Methode Electronics, Inc. (MEI) Earnings

Management highlights

### Overall Full Year 2026 Financial Performance - Full year 2026 net sales totaled ~$1 billion, a 2.8% year-over-year decrease, driven by auto and interface program roll-offs and one fewer fiscal week vs. prior year. Fourth quarter 2026 net sales rose 15.9% to $298.1 million. - Full year adjusted EBITDA increased 60% to $68.2 million, and free cash flow was $15.6 million (vs. a $15.2 million outflow in fiscal 2025). Net debt decreased 13% year-over-year to $185 million, with $140 million in ending cash. ### Transformation and Organizational Progress - Over the past two years, management completed legacy remediation work: the SEC investigation concluded with no enforcement action, internal control deficiencies have been addressed, the finance team has been rebuilt, and management can now focus on growth. - 8 of 10 executive leadership roles and nearly half of the top 100 global leadership positions have been reshaped. The company transitioned from a decentralized structure to a more aligned, collaborative global operating model to reduce redundancy and improve execution. ### Strategic and Operational Actions - Completed the divestiture of Datamate for an $11 million gain, and sold the former Howard Heights, Illinois corporate facility for $5 million in cash proceeds. Advanced restructuring in Malta, expected to generate $5 million in annual cost savings. - Egypt operations delivered 700 basis points of margin improvement in fiscal 2026 through upgraded leadership and process discipline. Turnaround efforts in Mexico continue: leadership has been strengthened, and while the segment still faces underabsorption from EV delays, improvement actions and new inbound business position it for better performance in 2027. - The company negotiated $45 million in total customer recoveries related to delayed/canceled EV automotive programs. $23 million was recognized as revenue in fiscal 2026, contributing $19 million to earnings, with the remaining $25 million to be realized through future production and tooling reimbursements over 2027-2029. ### Strategic Focus Shift to Growth - The company is leveraging 60+ years of power interconnect expertise across end markets, breaking down historical silos to capture cross-market synergies, particularly for vehicle electrification and 800-volt architectures. - Data center power solutions is a key growth priority: the company generated $80 million in data center sales in fiscal 2026, and has shifted from a low-margin second-source build-to-print model to direct engagement with hyperscale customers for more stable, higher-margin growth. The shift from fix-it mode to growth is now underway, as most operational legacy challenges are resolved.

Guidance

Management provided the following fiscal 2027 guidance: - Net sales is expected to be in the range of $1.025 billion to $1.075 billion, representing approximately 3% year-over-year growth vs. fiscal 2026. Excluding portfolio refinement and 2026 customer recoveries, organic net sales growth is expected to be ~8% year-over-year. - Adjusted EBITDA is expected to be between $72 million and $82 million, representing ~13% year-over-year growth, with an adjusted EBITDA margin of 7% to 7.6%. Excluding 2026 portfolio refinement and customer recoveries, adjusted EBITDA is expected to grow ~82% year-over-year. - Capital expenditures are projected to be $25 million to $30 million, and free cash flow is expected to be comparable to fiscal 2026 levels. - Interest expense is expected to be $20 million to $22 million, income tax expense $24 million to $26 million, and depreciation and amortization $58 million to $62 million. - Growth is expected to be driven by ~$50 million in incremental data center sales, improving commercial vehicle demand, and favorable volume/mix across the portfolio. Sales and earnings are expected to ramp through the year, with a seasonally lighter first quarter and a stronger second half of fiscal 2027. Data center sales are expected to reach $130 million in fiscal 2027, a 60% increase from 2026.

