months ended January 26, 2013, from 27.4% for the nine months ended January 28, 2012. The decrease in gross margins as a percentage of sales is primarily related to manufacturing inefficiencies due to launch delays for the white goods program, which was expected to launch in the second quarter of fiscal 2013.

Selling and Administrative Expenses. Selling and administrative expenses decreased $0.4 million, or 3.0%, to $13.0 million for the nine months ended January 26, 2013, compared to $13.4 million for the nine months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales decreased to 13.5% for the nine months ended January 26, 2013, from 14.4% for the nine months ended January 28, 2012. The decrease is primarily due to lower headcount and travel expense in the first nine months of fiscal 2013, compared to the first nine months of fiscal 2012.

31-------------------------------------------------------------------------------- Table of Contents Income from Operations. Interconnect segment income from operations increased $0.6 million, or 5.0%, to $12.7 million for the nine months ended January 26, 2013, compared to $12.1 million for the nine months ended January 28, 2012, primarily due to increased net sales, lower headcount and travel expenses, partially offset with increased costs for manufacturing inefficiencies due to launch delays.

Power Products Segment Results Below is a table summarizing results for the nine months ended: (in millions) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 37.4 $ 39.6 $ (2.2 ) (5.6 )% Cost of products sold 31.8 32.6 (0.8 ) (2.5 )% Gross margins 5.6 7.0 (1.4 ) (20.0 )% Selling and administrative expenses 5.0 5.2 (0.2 ) (3.8 )% Income from operations $ 0.6 $ 1.8 $ (1.2 ) (66.7 )% January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 85.0 % 82.3 % Gross margins 15.0 % 17.7 % Selling and administrative expenses 13.4 % 13.1 % Income from operations 1.6 % 4.5 % Net Sales. Power Products segment net sales decreased $2.2 million, or 5.6%, to $37.4 million for the nine months ended January 26, 2013, compared to $39.6 million for the nine months ended January 28, 2012. Net sales decreased in North America $1.2 million, or 4.6%, to $24.9 million in the first nine months of fiscal 2013, compared to $26.1 million in the first nine months of fiscal 2012, primarily due to lower demand for our busbar and heat sink products, partially offset by higher demand for our cabling products. Net sales in Europe were flat at $1.6 million for both the first nine months of fiscal 2013 and fiscal 2012. Net sales in Asia decreased $1.0 million, or 8.4%, to $10.9 million for the first nine months of fiscal 2013, compared to $11.9 million for the first nine months of fiscal 2012, due to lower demand for busbar products.

Cost of Products Sold. Power Products segment cost of products sold decreased $0.8 million, or 2.5%, to $31.8 million for the nine months ended January 26, 2013, compared to $32.6 million for the nine months ended January 28, 2012. The Power Products segment cost of products sold as a percentage of sales increased to 85.0% for the nine months ended January 26, 2013, from 82.3% for the nine months ended January 28, 2012. The increase in cost of products sold as a percentage of sales is primarily due to manufacturing inefficiencies due to lower sales volumes at our North American and Asian operations as well as unfavorable sales mix within the segment.

Gross Margins. Power Products segment gross margins decreased $1.4 million, or 20.0%, to $5.6 million for the nine months ended January 26, 2013, compared to $7.0 million for the nine months ended January 28, 2012. Gross margins as a percentage of net sales decreased to 15.0% for the nine months ended January 26, 2013 from 17.7% for the nine months ended January 28, 2012. The decrease in gross margins as a percentage of sales is primarily due to manufacturing inefficiencies due to lower sales volumes at our North American and Asian operations as well as unfavorable sales mix within the segment.

Selling and Administrative Expenses. Selling and administrative expenses decreased $0.2 million, or 3.8%, to $5.0 million for the nine months ended January 26, 2013, compared to $5.2 million for the nine months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales increased to 13.4% for the nine months ended January 26, 2013 from 13.1% for the nine months ended January 28, 2012. Selling and administrative expenses decreased primarily due to lower compensation expense in our North American operation.

