MEI

Greetings. Welcome to the Methode Electronics first quarter fiscal 2027 results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Joni Konstantelos, Managing Director. You may begin.

Good morning, and welcome to Methode Electronics' fiscal 2027 first quarter earnings conference call. Our first quarter results, including a press release and presentation, can be found on the Methode investor relations website. I am joined today by Jon DeGaynor, President and Chief Executive Officer, and Laura Kowalchik, Chief Financial Officer. Please turn to slide two for our safe harbor statements. This conference call contains certain forward-looking statements which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in Methode's expectations on a quarterly basis or otherwise. The forward-looking statements in this conference call involve a number of risks and uncertainties.

We will also be discussing non-GAAP financial information and performance measures, which we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q. Please turn to slide three, and I will now turn the call over to Jon DeGaynor.

Thank you, Joni, and good morning, everyone. Thank you for joining us for Methode's first quarter fiscal year 2027 earnings conference call. We delivered a strong start to fiscal 2027, with net sales up 10% year-over-year to $265.4 million, driven by higher volumes across our industrial portfolio, led by data center-related sales. That higher volume drove real profitability benefits, while we also saw genuine gains from our operational improvements. However, several items offset that progress. Some were one time in nature, and others reflected the investments we've made in talent and capabilities to strengthen the company's foundation. Laura will provide more details on this later in the call. On the commercial side, we booked new awards representing $75 million of peak annual revenue or approximately $400 million of lifetime revenue.

These awards were primarily for USMCA-compliant components across power products with either new customers or product lines with existing customers. A good proof point for the commercial momentum we are building. Our operational transformation journey remains on track as we continued to see the impact of cost actions and margin gains across key facilities while we implement our global operating model. We also continued to strengthen our balance sheet. We amended our credit agreement to extend certain maturities by one year and made net repayments on debt of $10 million while maintaining strong liquidity. Given all of this, we are reaffirming our fiscal 2027 guidance. I want to emphasize that the progress of our transformation journey will not always move in a straight line, but despite quarter-to-quarter volatility, we remain confident in our ability to drive sustainable improvement.

Now I will walk through some of these items in greater detail, starting with the actions we have taken over the past two years. Turning to slide four. We made significant progress stabilizing and strengthening the foundation of the company. We upgraded talent, rebuilt leadership teams, resolved legacy overhangs, simplified our portfolio, and strengthened manufacturing execution, delivering real margin and cost improvement inside our facilities.

That work is translating into better supply chain execution, shorter lead times, and stronger service levels, which is helping us earn the right to win with our customers. Our focus today is building on what we have already accomplished. There is still work to do, but we are actively working to drive top and bottom-line growth across the company. We remain focused on investing in higher growth opportunities such as data centers, and we have been pleased with the opportunities we are seeing in this market.

It is not just about data centers. We are also leveraging our capabilities and footprint to grow in other end markets and applications, including automotive and commercial vehicles. Turning to slide five. The awards we booked this quarter were not in data centers. They came from commercial vehicle and automotive power applications totaling $75 million of peak annual revenue or approximately $400 million of estimated lifetime revenue. These wins show the breadth of what our power and lighting capabilities, combined with our USMCA-compliant footprint, bring to both new and existing customers. Customers are rethinking their overall supply chains, looking for localized manufacturing to mitigate tariff exposure, shorten lead times, and ensure quality. Our engineering and manufacturing capabilities and our footprint position us well for that shift. This is what earning the right to win looks like in practice.

It is not a single award in a single market, but a broadening set of customers choosing Methode for our capabilities and because we are executing better than we have in the past. That is the commercial momentum we are building on. Turning to slide six. Part of our transformation has been moving from historically decentralized organization to a global operating model with improved alignment and collaboration across the company. We have taken a number of actions to change how our operations work globally, rebuilding the organization from the ground up. We installed a global head of operations who is building a team to drive alignment.

This includes new leadership in the areas of manufacturing strategy, quality, process engineering, and supply chain planning. We have also continued to upgrade site leadership in Egypt, Malta, Mexico, and China over the last 18 months. The breadth of these changes is being felt across the entire organization.

Egypt is the strongest example of what these operational improvements can deliver. The business drove more than 700 basis points of margin improvement in fiscal 2026, the product of stronger leadership, tighter operational rigor, and greater process discipline, with additional savings expected in fiscal 2027. In Malta, restructuring and operational improvements are driving approximately $5 million in annualized savings, including lower scrap, better quality, and other efficiencies. We're applying that same global playbook and leadership discipline to our Mexico region. To help understand the challenges in Mexico, this chart shows annual sales generated from the region over the last several years. Revenue dropped more than 50% from fiscal 2023 to fiscal 2026, mainly due to the roll-off of a major OEM user interface program, along with delays and cancellations across North American EV programs.

Those changes left us with significantly underutilized capacity and a fixed cost base that wasn't appropriately sized for the reduced revenue. We've taken foundational action to improve both operational and financial performance of this facility. We brought in new leadership, implemented best practice operating procedures, removed structural cost, and continued to drive alignment between our cost base and current demand. Early results indicate more than 500 basis points of margin improvement year-over-year at the Mexico facilities. Importantly, that improvement came without significant revenue tailwinds. We also saw an opportunity across our industrial portfolio by capitalizing on our customers' needs for localized USMCA-compliant production. Historically, our business operated as siloed units with capacity dedicated to serving one segment alone. Now, our globalized model footprint and manufacturing synergies are helping us meet those requirements.

We've begun transferring a portion of our production from Asia to Mexico, repositioning open capacity across the automotive data center and commercial vehicle markets, enabling us to take share, win new business, and diversify our demand base. This also allows us to spread fixed costs more effectively, benefiting margins in both segments. Altogether, Mexico is becoming one platform serving three markets with strong incremental adjusted EBITDA improvement. This is already built into our current guidance, but it gives you a sense of the transformation underway. Importantly, we are not just focused on these three sites. We continue to drive performance improvement and consolidation across our entire footprint. In China, we will consolidate sites. We will also exit a facility in the U.K. and at least one in Germany. Turning to slide seven. Our power solutions offerings are a fundamental piece of our long-term growth strategy.

We're applying more than 60 years of expertise designing and manufacturing complex high-performance power interconnect solutions, often pushing the limits of thermal and electromagnetic constraints to meet demanding power density, weight, and reliability requirements. We are partnering closely with our customers to understand and address their needs, whether through supply chain or product design solutions. Our product portfolio and our footprint give us the breadth to serve customers across end markets, which is a meaningful competitive advantage as we look ahead. On data centers specifically, the Mexico repositioning I just described is one example which leverages existing capacity that we can begin dedicating to hyperscaler customers who desire shorter lead times and supply chain stability.

We are also rotating engineering and commercial resources toward data centers to support that growth and bring in customers' innovative solutions that address AI-driven demand for power density, helping enable a more efficient future built on safe deployment of 800 V DC rack architectures. In vehicle electrification, we are leveraging our capabilities to drive growth with other customers in hybridization, including the new business awards I mentioned earlier. We continue to ramp up EV programs in EMEA, and we're expanding our commercial and engineering activity in Asia Pacific. In Mil-Aero, we're restructuring our commercial organization to better align with broader market dynamics and growth opportunities. Our transformation is a multi-year effort. Progress won't always be linear, but I'm confident we have the right strategy and the right team in place to deliver on the commitments we're making to our employees, our customers, and our shareholders.

