Mayville Engineering Company, Inc 10-Q for FY2022 Q3
Mayville Engineering Company, Inc. (MEC)
About this 10-Q
Mayville Engineering Company, Inc filed this 10-Q on November 2, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $136.28M
- up 25.0% from $109.02M a year earlier
- Net income
- $6.6M
- up 2298.5% from net income of $275K a year earlier
- Diluted EPS
- $0.32
- up 3100.0% from $0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 28, 2022, the registrant had
Table of Contents
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| Notes to Unaudited Condensed Consolidated Financial Statements | 9 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements related to future events, business strategy, future performance, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe” and similar expressions or their negative. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. Mayville Engineering Company, Inc. (MEC, the Company, we, our, us or similar terms) believes the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon.
Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the SEC) on March 2, 2022, as such may be amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report) and the following:
| ● | the negative impacts the COVID-19 pandemic has had and will continue to have on our business, financial condition, cash flows, results of operations and supply chain, including the supply chain issues encountered by our original equipment manufacturer customers, the current inflationary pressures on wages, benefits, components, and manufacturing supplies and future uncertain impacts; |
| ● | risks relating to developments in the industries in which our customers operate; |
| ● | risks related to scheduling production accurately and maximizing efficiency; |
| ● | failure to compete successfully in our markets; |
| ● | our ability to realize net sales represented by our awarded business; |
| ● | our ability to maintain our manufacturing, engineering and technological expertise; |
| ● | the loss of any of our large customers or the loss of their respective market shares; |
| ● | risks related to entering new markets; |
| ● | our ability to recruit and retain our key executive officers, managers and trade-skilled personnel; |
| ● | volatility in the prices or availability of raw materials critical to our business; |
| ● | manufacturing risks, including delays and technical problems, issues with third-party suppliers, environmental risks and applicable statutory and regulatory requirements; |
| ● | our ability to successfully identify or integrate acquisitions; |
| ● | our ability to develop new and innovative processes and gain customer acceptance of such processes; |
| ● | risks related to our information technology systems and infrastructure; |
| ● | political and economic developments, including foreign trade relations and associated tariffs; |
| ● | results of legal disputes, including product liability, intellectual property infringement and other claims; |
| ● | risks associated with our capital-intensive industry; |
| ● | risks related to our treatment as an S Corporation prior to the consummation of our initial public offering of common stock (IPO); and |
| ● | risks related to our employee stock ownership plan’s treatment as a tax-qualified retirement plan. |
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These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by federal securities laws.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Mayville Engineering Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
|
| September 30, |
| December 31, | ||
| | 2022 | | 2021 | ||
ASSETS | |
| | |
| |
Cash and cash equivalents | | $ | | | $ | |
Receivables, net of allowances for doubtful accounts of $ | |
| | |
| |
Inventories, net | |
| | |
| |
Tooling in progress | |
| | |
| |
Prepaid expenses and other current assets | |
| | |
| |
Total current assets | |
| | |
| |
Property, plant and equipment, net | |
| | |
| |
Assets held for sale | | | | | | — |
Goodwill | |
| | |
| |
Intangible assets, net | |
| | |
| |
Operating lease assets | | | | | | — |
Other long-term assets | |
| | |
| |
Total assets | | $ | | | $ | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
|
| |
| |
Accounts payable | | $ | | | $ | |
Current portion of operating lease obligation | | | | | | — |
Accrued liabilities: | |
| | |
| |
Salaries, wages, and payroll taxes | |
| | |
| |
Profit sharing and bonus | |
| | |
| |
Current portion of deferred compensation | | | | | | — |
Other current liabilities | |
| | |
| |
Total current liabilities | |
| | |
| |
Bank revolving credit notes | |
| | |
| |
Operating lease obligation, less current maturities | | | | | | — |
Deferred compensation, less current portion | |
| | |
| |
Deferred income tax liability | |
| | |
| |
Other long-term liabilities | |
| | |
| |
Total liabilities | | $ | | | $ | |
Commitments and contingencies (see Note 8) | |
|
| |
| |
Common shares, | |
| |
| ||
Additional paid-in-capital | |
| | |
| |
Retained earnings | |
| | |
| |
Treasury shares at cost, | |
| ( | |
| ( |
Total shareholders’ equity | |
| | |
| |
Total | | $ | | | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Mayville Engineering Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands, except share amounts and per share data)
(unaudited)
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net sales | | $ | | | $ | | | $ | | | $ | |
Cost of sales |
| | |
| | |
| | |
| | |
Amortization of intangible assets |
| | |
| | |
| | |
| | |
Profit sharing, bonuses, and deferred compensation |
| | |
| | |
| | |
| | |
Employee stock ownership plan expense (income) |
| | ( |
| | |
| | |
| | |
Other selling, general and administrative expenses |
| | |
| | |
| | |
| | |
Impairment of long-lived assets and gain on contracts | | | ( | | | — | | | ( | | | — |
Income from operations |
| | |
| | |
| | |
| | |
Interest expense |
| | ( |
| | ( |
| | ( |
| | ( |
Income before taxes |
| | |
| | |
| | |
| | |
Income tax expense |
| | |
| | |
| | |
| | |
Net income and comprehensive income | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
Earnings per share: | |
|
| |
|
| |
|
| |
|
|
Basic | | $ | | | $ | | | $ | | | $ | |
Diluted | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
Weighted average shares outstanding: | |
|
| |
|
| |
| | |
|
|
Basic | |
| | |
| | |
| | |
| |
Diluted | |
| | |
| | |
| | |
| |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
Mayville Engineering Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income | | $ | | | $ | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
|
Depreciation | |
| | |
| |
Amortization | |
| | |
| |
Allowance for doubtful accounts | |
| ( | |
| |
Inventory excess and obsolescence reserve | |
| ( | |
| ( |
Stock-based compensation expense | |
| | |
| |
Loss (gain) on disposal of property, plant and equipment | |
| | |
| ( |
Impairment of long-lived assets and gain on contracts | |
| ( | |
| — |
Deferred compensation | |
| ( | |
| ( |
Non-cash lease expense | | | | | | — |
Other non-cash adjustments | |
| | |
| |
Changes in operating assets and liabilities – net of effects of acquisition: | |
| | |
| |
Accounts receivable | |
| ( | |
| ( |
Inventories | |
| ( | |
| ( |
Tooling in progress | |
| ( | |
| ( |
Prepaids and other current assets | |
| ( | |
| ( |
Accounts payable | |
| | |
| |
Deferred income taxes | |
| | |
| |
Operating lease obligations | | | ( | | | — |
Accrued liabilities | |
| | |
| |
Net cash provided by operating activities | |
| | |
| |
CASH FLOWS FROM INVESTING ACTIVITIES | |
|
| |
|
|
Purchase of property, plant and equipment | |
| ( | |
| ( |
Proceeds from sale of property, plant and equipment | |
| | |
| |
Net cash used in investing activities | |
| ( | |
| ( |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Proceeds from bank revolving credit notes | |
| | |
| |
Payments on bank revolving credit notes | |
| ( | |
| ( |
Repayments of other long-term debt | |
| ( | |
| — |
Purchase of treasury stock | |
| ( | |
| ( |
Payments on finance leases | |
| ( | |
| ( |
Proceeds from the exercise of stock options | |
| — | |
| |
Other financing activities | |
| — | |
| ( |
Net cash provided by (used in) financing activities | |
| ( | |
| |
Net increase (decrease) in cash and cash equivalents | |
| ( | |
| |
Cash and cash equivalents at beginning of period | |
| | |
| |
Cash and cash equivalents at end of period | | $ | | | $ | |
Supplemental disclosure of cash flow information: | |
|
| |
|
|
Cash paid for interest | | $ | | | $ | |
Cash paid for taxes | | $ | | | $ | |
Non-cash construction in progress in accounts payable | | $ | | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Mayville Engineering Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(in thousands)
(unaudited)
| | Shareholders' Equity | ||||||||||
| | Additional | | Treasury | | Retained | | | ||||
|
| Paid-in-Capital |
| Shares |
| Earnings |
| Total | ||||
Balance as of December 31, 2021 | | $ | | | $ | ( | | $ | | | $ | |
Net income | | | — | | | — | | | | | | |
401(k) plan contribution |
| | — |
| | |
| | — |
| | |
Purchase of treasury stock | | | — | | | ( | | | — | | | ( |
Stock-based compensation |
| | |
| | — |
| | — |
| | |
Balance as of March 31, 2022 | | $ | | | $ | ( | | $ | | | $ | |
Net income | |
| — | |
| — | |
| | |
| |
Stock-based compensation | |
| | |
| — | |
| — | |
| |
Balance as of June 30, 2022 | | $ | | | $ | ( | | $ | | | $ | |
Net income | |
| — | |
| — | |
| | |
| |
Purchase of treasury stock | |
| — | |
| ( | |
| — | |
| ( |
Stock-based compensation | |
| | |
| — | |
| — | |
| |
Balance as of September 30, 2022 | | $ | | | $ | ( | | $ | | | $ | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Shareholders' Equity | ||||||||||
| | Additional | | Treasury | | Retained | | | ||||
|
| Paid-in-Capital |
| Shares |
| Earnings |
| Total | ||||
Balance as of December 31, 2020 | | $ | | | $ | ( | | $ | | | $ | |
Net income | | | — | | | — | | | | | | |
401(k) plan contribution | | | |
| | |
| | — |
| | |
Stock-based compensation |
| | |
| | — |
| | — |
| | |
Balance as of March 31, 2021 | | $ | | | $ | ( | | $ | | | $ | |
Net income | |
| — | |
| — | |
| | |
| |
Stock-based compensation | |
| | |
| — | |
| — | |
| |
Stock options exercised | |
| | |
| — | |
| — | |
| |
Balance as of June 30, 2021 | | $ | | | $ | ( | | $ | | | $ | |
Net income | |
| — | |
| — | |
| | |
| |
Purchase of treasury stock | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | | | | | — | | | — | | | |
Stock options exercised | |
| | |
| — | |
| — | |
| |
Balance as of September 30, 2021 | | $ | | | $ | ( | | $ | | | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8
Mayville Engineering Company, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands except share amounts, per share data, years and ratios)
(unaudited)
Note 1. Basis of presentation
The interim unaudited condensed consolidated financial statements of Mayville Engineering Company, Inc. and subsidiaries (MEC, the Company, we, our, us or similar terms) presented here have been prepared in accordance with the accounting principles generally accepted in the United States of America (GAAP) and with instructions to Form 10-Q and Article 10 of Regulation S-X. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations and financial position for the interim unaudited periods presented. All intercompany balances and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These interim unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K. A summary of the Company’s significant accounting policies is included in the Company’s 2021 financial statements in the Annual Report on Form 10-K. The Company followed these policies in preparation of the interim unaudited Condensed Consolidated Financial Statements except for new accounting pronouncements adopted as described below.
