mec(MEC) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands): | Metric | September 30, 2021 | December 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $127 | $121 | $6 | 5.0% | | Receivables, net | $58,841 | $42,080 | $16,761 | 39.8% | | Inventories, net | $62,914 | $41,366 | $21,548 | 52.1% | | Total current assets | $128,384 | $89,248 | $39,136 | 43.9% | | Property, plant and equipment, net | $120,150 | $106,688 | $13,462 | 12.6% | | Total assets | $379,216 | $338,533 | $40,683 | 12.0% | | Total current liabilities | $72,383 | $52,740 | $19,643 | 37.2% | | Bank revolving credit notes | $54,718 | $45,257 | $9,461 | 20.9% | | Total liabilities | $167,074 | $137,676 | $29,398 | 21.4% | | Total shareholders' equity | $212,142 | $200,857 | $11,285 | 5.6% | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands, except per share data): | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change ($) | Change (%) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $109,018 | $91,075 | $17,943 | 19.7% | $341,851 | $262,262 | $79,589 | 30.3% | | Income (loss) from operations | $864 | $280 | $584 | 208.6% | $9,733 | $(7,055) | $16,788 | 238.0% | | Net income (loss) | $275 | $(1,100) | $1,375 | 125.0% | $6,112 | $(8,064) | $14,176 | 175.8% | | Basic EPS | $0.01 | $(0.05) | $0.06 | 120.0% | $0.30 | $(0.41) | $0.71 | 173.2% | | Diluted EPS | $0.01 | $(0.05) | $0.06 | 120.0% | $0.29 | $(0.41) | $0.70 | 170.7% | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands): | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $12,793 | $19,291 | $(6,498) | -33.7% | | Net cash used in investing activities | $(21,240) | $(3,434) | $(17,806) | 518.5% | | Net cash provided by (used in) financing activities | $8,453 | $(15,748) | $24,201 | 153.7% | | Net increase (decrease) in cash and cash equivalents | $6 | $109 | $(103) | -94.5% | Condensed Consolidated Statements of Shareholders Equity Condensed Consolidated Statements of Shareholders' Equity (in thousands): | Metric | Balance as of Dec 31, 2020 | Balance as of Sep 30, 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Additional Paid-in-Capital | $190,793 | $195,994 | $5,201 | 2.7% | | Retained Earnings | $14,998 | $21,110 | $6,112 | 40.7% | | Treasury Shares | $(4,934) | $(4,962) | $(28) | 0.6% | | Total Shareholder's Equity | $200,857 | $212,142 | $11,285 | 5.6% | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of presentation - MEC operates as a leading U.S.-based value-added manufacturing partner, serving diverse end markets including commercial vehicles, construction, powersports, agriculture, military, and fitness equipment[26][27][103] - The COVID-19 pandemic has had and is expected to continue having a negative impact on the company's business, financial condition, cash flows, results of operations, and supply chain[27][105] - The company is evaluating the potential impact of ASU 2016-02, Leases (Topic 842), which requires lessees to record lease assets and liabilities on the balance sheet[28] - ASU 2019-12, Income Taxes (Topic 740), was adopted during the period ended March 31, 2021, with no impact on the financial statements[29][30] Note 2. Select balance sheet data Inventory Composition (in thousands): | Category | September 30, 2021 | December 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Finished goods and purchased parts | $35,195 | $24,561 | $10,634 | 43.3% | | Raw materials | $19,317 | $11,266 | $8,051 | 71.5% | | Work-in-process | $8,402 | $5,539 | $2,863 | 51.7% | | Total | $62,914 | $41,366 | $21,548 | 52.1% | Property, Plant and Equipment, Net (in thousands): | Category | September 30, 2021 | December 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total property, plant and equipment, gross | $311,352 | $283,179 | $28,173 | 9.9% | | Less accumulated depreciation | $191,202 | $176,491 | $14,711 | 8.3% | | Total property, plant and equipment, net | $120,150 | $106,688 | $13,462 | 12.6% | - The company sold its Greenwood, SC manufacturing facility for $5,300 thousand, resulting in a gain of $1,374 thousand[34] - An investment of $11,758 thousand was made for the ramp-up of production at a new facility in Hazel Park, MI[35] Intangible Assets, Net (in thousands): | Category | September 30, 2021 | December 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total amortizable intangible assets, net | $49,626 | $57,656 | $(8,030) | -13.9% | | Non-amortizable brand name | $3,811 | $3,811 | $0 | 0.0% | | Total intangible assets, net | $53,437 | $61,467 | $(8,030) | -13.1% | | Amortization expense (9 months) | $8,030 | $8,030 | $0 | 0.0% | Note 3. Bank revolving credit notes - The company has a $200,000 thousand revolving credit facility, maturing on September 26, 2024, with an additional $100,000 thousand debt capacity via an accordion feature[41][146] - As of September 30, 2021, the company was in compliance with all financial covenants, with a consolidated total leverage ratio of 1.23 to 1.00 and an interest coverage ratio of 16.51 to 