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Mayville Engineering Company, Inc. - Quarter Report: 2021 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38894

 

Mayville Engineering Company, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

Wisconsin

39-0944729

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

715 South Street

Mayville, Wisconsin

53050

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (920) 387-4500

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, no par value

 

MEC

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of July 29, 2021, the registrant had 20,475,915 shares of common stock, no par value per share, outstanding.

 

 

 

 


 

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

 

 

 

PART  I.

FINANCIAL INFORMATION

4

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

 

 

Condensed Consolidated Statements of Shareholders Equity

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

29

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Items 1A.

Risk Factors

   29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 6.

Exhibits

   30

 

 

 

Signatures

 

31

 

 

 

 

 

 

 

 

 

 

2

 


 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements related to future events, business strategy, future performance, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe” and similar expressions or their negative. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. Mayville Engineering Company, Inc. (MEC, the Company, we, our, us or similar terms) believes the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon.

Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the SEC) on March 5, 2021, as such, may be amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report) and the following:

 

the negative impacts the coronavirus (COVID-19) has had and will continue to have on our business, financial condition, cash flows, results of operations and supply chain (including future uncertain impacts);

 

failure to compete successfully in our markets;

 

risks relating to developments in the industries in which our customers operate;

 

our ability to maintain our manufacturing, engineering and technological expertise;

 

the loss of any of our large customers or the loss of their respective market shares;

 

risks related to scheduling production accurately and maximizing efficiency;

 

our ability to realize net sales represented by our awarded business;

 

our ability to successfully identify or integrate acquisitions;

 

risks related to entering new markets;

 

our ability to develop new and innovative processes and gain customer acceptance of such processes;

 

our ability to recruit and retain our key executive officers, managers and trade-skilled personnel;

 

risks related to our information technology systems and infrastructure;

 

manufacturing risks, including delays and technical problems, issues with third-party suppliers, environmental risks and applicable statutory and regulatory requirements;

 

political and economic developments, including foreign trade relations and associated tariffs;

 

volatility in the prices or availability of raw materials critical to our business;

 

results of legal disputes, including product liability, intellectual property infringement and other claims;

 

risks associated with our capital-intensive industry;

 

risks related to our treatment as an S Corporation prior to the consummation of our initial public offering of common stock (IPO); and

 

risks related to our employee stock ownership plan’s treatment as a tax-qualified retirement plan.

These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by federal securities laws.

3

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

 

 

 

June 30,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

119

 

 

$

121

 

Receivables, net of allowances for doubtful accounts of $1,347 at June 30, 2021

   and $1,298 at December 31, 2020

 

 

58,362

 

 

 

42,080

 

Inventories, net

 

 

50,939

 

 

 

41,366

 

Tooling in progress

 

 

2,093

 

 

 

3,126

 

Prepaid expenses and other current assets

 

 

3,400

 

 

 

2,555

 

Total current assets

 

 

114,913

 

 

 

89,248

 

Property, plant and equipment, net

 

 

114,695

 

 

 

106,688

 

Assets held for sale

 

 

3,552

 

 

 

3,552

 

Goodwill

 

 

71,535

 

 

 

71,535

 

Intangible assets-net

 

 

56,114

 

 

 

61,467

 

Capital lease, net

 

 

2,278

 

 

 

2,581

 

Other long-term assets

 

 

3,185

 

 

 

3,462

 

Total

 

$

366,272

 

 

$

338,533

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

49,254

 

 

$

33,495

 

Current portion of capital lease obligation

 

 

641

 

 

 

626

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Salaries, wages, and payroll taxes

 

 

12,014

 

 

 

10,190

 

Profit sharing and bonus

 

 

3,569

 

 

 

3,089

 

Other current liabilities

 

 

5,369

 

 

 

5,340

 

Total current liabilities

 

 

70,847

 

 

 

52,740

 

Bank revolving credit notes

 

 

43,854

 

 

 

45,257

 

Capital lease obligation, less current maturities

 

 

1,736

 

 

 

2,061

 

Deferred compensation and long-term incentive, less current portion

 

 

25,461

 

 

 

25,631

 

Deferred income tax liability

 

 

12,994

 

 

 

11,887

 

Other long-term liabilities

 

 

100

 

 

 

100

 

Total liabilities

 

 

154,992

 

 

 

137,676

 

Common shares, no par value, 75,000,000 authorized, 21,378,578 shares issued at

   June 30, 2021 and 21,093,035 at December 31, 2020

 

 

 

 

 

 

Additional paid-in-capital

 

 

194,754

 

 

 

190,793

 

Retained earnings

 

 

20,835

 

 

 

14,998

 

Treasury shares at cost, 902,663 shares at June 30, 2021 and 1,033,645 at

   December 31, 2020

 

 

(4,309

)

 

 

(4,934

)

Total shareholders’ equity

 

 

211,280

 

 

 

200,857

 

Total

 

$

366,272

 

 

$

338,533

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4

 


 

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except share amounts and per share data)

(unaudited)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales

 

$

120,213

 

 

$

62,582

 

 

$

232,833

 

 

$

171,187

 

Cost of sales

 

 

103,933

 

 

 

63,736

 

 

 

201,777

 

 

 

160,497

 

Amortization of intangibles

 

 

2,677

 

 

 

2,677

 

 

 

5,353

 

 

 

5,353

 

Profit sharing, bonuses, and deferred compensation

 

 

3,210

 

 

 

1,194

 

 

 

6,074

 

 

 

2,519

 

Employee stock ownership plan (income) expense

 

 

228

 

 

 

(675

)

 

 

701

 

 

 

 

Other selling, general and administrative expenses

 

 

5,362

 

 

 

4,552

 

 

 

10,059

 

 

 

10,153

 

Income (loss) from operations

 

 

4,803

 

 

 

(8,902

)

 

 

8,869

 

 

 

(7,335

)

Interest expense

 

 

(504

)

 

 

(637

)

 

 

(1,036

)

 

 

(1,463

)

Income (loss) before taxes

 

 

4,299

 

 

 

(9,539

)

 

 

7,833

 

 

 

(8,798

)

Income tax expense (benefit)

 

 

1,007

 

 

 

(2,525

)

 

 

1,996

 

 

 

(1,834

)

Net income (loss) and comprehensive income (loss)

 

$

3,292

 

 

$

(7,014

)

 

$

5,837

 

 

$

(6,964

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

(0.35

)

 

$

0.29

 

 

$

(0.35

)

Diluted

 

$

0.16

 

 

$

(0.35

)

 

$

0.28

 

 

$

(0.35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,454,541

 

 

 

19,902,912

 

 

 

20,316,936

 

 

 

19,718,222

 

Diluted

 

 

20,864,531

 

 

 

19,902,912

 

 

 

20,685,741

 

 

 

19,718,222

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

 


 

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5,837

 

 

$

(6,964

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

10,236

 

 

 

11,086

 

Amortization

 

 

5,353

 

 

 

5,353

 

Stock-based compensation expense

 

 

2,588

 

 

 

2,741

 

Allowance for doubtful accounts

 

 

49

 

 

 

591

 

Inventory excess and obsolescence reserve

 

 

(589

)

 

 

1,413

 

Loss on disposal of property, plant and equipment

 

 

66

 

 

 

618

 

Deferred compensation and long-term incentive

 

 

(170

)

 

 

(86

)

Other non-cash adjustments

 

 

151

 

 

 

168

 

Changes in operating assets and liabilities – net of effects of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(16,331

)

 

 

(35

)

Inventories

 

 

(8,984

)

 

 

3,936

 

Tooling in progress

 

 

1,033

 

 

 

(1,463

)

Prepaids and other current assets

 

 

(1,094

)

 

 

(222

)

Accounts payable

 

 

14,324

 

 

 

(14,356

)

Deferred income taxes

 

 

1,484

 

 

 

(1,895

)

Accrued liabilities, excluding long-term incentive

 

 

4,277

 

 

 

2,226

 

Net cash provided by operating activities

 

 

18,230

 

 

 

3,111

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(16,986

)

 

 

(3,652

)

Proceeds from sale of property, plant and equipment

 

 

414

 

 

 

1,766

 

Net cash used in investing activities

 

 

(16,572

)

 

 

(1,886

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from bank revolving credit notes

 

 

157,388

 

 

 

158,643

 

Payments on bank revolving credit notes

 

 

(158,791

)

 

 

(156,743

)

Deferred financing costs

 

 

 

 

 

(200

)

Purchase of treasury stock

 

 

 

 

 

(2,510

)

Payments on capital leases

 

 

(310

)

 

 

(296

)

Proceeds from the exercise of stock options

 

 

80

 

 

 

 

Other financing activities

 

 

(27

)

 

 

 

Net cash used in financing activities

 

 

(1,660

)

 

 

(1,106

)

Net increase (decrease) in cash and cash equivalents

 

 

(2

)

 

 

119

 

Cash and cash equivalents at beginning of period

 

 

121

 

 

 

1

 

Cash and cash equivalents at end of period

 

$

119

 

 

$

120

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,077

 

 

$

1,714

 