Nature of Operations
MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military and other end markets. Founded in 1945 and headquartered in Mayville, Wisconsin, we are a leading Tier I U.S. supplier of highly engineered components to original equipment manufacturers (OEM) customers with leading positions in their respective markets. The Company operates
Our
The COVID-19 pandemic has had and will continue to have a negative impact on our business, financial condition, cash flows, results of operations, supply chain, and raw material availability, although the full extent is still uncertain.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, creating Accounting Standard Codification (ASC) 842. Under the new guidance, lessees are required to recognize a right-of-use (ROU) asset and a lease liability for substantially all leases. When measuring ROU assets and lease liabilities, a lessee should include amounts related to option terms, such as the option of extending or terminating the lease or purchasing the underlying asset, that are reasonably certain to be exercised. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition. For finance leases, a lessee will recognize the interest on a lease liability separate from amortization of the ROU asset. In addition, repayments of principal will be presented within financing activities, and interest payments will be presented within operating activities in the statement of cash flows. For operating leases, a lessee will recognize a single lease cost on a straight-line basis and classify all cash payments within operating activities in the statement of cash flows. Entities have the option to adopt the new guidance through a cumulative effect adjustment to retained earnings applied either to the beginning of the earliest period presented (modified retrospective approach) or to the beginning of the period of adoption (effective date approach) whereby the comparative periods are unchanged. For public companies, this guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as the Company remained an emerging growth company (EGC), the new guidance was effective for annual reporting periods beginning after December 15, 2022, and interim periods within fiscal years beginning after December 15, 2022. Early adoption was permitted. The Company adopted the
9
annual reporting guidance as of January 1, 2022 using the effective date approach. The Company
The new guidance provides a number of optional practical expedients in transition. The Company elected the "package of practical expedients", which allows it to not reassess under the new guidance its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. In addition, the new guidance provides accounting policy elections for an entity’s ongoing lessee accounting. The Company has elected to not separate lease and non-lease components for certain of its real estate leases. The Company has elected the short-term lease recognition exemption for all leases that qualify which means that it will not recognize ROU assets or lease liabilities for those leases with a term of 12 months or less.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes ASC 326, Financial Instruments – Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to ASC 326, Financial Instruments – Credit Losses. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which amends ASC 326. This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to ASC 326, Financial Instruments – Credit Losses. The ASU clarifies the treatment of expected recoveries for amounts previously written off on purchased receivables, provides transition relief for troubled debt restructuring, and allows for certain disclosure simplifications of accrued interest. For as long as the Company remains an EGC, the new guidance is effective for annual reporting periods beginning after December 15, 2022. The Company is evaluating the potential effects on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes, creating ASC 740, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2020. For as long as the Company remains an EGC, the new guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. During the period ended
A summary of the Company’s evaluation of other recent accounting pronouncements is included in the Company’s 2021 financial statements in its Annual Report on Form 10-K for the year ended December 31, 2021.
Note 2. Select balance sheet data
Inventory
Inventories are stated at the lower of cost, determined on the first-in, first-out method and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Work-in-process and finished goods are valued at production costs consisting of material, labor, and overhead.
Inventories as of September 30, 2022 and December 31, 2021 consist of:
| | September 30, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Finished goods and purchased parts | | $ | | | $ | |
Raw materials |
| | |
| | |
Work-in-process |
| | |
| | |
Total | | $ | | | $ | |
At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from this customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company had committed to purchase, to meet obligations under the
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agreement with the former fitness customer as of December 31, 2021. As a result, at December 31, 2021, the Company recorded an inventory impairment of $
Property, plant and equipment
Property, plant and equipment as of September 30, 2022 and December 31, 2021 consist of:
|
| Useful Lives |
| September 30, |
| December 31, | |||
| | Years | | 2022 | | 2021 | |||
Land | | | | $ | | | $ | | |
Land improvements | | | | | | | | | |
Building and building improvements |
| |
| | |
| | | |
Machinery, equipment and tooling |
| | |
| | |
| | |
Vehicles |
| |
| | |
| | | |
Office furniture and fixtures |
| | |
| | |
| | |
Construction in progress |
| | N/A |
| | |
| | |
Total property, plant and equipment, gross |
| | | | | |
| | |
Less accumulated depreciation |
| | | | | |
| | |
Total property, plant and equipment, net | | | | | $ | | | $ | |
Depreciation expense was $
At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from the former fitness customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company had committed to purchase, to meet obligations under the agreement with the former fitness customer as of December 31, 2021. As a result, at December 31, 2021, the Company recorded a long-lived asset impairment of $
During the three and nine months ended September 30, 2022, the Company was able to cancel $
Throughout the three and nine months ended September 30, 2022, the Company sold $
The Company completed the closure of its Greenwood, SC manufacturing facility during the third quarter of 2020 and sold the facility during the third quarter of 2021 for $
As of September 30, 2022, $
The Company adopted ASC 842 on January 1, 2022, classifying finance leases of $
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the adoption, the Company reclassified net capital leases of $
Goodwill
There are no changes in the balance of goodwill of $
Intangible Assets
The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of September 30, 2022 and December 31, 2021:
| | Useful Lives | | September 30, | | December 31, | |||
|
| Years |
| 2022 |
| 2021 | |||
Amortizable intangible assets: | | | | | | | | | |
Customer relationships and contracts | | | | | $ | | | $ | |
Trade name |
| |
| | |
| | | |
Non-compete agreements |
| |
| | |
| | | |
Patents |
| |
| | |
| | | |
Accumulated amortization |
| | |
| | ( |
| | ( |
Total amortizable intangible assets, net |
| | |
| | |
| | |
Non-amortizable brand name |
| | |
| | |
| | |
Total intangible assets, net | | | | | $ | | | $ | |
Non-amortizable brand name is tested annually during the fourth quarter for impairment, or more frequently if triggering events occur indicating there may be impairment.
