Mayville Engineering Company, Inc. — 2020 Form 10-K
Business context and reporting period. MEC is a U.S. value-added metal fabricator and manufacturer serving commercial vehicles, construction and access equipment, powersports, agriculture, military and other markets. This annual report covers the fiscal year ended December 31, 2020; quarterly figures below are for Q4. Unless stated otherwise, dollar amounts are in millions.
Financial performance and condition
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $357.6 | $519.7 |
| Manufacturing margin | $31.5; 8.8% of sales | $58.7; 11.3% of sales |
| Operating loss | $(6.5) | $(2.0) |
| Net loss | $(7.1); $(0.36) per share | $(4.8); $(0.27) per share |
| EBITDA | $25.6; 7.2% margin | $30.9; 5.9% margin |
| Adjusted EBITDA | $32.8; 9.2% margin | $54.7; 10.5% margin |
| Cash from operating activities | $36.5 | $33.4 |
| Capital expenditures | $7.8 | $25.8 |
Q4 2020 sales were $95.3 million, compared with $102.3 million in Q4 2019. MEC reported Q4 net income of $1.0 million, versus a $1.7 million net loss in Q4 2019.
At year-end, cash was $0.1 million and current assets were $89.2 million against current liabilities of $52.7 million. Revolver borrowings were $45.3 million, down from $72.6 million a year earlier; the company reported $154.7 million of revolver availability. The facility has a $200 million revolving commitment and an additional $100 million accordion, subject to terms and covenants. Interest on outstanding borrowings was 2.50% at year-end. MEC reported covenant compliance, a 1.46x consolidated leverage ratio against a temporarily relaxed 4.25x ceiling, and 9.07x interest coverage against a 3.00x minimum.
Material changes and management commentary
- Sales fell 31.2% year over year, reflecting COVID-19-related customer shutdowns, lower demand and customer destocking, particularly in commercial vehicles, agriculture, and construction and access equipment. Customer facilities were shut for an average of five to six weeks during Q2; MEC temporarily halted production at some facilities. Volumes remained below pre-pandemic levels through year-end, though all facilities were open and existing customer relationships and programs remained intact.
- Manufacturing margin declined to 8.8% from 11.3%, mainly because lower volumes left fixed manufacturing costs under-absorbed. Adjusted EBITDA declined 39.9% to $32.8 million, and its margin contracted to 9.2% from 10.5%.
- Operating cash flow increased to $36.5 million, supported in part by working-capital movements. Lower capital spending reflected a shift from investing in automation and technology in 2019 to leveraging those investments and preserving cash in 2020. Operating cash was used to reduce revolving debt.
- MEC closed its Greenwood, South Carolina facility and transferred production to five other facilities, retaining customer programs. The closure generated $2.5 million of restructuring costs in 2020; $3.6 million of facility assets were classified as held for sale at year-end.
- Management said cost reductions and process optimization should support margin improvement beyond historical percentages when volumes return to historical levels. No specific revenue or earnings guidance was provided.
Outlook, risks and unusual items
- Management stated that operating cash flow and available borrowings were expected to be sufficient to fund 2021 operations, based on then-available assumptions about COVID-19, and expected covenant compliance through 2021 and the foreseeable future. These expectations are subject to substantial uncertainty.
- COVID-19 continues to pose risks to demand, customer operations, supply chains, raw-material availability, collections and liquidity. Other principal risks include customer concentration, cyclical end markets, variable customer forecasts, labor availability, production efficiency, raw-material and energy costs, competition, and reliance on suppliers.
- The four largest customers represented approximately 11%–15% each of 2020 sales; the top ten represented 79%. Contracts generally do not guarantee long-term purchase volumes, and customers may change orders or cancel awarded business.
- MEC recorded approximately $0.8 million of COVID-19-specific inventory-obsolescence and healthcare charges within cost of sales. Goodwill was $71.5 million; interim and annual impairment assessments indicated no impairment, with interim estimated fair value exceeding carrying value by more than 50%.
- The June 2020 credit-agreement amendment provided temporary covenant relief through December 2021, in exchange for increased pricing and restrictions, including on capital expenditures, acquisitions, dividends and share repurchases. The company reported no cash dividends and does not anticipate paying them in the foreseeable future.
- Management reported that previously identified material weaknesses in internal control over financial reporting had been remediated by December 31, 2020, and concluded controls were effective. The independent auditor issued an unmodified opinion on the financial statements but did not attest to internal controls, under the company’s emerging-growth-company exemption.
Important facts for investors to verify
- Whether customer demand and production volumes recovered after year-end, and whether the expected margin benefit from cost actions materialized.
- Whether operating cash flow, working-capital trends and revolver availability remain adequate given the very low year-end cash balance and ongoing pandemic-related uncertainty.
- How leverage and covenant headroom evolve as temporary covenant relief steps down, and the effect of floating interest rates and credit-agreement restrictions.
- Whether the Greenwood transition delivers sustainable savings without disrupting customer programs, and whether the held-for-sale assets are sold as expected.
- The assumptions supporting goodwill valuation and the estimates behind COVID-19-related reserves, customer receivable allowances and other significant estimates.