Mayville Engineering Company, Inc. — Q3 2019 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2019. Mayville Engineering (MEC) manufactures metal components and provides fabrication, coating, assembly, tooling and related services for commercial vehicle, construction, powersports, agriculture, military and other markets. Results include Defiance Metal Products (DMP), acquired in December 2018. MEC completed its IPO in May 2019 and its legacy business converted from an S corporation to a C corporation on May 9, 2019.
Key financial metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $128.5 | $84.3 | $417.4 | $263.1 |
| Manufacturing margin | $14.6 (11.3%) | $12.8 (15.2%) | $54.7 (13.1%) | $40.2 (15.3%) |
| Operating income | $13.2 | $5.7 | $2.7 | $20.6 |
| Net income (loss) | $9.7 | $4.8 | $(3.1) | $17.3 |
| Diluted EPS | $0.49 | $0.36 | $(0.18) | $1.24 |
| Adjusted EBITDA | $13.6 (10.6%) | $10.7 (12.6%) | $48.2 (11.5%) | $35.4 (13.5%) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $16.4 | $28.6 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $22.8 | $13.3 |
Balance sheet and liquidity at September 30, 2019: Cash was $1 thousand; receivables were $62.6 million and inventory was $50.7 million. Current assets were $118.0 million and current liabilities $63.0 million. Revolving borrowings were $87.0 million, at a 3.56% rate; other long-term debt was essentially repaid, with $83 thousand of current debt remaining. Capital lease obligations totaled $3.3 million. The amended facility provides a $200 million revolver plus a $100 million accordion, maturing in September 2024. MEC reported covenant compliance, a 1.30x total leverage ratio and 7.77x interest coverage.
Nine-month cash flow was $16.4 million from operations, $(26.8) million from investing and $7.3 million from financing; cash declined $3.1 million. The filing attributes weaker operating cash flow principally to working-capital movements, including a $9.5 million receivables increase, in part because DMP customers have longer payment terms.
Material changes versus comparable periods
- Q3 sales rose 52.4%; DMP contributed $51.8 million. Management said both DMP and legacy MEC faced weaker demand, particularly in agriculture, construction and medium-duty trucks, as customers curtailed or delayed production and reduced dealer inventories.
- Q3 manufacturing margin percentage fell to 11.3% from 15.2%. Adjusted EBITDA increased in dollars but its margin declined to 10.6% from 12.6%.
- Q3 net income included a $9.6 million noncash gain from revaluing DMP contingent consideration to zero. Management said DMP fell slightly short of the earnout threshold; the sellers had not confirmed agreement, and a disagreement may go to arbitration.
- Nine-month sales increased 58.6%, largely reflecting DMP. Despite higher adjusted EBITDA, nine-month GAAP results shifted to a $3.1 million loss from $17.3 million income. Expenses included approximately $10.2 million of IPO-related deferred-compensation expense, $9.9 million of IPO-related long-term incentive expense and $6.4 million of other IPO and acquisition expenses. The LTIP was terminated in May, with a total payout of $10.5 million.
- IPO proceeds were used in part to repay debt. On September 26, MEC refinanced prior term debt under the expanded revolving facility. The company also invested more in capital equipment and automation.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. MEC budgeted approximately $27 million in full-year 2019 capital expenditures and said operating cash flow plus available revolver borrowings should fund 2019 operations.
- Key stated risks include cyclical customer-industry demand, large-customer concentration, production scheduling and labor availability, raw-material prices, supplier and manufacturing disruptions, acquisition integration, tariffs and access to capital. Several customers represented at least 10% of sales in one or more reported periods.
- The filing states that disclosure controls and procedures were not effective at the reasonable-assurance level because previously identified material weaknesses remained. These involved IT access, segregation of duties and change management, as well as accounting policies, journal-entry controls and financial-reporting expertise. Remediation efforts were ongoing.
- Interest-rate exposure is variable; MEC estimated a hypothetical 100-basis-point rate increase would have added $0.5 million of interest expense for the nine-month period. The company does not use derivatives to manage this exposure.
- Subsequent to quarter-end, the board approved increasing the share repurchase program from $4 million to $25 million through 2021. Management reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the revolver’s actual availability: the filing reports $113 million available in one section, but $87 million in another; $87 million is also stated as the outstanding borrowing balance.
- Monitor underlying operating performance excluding the $9.6 million contingent-consideration gain and the IPO/acquisition adjustments used in adjusted EBITDA.
- Track demand, production schedules and margin trends in agriculture, construction and medium-duty trucks, along with DMP integration and customer concentration.
- Follow resolution of the DMP earnout calculation, continued covenant compliance, cash generation and receivables collection.
- Assess progress remediating internal-control material weaknesses and the effect of the expanded share repurchase authorization on liquidity and capital allocation.