mec(MEC) - 2022 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This section outlines the inherent risks and uncertainties associated with forward-looking statements, based on current management beliefs - The report contains forward-looking statements that involve risks and uncertainties, identified by words such as "seek," "anticipate," "plan," "estimate," "expect," "may," "will," "project," "predict," "potential," "targeting," "intend," "could," "might," "should," "believe" and similar expressions[7] - Important factors that could cause actual results to differ materially include the negative impacts of the COVID-19 pandemic on business, financial condition, cash flows, results of operations, and supply chain, including inflationary pressures, along with other industry, production, competition, and political risks[8][9] - The Company undertakes no obligation to update or revise any forward-looking statements after their date, except as required by federal securities laws[10] PART I. Financial Information This part presents the Company's unaudited condensed consolidated financial statements and management's analysis of financial condition Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, cash flow, and equity Condensed Consolidated Balance Sheets This section provides a snapshot of the Company's financial position, detailing assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheets (March 31, 2022 vs. December 31, 2021) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------- | :------------- | :---------------- | | Total current assets | $153,203 | $132,566 | | Total assets | $443,442 | $379,473 | | Total current liabilities | $88,786 | $77,372 | | Total liabilities | $240,358 | $181,202 | | Total shareholders' equity | $203,084 | $198,271 | - Total assets increased by $63,969 thousand (16.9%) from December 31, 2021, to March 31, 2022, primarily driven by increases in receivables, inventories, and operating lease assets[14] - Total liabilities increased by $59,156 thousand (32.7%), largely due to increases in bank revolving credit notes and operating lease obligations[14] Condensed Consolidated Statements of Comprehensive Income This section presents the Company's financial performance, detailing net sales, cost of sales, operating income, and net income Condensed Consolidated Statements of Comprehensive Income (Three Months Ended March 31) | Metric (in thousands, except per share) | 2022 | 2021 | Change | % Change | | :------------------------------------ | :------- | :------- | :------- | :------- | | Net sales | $136,252 | $112,620 | $23,632 | 21.0% | | Cost of sales | $121,370 | $97,844 | $23,526 | 24.0% | | Income from operations | $5,564 | $4,066 | $1,498 | 36.8% | | Net income and comprehensive income | $3,822 | $2,545 | $1,277 | 50.2% | | Basic EPS | $0.19 | $0.13 | $0.06 | 46.2% | | Diluted EPS | $0.19 | $0.12 | $0.07 | 58.3% | - Net sales increased by 21.0% year-over-year, while cost of sales increased by 24.0%, leading to a slight increase in manufacturing margins[16] - A gain of $1,183 thousand was recognized from the impairment of long-lived assets and gain on contracts in Q1 2022, compared to no such item in Q1 2021[16] Condensed Consolidated Statements of Cash Flows This section details cash inflows and outflows from operating, investing, and financing activities over a specific period Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31) | Cash Flow Activity (in thousands) | 2022 | 2021 | Change | % Change | | :---------------------------------------- | :-------- | :-------- | :-------- | :------- | | Net cash provided by (used in) operating activities | $(425) | $4,194 | $(4,619) | (110.1)% | | Net cash used in investing activities | $(12,620) | $(5,255) | $(7,365) | (140.2)% | | Net cash provided by financing activities | $13,047 | $1,064 | $11,983 | 1126.2% | | Net increase in cash and cash equivalents | $2 | $3 | $(1) | (33.3)% | - Operating activities shifted from providing $4,194 thousand in cash in 2021 to using $425 thousand in 2022, a decrease of $4,619 thousand[19] - Cash used in investing activities more than doubled, increasing by $7,365 thousand, primarily due to higher purchases of property, plant and equipment[19] - Financing activities provided significantly more cash, increasing by $11,983 thousand, driven by higher borrowings on bank revolving credit notes and treasury stock repurchases[19] Condensed Consolidated Statements of Shareholders' Equity This section outlines changes in the Company's equity, including paid-in capital, treasury shares, and retained earnings Condensed Consolidated Statements of Shareholders' Equity (March 31, 2022 vs. December 31, 2021) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------- | :------------- | :---------------- | | Additional Paid-in-Capital | $198,443 | $197,186 | | Treasury Shares | $(6,728) | $(6,462) | | Retained Earnings | $11,369 | $7,547 | | Total Shareholders' Equity | $203,084 | $198,271 | - Total shareholders' equity increased by $4,813 thousand, primarily due to net income of $3,822 thousand and stock-based compensation of $1,257 thousand, partially offset by treasury stock purchases of $2,323 thousand[21] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements Note 1. Basis of presentation This note describes the accounting principles and methods used in preparing the interim financial statements - The interim unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC instructions, reflecting all necessary adjustments for fair presentation[23] - MEC is a leading U.S.