Business Context and Reporting Period
Company: Mayville Engineering Company, Inc. (MEC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2024
Business Overview: MEC is a vertically-integrated, value-added manufacturing partner providing design, prototyping, tooling, fabrication, aluminum extrusion, and assembly services. The company operates 23 facilities across the U.S. and serves diverse end markets including commercial vehicles, construction & access equipment, powersports, agriculture, and military sectors. The company operates as a single segment.
Key Financial Metrics
| Metric (in thousands) | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Net Sales | $163,636 | $138,980 | $324,905 | $281,626 |
| Cost of Sales | $141,359 | $122,885 | $281,696 | $249,154 |
| Manufacturing Margin | $22,277 (13.6%) | $16,095 (11.6%) | $43,209 (13.3%) | $32,472 (11.5%) |
| Income from Operations | $8,150 | $4,273 | $15,780 | $8,943 |
| Net Income | $3,782 | $1,614 | $7,023 | $4,185 |
| Diluted EPS | $0.18 | $0.08 | $0.34 | $0.20 |
| EBITDA | $17,541 | $12,068 | $34,425 | $24,618 |
| Adjusted EBITDA | $19,639 | $15,299 | $38,159 | $29,138 |
Liquidity and Debt
- Cash and Cash Equivalents: $314 (June 30, 2024) vs. $672 (Dec 31, 2023).
- Revolving Credit Facility: $250 million total capacity. Outstanding borrowings were $122.1 million as of June 30, 2024, with $127.9 million available.
- Interest Rate: 7.68% on outstanding borrowings (SOFR-based).
- Financial Covenants: Consolidated total leverage ratio was 1.69:1.00 (max 4.00:1.00); Interest coverage ratio was 4.57:1.00 (min 3.00:1.00).
- Operating Cash Flow (YTD): $33.9 million provided by operating activities, a significant improvement from a $5.9 million use in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.7% in Q2 and 15.4% YTD compared to 2023. Growth was driven by the July 2023 acquisition of Mid-States Aluminum (MSA) and increased organic volumes in commercial vehicle, construction, and powersports markets.
- Margin Expansion: Manufacturing margins improved to 13.6% in Q2 (up from 11.6% in Q2 2023) due to volume increases, MSA integration, and pricing actions.
- Profitability: Net income surged 134.3% in Q2 and 67.8% YTD. Adjusted EBITDA margin expanded to 12.0% in Q2 from 11.0% in the prior year.
- Expense Increases:
- Interest Expense: Increased 50.9% in Q2 due to higher debt levels from the MSA acquisition and elevated interest rates.
- SG&A Expenses: Increased 11.7% in Q2, primarily due to legal costs associated with litigation against a former fitness customer (Peloton) and MSA integration costs.
- Profit Sharing: Increased 53.8% in Q2 due to higher bonus accruals and additional plan participants from MSA.
- Working Capital: Accounts receivable increased to $67.9 million (from $57.4 million at year-end), while inventory decreased to $60.8 million (from $67.8 million) due to improved efficiencies.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: Expected to be between $15 million and $20 million for the full year 2024, focusing on automation and high-return growth.
- Liquidity: Management believes operating cash flow and available credit facilities are sufficient to fund operations and capital expenditures for 2024 and beyond.
- Macroeconomic Factors: The company notes ongoing impacts from inflation, elevated interest rates, and supply chain constraints, though it utilizes contractual agreements to pass through commodity price fluctuations.
Risks and Contingencies
- Litigation: MEC is engaged in ongoing litigation against Peloton Interactive, Inc., alleging breach of contract regarding a supply agreement for exercise bike components. Peloton has filed a counterclaim alleging fraud. The outcome and potential recovery are uncertain.
- Customer Concentration: Three customers (labeled A, B, and C) accounted for 16.2%, 13.0%, and 11.0% of Q2 2024 net sales, respectively.
- Interest Rate Risk: A 100-basis-point increase in interest rates would result in an additional $0.7 million in annual interest expense based on current variable rate debt.
- Cybersecurity: The company recently hired a Chief Information Officer to enhance cybersecurity oversight, acknowledging risks related to IT infrastructure and data leakage.
Investor Verification Checklist
- Debt Servicing: Verify the sustainability of interest payments given the 7.68% rate on $122 million of debt and the impact of potential rate hikes.
- Litigation Exposure: Monitor the status of the Peloton lawsuit and the potential financial impact of the counterclaim alleging fraud.
- Customer Concentration: Assess the risk associated with the top three customers representing over 40% of quarterly revenue.
- Acquisition Integration: Evaluate the long-term contribution of the Mid-States Aluminum (MSA) acquisition to organic growth and margin stability.
- Capital Allocation: Review the balance between the $25 million share repurchase program and the $15-20 million planned capital expenditures for 2024.