Mayville Engineering Company, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars; financial figures below are rounded to millions unless otherwise noted. MEC is a U.S. metal-components manufacturer serving commercial vehicle, construction, powersports, agricultural, military, fitness, and other markets.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $120.2m | $62.6m | $232.8m | $171.2m |
| Manufacturing margin | $16.3m; 13.5% | $(1.2)m; (1.8%) | $31.1m; 13.3% | $10.7m; 6.2% |
| Operating income (loss) | $4.8m | $(8.9)m | $8.9m | $(7.3)m |
| Net income (loss) | $3.3m; diluted EPS $0.16 | $(7.0)m; diluted EPS $(0.35) | $5.8m; diluted EPS $0.28 | $(7.0)m; diluted EPS $(0.35) |
| Adjusted EBITDA and margin | $14.0m; 11.7% | $2.3m; 3.6% | $27.0m; 11.6% | $13.7m; 8.0% |
| Operating cash flow | Not separately provided for Q2 | $18.2m | $3.1m |
- First-half investing cash outflow was $16.6m, including $17.0m of property, plant and equipment purchases; financing cash outflow was $1.7m. Cash ended June at $0.1m.
- At June 30, current assets were $114.9m and current liabilities $70.8m. Revolver borrowings were $43.9m; capital lease obligations totaled $2.4m. The company reported approximately $156.1m of revolver availability, plus a $100m accordion subject to agreement terms.
- Debt interest rate was 2.25%. The company reported a 1.00x total leverage ratio against a 3.75x covenant ceiling for the quarter, and 15.24x interest coverage against a 3.00x minimum; it was in covenant compliance.
Material changes versus prior periods
- Q2 sales rose 92.1% year over year and first-half sales increased 36.0%. Management attributed the increases to recovering market demand and the prior-year comparison being affected by COVID-related customer shutdowns and, in the first half, destocking.
- Margins and earnings recovered substantially from the prior-year loss periods. Management cited higher volume, better manufacturing overhead absorption from technology and automation investments, lower overhead after the Greenwood facility closure, and a $0.4m reversal of certain COVID-related inventory and healthcare reserves. The prior-year periods included $1.8m of Greenwood restructuring costs.
- Margin improvement was partly offset by a lag in passing contractual raw-material price increases through to customers. Q2 also included approximately $0.1m of launch costs for the new Hazel Park facility.
- First-half operating cash flow improved, while capital spending increased significantly from $3.7m to $17.0m. Receivables and inventory grew with the recovery in production and sales.
Outlook, commentary, and risks
- Management expects 2021 capital expenditures of approximately $55m–$65m, including $35m–$45m of additional investment associated with a new strategic customer. The credit agreement was amended to permit up to $70m of 2021 capital expenditures.
- Management said operating cash flow and available revolver borrowings were expected to fund 2021 operations and planned spending, and expected covenant compliance through 2021 and the foreseeable future. It cautioned that future cash flows and capital access are uncertain.
- COVID-19 impacts remain uncertain. Management cited microchip shortages affecting commercial vehicle production and port issues affecting multiple end markets. Further risks include supply availability, raw-material price volatility, customer forecasts, labor recruitment and retention, customer concentration, and variable-rate debt exposure.
- A hypothetical 100-basis-point interest-rate increase would have added approximately $0.1m of interest expense based on June 30 variable-rate debt. MEC reported no commodity hedging instruments.
- The company had an $11.8m federal net operating loss carryforward, which management said does not expire, and estimated a long-term effective tax rate of approximately 26%.
- On July 1, 2021, MEC agreed to sell its closed Greenwood, South Carolina facility for $5.3m before fees, subject to a due-diligence period. Management reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether volume recovery and improved manufacturing margins can persist as COVID-related supply constraints, customer schedules, and raw-material pass-through timing evolve.
- Execution, timing, funding, and expected returns of the $55m–$65m 2021 capital program and the new-customer/Hazel Park ramp-up.
- Working-capital needs and cash conversion: receivables and inventories increased, while reported cash remained very low despite positive first-half operating cash flow.
- Debt availability, covenant headroom, floating-rate exposure, and the terms and restrictions of the amended credit agreement.
- Customer concentration: one customer represented 16.7% of Q2 sales and another 15.2%; assess the effect that changes in major-customer demand could have.
- Completion and proceeds of the proposed Greenwood facility sale, which remained contingent on due diligence as of the filing.