Mayville Engineering Company, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. MEC is a U.S. metal components manufacturer serving commercial vehicle, construction, powersports, agriculture, military and other markets. Financial figures below are in millions of dollars unless otherwise stated.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $62.6 | $145.1 | $171.2 | $288.9 |
| Manufacturing margin | $(1.2); -1.8% | $20.5; 14.1% | $10.7; 6.2% | $40.1; 13.9% |
| Operating loss | $(8.9) | $(16.7) | $(7.3) | $(10.6) |
| Net loss | $(7.0) | $(15.3) | $(7.0) | $(12.8) |
| Adjusted EBITDA (non-GAAP) | $2.3; 3.6% | $18.2; 12.5% | $13.7; 8.0% | $35.0; 12.1% |
- Q2 sales fell 56.9% year over year; first-half sales fell 40.7%. COVID-19-related customer shutdowns, lower demand and customer destocking drove the declines.
- Q2 manufacturing margin turned negative as lower volume left manufacturing costs under-absorbed; the quarter also included $1.8 million of Greenwood closure and restructuring charges. First-half manufacturing margin declined 7.7 percentage points.
- Net loss was smaller than in the comparable 2019 periods, but MEC attributed the improvement largely to prior-year IPO-related compensation and other one-time costs. Adjusted EBITDA declined substantially in both comparisons.
- Six-month operating cash flow was $3.1 million, down from $6.5 million. Investing used $1.9 million, compared with $19.0 million, reflecting reduced capital spending and proceeds from equipment sales. Cash increased by $0.1 million to $0.12 million.
- At June 30, cash was $0.12 million, current assets $86.4 million and current liabilities $30.8 million. Revolver borrowings were $74.5 million; capital lease obligations totaled about $3.0 million. Shareholders’ equity was $199.0 million.
Material changes, outlook and risks
- Management said customer facilities were shut for an average of five to six weeks during Q2; MEC temporarily halted production at some facilities. Production remained below pre-pandemic levels at quarter-end. Customer relationships and manufacturing programs remained intact, and end markets had begun to stabilize.
- The June 30 credit amendment provides temporary leverage-covenant relief through December 2021, with tighter pricing and restrictions on capital expenditures, acquisitions, dividends and share repurchases. At quarter-end, leverage was 2.35x against a temporary 4.25x maximum; interest coverage was 7.38x against a 3.00x minimum. MEC reported covenant compliance and $125.5 million of revolver availability, plus a $100 million accordion feature.
- Management expected 2020 capital expenditures of $10–13 million, nearer the low end if COVID-19 impacts worsened. Management said operating cash flow and available borrowings were expected to fund 2020 operations based on current estimates, and expected covenant compliance through 2020 and beyond. No revenue or earnings guidance was provided.
- MEC closed its Greenwood, South Carolina facility and is transferring production to five other facilities. It recorded $1.8 million of related Q2 charges and expected approximately $0.7 million of additional costs in Q3. Management estimated potential annual reductions in depreciation and facility-maintenance costs, while noting that personnel costs would be largely offset by costs at receiving facilities. The facility was expected to be listed for sale after closure; management estimated its fair value exceeded its $3.3 million carrying value.
- Key risks include uncertain COVID-19 effects, customer demand and forecasts, production utilization, customer concentration, floating-rate debt and commodity costs. A hypothetical 100-basis-point rate increase would add an estimated $0.2 million of annual interest expense based on quarter-end variable-rate debt.
- Disclosure controls were judged ineffective because a material weakness remained: accounting policies and procedures were not consistently documented and controls over complex or unusual transactions were not sufficiently formalized. Management was pursuing remediation. The filing reported no material litigation proceedings.
Important facts for investors to verify
- Whether customer volumes recovered after the quarter and how demand and destocking evolved across MEC’s end markets.
- Whether manufacturing margins and adjusted EBITDA improve as volumes return, and how much Greenwood-related savings are realized after transferred production costs.
- Liquidity, borrowing availability and covenant headroom under the amended credit agreement, including its higher pricing and restrictions.
- Actual 2020 capital expenditures and cash flow, given minimal cash on hand and dependence on the revolver.
- Progress in remediating the material weakness and the implications of the planned facility sale and remaining restructuring costs.