Executive Summary / Key Takeaways

• Methode Electronics is undergoing a significant transformation, focusing on operational execution, cost reduction, and strategic realignment to offset near-term market volatility and legacy program roll-offs.
• Despite a projected $100 million decline in sales in fiscal 2026, primarily due to softer EV demand and program delays, the company anticipates doubling its EBITDA margin to 7.9% through operational improvements and cost structure adjustments.
• Key growth drivers are expected to shift, with strong performance in data center power products (sales nearly doubled in FY2025 to over $80 million, with continued growth potential) and new program launches in diverse transportation and industrial applications.
• The company has successfully addressed balance sheet and liquidity concerns, improving working capital, generating positive free cash flow in recent quarters, and securing an amended credit facility that provides covenant relief and sufficient capacity.
• While facing intense competition and cyclical market exposure, Methode is leveraging its niche technological strengths in sensors and power distribution while actively reviewing its portfolio and pursuing organic growth opportunities in high-potential areas like non-transportation power solutions.

The Crucible of Transformation: Forging Methode's Future

Methode Electronics, Inc., a company with a 78-year history rooted in designing and manufacturing custom engineered solutions, finds itself at a pivotal juncture. Known for its mechatronic products spanning user interface, LED lighting, power distribution, and sensor applications across diverse end markets like transportation, cloud computing infrastructure, and industrial equipment, Methode is embarking on a comprehensive transformation. This strategic evolution is driven by the need to adapt to dynamic market shifts, execute a substantial pipeline of new programs, and enhance operational efficiency to position the company for sustainable long-term value creation.

The company's business is structured around three core segments: Automotive, Industrial, and Interface, having recently exited the Medical segment in fiscal 2024. Historically, Methode has built a foundation on operational excellence and global collaboration, leveraging its engineering and manufacturing footprint across North America, Europe, the Middle East, and Asia to solve complex customer problems. However, like many in the industry, Methode faces significant headwinds from market volatility, including a notable softening in EV demand, particularly in North America, and weakness in the commercial vehicle and off-road equipment sectors. Inflationary pressures on materials, labor, and freight, coupled with potential supply chain disruptions and changes in global trade policies, add further layers of complexity.

In this challenging environment, Methode's strategic response centers on resetting performance, building capabilities, and shifting its organizational culture towards a "One Methode" mindset. This involves improving fundamental operational metrics, enhancing cost focus and structure, utilizing global best practices, and instilling a sense of urgency across the organization. The success of this transformation is critical as the company navigates a transition away from large legacy programs that have rolled off, towards a multitude of new program launches.

Technological Edge and Innovation Roadmap

Methode's competitive standing is underpinned by its differentiated technology across its core product areas. In the Automotive segment, this includes expertise in integrated consoles, switches, and advanced sensors, notably incorporating magneto-elastic sensing technology. This sensor technology offers tangible benefits, such as potentially higher durability in demanding automotive environments, contributing to product reliability and customer confidence. In the Industrial segment, the company's strength lies in power distribution solutions like laminated busbars, PowerRail assemblies, and flexible power cabling systems, which offer advantages in current carrying capacity and potentially lower voltage drop for enhanced efficiency in applications like data centers and commercial vehicles.

While precise, directly comparable performance metrics for all niche technologies against all competitors are not publicly detailed, Methode's focus on custom-engineered solutions allows it to tailor products with specific advantages for customer needs. The company maintains a research and development program dedicated to enhancing existing products and developing new ones, with R&D expenditures totaling $41.8 million in fiscal 2025. This investment supports product engineering and design efforts aimed at keeping pace with rapid technological changes in its end markets.

The "so what" for investors is that these technological capabilities form a crucial part of Methode's competitive moat, particularly in specialized applications where standard components may not suffice. Leveraging this expertise, especially in power solutions for the rapidly evolving data center market and in sensor technology for transportation electrification, is central to the company's strategy for future organic growth and market positioning.

Performance Under Pressure: Navigating Roll-Offs and Headwinds

Fiscal year 2025 presented significant financial challenges for Methode, largely driven by the anticipated roll-off of major legacy programs and unexpected market softness. Net sales decreased by 6.0% to $1.048 billion compared to $1.115 billion in fiscal 2024. This decline was primarily attributable to lower sales in the Automotive segment, which saw revenue fall by 14.9% to $508.9 million as key programs, including a significant EV lighting program and the GM T1 center console, reached their end of life. The Automotive segment reported a gross profit margin of just 0.9% and an operating loss of $47.7 million in fiscal 2025, reflecting the impact of lower volumes, higher inventory obsolescence expenses ($20.4 million for the full year), and increased warranty costs ($12 million for the full year).

Conversely, the Industrial segment demonstrated resilience, with net sales increasing by 5.9% to $487.4 million, driven by strong demand for power distribution products, particularly in data center applications. Industrial segment gross profit margin remained robust at 29.6%, contributing significantly to the company's overall gross profit. The Interface segment saw a slight sales decrease but improved its gross profit margin to 24.5%.

Overall consolidated gross profit margin declined to 15.6% in fiscal 2025 from 16.0% in fiscal 2024, primarily due to the unfavorable impact of higher inventory obsolescence expenses, partially offset by a more favorable product mix with a higher contribution from the Industrial segment. Selling and administrative expenses increased, partly due to significant professional fees ($9.8 million) related to consulting and interim executive services as the company underwent leadership changes and initiated transformation efforts. The net result was a consolidated net loss of $62.6 million in fiscal 2025, an improvement from the $123.3 million net loss in fiscal 2024, which included a substantial $105.9 million goodwill impairment charge.