We are proud of what we've accomplished so far, and we know there is more work ahead. Before I turn the call over to Laura to review the financials, I wanted to share that we will be hosting an investor day on December 17th at the New York Stock Exchange. This half-day event will include presentations from our chief strategy officer and our head of mobility and will also include product demonstrations. We will send out more information soon but look forward to seeing you there. With that, I'll turn the call over to Laura to review our first quarter financial results in more detail.

Thank you, Jon, and good morning, everyone. Please turn to slide eight. As a reminder, unless otherwise noted, all year-over-year comparisons are for the same period in the prior year. First quarter net sales were $265.4 million, up 10.4%. The increase primarily reflected higher volumes and mix in the industrial segment, partially offset by lower sales in the interface segment related to portfolio refinements. First quarter gross profit increased to $47.7 million from $43.5 million. The increase was primarily driven by higher industrial segment net sales and mix, and operational improvements across both segments. This was partially offset by higher material and freight inflation, as well as premium freight costs related to the moving of a portion of production from Asia to Mexico. Selling and administrative expenses were $45.9 million in the first quarter, compared to $36.6 million.

The increase was primarily driven by investments in talent and capabilities and higher professional fees. Income tax expense was $4.1 million in the first quarter, compared to $4.2 million. First quarter adjusted net loss was $7.7 million, or $0.22 per diluted share, compared to an adjusted net loss of $7.8 million, or $0.22 per diluted share. First quarter adjusted EBITDA was $13.7 million compared to $15.7 million. As Jon mentioned earlier, the underlying profitability was offset by expenses that were one time in nature, including a $3.8 million impact from portfolio refinements and a $2.3 million of premium freight related to the transfer of production from Asia to Mexico, along with the recovery actions where there is a lag effect before the recovery comes through. Taken together, these expenses were a $6.7 million headwind on adjusted EBITDA.

Importantly, the underlying ongoing drivers of the business, including volume, mix, and operational execution, represented a positive $4.7 million impact on a net basis, reflecting genuine underlying progress. Turning to our segment results on slide nine. First quarter automotive segment net sales were $105.7 million, a decrease of 0.4%. Lower volumes in EMEA and Asia were mostly offset by higher sales in North America. Automotive segment operating loss narrowed to $11.7 million, representing a 6% improvement from the prior year, reflecting lower inventory adjustments and lower scrap, partially offset by higher material cost inflation. We expect to see continued improvement, specifically related to Mexico, as we transition available capacity and related fixed costs to our industrial business. The industrial segment continued to deliver strong performance.

First quarter 2027 net sales increased 27% to $156.8 million, driven by continued momentum in data center power distribution and strong demand for off-road lighting solutions. Additionally, during the quarter, we recognized $2.2 million in recoveries from commercial vehicle lighting customers. Industrial segment operating income expanded 19% to $31.6 million, driven by higher volumes and mix, customer recoveries, and operational improvements, partially offset by higher material and freight inflation, increased expedited freight expense, and investments in talent and capabilities. The interface segment net sales declined 73% to $2.9 million. Loss from operations was $800,000 compared to income from operations of $3 million. The decline primarily reflected the divestiture of the dataMate business as part of our ongoing portfolio optimization efforts, as well as the planned roll-off of a major appliance program. Turning to slide 10.

We ended the quarter with $116.2 million in cash and cash equivalents compared to $139 million at the end of fiscal 2026. Total debt was $310.5 million at the quarter end, down $14.5 million from the end of fiscal 2026, reflecting $10 million of net repayments and $4.5 million of favorable currency impact. Net debt increased from $185.4 million at the end of fiscal 2026 to $194.3 million in the first quarter due to the decrease in cash and cash equivalents. As you probably saw in our earnings release, subsequent to quarter end, we completed an amendment that extends the maturity date of certain revolving loans by 12 months to October 2028. As part of that extension, we reduced our revolving credit facility from $400 million-$375 million at closing. Capital expenditures were $3.1 million, down from $7.1 million.

Free cash flow with an outflow of $10.9 million in the quarter compared to an inflow of $18 million. The free cash outflow in the quarter was largely driven by higher working capital levels, primarily reflecting a planned inventory build to support the transition of production from Asia to Mexico. This was partially offset by customer recoveries. Turning to slide 11. Our capital allocation framework continues to guide how we deploy capital, with clear priorities, including strengthening our balance sheet, funding core operations, selectively reinvesting in high return growth opportunities, and returning capital to shareholders. We remain focused on reducing leverage while directing capital towards the highest return opportunities across the business. Turning to fiscal 2027 guidance on slide 12.

We are affirming the fiscal 2027 guidance we provided last quarter, which continues to reflect our current market outlook, including third-party industry forecasts, customer production schedules, current U.S. tariff policies, and bank forecasts for currency. We continue to expect net sales in the range of $1.025 billion-$1.075 billion and adjusted EBITDA between $72 million and $82 million, representing an adjusted EBITDA margin of approximately 7%-7.6%. We continue to expect free cash flow comparable to fiscal 2026. All other elements of our fiscal 2027 guidance remain unchanged. This guidance reflects our expectations for data center growth, ongoing operational improvement in Mexico, improving commercial vehicle demand, and further cost savings and operational improvements across the business.

We have included the fiscal 2027 guidance bridge we shared last quarter in the appendix section of the slide presentation. This bridges our fiscal 2026 result to the midpoint of our fiscal 2027 guidance for both net sales and adjusted EBITDA, which we are affirming. With that, I will turn the call back to the operator for questions.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from Luke Junk with Baird.

Good morning. Thanks for taking the questions. Wanted to start on the margin progression going through the year, specifically your comment that you expect to see some improvement in auto margins as you transfer capacity and some fixed costs into the industrial segment. Jon or Laura, can you just put some guardrails around the materiality there? And I would assume that is primarily a gross margin-related consideration. Thank you.

Good morning, Luke, and thanks for the question.

Yeah, Luke. As we mentioned, we did see in Mexico 500 basis points improvement already year-over-year. We do expect that to continue as we do make more operational improvements and the production transfers to then the fixed costs there.

Yeah. Would you say, is the production transfer the bigger factor there? I'm just trying to size the buckets and-

No.

Yeah.

The base performance improvement in Mexico, the production transfers will help, but the biggest thing is performance within the plant reduction of premium freight and scrap.

Got it. Thank you.

And direct labor.

Second, just be great to get your perspective, Jon, on the investments in talent and capabilities in your EBITDA bridge. I know you've been reinvesting some dollars from an engineering standpoint and flowing it to the highest growth opportunities. Can we just maybe reconcile your interest in those incremental dollars and sort of the underlying support that we maybe can't see from the reallocation?

