Mayville Engineering Company, Inc. — Q1 2022 Form 10-Q
Business context and period. MEC is a U.S. manufacturer of engineered metal components and related services for commercial vehicles, construction and access equipment, powersports, agriculture, military and other markets. This unaudited report covers the three months ended March 31, 2022, compared with the same 2021 period. Amounts below are in millions except per-share data and ratios.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $136.3 | $112.6 |
| Manufacturing margin | $14.9; 10.9% | $14.8; 13.1% |
| Operating income | $5.6; 4.1% | $4.1; 3.6% |
| Net income | $3.8; 2.8% | $2.5; 2.3% |
| Diluted EPS | $0.19 | $0.12 |
| EBITDA / margin | $12.8 / 9.4% | $11.8 / 10.5% |
| Adjusted EBITDA / margin | $14.8 / 10.8% | $13.0 / 11.6% |
| Operating cash flow | $(0.4) | $4.2 |
| Capital expenditures | $13.0 | $5.6 |
Sales increased 21.0%, primarily from contractual raw-material pass-throughs, commercial pricing and improved volumes. Cost of sales rose 24.0%, faster than sales; management cited Hazel Park transition costs and the margin-dilutive effect of material pass-throughs. Manufacturing margin percentage declined 2.2 percentage points. Net income rose 50.2%, while Adjusted EBITDA rose 13.5% and its margin declined 0.8 percentage points.
Liquidity, debt and balance sheet
- Cash was $0.1 million at March 31, 2022. Current assets were $153.2 million and current liabilities $88.8 million.
- Revolving credit borrowings were $83.3 million, up from $67.6 million at year-end 2021; stated revolver availability was $116.7 million. The $200 million facility matures September 2024 and includes a further $100 million accordion, subject to conditions.
- Leverage ratio was 1.81x against a 3.25x maximum; interest coverage was 19.13x against a 3.00x minimum. MEC reported compliance with covenants. The revolver interest rate was 1.75% at quarter-end.
- Operating cash flow turned negative, mainly reflecting higher receivables as revenue grew and other working-capital movements. Investing cash outflow was $12.6 million, largely for capital expenditures; financing cash inflow was $13.0 million, including net revolver borrowing.
- MEC repurchased 200,000 shares for $2.3 million in Q1. The remaining authorization under its current program was $21.2 million.
Outlook, commentary and notable items
- Management expects 2022 capital expenditures of $55–$65 million, with investment in automation, technology and repurposing the Hazel Park facility expected to continue through 2022. Management said operating cash flow and available borrowing were expected to fund operations and planned investment, and anticipated covenant compliance through 2022 and the foreseeable future.
- COVID-related customer supply-chain constraints, labor and materials shortages, and inflation in wages, benefits, materials and manufacturing supplies remained sources of uncertainty. Management said the resulting future impact was difficult to predict.
- A fitness customer notified MEC in February that it forecast no demand for products covered by its agreement through March 2026. MEC had recorded a $16.2 million impairment and loss on contracts in Q4 2021; in Q1 2022 it reversed $1.2 million after canceling related equipment purchase commitments. $2.8 million of related property and equipment was classified as held for sale at quarter-end.
- MEC adopted the lease accounting standard (ASC 842) in 2022. It recognized $39.1 million of operating lease assets and $39.4 million of operating lease liabilities at March 31; this makes balance-sheet comparisons with year-end 2021 less direct.
- Customer concentration remained meaningful: four customers each represented at least 10% of Q1 sales—18.2%, 15.7%, 11.1% and 10% or more, respectively. Customer identities are not disclosed in the filing excerpt.
- A hypothetical 100-basis-point interest-rate increase was estimated to add about $0.2 million of interest expense based on quarter-end variable-rate debt. MEC reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher sales volumes and pricing can offset inflation, transition costs and the lower manufacturing margin percentage.
- Receivables, inventory and operating cash-flow trends as sales grow, and the funding needs of the planned $55–$65 million capital program.
- Execution and financial effects of the Hazel Park transition and the fitness-customer impairment, contract reversal and held-for-sale assets.
- Customer concentration, customer production schedules, revolver borrowing and covenant headroom; also assess exposure to floating interest rates.
- Comparability of reported balance-sheet and lease costs following ASC 842 adoption, and the assumptions supporting management’s liquidity outlook.