Cash paid for taxes

 

$

716

 

 

$

15

 

Non-cash construction in progress in accounts payable

 

$

2,994

 

 

$

265

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

 


 

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands)

(unaudited)  

 

 

 

Shareholder’s Equity

 

 

 

Additional

Paid-in-Capital

 

 

Treasury

Shares

 

 

Retained

Earnings

 

 

Total

 

Balance as of December 31, 2020

 

$

190,793

 

 

$

(4,934

)

 

$

14,998

 

 

$

200,857

 

Net income

 

 

 

 

 

 

 

 

2,545

 

 

 

2,545

 

401(k) plan contribution

 

 

1,319

 

 

 

625

 

 

 

 

 

 

1,944

 

Stock-based compensation

 

 

1,200

 

 

 

 

 

 

 

 

 

1,200

 

Balance as of March 31, 2021

 

$

193,312

 

 

$

(4,309

)

 

$

17,543

 

 

$

206,546

 

Net income

 

 

 

 

 

 

 

 

3,292

 

 

 

3,292

 

Stock-based compensation

 

 

1,388

 

 

 

 

 

 

 

 

 

1,388

 

Stock options exercised

 

 

54

 

 

 

 

 

 

 

 

 

54

 

Balance as of June 30, 2021

 

$

194,754

 

 

$

(4,309

)

 

$

20,835

 

 

$

211,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder’s Equity

 

 

 

Additional

Paid-in-Capital

 

 

Treasury

Shares

 

 

Retained

Earnings

 

 

Total

 

Balance as of December 31, 2019

 

$

183,687

 

 

$

(4,882

)

 

$

22,090

 

 

$

200,895

 

Net income

 

 

 

 

 

 

 

 

50

 

 

 

50

 

Purchase of treasury stock

 

 

 

 

 

(2,435

)

 

 

 

 

 

(2,435

)

ESOP Contribution

 

 

2,374

 

 

 

2,457

 

 

 

 

 

 

4,831

 

Stock-based compensation

 

 

1,582

 

 

 

 

 

 

 

 

 

1,582

 

Balance as of March 31, 2020

 

$

187,643

 

 

$

(4,860

)

 

$

22,140

 

 

$

204,923

 

Net loss

 

 

 

 

 

 

 

 

(7,014

)

 

 

(7,014

)

Purchase of treasury stock

 

 

 

 

 

(74

)

 

 

 

 

 

(74

)

Stock-based compensation

 

 

1,159

 

 

 

 

 

 

 

 

 

1,159

 

Balance as of June 30, 2020

 

$

188,802

 

 

$

(4,934

)

 

$

15,126

 

 

$

198,994

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7

 


 

Mayville Engineering Company, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except share amounts, per share data, years and ratios)

(unaudited)

Note 1. Basis of presentation

The interim unaudited consolidated financial statements of Mayville Engineering Company, Inc. and subsidiaries (MEC, the Company, we, our, us or similar terms) presented here have been prepared in accordance with the accounting principles generally accepted in the United States of America (GAAP) and with instructions to Form 10-Q and Article 10 of Regulation S-X. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations and financial position for the interim unaudited periods presented. All intercompany balances and transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These interim unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K. A summary of the Company’s significant accounting policies is included in the Company’s 2020 financial statements in the Annual Report on Form 10-K. The Company followed these policies in preparation of the interim unaudited Condensed Consolidated Financial Statements.

Nature of Operations

MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military, fitness equipment and other end markets. Along with process engineering and development services, MEC maintains an extensive manufacturing infrastructure with 19 facilities across seven states. These facilities make it possible to offer conventional and computer numerical control (CNC) stamping, shearing, fiber laser cutting, forming, drilling, tapping, grinding, tube bending, machining, welding, assembly and logistic services. MEC also possesses a broad range of finishing capabilities including shot blasting, e-coating, powder coating, wet spray and military grade chemical agent resistant coating (CARC) painting.

Our one operating segment focuses on producing metal components that are used in a broad range of heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agricultural, military, fitness equipment and other products.

COVID-19 has had and will continue to have a negative impact on our business, financial condition, cash flows, results of operations and supply chain, although the full extent is still uncertain.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, creating Topic 842, which requires lessees to record the assets and liabilities arising from all leases in the statement of financial position. Under ASU 2016-02, lessees will recognize a liability for lease payments and a right-of-use asset. When measuring assets and liabilities, a lessee should include amounts related to option terms, such as the option of extending or terminating the lease or purchasing the underlying asset, that are reasonably certain to be exercised. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election to not recognize lease assets and liabilities. This guidance retains the distinction between finance leases and operating leases and the classification criteria remains similar to existing guidance. For financing leases, a lessee will recognize the interest on a lease liability separate from amortization of the right-of-use asset. In addition, repayments of principal will be presented within financing activities, and interest payments will be presented within operating activities in the statement of cash flows. For operating leases, a lessee will recognize a single lease cost on a straight-line basis and classify all cash payments within operating activities in the statement of cash flows. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as the Company remains an “emerging growth company” (EGC), the new guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes, creating Topic 740, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2020. For as long as the Company remains an EGC, the new guidance is effective for annual reporting periods

8

 


 

beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. During the period ended March 31, 2021, the Company adopted this guidance. This adoption had no impact on the financial statements.

A summary of the Company’s evaluation of other recent accounting pronouncements is included in the Company’s 2020 financial statements in its Annual Report on Form 10-K for the year ended December 31, 2020.

Note 2. Select balance sheet data

Inventory

Inventories are stated at the lower of cost, determined on the first-in, first-out method (FIFO) and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Work-in-process and finished goods are valued at production costs consisting of material, labor, and overhead.

Inventories as of June 30, 2021 and December 31, 2020 consist of:

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Finished goods and purchased parts

 

$

29,205

 

 

$

24,561

 

Raw materials

 

 

14,884

 

 

 

11,266

 

Work-in-process

 

 

6,850

 

 

 

5,539

 

Total

 

$

50,939

 

 

$

41,366

 

Property, plant and equipment

Property, plant and equipment as of June 30, 2021 and December 31, 2020 consist of:

 

 

 

Useful Lives

Years*

 

June 30,

2021

 

 

December 31,

2020

 

Land

 

Indefinite

 

$

1,033

 

 

$

1,033

 

Land improvements

 

15-39

 

 

3,169

 

 

 

3,169

 

Building and building improvements

 

15-39

 

 

55,556

 

 

 

55,172

 

Machinery, equipment and tooling

 

3-10

 

 

208,170

 

 

 

199,854

 

Vehicles

 

5

 

 

3,841

 

 

 

3,778

 

Office furniture and fixtures

 

3-7

 

 

17,126

 

 

 

16,242

 

Construction in progress

 

N/A

 

 

11,717

 

 

 

3,931

 

Total property, plant and equipment, gross

 

 

 

 

300,612

 

 

 

283,179

 

Less accumulated depreciation

 

 

 

 

185,917

 

 

 

176,491

 

Total property, plant and equipment, net

 

 

 

$

114,695

 

 

$

106,688

 

 

The Company completed the closure of its Greenwood, SC manufacturing facility during the third quarter of the prior year. The net amount of property, plant and equipment associated with the facility was $3,552, which is classified in assets held for sale on the Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020.

Additionally, the Company finalized an agreement to open a new facility in Hazel Park, MI during the quarter ended June 30, 2021. As of June 30, 2021, the Company invested $5,271 for the ramp-up of production which is classified in construction in progress.

Goodwill

Changes in goodwill between December 31, 2020 and June 30, 2021 consist of:

 

Balance as of December 31, 2020

 

$

71,535

 

Impairment

 

 

 

Balance as of June 30, 2021

 

$

71,535

 

9

 


 

 

 

 Intangible Assets

The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of June 30, 2021 and December 31, 2020:

 

 

 

Useful Lives

Years

 

June 30,

2021

 

 

December 31,

2020

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

Customer relationships and contracts

 

9-12

 

$

78,340

 

 

$

78,340

 

Trade name

 

10

 

 

14,780

 

 

 

14,780

 

Non-compete agreements

 

5

 

 

8,800

 

 

 

8,800

 

Patents

 

19

 

 

24

 

 

 

24

 

Accumulated amortization

 

 

 

 

(49,641

)

 

 

(44,288

)

Total amortizable intangible assets, net

 

 

 

 

52,303

 

 

 

57,656

 

Non-amortizable brand name

 

 

 

 

3,811

 

 

 

3,811

 

Total intangible assets, net

 

 

 

$

56,114

 

 

$

61,467

 

 

Non-amortizable brand name is tested annually for impairment.

Changes in intangible assets between December 31, 2020 and June 30, 2021 consist of:

 

Balance as of December 31, 2020

 

$

61,467

 

Amortization expense

 

 

(5,353

)

Balance as of June 30, 2021

 

$

56,114

 

 

Amortization expense was $2,677 for each of the three months ended June 30, 2021 and 2020, and $5,353 for the six months ended June 30, 2021 and 2020.

