Methode Electronics (MEI) Risk Analysis

A significant portion of our long-term assets consists of long-lived assets, goodwill, and intangible assets recorded as a result of past acquisitions. Under generally accepted accounting pricings in the U.S. ("GAAP"), long-lived assets, excluding goodwill and indefinite-lived intangible assets, are required to be evaluated for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause profitability and cash flows to decline, we may be required to record a non-cash impairment charge to earnings that could adversely affect our financial condition and results of operations. Goodwill and indefinite-lived intangible assets must be evaluated for impairment annually or more frequently if events indicate it is warranted. The process of evaluating the potential impairment of goodwill and other intangible assets requires significant judgment. Negative industry or economic trends, including reduced estimates of future cash flows, disruptions to our business, slower growth rates, or lack of growth in our relevant business units, could lead to further impairment charges against our goodwill and other intangible assets. In the event that we determine that our goodwill or other intangible assets are impaired, we may be required to record a significant charge to earnings that could adversely affect our financial condition and results of operations.

Our primary sources of liquidity are cash generated from operations and availability under our $400 million revolving credit facility that matures on October 31, 2027. Our senior secured credit agreement provides for variable rates of interest based on, among other things, the currency of the borrowing and our consolidated leverage ratio and contains customary representations and warranties, financial covenants, restrictive covenants, and events of default. The obligations under our senior secured credit agreement are secured by a lien on substantially all of our personal property and our U.S. subsidiaries that are guarantors, including 100% of the equity interests of their respective U.S. subsidiaries and 65% of the equity interests of their respective foreign subsidiaries (or such greater amount to the extent such pledge could not reasonably cause adverse tax consequences). Our senior secured credit agreement imposes various restrictions and covenants regarding the operation of our business, including covenants that require us to obtain the lenders' consent before we can, among other things and subject to certain exceptions: (i) incur additional indebtedness or additional liens on our property; (ii) consummate certain acquisitions, dispositions, mergers or consolidations; (iii) make any material change in the nature of our business; (iv) enter into certain transactions with our affiliates; or (v) repurchase or redeem any outstanding shares of our common stock or pay cash dividends to our stockholders in excess of certain amounts or when a default exists or certain financial covenants are not maintained. Our senior secured credit agreement also imposes various other restrictions and covenants (including covenants requiring us to maintain compliance with a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio, in each case as of the end of each fiscal quarter of the Company). In addition, our senior secured credit agreement includes an "anti-cash hoarding" requirement, which provides that if we have cash on hand in the U.S. (subject to certain exceptions) of more than $65 million for 10 consecutive business days, we shall prepay the indebtedness under our senior secured credit agreement by the amount of such excess. These restrictions and covenants could (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans and (2) adversely affect our liquidity and ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that may be in our interest. Further, the amount of our outstanding indebtedness could have an adverse effect on our operations and liquidity, including by, among other things: (i) making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions, because we may not have sufficient cash flows to make our scheduled debt payments; (ii) causing us to use a larger portion of our cash flows to fund interest and principal payments, thereby reducing the availability of cash to fund working capital, product development, capital expenditures and other business activities; (iii) making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market or industry conditions; and (iv) limiting our ability to borrow additional monies in the future to fund the activities and expenditures described above and for other general corporate purposes as and when needed, which could force us to suspend, delay or curtail business prospects, strategies or operations. We currently intend to refinance or extend our obligations under our revolving credit agreement; however, there can be no assurance that we will be able to do so on favorable terms or at all. Recent volatility in credit markets, rising interest rates and reduced lender risk tolerance may adversely affect our ability to access capital. Any refinancing we undertake may result in higher interest expense, more restrictive covenants or the requirement to pledge additional collateral. If we are unable to refinance or extend these maturities, or if refinancing is only available on unfavorable terms, our liquidity position could be materially weakened, which could limit our ability to fund operations, execute our business strategy, or meet other obligations as they come due.

