Mayville Engineering Company, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. MEC is a U.S. metal-components manufacturer serving commercial vehicle, construction and access equipment, agriculture, powersports, military and other markets. Figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $91.1 | $128.5 | $262.3 | $417.4 |
| Manufacturing margin | $9.7 (10.7%) | $14.6 (11.3%) | $20.4 (7.8%) | $54.7 (13.1%) |
| Operating income (loss) | $0.3 | $13.2 | $(7.1) | $2.7 |
| Net income (loss) | $(1.1) | $9.7 | $(8.1) | $(3.1) |
| Diluted EPS | $(0.05) | $0.49 | $(0.41) | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $9.8 (10.8%) | $14.2 (11.0%) | $23.5 (9.0%) | $49.2 (11.8%) |
For the nine months, operating cash flow was $19.3 versus $16.4 in 2019; investing cash use was $3.4 versus $26.8; and financing cash use was $15.7 versus $ inflows of $7.3. Cash at September 30 was $0.11. Capital expenditures were $5.4 for the nine months.
At September 30, revolving credit borrowings were $60.0, down from $72.6 at year-end 2019; capital lease obligations were $2.8. The $200.0 revolving facility had approximately $140.0 available, plus a $100.0 accordion feature, subject to terms and covenants. The revolving facility matures in September 2024; its interest rate was 2.50%. Total leverage was 2.16x against a temporary 4.25x maximum, and interest coverage was 7.44x against a 3.00x minimum. The company reported covenant compliance.
Changes and drivers
- Q3 sales fell 29.1% year over year; nine-month sales fell 37.2%. Management attributed the declines primarily to COVID-related customer shutdowns, lower demand and continued customer destocking, especially in commercial vehicles, agriculture, and construction and access equipment.
- Nine-month manufacturing margin declined 530 basis points. Lower volumes caused under-absorption of manufacturing costs; the period also included $2.5 of Greenwood closure and restructuring costs and approximately $0.8 of COVID-related inventory and healthcare accruals.
- Nine-month net loss widened to $8.1. Q3 comparison was also affected by a $9.6 prior-year contingent-consideration revaluation benefit related to the DMP acquisition; that benefit did not recur.
- Interest expense declined to $2.1 for the nine months from $5.8, reflecting lower borrowings and interest rates. The company generated operating cash despite the net loss, aided in part by working-capital movements, including inventory reductions.
Outlook, risks and unusual items
- Management gave no specific revenue or earnings forecast. It expected 2020 capital expenditures of approximately $10–$13, with spending 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, while noting uncertainty around future cash flows and capital access.
- All MEC facilities were open by the end of Q3, but production remained below pre-pandemic levels. Management said customer relationships and manufacturing programs remained intact and expected manufacturing margins to improve beyond historical percentages when volumes return to historical levels.
- The Greenwood, South Carolina facility closure was completed in Q3; customer programs were transferred to five other facilities. Total restructuring costs were $2.5 for the first nine months, with an immaterial amount of additional costs expected in Q4. Assets held for sale were recorded at $3.6. Management cited prospective savings in depreciation, maintenance and facility costs, while noting most personnel costs would shift to other locations.
- A June 2020 credit amendment provided temporary leverage-covenant relief through 2021 in exchange for higher pricing and restrictions on capital expenditures, acquisitions, dividends and share repurchases. The covenant ceiling is scheduled to decline to 3.25x by Q4 2021. Floating-rate debt creates interest-rate exposure; a hypothetical 100-basis-point increase would add about $0.2 of annual interest expense at the reported debt level.
- COVID-19, customer forecast volatility, customer concentration, commodity prices, supplier and manufacturing disruptions, and access to capital remain key risks. MEC reported a material weakness in internal controls over financial reporting involving documentation of accounting policies and controls over complex or unusual transactions; disclosure controls were therefore deemed ineffective. Remediation was ongoing.
- No material litigation was reported. The filing disclosed post-quarter change-in-control severance agreements for four executives, with enhanced severance and benefits under specified circumstances.
Important facts for investors to verify
- Whether customer volumes and destocking improve, and whether margin recovery follows as management anticipates.
- Whether the company remains within credit covenants as temporary relief tightens, and how much revolver availability remains usable under the agreement.
- Whether forecast capital spending, restructuring savings and cash generation are achieved without weakening operating capacity or liquidity.
- Progress in remediating the material weakness and the status of management’s required internal-control evaluation for the 2020 Form 10-K.
- How COVID-related accruals, major-customer exposure and floating-rate debt affect subsequent results and cash flows.