Segment performance

Method Electronics reports three product segments for full fiscal 2026: 1. **Automotive segment**: Net sales of $467.7 million, an 8.1% year-over-year decrease, representing 46.0% of total company net sales. The decline was driven by program roll-offs and EV program delays in North America, partially offset by customer recovery agreements and $18 million in favorable foreign exchange. Operating loss improved by $18 million to $30.1 million, supported by customer recoveries, operational improvements, and stronger commercial discipline. 2. **Industrial segment**: Net sales of $524.3 million, an 8% year-over-year increase, representing 51.4% of total company net sales. Operating income grew 27% to $114.6 million. Roughly half of the sales increase came from favorable foreign exchange. Growth was driven by strong momentum in data center power distribution and off-road lighting solutions, partially offset by softness in commercial vehicle markets. 3. **Interface segment**: Net sales of $27.2 million, a 47% year-over-year decrease, representing 2.7% of total company net sales. Operating income decreased 51% to $5 million. The decline reflects the planned roll-off of a major appliance program and the divestiture of the Datamate business as part of ongoing portfolio optimization. For fiscal 2027, the interface segment is expected to generate less than $5 million in net sales.

Risks & headwinds

- Ongoing external headwinds include EV program delays, cancellations and resizing by customers, customer production schedule volatility, softness in the commercial vehicle market, ongoing supply chain complexities, and tariff-related uncertainties. - The Mexico operation continues to face underabsorption issues from delayed EV program ramps, requiring additional operational improvement work to return to profitability. - Forward-looking results are subject to inherent uncertainties that could cause actual performance to differ materially from management expectations, with detailed risk factors outlined in the company's SEC filings.

Analyst Q&A

• Q: What products is Method selling into the data center market currently, and is future 800-volt architecture opportunity included in fiscal 2027 guidance? Also, are the customer recoveries from delayed EV programs, and is more recovery activity expected in 2027? /

  A: The 60% data center growth guidance for 2027 only includes current bus bar sales to hyperscalers; future 800-volt DC rack technology opportunity is not included in the guide, it is a pipeline opportunity the company is developing. The $45 million in customer recoveries are for EV programs won years ago that did not ramp as expected due to North American EV market shifts. Most recovery activity is complete, with only a few small remaining discussions, and the remaining $25 million of agreed recoveries will be realized over the next three to four years through future production and tooling reimbursements. Automotive will see mild year-over-year growth in 2027, but will not be a core driver of material growth.

• Q: What explains the large year-over-year jump in income tax expense, and how should commercial vehicle growth expectations be modeled, given broader industry order growth? /

  A: The 2026 tax expense increase primarily comes from higher non-deductible items and higher foreign taxes, plus a one-time non-recurring tax benefit in 2025 that does not repeat going forward; 2027 guidance uses a similar tax expense range to 2026 for modeling. Commercial vehicle revenue represented 10% of total 2026 sales, remains a high contribution margin business, and current industry order book growth is already reflected in the 2027 guidance. Commercial vehicle business is being moved into Mexico facilities to improve USMCA localization for customers, which will help improve fixed cost absorption at the underutilized Mexico sites.

• Q: What key actions will improve automotive segment performance toward break-even in 2027, and what is the visibility for 60% data center growth? /

  A: After large revenue declines driven by EV program delays, North American automotive revenue is expected to grow from $182 million in 2026 to ~$200 million in 2027. Operational improvements in Egypt and ongoing cost reduction in Mexico, paired with customer recoveries, are expected to deliver $15 million in underlying operating performance improvement. Mexico's excess capacity is being utilized for new commercial vehicle and data center business, which improves absorption. For data centers, the 60% growth guidance is based on confirmed 52-week electronic data interchange schedules from customers (a shift from prior spot-buy relationships), includes two new programs across multiple customers, and the company is confident in the outlook, with additional new customer opportunities not included in current guidance.

• Q: Is ongoing portfolio refinement limited to already completed divestitures, and what is the future of the interface segment? Will debt reduction remain a capital allocation priority in 2027? /

  A: Portfolio refinement includes only the completed Datamate divestiture and planned appliance program roll-off to date, but ongoing product line profitability review remains a core priority. Management will continue to adjust the portfolio to align resources with the highest return opportunities, with no additional changes to announce currently. The interface segment will be a de minimis part of the business in 2027 (less than $5 million in sales), and will not be a focus of future investment as resources are prioritized for higher-growth areas like data centers, commercial vehicles, and off-highway solutions. Continued net debt reduction remains a top capital allocation priority for fiscal 2027.