1.00[45][46][151][154][155] - The Third Amendment to the Credit Agreement increased allowable capital expenditures for 2021 from $35,000 thousand to $70,000 thousand[45][156] - The interest rate on outstanding borrowings was 2.25% as of September 30, 2021, down from 2.50% at December 31, 2020[47][149] Note 4. Capital lease obligation Capital Lease Obligations (in thousands): | Year Ending December 31, | Amount | | :--- | :--- | | 2021 (remainder) | $184 | | 2022 | $734 | | 2023 | $734 | | 2024 | $514 | | 2025 | $226 | | Total | $2,392 | | Less payment amount allocated to interest | $172 | | Present value of capital lease obligation | $2,220 | | Current portion of capital lease obligation | $648 | | Long-term portion of capital lease obligation | $1,572 | - Capitalized cost of equipment under capital leases was $3,847 thousand as of September 30, 2021, with accumulated depreciation of $1,732 thousand[50] Note 5. Operating lease obligation Operating Lease Obligations (in thousands): | Year Ending December 31, | Amount | | :--- | :--- | | 2021 (remainder) | $1,542 | | 2022 | $5,849 | | 2023 | $5,849 | | 2024 | $5,121 | | 2025 | $4,623 | | Thereafter | $22,976 | | Total | $45,960 | Total Rent Expense (in thousands): | Period | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $1,392 | $1,128 | $264 | 23.4% | | Nine Months Ended Sep 30 | $3,557 | $3,283 | $274 | 8.3% | Note 6. Employee stock ownership plan ESOP Expense (in thousands): | Period | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $124 | $0 | $124 | N/A | | Nine Months Ended Sep 30 | $825 | $0 | $825 | N/A | - The increase in ESOP expense is due to the elimination of the discretionary accrual in fiscal year 2020 due to COVID-19 impacts[123][136] - Allocated ESOP shares decreased from 8,253,533 at December 31, 2020, to 7,292,392 at September 30, 2021[54] Note 7. Retirement plans - The Mayville Engineering Company Inc. 401(k) Plan is a defined contribution plan covering eligible employees[55][56] Note 8. Income taxes Income Tax Expense (Benefit) and Effective Tax Rate (ETR): | Period | Income Tax Expense (Benefit) (in thousands) | ETR | | :--- | :--- | :--- | | Three Months Ended Sep 30, 2021 | $63 | 18.64% | | Three Months Ended Sep 30, 2020 | $733 | -199.82% | | Nine Months Ended Sep 30, 2021 | $2,059 | 25.20% | | Nine Months Ended Sep 30, 2020 | $(1,101) | 12.17% | - The federal operating loss (NOL) carryforward was $11,699 thousand as of September 30, 2021, which does not expire[127][139] - Unrecognized tax benefits related to the research and development tax credit amounted to $301 thousand at September 30, 2021[62] Note 9. Contingencies - Management believes any reasonably possible loss from current legal proceedings is not expected to have a material adverse impact on the financial statements[64] Note 10. Deferred compensation - The total accrued amount for the deferred compensation plan was $25,373 thousand at September 30, 2021[68] Deferred Compensation Expense (in thousands): | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $(89) | $310 | | Nine Months Ended Sep 30 | $316 | $289 | Note 11. Self-Funded insurance Healthcare Costs (in thousands): | Period | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $5,513 | $4,757 | $756 | 15.9% | | Nine Months Ended Sep 30 | $12,524 | $16,072 | $(3,548) | -22.1% | - An estimated accrued liability for unpaid claims of $1,420 thousand was recorded as of September 30, 2021[69] Note 12. Segments - The company operates as a single operating segment and does not have revenues or long-lived assets in foreign countries[70] Note 13. Fair value of financial instruments - Deferred compensation liabilities are recorded at fair value, classified as Level 1 (quoted prices) and Level 2 (observable data)[73][75] - Cash and cash equivalents are classified as Level 1 fair value measurements[73] Note 14. Earnings Per Share Anti-Dilutive Stock Options: | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | 300,510 | — | | Nine Months Ended Sep 30 | 300,510 | — | Note 15. Revenue Recognition Changes in Contract Assets and Liabilities (in thousands): | Metric | As of Dec 31, 2020 | As of Sep 30, 2021 | Net Activity | | :--- | :--- | :--- | :--- | | Contract Assets | $3,126 | $3,435 | $309 | | Contract Liabilities | $1,060 | $2,472 | $1,412 | Disaggregated Revenue by Product Category (in thousands): | Product Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change ($) | Change (%) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Outdoor sports | $2,230 | $1,898 | $332 | 17.5% | $7,907 | $5,260 | $2,647 | 50.3% | | Fabrication | $74,512 | $56,658 | $17,854 | 31.5% | $222,201 | $169,674 | $52,527 | 31.0% | | Performance structures | $15,632 | $18,543 | $(2,911) | -15.7% | $54,840 | $42,334 | $12,506 | 29.5% | | Tube | $14,392 | $12,772 | $1,620 | 12.7% | $45,039 | $37,047 | $7,992 | 21.6% | | Tank | $5,564 | $4,316 | $1,248 | 28.9% | $17,977 | $13,399 | $4,578 | 34.2% | | Total, net sales | $109,018 | $91,075 | $17,943 | 19.7% | $341,851 | $262,262 | $79,589 | 30.3% | Note 16. Concentration of major customers Concentration of Major Customers (10% or greater): | Customer | Net Sales (3 Months Ended Sep 30, 2021) | Net Sales (9 Months Ended Sep 30, 2021) | Accounts Receivable (As of Sep 30, 2021) | | :--- | :--- | :--- | :--- | | A | 18.0% | 16.8% | 15.3% | | D | 13.6% | 14.1% | <10% | | E | 10.8% | <10% | 13.9% | Note 17. Stock based compensation - Shareholders approved an amendment to the 2019 Omnibus Incentive Plan, increasing authorized shares for issuance by 2,500,000[84] Stock-Based Compensation Expense (in thousands): | Award Type | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change ($) | Change (%) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Unit awards | $714 | $586 | $128 | 21.8% | $2,282 | $1,670 | $612 | 36.7% | | Option awards | $468 | $392 | $76 | 19.4% | $1,489 | $1,020 | $469 | 46.0% | | Total expense, net of tax | $1,182 | $978 | $204 | 20.9% | $3,771 | $3,719 | $52 | 1.4% | - Unrecognized stock-based compensation expense was $4,405 thousand as of September 30, 2021, to be expensed through February 28, 2023[90] Note 18. Greenwood Facility Closure, Restructuring, and Sale - The Greenwood, SC facility was sold on August 30, 2021, for $5,300 thousand, resulting in a gain on sale of $1,374 thousand[92] - The closure eliminated approximately $825 thousand in annual depreciation expense for disposed assets and $800 thousand in annual facility maintenance costs[96][97] Greenwood Facility Closure and Restructuring Costs (in thousands): | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0 | $687 | | Nine Months Ended Sep 30 | $0 | $2,524 | Note 19. Subsequent events - On October 19, 2021, the Board of Directors approved a new share repurchase program of up to $25 million of common stock through 2023[99][175] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operational results, and key performance drivers Overview - MEC is a leading U.S.-based value-added manufacturing partner, serving diverse end markets such as commercial vehicles, construction, powersports, agriculture, military, and fitness equipment[103][104] COVID-19 Impact - COVID-19 continues to negatively impact the business, financial condition, cash flows, results of operations, and supply chain[105] - Supply chain issues, including microchip shortages and port issues, led to lower production demand and impacted net sales[106] - The company is experiencing inflationary pressures on wages, benefits, materials, and manufacturing supplies[106] How We Assess Performance - Net sales are affected by general economic conditions, weather, acquisitions, and customer production schedules[109] - Manufacturing margins are largely protected from commodity price fluctuations by contractual pass-through agreements with customers[110] - Non-GAAP measures like EBITDA and Adjusted EBITDA are used as key performance indicators by management and investors[113][114] Consolidated Results of Operations Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Key Financial Highlights (Three Months Ended September 30, in thousands): | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $109,018 | $91,075 | $17,943 | 19.7% | | Manufacturing margins | $10,909 | $9,735 | $1,174 | 12.1% | | Income from operations | $864 | $280 | $584 | 208.6% | | Net income (loss) | $275 | $(1,100) | $1,375 | 125.0% | | EBITDA | $8,825 | $8,174 | $651 | 8.0% | | Adjusted EBITDA | $10,007 | $9,839 | $168 | 1.7% | - Net sales increased by 19.7% due to $8.4 million in raw material pricing pass-throughs and $9.3 million from increased market demand[118] - Manufacturing margin percentage decreased from 10.7% to 10.0% due to raw material pass-throughs, inflation, and $800 thousand in launch costs for the new Hazel Park facility[119][120] Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Key Financial Highlights (Nine Months Ended September 30, in thousands): | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $341,851 | $262,262 | $79,589 | 30.3% | | Manufacturing margins | $41,966 | $20,424 | $21,542 | 105.5% | | Income (loss) from operations | $9,733 | $(7,055) | $16,788 | 238.0% | | Net income (loss) | $6,112 | $(8,064) | $14,176 | 175.8% | | EBITDA | $33,283 | $17,279 | $16,004 | 92.6% | | Adjusted EBITDA | $37,054 | $23,522 | $13,532 | 57.5% | - Net sales increased by 30.3% due to improved market conditions, increased sales volumes, and $13.1 million in raw material price pass-throughs[132] - Manufacturing margin percentage increased from 7.8% to 12.3%, driven by higher production volumes and cost reductions from the Greenwood facility closure[133][134] Liquidity and Capital Resources Cash Flows Analysis Cash Flows (Nine Months Ended September 30, in thousands): | Activity | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $12,793 | $19,291 | $(6,498) | -33.7% | | Net cash used in investing activities | $(21,240) | $(3,434) | $(17,806) | 518.5% | | Net cash provided by (used