Future amortization expense is expected to be as followed:

Year ending December 31,

 

 

 

 

2021 (remainder)

 

$

5,353

 

2022

 

$

6,952

 

2023

 

$

6,866

 

2024

 

$

5,192

 

2025

 

$

5,192

 

Thereafter

 

$

22,748

 

 

Note 3. Bank revolving credit notes

On September 26, 2019, and as last amended on March 31, 2021, we entered into an amended and restated credit agreement (Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The Credit Agreement provides for a $200,000  revolving credit facility (the Revolving Loan), with a letter of credit sub-facility in an aggregate amount not to exceed $5,000, and a swingline facility in an aggregate amount of $20,000. The Credit Agreement also provides for an additional $100,000 of debt capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness, create or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00 as well as a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions.

10

 


 

In order to provide a means of insurance against future macroeconomic events, we entered into an amendment (Second Amendment) to the Credit Agreement on June 30, 2020. The Second Amendment provides the Company with temporary changes to the total leverage ratio covenant for the period from June 30, 2020, through December 31, 2021, or such earlier date as the Company may elect (Covenant Relief Period), in return for certain increases in interest rates, fees and restrictions on certain activities of the Company, including capital expenditures, acquisitions, dividends and share repurchases. New pricing, which takes effect for the quarters ending on and after September 30, 2020, includes interest at a fluctuating London Interbank Offered Rate (LIBOR) (at a floor of 75 basis points), plus 1.00% to 2.75%, along with the commitment fee ranging from 20 to 50 basis points.

During the Covenant Relief Period, the required ceiling on the Company’s total leverage ratio will be 4.25 to 1.00 for quarters ending June 30, 2020 through and including December 31, 2020, and will decline in quarterly increments to 3.25 to 1.00 through the quarter ending December 31, 2021.

Due to our recently announced relationship with a strategic new customer, we entered into an amendment (Third Amendment) to the Credit Agreement on March 31, 2021. The Third Amendment allows the Company to incur up to $70,000 of capital expenditures in 2021, as opposed to $35,000.

At June 30, 2021, our consolidated total leverage ratio was 1.00 to 1.00 as compared to a covenant maximum of 3.75 to 1.00 in accordance with the Second Amendment of the Credit Agreement.

At June 30, 2021, our interest coverage ratio was 15.24 to 1.00 as compared to a covenant minimum of 3.00 to 1.00 under the Credit Agreement.

Under the Credit Agreement, interest is payable quarterly at the adjusted LIBOR plus an applicable margin based on the current funded indebtedness to adjusted EBITDA ratio. The interest rate was 2.25% and 2.50% as of June 30, 2021 and December 31, 2020, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.25% and 0.20% as of June 30, 2021 and December 31, 2020, respectively.

The Company was in compliance with all financial covenants of its credit agreements as of June 30, 2021 and December 31, 2020. The amount borrowed on the revolving credit notes was $43,854 and $45,257 as of June 30, 2021 and December 31, 2020, respectively.

Note 4. Capital lease obligation

Capital leases consist of equipment with a capitalized cost of $3,847 and $3,825 and accumulated depreciation of $1,569 and $1,245 at June 30, 2021 and December 31, 2020, respectively. Depreciation of $163 and $324 was recognized on the capital lease assets during the three- and six months ended June 30, 2021, respectively, and $161 and $322 during the three- and six months ended June 30, 2020, respectively. Non-cash capital lease transactions amounted to $0 for the three- and six months ended June 30, 2021 and 2020. Future minimum lease payments required under the lease are as follows:

 

Year ending December 31,

 

 

 

 

2021 (remainder)

 

$

367

 

2022

 

 

734

 

2023

 

 

734

 

2024

 

 

514

 

2025

 

 

226

 

Thereafter

 

 

 

Total

 

 

2,575

 

Less payment amount allocated to interest

 

 

198

 

Present value of capital lease obligation

 

$

2,377

 

Current portion of capital lease obligation

 

 

641

 

Long-term portion of capital lease obligation

 

 

1,736

 

Total capital lease obligation

 

$

2,377

 

 

Note 5. Operating lease obligation

Operating leases relate to property, plant and equipment. Future minimum lease payments required under the leases are as follows:

11

 


 

Year ending December 31,

 

 

 

 

2021 (remainder)

 

$

2,647

 

2022

 

 

5,528

 

2023

 

 

5,521

 

2024

 

 

4,786

 

2025

 

 

4,282

 

Thereafter

 

 

21,912

 

Total

 

$

44,676

 

The Company leases certain office space, warehousing facilities, equipment and vehicles under operating lease arrangements with third-party lessors. These lease arrangements expire at various times through August 2031. Total rent expense under the arrangements was approximately $1,081 and $1,094 for the three months ended June 30, 2021 and 2020, respectively, and $2,165 and $2,155 for the six months ended June 30, 2021 and 2020, respectively.

Note 6. Employee stock ownership plan

Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (the ESOP), the Company can make annual discretionary contributions to the trust for the benefit of eligible employees in the form of cash or shares of common stock of the Company subject to the board of directors’ approval. For the three months ended June 30, 2021 and 2020, the Company’s estimated ESOP expense was $228 and income of $675, respectively. For the six months ended June 30, 2021 and 2020, the Company’s estimated ESOP expense amounted to $701 and $0, respectively.

At various times following death, disability, retirement or termination of employment, an ESOP participant is entitled to receive their ESOP account balance in accordance with various distribution methods as permitted under the policies adopted by the ESOP.

As of June 30, 2021, and December 31, 2020, the ESOP shares, excluding safe harbor shares held in the Company’s 401(k) plan, consisted of 7,292,392 and 8,253,533 in allocated shares, respectively.

Note 7. Retirement plans

The Mayville Engineering Company Inc. 401(k) Plan (the 401(k) Plan) covers substantially all employees meeting certain eligibility requirements. The 401(k) Plan is a defined contribution plan and is intended for eligible employees to defer tax-free contributions to save for retirement. Employees may contribute up to 50% of their eligible compensation to the 401(k) Plan, subject to the limits of Section 401(k) of the Internal Revenue Code.

The 401(k) Plan also provides for employer discretionary profit-sharing contributions and the Board of Directors may authorize discretionary profit-sharing contributions (which are usually approved at the end of each calendar year).

Note 8. Income taxes

On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate. As the year progresses, the Company will refine its estimate based on facts and circumstances by each tax jurisdiction.

Income tax expense was $1,007 and $1,996, and the effective tax rate (ETR) from continuing operations was 23.43% and 25.48% for the three and six months ended June 30, 2021, respectively. Our ETR is different from the expected tax rate due to state taxes, non-deductible items, research and development credits and benefit from excess tax deductions related to share based compensation items.

For the three and six months ended June 30, 2020, income tax benefit was estimated at $2,525 and $1,834 and the ETR from continuing operations was 27.69% and 28.77% respectively.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in these jurisdictions. Accounting Standards Codification (ASC) Topic 740, Income Taxes, states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of technical merits.

12

 


 

The Company’s policy for recording interest and penalties associated with potential income tax audits is to record such expense as a component of income tax expense (benefit). There were no amounts for penalties or interest recorded as of June 30, 2021. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its positions.

Uncertain Tax Positions

Based on the Company’s evaluation, it has been concluded that there is one tax position related to the research and development tax credit requiring recognition in the Company’s financial statements as of June 30, 2021. The Company does not anticipate that there will be a material change in the balance of the unrecognized tax benefits in the next twelve months. Any interest and penalties related to uncertain tax positions are recorded in income tax expense. No amounts have been recorded as tax expense for interest and penalties for the three months ended June 30, 2021, as the amount for the utilized portion for the research and development credit on the Wisconsin return is considered to be immaterial. At June 30, 2021 and December 31, 2020, a total of $307 and $208, respectively, of unrecognized tax benefits would, if recognized, impact the Company’s ETR.

The Company files income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. Federal tax returns for tax years beginning January 1, 2017, and state tax returns beginning January 1, 2016, are open for examination.

Note 9. Contingencies

From time to time, the Company may be involved in various claims and lawsuits, both for and against the Company, arising in the normal course of business. Although the results of litigation and claims cannot be predicted with certainty, in management’s opinion, either the likelihood of loss is remote, or any reasonably possible loss associated with the resolution of such proceedings is not expected to have a material adverse impact on the consolidated financial statements.

Note 10. Deferred compensation

The Mayville Engineering Deferred Compensation Plan is available for certain employees designated to be eligible to participate by the Company and approved by the Board of Directors. Eligible employees may elect to defer a portion of his or her compensation for any plan year and the deferral cannot exceed 50% of the participant’s base salary and may include the participant’s annual short-term cash incentive up to 100%. The participant’s election must be made prior to the first day of the plan year.

 An employer contribution will be made for each participant to reflect the amount of any reduced allocations to the ESOP and/or 401(k) employer contributions due solely to the participant’s deferral amounts, as applicable. In addition, a discretionary amount may be awarded to a participant by the Company.

Deferrals are assumed to be invested in an investment vehicle based on the options made available to the participant (which does not include Company stock).