Changes in intangible assets between December 31, 2021 and September 30, 2022 consist of:
Balance as of December 31, 2021 |
| $ | |
Amortization expense |
| | ( |
Balance as of September 30, 2022 | | $ | |
Amortization expense was $
Future amortization expense is expected to be as followed:
Year ending December 31, |
| | |
2022 (remainder) | | $ | |
2023 | | $ | |
2024 | | $ | |
2025 | | $ | |
2026 | | $ | |
Thereafter | | $ | |
Note 3. Bank revolving credit notes
On September 26, 2019, and as last amended on March 31, 2022, we entered into an amended and restated credit agreement (Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The Credit Agreement provides for a $
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additional $
The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness, create or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of
In order to provide a means of insurance against future macroeconomic events, we entered into an amendment (Second Amendment) to the Credit Agreement on June 30, 2020.
During the Covenant Relief Period, the required ceiling on the Company’s total leverage ratio was
We entered into an amendment (Third Amendment) to the Credit Agreement on March 31, 2021 which allowed the Company to incur up to $
We entered into an amendment (Fourth Amendment) to the Credit Agreement on March 31, 2022 which allows the Company to incur up to $
At September 30, 2022, our consolidated total leverage ratio was
At September 30, 2022, our interest coverage ratio was
Under the Credit Agreement, interest is payable quarterly at the adjusted LIBOR plus an applicable margin based on the current funded indebtedness to adjusted EBITDA ratio. The interest rate was
The Company was in compliance with all financial covenants of its credit agreements as of September 30, 2022 and December 31, 2021. The amount borrowed on the revolving credit notes was $
Note 4. Leases
In February 2016, the FASB issued ASU 2019-02, Leases, creating ASC 842. For public companies, this guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as the Company remained an EGC, the new guidance was effective for annual reporting periods beginning after December 15, 2022 and interim periods within fiscal years beginning after December 15, 2022. Early adoption was permitted. The Company adopted the annual
13
reporting guidance as of January 1, 2022 using the effective date approach. The Company early adopted the interim reporting guidance during the period ended March 31, 2022.
The most significant judgements and impacts related to the application of the new guidance include the following:
| ● | In evaluating contracts to determine if they qualify as a lease, the Company considers factors such as if the Company has obtained or transferred substantially all of the rights to the underlying asset through exclusivity, if the Company can transfer or has transferred the ability to direct the use of the asset by making decisions about how and for what purpose the asset will be used and if the lessor has substantive substitution rights. |
| ● | The Company made judgements regarding lease terms for certain of its leases that were in month-to-month status or that contained auto-renewal clauses. The Company estimated a lease end date based on the required length of usage of the property and calculated an ROU asset and lease liability based on the resulting estimated lease term. |
| ● | The Company has recognized ROU assets and lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. |
| ● | The ROU asset for operating leases is based on the initial calculated lease liability as adjusted for the reclassification of certain balance sheet amounts such as deferred rent. |
| ● | In determining the discount rate used to measure the ROU assets and lease liabilities, the Company uses the rate implicit in the lease, or if not readily available, the Company uses the Company’s incremental borrowing rate. The base rate used to establish the Company’s incremental borrowing rate is based on a Prime Rate (or LIBOR fallback option) plus fixed basis points methodology pursuant to the Company’s revolving credit facility (as amended from time to time). Certain required adjustments were then made to this base rate to arrive at an estimated incremental borrowing rate. |
| ● | The Company’s real property leases vary in terms of up to |
| ● | Upon adoption of the new guidance at January 1, 2022, the Company established a ROU asset of $ |
The Company has real property operating leases for office and light manufacturing space. Operating leases for the Company’s personal property consist of leases for office equipment, vehicles, forklifts and storage tanks for bulk gases. The Company recognizes a ROU asset and a lease liability for operating leases based on the net present value of future minimum lease payments. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term, including renewal periods that are considered reasonably certain.
The Company has finance leases for two laser cutting systems and a vehicle. The Company recognizes an ROU asset and a lease liability for finance leases based on the net present value of future minimum lease payments. Lease expense for the Company’s
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finance leases is comprised of the amortization of the ROU asset and interest expense recognized based on the effective interest method.
Variable lease expense is related to certain of the Company’s real property leases and personal property leases, and it generally consists of property tax and insurance components that are for the benefit of the lessor (real property leases) and variable overage fees (personal property leases) that are remitted as part of the Company’s lease payments.
The components of lease expense were as follows:
| | Three Months Ended | | Nine Months Ended | ||
|
| September 30, 2022 | | September 30, 2022 | ||
Finance lease cost: | | | | | | |
Amortization of finance lease assets | | $ | | | $ | |
Interest on finance lease liabilities | | | | |
| |
Total finance lease expense | | | | | | |
Operating lease expense | | | | | | |
Short-term lease expense | | | | | | |
Variable lease expense | | | | |
| |
Sublease income (1) | | | ( | | | ( |
Total lease expense | | $ | | | $ | |
| (1) | The Company subleased a portion of its Hazel Park, MI facility starting in June 2022. |
Total rent expense for the three and nine months ended September 30, 2021 was $
Supplemental information related to leases was as follows:
| | Balance Sheet Classification |
| September 30, 2022 | |
Assets: | | | | | |
Finance lease assets | | | $ | | |
Operating lease assets | | Operating lease assets | | | |
Total lease assets | | | | $ | |
| | | | | |
Current liabilities: | | | | | |
Current finance lease liabilities | | | $ | | |
Current operating lease liabilities | | Current portion of operating lease obligation | | | |
Noncurrent liabilities: | | | |
| |
Long-term finance lease liabilities | | | | | |
Long-term operating lease liabilities | | Operating lease obligation, less current maturities | | | |
Total lease liabilities | | | | $ | |
|
| September 30, 2022 | |
Weighted average remaining lease term (in years) | | | |
Finance leases | | | |
Operating leases | | | |
| | | |
Weighted average discount rate | | | |
Finance leases | | | % |
Operating leases | | | % |
15
The table below represents ROU asset balances by type of lease:
|
| September 30, 2022 | |
Real estate leases | | $ | |
Equipment leases | | | |
Vehicle leases | |
| |
Total lease assets | | $ | |
Maturities of lease liabilities at September 30, 2022 and minimum lease payments under ASC 842 having initial or remaining non-cancellable terms in excess of one year were as follows:
| | Operating | | Finance | | | |||
Year ending December 31, |
| Leases | | Leases | | Total | |||
2022 (remainder) | | $ | | | $ | | | $ | |
2023 | |
| | | | | | | |
2024 | |
| | | | | | | |
2025 | | | | | | | | | |
2026 | | | | | | — | | | |
Thereafter | | | | | | — | | | |
Total lease payments | | | | | | | | | |
Less: lease modification not yet commenced | | | — | | | — | | | — |
Less: imputed interest | | | ( | | | ( | | | ( |
Total lease obligations | | $ | | | $ | | | $ | |
At September 30, 2021, future minimum lease payments under ASC 840 were as follows:
| | Operating | | Finance | | | |||
Year ending December 31, |
| Leases | | Leases | | Total | |||
2021 (remainder) | | $ | | | $ | | | $ | |
2022 | |
| | | | | | | |
2023 | |
| | | | | | | |
2024 | | | | | | | | | |
2025 | | | | | | | | | |
Thereafter | | | | | | — | | | |
Total minimum lease payments | | $ | | | $ | | | $ | |
Lease related supplemental cash flow information:
| | Nine Months Ended | |
| | September 30, 2022 | |
Cash paid for amounts included in the measurement of lease liabilities for finance leases: | | | |
Operating cash flows | | $ | |
Financing cash flows | | $ | |
| | | |
Cash paid for amounts included in the measurement of lease liabilities for operating leases: | | | |
Operating cash flows | | $ | |
| | | |
Right-of-use assets obtained in exchange for recorded lease obligations: | |
| |
Operating leases | | $ | |
Finance leases | | $ | — |
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ROU assets are assessed for impairment in accordance with the Company’s long-lived asset policy. The Company reassesses lease classification and remeasures ROU assets and lease liabilities when a lease is modified, and that modification is not accounted for as a separate new lease or upon certain other events that require reassessment in accordance with ASC 842.
Note 5. Employee stock ownership plan
Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (the ESOP), the Company can make annual discretionary contributions to the trust for the benefit of eligible employees in the form of cash or shares of common stock of the Company subject to the Board of Directors’ approval. For the three months ended September 30, 2022 and 2021, the Company’s estimated ESOP (income) expense was ($
At various times following death, disability, retirement or termination of employment, an ESOP participant is entitled to receive their ESOP account balance in accordance with various distribution methods as permitted under the policies adopted by the ESOP.
