Mayville Engineering Company, Inc. (MEC) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial amounts below are in millions of dollars unless stated otherwise. MEC is a vertically integrated manufacturer serving commercial vehicle, construction and access, powersports, agriculture, military and other markets.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $158.2 | $136.3 | $439.8 | $410.9 |
| Manufacturing margin | $19.0 (12.0%) | $15.5 (11.3%) | $51.5 (11.7%) | $48.1 (11.7%) |
| Operating income | $5.9 | $8.9 | $14.8 | $23.0 |
| Net income | $1.4 | $6.6 | $5.6 | $16.3 |
| Diluted EPS | $0.07 | $0.32 | $0.27 | $0.80 |
| Adjusted EBITDA (non-GAAP) | $19.2 | $16.1 | $48.3 | $49.2 |
- Q3 revenue grew 16.1%, primarily from the July 1 acquisition of Mid-States Aluminum (MSA) and organic volume growth. Nine-month revenue increased 7.1%.
- Q3 operating margin was approximately 3.7% and net margin approximately 0.9%; nine-month operating margin was approximately 3.4% and net margin approximately 1.3%.
- For the first nine months, operating cash flow was $13.7 million, versus $33.3 million a year earlier. Investing cash use was $97.7 million, including $88.6 million paid for MSA net of cash acquired. Financing provided $86.1 million. Cash at September 30 was $2.3 million.
- At September 30, current assets were $157.9 million and current liabilities $81.5 million. Revolver borrowings were $168.4 million, with $81.6 million available under the $250 million facility. The borrowing rate was 7.92%.
- Debt covenants were met: total leverage ratio 2.46 against a 4.00 maximum; interest coverage 6.11 against a 3.00 minimum. A 100-basis-point rate increase would add an estimated $0.9 million of annual interest expense at the reported debt level.
Material changes and notable items
- MSA contributed $13.5 million in net sales and $1.0 million in operating income since acquisition. The preliminary purchase-price allocation includes $21.1 million of goodwill and $22.6 million of identifiable intangible assets. Acquisition-related transaction costs were $1.4 million year to date, and an $0.9 million acquired-inventory step-up was expensed.
- Q3 net income fell 78.3% year over year despite higher sales. Higher borrowing and interest rates, increased compensation-related expense and SG&A, and the absence of prior-year gains on former fitness-customer assets weighed on results. Q3 adjusted EBITDA increased 19.0%; nine-month adjusted EBITDA declined 1.8%.
- Nine-month operating cash flow included $18.5 million of deferred-compensation distributions, principally related to a retired executive. Capital expenditures were $9.8 million, compared with $38.8 million in the prior-year period.
- The company repurchased $2.7 million of shares in the first nine months. On October 26, 2023, the board authorized a new $25 million repurchase program through 2026, replacing the prior program.
Outlook, risks and contingencies
- MEC expects full-year 2023 capital expenditures of $15 million to $20 million and stated that operating cash flow and available borrowings are expected to support operations in 2023 and beyond. The filing provides no specific revenue or earnings guidance.
- Management cited inflation, labor availability and costs, supply-chain challenges, customer demand and production scheduling as ongoing risks. Demand softened in construction and agriculture; commercial vehicle, powersports and military volumes increased. Three customers each represented at least 10% of nine-month sales.
- Borrowings carry floating SOFR-based rates. Commodity price movements, especially in steel and aluminum, may affect results; the company reported no commodity hedges.
- MEC’s lawsuit against Peloton over a supply agreement remains pending. MEC alleges breach and anticipatory repudiation and seeks substantial damages, but the amount and timing of any recovery are uncertain; no gain is recognized unless realized or realizable.
- Management reported disclosure controls effective at the reasonable-assurance level and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of sales growth and future earnings is attributable to MSA versus organic volume, and whether the preliminary acquisition valuations change.
- Whether margin performance improves as new projects ramp and the one-time acquired-inventory step-up passes through results.
- Debt, interest expense, covenant headroom and liquidity under continued elevated rates or weaker customer demand.
- The cash-flow effects of deferred-compensation payments, working capital and planned capital expenditures.
- Developments in the Peloton litigation and customer concentration, including changes in major customers’ forecasts.