-based value-added manufacturing partner providing prototyping, tooling, fabrication, coating, assembly, and aftermarket components to diverse end markets, operating 19 facilities across several states[25] - The Company adopted ASC 842, Leases, for annual reporting as of January 1, 2022, using the effective date approach, and early adopted interim reporting guidance for the three months ended March 31, 2022[29] Note 2. Select balance sheet data This note provides detailed breakdowns and explanations for specific line items within the balance sheet Inventories (March 31, 2022 vs. December 31, 2021) | Inventory Type (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Finished goods and purchased parts | $42,448 | $41,041 | | Raw materials | $18,720 | $18,905 | | Work-in-process | $11,132 | $10,211 | | Total | $72,300 | $70,157 | - An inventory impairment of $700 thousand was recorded at December 31, 2021, due to uncertainty in demand from a new fitness customer, with no additional impairments or reversals as of March 31, 2022[35][36] Property, Plant and Equipment, Net (March 31, 2022 vs. December 31, 2021) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Total property, plant and equipment, net | $124,363 | $120,746 | - A $1,183 thousand gain was recognized in Q1 2022 from the cancellation of purchase commitments for property, plant and equipment relating to a new fitness customer, reversing a prior impairment[39] Intangible Assets, Net (March 31, 2022 vs. December 31, 2021) | Intangible Asset (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------------------- | :------------- | :---------------- | | Total amortizable intangible assets, net | $45,212 | $46,950 | | Non-amortizable brand name | $3,811 | $3,811 | | Total intangible assets, net | $49,023 | $50,761 | - Amortization expense for intangible assets decreased to $1,738 thousand for the three months ended March 31, 2022, from $2,677 thousand in the prior year, due to the full amortization of certain assets[44] Note 3. Bank revolving credit notes This note details the Company's revolving credit facility, including its terms, covenants, and outstanding balances - The Company has a $200,000 thousand revolving credit facility, with an additional $100,000 thousand debt capacity through an accordion feature, maturing on September 26, 2024[46] - As of March 31, 2022, the consolidated total leverage ratio was 1.81 to 1.00 (covenant maximum 3.25 to 1.00) and the interest coverage ratio was 19.13 to 1.00 (covenant minimum 3.00 to 1.00), indicating compliance with all financial covenants[50][51][53] - The amount borrowed on revolving credit notes increased to $83,330 thousand at March 31, 2022, from $67,610 thousand at December 31, 2021[53] Note 4. Leases This note explains the Company's adoption of ASC 842 and provides details on lease assets, liabilities, and expenses - The Company adopted ASC 842, Leases, as of January 1, 2022, recognizing Right-of-Use (ROU) assets and lease liabilities for operating leases[54][57] Lease Expense (Three Months Ended March 31, 2022) | Lease Expense Component (in thousands) | Amount | | :------------------------------------- | :----- | | Total finance lease expense | $90 | | Operating lease expense | $1,522 | | Short-term lease expense | $179 | | Variable lease expense | $47 | | Total lease expense | $1,838 | Lease Assets and Liabilities (March 31, 2022) | Metric (in thousands) | Amount | | :---------------------- | :----- | | Total lease assets | $40,118 | | Total lease liabilities | $40,576 | Note 5. Employee stock ownership plan This note outlines the Company's Employee Stock Ownership Plan, including related expenses and share allocations - Estimated ESOP expense for the three months ended March 31, 2022, was $490 thousand, compared to $473 thousand in 2021[64] - Allocated ESOP shares decreased from 7,292,392 at December 31, 2021, to 6,720,194 at March 31, 2022[65] Note 6. Retirement plans This note describes the Company's retirement plans, including the 401(k) Plan and employer contributions - The 401(k) Plan covers substantially all eligible employees, allowing tax-free contributions