The deferred compensation plan provides benefits payable upon separation of service or death. Payments are to be made 30 days after date of separation from service, either in a lump-sum payment or up to five annual installments as elected by the participant when the participant first elects to defer compensation.

The deferred compensation plan is non-funded, and all future contributions are unsecured in that the employees have the status of a general unsecured creditor of the Company and the agreements constitute a promise by the Company to make benefit payments in the future. During the three months ended June 30, 2021 and 2020, eligible employees elected to defer compensation of $0 and $12, respectively. During the six months ended June 30, 2021 and 2020, eligible employees elected to defer compensation of $0 and $41, respectively. As of June 30, 2021, and December 31, 2020, the total amount accrued for all benefit years under this plan was $25,461 and $25,631, respectively, which is included within the deferred compensation and long-term incentive on the Condensed Consolidated Balance Sheets. These amounts include the initial deferral of compensation as adjusted for (a) subsequent changes in the share value of the Company stock or (b) in the investment options chosen by the participants. Total expense for the deferred compensation plan for the three months ended June 30, 2021 and 2020 amounted to $575 and $586, respectively. Total (income) expense for the deferred compensation plan for the six months ended June 30, 2021 and 2020 amounted to $405 and $(21), respectively These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Note 11. Self-Funded insurance

The Company is self-funded for the medical benefits provided to its employees and their dependents. Healthcare costs are expensed as incurred and are based upon actual claims paid, reinsurance premiums, administration fees, and estimated unpaid claims.

13

 


 

As of March 31, 2020, the Company consolidated benefit plans with no specific stop loss and an aggregate stop loss to limit risk. Expense related to this contract is approximately $3,290 and $5,411 for the three months ended June 30, 2021 and 2020, respectively, and $7,011 and $11,135 for the six months ended June 30, 2021 and 2020, respectively. An estimated accrued liability of approximately $1,262 and $1,721 was recorded as of June 30, 2021 and December 31, 2020, respectively, for estimated unpaid claims and is included within other current liabilities on the Condensed Consolidated Balance Sheets.

Note 12. Segments

The Company applies the provisions of ASC Topic 280, Segment Reporting. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined it has one operating segment. The Company does not earn revenues or have long-lived assets located in foreign countries.

 

Note 13. Fair value of financial instruments

Fair value provides information on what the Company may realize if certain assets were sold or might pay to transfer certain liabilities based upon an exit price. Financial assets and liabilities that are measured and reported at fair value are classified into a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data. Long-term debt is classified as a Level 2 fair value input.

 

Level 3 – Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be the Company’s own data and judgements about assumptions that market participants would use in pricing the asset or liability.

The following table lists the Company’s financial assets and liabilities accounted for at fair value by the fair value hierarchy:

 

 

 

 

 

 

 

Fair Value Measurements at

Report Date Using

 

 

 

Balance at June 30,

2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Deferred compensation liability

 

$

25,461

 

 

$

18,296

 

 

$

7,165

 

 

$

 

Total

 

$

25,461

 

 

$

18,296

 

 

$

7,165

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at

Report Date Using

 

 

 

Balance at December 31,

2020

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Deferred compensation liability

 

$

25,631

 

 

$

4,865

 

 

$

20,766

 

 

$

 

Total

 

$

25,631

 

 

$

4,865

 

 

$

20,766

 

 

$

 

 

Fair value measurements for the Company’s cash and cash equivalents are classified based upon Level 1 measurements because such measurements are based upon quoted market prices in active markets for identical assets.

Accounts receivable, accounts payable, long-term debt and accrued liabilities are recorded in the financial statements at cost and approximate fair value.

Deferred compensation liabilities are recorded at amounts due to participants at the time of deferral. Deferrals are invested in an investment vehicle based on the options made available to the participant, considered to be Level 1 and Level 2 on the fair value hierarchy, with the majority of the balance as Level 1. The change in fair value is recorded in the Profit sharing, bonuses, and deferred

14

 


 

compensation line item on the Condensed Consolidated Statements of Comprehensive Income (Loss). The balance due to participants is reflected on the deferred compensation and long-term incentive line item on the Condensed Consolidated Balance Sheets.

The Company’s non-financial assets such as intangible assets and property, plant, and equipment are re-measured at fair value when there is an indication of impairment and adjusted only when an impairment charge is recognized.

Note 14. Earnings Per Share

The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share. In accordance with ASC 260, outstanding options will be considered to have been exercised and outstanding as of the beginning of the period if the average market price of the common stock during the period exceeds the exercise price of the options (they are “in the money”), and the assumed exercise of the options do not have an anti-dilutive impact on earnings per share.

Options in the money that were not included in the computation of diluted earnings per share because they would have had an anti-dilutive impact on earnings per share were as follows:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock options

 

 

300,510

 

 

 

 

 

 

300,510

 

 

 

 

 

Note 15. Revenue Recognition

Contract Assets and Contract Liabilities

The Company has contract assets and contract liabilities, which are included in other current assets and other current liabilities on the Condensed Consolidated Balance Sheet, respectively. Contract assets include products where the Company has satisfied its performance obligation, but receipt of payment is contingent upon delivery. Contract liabilities include deferred tooling revenue, where the performance obligation was not met. The performance obligation is satisfied when the tooling is completed and the customer signs off through the Product Part Approval Process (PPAP). Cost of goods sold is recognized and released from the balance sheet when control of the tooling promised under contract is transferred to the customer either at a point in time or over a period of time.

The Company’s contracts with customers are short-term in nature; therefore, revenue is typically recognized, billed and collected within a 12-month period. The following table reflects the changes in our contract assets and liabilities during the six months ended June 30, 2021.

 

 

 

Contract Assets

 

 

Contract Liabilities

 

As of December 31, 2020

 

$

3,126

 

 

$

1,060

 

Net Activity

 

 

(1,033

)

 

 

260

 

As of June 30, 2021

 

$

2,093

 

 

$

1,320

 

 

Disaggregated Revenue

The following table represents a disaggregation of revenue by product category:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Outdoor sports

 

$

3,006

 

 

$

1,592

 

 

$

5,677

 

 

$

3,363

 

Fabrication

 

 

78,318

 

 

 

43,224

 

 

 

147,689

 

 

 

113,016

 

Performance structures

 

 

18,753

 

 

 

7,152

 

 

 

39,208

 

 

 

23,791

 

Tube

 

 

15,760

 

 

 

9,320

 

 

 

30,647

 

 

 

24,274

 

Tank

 

 

5,622

 

 

 

2,364

 

 

 

12,413

 

 

 

9,082

 

Total

 

 

121,459

 

 

 

63,652

 

 

 

235,634

 

 

 

173,526

 

Intercompany sales elimination

 

 

(1,246

)

 

 

(1,070

)

 

 

(2,801

)

 

 

(2,339

)

Total, net sales

 

$

120,213

 

 

$

62,582

 

 

$

232,833

 

 

$

171,187

 

 

15

 


 

 

Note 16. Concentration of major customers

The following customers accounted for 10% or greater of the Company’s recorded net sales and net trade receivables:

 

 

 

Net Sales

 

 

 

Accounts Receivable

 

 

 

Three Months Ended

June 30,

 

 

 

Six Months Ended

June 30,

 

 

 

As of

 

 

As of

 

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

2020

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Customer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A

 

16.7

 

%

 

 

18.0

 

%

 

16.2

%

 

16.9

 

%

 

14.0

%

 

11.3

%

B

 

 

10.3

 

%

 

<10

 

%

 

11.1

%

 

 

10.0

 

%

 

<10

%

 

<10

%

C

 

<10

 

%

 

<10

 

%

 

10.8

%

 

<10

 

%

 

<10

%

 

12.2

%

D

 

15.2

 

%

 

<10

 

%

 

14.3

%

 

10.2

 

%

 

10.8

%

 

<10

%

E

 

<10

 

%

 

<10

 

%

 

<10

%

 

<10

 

%

 

12.7

%

 

<10

%

 

Note 17. Stock based compensation

The Mayville Engineering Company, Inc. 2019 Omnibus Incentive Plan provides the Company the ability to grant monetary payments based on the value of its common stock, up to 2,000,000 shares.

On April 20, 2021, shareholders of the Company approved an amendment to the 2019 Omnibus Incentive Plan increasing the number of shares of common stock authorized for issuance by 2,500,000 shares.

The Company recognizes stock-based compensation using the fair value provisions prescribed by ASC Topic 718, Compensation – Stock Compensation. Accordingly, compensation costs for awards of stock-based compensation settled in shares are determined based on the fair value of the share-based instrument at the time of grant and are recognized as expense over the vesting period of the share-based instrument. For units, fair value is equivalent to the stock price at the date of grant. The Black-Scholes option pricing model is utilized to determine fair value for options.

Cancellations and forfeitures are accounted for as incurred.

Stock awards were granted on June 3, 2021, May 12, 2021, April 20, 2021, February 28, 2021, May 12, 2020, February 27, 2020 and May 8, 2019. There were no stock awards granted prior to this.