in) financing activities | $8,453 | $(15,748) | $24,201 | 153.7% | | Net change in cash | $6 | $109 | $(103) | -94.5% | - The decrease in operating cash flows was primarily due to changes in net working capital, including increased accounts receivable and inventories[143] - Investing activities saw a significant increase in cash used, driven by $26,588 thousand in capital expenditures, including $11,758 thousand for the new Hazel Park facility[144][157] Amended and Restated Credit Agreement - The company has a $200,000 thousand revolving credit facility, with $145,282 thousand available as of September 30, 2021[146][149] - The interest rate on outstanding borrowings was 2.25% at September 30, 2021[149] - The company was in compliance with all financial covenants, including an interest coverage ratio of 16.51 to 1.00 and a consolidated total leverage ratio of 1.23 to 1.00[151][155] Second Amendment to the Credit Agreement - The Second Amendment provided temporary relief for the consolidated total leverage ratio covenant, setting it at 3.50 to 1.00 for the quarter[153][154] - This relief came with increased interest rates and fees, and restrictions on capital expenditures, acquisitions, and dividends[153] Third Amendment to the Credit Agreement - The Third Amendment increased the allowable capital expenditures for 2021 to $70,000 thousand from $35,000 thousand to support a new strategic customer[156] Capital Requirements and Sources of Liquidity - Capital expenditures for the nine months ended September 30, 2021, were $26,588 thousand, with full-year 2021 expenditures expected to be $52,000 thousand to $57,000 thousand[157] - The company relies on operating cash flow and available credit facilities to fund working capital and growth[158][159] Contractual Obligations Contractual Obligations at September 30, 2021 (in thousands): | Obligation | Total | 2021 (Remainder) | 2022 – 2023 | 2024 – 2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt principal payment obligations | $54,718 | $0 | $0 | $54,718 | $0 | | Forecasted interest on debt payment obligations | $4,784 | $399 | $3,189 | $1,196 | $0 | | Capital lease obligations | $2,392 | $184 | $1,468 | $740 | $0 | | Operating lease obligations | $45,960 | $1,542 | $11,698 | $9,744 | $22,976 | | Total | $107,854 | $2,125 | $16,355 | $66,398 | $22,976 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks like customer forecasts, interest rates, and commodity prices Customer Forecasts - The company is exposed to market risk from fluctuations in customer order forecasts, which can change dramatically[164] Interest Rate Risk - The company is exposed to interest rate risk on LIBOR-based floating rate borrowings under its Credit Agreement[165] - A hypothetical 100-basis-point increase in interest rates would result in an additional $0.1 million of interest expense[167] Commodity Risk - The company faces commodity risk from price fluctuations in raw materials like steel, aluminum, copper, and paint[168] - To mitigate commodity risk, the company strives to pass price increases to customers through contractual agreements[168] Item 4. Controls and Procedures This section details the evaluation of disclosure controls and procedures and changes in internal financial reporting controls Evaluation of Disclosure Controls and Procedures - Management concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021[170] Changes in Internal Control Over Financial Reporting - There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended September 30, 2021[171] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section confirms the company is not currently involved in any material litigation - The company is not currently a party to any material litigation proceedings[173] Items 1A. Risk Factors This section confirms no material changes to previously disclosed risk factors - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K[174] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on common stock repurchases and a new share repurchase program Common Stock Repurchases (Quarter Ended September 30, 2021): | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | :--- | | July 2021 | — | $— | — | $19,896,406 | | August 2021 | — | $— | — | $19,896,406 | | September 2021 | 47,000 | $13.89 | 47,000 | $19,243,534 | | Total | 47,000 | $13.89 | 47,000 | $19,243,534 | - On October 19, 2021, the Board of Directors approved a new share repurchase program of up to $25 million of common stock through 2023[175] Item 6. Exhibits This section lists all exhibits filed as part of this Quarterly Report on Form 10-Q - The report includes certifications from the Principal Executive Officer and Principal Financial Officer and various Inline XBRL documents[179] Signatures This section contains the official signatures certifying the filing of the report - The report is signed by Robert D. Kamphuis, Chairman, President & Chief Executive Officer, and Todd M. Butz, Chief Financial Officer, on November 3, 2021[183]