and employer discretionary profit-sharing contributions[66][67] Note 7. Income taxes This note details the Company's income tax expense, effective tax rate, and unrecognized tax benefits Income Tax Expense and Effective Tax Rate (Three Months Ended March 31) | Metric | 2022 | 2021 | | :----------------- | :------ | :------ | | Income tax expense | $1,175 | $989 | | Effective tax rate | 23.52% | 27.98% | - The ETR decreased from 27.98% in 2021 to 23.52% in 2022, influenced by state taxes, non-deductible items, R&D credits, and benefits from excess tax deductions related to share-based compensation[69] - Unrecognized tax benefits related to the R&D tax credit were $394 thousand at March 31, 2022, up from $314 thousand at December 31, 2021[72] Note 8. Contingencies This note addresses potential future obligations arising from claims and lawsuits, assessing their financial impact - Management believes that any reasonably possible loss from current claims and lawsuits is not expected to have a material adverse impact on the consolidated financial statements[74] Note 9. Deferred compensation This note provides information on the Company's deferred compensation plan, including accrued liabilities and credits - The long-term portion of deferred compensation accrued was $21,913 thousand at March 31, 2022, a decrease from $25,117 thousand at December 31, 2021[78] - Total credit for the deferred compensation plan was $1,128 thousand for the three months ended March 31, 2022, compared to $170 thousand in the prior year[78] Note 10. Self-Funded insurance This note details expenses and accrued liabilities related to the Company's self-funded medical benefits program - Self-funded medical benefits expense was approximately $4,760 thousand for the three months ended March 31, 2022, a decrease from $5,096 thousand in 2021[79] - An estimated accrued liability for unpaid claims was $1,571 thousand at March 31, 2022, up from $1,471 thousand at December 31, 2021[79] Note 11. Segments This note clarifies the Company's operating segments and geographical revenue and asset distribution - The Company operates as one operating segment and does not earn revenues or have long-lived assets in foreign countries[80] Note 12. Fair value of financial instruments This note provides fair value measurements for financial instruments, particularly deferred compensation liabilities Deferred Compensation Liability Fair Value (March 31, 2022 vs. December 31, 2021) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total Deferred compensation liability | $22,941 | $25,117 | | Level 1 | $20,074 | $22,272 | | Level 2 | $2,867 | $2,845 | - Deferred compensation liabilities are recorded at amounts due to participants, with investments primarily classified as Level 1 and Level 2 in the fair value hierarchy[84] Note 13. Earnings Per Share This note details the calculation of basic and diluted earnings per share, including anti-dilutive impacts - Stock options that were 'in the money' but had an anti-dilutive impact on EPS were 479,947 for Q1 2022, compared to 307,365 for Q1 2021[89] Note 14. Revenue Recognition This note disaggregates revenue by product category and details contract assets and liabilities Disaggregated Revenue by Product Category (Three Months Ended March 31) | Product Category (in thousands) | 2022 | 2021 | Change | % Change | | :------------------------------ | :------- | :------- | :------ | :------- | | Fabrication | $82,232 | $69,370 | $12,862 | 18.5% | | Performance structures | $28,959 | $20,455 | $8,504 | 41.6% | | Tube | $18,309 | $14,887 | $3,422 | 23.0% | | Tank | $8,550 | $6,792 | $1,758 | 25.9% | | Outdoor sports | $2,527 | $2,671 | $(144) | (5.4)% | | Total, net sales | $136,252 | $112,620 | $23,632 | 21.0% | Contract Assets and Liabilities (March 31, 2022 vs. December 31, 2021) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------- | :------------- | :---------------- | | Contract Assets | $5,196 | $3,950 | | Contract Liabilities | $3,383 | $2,718 | Note 15. Concentration of major customers This note identifies major customers and their contribution to net sales and accounts receivable Major Customer Concentration (Three Months Ended March 31, 2022) | Customer | Net Sales % (2022) | Net Sales % (2021) | Accounts Receivable % (2022) | Accounts Receivable % (2021) | | :------- | :----------------- | :----------------- | :--------------------------- | :--------------------------- | | A | 18.2% | 15.7% | 15.3% | 10.2% | | B | 11.1% | 12.0% | <10% | <10% | | D | 15.7% | 13.3% | 11.3% | <10% | | E | <10% | <10% | 13.2% | 11.2% | - Customer A's contribution to net sales increased from 15.7% in Q1 2021 to 18.2% in Q1 2022, and its share of accounts receivable also rose[95] Note 16. Stock based compensation This note details the Company's stock-based compensation plans, including expense and