During the six months ended June 30, 2021, 314,902 units vested. For the same period, 484,661 options vested with a weighted average strike price of $11.23. There were 125,414 options vested for the six months ended June 30, 2020.

As of June 30, 2021, 1,129,487 options remained outstanding with a weighted average strike price of $11.08 and a weighted average contractual life of 8.88 years remaining.

The Company’s stock-based compensation expense by award type is summarized as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

One-time IPO unit awards

 

$

 

 

$

304

 

 

$

 

 

$

1,029

 

Unit awards

 

 

849

 

 

 

520

 

 

 

1,568

 

 

 

1,084

 

Option awards

 

 

539

 

 

 

335

 

 

 

1,020

 

 

 

628

 

Stock based compensation expense, net of tax

 

$

1,388

 

 

$

1,159

 

 

$

2,588

 

 

$

2,741

 

16

 


 

 

 

One-time IPO unit awards were fully expensed as of December 31, 2020.

A rollforward of unrecognized stock-based compensation expense is displayed in the table below. Unrecognized stock-based compensation expense as of June 30, 2021 will be expensed over the remaining requisite service period from which individual award values relate, up to February 28, 2023.

 

 

Units

 

 

Options

 

 

Total

 

Balance as of December 31, 2020

 

$

1,545

 

 

$

1,432

 

 

$

2,977

 

Grants

 

 

2,564

 

 

 

2,130

 

 

 

4,694

 

Forfeitures

 

 

(81

)

 

 

 

 

 

(81

)

Expense

 

 

(719

)

 

 

(481

)

 

 

(1,200

)

Balance as of March 31, 2021

 

 

3,309

 

 

 

3,081

 

 

 

6,390

 

Grants

 

 

892

 

 

 

 

 

 

892

 

Forfeitures

 

 

(113

)

 

 

(69

)

 

 

(182

)

Expense

 

 

(849

)

 

 

(539

)

 

 

(1,388

)

Balance as of June 30, 2021

 

$

3,239

 

 

$

2,473

 

 

$

5,712

 

 

Note 18. Greenwood Facility Closure and Restructuring

Based on the Company’s investments in new technology and automation, which have resulted in a smaller footprint requirement to maintain manufacturing capacity, the Company announced it would be closing its Greenwood, SC facility on May 6, 2020. The facility closure was finalized during the third quarter of 2020 with all customer components re-distributed among five other MEC manufacturing facilities. All customer relationships and manufactured components were maintained through this transition without disruption to our customers.

Costs associated with the closure are being accounted for in accordance with ASC 420 Exit or Disposal Cost Obligations.

For the three and six months ended June 30, 2021, the Company incurred $0 costs associated with the facility closure and restructuring. For the three and six months ended June 30, 2020, the Company incurred $1,838 of total costs. These costs were recognized on the cost of sales line item of the Condensed Consolidated Statements of Comprehensive Income (Loss), including $844 for the loss on the sale of manufacturing equipment that was not being transferred to another MEC facility, $231 for severance and retention bonus, $638 for the increase to the excess and obsolete inventory reserve for the inventory the Company planned to dispose of and $125 mostly related to costs to close this facility and relocate equipment to other facilities.

As a result of the Greenwood facility closure, future earnings and cash flows will no longer be impacted by the depreciation associated with the assets disposed of or the facility, maintenance costs of the facility, and facility personnel expenses.

Assets disposed of had a net book value of $2,475 with a remaining useful life of approximately 3 years resulting in approximately $825 of annual depreciation expense that will no longer be incurred. The facility has a net book value of $3,552 as of June 30, 2021 with a remaining weighted average useful life of approximately 27 years resulting in approximately $133 of annual depreciation expense that will no longer be incurred.

Additionally, the Company will no longer have approximately $800 of annual facility maintenance costs.

Total personnel costs associated with the facility were approximately $2,250 for the first quarter 2020 resulting in approximately $9,000 of annual personnel expenses; the majority of these costs were transitioned to five other MEC facilities that are now manufacturing these components. As previously mentioned, all customer relationships and manufacturing programs were retained through the transition.

The aforementioned depreciation, maintenance costs, and personnel expenses associated with the Greenwood facility have been classified as cost of sales on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Note 19. Subsequent events

The Company evaluated events and transactions for potential recognition or disclosure in the interim unaudited Condensed Consolidated Financial Statements through August 4, 2021, the date on which the interim unaudited Condensed Consolidated Financial Statements were available to be issued.

17

 


 

On July 1, 2021, the Company entered into a new contractual agreement to sell the Greenwood, SC manufacturing facility for $5,300 before commissions and fees. Finalization of the contract is contingent upon a 30-day due diligence period, that may be extended for an additional 15 days, upon written notice from the purchaser.

 


18

 


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in the understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in Part II Item 1A. of this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 and our unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item I of this Quarterly Report on Form 10-Q. In this discussion, we use certain non-GAAP financial measures. Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management Discussion and Analysis of Financial Condition and Results of Operations. Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

All amounts are presented in thousands except share amounts, per share data, years and ratios.

Overview

MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military, fitness equipment and other end markets. We have developed long-standing relationships with our blue-chip customers based upon a high level of experience, trust and confidence.

Our one operating segment focuses on producing metal components that are used in a broad range of heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agricultural, military, fitness equipment and other products.

COVID-19 Impact

COVID-19 has had and will continue to have a negative impact on our business, financial condition, cash flows, and results of operations, although the full extent is still uncertain.

For the three and six months ended June 30, 2021, net sales reflected the supply chain issues encountered by original equipment manufacturers’ that led to lower production demand at times, which can be directly attributed to microchip shortages in the commercial vehicle market and port issues that impacted nearly all end markets served.

The future financial effects of COVID-19 are unknown due to many factors. These factors include the uncertainty of the new Delta variant, uncertainty of the effectiveness of governmental actions to address COVID-19, including health, monetary and fiscal policies, the effect of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing, trade agreements, other geopolitical events, and the availability and volatility in the price of raw materials and other commodities. As a result, predicting the Company’s forecasted financial performance is difficult and subject to many assumptions.

The Company’s first priority has been to safeguard the health and well-being of its employees while fulfilling its obligations as an essential business serving its customer base. This proactive approach has kept employees safe and production facilities operational based on customer demand. Our goal is to continue to successfully manage through the effects of COVID-19 and strengthen our position serving customers in the future.

How We Assess Performance

Net Sales. Net sales reflect sales of our components and products net of allowances for returns and discounts. In addition to COVID-19, several factors affect our net sales in any given period, including general economic conditions, weather, timing of acquisitions and the production schedules of our customers. Net sales are recognized at the time of shipment to the customer.

Manufacturing Margins. Manufacturing margins represent net sales less cost of sales. Cost of sales consists of all direct and indirect costs used in the manufacturing process, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other directly related overhead costs. Our cost of sales is directly affected by the fluctuations in commodity

19

 


 

prices, primarily sheet steel and aluminum, but these changes are largely mitigated by contractual agreements with our customers that allow us to pass through these price changes based upon certain market indexes.

Depreciation and Amortization. We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. Amortization expense is the periodic expense related to leasehold improvements and intangible assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.

Other Selling, General, and Administrative Expenses. Other selling, general and administrative expenses consist primarily of salaries and personnel costs for our sales and marketing, finance, human resources, information systems, administration and certain other managerial employees and certain corporate level administrative expenses such as incentive compensation, audit, accounting, legal and other consulting and professional services, travel, and insurance.

Other Key Performance Indicators

EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin

EBITDA represents net income (loss) before interest expense, provision (benefit) for income taxes, depreciation and amortization. EBITDA Margin represents EBITDA as a percentage of net sales for each period.

Adjusted EBITDA represents EBITDA before stock-based compensation expenses and restructuring expenses related to the closure of the Greenwood facility. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net sales for each period. These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered as an alternative to net income (loss) or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin as management uses these measures as key performance indicators, and we believe they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.

Our calculation of EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to the similarly named measures reported by other companies. Potential differences between our measures of EBITDA and Adjusted EBITDA compared to other similar companies’ measures of EBITDA and Adjusted EBITDA may include differences in capital structure and tax positions.

The following table presents a reconciliation of net income (loss), the most directly comparable measure calculated in accordance with GAAP, to Adjusted EBITDA, and the calculation of Adjusted EBITDA Margin for each of the periods presented.

