Mayville Engineering Company, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. MEC is a U.S. metal-components manufacturer serving commercial vehicle, construction, powersports, agriculture, military, fitness and other markets. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $109.0 | $91.1 | $341.9 | $262.3 |
| Manufacturing margin | $10.9 (10.0%) | $9.7 (10.7%) | $42.0 (12.3%) | $20.4 (7.8%) |
| Operating income (loss) | $0.9 | $0.3 | $9.7 | $(7.1) |
| Net income (loss) | $0.3 | $(1.1) | $6.1 | $(8.1) |
| Diluted EPS | $0.01 | $(0.05) | $0.29 | $(0.41) |
| Adjusted EBITDA margin | 9.2% | 10.8% | 10.8% | 9.0% |
Q3 sales grew 19.7%, including $8.4 million of raw-material pass-throughs and $9.3 million attributed to improved demand versus pandemic-related shutdowns in the prior-year quarter. Nine-month sales rose 30.3%, reflecting higher volumes and $13.1 million of pass-throughs. Q3 manufacturing margin percentage declined year over year, while the nine-month margin improved substantially.
Q3 results included a $1.374 million gain on sale of the Greenwood facility, classified in cost of sales. Offsetting margin pressures included inflation in wages, benefits, materials and supplies, raw-material pass-throughs, and approximately $0.8 million of Hazel Park launch costs. For the nine months, Hazel Park launch costs were approximately $0.9 million. The prior-year nine-month period included $2.524 million of Greenwood closure and restructuring costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $12.8 million, down from $19.3 million. Working-capital uses included $16.8 million in receivables and $21.0 million in inventory; accounts payable provided $13.8 million.
- Investing cash outflow was $21.2 million, including $26.6 million of capital expenditures, partly offset by $5.3 million of sale proceeds from Greenwood. Financing provided $8.5 million; cash increased by just $6,000 to $127,000.
- At September 30, revolving-credit borrowings were $54.7 million, up from $45.3 million at year-end; capital-lease obligations totaled $2.2 million. The revolver matures in September 2024 and carried a 2.25% interest rate. Reported availability was approximately $145.3 million, plus an accordion feature for up to $100 million subject to conditions.
- Current assets were $128.4 million and current liabilities $72.4 million. The company reported a 1.23x consolidated leverage ratio and 16.51x interest coverage ratio, within applicable covenants, and stated it expected covenant compliance through 2021 and the foreseeable future.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. MEC expected 2021 capital expenditures of approximately $52–57 million; its new strategic customer was expected to require $35–40 million of additional capital investment. The credit agreement permitted up to $70 million of 2021 capital expenditures.
- Management cited COVID-19-related supply-chain disruption, commercial-vehicle microchip shortages, port issues, labor and material availability, and inflation. The impact and timing remained uncertain. Customer production schedules and forecasts can change materially.
- Other risks include customer concentration, competition, skilled-labor retention, raw-material price and availability volatility, manufacturing execution, and floating-rate debt. A hypothetical 100-basis-point rate increase would add about $0.1 million of interest expense based on period-end variable debt. MEC had no commodity hedges.
- Five customers each represented at least 10% of sales in at least one reported period; Customer A was 18.0% of Q3 sales and 15.3% of receivables at September 30. The filing says no material litigation was pending and identifies no material change to previously disclosed risk factors.
- On October 19, 2021, the board approved a new share-repurchase program of up to $25 million through 2023, replacing the prior program. MEC repurchased 47,000 shares for $0.653 million during Q3.
Important facts for investors to verify
- Whether reported sales growth converts into sustainable margins after pass-through pricing, inflation and Hazel Park startup costs.
- Customer production forecasts, supply-chain constraints and the ramp-up and returns on the Hazel Park investment.
- Working-capital needs and cash generation relative to the elevated capital-spending plan and debt balances.
- Revolver availability, covenant terms and compliance as temporary covenant relief approaches its scheduled end.
- Customer concentration and the terms, timing and actual use of the new share-repurchase authorization.