Mayville Engineering Company, Inc. (MEC) Earnings

Management highlights

### Overall Q2 Performance & Strategic Positioning - Q2 top-line results exceeded management expectations, driven by stronger-than-forecast demand across DCP, critical power, and the recovering commercial vehicle market, positioning the company well entering H2 2026. - A $94 million net proceeds common stock offering was completed successfully during the quarter, strengthening the balance sheet, leaving over $100 million in available liquidity, and providing capital to invest ahead of accelerating demand rather than reacting to it. - Incremental front-loaded operating costs are being incurred to support rapid DCP scaling, including pre-launch capacity investments and third-party outsourcing for fabrication work constrained by existing in-house equipment; these costs are viewed as temporary and expected to subside as new capacity comes online and workforce productivity ramps, with long-term margin expansion expected from current programs. ### End Market & Commercial Momentum - North American Class 8 production is recovering faster than previously expected, with 2026 full-year production projected to increase 9.1% (and 9.7% in 2027), with new program wins tied to 2027 EPA emissions regulation changes on track to launch production in late 2026. - The company secured ~$40 million in new DCP awards during Q2, with revenue generation expected to begin in 2027, bringing total 2026 year-to-date DCP pipeline visibility to over $125 million, with $50 million to $60 million in projects scheduled to launch in 2026. - The company is actively evaluating a dedicated capacity reservation model for DCP customers amid widespread U.S. manufacturing capacity constraints, which would provide customers supply certainty and deliver more predictable revenue and higher margins for MEC by prioritizing high-value programs. ### Capital Allocation Priorities With a strengthened balance sheet, management has three core capital priorities: 1. **Organic growth investment**: Over the next two years, the company expects to invest $50 million in incremental capacity expansion for DCP, including existing facility upgrades and potential new production facility in the southeastern U.S. This will increase total company revenue capacity beyond the prior $850 million target. All new capital investments require a 2-3 year payback period and minimum 15% internal rate of return. 2. **Deleveraging**: The long-term net leverage target remains 2.5x, with the Q2 equity offering representing a meaningful step toward this goal, and further deleveraging expected from rising earnings and cash flow as volumes grow. 3. **Accretive acquisitions**: Management will remain opportunistic for acquisitions that strengthen competitive position, expand capacity, and support long-term value creation.

Guidance

- **Third Quarter 2026**: Management expects net sales between $160 million and $170 million, and adjusted EBITDA between $15.5 million and $18.5 million. The outlook includes $1 million to $1.5 million in launch-related costs and an additional $1 million to $1.5 million in DCP outsourcing costs. - **Full Year 2026**: Management upwardly revised net sales guidance to a range of $620 million to $650 million, maintained adjusted EBITDA guidance at $52 million to $60 million, and lowered free cash flow guidance to a range of $7 million to $15 million. Full-year guidance includes $5 million to $6 million in total DCP launch-related costs and $2 million to $3 million in total DCP outsourcing costs, as well as a full year of AccuFab ownership and $50 million to $60 million in incremental DCP cross-selling revenue. - **Capital Expenditure**: $25 million of the planned $50 million incremental two-year capacity investment is expected to be spent in 2026, with the majority of the remaining balance spent in 2027. A potential new southeastern U.S. facility would require $25 million to $30 million in total investment (not included in the $50 million incremental plan) and support $50 million to $60 million in incremental revenue; a final investment decision is targeted for late 2026.

Segment performance

Total company net sales for Q2 2026 increased 23.2% year-over-year to $163 million; organic net sales (excluding AccuFab acquisition impact) increased 9.2% YoY. The performance across segments is as follows: - Commercial Vehicle: Net sales increased ~3% YoY, driven by the early recovery of North American Class 8 production, with accelerating customer build rates expected to continue into H2 2026. This segment is projected to remain a core legacy end market, with mix declining as data center and critical power grows. - Construction and Access: Revenue increased ~15% YoY, supported by strength in non-residential construction activity. - Power Sports: Net sales decreased ~6% YoY, primarily driven by softness in legacy ATV, UTV, and motorcycle original equipment manufacturer (OEM) programs due to ongoing customer offshoring initiatives. - Data Center and Critical Power (DCP): Organic year-over-year growth reached ~173%, supported by growth from existing OEM customers and cross-selling opportunities from the AccuFab acquisition. DCP is on track to represent approximately 20% of total company revenue in 2026.

Risks & headwinds

- Equipment lead times for in-house capacity expansion are 4 to 6 months, creating near-term capacity constraints that require costly third-party outsourcing, with cost timing dependent on equipment delivery schedules. - Tight labor markets in current manufacturing locations (unemployment rates as low as 2.3% in some regions) create hiring challenges and upward pressure on labor costs, requiring incremental attraction and retention investment ahead of revenue ramp. - Domestic manufacturing capacity is broadly constrained across the industry, requiring the company to turn away lower-value programs and make portfolio trade-offs to prioritize higher-margin DCP opportunities. - Legacy end markets such as commercial vehicle remain cyclical, creating uncertainty for long-term capacity utilization as the company expands overall capacity. - DCP customer program timelines can shift (with pushes or pulls forward), creating variability to near-term revenue and profitability results. - While DCP demand is currently robust, there is uncertainty around the pace of market growth and customer adoption of the new dedicated capacity reservation model.

Analyst Q&A

• Q: Can you share more details about the proposed dedicated capacity reservation model? Is this only for DCP customers, how did conversations start, and are they with new or existing customers?

  A: Discussions are primarily centered on DCP customers, given widespread domestic manufacturing capacity constraints for this growing end market, and include both existing and new potential customers. Legacy end market customers are not accustomed to this model, so conversations there are very limited. The opportunity has naturally emerged amid high demand, and the potential new southeastern facility creates an additional opening to market the reserved capacity model to customers. To date, no contracts have been signed, but multiple pricing and commitment structures are being explored, including upfront fees and volume commitments.

• Q: What are the core drivers of the low and high end of the Q3 2026 guidance range, and what creates the most uncertainty?

  A: The three key variables that determine whether results land at the low or high end of the range are: the pace of the commercial vehicle recovery, which is accelerating faster than previously expected but the exact speed of ramp remains uncertain; the timing of DCP program launches, as customers sometimes push out or pull forward programs in this fast-evolving market; and the delivery timing of new equipment to bring outsourced work back in-house, which directly impacts near-term cost levels.

• Q: What functions is MEC currently outsourcing for DCP, when will this work be brought back in-house, and how is MEC addressing labor constraints?

  A: The three most commonly outsourced functions are laser cutting of metal sheets, brake press operations, and paint/powder coating. New equipment for all three functions has already been ordered, with deliveries staggered through the end of 2026, and most work is expected to be brought back in-house by early 2027. Labor constraints are being addressed via strategic location selection for new capacity (prioritizing areas with larger available labor pools), proactive pre-hiring and training of staff ahead of 2027 production ramps, and the use of third-party recruiting resources to speed up hiring in tight labor markets. Higher labor costs are also being incorporated into new program pricing.

• Q: How is the revenue mix expected to change over the long term as MEC prioritizes high-quality DCP programs?

  A: Management is on track to hit a 20% DCP revenue mix by the end of 2026, and expects long-term DCP mix to settle between 25% and 30% of total revenue, driven by a multi-year growth cycle for DCP. This will reduce the relative share of lower-margin, more cyclical legacy segments like commercial vehicle, which is targeted to drop to just under 25% mix not via exiting programs, but through faster DCP growth. MEC is prioritizing larger, higher-value DCP programs and scaling existing programs over many small low-margin projects to improve overall portfolio margin stability.