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

3,292

 

 

$

(7,014

)

 

$

5,837

 

 

$

(6,964

)

Interest expense

 

 

504

 

 

 

637

 

 

 

1,036

 

 

 

1,463

 

Provision (benefit) for income taxes

 

 

1,007

 

 

 

(2,525

)

 

 

1,996

 

 

 

(1,834

)

Depreciation and amortization

 

 

7,838

 

 

 

8,159

 

 

 

15,589

 

 

 

16,439

 

EBITDA

 

 

12,641

 

 

 

(743

)

 

 

24,458

 

 

 

9,104

 

IPO stock based compensation expense

 

 

 

 

 

304

 

 

 

 

 

 

1,029

 

Stock based compensation expense

 

 

1,388

 

 

 

855

 

 

 

2,588

 

 

 

1,712

 

Greenwood restructuring charges

 

 

 

 

 

1,838

 

 

 

 

 

 

1,838

 

Adjusted EBITDA

 

$

14,029

 

 

$

2,254

 

 

$

27,046

 

 

$

13,683

 

Net sales

 

$

120,213

 

 

$

62,582

 

 

$

232,833

 

 

$

171,187

 

EBITDA Margin

 

 

10.5

%

 

 

-1.2

%

 

 

10.5

%

 

 

5.3

%

Adjusted EBITDA Margin

 

 

11.7

%

 

 

3.6

%

 

 

11.6

%

 

 

8.0

%

20

 


 

 

Consolidated Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Increase (Decrease)

 

 

 

Amount

 

 

% of Net

Sales

 

 

Amount

 

 

% of Net

Sales

 

 

Amount

Change

 

 

% Change

 

Net sales

 

$

120,213

 

 

 

100.0

%

 

$

62,582

 

 

 

100.0

%

 

$

57,631

 

 

 

92.1

%

Cost of sales

 

 

103,933

 

 

 

86.5

%

 

 

63,736

 

 

 

101.8

%

 

 

40,197

 

 

 

63.1

%

Manufacturing margins

 

 

16,280

 

 

 

13.5

%

 

 

(1,154

)

 

 

-1.8

%

 

 

17,434

 

 

 

1510.7

%

Amortization of intangibles

 

 

2,677

 

 

 

2.2

%

 

 

2,677

 

 

 

4.3

%

 

 

 

 

 

0.0

%

Profit sharing, bonuses and deferred compensation

 

 

3,210

 

 

 

2.7

%

 

 

1,194

 

 

 

1.9

%

 

 

2,016

 

 

 

168.8

%

Employee stock ownership plan (income) expense

 

 

228

 

 

 

0.2

%

 

 

(675

)

 

 

-1.1

%

 

 

903

 

 

 

133.8

%

Other selling, general and administrative expenses

 

 

5,362

 

 

 

4.5

%

 

 

4,552

 

 

 

7.3

%

 

 

810

 

 

 

17.8

%

Income (loss) from operations

 

 

4,803

 

 

 

4.0

%

 

 

(8,902

)

 

 

-14.2

%

 

 

13,705

 

 

 

154.0

%

Interest expense

 

 

(504

)

 

 

0.4

%

 

 

(637

)

 

 

1.0

%

 

 

(133

)

 

 

-20.9

%

Provision (benefit) for income taxes

 

 

1,007

 

 

 

0.8

%

 

 

(2,525

)

 

 

-4.0

%

 

 

3,532

 

 

 

139.9

%

Net income (loss) and comprehensive income (loss)

 

$

3,292

 

 

 

2.7

%

 

$

(7,014

)

 

 

-11.2

%

 

$

10,306

 

 

 

146.9

%

EBITDA

 

$

12,641

 

 

 

10.5

%

 

$

(743

)

 

 

-1.2

%

 

$

13,384

 

 

 

1801.3

%

Adjusted EBITDA

 

$

14,029

 

 

 

11.7

%

 

$

2,254

 

 

 

3.6

%

 

$

11,775

 

 

 

522.4

%

 

Net Sales. Net sales were $120,213 for the three months ended June 30, 2021 as compared to $62,582 for the three months ended June 30, 2020, an increase of $57,631, or 92.1%. This change is primarily attributed to increasing sales volumes due to the continued improvement of market conditions in the current period and the impact of customer plant shutdowns caused by COVID-19 during the prior year period.

Manufacturing Margins. Manufacturing margins were $16,280 for the three months ended June 30, 2021 as compared to a loss of $1,154 for the three months ended June 30, 2020, an increase of $17,434, or 1,510.7%. The increase was driven by the aforementioned sales volume increases in the current period coupled with the utilization of the Company’s investments in new technology and automation. In addition, reduced overhead costs following the closure of the Greenwood, SC facility in 2020 resulted in a significant improvement in absorbed manufacturing overhead costs in the current period, and $429 related to the reversal of inventory obsolescence and healthcare reserves specific to the estimated potential impacts of COVID-19. This was offset by the lag in contractual raw material price increases passed through to customers in the current period. The Company incurred approximately $100 in launch costs related to the new Hazel Park, MI facility for our new customer in the fitness equipment market. Additionally, the prior year period included $1,838 of restructuring costs charged to cost of sales related to the Greenwood facility closure.

Manufacturing margin percentages were 13.5% for the three months ended June 30, 2021, as compared to a negative 1.8% for the three months ended June 30, 2020, an increase of 1,510.7%. This percentage change was attributable to the items discussed above.

Amortization of Intangibles Expense. Amortization of intangibles expense was $2,677 for both the three months ended June 30, 2021 and 2020.

Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses, and deferred compensation expenses were $3,210 for the three months ended June 30, 2021 as compared to $1,194 for the three months ended June 30, 2020, an increase of $2,016, or 168.8%. This change was primarily driven by the return of normalized discretionary employer 401(k) and bonus accruals as business activity and sales volumes move towards pre-pandemic levels.

Employee Stock Ownership Plan (Income) Expense. Employee stock ownership plan estimated expense was $228 for the three months ended June 30, 2021 as compared to income of $675 for the three months ended June 30, 2020, an increase of $903, or 133.8%. The change is due to the discretionary nature of contributions to the ESOP plan and the decision made in the prior year period to eliminate the discretionary accrual for the fiscal year 2020 as a result of lower forecasted financial performance due to the impacts of COVID-19.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $5,362 for the three months ended June 30, 2021 as compared to $4,552 for the three months ended June 30, 2020, an increase of $810, or 17.8%. The increase was principally driven by higher salary and payroll expenses in the current period as well as higher travel and entertainment expenses, which were artificially low in the prior year period due to the COVID-19 pandemic.

21

 


 

Interest Expense. Interest expense was $504 for the three months ended June 30, 2021 as compared to $637 for the three months ended June 30, 2020, a decrease of $133, or 20.9%. The change is due to lower debt levels in the current period and comparative interest rates in the prior year period.

Provision (Benefit) for Income Taxes. Income tax expense was $1,007 for the three months ended June 30, 2021 as compared to income tax benefit of $2,525 for the three months ended June 30, 2020. Please reference Note 8 of the Condensed Consolidated Financial Statements for more specifics. As of June 30, 2021, our federal operating loss (NOL) carryforward was $11,833 driven by the pretax losses incurred in the prior years. The NOL does not expire and will be used to offset future pretax income. We estimate our long-term effective tax rate to be approximately 26%, based on current tax regulations.

Net Income (Loss) and Comprehensive Income (Loss). Net income and comprehensive income were $3,292 for the three months ended June 30, 2021 as compared to a loss of $7,014 for the three months ended June 30, 2020. The increase of $10,306 was due to the previously discussed items.

EBITDA and EBITDA Margin. EBITDA and EBITDA Margin were $12,641 and 10.5%, respectively, for the three months ended June 30, 2021 as compared to negative $743 and negative 1.2%, respectively, for the three months ended June 30, 2020. The $13,384 increase in EBITDA was primarily due to the increase in net sales caused by the aforementioned increase in sales volumes, improved manufacturing overhead absorption costs due to the utilization of our investments in new technology and automation and reduction in overhead costs from the closure of the Greenwood, SC facility in 2020, and the adverse impacts of COVID-19 in the prior period.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $14,029 and 11.7%, respectively, for the three months ended June 30, 2021, as compared to $2,254 and 3.6%, respectively, for the three months ended June 30, 2020. The increase in Adjusted EBITDA of $11,775 was primarily due to the aforementioned items discussed above and the adverse impacts of COVID-19 in the prior period.


22

 


 

 

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Increase (Decrease)

 

 

 

Amount

 

 

% of Net

Sales

 

 

Amount

 

 

% of Net

Sales

 

 

Amount

Change

 

 

% Change

 

Net sales

 

$

232,833

 

 

 

100.0

%

 

$

171,187

 

 

 

100.0

%

 

$

61,646

 

 

 

36.0

%

Cost of sales

 

 

201,777

 

 

 

86.7

%

 

 

160,497

 

 

 

93.8

%

 

 

41,280

 

 

 

25.7

%

Manufacturing margins

 

 

31,056

 

 

 

13.3

%

 

 

10,690

 

 

 

6.2

%

 

 

20,366

 

 

 

190.5

%

Amortization of intangibles

 

 

5,353

 

 

 

2.3

%

 

 

5,353

 

 

 

3.1

%

 

 

 

 

 

0.0

%

Profit sharing, bonuses and deferred compensation

 

 

6,074

 

 

 

2.6

%

 

 

2,519

 

 

 

1.5

%

 

 

3,555

 

 

 

141.1

%

Employee stock ownership plan expense

 

 

701

 

 

 

0.3

%

 

 

 

 

 

0.0

%

 

 

701

 

 

N/A

 

Other selling, general and administrative expenses

 

 

10,059

 

 

 

4.3

%

 

 

10,153

 

 

 

5.9

%

 

 