As of September 30, 2022, and December 31, 2021, the ESOP shares, excluding safe harbor shares held in the Company’s 401(k) Plan, consisted of
Note 6. Retirement plans
The Mayville Engineering Company Inc. 401(k) Plan (the 401(k) Plan) covers substantially all employees meeting certain eligibility requirements. The 401(k) Plan is a defined contribution plan and is intended for eligible employees to defer tax-free contributions to save for retirement. Employees may contribute up to
The 401(k) Plan also provides for employer discretionary profit-sharing contributions and the Board of Directors may authorize discretionary profit-sharing contributions (which are usually approved at the end of each calendar year).
Note 7. Income taxes
On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate. As the year progresses, the Company will refine its estimate based on facts and circumstances by each tax jurisdiction.
Income tax expense was $
For the three and nine months ended September 30, 2021, income tax expense was estimated at $
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in these jurisdictions. ASC 740, Income Taxes, states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of technical merits.
The Company’s policy for recording interest and penalties associated with potential income tax audits is to record such expense as a component of income tax expense. There were
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Uncertain Tax Positions
Based on the Company’s evaluation, it has been concluded that there is one tax position related to the research and development tax credit requiring recognition in the Company’s financial statements as of September 30, 2022. The Company does not anticipate that there will be a material change in the balance of the unrecognized tax benefits in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in income tax expense.
The Company files income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. Federal tax returns for tax years beginning January 1, 2018, and state tax returns beginning January 1, 2017, are open for examination.
Note 8. Contingencies
On August 4, 2022, the Company filed a lawsuit against Peloton Interactive, Inc. (“Peloton”) in the Supreme Court for the State of New York, New York County. The lawsuit arises from a March 2021 Supply Agreement between the parties, pursuant to which MEC was to manufacture and supply custom component parts for Peloton’s exercise bikes (the “Manufacturing Project”). In the lawsuit, the Company asserts
From time to time, the Company may also be involved in various claims and lawsuits, both for and against the Company, arising in the normal course of business. Although the results of any such litigation and claims cannot be predicted with certainty, in management’s opinion, either the likelihood of loss is remote, or any reasonably possible loss associated with the resolution of such proceedings is not expected to have a material adverse impact on the consolidated financial statements.
Note 9. Deferred compensation
An employer contribution will be made for each participant to reflect the amount of any reduced allocations to the ESOP and/or 401(k) employer contributions due solely to the participant’s deferral amounts, as applicable. In addition, a discretionary amount may be awarded to a participant by the Company.
Deferrals are assumed to be invested in an investment vehicle based on the options made available to the participant (which does not include Company stock).
The deferred compensation plan provides benefits payable upon separation of service or death. Payments are to be made 30 or 180 days after date of separation from service, either in a lump-sum payment or up to five annual installments as elected by the participant when the participant first elects to defer compensation.
The deferred compensation plan is non-funded, and all future contributions are unsecured in that the employees have the status of a general unsecured creditor of the Company and the agreements constitute a promise by the Company to make benefit payments in the future. During the three and nine months ended September 30, 2022 and 2021, eligible employees elected to defer compensation of $
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than 12 months under this plan was $
Note 10. Self-Funded insurance
The Company is self-funded for the medical benefits provided to its employees and their dependents. Healthcare costs are expensed as incurred and are based upon actual claims paid, reinsurance premiums, administration fees, and estimated unpaid claims. Since March 31, 2020, the Company has an aggregate stop loss limit to mitigate risk. Expense related to this was $
Note 11. Segments
The Company applies the provisions of ASC 280, Segment Reporting. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined it has
Note 12. Fair value of financial instruments
Fair value provides information on what the Company may realize if certain assets were sold or might pay to transfer certain liabilities based upon an exit price. Financial assets and liabilities that are measured and reported at fair value are classified into a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs as follows:
| ● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data. Long-term debt is classified as a Level 2 fair value input. |
| ● | Level 3 – Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be the Company’s own data and judgements about assumptions that market participants would use in pricing the asset or liability. |
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The following table lists the Company’s financial assets and liabilities accounted for at fair value by the fair value hierarchy:
| | Balance at | | Fair Value Measurements at | ||||||||
| | September 30, | | Report Date Using | ||||||||
|
| 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Deferred compensation liability | | $ | | | $ | | | $ | — | | $ | — |
Total | | $ | | | $ | | | $ | — | | $ | — |
| | Balance at | | Fair Value Measurements at | ||||||||
| | December 31, | | Report Date Using | ||||||||
|
| 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Deferred compensation liability | | $ | | | $ | | | $ | | | $ | — |
Total | | $ | | | $ | | | $ | | | $ | — |
Fair value measurements for the Company’s cash and cash equivalents are classified based upon Level 1 measurements because such measurements are based upon quoted market prices in active markets for identical assets.
Accounts receivable, accounts payable, long-term debt and accrued liabilities are recorded in the Condensed Consolidated Balance Sheets at cost and approximate fair value.
Deferred compensation liabilities are recorded at amounts due to participants at the time of deferral. Deferrals are invested in an investment vehicle based on the options made available to the participant, considered to be Level 1 and Level 2 on the fair value hierarchy, with the current balance all as Level 1. The change in fair value is recorded in the profit sharing, bonuses, and deferred compensation line item on the Condensed Consolidated Statements of Comprehensive Income. The short-term and long-term balances due to participants are reflected on the current portion of deferred compensation and deferred compensation, less current portion, line items, respectively, on the Condensed Consolidated Balance Sheets.
The Company’s non-financial assets such as goodwill, intangible assets and property, plant, and equipment are re-measured at fair value when there is an indication of impairment and adjusted only when an impairment charge is recognized.
Note 13. Earnings Per Share
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share. In accordance with ASC 260, outstanding options will be considered to have been exercised and outstanding as of the beginning of the period if the average market price of the common stock during the period exceeds the exercise price of the options (they are “in the money”), and the assumed exercise of the options do not have an anti-dilutive impact on earnings per share.
A reconciliation of basic and diluted net income per share attributable to the Company were as follows:
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
Net income attributable to MEC | | $ | | | $ | | | $ | | | $ | |
Average shares outstanding | | | | | | | | | | | | |
Basic per share | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
Average shares outstanding | | | | | | | | | | | | |
Effect of dilutive share-based compensation | | | | | | | | | | | | |
Total potential shares outstanding | | | | | | | | | | | | |
Diluted per share | | $ | | | $ | | | $ | | | $ | |
20
Options in the money that were not included in the computation of diluted earnings per share because they would have had an anti-dilutive impact on earnings per share were as follows:
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
Stock options | | — | | | | — | | |
Note 14. Revenue Recognition
Contract Assets and Contract Liabilities
The Company has contract assets and contract liabilities, which are included in tooling in progress and other current liabilities on the Condensed Consolidated Balance Sheets, respectively. Contract assets include products where the Company has satisfied its performance obligation, but receipt of payment is contingent upon delivery. Contract liabilities include deferred tooling revenue, where the performance obligation was not met. The performance obligation is satisfied when the tooling is completed and the customer signs off through the Product Part Approval Process (PPAP) or other documented customer acceptance. Cost of goods sold is recognized and released from the balance sheet when control of the tooling promised under contract is transferred to the customer.