Yeah. So thanks for the question, Luke. I'll give some top-level thoughts, and I'll let Laura give some additional detail. I think it's important in that part of what you're seeing is the sequential impact, because we're looking at it on a quarter-over-quarter basis. First quarter 2026 versus first quarter 2027 fiscal. There's a little bit of a timing impact here. If you would look at the comparison or run rate comparison of the executive teams, it's actually not a significant change. As a matter of fact, it's a reduction from the structure in the past. But as we've added talent and we have a timing impact, that's why you see this change on a year-over-year basis, although part of it is also variable comp.

Yeah. These costs reflect the leadership changes we have made over the past 12 months to strengthen our foundation and position us to capture the growth ahead. We have upgraded talent. We are building out a global organization. We are bringing in new global leadership across operations, manufacturing, strategy, and supply chain. We also need some of the ongoing external support to help us get through this transformation.

Yeah. I think, Luke, another thing to keep in mind is we have talked about rotation of investment to support data centers from some of our existing business. There is also some new talent that has to be brought in there to help us from an engineering perspective. Honestly, there is some spend as we think about it from a global planning and a global strategic activity, that we are spending that from an SG&A standpoint, but it is what is allowing us to drive the performance and reduce some of the other costs and better serve our customers. So I would rather spend it with talent that helps us drive the growth than in premium freight and scrap.

Mm-hmm. Speaking of data center, in the slides, you mentioned that there was just a bit of a timing benefit in data center sales this quarter. Can you size that? Or maybe more importantly, just explain what is going on there.

Yeah. There were some just pull aheads, so we are not expecting the full year to change, but we did have pull aheads come up into Q1 from later in the year.

Got it.

We're still reaffirming that.

Yeah.

We're still reaffirming the number that we gave you from a year-over-year.

At 130.

Yep. Last question for you, Jon. Just curious to get an update on how you're thinking about some of the pillar franchises within the company, especially some of the areas we don't discuss as much, such as lighting or Hetronic, and just where we are in the life cycle of this transformation journey that you're on. Are we at a stage where you're starting to think about any portfolio actions? Or just what your thinking is there right now would be helpful.

Yeah. Thanks for the question, Luke. The Nordic Lights, let's talk first from a lighting standpoint. The Nordic Lights franchise, and the Nordic Lights business has been pretty much underappreciated, but an extremely successful acquisition and an extremely successful business. The team has done a great job of supporting customers around the world, and we continue to grow there, and we're seeing a pretty significant growth on the scale of that business on a year-over-year basis. What we've done with regard to our creating the global structures is we're actually the stuff that the customer does not see, the commonality from a supply chain perspective, and commonality from an engineering perspective gives us the opportunity for some of, for example, the leader in engineering who came from Nordic Lights is now the lighting leader around the world.

So we're using some of the Nordic Lights capabilities to help drive growth in other pieces within Methode. Grakon, as we have talked to you before, has been challenged twofold. One, with regard to some past strategic decisions, and also with regard to commercial vehicle volumes, particularly in North America. We're seeing those commercial vehicle volumes start to come back, and we've also got some initial business wins on the Grakon side. Honestly, one of the bookings that we had in the $75 million was a commercial vehicle win on the power side that actually was built upon the relationships that the Grakon team had with our commercial vehicle OEMs. So what you're seeing is the lighting business continues to grow.

We continue to build synergies behind the scenes on the back office side, engineering, operations, supply chain, while deepening our focus on each of our individual customers, so whether it's Nordic Lights or the Grakon brand. I'm really confident in where that's going and how that can continue to grow. With regard to Hetronic, it's a team that's continued to actually drive growth there.

We've got some exciting new things with a couple of our customers there also. So both Hetronic and the controls business within Hetronic and the lighting business, we don't talk about it as much, but we see growth on both sides. With regard to the portfolio, we're constantly looking at what can we do to refine a portfolio that fits with our strategic direction and also may give us some opportunities to further accelerate our balance sheet cleanup. Nothing to talk about right now, but that is how we think about it here.

I will leave it there. Thank you.

Your next question is from John Franzreb with Sidoti & Company.

Good morning, Jon and Laura. Thanks for taking the questions.

Good morning, John.

I guess I'd like to pick up where you just left off. When you talked about the new order being about $75 million annualized at peak and $400 million over the life duration, it sounds like a lot of that's coming from the commercial vehicle market. I'm curious about a couple of things. Does that peak run rate, is that something you'll probably hit within the next 12-18 months? How much of that reflects the strong order book we see in CV? You kind of just touched on some new market penetration also. I'm kind of curious if you can deconstruct that.

Yeah. Thanks, John. Primarily, the $75 million is less than a third is commercial vehicle. The majority of it is new business wins with new automotive customers.

Okay.

For electrification, but more for hybridization. We have talked in previous earnings calls about opportunities that are being presented to us by new customers who are re-looking at their overall supply chain and their footprint, and their, if you will, their supplier footprint, and that's where the majority of those booking wins come. The commercial vehicle award is for a power product, not on the EV side, but using some of our power technology for one of the commercial vehicle OEMs. The answer is, nothing that we talked about in the $75 million is just tied to additional sales. It's not about a rising tide lifting all boats. These are new awards. In answer to your second question with regard to when would we start to see the volumes, the majority of these launch late next fiscal year or after.

As you are well aware, in automotive or commercial vehicle programs, there is a lead time between the point when you get an award and when it starts to ramp up. It is the end of next fiscal year where we start to see that, but we are already spending engineering and working with the customers to get those programs developed at this point. We feel really good about the commercial, if you will, the commercial momentum we have, and what this signals for growth beyond our data center growth that we talked so much about.

Got it. Thank you for that. On the automotive side, I am getting some mixed messages out there, so I am curious to hear your thoughts. Are there any changes in your production assumptions for your customer base? I guess, in your case, if we take it by geography, that would be the best way to kind of look at it for me.

Well, as we talked about in the script, we are seeing some revenue tailwinds in North America, and that comes down to. Because we are not represented across the entire, as we have said before, John, we are not a SAR-based. You cannot just calculate our progress one way or the other based on SAR, because we are not across all of the end customers. But with our customer mix and some of our products, we are seeing some tailwinds with regard to SUVs and pickup trucks that are selling more. In EMEA, and particularly Asia, are the revenues down a little bit? Yeah. Particularly in China with a couple of our customers, we have got some headwinds there. So overall, automotive revenue, North America is up, China is down, and EMEA has got a little bit of headwinds as well.

Okay. Thank you for that. One last question. You maintained the CapEx guidance, but you came out of the gate with only $3 million. Suggests a big pickup in spending. Can you kind of talk us where the spending is going and the timing of it?

We spend, it is roughly half and half between maintenance capital and new capital. Some of that is just the timing of programs and the timing of when we are adding equipment. As we have said in the calls, we are doing a great deal of reutilizing existing capital as we are supporting transfers, whether it is with the data center transfers or some of the other things. There will be new investments that are put in place on the plant floor in order to support growth in multiple of our end markets. We are comfortable with where we are from a CapEx forecast at this point.

Okay. Thank you. I will get back into queue.

Thanks, John.

