Mayville Engineering Company, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. MEC is a U.S. vertically integrated manufacturer serving commercial vehicle, construction and access, powersports, agriculture, military and other markets. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $139.0 | $138.3 | $281.6 | $274.6 |
| Manufacturing margin | $16.1; 11.6% | $18.3; 13.2% | $32.5; 11.5% | $33.1; 12.1% |
| Operating income | $4.3 | $8.5 | $8.9 | $14.1 |
| Net income | $1.6 | $5.9 | $4.2 | $9.8 |
| Diluted EPS | $0.08 | $0.29 | $0.20 | $0.47 |
| Adjusted EBITDA and margin | $15.3; 11.0% | $18.2; 13.1% | $29.1; 10.3% | $32.9; 12.0% |
First-half operating cash flow was negative $5.9 million, versus positive $15.7 million a year earlier; investing cash use was $6.2 million, and capital expenditures were $6.3 million. Financing provided $102.0 million, primarily reflecting borrowing for the MSA acquisition funds placed in escrow. Cash at June 30 was $90.1 million, but the filing says these funds were held for the acquisition. Revolver borrowings were $177.9 million, up from $72.2 million at year-end 2022; stated availability was $72.1 million. The June 2023 credit agreement provides a $250 million revolver maturing in 2028. Its rate was 7.69% at quarter-end. Total assets were $528.6 million and shareholders’ equity was $225.4 million.
Changes versus prior comparable periods
- Q2 sales increased 0.5%; first-half sales increased 2.6%. Higher commercial vehicle, powersports and military volumes and pricing discipline were partly offset by customer supply-chain constraints and softer construction and small-agriculture demand.
- Profitability declined despite higher sales: Q2 net income fell 72.8%, and first-half net income fell 57.1%. Manufacturing margins contracted in both periods.
- Management cited unabsorbed fixed costs from new project launches, a one-time field replacement claim, higher employee healthcare costs and lower scrap income. First-half interest expense rose to $3.6 million from $1.3 million, reflecting higher rates and average borrowings.
- Operating cash flow worsened in part because of a $17.6 million deferred-compensation payment to a retired executive. Capital spending fell substantially from the prior year following completion of the Hazel Park facility investment.
Outlook, risks and unusual items
- Management expects 2023 capital expenditures of $15–$20 million, and says operating cash flow and available revolver borrowings are expected to fund operations, subject to macroeconomic conditions and covenant compliance. No specific revenue or earnings guidance is provided.
- On July 1, 2023, MEC acquired Mid-States Aluminum for stated consideration of $95.9 million, subject to adjustments; estimated net consideration of $90.0 million was financed under the credit agreement. Purchase accounting was not complete. MEC recorded $0.9 million of related transaction costs by June 30.
- Credit covenants require minimum interest coverage of 3.00x and maximum leverage of 3.50x. At June 30, coverage was 5.93x and leverage was 1.61x. A hypothetical 100-basis-point rate increase would add an estimated $0.6 million of interest expense based on quarter-end variable-rate debt.
- MEC is pursuing Peloton for alleged breach of a manufacturing supply agreement after Peloton cancelled the project. A claim remains pending; recovery and timing are uncertain, and any gain will be recognized only when realized or realizable.
- Other disclosed pressures include inflation, labor availability and costs, supply-chain challenges, customer forecast volatility, commodity prices, and customer concentration. Two customers each represented about 15.6% of Q2 sales.
- The $0.5 million field replacement claim and $0.2 million loss on extinguishment of debt affected Q2 results; adjusted EBITDA excludes specified items. The ESOP expense ended under a plan transition to a 401(k) match program beginning in 2023.
Investor verification points
- Confirm the final MSA purchase price, funding and post-acquisition debt, liquidity and covenant headroom.
- Assess whether margin pressure from project launches, healthcare costs and the field claim is temporary, and compare GAAP results with management’s adjusted EBITDA exclusions.
- Review the sustainability of cash conversion, including the deferred-compensation payment and working-capital movements.
- Monitor customer forecasts and concentration, floating-rate exposure, and the outcome of the Peloton litigation.
- Track capital spending against the $15–$20 million 2023 expectation and any changes in management’s outlook.