32-------------------------------------------------------------------------------- Table of Contents Income From Operations. Power Products segment income from operations decreased $1.2 million, or 66.7%, to $0.6 million for the nine months ended January 26, 2013, compared to $1.8 million for the nine months ended January 28, 2012, due lower net sales, manufacturing inefficiencies, unfavorable sales mix and lower selling and administrative expenses.

Other Segment Results Below is a table summarizing results for the nine months ended: (in millions) ("N/M" equals not meaningful) January 26, January 28, 2013 2012 Net Change Net Change Net sales $ 12.0 $ 10.0 $ 2.0 20.0 % Cost of products sold 7.5 7.8 (0.3 ) (3.8 )% Gross margins 4.5 2.2 2.3 104.5 % Selling and administrative expenses 1.8 2.9 (1.1 ) (37.9 )% Income/(loss) from operations $ 2.7 $ (0.7 ) $ 3.4 N/M January 26, January 28, Percent of sales: 2013 2012 Net sales 100.0 % 100.0 % Cost of products sold 62.5 % 78.0 % Gross margins 37.5 % 22.0 % Selling and administrative expenses 15.0 % 29.0 % Income/(loss) from operations 22.5 % (7.0 )% Net Sales. The Other segment net sales increased $2.0 million, or 20.0%, to $12.0 million for the nine months ended January 26, 2013, compared to $10.0 million for the nine months ended January 28, 2012. Net sales from our torque-sensing business increased 40.2% in the first nine months of fiscal 2013, compared to the first nine months of fiscal 2012, primarily due to penetration in the e-bike and motorcycle markets. Net sales from our testing facilities decreased 2.8% in the first nine months of fiscal 2013, compared to the first nine months of fiscal 2012.

Cost of Products Sold. Other segment cost of products sold decreased $0.3 million, or 3.8%, to $7.5 million for the nine months ended January 26, 2013, compared to $7.8 million for the nine months ended January 28, 2012. Cost of products sold as a percentage of net sales decreased to 62.5% in the first nine months of fiscal 2013, compared to 78.0% in the first nine months of fiscal 2012. The decrease in cost of products sold as a percentage of net sales is primarily due to lower material costs due to a lower percentage of purchased content as well as increased manufacturing efficiencies from our torque-sensing business.

Gross Margins. The Other segment gross margins increased $2.3 million, or 104.5%, to $4.5 million for the nine months ended January 26, 2013, compared to $2.2 million for the nine months ended January 28, 2012. Gross margins as a percentage of net sales increased to 37.5% for the nine months ended January 26, 2013 from 22.0% for the nine months ended January 28, 2012. The increase in gross margins as a percentage of sales is primarily due to decreased material costs as well as increased manufacturing efficiencies from our torque-sensing business.

Selling and Administrative Expenses. Selling and administrative expenses decreased $1.1 million, or 37.9%, to $1.8 million for the nine months ended January 26, 2013, compared to $2.9 million for the nine months ended January 28, 2012. Selling and administrative expenses as a percentage of net sales decreased to 15.0% for the nine months ended January 26, 2013, from 29.0% for the nine months ended January 28, 2012. Selling and administrative expenses decreased in the first nine months of fiscal 2013, compared to the first nine months of fiscal 2012, due to lower compensation, severance and legal expenses.

33-------------------------------------------------------------------------------- Table of Contents Income/(Loss) From Operations The Other segment income/(loss) from operations improved $3.4 million to income of $2.7 million for the nine months ended January 26, 2013, compared to a loss of $0.7 million for the nine months ended January 28, 2012. The increase was primarily due to increased sales, lower material costs content and increased manufacturing efficiencies from our torque-sensing business as well as lower selling and administrative expenses.