The USMCA, which governs trade among the United States, Mexico and Canada, is subject to a scheduled review process and potential renewal or termination. Pursuant to its terms, the agreement will be reviewed in 2026 and may be extended for an additional term if the parties agree. If the parties do not agree to extend the USMCA, the agreement could expire in 2036, subject to earlier termination by any member country. Our operations depend in part on the current trade framework established by the USMCA, including preferential tariff treatment, rules of origin requirements, and cross-border supply chain efficiencies. Any uncertainty surrounding the review process, or any failure by the parties to extend or maintain substantially similar terms, could result in increased tariffs, changes to rules of origin, new trade barriers, or other disruptions affecting the flow of goods among the United States, Mexico and Canada. If the USMCA is modified in a manner that imposes more stringent compliance requirements or reduces preferential treatment, we could experience increased costs of production, reduced demand for our products, supply chain disruptions, and decreased competitiveness. In addition, uncertainty regarding the future of the USMCA may cause our customers or suppliers to delay or change investments, sourcing decisions or production planning, which could adversely affect our business. In particular, changes to rules of origin or content requirements could increase compliance costs or limit our ability to meet customer specifications or expectations. In addition, we have manufacturing operations in Mexico and Canada, and any imposition of tariffs or border taxes could materially increase our costs. We may not be able to mitigate the effects of these developments through pricing actions, supply chain adjustments or operational efficiencies. As a result, any material changes to the USMCA or its expiration could have a material adverse effect on our business, financial condition and results of operations.

We derive a substantial portion of our revenues from customers in the automotive, commercial vehicle, data center and construction industries. Factors negatively affecting these industries also negatively affect our business, financial condition and results of operations. Automotive sales and production are highly cyclical and, in addition to general economic conditions, also depend on other factors, such as consumer confidence and consumer preferences. Demand from data centers depends on many factors including the pace of investment in cloud computing, artificial intelligence ("AI") and other digital infrastructure. Any adverse occurrence, including industry slowdowns, recession, rising interest rates, rising fuel costs, political instability, changes in trade policy, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers' production schedules or labor disturbances or work stoppages, that results in a significant decline in sales volumes and mix in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and results of operations.

We manage our business based upon projected future sales volumes, which are based upon many factors, including awarded business and assumptions of conversion rates thereof, customers' forecasts, and general macroeconomic and industry market data. Where possible, we utilize third-party forecast data to support our projected future sales volumes. Our product revenues generally are based upon purchase orders issued by our customers, with updated production schedules for volume adjustments, and our customers generally do not guarantee sales volumes. In addition, awarded business may include business under arrangements that our customers have the right to terminate without penalty at any time. Further, our customers' forecasts are subject to numerous assumptions, and such forecasts often are changed rapidly with limited notice. Therefore, our actual sales volumes, and thus the ultimate amount of revenue that we derive from such sales, are not committed. We also must incur costs and make commitments well in advance of the receipt of orders and resulting revenues from customers. If actual production orders from our customers are not consistent with our projected future sales volumes, we could realize substantially less revenue and incur greater expenses over the life of a program. The receipt of orders and resulting revenues from customers is significantly affected by global automotive, commercial vehicle, data center, and construction equipment production levels.