The Company’s contracts with customers are short-term in nature; therefore, revenue is typically recognized, billed and collected within a 12-month period. The following table reflects the changes in our contract assets and liabilities during the nine months ended September 30, 2022:
| | Contract | | Contract | ||
|
| Assets |
| Liabilities | ||
As of December 31, 2021 | | $ | | | $ | |
Net activity | | | | | | |
As of September 30, 2022 | | $ | | | $ | |
Disaggregated Revenue
The following table represents a disaggregation of revenue by product category:
| | Three Months Ended | Nine Months Ended | | |||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Outdoor sports | | $ | | | $ | | | $ | | | $ | | |
Fabrication | | | | | | | | | | | | | |
Performance structures | | | | | | | | | | | | | |
Tube | | | | | | | | | | | | | |
Tank | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | |
Intercompany sales elimination | | | ( | | | ( | | | ( | | | ( | |
Total, net sales | | $ | | | $ | | | $ | | | $ | | |
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Note 15. Concentration of major customers
The following customers accounted for 10% or greater of the Company’s recorded net sales or net trade receivables:
| | Net Sales | | | Accounts Receivable | | | ||||||||||||
| | Three Months Ended | | | Nine Months Ended | | | As of | | | As of | | | ||||||
| | September 30, | | | September 30, | | | September 30, | | | December 31, | | | ||||||
|
| 2022 |
| | 2021 |
| | 2022 |
| | 2021 |
| | 2022 |
| | 2021 | | |
Customer | | | | | | | | | | | | | | | | | | | |
A |
| | % | | | % | | | % | | | % | | | % | | | % |
|
B |
| | % | | % | | | % | | | % | | % | | % |
| |||
C |
| % | | % | | % | | | % | | % | | % |
| |||||
D |
| | % | | | % | | | % | | | % | | | % | | % |
| |
E |
| % | | % | | % | | % | | | % | | | % |
| ||||
Note 16. Stock based compensation
The Mayville Engineering Company, Inc. 2019 Omnibus Incentive Plan provides the Company the ability to grant monetary payments based on the value of its common stock, up to
On April 20, 2021, shareholders of the Company approved an amendment to the 2019 Omnibus Incentive Plan increasing the number of shares of common stock authorized for issuance by
The Company recognizes stock-based compensation using the fair value provisions prescribed by ASC 718, Compensation – Stock Compensation. Accordingly, compensation costs for awards of stock-based compensation settled in shares are determined based on the fair value of the share-based instrument at the time of grant and are recognized as expense over the vesting period of the share-based instrument. For units, fair value is equivalent to the stock price at the date of grant. The Black-Scholes option pricing model is utilized to determine fair value for options.
Cancellations and forfeitures are accounted for as incurred.
Stock awards were granted on July 19, 2022, April 19, 2022, February 28, 2022, June 3, 2021, May 12, 2021, April 20, 2021, February 28, 2021, May 12, 2020, February 27, 2020 and May 8, 2019. There were no stock awards granted prior to this.
During the nine months ended September 30, 2022,
As of September 30, 2022,
The Company’s stock-based compensation expense by award type is summarized as follows:
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Unit awards | | $ | | | $ | | | $ | | | $ | | |
Option awards | |
| ( | |
| | |
| | |
| | |
Stock based compensation expense, net of tax | | $ | | | $ | | | $ | | | $ | | |
22
A roll-forward of unrecognized stock-based compensation expense is displayed in the table below. Unrecognized stock-based compensation expense as of September 30, 2022 will be expensed over the remaining requisite service period from which individual award values relate, up to
|
| Units |
| Options |
| Total | |||
Balance as of December 31, 2021 | | $ | | | $ | | | $ | |
Grants | | | | | | | | | |
Forfeitures | | | ( | | | — | | | ( |
Expense | | | ( | | | ( | | | ( |
Balance as of March 31, 2022 | | $ | | | $ | | | $ | |
Grants | | | | | | — | | | |
Forfeitures | | | — | | | — | | | — |
Expense | | | ( | | | ( | | | ( |
Balance as of June 30, 2022 | | $ | | | $ | | | $ | |
Grants | | | | | | — | | | |
Forfeitures | | | ( | | | ( | | | ( |
Expense | | | ( | | | | | | ( |
Balance as of September 30, 2022 | | $ | | | $ | | | $ | |
Note 17. Subsequent events
The Company has evaluated subsequent events since September 30, 2022, the date of these financial statements. There were no material events or transactions discovered during this evaluation that requires recognition or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in the understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in Part II Item 1A. of this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 and our unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item I of this Quarterly Report on Form 10-Q. In this discussion, we use certain non-GAAP financial measures. Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management Discussion and Analysis of Financial Condition and Results of Operations. Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.
All amounts are presented in thousands except share amounts, per share data, years and ratios.
Overview
MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military and other end markets. We have developed long-standing relationships with our blue-chip customers based upon a high level of experience, trust and confidence.
Our one operating segment focuses on producing metal components that are used in a broad range of heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agricultural, military and other products.
COVID-19 Impact
The COVID-19 pandemic has had and will continue to have a negative impact on our business, financial condition, cash flows, results of operations, supply chain, and raw material availability, although the full extent is still uncertain.
For the three and nine months ended September 30, 2022 and 2021, net sales reflected the ongoing supply chain constraints impacting many of our customers. Additionally, we continue to experience inflationary pressures on wages, benefits, materials, and manufacturing supplies due to a higher level of competition for employees and materials. We are unable to predict the future impact of the labor and supply chain shortages and inflation, and the resulting impact on our Company’s business, financial condition, cash flows and results of operations.
The future financial effects of the continuing COVID-19 pandemic are unknown due to many factors. These factors include uncertainty related to Delta, Omicron and other variants, uncertainty of the effectiveness of governmental actions to address the pandemic, including health, monetary and fiscal policies, the effect of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing, trade agreements, other geopolitical events, and the availability and volatility in the price of raw materials and other commodities. As a result, predicting the Company’s forecasted financial performance is difficult and subject to many assumptions.
How We Assess Performance
Net Sales. Net sales reflect sales of our components and products net of allowances for returns and discounts. In addition to the COVID-19 pandemic, several factors affect our net sales in any given period, including general economic conditions, weather, timing of acquisitions and the production schedules of our customers. Net sales are recognized at the time of shipment or at delivery to the customer.
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Manufacturing Margins. Manufacturing margins represent net sales less cost of sales. Cost of sales consists of all direct and indirect costs used in the manufacturing process, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other directly related overhead costs. Our cost of sales is directly affected by the fluctuations in commodity prices, primarily sheet steel and aluminum, but these changes are largely mitigated by contractual agreements with our customers that allow us to pass through these price variations based upon certain market indexes.
Depreciation and Amortization. We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. The periodic expense related to leasehold improvements and intangible assets is depreciation and amortization expense, respectively. Leasehold improvements are depreciated over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.
Other Selling, General, and Administrative Expenses. Other selling, general and administrative expenses consist primarily of salaries and personnel costs for our sales and marketing, finance, human resources, information systems, administration and certain other managerial employees and certain corporate level administrative expenses such as incentive compensation, audit, accounting, legal and other consulting and professional services, travel, and insurance.
Other Key Performance Indicators
EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin
EBITDA represents net income before interest expense, provision for income taxes, depreciation and amortization. EBITDA Margin represents EBITDA as a percentage of net sales for each period.
Adjusted EBITDA represents EBITDA before CEO transition costs, stock-based compensation, Hazel Park transition costs due to the former fitness customer and impairment charges on long-lived assets and gain on contracts specifically purchased to meet obligations under the agreement with our former fitness customer. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net sales for each period. These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin as management uses these measures as key performance indicators, and we believe they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.
Our calculation of EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to the similarly named measures reported by other companies. Potential differences between our measures of EBITDA and Adjusted EBITDA compared to other similar companies’ measures of EBITDA and Adjusted EBITDA may include differences in capital structure and tax positions.
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The following table presents a reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to EBITDA and Adjusted EBITDA, and the calculation of EBITDA Margin and Adjusted EBITDA Margin for each of the periods presented.
