MEI (MEI) Q2 2026: Data Center Revenue Doubles, Offsetting $100M EV Program Headwinds
MEI’s Q2 reveals a business in operational turnaround mode, with data center revenue surpassing $80 million and offsetting persistent EV program delays. Management’s focus on plant execution and cost removal is yielding sequential margin gains, but external volatility and auto sector softness keep guidance wide. Investors should watch for further data center tailwinds and sustained plant discipline as the company eyes a return to profitability.
Summary
- Data Center Momentum: Revenue from data centers exceeded $80 million, doubling year-over-year and providing a long-term growth lever.
- Execution Overhaul: Plant upgrades and leadership changes in Mexico and Egypt underpin sequential margin improvement despite top-line declines.
- Guidance Bracketed: Management maintains a wide range for sales and EBITDA, citing ongoing market turbulence and auto program unpredictability.
Performance Analysis
MEI’s Q2 2026 results reflect continued operational recovery amid tough end markets. Net sales declined 16% year-over-year to $246.9 million on lower volume across all segments, but improved 3% sequentially. Adjusted EBITDA fell $9.1 million year-over-year, yet sequential gains and a $1.1 million reduction in adjusted net loss signal that execution improvements are stabilizing the business.
Free cash flow usage narrowed dramatically versus last year, with a $46.8 million improvement year-over-year, aided by a disciplined capital allocation strategy and a $29.6 million net debt reduction. The quarter included a $10 million inventory build to support the shift to vendor-managed inventory for data center customers, a strategic move expected to drive future share gains. Cash at quarter-end stood at $118.5 million, up $21.5 million year-over-year, underscoring improved liquidity and financial resilience.
- Plant Recovery Drives Margins: Gross margin nearly doubled at the Egypt facility, and Mexico saw cost reductions despite volume pressure.
- Data Center Outperformance: Data center sales are tracking ahead of internal forecasts, providing a rare bright spot amid auto and EV headwinds.
- EV Weakness Baked In: North America EV sales represent only 12% of auto segment revenue, with prior program cancellations already reflected in guidance.
While headline sales remain pressured, MEI’s sequential margin and cash flow improvements point to a business regaining control of its cost base. The plant turnaround and data center momentum are the core drivers to watch as the company transitions from stabilization to growth.
Executive Commentary
"We are aggressively driving financial improvement to strengthen our balance sheet and deliver our fiscal 2026 guidance. At the same time, we are selectively investing in initiatives such as data centers that will position Method for long-term growth."
John, Chief Executive Officer
"Net debt was down $29.6 million compared to the same period last year as we continue to drive cash flow and debt reduction. Our operating cash flow performance in the quarter would have been positive without the vendor-managed inventory impact."
Laura, Chief Financial Officer
Strategic Positioning
1. Data Center Expansion as Growth Engine
Data center revenue doubled year-over-year, topping $80 million in annual sales and establishing this business as a cornerstone for future growth. The company’s move to vendor-managed inventory, a supply chain model where the supplier manages inventory for the customer, is expected to deepen customer relationships and improve demand visibility. Management remains cautious, holding off on raising guidance until electronic data interchange (EDI) processes are fully implemented, but signals growing confidence in this segment’s trajectory.
2. Automotive and EV Program Realignment
Automotive remains 44% of total sales, but delayed and canceled EV launches, particularly in North America, have already taken a $100 million bite out of revenue guidance. The company’s EV exposure is more pronounced in Europe and Asia, with North America representing only $11.5 million in first-half EV sales. Management is actively renegotiating with OEMs like Stellantis over lost programs, but does not expect near-term relief. The focus is now on ramping new launches, especially in Mexico, and selectively pursuing hybrid and ICE (internal combustion engine) programs to rebalance the portfolio.
3. Plant Turnaround and Cost Discipline
Comprehensive leadership changes and operational upgrades in key plants (Mexico, Egypt, Malta) are driving margin recovery and cost takeout. Over 1,000 headcount reductions and material cuts in scrap, freight, and labor have helped nearly double gross margins in Egypt and improved predictability across the network. This plant-led recovery is the foundation for MEI’s return to profitability, with management emphasizing that “cost for quality and waste out of the plants” is the main driver of EBITDA improvement, not sales growth.