(94

)

 

 

-0.9

%

Income (loss) from operations

 

 

8,869

 

 

 

3.8

%

 

 

(7,335

)

 

 

-4.3

%

 

 

16,204

 

 

 

220.9

%

Interest expense

 

 

(1,036

)

 

 

0.4

%

 

 

(1,463

)

 

 

0.9

%

 

 

(427

)

 

 

-29.2

%

Provision (benefit) for income taxes

 

 

1,996

 

 

 

0.9

%

 

 

(1,834

)

 

 

-1.1

%

 

 

3,830

 

 

 

208.8

%

Net income (loss) and comprehensive income (loss)

 

$

5,837

 

 

 

2.5

%

 

$

(6,964

)

 

 

-4.1

%

 

$

12,801

 

 

 

183.8

%

EBITDA

 

$

24,458

 

 

 

10.5

%

 

$

9,104

 

 

 

5.3

%

 

$

15,354

 

 

 

168.6

%

Adjusted EBITDA

 

$

27,046

 

 

 

11.6

%

 

$

13,683

 

 

 

8.0

%

 

$

13,363

 

 

 

97.7

%

 

Net Sales. Net sales were $232,833 for the six months ended June 30, 2021 as compared to $171,187 for the six months ended June 30, 2020 for an increase of $61,646, or 36.0%. This change is primarily attributed to increasing sales volumes due to the continued improvement of market conditions in the current year and the impact of market demand and related destocking activities during the first quarter of the prior year period, which was most apparent in the Commercial Vehicle, Agricultural and Construction and Access Equipment end markets served, along with manufacturing volume reductions driven by COVID-19 in the second quarter of the prior year due to forced customer plant shutdowns, which averaged 5 – 6 weeks per customer.

Manufacturing Margins. Manufacturing margins were $31,056 for the six months ended June 30, 2021 as compared to $10,690 for the six months ended June 30, 2020, an increase of $20,366, or 190.5%. The increase was driven by the aforementioned sales volume increases in the current period, coupled with the utilization of the Company’s investments in new technology and automation. In addition, reduced overhead costs following the closure of the Greenwood, SC facility in 2020 resulted in a significant improvement in absorbed manufacturing overhead costs and $429 related to the reversal of inventory obsolescence and healthcare reserves specific to the estimated potential impacts of COVID-19. This was offset by the lag in contractual raw material price increases passed through to customers in the second quarter of the current year. Further, the prior year period was negatively impacted by the following: previously discussed market demand changes, customer shutdowns related to COVID-19, approximately $775 of inventory obsolescence and health care charges specific to the estimated potential impacts of COVID-19, and $1,838 of restructuring costs related to the Greenwood facility closure.

Manufacturing margin percentages were 13.3% for the six months ended June 30, 2021 as compared to 6.2% for the six months ended June 30, 2020, an increase of 190.5%. This increase was attributable to the items discussed above.

Amortization of Intangibles Expense. Amortization of intangibles expense was $5,353 for both the six months ended June 30, 2021, and 2020.

Profit Sharing, Bonuses and Deferred Compensation Expense. Profit sharing, bonuses and deferred compensation expenses were $6,074 for the six months ended June 30, 2021 as compared to $2,519 for the six months ended June 30, 2020, an increase of $3,555, or 141.1%. This change was primarily driven by the return of normalized discretionary employer 401(k) and bonus accruals as business activity and sales volumes have improved to more normalized levels.

Employee Stock Ownership Plan Expense. Employee stock ownership plan expense was $701 for the six months ended June 30, 2021 as compared to $0 for the six months ended June 30, 2020, an increase of $701. The change is primarily due to the discretionary nature of contributions to the ESOP plan and the decision made in the prior year period to eliminate the discretionary accrual for the fiscal year 2020 as a result of lower forecasted financial performance due to the impacts of COVID-19.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $10,059 for the six months ended June 30, 2021 as compared to $10,153 for the six months ended June 30, 2020, a decrease of $94, or 0.9%. The decrease was driven by lower public company costs attributable to process improvements, continued synergies through the integration of Defiance Metal Products and other cost saving initiatives, offset by higher salary and payroll expenses in the current year period.

23

 


 

Interest Expense. Interest expense was $1,036 for the six months ended June 30, 2021 as compared to $1,463 for the six months ended June 30, 2020, a decrease of $427, or 29.2%. The change is due to lower borrowings and interest rates during the current period as compared to the prior period.

Provision (Benefit) for Income Taxes. Income tax expense was $1,996 for the six months ended June 30, 2021 as compared to income tax benefit of $1,834 for the six months ended June 30, 2020. The change is due to pretax income in the current period as compared to a pretax loss for the same prior year period. Please reference Note 8 of the Condensed Consolidated Financial Statements for more specifics. As of June 30, 2021, our federal operating loss (NOL) carryforward was $11,833 driven by the pretax losses incurred in the prior years. The NOL does not expire and will be used to offset future pretax income. We estimate our long-term effective tax rate to be approximately 26%, based on current tax regulations.

Net Income (Loss) and Comprehensive Income (Loss). Net income and comprehensive income were $5,837 for the six months ended June 30, 2021 as compared to a loss of $6,964 for the six months ended June 30, 2020. The increase of $12,801 was due to the previously discussed items.

EBITDA and EBITDA Margin. EBITDA and EBITDA Margin were $24,458 and 10.5%, respectively, for the six months ended June 30, 2021 as compared to $9,104 and 5.3%, respectively, for the six months ended June 30, 2020. The $15,354 increase in EBITDA was primarily driven by increasing sales volumes due to the continued improvement of market conditions, improved manufacturing overhead absorption costs with the utilization of the Company’s investments in new technology and automation and a reduction in overhead costs following the closure of the Greenwood, SC facility in 2020, offset by the lag in contractual raw material price increases passed through to customers in the second quarter of the current year.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $27,046 and 11.6%, respectively, for the six months ended June 30, 2021, as compared to $13,683 and 8.0%, respectively, for the six months ended June 30, 2020. The increase in Adjusted EBITDA of $13,363 was primarily due to the aforementioned items discussed above offset by the lag in contractual raw material price increases passed through to customers in the current year period and the adverse impacts of COVID-19 in the prior year period.

24

 


 

 

Liquidity and Capital Resources

Cash Flows Analysis

 

 

 

Six Months Ended

June 30,

 

 

Increase (Decrease)

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

Net cash provided by operating activities

 

$

18,230

 

 

$

3,111

 

 

 

15,119

 

 

 

486.0

%

Net cash used in investing activities

 

 

(16,572

)

 

 

(1,886

)

 

 

(14,686

)

 

 

-778.7

%

Net cash used in financing activities

 

 

(1,660

)

 

 

(1,106

)

 

 

(554

)

 

 

-50.1

%

Net change in cash

 

$

(2

)

 

$

119

 

 

$

(121

)

 

 

101.7

%

 

Operating Activities. Cash provided by operating activities was $18,230 for the six months ended June 30, 2021, as compared to $3,111 for the six months ended June 30, 2020. The $15,119, or 486.0% increase in operating cash flows was primarily due to changes in net working capital. More specifically, accounts receivable rose relative to the growth in sales, while inventories and accounts payable were higher as production levels rebounded from COVID-19 lows. Beneficial changes in a variety of other asset and liability categories increased operating cash flows for the current period as well. Additionally, income was reported in the current period as compared to a loss in the prior year period. Changes to customer pricing, payment terms and credit terms did not have a significant impact on changes to working capital items, or any other element of the operating cash flow activities, for the periods presented.

Investing Activities. Cash used in investing activities was $16,572 for the six months ended June 30, 2021, as compared to $1,886 for the six months ended June 30, 2020. The $14,686, or 778.7% increase in cash used in investing activities was driven by the Company’s continued investment in technology and automation in the current period as compared to leveraging our investments in new technology and automation and preserving cash during the prior year period. Additionally, the Company invested $5,271 into the new Hazel Park, MI facility during the current year period for the ramp-up of production for our new customer in the fitness equipment end market.

Financing Activities. Cash used in financing activities was $1,660 for the six months ended June 30, 2021, as compared to $1,106 for the six months ended June 30, 2020. The $554 change was primarily driven by lower borrowings and higher debt repayments due to the aforementioned items in the current period, compared to higher borrowings offset by the purchase of treasury stock for the prior year period.

Amended and Restated Credit Agreement

On September 26, 2019, and as last amended as of March 31, 2021, we entered into the Credit Agreement with certain lenders and Wells Fargo Bank, National Association, the Agent. The Credit Agreement provides for a $200,000 Revolving Loan, with a letter of credit sub-facility in an aggregate amount not to exceed $5,000, and a swingline facility in an aggregate amount of $20,000. The Credit Agreement also provides for an additional $100,000 of capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.

Our obligations under the Credit Agreement are secured by first priority security interests in substantially all of our personal property and guaranteed by, and secured by first priority security interests in, substantially all of the personal property of, our direct and indirect subsidiaries: Center Manufacturing, Inc., Center Manufacturing Holdings, Inc., Center—Moeller Products LLC, Defiance Metal Products Co., Defiance Metal Products of Arkansas, Inc., Defiance Metal Products of PA., Inc. and Defiance Metal Products of WI, Inc.