Your next question for today is from Ryan Sigdahl with Craig-Hallum Capital Group.

Hey, good morning, Jon, Laura.

Good morning, Ryan.

I want to dig into the cost a little bit more. So you had $5.9 million recurring talent and capabilities. I presume that is a recurring cost going forward, but maybe help us level set if that's kind of the right assumption to continue to assume or if that needs to increase. And then I caught a rate $6.7 million of one-time costs. Is that right? Or are those kind of double counting between those buckets?

Yeah. Thanks, Ryan. For the investment in the talent and capabilities, yes, we do expect that to continue this fiscal year. Going out into further years, though, we will not need as much support externally. That's included in that number. But throughout the rest of this fiscal year, we do see that continuing. As far as the one time in nature costs, those were related to the divestiture in Q4, so we're going to continue to have that through this fiscal year, that decrease there. And then the premium freight, that was related to the production transfer and there were execution issues with that from the Asia to Mexico, and those issues have been resolved. So we do not see that continuing going into the rest of the fiscal year, just seeing probably minimal premium freight going forward.

How much specifically was that premium freight and execution issues?

If you look at slide eight referenced there, it is $2.3 million.

Great. Just the talent and capabilities, I guess curious if you are willing to comment on how much of that is data centers and then give an update on the design work with your hyperscaler customers, specifically on 800 V architecture, where you are at, any incremental details. Just curious if you are willing and able to share anything more at this point.

Ryan, thanks for the question. Let us start first with, when you look at investment in talent, as I said it is a change in talent at the senior team, but it is not a change in expense at the senior team. Where you see the additional expenses is we have added commercial leadership from a data center standpoint. We are adding additional engineering there. We mentioned that we are adding commercial leadership in our Mil-Aero areas. We have done some things with regard to a manufacturing strategy, a global head of quality, actually improving our overall strategy team.

Those are all investments, shall we say, a couple of layers down from me that really help to build a much more robust both planning and execution structure within the organization that, as we've talked together, making sure that when we talk about performance for Methode, that there's a level of confidence going forward, we understand what underlies it. So that's where that investment comes in, is it's investment in capabilities across the organization to make us much more sustainable quarter-over-quarter, year-over-year with regard to our performance.

Any comment from a data center specifically?

Are we spending more money on engineering for data centers as well as outside help? Yes. Are we breaking that out specifically? We are not.

Fair enough. Automotive, it's been in decline obviously for program roll-offs and reasons we've talked about for many years. You mentioned some crosswinds, some headwinds in Asia and Europe, maybe some tailwinds in North America. But maybe level set kind of today, I guess directionally, do you think that business segment from a revenue standpoint is stable and flat this year? Is it up? What gives you that confidence and visibility from a stabilization and potentially return to growth given the new awards you announced today are kind of out two years from here?

Yeah. So from a revenue perspective, it is why we are able to reaffirm guidance. What we see right now from a SAR perspective and what we see right now with the equivalent of S&OP in EMEA and in Asia gives us a level of confidence that what we say from a revenue perspective, we are flat. Yes, there is some mix between the regions. From a performance perspective, as we said, we expect Egypt and Malta to continue to improve on a year-over-year basis. We have 500 basis points worth of performance improvement in Mexico.

We expect to see that to continue to improve. And we have business and facility refinement in broader in Europe and in Asia that will allow us to continue to drive profitability there. The performance that we see on a year-over-year basis from an automotive and from an overall Methode standpoint is not based on revenue tailwinds.

It is really based on what we have done to take structural cost out and continue to take structural cost out. And the team around the world is absolutely focused on what do we do to drive that performance in each of the regions. The answer to the question is, we feel confident that we can continue to drive performance. Will there be some fits and starts as we go here? And it is part of why we have had to make the investment in talent that we have made and why we will still have some external support to help us through this. But we do feel good about where the profitability profile is and how we can drive more performance.

Thanks, Jon. Laura. Good luck, guys.

Thank you.

Thank you.

As a reminder, if you would like to ask a question, please press star one. Your next question for today is from Gary Prestopino with Barrington.

Hi. Good morning, Jon and Laura.

Good morning, Gary.

Jon, I wanted to ask you on these new awards, particularly in the hybrid electric vehicle market. Are the bulk of these awards dealing with actual hybrid vehicles? Or how is it split in regard to pure EVs versus hybrids? Where are these new awards coming from? Are they domestic U.S., foreign, or are they in Europe?

They are all hybrid awards. Let me be clear with that. They are not EV awards. Secondly, they are to be manufactured, for all of these awards, they are to be manufactured in North America, so manufactured in Mexico. Other than the commercial vehicle award that we talked about, all of those awards are with new customers to Methode. Gary, it is directly consistent with what we have said that our footprint and our capabilities with the global turbulence from a supply chain standpoint and the global turbulence from a tariff standpoint, our capabilities are creating opportunities for us, and these awards are a demonstration that those capabilities are being brought into fruition with tangible awards.

Okay. All right. I think this question was asked, but I do not know whether you really answered it, at least to my satisfaction. In the data center area, you are working on this 800 V capability, right?

Yep.

Is that 800 V architecture out in the market now, or is that something that we are going to see in a year or two?

It is not out in the market now.

Okay.

And it is why, Gary, we have been very clear to say, yes, we are spending engineering on it. Yes, we are working with our partners on development activities, but none of it is in our guidance because it is not out in the market, and we do not have any business awards. All of the growth that we talk about from a revenue perspective in fiscal 2027 is with the current architectures. We are spending money on the advanced development and the future activities with regard to 800 V, but none of that is in our revenue forecast. And we believe that we are in a strong position with the leaders in the space. No, nothing is out in the market, and we do believe we are well-positioned there.

Yeah. I guess the question I would have is when does this actually come to market?

Well, the first thing that has to happen is the demonstration that it is viable and very importantly, that it is safe. With current architectures, the voltages at the racks are safe for the people around the rack. At 800 V with the sort of voltage and current that we are talking about, that is no longer the case. What we are working on and the solutions that we are working on, we talk about bringing automotive-related safety activities into the data center side, is making sure that an 800 V high current architecture can be done safely. We have to demonstrate that first.

Okay.

We expect that later this fiscal year, we will have proof of concept and demonstrate that, and then that should turn into customer awards.

Okay. Are you concerned at all about some of what is going on with the data center pushback? Various states are putting a moratorium on them and all that. Give us your thoughts on that and what is going on in the market.

There is an interesting op-ed in The Wall Street Journal yesterday and a couple of things right on the headlines talking about the fact that, yes, it is a little bit of a political football, but that this is the right thing for the U.S. economy.

All right.

We watch it, we monitor it. We do believe that some of the pushback actually will drive additional efficiency in the architectures. The 800 V architecture will ultimately drive efficiency in the data center. The way in which these things are done will. There's a lag in what the world and what the press understands with regard to data centers. What we're working on is the future state, but some of that pushback due to the lag is pushing innovation. Are we watching it? We're not seeing any softness from a revenue forecast standpoint. We do see that as we're working on advanced development, we're aligned with where those opportunities should go in the future.

Okay. Thank you.

