Mayville Engineering Company, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. MEC is a U.S. manufacturer of engineered metal components and related services, serving commercial vehicle, construction, powersports, agricultural, military and other markets.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $136.3 | $109.0 | $410.9 | $341.9 |
| Manufacturing margin | $15.5 (11.3%) | $10.9 (10.0%) | $48.1 (11.7%) | $42.0 (12.3%) |
| Operating income | $8.9 | $0.9 | $23.0 | $9.7 |
| Net income | $6.6 | $0.3 | $16.3 | $6.1 |
| Diluted EPS | $0.32 | $0.01 | $0.80 | $0.29 |
| Adjusted EBITDA and margin | $16.1 (11.8%) | $10.0 (9.2%) | $49.2 (12.0%) | $37.1 (10.8%) |
Sales rose 25.0% in Q3 and 20.2% year to date, reflecting higher volumes, customer restocking, commercial pricing and contractual raw-material price pass-throughs. Q3 manufacturing margin percentage improved 1.3 percentage points year over year; the nine-month margin percentage declined 0.6 points, with Hazel Park transition costs and pass-through sales diluting the rate. Management cited improved volume, absorption and pricing as offsets.
Cash flow, balance sheet and liquidity
- Cash flow, nine months: Operating cash flow was $33.3 million, versus $12.8 million in 2021. Investing used $31.1 million, including $38.8 million of capital expenditures; financing used $2.2 million. Cash ended at $0.1 million.
- Debt and liquidity: Revolver borrowings were $71.4 million, with $128.6 million available under the $200 million facility. A further $100 million accordion is subject to agreement terms. The facility matures September 2024; the borrowing rate was 3.56% at quarter-end.
- Covenants: MEC reported compliance, with a 1.30x total leverage ratio versus a 3.25x maximum and 17.46x interest coverage versus a 3.00x minimum.
- Balance sheet: Total assets were $446.7 million and shareholders’ equity $214.6 million. Current assets were $153.1 million versus current liabilities of $111.0 million. The company also reported $37.9 million of operating lease obligations.
Changes, outlook and notable items
- Operating results improved substantially from the prior-year periods. Interest expense increased 57.8% in Q3 and 38.5% year to date, attributed to higher average debt and interest rates.
- Q3 and year-to-date operating income included gains from cancelling former-customer purchase commitments and selling related equipment: $1.7 million and $4.3 million, respectively. These gains followed a $16.2 million impairment and contract loss recorded in Q4 2021 after a former fitness customer forecast no further demand under an agreement running through March 2026.
- MEC sued Peloton in August 2022, alleging breach and anticipatory repudiation of the supply agreement and, alternatively, breach of the duty of good faith and fair dealing. The company says claimed damages are substantial, but recovery amount and timing are uncertain; any recovery is a contingent gain and is not recognized until realized or realizable.
- Capital spending outlook: MEC expected 2022 capital expenditures of $55–$65 million, primarily for technology, automation and Hazel Park facility work. The filing provides no specific revenue or earnings guidance.
- Management reported continued COVID-related supply-chain effects and inflation in wages, benefits, materials and manufacturing supplies. Other stated risks include uncertain customer forecasts, customer concentration, labor availability, commodity costs and floating-rate debt. A hypothetical 100-basis-point rate increase would add about $0.5 million of annual interest expense based on quarter-end variable-rate debt.
- The company adopted lease accounting standard ASC 842 in 2022, recording operating lease right-of-use assets and liabilities. Disclosure controls were deemed effective; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether sales growth converts into sustained margin improvement after Hazel Park transition costs and inflation.
- Capital spending, operating cash generation and revolver usage, given low cash balances and the planned $55–$65 million 2022 capex range.
- Customer demand and concentration: two customers each represented at least 10% of Q3 sales, and one former fitness customer’s cancelled demand led to significant impairment and ongoing litigation.
- Progress and possible outcomes of the Peloton lawsuit; any recovery remains uncertain and is not booked as income.
- Floating-rate debt exposure and continued covenant compliance as borrowing costs change.