Business Context and Reporting Period
Mayville Engineering Company, Inc. (NYSE: MEC) filed this Form 10-K for the fiscal year ended December 31, 2021. The filing reports full-year results, not a standalone fourth-quarter income statement. MEC is a U.S. contract manufacturer of fabricated metal components, tooling, coatings and assemblies for OEMs in commercial vehicles, construction and access equipment, powersports, agriculture, military and other markets. It operated 19 of 20 U.S. facilities and employed approximately 2,200 people.
Financial Performance and Liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net sales | $454.8 million | $357.6 million |
| Manufacturing margin | $51.4 million; 11.3% | $31.5 million; 8.8% |
| Operating loss | $7.4 million | $6.5 million |
| Net loss | $7.5 million; $0.37 basic loss per share | $7.1 million; $0.36 basic loss per share |
| EBITDA (non-GAAP) | $24.4 million; 5.4% margin | $25.6 million; 7.2% margin |
| Adjusted EBITDA (non-GAAP) | $46.2 million; 10.2% margin | $32.8 million; 9.2% margin |
| Cash from operating activities | $14.5 million | $36.5 million |
| Capital expenditures | $39.4 million | $7.8 million |
Sales rose 27.2%, reflecting recovering markets and fourth-quarter commercial pricing increases, partly offset by OEM supply-chain constraints and delayed raw-material cost pass-throughs. Higher volumes, scrap income, automation utilization and manufacturing overhead absorption lifted manufacturing margin; wage, benefit, material and other operating-cost inflation partially offset improvement. Net loss remained elevated in part because of a $16.2 million long-lived-asset impairment and loss on contracts recorded in the fourth quarter.
Operating cash flow declined by $22.1 million, mainly as receivables and inventories increased with sales recovery and customer order deferrals. Investing cash outflow was $34.0 million, including $19.7 million invested in the Hazel Park facility. Financing activities provided $19.5 million, largely from higher net revolving-credit borrowings. Cash at year-end was $0.1 million; current assets were $132.6 million and current liabilities $77.4 million.
At December 31, 2021, revolving-credit debt was $67.6 million, up from $45.3 million a year earlier. MEC reported $132.4 million of revolver availability and a further $100 million accordion feature, subject to agreement terms. The borrowing rate was 1.75%; the company was in compliance with covenants, with leverage of 2.43x against a 3.25x maximum and interest coverage of 10.36x against a 3.00x minimum.
Material Changes Versus the Prior Year
- Revenue and manufacturing margin improved substantially from pandemic-affected 2020, but 2021 remained loss-making under GAAP.
- Cash from operations fell sharply as working capital expanded; capital spending increased significantly for automation, technology and the Hazel Park facility.
- Adjusted EBITDA improved, but GAAP EBITDA declined. Adjusted EBITDA adds back, among other items, the $16.2 million impairment, $0.7 million of inventory impairment and loss on contracts, and stock-based compensation; it is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- Revolver borrowings increased by $22.4 million year over year. MEC repurchased 147,785 shares during 2021 for $2.2 million.
Outlook, Commentary, Risks and Unusual Items
The filing provides no specific revenue or earnings guidance. Management said 2022 capital expenditures were expected to exceed 2021 levels, including final payments on equipment commitments connected with the fitness customer and further investment in technology and automation. Management believed operating cash flow and available credit would be sufficient to fund operations and anticipated needs, while cautioning that forecasts and liquidity depend on uncertain conditions.
A significant subsequent event concerns a new fitness-market customer and the Hazel Park facility. On February 18, 2022, the customer advised MEC it forecast no demand for products covered by the agreement for the remainder of its term, which ends in March 2026. MEC recorded a $16.2 million 2021 impairment and contract loss, including a $12.9 million reduction in property and equipment and $3.3 million for non-cancellable equipment commitments. It also recorded a $0.7 million inventory impairment. Fixed amounts the customer owed beginning in January 2022 were expected to be reserved in full as doubtful accounts. MEC had invested $19.7 million in the Hazel Park facility by year-end.
Principal risks include COVID-19 effects, OEM production and supply-chain disruptions, inflation in wages and materials, volatile customer forecasts and fixed-cost under-absorption, customer concentration, labor availability, and the possibility that awarded business is cancelled or delayed. Four customers represented approximately 51.5% of 2021 sales; the largest, John Deere, accounted for 16.6%. Other risks include floating-rate debt, environmental and product-liability exposure, and acquisition and integration risks. MEC reported no material litigation proceedings. It paid no cash dividends and did not anticipate dividends in the foreseeable future. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control attestation because MEC qualified as an emerging growth company.
Important Facts for Investors to Verify
- Review the fitness-customer agreement, the basis and completeness of the impairment and contract-loss estimates, expected doubtful-account reserves, and remaining Hazel Park commitments.
- Track customer production schedules, order deferrals, supply-chain constraints, inflation, and the timing of contractual price pass-throughs.
- Assess the sustainability of margin recovery and reconcile non-GAAP Adjusted EBITDA adjustments to GAAP operating and cash-flow performance.
- Monitor working-capital requirements, planned capital expenditures, revolver utilization, covenant headroom and the floating-rate exposure.
- Confirm customer concentration and the extent to which awarded business converts into firm orders and realized sales.