Borrowings under the Credit Agreement bear interest at a fluctuating LIBOR (which may be adjusted for certain reserve requirements), plus 1.00% to 2.00% depending on the current Consolidated Total Leverage Ratio (as defined in the Credit Agreement). Under certain circumstances, we may not be able to pay interest based on LIBOR. If that happens, we will be required to pay interest at the Base Rate, which is the sum of (a) the higher of (i) the Prime Rate (as publicly announced by the Agent from time to time) and (ii) the Federal Funds Rate plus 0.50%, plus (b) 0.00% to 1.00%, depending on the current Total Consolidated Leverage Ratio. The Credit Agreement also includes provisions for determining a replacement rate when LIBOR is no longer available.

At June 30, 2021, the interest rate on outstanding borrowings under the Revolving Loan was 2.25%. At June 30, 2021, we had availability of approximately $156,146 under the Revolving Loan.

We must pay a commitment fee at a rate of 0.20% per annum on the average daily unused portion of the aggregate unused revolving commitments under the Credit Agreement. We must also pay fees as specified in the Fee Letter (as defined in the Credit Agreement) and with respect to any letters of credit issued under the Credit Agreement.

25

 


 

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness, create or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00. At June 30, 2021, our interest coverage ratio was 15.24 to 1.00. The Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions. This ratio was increased through the Second Amendment to the Credit Agreement to 3.75 to 1.00 for this quarter, as discussed in more detail below. As of June 30, 2021, our consolidated total leverage ratio was 1.00 to 1.00.

The Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, material money judgments, and failure to maintain subsidiary guarantees. If an event of default occurs, the Agent will be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of the credit facility, and all other actions permitted to be taken by a secured creditor.

Second Amendment to the Credit Agreement

On June 30, 2020, the Company entered into the Second Amendment to the Credit Agreement. The Second Amendment provides the Company with temporary relief regarding a financial covenant (the consolidated total leverage ratio) for the period from June 30, 2020, through December 31, 2021, or such earlier date as the Company may elect (Covenant Relief Period), in return for certain increases in interest rates and fees and restrictions on certain activities of the Company, including capital expenditures, acquisitions, dividends and share repurchases. New pricing, which takes effect for the quarters ended on and after September 30, 2020, includes interest at a fluctuating LIBOR (at a floor of 75 basis points), plus 1.00% to 2.75%, along with the commitment fee ranging from 20 to 50 basis points.

During the Covenant Relief Period, the required ceiling on the Company’s consolidated total leverage ratio will be 4.25 to 1.00 for quarters ending June 30, 2020 through and including December 31, 2020 and will decline in quarterly increments to 3.25 to 1.00 for the quarter ending December 31, 2021.

As of June 30, 2021, our consolidated total leverage ratio was 1.00 to 1.00 in accordance with the Second Amendment of the Credit Agreement.

At June 30, 2021, we were in compliance with all covenants under the Credit Agreement and the Second Amendment.

Third Amendment to the Credit Agreement

On March 31, 2021, the Company entered into the Third Amendment to the Credit Agreement. The Third amendment allows the Company to incur up to $70,000 of capital expenditures during 2021, versus $35,000 in the prior period.

Capital Requirements and Sources of Liquidity

During the six months ended June 30, 2021 and 2020, our capital expenditures were $16,986 and $3,652, respectively. The increase of $13,334 was driven by our continued focus on investment in technology and automation in the current period as compared to leveraging our investments and preserving cash during the same prior year period. Additionally, the Company invested $5,271 into the new Hazel Park, MI facility during the current year period for the ramp-up of production. Capital expenditures for the full year 2021 are expected to be approximately $55,000 to $65,000. The addition of our new strategic customer is generating the requirement of $35,000 to $45,000 in additional capital investments.

We have historically relied upon cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. At June 30, 2021, we had immediate availability of approximately $156,146 through our Revolving Loan and another $100,000 through an accordion feature under our Credit Agreement, subject to the covenants under the Credit Agreement and Second Amendment. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependent on our ability to access outside sources of capital. We will continue to have access to the availability currently provided under the Credit Agreement as long as we remain compliant with the financial covenants. Based on our estimates of the impact of COVID-19 at this time, we expect to be in compliance with these financial covenants through 2021 and the foreseeable future.

We believe that our operating cash flow and available borrowings under the Credit Agreement are sufficient to fund our operations for 2021 when taking into consideration the estimated impacts of COVID-19 based on the information we have available at

26

 


 

this time. However, future cash flows are subject to a number of variables, and additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

Contractual Obligations

The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at June 30, 2021:

 

 

 

 

 

 

Payments Due by Period

 

 

 

Total

 

 

2021

(Remainder)

 

 

2022 – 2023

 

 

2024 – 2025

 

 

Thereafter

 

Long-term debt principal payment obligations (1)

 

$

43,854

 

 

$

 

 

$

 

 

$

43,854

 

 

$

 

Forecasted interest on debt payment obligations (2)

 

 

4,475

 

 

 

688

 

 

 

2,754

 

 

 

1,033

 

 

 

 

Capital lease obligations

 

 

2,575

 

 

 

367

 

 

 

1,468

 

 

 

740

 

 

 

 

Operating lease obligations

 

 

44,676

 

 

 

2,647

 

 

 

11,049

 

 

 

9,068

 

 

 

21,912

 

Total

 

$

95,580

 

 

$

3,702

 

 

$

15,271

 

 

$

54,695

 

 

$

21,912

 

(1)

The long-term amounts in the table include principal payments under the Company’s Credit Agreement, which expires in 2024.

(2)

Forecasted interest on debt obligations based on the debt balance, interest rate and unused fee as of June 30, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in customer forecasts, interest rates, and, to a lesser extent, commodities. To reduce such risks, we selectively use financial instruments and other proactive management techniques.

Customer Forecasts

The use and consumption of our components, products and services fluctuates depending on order forecasts we receive from our customers. These order forecasts can change dramatically from quarter-to-quarter dependent upon the respective markets that our customers provide products in.

Interest Rate Risk

We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the Credit Agreement, which exposes us to variability in interest payments due to changes in the referenced interest rates.

The amount borrowed under the Revolving Loan under the Credit Agreement was $43.9 million as of June 30, 2021. The interest rate was 2.25% as of June 30, 2021. Please see “Liquidity and Capital Resources - Amended and Restated Credit Agreement” in Part I, Item 2 of this Quarterly Report on Form 10-Q and Note 3 in the Notes to the Unaudited Condensed Consolidated Financial Statements for more specifics.

A hypothetical 100-basis-point increase in interest rates would have resulted in an additional $0.1 million of interest expense based on our variable rate debt at June 30, 2021. We do not use derivative financial instruments to manage interest risk or to speculate on future changes in interest rates. A rise in interest rates could negatively affect our cash flow.

Commodity Risk

We source a wide variety of materials and components from a network of suppliers. While such materials are generally available from numerous suppliers, COVID-19 has resulted in availability delays at times. In addition, commodity raw materials, such as steel, aluminum, copper, paint and paint chemicals, and other production costs are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion and in many cases utilize contracts with those customers to mitigate the impact of commodity raw material price fluctuations. As of June 30, 2021, we did not have any commodity hedging instruments in place.

27

 


 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

28

 


 

PART II—OTHER INFORMATION

We are not currently a party to any material litigation proceedings. From time to time, however, we may be a party to litigation and subject to claims incident to the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 5, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The table below sets forth information with respect to purchases we made of shares of our common stock during the quarter ended June 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 (1)

 

 

Dollar Value of

Shares that

May Yet Be

Purchased

Under the Plans

or Programs (1)

 

April 2021

 

 

 

 

$

 

 

 

 

 

$

19,896,406

 

May 2021

 

 

 

 

$

-

 

 

 

 

 

$

19,896,406

 

June 2021

 

 

 

 

$

 

 

 

 

 

$

19,896,406

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

On June 12, 2019, our board of directors authorized the purchase of up to $4 million of shares of our common stock to be used to meet our required 2019 safe harbor funding obligation under the ESOP. On October 28, 2019, our board of directors approved an increase of our share repurchase program from $4 million to $25 million of shares through 2021.


29

 


 

 

Item 6. Exhibits.

The exhibits listed in the Exhibit Index below are filed as part of this Quarterly Report on Form 10-Q.

EXHIBIT INDEX

 

Exhibit

Number

 

Description

 

 

 

  31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32

 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

Inline XBRL Instance Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

Mayville Engineering Company, Inc.

 

 

 

 

 

Date: August 4, 2021

 

By:

 

/s/ Robert D. Kamphuis

 

 

 

 

Robert D. Kamphuis

 

 

 

 

Chairman, President & Chief Executive Officer

 

 

 

 

 

 

 

By:

 

/s/ Todd M. Butz

 

 

 

 

Todd M. Butz

 

 

 

 

Chief Financial Officer

 

31