We have reached the end of the question and answer session and today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Please note this conference is being recorded. I will now like to turn the conference over to your host, Joni Konstantelos, managing director. You may begin.

Good morning, welcome to Methode Electronics' Fiscal 2026 Q4 and full year earnings conference call. Our Fiscal 2026 financial results, including a press release and presentation, can be found on the Methode investor relations website. I am joined today by Jonathan DeGaynor, President and Chief Executive Officer, and Laura Kowalchik, Chief Financial Officer. Please turn to Slide two for our safe harbor statement. This conference call contains certain forward-looking statements which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise. The forward-looking statements in this conference call involve a number of risks and uncertainties.

We will also be discussing non-GAAP information and performance measures, which we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q. Please turn to Slide three, I will now turn the call over to Jonathan DeGaynor.

Thank you, Joni. Good morning, everyone. Thank you for joining us for Methode's Q4 and Fiscal 2026 earnings call. I'd like to begin by thanking our global team for their dedication, resilience, and commitment to serving our customers throughout another dynamic year. Turning to Slide three. Fiscal 2026 was an important year for Methode. While we continued to operate in a challenging environment, including EV program delays and cancellations, customer production volatility, commercial vehicle end market softness, and ongoing supply chain and tariff-related complexities, we remained focused on the areas within our control. Our priorities were clear: improve operational execution, strengthen financial performance, simplify the portfolio, generate cash, reduce leverage, and position the company for sustainable long-term value creation.

For the full year, net sales were approximately $1 billion, down three percent from the prior year, reflecting North American auto program roll-offs, commercial vehicle market softness, portfolio actions, and significant customer program delays. To address and react to the customer program delays, our team negotiated approximately $45 million of customer recoveries, helping offset the impact of customer-driven program changes and creating both near-term and longer-term financial benefits for the company. These recoveries also helped reimburse a portion of the significant development, launch, and other program costs incurred by the company over the past several years. Despite the lower sales environment, adjusted EBITDA increased 60% to $68 million, driven by stronger operational performance, customer recoveries, disciplined cost management, and the benefits of actions taken across our global manufacturing footprint. We also generated approximately $16 million of free cash flow through improved working capital management and inventory reduction initiatives.

While these results do not yet reflect fully the potential of Methode, they demonstrate meaningful progress. We expanded margins, improved cash generation, continued executing the operational and strategic actions necessary to create a more competitive and profitable company. Turning to Slide four. As a reminder, our transformation journey began approximately two years ago and is focused on improving performance, strengthening the organization, and creating a platform capable of delivering sustained, profitable growth. Before discussing our progress in more detail, I think it is important to provide context on what the company has accomplished during that period, because the headline financial results do not fully reflect the magnitude of the change that has occurred within Methode. First, we've been operating through a massive revenue headwind. Several mature automotive programs rolled off, while anticipated EV program launches were delayed, resized, or canceled by customers.

As a result, expected replacement revenue did not materialize on the timeline originally anticipated. Despite those headwinds, we improved profitability, generated free cash flow, and strengthened our balance sheet, invested in future growth opportunities, and upgraded significant portions of the organization. Second, we spent considerable time and resources addressing legacy matters, including the SEC investigation, material weakness and internal control deficiencies, inefficient financial processes, and gaps within the finance organization. Today, that work is largely behind us. The SEC investigation has concluded with no enforcement action. Our control environment is substantially stronger. We've rebuilt the finance team, and management can increasingly focus our attention and resources on growth, execution, and customer engagement. Third, we believe the market underestimates the amount of operational work completed across the business.

Over the last 24 months, we rebuilt leadership teams, upgraded talent, implemented a more rigorous operating cadence, strengthened manufacturing execution, improved supply chain discipline, reduced inventory, lowered scrap and freight costs, and increased accountability throughout our global footprint. Collectively, these actions have fundamentally improved the quality of the business. Turning to slide five. We are beginning to see tangible evidence that our efforts are working. Our progress can be viewed through three areas, our people, the strategic actions we've taken, and improved operational performance. Starting with our people, we've invested heavily in building the leadership team and operating model needed for the next phase of Methode's evolution. Over the past two years, we substantially reshaped the organization, including changes to eight of our 10 executive leadership positions and nearly half of the top 100 leadership roles globally.

The relocation of our headquarters from Chicago to Southfield, Michigan, provided an opportunity to rebuild much of our corporate organization, particularly within finance and HR. We established a stronger team, improved financial rigor and visibility, and created greater accountability across the business. We also upgraded leadership across engineering, product management, sales, operations, and strategy, while expanding capabilities that support our growth initiatives, including data centers. At the same time, we've been transitioning from a decentralized structure to a more global, aligned, and collaborative operating model. This is improving coordination across regions, strengthening accountability, reducing redundant efforts, and driving more consistent execution throughout the company. Turning to strategic actions. Our focus has been on simplifying the portfolio and directing resources toward higher growth opportunities. One of the clearest examples of this redirection is our data center business.

I'll discuss that in more detail shortly, but we continue to see strong momentum and expected significant growth in fiscal 2027. The actions we have taken with customers reflect the more disciplined commercial approach we have implemented across the organization, which has helped improve program economics and offset a portion of the external headwinds affecting the business. From a portfolio and footprint rationalization perspective, we completed the divestiture of DataMate, generating an $11 million gain and further aligning the company around our long-term growth priorities. We also sold our Harwood Heights, Illinois, facility, generating approximately $5 million in cash proceeds. Operationally, we continue to make measurable progress across our manufacturing footprint. Egypt remains one of our strongest examples of what improved execution can achieve. Through upgraded leadership, better process discipline, and enhanced operational rigor, the business delivered more than 700 basis points of margin improvement during fiscal 2026.

We also advanced restructuring initiatives in Malta that are expected to generate approximately $5 million of annual savings. In Mexico, our transformation efforts continue to progress. We have strengthened the leadership, improved execution, and gained significantly better visibility into our operational challenges. Although Mexico continues to be impacted by EV program delays, customer schedule changes, and under absorption, we believe the cost reduction and improvement actions underway, as well as the new business that is coming into our Mexico facilities, positions the business for improved performance in fiscal 2027. There is still work to do, particularly in Mexico, but the underlying trends give us confidence that the organization is operating more effectively and is increasingly well-positioned to drive sustainable margin expansion and cash generation going forward. Turning to slide six. The benefits are increasingly evident in our customer relationships as well.

Improved service levels, better supply chain performance, reduced lead times, and stronger coordination between engineering and commercial teams are helping us rebuild credibility through execution. We look forward to sharing more details on business wins and new business bookings during our first quarter call. Turning to slide seven. On the next slide, one area where the benefits of these changes are becoming particularly visible is power solutions. Methode has more than 60 years of expertise designing and manufacturing complex, high-performance power interconnect solutions, often pushing the limits of thermal and electromagnetic constraints to achieving demanding power density, weight, and reliability requirements. Those capabilities have supported a diverse set of end markets over the years, including automotive, commercial vehicles, aerospace, defense, data center, and other industrial applications. Our technology has not changed. What has changed is our ability to leverage the expertise across the company and end markets.

