Mayville Engineering Company, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. MEC is a U.S. metal-components manufacturer serving commercial vehicle, construction, powersports, agriculture, military and other markets. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $112.6 | $108.6 | +3.7% |
| Manufacturing margin | $14.8; 13.1% | $11.8; 10.9% | +220 basis points |
| Operating income | $4.1; 3.6% of sales | $1.6; 1.4% | +$2.5 |
| Net income | $2.5 | $0.05 | +$2.5 |
| Diluted EPS | $0.12 | $0.00 | — |
| Adjusted EBITDA | $13.0; 11.6% | $11.4; 10.5% | +13.9% |
| Operating cash flow | $4.2 | $2.6 | +$1.6 |
| Capital expenditures | $5.6 | $2.4 | +$3.2 |
At March 31, cash was $0.1, current assets were $107.6 and current liabilities were $61.3. Revolver borrowings were $46.5; reported availability was approximately $153.5 under the $200 million facility. The facility matures in September 2024. MEC reported a 1.42-to-1.00 leverage ratio versus a 4.00 maximum for the quarter, and 10.85-to-1.00 interest coverage versus a 3.00 minimum; it said it was in compliance with covenants. The borrowing rate was 2.25%. Capital lease obligations were $2.5.
Changes and management commentary
- Sales rose primarily on stronger market conditions and comparison with customer shutdowns in late March 2020. Management also said Q1 2021 sales were affected by OEM supply-chain constraints, including commercial-vehicle microchip shortages and port issues across end markets.
- Margin improvement reflected higher volumes, technology and automation investments, lower overhead following the Greenwood facility closure, and approximately $0.9 million of prior-year inventory-obsolescence and healthcare provisions related to COVID-19. Lower SG&A and interest expense also supported earnings; higher profit-sharing, bonus and deferred-compensation expense partly offset the improvement.
- Operating cash flow increased, but receivables and inventory rose and investing cash use increased with technology and automation spending. Cash was nearly unchanged at $0.124 million; financing provided $1.1 million, versus $12.6 million in Q1 2020, when MEC drew on its revolver for liquidity.
Outlook, risks and notable items
- MEC forecast 2021 capital expenditures of approximately $55–$65 million, including $35–$45 million of additional investment associated with a new strategic customer. A March 31 credit amendment raised the 2021 capital-expenditure allowance under the agreement from $35 million to $70 million.
- Management said operating cash flow and available borrowings should fund 2021 operations and planned investment, based on current COVID-19 assumptions, and expected covenant compliance through 2021 and the foreseeable future. It cautioned that future cash flows and access to additional capital are uncertain. The filing gives no specific revenue or earnings guidance.
- COVID-19 effects remain uncertain, including supply-chain availability and customer demand. Other disclosed risks include customer production forecasts and concentration, raw-material prices, interest-rate exposure, skilled-labor availability, manufacturing execution and competition. Four customers each represented at least 10% of Q1 sales; one additional customer represented at least 10% of receivables at quarter-end.
- On April 11, MEC agreed to sell its closed Greenwood, South Carolina facility for approximately $4.95 million before fees, subject to buyer due diligence. The facility was carried as held for sale at $3.55 million at quarter-end. No restructuring costs were recorded in either first quarter.
- MEC reported no material litigation and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective.
Investor facts to verify
- Whether the new strategic customer program ramps as expected and the associated $35–$45 million investment earns adequate returns.
- Whether supply-chain constraints, especially microchip shortages and port delays, affect customer schedules, sales and margins in subsequent quarters.
- Working-capital conversion and liquidity, given very low cash, higher receivables and inventory, and reliance on the revolving facility.
- Progress on the Greenwood property sale, including due-diligence completion, final proceeds and any related gain or costs.
- Compliance with the credit agreement as covenant thresholds tighten during the temporary relief period, and sensitivity to floating-rate debt costs.