Mayville Engineering Company, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Amounts below are in millions of dollars unless noted. MEC is a vertically integrated U.S. manufacturer serving commercial vehicle, construction and access, powersports, agriculture, military and other markets. The company operates as one segment.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $161.3 | $142.6 | +13.1% |
| Manufacturing margin | $20.9; 13.0% | $16.4; 11.5% | +27.8%; +1.5 percentage points |
| Operating income | $7.6; 4.7% of sales | $4.7; 3.3% | +63.4% |
| Interest expense | $3.4 | $1.7 | +102.4% |
| Net income | $3.2 | $2.6 | +26.1% |
| Diluted EPS | $0.16 | $0.12 | Up $0.04 |
| Adjusted EBITDA and margin | $18.5; 11.5% | $13.8; 9.7% | +33.8% |
| Operating cash flow | $10.6 provided | $6.0 used | Improved $16.7 |
| Capital expenditures | $2.8 | $2.4 | +$0.4 |
Sales growth reflected the July 2023 Mid-States Aluminum (MSA) acquisition and higher organic volumes in construction and access and powersports, partly offset by softer legacy agriculture demand and the end of certain military aftermarket programs. Management attributed improved manufacturing margins to sales volume, MSA, operational excellence initiatives and pricing actions. Adjusted EBITDA is a non-GAAP measure; MEC’s reconciliation adds stock compensation and legal costs to EBITDA.
Financial position and liquidity
- At March 31, cash was $0.3; receivables were $70.3 and inventories $66.1. Total assets were $499.9 and shareholders’ equity $234.0.
- Revolving credit borrowings were $139.8, down from $147.5 at year-end 2023. The revolving facility is $250.0, matures June 2028, and had $110.2 of availability. The stated borrowing rate was 7.68%.
- Management reported covenant compliance: total leverage of 1.98x against a maximum 4.00x, and interest coverage of 4.87x against a minimum 3.00x. A 100-basis-point rate increase would add an estimated $0.4 of annualized interest expense based on quarter-end variable-rate debt.
- Operating cash flow improvement was driven chiefly by working-capital movements, including higher accounts payable as MEC extended supplier payment terms, and collection efforts. Accounts receivable used $12.9 of cash in the quarter; accounts payable provided $6.7.
- Cash used in investing was $2.7. Cash used in financing was $8.3, primarily reflecting revolving debt repayments in excess of borrowings. MEC reported $0.3 ending cash.
Outlook, risks and notable items
- MEC expects 2024 capital expenditures of $15–$20 million, prioritizing high-return investments, growth and automation. Management said operating cash flow and available credit are expected to fund operations and capital needs, and expects covenant compliance through 2024 and the foreseeable future. No revenue or earnings guidance is provided in the filing.
- Management expects some effects of supply constraints affecting customers, material-cost pressures, wage and benefit inflation, labor availability and broader macroeconomic uncertainty to continue in 2024. Customer production forecasts can change materially. Steel and aluminum price changes are generally addressed through customer pass-through arrangements; MEC reported no commodity hedges.
- Interest expense more than doubled year over year, reflecting higher rates and acquisition-related borrowings. The revolving credit facility carries floating-rate exposure.
- MEC’s Peloton dispute remains unresolved. MEC seeks substantial damages for alleged breach and anticipatory repudiation of a supply agreement; the amount and timing of any recovery are uncertain and no contingent gain is recognized. Peloton has counterclaimed, alleging fraud and seeking rescission and damages. An appeals court affirmed the order allowing MEC’s contract claim to proceed and dismissal of MEC’s alternative good-faith claim.
- MSA was acquired in July 2023 for net consideration reported as approximately $90.0 at closing; purchase-price allocation remained preliminary, with management not expecting remaining adjustments to be significant.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported sales growth and margin improvement reflects MSA versus continuing organic demand, particularly as end-market conditions and customer forecasts change.
- Whether the improved operating cash flow is sustainable given the quarter’s receivables outflow and increased reliance on extended supplier payment terms.
- Floating-rate debt exposure, remaining credit availability and continued headroom under leverage and interest-coverage covenants.
- Developments and potential financial outcomes of the Peloton litigation; any recovery remains uncertain.
- The filing’s Fond du Lac term-note balance is inconsistent: the debt note reports $2.375 million, matching its stated current and long-term portions, while the MD&A states $2.735 million. Verify the correct amount.
- Customer concentration: two customers represented 16.6% and 14.0% of Q1 sales, respectively.