unrecognized amounts Stock-Based Compensation Expense (Three Months Ended March 31) | Award Type (in thousands) | 2022 | 2021 | | :------------------------ | :----- | :----- | | Unit awards | $751 | $719 | | Option awards | $506 | $481 | | Total | $1,257 | $1,200 | - Unrecognized stock-based compensation expense totaled $7,497 thousand as of March 31, 2022, to be expensed over the remaining service period up to February 28, 2023[102] Note 17. Subsequent events This note reports on any significant events or transactions occurring after the reporting period - No material events or transactions requiring recognition or disclosure were discovered during the evaluation of subsequent events since March 31, 2022[103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting key trends Overview This section provides a general description of the Company's business, its core operations, and market focus - MEC is a leading U.S.-based value-added manufacturing partner specializing in prototyping, tooling, production fabrication, coating, assembly, and aftermarket components for diverse end markets[107] - The Company operates as one segment, focusing on metal components for heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, and military products[108] COVID-19 Impact This section discusses the ongoing negative effects of the COVID-19 pandemic on the Company's operations and financial performance - The COVID-19 pandemic continues to negatively impact the Company's business, financial condition, cash flows, results of operations, supply chain, and raw material availability, with the full extent remaining uncertain[109] - Net sales for Q1 2022 and 2021 reflected ongoing supply chain constraints and inflationary pressures on wages, benefits, materials, and manufacturing supplies[110] - The Company's priority is safeguarding employee health and maintaining operational production based on customer demand, aiming to manage through the pandemic's effects[112] How We Assess Performance This section explains the key financial and operational metrics used by management to evaluate the Company's performance - Net sales are affected by economic conditions, weather, acquisitions, and customer production schedules, with revenue recognized at shipment or delivery[113] - Manufacturing margins are net sales less cost of sales, with commodity price fluctuations largely mitigated by contractual pass-through agreements with customers[114] - Adjusted EBITDA, a non-GAAP measure, is used by management and investors to evaluate operating performance, excluding stock-based compensation, Hazel Park transition costs, and impairment charges[118] EBITDA and Adjusted EBITDA (Three Months Ended March 31) | Metric (in thousands) | 2022 | 2021 | Change | % Change | | :--------------------- | :------ | :------ | :------ | :------- | | Net income | $3,822 | $2,545 | $1,277 | 50.2% | | EBITDA | $12,771 | $11,817 | $954 | 8.1% | | Adjusted EBITDA | $14,772 | $13,017 | $1,755 | 13.5% | | EBITDA Margin | 9.4% | 10.5% | (1.1)% | | | Adjusted EBITDA Margin | 10.8% | 11.6% | (0.8)% | | Consolidated Results of Operations This section provides a detailed analysis of the Company's financial results, including sales, costs, and profitability Consolidated Results of Operations (Three Months Ended March 31) | Metric (in thousands) | 2022 | % of Net Sales (2022) | 2021 | % of Net Sales (2021) | Change | % Change | | :----------------------------- | :------- | :-------------------- | :------- | :-------------------- | :------ | :------- | | Net sales | $136,252 | 100.0% | $112,620 | 100.0% | $23,632 | 21.0% | | Cost of sales | $121,370 | 89.1% | $97,844 | 86.9% | $23,526 | 24.0% | | Manufacturing margins | $14,882 | 10.9% | $14,776 | 13.1% | $106 | 0.7% | | Income from operations | $5,564 | 4.1% | $4,066 | 3.6% | $1,498 | 36.8% | | Net income | $3,822 | 2.8% | $2,545 | 2.3% | $1,277 | 50.2% | - Net sales increased by 21.0% primarily due to contractual raw material price pass-throughs to customers, commercial pricing increases, and improved volumes[122] - Manufacturing margin percentage decreased by 2.2% to 10.9% due to Hazel Park, MI facility transition costs and the dilutive impact of material price pass-throughs to customers[124][126] - Other selling, general and administrative expenses increased by 21.9% to $5,725 thousand, driven by higher consulting and professional fees, wages and benefits, information technology, and travel and entertainment expenses[129] - A gain of $1,183 thousand was recorded from the cancellation of purchase commitments for property, plant and equipment relating to a new fitness customer, reversing a prior impairment[131] Liquidity and Capital Resources This section discusses the Company's ability to generate and manage cash, including sources and uses of funds Cash Flows Analysis (Three Months Ended March 31) | Cash