| | Three Months Ended | | | Nine Months Ended | | ||||||||||
| | September 30, | | | September 30, | | ||||||||||
|
| 2022 |
| | 2021 |
|
| 2022 |
| | 2021 |
| ||||
Net income and comprehensive income | | $ | 6,596 | | | $ | 275 | | | $ | 16,346 | | | $ | 6,112 | |
Interest expense |
| | 830 |
| | | 526 |
|
| | 2,163 |
| | | 1,562 |
|
Provision for income taxes |
| | 1,490 |
| | | 63 |
|
| | 4,464 |
| | | 2,059 |
|
Depreciation and amortization |
| | 7,105 |
| | | 7,961 |
|
| | 21,556 |
| | | 23,550 |
|
EBITDA |
| | 16,021 |
| | | 8,825 |
|
| | 44,529 |
| | | 33,283 |
|
CEO transition costs |
| | 861 |
| | | — |
|
| | 1,512 |
| | | — |
|
Hazel Park transition costs due to former fitness customer |
| | 862 |
| | | — |
|
| | 4,678 |
| | | — |
|
Stock based compensation expense |
| | 141 |
| | | 1,182 |
|
| | 2,855 |
| | | 3,771 |
|
Impairment of long-lived assets and gain on contracts |
| | (1,737) |
| | | — |
|
| | (4,346) |
| | | — |
|
Adjusted EBITDA | | $ | 16,148 | | | $ | 10,007 | | | $ | 49,228 | | | $ | 37,054 | |
Net sales | | $ | 136,276 | | | $ | 109,018 | | | $ | 410,865 | | | $ | 341,851 | |
EBITDA Margin | |
| 11.8 | % | |
| 8.1 | % | |
| 10.8 | % | |
| 9.7 | % |
Adjusted EBITDA Margin | |
| 11.8 | % | |
| 9.2 | % | |
| 12.0 | % | |
| 10.8 | % |
Consolidated Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
| | Three Months Ended September 30, |
| |||||||||||||||
| | 2022 | | | 2021 | | | Increase (Decrease) |
| |||||||||
| | | | % of Net | | | | | % of Net | | | Amount | | |
| |||
|
| Amount |
| Sales |
| | Amount |
| Sales |
| | Change |
| % Change | | |||
Net sales | | $ | 136,276 | | 100.0 | % | | $ | 109,018 | | 100.0 | % | | $ | 27,258 | | 25.0 | % |
Cost of sales | | | 120,812 | | 88.7 | % | | | 98,109 | | 90.0 | % | | | 22,703 | | 23.1 | % |
Manufacturing margins | | | 15,464 | | 11.3 | % | | | 10,909 | | 10.0 | % | | | 4,555 | | 41.8 | % |
Amortization of intangibles |
| | 1,738 |
| 1.3 | % | | | 2,677 |
| 2.5 | % | | | (939) |
| (35.1) | % |
Profit sharing, bonuses and deferred compensation |
| | 166 |
| 0.1 | % | | | 1,939 |
| 1.8 | % | | | (1,773) |
| (91.4) | % |
Employee stock ownership plan expense (income) | | | (152) | | (0.1) | % | | | 124 | | 0.1 | % | | | (276) | | (222.6) | % |
Other selling, general and administrative expenses |
| | 6,533 |
| 4.8 | % | | | 5,305 |
| 4.9 | % | | | 1,228 |
| 23.1 | % |
Impairment of long-lived assets and gain on contracts |
| | (1,737) |
| (1.3) | % | | | — |
| 0.0 | % | | | (1,737) |
| N/A | |
Income from operations |
| | 8,916 |
| 6.5 | % | | | 864 |
| 0.8 | % | | | 8,052 |
| 931.9 | % |
Interest expense |
| | (830) |
| 0.6 | % | | | (526) |
| 0.5 | % | | | 304 |
| 57.8 | % |
Provision for income taxes |
| | 1,490 |
| 1.1 | % | | | 63 |
| 0.1 | % | | | 1,427 |
| 2,265.1 | % |
Net income and comprehensive income | | $ | 6,596 |
| 4.8 | % | | $ | 275 |
| 0.3 | % | | $ | 6,321 |
| 2,298.5 | % |
EBITDA | | $ | 16,021 |
| 11.8 | % | | $ | 8,825 |
| 8.1 | % | | $ | 7,196 |
| 81.5 | % |
Adjusted EBITDA | | $ | 16,148 |
| 11.8 | % | | $ | 10,007 |
| 9.2 | % | | $ | 6,141 |
| 61.4 | % |
Net Sales. Net sales were $136,276 for the three months ended September 30, 2022 as compared to $109,018 for the three months ended September 30, 2021, an increase of $27,258, or 25.0%. This increase was primarily driven by improved volumes, commercial pricing increases, and contractual raw material price pass-throughs to customers.
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Manufacturing Margins. Manufacturing margins were $15,464 for the three months ended September 30, 2022 as compared to $10,909 for the three months ended September 30, 2021, an increase of $4,555, or 41.8%. The increase was largely the result of increased volumes, improved absorption of manufacturing costs, and commercial pricing increases, which were slightly offset by lower scrap income and Hazel Park transition costs.
Manufacturing margin percentages were 11.3% for the three months ended September 30, 2022, as compared to 10.0% for the three months ended September 30, 2021, an increase of 1.3%. The increase was attributable to the items discussed in the preceding paragraph.
Amortization of Intangibles Assets. Amortization of intangible assets were $1,738 for the three months ended September 30, 2022 as compared to $2,677 for the three months ended September 30, 2021, a decrease of $939, or 35.1%. The decrease is due to the full amortization of certain intangible assets.
Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses, and deferred compensation expenses were $166 for the three months ended September 30, 2022 as compared to $1,939 for the three months ended September 30, 2021, a decrease of $1,773, or 91.4%. The decrease was primarily related to a reduction in deferred compensation expense due to fluctuations within the financial markets and stock-based compensation expense related to forfeitures of unvested awards.
Employee Stock Ownership Plan (Income) Expense. Employee stock ownership plan estimated (income) expense was ($152) for the three months ended September 30, 2022 as compared to $124 for the three months ended September 30, 2021, a decrease of $276, or 222.6%. The change is due to the discretionary nature of contributions to the ESOP plan.
Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $6,533 for the three months ended September 30, 2022 as compared to $5,305 for the three months ended September 30, 2021, an increase of $1,228, or 23.1%. The increase was predominantly attributable to CEO transition costs, higher consulting, legal and professional fees, as well as continued inflationary pressures on wages and benefits.
Impairment of Long-Lived Assets and Gain on Contracts. At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from this customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company committed to purchase, to meet obligations under the agreement with the former fitness customer as December 31, 2021. The notification informed the Company that it did not forecast any demand for any products or parts that were the subject of the agreement between the Company and the customer for the remainder of the agreement’s term, which ends in March 2026. Given the circumstances, GAAP required the Company to assess whether the assets were impaired. As a result of this assessment, the Company recorded an impairment on the assets specifically purchased to meet obligations under the agreement with the former fitness customer. Consequently, the Company recorded an impairment of long-lived assets and loss on contracts of $16,151 in the fourth quarter of 2021.
During the three months ended September 30, 2022, the Company was able to cancel $168 of purchase commitments for property, plant and equipment relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and loss on contracts at December 31, 2021. The cancellation of purchase commitments resulted in the reversal of this amount. Additionally, the Company was able to sell property, plant and equipment resulting in a gain of $1,569 relating to the former fitness
27
customer that had previously been recorded as an impairment of long-lived assets and written down to fair value at December 31, 2021.
Interest Expense. Interest expense was $830 for the three months ended September 30, 2022 as compared to $526 for the three months ended September 30, 2021, an increase of $304, or 57.8%. The change is due to higher average debt levels and interest rates in the current period.
Provision for Income Taxes. Income tax expense was $1,490 for the three months ended September 30, 2022 as compared to $63 for the three months ended September 30, 2021. This increase is attributable to higher operating income during the current year period.
Due to the factors described in the preceding paragraphs, net income, comprehensive income, EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin increased during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
| | Nine Months Ended September 30, |
| |||||||||||||||
| | 2022 | | | 2021 | | | Increase (Decrease) |
| |||||||||
| | | | % of Net | | | | | % of Net | | | Amount | | |
| |||
|
| Amount |
| Sales |
| | Amount |
| Sales |
| | Change |
| % Change | | |||
Net sales | | $ | 410,865 | | 100.0 | % | | $ | 341,851 | | 100.0 | % | | $ | 69,014 | | 20.2 | % |
Cost of sales | | | 362,782 | | 88.3 | % | | | 299,885 | | 87.7 | % | | | 62,897 | | 21.0 | % |
Manufacturing margins | | | 48,083 | | 11.7 | % | | | 41,966 | | 12.3 | % | | | 6,117 | | 14.6 | % |
Amortization of intangibles |
| | 5,214 |
| 1.3 | % | | | 8,030 |
| 2.3 | % | | | (2,816) |
| (35.1) | % |
Profit sharing, bonuses and deferred compensation |
| | 3,921 |
| 1.0 | % | | | 8,013 |
| 2.3 | % | | | (4,092) |
| (51.1) | % |
Employee stock ownership plan expense | | | 1,668 | | 0.4 | % | | | 825 | | 0.2 | % | | | 843 | | 102.2 | % |
Other selling, general and administrative expenses |
| | 18,653 |
| 4.5 | % | | | 15,365 |
| 4.5 | % | | | 3,288 |
| 21.4 | % |
Impairment of long-lived assets and gain on contracts |
| | (4,346) |
| (1.1) | % | | | — |
| 0.0 | % | | | (4,346) |
| N/A | |
Income from operations |
| | 22,973 |
| 5.6 | % | | | 9,733 |
| 2.8 | % | | | 13,240 |
| 136.0 | % |
Interest expense |
| | (2,163) |
| 0.5 | % | | | (1,562) |
| 0.5 | % | | | 601 |
| 38.5 | % |
Provision for income taxes |
| | 4,464 |
| 1.1 | % | | | 2,059 |
| 0.6 | % | | | 2,405 |
| 116.8 | % |
Net income and comprehensive income | | $ | 16,346 |
| 4.0 | % | | $ | 6,112 |
| 1.8 | % | | $ | 10,234 |
| 167.4 | % |
EBITDA | | $ | 44,529 |
| 10.8 | % | | $ | 33,283 |
| 9.7 | % | | $ | 11,246 |
| 33.8 | % |
Adjusted EBITDA | | $ | 49,228 |
| 12.0 | % | | $ | 37,054 |
| 10.8 | % | | $ | 12,174 |
| 32.9 | % |
Net Sales. Net sales were $410,865 for the nine months ended September 30, 2022 as compared to $341,851 for the nine months ended September 30, 2021 for an increase of $69,014, or 20.2%. This change is primarily attributed to increased sales volumes due to strengthened end market demand and customer restocking efforts as dealer inventories remain at historical levels, commercial pricing increases, and contractual raw material price pass-throughs to customers.