We are involved in legal proceedings and government investigations related to various matters, including securities litigation, and may become involved in other legal proceedings, as well as government investigations and inquiries, that arise from time to time in the future. For example, as discussed further in Note 12, "Commitments and Contingencies" to the consolidated financial statements contained in this Annual Report, on August 26, 2024, a purported stockholder of the Company filed a putative class action lawsuit alleging that the Company, its former Chief Executive Officer, and its former Chief Financial Officer violated the federal securities laws by making false and/or misleading statements relating to our business, operations and prospects, including in respect of our transition to production of more specialized components for manufacturers of electric vehicles and our operations at our facility in Monterrey, Mexico. The complaint seeks unspecified money damages along with equitable relief and costs and expenses, including counsel fees and expert fees. Another purported stockholder filed a substantially similar action against the same defendants and a former Chief Operating Officer of the Company on October 7, 2024. In addition, on November 26, 2024 and February 4, 2025, respectively, two purported stockholders filed derivative lawsuits on behalf of the Company against the current members of the Company's Board of Directors, as well as certain former directors and executives, alleging that the defendants breached their fiduciary duties by allowing the Company to issue various statements that are alleged to have been false or misleading for the same reasons alleged in the securities class action complaints. On February 3, 2026, the court granted our motion to dismiss against the consolidated complaint. The plaintiff subsequently filed a second amended complaint on March 20, 2026, and we moved to dismiss that complaint, which motion remains pending. We continue to vigorously defend ourselves against the allegations but there can be no assurance as to outcome. An unfavorable outcome in this litigation and other legal proceedings may have a material adverse effect on our consolidated financial position, results of operations, cash flows or liquidity. This type of litigation can also result in substantial costs, and a diversion of management's attention and resources, which could adversely affect our business, operating results, or financial condition. Additionally, the dramatic increase in the cost of directors' and officers' liability insurance may cause us to opt for lower overall policy limits or to forgo insurance that we may otherwise rely on to cover any significant defense costs, settlements, and damages awarded to plaintiffs, or incur substantially higher costs to maintain the same or similar coverage. These factors may make it more difficult to attract and retain qualified executive officers and members of our board of directors.

Our future effective tax rates could be adversely affected by changes in tax laws, both domestically and internationally, or the interpretation or application thereof. From time to time, the U.S. federal, state, and foreign governments enact legislation that could increase our effective tax rate or the effective tax rates of our consolidated affiliates. We cannot determine whether, or in what form, future tax legislation will ultimately be enacted or what effect any such legislation could have on our profitability, and we will continue to monitor any such legislation. Our future effective tax rates could also be adversely affected by changes in the valuation of our deferred tax assets and liabilities, changes in the mix of earnings in countries with differing statutory tax rates, the ultimate repatriation of earnings from foreign subsidiaries to the U.S., or by changes in tax laws, treaties, regulations, accounting principles or interpretations thereof in one or more countries in which we operate. In addition, we are subject to the potential examination of our income tax returns by the Internal Revenue Service and other tax authorities in jurisdictions where we file tax returns. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that such examinations will not have a material adverse effect on our business, financial condition and results of operations. Further, the Organization for Economic Co-operation and Development ("OECD") has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (commonly referred to as "Pillar 2"). A number of jurisdictions in which we operate have enacted Pillar 2 legislation effective beginning in fiscal 2025, with additional jurisdictions implementing or expected to implement such rules in fiscal 2026 and beyond. These rules are complex and continue to evolve, including through ongoing administrative guidance and interpretive frameworks. Certain implementation details have yet to be developed, and the enactment of certain of these changes has not yet taken effect in all jurisdictions in which we operate. On January 5, 2026, the OECD issued new guidance introducing the "side-by-side" system as part of the Pillar 2 framework. This approach is designed to align the Pillar 2 rules with jurisdictions that already maintain their own minimum tax regimes. Under the OECD's guidance, the United States is treated as a qualifying jurisdiction, enabling U.S.-parented multinational enterprises to opt out of the global Pillar 2 income inclusion rule and undertaxed profits rule beginning January 1, 2026. For fiscal 2026, the Company performed a calculation of an additional top-up tax under the safe harbor Pillar 2 framework to determine the jurisdictions where the effective tax rate fell below the minimum threshold of 15% and included the results in income tax expense for the period. As a result, these changes may have implications for us, may increase our compliance costs, and may affect the amount of tax we are required to pay in certain jurisdictions.