Liquidity and Capital Resources In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete with respect to the related technology. In exchange, the Company received a payment of $20.0 million, half of which was paid in October 2012 and half of which was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

We believe our current world-wide cash balances together with expected future cash flows to be generated from operations will be sufficient to support our operations. However, due to the shifting of operations from the U.S. to foreign locations, a significant amount of cash and expected future cash flows are located outside of the U.S. Of the total cash and cash equivalents as of January 26, 2013, $58.8 million, which represents 80.1% of our total cash and cash equivalents, was held in subsidiaries outside the U.S. and is deemed to be permanently reinvested and therefore not available to fund our domestic operations. We currently have $50.8 million of net operating loss carry-forwards in the U.S. which would reduce the cash tax obligation upon any future repatriation of funds, as well as future domestic income.

During fiscal 2011, we were awarded a next generation center stack program for multiple GM vehicle platforms. The program will be manufactured in our plants in Monterrey, Mexico. This program requires a significant amount of cash for the purchase of equipment, tooling and initial inventory as well as additional staffing for the development and launching of the programs. We expect to begin production and generate sales on this program in the first quarter of fiscal 2014. Therefore, we anticipate our cash balances may decline (not including the settlement mentioned above) further due to the launch of this program without a corresponding increase in sales.

We are party to an Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, and certain other financial institutions. On September 21, 2012, we entered into an amendment to the Amended and Restated Credit Agreement which increased the maximum principal amount of the credit facility from $75.0 million to $100.0 million, with an option to increase the principal amount by up to an additional $50.0 million, subject to customary conditions and approval of the lender(s) providing new commitment(s). The amendment also extended the maturity date from February 25, 2016 to September 21, 2017. The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio.

Currently, the interest rate on the credit facility is 1.5% plus LIBOR. The Amended and Restated Credit Agreement is guaranteed by certain of our U.S.

subsidiaries. At January 26, 2013, we were in compliance with the covenants of the agreement. During the first nine months of fiscal 2013, we had borrowings of $28.5 million and payments of $37.2 million, which includes interest of $0.7 million under this credit facility. As of January 26, 2013, there were outstanding balances against the credit facility of $40.0 million. There was $60.0 million available to borrow under the credit facility as of January 26, 2013, which does not include the option to increase the principal amount. We believe the fair value approximates the carrying amount as of January 26, 2013.

Cash Flow Operating Activities Net cash provided by operating activities increased $21.0 million to $32.9 million for the nine months ended January 26, 2013, compared to $11.9 million for the nine months ended January 28, 2012. The operating activities increase is primarily driven by the $20.0 million received related to the legal settlement. In addition, accounts receivable balances increased due to timing of sales, as well as increases in inventory due to the timing of our product launches.

Cash Flow Investing Activities Net cash used in investing activities increased by $8.4 million, to $31.4 million for the nine months ended January 26, 2013, compared to $23.0 million for the nine months ended January 28, 2012. Purchases of property, plant and equipment increased $13.4 million, to $30.0 million for the nine months ended January 26, 2013, compared to $16.6 million for the nine months ended January 28, 2012. The increase primarily relates to plant expansion and equipment purchases in Europe and North America for products scheduled to be launched in the first quarter of fiscal 2014. In the first nine months of fiscal 2013, we acquired the Hetronic Italy business for $1.4 million. See note 12 for more information regarding the transaction. In the first nine months of fiscal 2012, we acquired the Advanced Molding and Decoration business for $6.4 million.

34-------------------------------------------------------------------------------- Table of Contents Cash Flow Financing Activities Net cash provided by financing activities decreased $47.7 million to cash used of $15.8 million in the first nine months of fiscal 2013, compared to cash provided of $31.9 million for the first nine months of fiscal 2012. During the first nine months of fiscal 2013, the Company had net payments against the credit facility of $8.0 million, compared to net borrowings of $39.5 million in the first nine months of fiscal 2012. We paid dividends of $7.8 million for both the first nine months of fiscal 2013 and fiscal 2012. The first nine months of fiscal 2012 included $0.2 million of proceeds for the exercise of stock options.

Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, other than operating leases and purchase obligations entered into in the normal course of business.

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