4. Capital Allocation and Liquidity Management
Net debt reduction and improved cash flow discipline are key themes, with the company ending the quarter with $118.5 million in cash and positive first-half operating cash flow (excluding the one-time vendor-managed inventory build). Management is prioritizing debt reduction and maintaining flexibility to invest selectively in growth initiatives, particularly in data centers and new program launches.
5. Navigating External Volatility
Tariffs, supply chain disruptions, and chip shortages (notably the Nexperia issue) continue to inject uncertainty into both revenue and cost planning. The company’s USMCA (United States-Mexico-Canada Agreement) facility provides some tariff mitigation, but external turbulence keeps guidance ranges wide. Management is passing unavoidable tariffs to customers where possible, but sees no near-term resolution to these macro pressures.
Key Considerations
MEI’s Q2 marks a critical inflection in its transformation journey, with the company moving from stabilization to operational leverage and growth. The following points frame the strategic landscape:
Key Considerations:
- Data Center Leverage: Sustained growth and share gains in data centers could materially improve MEI’s long-term revenue mix and margin profile.
- Execution Risk in New Launches: While most problematic launches are behind, ongoing ramp-up in Mexico and new programs in APAC still carry operational risk.
- Cost Discipline as Profit Catalyst: Margin expansion is driven by plant efficiency, not sales growth, making continued cost control essential for profitability.
- External Headwinds Remain: Tariffs, chip shortages, and auto sector volatility limit visibility and keep management from narrowing guidance.
- Capital Flexibility: Improved liquidity provides a buffer against shocks and supports selective investment in high-return areas.
Risks
Persistent external volatility—tariffs, chip shortages, and unpredictable OEM schedules—pose ongoing risks to both revenue and cost structure. The company’s heavy reliance on a few large customers in auto and data centers increases exposure to program delays and renegotiations. Operational improvements must be sustained to avoid backsliding, and any setback in plant performance could quickly erode recent gains. Management’s wide guidance range reflects these uncertainties, and investors should be alert to any signs of renewed execution slippage or end-market deterioration.
Forward Outlook
For Q3, MEI expects:
- Traditional seasonality to weigh on top-line, with improvement anticipated in Q4.
- Second-half results to be stronger than the first half, driven by operational conversion and plant improvements.
For full-year 2026, management reaffirmed guidance:
- Sales in the $900 million to $1 billion range
- Adjusted EBITDA between $70 million and $80 million
- Positive free cash flow (versus a $15 million outflow last year)
Management cited several factors shaping the outlook:
- Further margin gains as plant launches stabilize and cost discipline deepens
- Potential for upside from data center customer wins, pending EDI lock-in
Takeaways
MEI’s turnaround is gaining traction, but the company’s future hinges on sustaining plant discipline and capturing secular growth in data centers.
- Plant Execution Is the Core Lever: Margin and EBITDA gains are driven by operational discipline, not top-line growth, with Egypt and Mexico leading the recovery.
- Data Center Growth Offsets Auto Weakness: Doubling of data center revenue is a rare bright spot, with further upside possible as vendor-managed inventory ramps.
- Wide Guidance Reflects End-Market Turbulence: Management’s cautious stance on guidance narrowing signals persistent uncertainty in both auto and external macro conditions.
Conclusion
MEI’s Q2 underscores a company in operational rebuild, leveraging plant turnaround and data center momentum to offset auto market headwinds. With cost discipline and selective growth bets, MEI is positioned for recovery, but external volatility and execution risk require continued vigilance.
Industry Read-Through
MEI’s experience highlights a broader trend of industrial suppliers pivoting from auto-centric exposure to secular growth areas like data centers and electrification. The company’s data center gains and vendor-managed inventory adoption point to rising demand for integrated supply chain solutions in tech infrastructure. At the same time, the persistent volatility in auto and commercial vehicles, compounded by tariffs and chip shortages, signals ongoing risk for suppliers tied to cyclical OEM programs. Investors in the industrial and electronics supply chain should watch for similar plant-led recoveries and shifts toward higher-growth end markets as a blueprint for resilience.