Ongoing geopolitical tensions, including the military conflict involving the United States, Israel and Iran, have contributed to volatility in global financial markets and energy prices. Any escalation of hostilities in the Middle East could disrupt global oil and natural gas supply, shipping routes (including the Strait of Hormuz), and related infrastructure, leading to significant increases and volatility in fuel and energy costs. We are exposed to fluctuations in the price and availability of fuel, energy, and petroleum-based products used directly or indirectly in our operations and supply chain. Sudden or sustained increases in oil or natural gas prices could result in: - increased manufacturing, transportation, and logistics costs;- higher costs of raw materials and components, particularly petrochemical-based inputs;- disruptions or delays in our supply chain due to supplier cost pressures or shortages;- reduced demand for our products if our customers experience margin compression or reduced end-market demand; and - increased volatility in foreign exchange rates, interest rates, and overall macroeconomic conditions. While we may seek to mitigate energy and fuel cost increases through pricing actions, hedging strategies, or operational efficiencies, such measures may not fully offset the effect of rapid or sustained increases in energy prices, particularly in competitive markets or where contractual arrangements limit our ability to pass through costs. The extent and duration of any geopolitical conflict and its effect on global energy markets are inherently uncertain. Any of the foregoing factors could materially and adversely affect our business, results of operations, cash flows, and financial condition.

We manufacture and sell our products globally and rely on a global supply chain to deliver the required raw materials, components, and parts, as well as the final products to our customers. Starting 2025, the U.S. administration imposed extensive new tariffs on many countries where we do business, including both broad and product-specific tariffs, prompting retaliatory measures from a number of other nations. Even as the long-term direction of U.S. trade policy remains unsettled, global tariff levels have risen substantially above recent historical norms. Further changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, export licenses, tariffs or taxes on imports from countries or geographic regions where we manufacture products, such as Canada, China, Egypt, Europe and Mexico, could have a material adverse effect on our business, financial condition and results of operations. Depending upon the continuation and potential expansion of these tariffs and other trade barriers, as well as our ability to mitigate their effects, these tariffs and other regulatory actions could materially affect our business, including in the form of an increase in cost of goods sold, decreased margins, increased pricing for customers, disruptions in our supply chain, impaired ability to compete effectively, and reduced sales. If such changes in trade policy cause increased prices for vehicles, data center equipment, consumer demand may decline, prompting a reduction in global vehicle production volumes, which is a material driver of our operations, sales and profitability.

The technologies relating to some of our products have undergone, and are continuing to undergo, rapid and significant changes. Specifically, end-markets for electronic components and assemblies are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards. These changes could render our existing products unmarketable before we can recover any or all of our research, development and other expenses. Furthermore, the life cycles of our products vary, may change and are sometimes difficult to estimate. If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and results of operations could be materially adversely affected. We also use artificial intelligence and machine learning tools internally, including in engineering, manufacturing, finance, and other business functions. The use of these technologies presents risks, including the potential for inaccurate, biased or unreliable outputs, inadvertent disclosure of confidential or proprietary information, infringement of third-party intellectual property rights, security vulnerabilities, and non-compliance with evolving laws and regulations governing the development and use of artificial intelligence. If our policies and training fail to ensure that artificial intelligence tools are used within appropriate bounds, we could experience delays, reputational harm, or loss of stakeholder trust, any of which could materially adversely affect our business, financial condition and results of operations.

We face certain security threats relating to the confidentiality and integrity of our information technology ("IT") systems. Despite implementation of security measures, our IT systems may be vulnerable to damage from computer viruses, cyber-attacks and other unauthorized access, and these security breaches could result in a disruption to our operations. A material network breach of our IT systems could involve the theft of our and our customers' intellectual property or trade secrets which may be used by competitors to develop competing products. To the extent that any security breach results in a loss or damage to data, or inappropriate disclosure of confidential or proprietary information, it could cause significant damage to our reputation, affect our customer relations, lead to claims against us, increase our costs to protect against future damage and could result in a material adverse effect on our business, financial condition and results of operations. Any such disruption or security breach, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the U.S. and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. Federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly changing nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful. While we have secured cyber insurance to potentially cover certain risks associated with cyber incidents, there can be no assurance it will be sufficient to cover any such liability. In particular, the General Data Privacy Regulation ("GDPR") of the European Union creates a range of compliance obligations applicable to the collection, use, retention, security, processing and transfer of personal data in the European Union. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to countries such as the U.S., enhances enforcement authority and imposes large penalties for noncompliance.