When run as a collection of independent businesses, Methode was unable to capitalize fully on engineering, manufacturing, and commercial synergies. As we have become a more integrated organization, we are increasingly able to creatively apply our common technologies, manufacturing capabilities, and customer relationships to deliver unique solutions across multiple end markets. This is particularly important given Methode's investments to support vehicle electrification. The engineering expertise developed around advanced power distribution and 800-volt architectures, combined with available capacity within portions of our manufacturing footprint, creates opportunities well beyond traditional automotive applications. The progress we are making reflects not only our technology and manufacturing capabilities, but also the leadership team we have assembled to identify opportunities across end markets and execute on a more integrated strategy.

These leaders are helping break down historical silos, align resources across businesses, and position the company to generate greater returns from investments made over the past several years. Data centers are emblematic of our change in focus. We have supplied busbars into data center applications for more than 30 years, including early participation in the Open Compute Project. However, without continued focus and investment, Methode lapsed into a role as a second source build-to-print manufacturer. Today, we are engaging directly with hyperscale customers to address their needs for shortened lead times and supply chain stability. Simultaneously, we are bringing creative solutions to them to address AI-driven demand for power density and helping to enable a more efficient future based on automotive-grade, safe deployment of 800 volt DC rack architectures. During fiscal 2026, we generated approximately $80 million of data center related sales.

Based on current visibility, we expect that figure to increase approximately 60% - $130 million in fiscal 2027, with continued growth anticipated beyond that. More broadly, we are directing capital, talent, and engineering resources toward markets where we can leverage existing capabilities, deploy our technologies across multiple end markets, and create differentiated value for our customers. As we look ahead to fiscal 2027, we are shifting our focus in this transformation journey from fix it to growth. The operational challenges that demanded so much of our attention in recent years are largely behind us. Today, our energy is increasingly directed toward winning new business, investing in strategic growth opportunities, and building on the stronger foundation we've established. With that, I'll turn the call over to Laura to review our Q4 and fiscal 2026 results, balance sheet, and fiscal 2027 outlook.

Thank you, John, good morning, everyone. Please turn to slide eight. Unless otherwise noted, all year-over-year comparisons are to the prior year period. As a reminder, fiscal 2026 consisted of 52 weeks compared to 53 weeks in fiscal 2025. Q4 net sales increased 15.9% - $298.1 million. The increase was primarily driven by customer recoveries in the automotive segment, strength in the industrial segment, and favorable foreign exchange, partially offset by the interface segment program roll-offs, and the divestiture of the DataMate business. Fiscal 2026 net sales decreased 2.8% to approximately $1 billion. The decline was driven by program roll-offs in both the automotive segment and interface segment, and the impact of one last week in the fiscal year. These factors were partially offset by customer recoveries in the automotive segment, strength in the industrial segment, and favorable foreign exchange.

Q4 gross profit increased to $72.2 million from $19.6 million, driven by customer recoveries and improved operating performance across our automotive and industrial businesses. For the full year, gross profit increased to $202.2 million from $163.4 million, reflecting stronger operational execution and manufacturing efficiencies. Selling and administrative expenses were $55.6 million in the Q4 compared to $37.4 million. The increase is primarily driven by higher employee compensation costs, $2 million of transaction-related and strategic initiatives costs, and $1 million impairment charge related to the exit of our former corporate office. For fiscal 2026, selling and administrative expenses were $170.3 million compared to $163.9 million. The increase was driven primarily by foreign currency translation, higher employee compensation costs, and restructuring charges, partially offset by lower professional fees. Income tax expense was $12.3 million in the Q4 compared to a tax benefit of $2.1 million.

For fiscal 2026, income tax expense was $25 million compared to $12.5 million. The year-over-year increase for both periods was primarily driven by approximately $4.8 million of additional tax expense related to non-deductible items, and $3.4 million of higher foreign taxes. The comparison was also impacted by a non-recurring tax benefit of $3.9 million recognized in the Q4 of fiscal 2025 related to expiration of certain statutes of limitations. Turning to profitability, fourth quarter adjusted EBITDA was $26.9 million compared to an adjusted EBITDA loss of $7.1 million. For fiscal 2026, adjusted EBITDA increased 60% to $68.2 million. The improvement reflects stronger operational execution across the business, customer recoveries, disciplined cost management, and favorable foreign exchange. As John mentioned, we negotiated approximately $45 million of customer recoveries, resolving claims associated with EV program delays and cancellations.

Approximately $23 million was recognized as revenue in fiscal 2026 and contributed approximately $19 million to earnings. For this portion of the recovery, we expect cash payments of $7 million per year in fiscal 2027 through 2029. We expect to realize the remaining $25 million of customer recoveries through future production volumes and tooling-related reimbursements. Q4 adjusted net loss was $10.4 million, or $0.30 per diluted share, compared to an adjusted net loss of $27.4 million, or $0.77 per diluted share. For fiscal 2026, adjusted net loss was $37.5 million, or $1.07 per diluted share, compared to adjusted net loss of $39.7 million, or $1.12 per diluted share. Turning to our segment results on slide nine. I'll focus primarily on fiscal 2026 performance, as we believe the full-year results best reflect the progress we've made across the business.

Fiscal 2026 Automotive segment net sales were $467.7 million, down 8.1% compared to the prior year. This decrease was primarily driven by the impact of program roll-offs and EV program delays in North America, partially offset by customer recovery agreements and $18 million of favorable foreign exchange. Despite these headwinds, Automotive operating loss improved by $18 million to $30.1 million, reflecting the benefits of customer recovery agreements, operational improvements, and greater commercial discipline across the segment. While North American Automotive continues to be impacted by under-absorption and customer schedule volatility, we are increasingly leveraging engineering, manufacturing, and commercial capabilities across the company, enabling us to utilize available capacity in Mexico to support new business wins across a broader range of end markets. Many of these opportunities carry more attractive margin profiles than the programs they replace while improving fixed cost absorption and further diversifying the business.

We believe these actions position both the segment and the company for improvement. The Industrial segment continued to deliver strong performance, with fiscal 2026 net sales increasing eight percent to $524.3 million and operating income growing 27% to $114.6 million. Approximately half of the sales increase was attributable to favorable foreign exchange. Results were driven by continued momentum in data center power distribution and strong demand for off-road lighting solutions, partially offset by softness in commercial vehicle markets. Our Industrial business is a strong example of the benefits of the more integrated operating model John discussed earlier. By leveraging common engineering expertise, manufacturing capabilities, and customer relationships across the organization, we are increasingly able to deploy our power distribution technologies into attractive growth markets, such as data centers.

This not only supports growth, but also allows us to better leverage our existing manufacturing footprint and demonstrate the value of investments we have made across the business over the last several years. The Interface segment net sales declined 47% to $27.2 million, while operating income decreased 51% to $5 million. The decline primarily reflected the planned roll-off of a major appliance program and the divestiture of the DataMate business as part of our ongoing portfolio optimization efforts. Overall, the segment results demonstrate the benefits of the operational and strategic actions we have taken over the past two years. While sales continue to be impacted by external market factors, we are delivering improved profitability through stronger execution, disciplined cost management, and a more focused portfolio. Turning to slide 10.