Despite the top-line and profitability pressures, the company showed signs of operational improvement and a focus on cash management. Working capital was reduced by $9 million in the first quarter of fiscal 2025, and accounts receivable saw a $22 million reduction for the full year. The fourth quarter of fiscal 2025 delivered $26 million in free cash flow, marking the best quarter since Q4 fiscal 2023 and demonstrating the impact of efforts to improve operating efficiency and manage the balance sheet.

Competitive Landscape and Strategic Positioning

Methode operates in highly competitive markets characterized by rapid technological change. It competes with a large number of manufacturers, many of whom, such as TE Connectivity (TEL), Aptiv (APTV), Amphenol (APH), and Eaton (ETN), possess greater resources and sales scale. A comparison of recent financial performance highlights the competitive pressures. For instance, while Methode's TTM gross profit margin stands at 15.59%, competitors like TEL (34%), APTV (19%), APH (34%), and ETN (38%) generally exhibit higher profitability at the gross level, suggesting potential differences in cost structure, pricing power, or product mix. Similarly, MEI's TTM operating margin (-2.28%) and net margin (-5.97%) trail significantly behind these larger rivals, reflecting the impact of its recent operational challenges and restructuring efforts.

Methode's market share is estimated to be in the 5-10% range across its primary markets, lower than the significant shares held by some competitors in specific areas (e.g., APH in connectors). While MEI leverages niche technological advantages like magneto-elastic sensing and custom power solutions to differentiate itself, competitors often lead in areas like high-speed data transmission reliability (e.g., APH) or energy efficiency (e.g., ETN). The lengthy sales cycle in automotive and commercial vehicle markets also poses a challenge, requiring significant upfront investment without guaranteed volumes, a risk amplified by recent program delays.

In response to this competitive environment, Methode's strategy emphasizes leveraging its diversified segment exposure to mitigate cyclicality and exploit opportunities where competitors may be less focused (e.g., certain industrial niches, the former Medical segment). The ongoing transformation, particularly the focus on improving operational execution and cost structure, is aimed at narrowing the financial performance gap with peers and enhancing competitiveness on price and service, which are critical elements in its markets. The push into high-growth areas like data center power solutions, where the company can apply its core competencies, represents a strategic move to capture market share in less saturated or rapidly expanding segments.

Outlook and Risks

Looking ahead, fiscal year 2026 is anticipated to be a transitional year marked by continued market headwinds, particularly the projected 10-15% decline in EV sales driven by lower OEM demand and program delays, notably from Stellantis (STLA). This is expected to result in a further decline in consolidated net sales to a range of $900 million to $1 billion, down approximately $100 million from fiscal 2025.

However, management projects a significant improvement in profitability, forecasting adjusted EBITDA in the range of $70 million to $80 million. This outlook implies a doubling of the EBITDA margin from approximately 4.1% in fiscal 2025 to 7.9% at the midpoint of the fiscal 2026 guidance. The rationale for this expected improvement is grounded in the anticipated benefits from the operational improvements and cost reduction initiatives undertaken in fiscal 2025, which are expected to offset the negative impact of lower sales volume. Management expects the second half of fiscal 2026 to be stronger than the first half, aligning with typical launch ramp-up schedules.

Key assumptions underpinning this guidance include the current market outlook based on third-party forecasts and customer projections, the current US tariff policy (with an expectation of 100% mitigation or recovery), and planned levels for depreciation and amortization ($58-$63 million), capital expenditures ($24-$29 million), interest expense ($21-$23 million), and tax expense ($17-$21 million, largely non-cash). The reduction in CapEx guidance reflects proactive delays and capital efficiency efforts.

Despite the positive EBITDA outlook, significant risks remain. The continued volatility and potential further softening of the EV market, particularly the risk of additional program delays or cancellations beyond current projections, could negatively impact sales and profitability. Customer concentration, with the top five customers accounting for 36% of sales, makes the company vulnerable to changes in their production volumes or sourcing decisions. Supply chain disruptions, inflationary pressures, and the ability to fully pass on cost increases to customers continue to pose risks to margins. The company's debt level and compliance with financial covenants under the amended credit agreement require careful management, although the recent amendment provides some near-term flexibility.

Furthermore, ongoing litigation and the SEC investigation could result in substantial costs and diversion of management attention. The ability to successfully execute the large number of new program launches on time and within budget is paramount to realizing the projected growth and profitability improvements.

Conclusion

Methode Electronics is actively engaged in a critical transformation aimed at strengthening its operational and financial foundation amidst a challenging market backdrop. While facing significant headwinds from legacy program roll-offs and volatility in key end markets, particularly the EV sector, the company's focus on operational execution, cost reduction, and strategic realignment is expected to drive a notable improvement in profitability in fiscal 2026, even as sales decline. The projected doubling of EBITDA margin underscores the anticipated impact of these internal initiatives.

The investment thesis hinges on Methode's ability to successfully execute its transformation plan, leverage its niche technological strengths in areas like sensors and power distribution, and capitalize on growth opportunities in markets like data centers and new program launches. While competitive pressures and market risks are significant, the company's efforts to improve efficiency, manage its balance sheet, and strategically position itself in higher-potential areas suggest a path towards future profitable growth beyond the near-term reset. Investors should closely monitor the execution of new program launches, the trajectory of EV market demand, the realization of cost reduction benefits, and the company's progress in its strategic portfolio review.