Mayville Engineering Company, Inc. annual report, FY2022

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Mayville Engineering Company, Inc. — FY2022 Form 10-K

Business context and reporting period. MEC is a U.S. contract manufacturer of engineered metal components and assemblies, serving commercial vehicles, construction and access equipment, powersports, agriculture, military and other markets. This 10-K reports the fiscal year ended December 31, 2022; the supplied filing text does not provide a clear standalone fourth-quarter income statement or results. MEC operated 20 U.S. facilities and reported one operating segment.

Financial performance and liquidity

  • Revenue: Net sales were $539.4 million, up 18.6% from $454.8 million in 2021. Growth reflected raw-material price pass-throughs, higher volumes as markets strengthened and customer restocking, and commercial price increases; customer supply-chain issues partly offset growth.
  • Profitability: Operating income was $25.8 million versus an operating loss of $7.4 million. Net income was $18.7 million ($0.92 basic and $0.91 diluted per share), compared with a $7.5 million net loss ($0.37 basic loss per share) in 2021. Manufacturing margin was $61.1 million, or 11.3% of sales, unchanged as a percentage from 2021.
  • EBITDA measures: Adjusted EBITDA, a non-GAAP measure, rose 31.5% to $60.8 million; adjusted EBITDA margin increased to 11.3% from 10.2%. GAAP EBITDA was $55.1 million, or 10.2% of sales, versus $24.4 million, or 5.4%, in 2021.
  • Cash flow and investment: Operating cash flow was $52.4 million versus $14.5 million. Capital expenditures were $58.6 million, up from $39.3 million; cash used in investing activities was $50.7 million. Operating cash flow less capital expenditures was approximately negative $6.2 million, a simple derived measure. Cash increased by $9,000 to $127,000.
  • Debt and liquidity: Revolver borrowings were $72.2 million, compared with $67.6 million a year earlier; the year-end rate was 5.69%. MEC reported $127.8 million of revolver availability and an additional $100 million accordion capacity, subject to agreement terms. The facility matures September 2024. Leverage was 1.26x against a 3.25x maximum, and interest coverage was 13.14x against a 3.00x minimum; MEC reported covenant compliance.
  • Balance sheet: Total assets were $440.6 million and total liabilities were $222.7 million. Adoption of lease accounting resulted in $36.1 million of operating lease assets and $36.7 million of operating lease liabilities at year-end.

Material changes versus 2021

  • Sales increased 18.6%, while manufacturing margin percentage remained at 11.3%; higher demand, pricing and overhead absorption were offset by transition and launch costs, customer supply constraints and lower scrap income in the second half.
  • Net results improved from a loss to a profit. The comparison includes a $16.2 million long-lived-asset impairment and contract loss recorded in 2021 related to a former fitness customer. In 2022, MEC recorded a $4.3 million net gain in the corresponding line, reflecting cancelled purchase commitments and proceeds from sales of related equipment.
  • Operating cash flow improved substantially, partly because working capital had absorbed cash in 2021 as receivables and inventory rose during the recovery. Capital expenditures increased with automation, technology and Hazel Park facility repurposing.
  • Interest expense rose to $3.4 million from $2.0 million, reflecting higher borrowing levels and rates. Intangible amortization declined to $7.0 million from $10.7 million as certain assets became fully amortized.

Outlook, commentary and risks

  • Management expected 2023 capital expenditures of $20–25 million, below 2022 levels as the unusually high investment cycle neared completion. Management stated that operating cash flow and available borrowing capacity were expected to fund operations and capital needs, and anticipated covenant compliance in 2023 and the foreseeable future.
  • Management’s value-creation priorities include operational and commercial excellence through its MEC Business Excellence initiative, organic customer and platform growth, selective acquisitions, and workforce development. The filing provides no quantified revenue or earnings guidance.
  • Inflation in wages, benefits, materials and manufacturing supplies, supply-chain disruptions affecting OEM customers, and labor availability weighed on results; management expected these pressures to continue into 2023 and cautioned it might not fully offset inflation through pricing.
  • Customer concentration is significant: John Deere represented 17.2% of 2022 sales, PACCAR 16.0%, and AB Volvo 11.9%; the top ten customers represented 79.9%. Customer schedules are generally not firm long-term commitments, and awarded business may be delayed, reduced or cancelled.
  • MEC filed suit against Peloton over cancellation of a manufacturing project and unpaid fixed monthly payments. A court allowed MEC’s breach/anticipatory-repudiation claim to proceed and dismissed an alternative claim. MEC described claimed damages as substantial, but recovery and timing are uncertain; any recovery is a contingent gain and is recognized only when realized or realizable.
  • Other principal risks include floating-rate debt, customer and end-market cyclicality, supplier and raw-material availability, execution of new programs and acquisitions, cybersecurity, manufacturing and environmental liabilities, and potential goodwill impairment. No goodwill impairment was recorded in 2022.
  • The company reported effective disclosure controls and internal control over financial reporting. Its financial statements received an unqualified audit opinion; the auditor did not attest to internal control, consistent with MEC’s emerging-growth-company exemption.

Important facts for investors to verify

  • Review standalone Q4 performance in the relevant quarterly filing; this 10-K text primarily reports full-year figures.
  • Assess whether sales and margin gains can persist after raw-material pass-throughs, pricing changes, and customer restocking, and whether supply constraints continue to limit production.
  • Track conversion of operating cash flow into free cash flow against the planned reduction in capital spending, and monitor working capital and cash levels.
  • Check floating-rate borrowing costs, revolver availability, covenant headroom and the September 2024 maturity/refinancing plan.
  • Monitor major-customer demand and concentration, the outcome and potential recovery from the Peloton litigation, and the performance of repurposed Hazel Park assets.