We generated free cash flow of $15.6 million in fiscal 2026, compared to an outflow of $15.2 million in the prior year, driven by stronger operating performance and disciplined working capital management. Capital expenditures were $22 million, down 46% year-over-year. We ended the year with approximately $140 million of cash and net debt of $185 million, a 13% reduction from fiscal 2025. Turning to slide 11. Our fiscal 2026 results reflect continued progress in cash generation, balance sheet strength, and capital allocation discipline. We remain focused on reducing leverage while investing the highest return opportunities across the business. Turning to fiscal 2027 guidance on slide 12.

Based on our current market outlook, including third-party industry forecasts, customer production schedules, current U.S. tariff policies, and bank forecasts for currency, we expect fiscal 2027 net sales to be in the range of $1.025 billion-$1.075 billion and adjusted EBITDA to be between $72 million and $82 million, representing an adjusted EBITDA margin of approximately 7%-7.6%. We expect capital expenditures of $25 million-$30 million and free cash flow to be comparable to fiscal 2026. We expect interest expense of $20 million-$22 million, income tax expense of $24 million-$26 million, and depreciation and amortization expense of $58 million-$62 million. Turning to slide 13. The charts provide a bridge from our fiscal 2026 results to the midpoint of our fiscal 2027 outlook for both net sales and adjusted EBITDA. We expect fiscal 2027 net sales to grow approximately three percent compared to fiscal 2026.

Excluding the impact of portfolio refinement activity, including the major appliance program roll-offs, and the DataMate divestiture, as well as customer recoveries in fiscal 2026, net sales are expected to grow approximately eight percent year-over-year. That growth is expected to be driven by approximately $50 million of incremental sales from data center applications, improving commercial vehicle demand, and the net benefit of volume and mix across the portfolio. We expect sales associated with our data center programs to ramp throughout the year. Adjusted EBITDA is expected to grow 13% compared to fiscal 2026. Excluding the impact of fiscal 2026 portfolio refinement activity and customer recoveries, we expect Adjusted EBITDA to grow approximately 82% year-over-year. This improvement is expected to be driven by continued growth in our data center power distribution business, improving demand in commercial vehicles, and favorable volume and mix across the portfolio.

We expect to realize further operational improvements from the actions we have taken across the business, including improved performance in Mexico, benefits from our restructuring initiatives in Europe, and continued execution of our cost reduction programs. Together, these actions are expected to drive meaningful margin expansion and earnings growth in fiscal 2027. For modeling purposes, as you think about the cadence of the year, we expect a lighter Q1 driven by typical seasonality. From there, we expect sales and earnings to ramp throughout the year, resulting in a stronger second half of fiscal 2027 as volume growth and operational improvements continue to build. In summary, fiscal 2026 marked an important year of progress. We improved profitability, generated a positive free cash flow, strengthened the balance sheet, and continued to enhance operational performance across the business.

As we look ahead to fiscal 2027, our focus remains on executing our growth initiatives, expanding margins, generating cash, and further reducing leverage. We believe the actions taken over the last two years have created a stronger foundation for sustainable value creation. With that, I will turn the call back to the operator for questions.

Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from Gary Prestopino with Barrington.

Hey, good morning, all.

Good morning, Gary.

Congratulations, John and Laura, on what you've done with the company so far. Couple of questions here. First of all, in the data center business, can you just remind me of what you're actually selling into that business? I believe it's busbars, right?

Yeah. Gary, as we've talked about both the results of fiscal 2026 and the guide for fiscal 2027 are based on our current busbar business into the hyperscalers.

Okay.

When we reference the future technology and the 800-volt architectures, none of that is in our guide. That is opportunity that we're working on and we're really excited about, but none of that's in the revenue guide for 2027.

Okay. Right now it's just all busbars, which is good.

Correct.

The other thing, could you maybe just, as we talk about these recoveries, these recoveries were from the automotive programs that you guys had taken on over the last couple of years, correct?

Yes.

Okay. Were these agreements due to the old management team, or were these agreements that you guys had put in place and then the market just really turned against you in a sense of that the volumes that you anticipated were not there?

Yeah. Gary, if you go back to some of the bridges that we provided in the past with regard to program ramp-ups, these programs were won years ago. As recently as a year and a half ago, when we went through the revenue plan as we laid it out in earnings calls, we talked about an opportunity of a couple hundred million dollars worth of revenue between a couple of these EV program ramp-ups. When we talk about under absorption and some of the challenges that we mentioned during this call, that goes back to things that we anticipated happening and where we had spent the engineering and where we had spent the capital, and we had done all the work in our facilities, particularly in our Mexico facility, to be ready for those ramp-ups.

With the changes in the dynamics in the North American EV market, that required us to go back to customers. Those were programs that were won years ago, that was revenue that was anticipated. Over the last months, we've been negotiating with the customers to get these recoveries, and it is a team effort to get to the results that we got.

Okay. Do you feel that for I guess we didn't really talk too much about the automotive, but it seems like the automotive is not going to be really driving too much growth this year. Is this program of going back and getting recoveries, is that over, or is that something that we could still anticipate is going to be an impact in fiscal 2027 in terms of the auto programs and the expenses, et cetera, things like that?

We will see automotive growth on a year-over-year basis.

As we've said previously, Gary, we had tremendous headwinds in fiscal 2026.

Right.

The recovery activity is largely done. There are a couple of customers that we continue to talk to, but those programs are much smaller, and the recovery activities are much smaller. We see growth on a year-over-year basis, particularly in North America from an automotive side. Not to the level of materiality that we envision with regard to some of the other pieces of our business.

Also, Gary, of the $45 million of the customer recoveries that we have already negotiated, we said that $19 million is impacting our earnings in FY 2026. We expect to recover the remaining $25 million over time, and that's through future pricing of customer production and tooling recoveries that we collect once our programs go into production. We expect that to come in the next three - four years.

Okay. Yeah, that's what I thought I heard you say. Okay, thank you.

Thanks, Gary.

Your next question for today is from John Franzreb with Sidoti & Company.

Yeah. Congratulations, everybody. Thanks for taking the questions.

Good morning, John.

go back to the recoveries. $19 million in 2026. How much was in the Q4? If I heard you correctly, this is revenue being recognized with no associated COGS, I'm guessing. Is that how it's dropping right down into the P&L?

Yeah. Hi, John. All of the $22 million of sales was recognized in the Q4.

Okay.

There is a little amount of COGS, so there's $19 million flowing through down to the earnings, down to the bottom line.

All right. Got it, Laura. Thank you. I was wondering why the gross margin jumped up. That was one of my original questions.

Can you just maybe walk us through a little bit on what's going on in the tax line? For the full year, it's been all over the board. Just maybe kind of recap and how should we think about modeling that on an adjusted basis going forward?