Flow Activity (in thousands) | 2022 | 2021 | Change | % Change | | :---------------------------------------- | :-------- | :-------- | :-------- | :------- | | Net cash provided by (used in) operating activities | $(425) | $4,194 | $(4,619) | (110.1)% | | Net cash used in investing activities | $(12,620) | $(5,255) | $(7,365) | (140.2)% | | Net cash provided by financing activities | $13,047 | $1,064 | $11,983 | 1126.2% | - Operating cash flow decreased by $4,619 thousand, primarily due to changes in net working capital, including increased accounts receivable and inventories, partially offset by higher net income[135] - Investing activities used $12,620 thousand, an increase of $7,365 thousand, driven by ongoing investment in new technology, automation, and repurposing assets at the Hazel Park, MI facility[136] - Financing activities provided $13,047 thousand, an increase of $11,983 thousand, mainly from higher borrowings on revolving credit notes and the repurchase of 200,000 shares of common stock for $2,323 thousand[137] - Capital expenditures for the full year 2022 are expected to be between $55,000 thousand and $65,000 thousand[146] Contractual Obligations (March 31, 2022) | Obligation Type (in thousands) | Total | 2022 (Remainder) | 2023 – 2024 | 2025 – 2026 | Thereafter | | :--------------------------------------- | :-------- | :--------------- | :---------- | :---------- | :--------- | | Long-term debt principal payment obligations | $83,330 | $0 | $83,330 | $0 | $0 | | Equipment financing agreements | $2,428 | $908 | $1,520 | $0 | $0 | | Forecasted interest on debt payment obligations | $4,351 | $1,341 | $3,010 | $0 | $0 | | Finance lease obligations | $1,208 | $269 | $716 | $223 | $0 | | Operating lease obligations | $43,853 | $4,240 | $11,355 | $9,487 | $18,771 | | Total | $135,170 | $6,758 | $99,931 | $9,710 | $18,771 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, including customer forecasts, interest rates, and commodity prices - The Company is exposed to market risk from fluctuating customer order forecasts, which can change dramatically quarter-to-quarter[153] - Interest rate risk arises from LIBOR-based floating rate borrowings under the Credit Agreement; a hypothetical 100-basis-point increase in interest rates would result in an additional $0.2 million in interest expense based on variable rate debt at March 31, 2022[154][156] - Commodity risk from raw materials like steel and aluminum is largely mitigated by contractual agreements allowing price pass-throughs to customers[157] Item 4. Controls and Procedures This section details the Company's disclosure controls and procedures, confirming effectiveness and reporting internal control changes - Management, under the supervision of the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022[159] - The adoption of ASC 842 Leases during Q1 2022 resulted in material changes to internal control over financial reporting, including policy, process, and new software implementation[160] PART II. Other Information This part includes information on legal proceedings, risk factors, equity sales, and a list of exhibits filed with the report Item 1. Legal Proceedings This section states that the Company is not currently involved in any material litigation proceedings - The Company is not currently a party to any material litigation proceedings[163] Item 1A. Risk Factors This section confirms no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[164] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase activities during the quarter ended March 31, 2022 Share Repurchase Activity (Quarter Ended March 31, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------ | :------------------------------- | :--------------------------- | | January 2022 | 100,000 | $11.78 | | February 2022 | 100,000 | $11.46 | | March 2022 | — | $— | | Total | 200,000 | | - The Company repurchased 200,000 shares of common stock for a total cost of $2,323 thousand during Q1 2022[137][165] - As of March 31, 2022, $21,176,679 remained available for repurchase under the $25 million share repurchase program approved on October 19, 2021[165] Item 6. Exhibits This section lists the exhibits filed as part of this Quarterly Report on Form 10-Q, including agreements, certifications, and XBRL - Exhibits include the Fourth Amendment to the Amended and Restated Credit Agreement, Retirement Transition Agreement, Agreement on Confidentiality, Assignment of Intellectual Property, Non-Competition and Non-Solicitation, and various certifications (31.1, 31.2, 32) and XBRL documents[168] Signatures This section contains the signatures of the Company's authorized officers, certifying the report's submission - The report is signed by Robert D. Kamphuis, Chairman, President & Chief Executive Officer, and Todd M. Butz, Chief Financial Officer, on May 4, 2022[174]