Mayville Engineering Company, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. MEC is a U.S. manufacturer of engineered metal components and related services for commercial vehicle, construction, powersports, agricultural, military, and other markets. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $138.3 | $120.2 | $274.6 | $232.8 |
| Manufacturing margin | $18.3; 13.2% | $16.3; 13.5% | $33.1; 12.1% | $31.1; 13.3% |
| Operating income | $8.5 | $4.8 | $14.1 | $8.9 |
| Net income | $5.9 | $3.3 | $9.8 | $5.8 |
| Diluted EPS | $0.29 | $0.16 | $0.47 | $0.28 |
| Adjusted EBITDA and margin | $18.2; 13.1% | $14.0; 11.7% | $32.9; 12.0% | $27.0; 11.6% |
Sales rose 15.1% in Q2 and 17.9% year to date, with management attributing growth to contractual material-price pass-throughs, commercial pricing increases, and improved volumes. Higher sales and operating income did not translate into higher manufacturing-margin percentages: the six-month margin declined 1.2 percentage points, reflecting pass-through pricing that increased sales without increasing margin dollars, plus Hazel Park transition costs.
For the first half, operating cash flow was $15.7, down from $18.2. Investing cash outflow was $21.1, including $26.4 of capital expenditures; financing provided $5.4. Cash ended at $0.1. At June 30, current assets were $155.3 and current liabilities $110.5.
Debt, liquidity, and balance sheet
- Revolver borrowings were $76.1, up from $67.6 at December 31, 2021. The $200 million revolving facility matures September 2024; reported availability was $123.9, plus a $100 million accordion subject to its terms.
- The borrowing rate was 2.06%. MEC reported a 1.52x total leverage ratio versus a 3.25x maximum and 18.34x interest coverage versus a 3.00x minimum; it was compliant with financial covenants.
- Operating and finance lease liabilities totaled $39.4 following adoption of the lease accounting standard in 2022. This adoption affects balance-sheet comparability with prior periods.
- Total assets were $446.3 versus $379.5 at year-end, while shareholders’ equity was $210.5 versus $198.3.
Material changes and unusual items
- Net income increased 80.1% in Q2 and 67.1% for the first half. Interest expense increased 51.8% in Q2 and 28.6% year to date, primarily due to higher average debt.
- Hazel Park transition costs related to a former fitness customer were $1.9 in Q2 and $3.8 for the first half. That customer reported no forecast demand for the affected products through the agreement’s March 2026 end date. MEC had recorded $16.2 of impairment and contract losses in Q4 2021; in 2022 it reversed $0.9 in Q2 and $2.1 year to date after canceling purchase commitments. MEC also sold related machinery, recording a $0.5 gain in Q2, and classified $1.3 of property and equipment as held for sale at June 30.
- First-half capital expenditures increased to $26.4 from $17.0. MEC repurchased 200,000 shares for $2.3 in the first half; no shares were repurchased in Q2.
- Customer concentration remains significant: two customers each represented at least 10% of Q2 sales, at 18.3% and 16.1%.
Outlook, risks, and contingencies
- Management expected 2022 capital expenditures of $55–$65 million, including continued investments in technology, automation, and Hazel Park. It stated operating cash flow and available borrowing capacity should fund operations and planned needs, and expected covenant compliance through 2022 and the foreseeable future; these are forward-looking expectations, not guarantees.
- Management cited continuing COVID-related customer supply-chain constraints, labor and material availability issues, and inflation in wages, benefits, materials, and manufacturing supplies. It said the effects and future financial impact remain uncertain.
- Other highlighted exposures include customer forecast volatility and concentration, competition, recruiting and retaining skilled workers, raw-material price and availability fluctuations, manufacturing execution, and floating-rate debt. A hypothetical 100-basis-point rate increase would add approximately $0.4 million of annualized interest expense based on debt at June 30; MEC reported no commodity hedges.
- The filing reports no material litigation and no material changes to previously disclosed risk factors. Management said reasonably possible losses from ordinary-course claims are not expected to materially affect the financial statements.
Most important facts for investors to verify
- Whether volume and pricing gains can sustain revenue growth while restoring manufacturing-margin percentages, given pass-through dilution and Hazel Park transition costs.
- Whether customer production schedules, especially those of major customers, support forecasts and receivables collection.
- Whether the $55–$65 million capital program delivers expected benefits without weakening cash generation or increasing revolver dependence.
- The ongoing costs and remaining asset, contract, and disposition exposure associated with the former fitness customer and Hazel Park transition.
- Available revolver capacity and covenant headroom as borrowing rates, working-capital needs, and lease obligations evolve.