As I mentioned, we had $12 million in FY 2025 and $25 million of tax expense in FY 2026. This is primarily due to non-recoverability of non-deductible assets. Higher tax expense of non-deductible amounts, as well as additional foreign tax expense. There was a one-time benefit in FY 2025. That is non-recurring going forward. However, our guidance does have us in the tax expense range that we were in this year, so you can model it appropriately.

Got it. Now on a going-forward basis, I think I brought this up last conference call, the commercial vehicle market order book through May is up 112%. I'm curious if, firstly, your order book is similar to that kind of year-over-year growth. Secondly, can you remind us how much in revenue commercial vehicles were in fiscal 2026?

John, we base our guidance based on programs tied to IHS or third-party forecasts. As you see order books going up, that is in our guidance, and it does move that way.

The split with regard to commercial vehicle revenue, give me just a second.

One second.

It's 10% of the total in fiscal 2026.

Got it. From what I recall from years past, that was a higher contribution margin business than the overall portfolio.

I'm sorry, John, say that one more time.

In years past, that was a good contribution margin business. Is that still the case?

Yeah, it still is the case, we continue to refine that portfolio and actually grow that business with our customers. As we've talked about in previous situations, they're looking to shorten their supply chains and strengthen their USMCA presence. So we are actually moving business between regions to support our customers, and we expect that to create additional opportunities for growth for us.

Just one last question related to this, I'll get back into queue. From what I recall, some of these products are made in Mexico. Would this be part of the revenue recoveries that helps the Mexico facility? I don't know. Does it actually move into profitability in fiscal 2027?

The commercial vehicle business has historically not been made in Mexico. There has been a small percentage.

Okay.

We are actually moving business into our Mexico facilities. John, you are exactly right. The capability that we have within our Mexico facilities, it is not just an automotive facility. It is supporting other end markets. It is supporting our data center localization. It is supporting our commercial vehicle localization. Yes, you will see that from a growth from a year-over-year standpoint in the Mexico facility activities. Part of it will be commercial vehicle.

Got it. Thanks, John. I will get back into queue.

Thanks.

As a reminder, if you would like to ask a question, please press star one. Your next question is from Luke Junk with Baird.

Morning. Thanks for taking the question. John, hoping we could start with auto. I guess if you back out the EV recovery this quarter, margin's still mixed there. I know that's Mexico mainly in fiscal 2026. If you look kind of in underlying basis was relatively similar year-over-year. A lot going on under the surface, including the improvement that you said in Egypt, but just hoping you can comment on some of the key actions incrementally into fiscal 2027 here to get that business moving back towards breakeven. Thank you.

Thanks for your question, Luke, and you're right. Certainly, the customer recoveries do change that picture. What you see is on a year-over-year basis in our guide, operating performance is worth $15 million. The recoveries were $19 million. Then we see volume and mix as a negative on the automotive side of $18 million. We're driving performance both in Egypt and in Mexico from an operational perspective. If you were to look at a historic revenue outlook, that North American automotive business a couple of years back was well north of $300 million in revenue, and in fiscal 2026, it went as low as $182 million. We see that coming back to close to $200 million in fiscal 2027 and continuing to grow.

The way in which we look at this is the automotive business overall, which is 46% of our total, is good business. The under-absorption and the challenge that we've had in North America, particularly with regard to these EV program delays, is why it was so important for us to get the recoveries from the customers as we did and as we told you we would, then why we also need to continue to drive cost reduction and drive performance in our plants in Mexico. That then become a foundation that allow us to transfer business in for the commercial vehicle business that we talked about to become a USMCA footprint for our data centers that we've talked about, also as a USMCA footprint for us to win new business that we have talked a bit about, then we'll talk much more in our Q1 call.

That is helpful. Thank you. I want to switch gears to the data center opportunity and the guidance specifically. Just want to understand some of the gating to give you the line of sight to that 60% growth in terms of, it sounds like you've got the orders in hand. Curious if there's any new program ramps in that, just in terms of the constitution of the business here in fiscal 2027, how many customers you're actually working with right now? Thank you.

The business, as we've talked about it and as we've committed to our shareholders, is that as we talk about guidance, it would be based on customer EDI. That was part of the change within the organization, part of the change to go to vendor-managed inventory and deepen those relationships. We moved from being a spot buy relationship to a 52-week EDI relationship. We're quite confident with regard to the $130 million versus the $80 million. It is two new programs, there are program changes throughout that. These programs move in an 18 - 24-month cycle, that shortening the lead time, improving our engineering capabilities, and being able to respond to those cycles means that we get to capture a larger percentage of market share and wallet share than we did in the past versus the spot buy approach.

Yes, it is launches. Yes, it is new programs. At this point, what's in our guide is the current customer base. We are talking to additional customers. We expect to see that expand. What is in our guide is our current base with the launches that we know right now and the EDI that we have from the customers.

That's helpful. Just to clarify, I think historically, when this was not an area that was in focus, it was mainly a single customer relationship. Are you talking multiple programs with one customer, or is it multiple programs and more than one customer at this point?

It's multiple programs and multiple customers.

Understood. I'll leave it there. Thank you.

Great. Thanks, Luke.

Your next question for today is a follow-up question from John Franzreb. Your line is live.

Yes. Just a quick question on the bridge. The portfolio refinement portion of it, is that just the businesses that you've sold and exited, or is there something else built in there for exiting maybe unprofitable product lines?

John, that is the DataMate business that we sold that we discussed, as well as the appliance program roll-off in our interface segment.

Got it. Where are you in the strategic review of the product line profitability process, especially considering all the new people that you brought in? I would imagine that would be something of a priority.

John, it is still a priority, and we're looking across all of our businesses. What we're trying to do is make sure, not just from a product line profitability, but also from a really return on effort side, that we are putting resources against the places that can drive the greatest growth. You will not be surprised that we will continue to make adjustments over the forthcoming quarters. We don't have anything to announce right now, and our current portfolio is what's in our guide, but yes, we will continue to work on that. That leads to everything from customer negotiations as we look at unprofitable programs to also us deciding on certain product lines or segments that we will expand or that we won't continue with.

Got it. John, maybe you could just update us on what is the plan for the interface segment on a go-forward basis?

That interface business becomes a smaller piece of the company overall. It's de minimis in fiscal 2020. It's less than $5 million in fiscal 2027.

Right.

We don't see it as a place where, when we talk about return on effort, that it is something that we could get to growth. While it was historically a good business and profitable, and we appreciate those customers, it's not a place where we're going to be focusing our time because we have so many opportunities as we grow the commercial vehicle business, as we grow the off-highway lighting business, as we grow our user interface both for off-highway and automotive. As we've talked so much about as we grow our data center business and the next technologies there, we have more opportunities than we have capability to pursue. We have to be refined with regard to how we put our capital to work and how we put our engineering and our talent to work.

We're adjusting and we're moving resources to support those highest growth long-term opportunities.

Got it. Just one last question. You highlighted in the prepared remarks, debt reduction in 2026 versus 2025, and you said managing the balance sheet would also be a priority in 2027. Can we expect continued debt reduction in 2027?

Yes, that's definitely a focus of our capital allocation.

Great. Thank you for taking my follow-ups. Congratulations again.

Thanks again, John.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.