Mayville Engineering Company, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
MEC is a U.S. contract manufacturer of fabricated metal components, tooling, coatings and assemblies for OEMs in commercial vehicles, construction, agriculture, powersports, military and other markets. It reported one operating segment. The 2019 results include a full year of operations from Defiance Metal Products (DMP), acquired in December 2018 for approximately $117.1 million, net of cash acquired.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $519.7 | $354.5 |
| Manufacturing margin | $58.7; 11.3% | $50.6; 14.3% |
| Operating income (loss) | ($2.0) | $22.2 |
| Net income (loss) | ($4.8) | $17.9 |
| Basic and diluted EPS | ($0.27) | $1.29 |
| EBITDA / margin | $30.9 / 5.9% | $41.8 / 11.8% |
| Adjusted EBITDA / margin | $53.1 / 10.2% | $43.7 / 12.3% |
| Operating cash flow | $33.4 | $36.7 |
| Capital expenditures | $25.8 | $17.9 |
Revenue rose 46.6%, largely from DMP, which contributed approximately $193.4 million in 2019 net sales. MEC reported a GAAP net loss despite higher adjusted EBITDA; adjusted EBITDA is a non-GAAP measure and includes adjustments for IPO and acquisition-related items, among others. Cash used in investing was $28.1 million, compared with $132.6 million in 2018, when DMP was acquired. Cash used in financing was $8.4 million; 2019 included $101.8 million of net IPO proceeds and debt repayments.
At December 31, 2019, cash was $0.001 million, total assets were $363.6 million, total liabilities were $162.7 million, and shareholders’ equity was $200.9 million. Revolver borrowings were $72.6 million, with $127.4 million available under a $200 million revolving facility. The facility also has a $100 million accordion feature. The company reported covenant compliance, a 1.39-to-1 consolidated leverage ratio against a maximum of 3.25-to-1, and interest coverage of 7.42-to-1 against a minimum of 3.00-to-1. Management stated that operating cash flow and available borrowings were expected to fund 2020 operations.
Fourth-quarter results and changes versus comparable periods
Q4 2019 net sales were $102.3 million, up from $91.4 million in Q4 2018. Manufacturing margin was $4.0 million (about 3.9% of sales), versus $10.4 million (about 11.4%) a year earlier. Operating loss was $4.6 million, net loss was $1.7 million, and loss per share was $0.08; Q4 2018 reported operating income of $1.6 million, net income of $0.6 million and EPS of $0.04.
For the full year, sales growth did not translate into stronger GAAP profitability: cost of sales rose faster than revenue, and manufacturing margin declined as a share of sales. Management attributed weaker late-year manufacturing performance to market declines and customer destocking, labor disruptions at several commercial-vehicle customers, lower production volumes and labor absorption, facility and shift consolidation costs, higher healthcare costs, and fewer working days in Q4.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management cited automation, operational improvements, organic growth and opportunistic acquisitions as priorities, while stating that cash and available credit were sufficient for anticipated 2020 operating needs.
- Significant one-time costs: 2019 included approximately $10.2 million of IPO-related deferred compensation expense and $9.9 million of IPO-related long-term incentive plan expense, as well as approximately $5.7 million of IPO and DMP acquisition expenses. The long-term incentive plan was terminated in connection with the IPO.
- Acquisition earnout: DMP did not meet the earnout threshold; the contingent consideration liability was reduced to zero, generating a $6.1 million revaluation gain in 2019.
- Demand and concentration: Late-2019 demand weakness and customer destocking particularly affected commercial vehicles, agriculture and construction. John Deere, AB Volvo and PACCAR represented approximately 15%, 14% and 13% of annual sales, respectively; the top ten customers represented 81%.
- Other key risks: Cyclical OEM demand, limited firm long-term customer commitments, customer concentration, labor availability, manufacturing utilization, acquisition integration, raw-material and tariff exposure, floating interest rates, and environmental, product-liability and cybersecurity risks. A 100-basis-point rise in borrowing rates was estimated to increase annual interest expense by approximately $0.3 million.
- Controls and reporting: Management identified a material weakness involving inconsistent documentation of accounting policies and insufficient formal controls over complex and unusual transactions. Disclosure controls and procedures were deemed ineffective at year-end. The auditor gave an unqualified opinion on the financial statements but did not audit internal control effectiveness.
- Shareholder returns: MEC said it did not anticipate cash dividends in the foreseeable future; its credit agreement restricts dividends. The filing reports no material litigation proceedings pending.
Important facts for investors to verify
- Whether the late-2019 demand downturn and destocking persisted, and how customer production schedules affected subsequent sales and factory utilization.
- Whether manufacturing margins recovered after Q4 and whether automation and facility consolidation delivered the expected savings.
- How much of FY 2019 adjusted EBITDA reflects recurring operations versus IPO, acquisition and other adjustments.
- Progress in remediating the material weakness and the implications of the ineffective disclosure controls.
- Liquidity and debt trends, including revolver availability, covenant headroom, floating-rate exposure and planned capital spending or acquisitions.
- Customer concentration and DMP integration performance, including the sustainability of acquired sales and margins.