Manufacturing Margin. Manufacturing margins were $48,083 for the nine months ended September 30, 2022 as compared to $41,966 for the nine months ended September 30, 2021, an increase of $6,117, or 14.6%. This increase was driven by greater demand and the impact of ongoing commercial pricing increases, offset by Hazel Park transition costs of $4,516 in the current year.
Manufacturing margin percentages were 11.7% for the nine months ended September 30, 2022 as compared to 12.3% for the nine months ended September 30, 2021, a decrease of 0.6%. The slight decrease was mainly due to the Hazel Park transition costs discussed in the preceding paragraph and the dilutive impact of material price pass-throughs to our customers that increase sales but do not impact margin dollars. These items were partially negated by the impacts of commercial pricing increases and increased sales volumes.
Amortization of Intangibles Assets. Amortization of intangible assets were $5,214 for the nine months ended September 30, 2022 as compared to $8,030 for the nine months ended September 30, 2021, a decrease of $2,816, or 35.1%. The decrease is due to the full amortization of certain intangible assets.
Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses, and deferred compensation expenses were $3,921 for the nine months ended September 30, 2022 as compared to $8,013 for the nine months ended September 30, 2021, a decrease of $4,092, or 51.1%. The decrease was primarily related to a decrease in deferred compensation expense due to fluctuations within the financial markets.
Employee Stock Ownership Plan Expense. Employee stock ownership plan estimated expense was $1,668 for the nine months ended September 30, 2022 as compared to $825 for the nine months ended September 30, 2021, an increase of $843, or 102.2%. The change is due to the discretionary nature of contributions to the ESOP plan to align with business performance.
Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $18,653 for the nine months ended September 30, 2022 as compared to $15,365 for the nine months ended September 30, 2021, an increase of $3,288,
29
or 21.4%. The increase was primarily driven by higher consulting, legal and professional fees, CEO transition costs, wages and benefits due to the continued inflationary pressures, information technology and travel and entertainment expenses.
Impairment of Long-Lived Assets and Gain on Contracts. At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from this customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company committed to purchase, to meet obligations under the agreement with the former fitness customer as December 31, 2021. The notification informed the Company that it did not forecast any demand for any products or parts that were the subject of the agreement between the Company and the customer for the remainder of the agreement’s term, which ends in March 2026. Given the circumstances, GAAP required the Company to assess whether the assets were impaired. As a result of this assessment, the Company recorded an impairment on the assets specifically purchased to meet obligations under the agreement with the former fitness customer. Consequently, the Company recorded an impairment of long-lived assets and loss on contracts of $16,151 in the fourth quarter of 2021.
During the nine months ended September 30, 2021, the Company was able to cancel $2,257 of purchase commitments for property, plant and equipment relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and loss on contracts at December 31, 2021, as previously described. The cancellation of purchase commitments resulted in the reversal of this amount. Additionally, the Company was able to sell property, plant and equipment resulting in a gain of $2,089 relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and written down to fair value at December 31, 2021.
Interest Expense. Interest expense was $2,163 for the nine months ended September 30, 2022 as compared to $1,562 for the nine months ended September 30, 2021, an increase of $601, or 38.5%. The change is due to higher average debt levels and interest rates as compared to the prior year period.
Provision for Income Taxes. Income tax expense was $4,464 for the nine months ended September 30, 2022 as compared to $2,059 for the nine months ended September 30, 2021. This increase is attributable to higher operating income during the current year period. As of September 30, 2022, our federal net operating loss (NOL) carryforward was $18,466 driven by the pretax losses incurred in prior years. The NOL does not expire and will be used to offset future pretax income. We estimate our long-term effective tax rate to be approximately 27%, based on current tax regulations.
Due to the factors described in the preceding paragraphs, net income, comprehensive income, EBITDA, EBITDA Margin, Adjusted EBITDA, and Adjusted EBITDA Margin increased during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Liquidity and Capital Resources
Cash Flows Analysis
| | Nine Months Ended | | | | |||||||
| | September 30, | | Increase (Decrease) | | |||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change | | |||
Net cash provided by operating activities | | $ | 33,315 | | $ | 12,793 | | | 20,522 | | 160.4 | % |
Net cash used in investing activities |
| | (31,072) |
| | (21,240) |
| | (9,832) | | (46.3) | % |
Net cash provided by (used in) financing activities |
| | (2,249) |
| | 8,453 |
| | (10,702) | | 126.6 | % |
Net change in cash | | $ | (6) | | $ | 6 | | $ | (12) | | 200.0 | % |
Operating Activities. Cash provided by operating activities was $33,315 for the nine months ended September 30, 2022, as compared to $12,793 for the nine months ended September 30, 2021. The $20,522 change in operating cash flows is primarily associated with the increases in accounts receivable and inventories, partially offset by higher balances in accounts payable. These balances have stabilized throughout the current year period as customer demand and production levels rebounded during the prior year period from COVID-19 lows.
Investing Activities. Cash used in investing activities was $31,072 for the nine months ended September 30, 2022, as compared to $21,240 for the nine months ended September 30, 2021. The $9,832 increase in cash used in investing activities was driven by the
30
ongoing investments in new technology and automation and the continued build-out and repurposing of assets at the Company’s Hazel Park, MI facility. This was partially offset by proceeds from the sale of property, plant and equipment which was originally intended to support production for the former fitness customer.
Financing Activities. Cash used in financing activities was $2,249 for the nine months ended September 30, 2022, as compared to cash provided by financing activities of $8,453 for the nine months ended September 30, 2021. The $10,702 decrease was primarily driven by increased borrowings, but with higher debt repayments, resulting in a smaller rise in the Company’s debt balance during the current year period. Additionally, the Company repurchased 559,945 shares of its common stock during the current year period under our share repurchase program at a total cost of $4,947. During the prior year period, the Company repurchased 47,000 shares of its common stock under the share repurchase program at a total cost of $653. The Company’s decision to repurchase additional shares for the remainder of the current fiscal year will depend on business conditions, free cash flow generation, other cash requirements and stock price. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information regarding share repurchases.
Amended and Restated Credit Agreement
On September 26, 2019, and as last amended as of March 31, 2022, we entered into the Credit Agreement with certain lenders and Wells Fargo Bank, National Association, the Agent. The Credit Agreement provides for a $200,000 Revolving Loan, with a letter of credit sub-facility in an aggregate amount not to exceed $5,000, and a swingline facility in an aggregate amount of $20,000. The Credit Agreement also provides for an additional $100,000 of capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.
Our obligations under the Credit Agreement are secured by first priority security interests in substantially all of our personal property and guaranteed by, and secured by first priority security interests in, substantially all of the personal property of, our direct and indirect subsidiaries: Center Manufacturing, Inc., Center Manufacturing Holdings, Inc., Center—Moeller Products LLC, Defiance Metal Products Co., Defiance Metal Products of Arkansas, Inc., Defiance Metal Products of PA., Inc. and Defiance Metal Products of WI, Inc.
Borrowings under the Credit Agreement bear interest at a fluctuating LIBOR (which may be adjusted for certain reserve requirements), plus 1.00% to 2.00% depending on the current Consolidated Total Leverage Ratio (as defined in the Credit Agreement). Under certain circumstances, we may not be able to pay interest based on LIBOR. If that happens, we will be required to pay interest at the Base Rate, which is the sum of (a) the higher of (i) the Prime Rate (as publicly announced by the Agent from time to time) and (ii) the Federal Funds Rate plus 0.50%, plus (b) 0.00% to 1.00%, depending on the current Total Consolidated Leverage Ratio. The Credit Agreement also includes provisions for determining a replacement rate when LIBOR is no longer available.
