Mayville Engineering Company, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. MEC is a U.S. vertically integrated manufacturer of metal components and related services for commercial vehicles, construction and access equipment, powersports, agriculture, military and other markets. This unaudited report covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Financial amounts below are in millions of dollars except per-share data and ratios.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net sales | $142.6 | $136.3; up 4.7% |
| Manufacturing margin | $16.4; 11.5% of sales | $14.9; 10.9% |
| Income from operations | $4.7; 3.3% of sales | $5.6; 4.1% |
| Net income / diluted EPS | $2.6 / $0.12 | $3.8 / $0.19 |
| EBITDA / Adjusted EBITDA (non-GAAP) | $12.6 / $13.8 | $12.8 / $14.8 |
| Adjusted EBITDA margin (non-GAAP) | 9.7% | 10.8% |
| Cash from operations | $(6.0) | $(0.4) |
| Capital expenditures | $2.4 | $13.0 |
| Cash and revolving credit borrowings at March 31 | $0.1 cash; $81.6 borrowings | At December 31, 2022: $0.1 cash; $72.2 borrowings |
Total assets were $448.0 million and shareholders’ equity was $223.3 million at March 31, 2023. Current assets were $154.8 million versus current liabilities of $96.2 million. Revolver availability was $118.4 million, with a further $100 million accordion capacity subject to the agreement’s terms. The credit facility matures September 26, 2024. MEC reported leverage of 1.44x against a 3.25x maximum and interest coverage of 9.82x against a 3.00x minimum; it was in covenant compliance. The borrowing rate was 6.19% at quarter-end.
Material changes versus Q1 2022
- Sales rose $6.4 million, chiefly from commercial vehicle, powersports and military volume and continued pricing discipline; supply constraints and softer construction and access demand partly offset growth.
- Manufacturing margin increased, supported by volume and pricing, partly offset by lower scrap income. Despite this improvement, operating income fell 16.1% and net income fell 32.7%.
- Interest expense increased $1.1 million to $1.7 million, primarily due to higher rates. Selling, general and administrative expense rose 21.7%, including higher salaries, recruiting and professional fees related to preparation for SOX 404(b) compliance in 2024.
- Operating cash use increased to $6.0 million. Management cited lower accounts payable, while inventory declined as deferred customer orders shipped. Receivables increased to $74.2 million from $58.0 million at year-end.
- Capital spending fell as the Hazel Park, Michigan facility investment was completed at year-end 2022. The prior-year operating comparison also included a $1.2 million gain from cancellation of former fitness-customer-related purchase commitments; there was no comparable gain in Q1 2023.
- Beginning January 1, 2023, MEC replaced its prior profit-sharing approach with a 401(k) match of 50% on employee contributions up to 6%; Q1 employer-match expense was $0.9 million. ESOP expense was zero versus $0.5 million in Q1 2022.
Outlook, commentary and risks
- MEC expects 2023 capital expenditures of $20 million to $25 million. Management said operating cash flow and available credit are expected to fund operations in 2023 and beyond, while noting cash flows and access to capital are subject to uncertainty. No sales or earnings guidance was provided in the filing text.
- Management cited ongoing customer supply-chain constraints, inflationary pressure on wages, benefits and supplies, and stabilizing material costs. A hypothetical 100-basis-point interest-rate increase would add about $0.2 million in annual interest expense based on quarter-end variable-rate debt.
- MEC is pursuing Peloton Interactive over alleged breach and anticipatory repudiation of a supply agreement. The court allowed the contract claim to proceed and dismissed an alternative claim. The claimed damages are substantial, but recovery amount and timing are uncertain; no contingent gain has been recognized.
- Other disclosed risks include customer forecast and end-market volatility, labor availability and cost, raw-material prices, production efficiency, customer concentration, capital needs and litigation. Three customers each accounted for at least 10% of Q1 sales (15.6%, 12.1% and 15.3%). MEC reported no material change to the risk factors in its 2022 Form 10-K.
- Management reported effective disclosure controls as of quarter-end and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher sales volumes and improved manufacturing margins can be sustained amid customer supply constraints and softer construction and access demand.
- Whether operating cash flow improves, particularly as receivables rose and revolving borrowings increased by $9.3 million from year-end.
- How floating-rate debt costs, the 2024 credit-facility maturity and planned 2023 capital spending affect liquidity and covenant headroom.
- The status, potential economics and timing of the Peloton litigation; any recovery remains contingent and unrecognized.
- Whether forecast capital expenditures and management’s liquidity expectations remain achievable as macroeconomic, labor and customer-market conditions evolve.