At September 30, 2022, the interest rate on outstanding borrowings under the Revolving Loan was 3.56%. Additionally, we had availability of $128,629 under the Revolving Loan at September 30, 2022.
We must pay a commitment fee at a rate of 0.20% per annum on the average daily unused portion of the aggregate unused revolving commitments under the Credit Agreement. We must also pay fees as specified in the Fee Letter (as defined in the Credit Agreement) and with respect to any letters of credit issued under the Credit Agreement.
The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness, create or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00. At September 30, 2022, our interest coverage ratio was 17.46 to 1.00. The Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions. As of September 30, 2022, our consolidated total leverage ratio was 1.30 to 1.00.
The Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, material money judgments, and failure to maintain subsidiary guarantees. If an event of default occurs, the Agent will be entitled to take various actions, including the
31
acceleration of amounts due under the Credit Agreement, termination of the credit facility, and all other actions permitted to be taken by a secured creditor.
On June 30, 2020, March 31, 2021 and March 31, 2022, the Company entered into amendments to the Credit Agreement. Please refer to Note 3 – Bank Revolving Credit Notes in the Notes to the Consolidated Financial Statements for a more detailed discussion.
Capital Requirements and Sources of Liquidity
During the nine months ended September 30, 2022 and 2021, our capital expenditures were $38,808 and $26,588, respectively. The increase of $12,220 was driven by our continued investments in new technology and automation along with the build-out and repurposing of assets in the Company’s Hazel Park, MI facility. Capital expenditures for the full year 2022 are expected to be between $55,000 and $65,000.
We have historically relied upon cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. At September 30, 2022, we had immediate availability of $128,629 through our Revolving Loan and another $100,000 through an accordion feature under our Credit Agreement, subject to the covenants under the Credit Agreement. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependent on our ability to access outside sources of capital. We will continue to have access to the availability currently provided under the Credit Agreement as long as we remain compliant with the financial covenants. Based on our estimates at this time, we expect to be in compliance with these financial covenants through 2022 and the foreseeable future.
We believe that our operating cash flow and available borrowings under the Credit Agreement are sufficient to fund our operations for 2022 and beyond when taking into consideration the estimated impacts of the pandemic based on the information we have available at this time. However, future cash flows are subject to a number of variables, and additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.
Contractual Obligations
The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at September 30, 2022:
| | | | | Payments Due by Period | ||||||||||
|
| Total |
| 2022 (Remainder) |
| 2023 – 2024 |
| 2025 – 2026 |
| Thereafter | |||||
Long-term debt principal payment obligations (1) | | $ | 71,371 | | $ | — | | $ | 71,371 | | $ | — | | $ | — |
Equipment financing agreements (2) | | | 1,823 | | | 303 | | | 1,520 | | | — | | | — |
Forecasted interest on debt payment obligations (3) | | | 5,671 | | | 721 | | | 4,950 | | | — | | | — |
Finance lease obligations (4) |
| | 1,029 |
| | 90 |
| | 716 |
| | 223 |
| | — |
Operating lease obligations (4) |
| | 42,056 |
| | 1,422 |
| | 11,343 |
| | 9,463 |
| | 19,828 |
Total | | $ | 121,950 | | $ | 2,536 | | $ | 89,900 | | $ | 9,686 | | $ | 19,828 |
| (1) | Principal payments under the Company’s Credit Agreement, which expires in 2024. |
| (2) | Financing agreements entered into to purchase manufacturing equipment. Current and long-term portions are classified in other current liabilities and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets |
| (3) | Forecasted interest on debt obligations are based on the debt balance, interest rate, and unused fee of the Company’s revolver credit facility, and the debt balances and interest rates of the Company’s equipment finance agreements as of September 30, 2022. |
| (4) | See Note 4 – Leases in the Notes to Condensed Consolidated Financial Statements for additional information. |
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in customer forecasts, interest rates, and, to a lesser extent, commodities. To reduce such risks, we selectively use financial instruments and other proactive management techniques.
Customer Forecasts
The use and consumption of our components, products and services fluctuates depending on order forecasts we receive from our customers. These order forecasts can change dramatically from quarter-to-quarter dependent upon the respective markets that our customers provide products in.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the Credit Agreement, which exposes us to variability in interest payments due to changes in the referenced interest rates.
The amount borrowed under the Revolving Loan under the Credit Agreement was $71.4 million as of September 30, 2022. The interest rate was 3.56% as of September 30, 2022. Please see “Liquidity and Capital Resources – Amended and Restated Credit Agreement” in Part I, Item 2 and Note 3 in the Notes to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for more specifics.
A hypothetical 100-basis-point increase in interest rates would have resulted in an additional $0.5 million of interest expense based on our variable rate debt at September 30, 2022. We do not use derivative financial instruments to manage interest risk or to speculate on future changes in interest rates. A rise in interest rates could negatively affect our cash flow.
Commodity Risk
We source a wide variety of materials and components from a network of suppliers. While such materials are generally available from numerous suppliers, the COVID-19 pandemic has resulted in availability delays at times. In addition, commodity raw materials, such as steel, aluminum, copper, paint and paint chemicals, and other production costs are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion and in many cases utilize contracts with those customers to mitigate the impact of commodity raw material price fluctuations. As of September 30, 2022, we did not have any commodity hedging instruments in place.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
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Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, with the exception of those changes related to the adoption of ASC 842 Leases that occurred during the quarter ended March 31, 2022 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. The adoption of this guidance resulted in policy, process and related internal control changes to conform with the requirements of the new standard including the implementation of new software and related internal controls. Please refer to Note 4 – Leases of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the impact of ASC 842 Leases on the Company.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 8 – Contingencies in the Notes to the Condensed Consolidated Financial Statements for information on legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 2, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The table below sets forth information with respect to purchases we made of shares of our common stock during the quarter ended September 30, 2022:
| | | | | | | Total Number | | Dollar Value of | |
| | | | | | | of Shares | | Shares that | |
| | Total | | | | | Purchased as | | May Yet Be | |
| | Number | | | | | Part of Publicly | | Purchased | |
| | of Shares | | Average Price | | Announced Plans | | Under the Plans | ||
Period |
| Purchased |
| Paid per Share |
| or Programs (1) |
| or Programs (1) | ||
July 2022 | | — | | $ | — | | — | | $ | 21,176,679 |
August 2022 | | 359,945 | | $ | 7.29 | | 359,945 | | $ | 18,552,679 |
September 2022 | | — | | $ | — | | — | | $ | 18,552,679 |
Total |
| 359,945 |
| | |
| 359,945 |
| |
|
| (1) | October 28, 2019, our Board of Directors approved an increase of our prior share repurchase program from $4 million to $25 million of shares of our common stock through 2021. On October 19, 2021, the Board of Directors approved a new share repurchase program of up to $25 million of shares through 2023. The new share repurchase program replaced the prior program. |
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Item 6. Exhibits.
The exhibits listed in the Exhibit Index below are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
Exhibit Number | | Description |
| | |
10.1 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32 | | |
| | |
101.INS | | Inline XBRL Instance Document |
| ||
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| ||
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| ||
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| ||
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| ||
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| ||
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MAYVILLE ENGINEERING COMPANY, INC. | |||
Date: November 2, 2022 |
| By: | /s/ Jagadeesh A. Reddy |
| Jagadeesh A. Reddy | ||
| President & Chief Executive Officer | ||
| By: | /s/ Todd M. Butz | |
| | Todd M. Butz | |
| | Chief Financial Officer | |
37
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jagadeesh A. Reddy, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Mayville Engineering Company, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 2, 2022 | By: | /s/ Jagadeesh A. Reddy |
| | Jagadeesh A. Reddy |
| | President & Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Todd M. Butz, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Mayville Engineering Company, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 2, 2022 | By: | /s/ Todd M. Butz |
| | Todd M. Butz |
| | Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Mayville Engineering Company, Inc. (the “Company”) for the period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jagadeesh A. Reddy, as President and Chief Executive Officer of the Company, and Todd M. Butz, as Chief Financial Officer of the Company, each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 2, 2022 | By: | /s/ Jagadeesh A. Reddy |
| | Jagadeesh A. Reddy |
| | President & Chief Executive Officer |
| | |
| By: | /s/ Todd M. Butz |
| | Todd M. Butz |
| | Chief Financial Officer |