Mayville Engineering Company, Inc. [MEC] Filings

10-Q 1 tmb-20230630x10q.htm 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, 2023

☐	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

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 28, 2023, the registrant had 20,392,594 shares of common stock, no par value per share, outstanding.

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		Page

PART I.	FINANCIAL INFORMATION	5

Item 1.	Financial Statements (Unaudited)	5

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Comprehensive Income	6

	Condensed Consolidated Statements of Cash Flows	7

	Condensed Consolidated Statements of Shareholders’ Equity	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION	31

Item 1.	Legal Proceedings	31

Items 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

Signatures		33

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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, 2022, filed with the Securities and Exchange Commission (the SEC) on March 1, 2023, 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:

●

Macroeconomic conditions, including inflation, rising interest rates and recessionary concerns, as well as ongoing supply chain challenges, labor availability and cost pressures, and the COVID-19 pandemic have had, and may continue to have, a negative impact on our business, financial condition, cash flows and results of operations (including future uncertain impacts);

●

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

●

risks related to scheduling production accurately and maximizing efficiency;

●

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

●

failure to compete successfully in our markets;

●

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 entering new markets;

●

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

●

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

●

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

●

our ability to successfully identify or integrate acquisitions;

●

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

●

risks related to our information technology systems and infrastructure;

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●

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

●

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.

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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,		December 31,
	2023		2022
ASSETS
Cash and cash equivalents	$	90,125	$	127
Receivables, net of allowances for doubtful accounts of $551 at June 30, 2023 and $545 at December 31, 2022		69,066		58,001
Inventories, net		66,828		71,708
Tooling in progress		7,827		7,938
Prepaid expenses and other current assets		4,360		3,529
Total current assets		238,206		141,303
Property, plant and equipment, net		141,326		145,771
Assets held for sale		81		83
Goodwill		71,535		71,535
Intangible assets, net		40,333		43,809
Operating lease assets		33,929		36,073
Other long-term assets		3,192		2,007
Total assets	$	528,602	$	440,581
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	52,354	$	53,735
Current portion of operating lease obligation		5,017		4,857
Accrued liabilities:
Salaries, wages, and payroll taxes		8,229		7,288
Profit sharing and bonus		1,499		6,860
Current portion of deferred compensation		273		18,062
Other current liabilities		11,333		11,646
Total current liabilities		78,705		102,448
Bank revolving credit notes		177,943		72,236
Operating lease obligation, less current maturities		29,745		31,891
Deferred compensation, less current portion		3,446		3,132
Deferred income tax liability		12,710		11,818
Other long-term liabilities		684		1,189
Total liabilities	$	303,233	$	222,714
Commitments and contingencies (see Note 8)
Common shares, no par value, 75,000,000 authorized, 21,829,453 shares issued at June 30, 2023 and 21,645,193 at December 31, 2022		—		—
Additional paid-in-capital		203,423		200,945
Retained earnings		30,459		26,274
Treasury shares at cost, 1,458,655 shares at June 30, 2023 and 1,472,447 at December 31, 2022		(8,513)		(9,352)
Total shareholders’ equity		225,369		217,867
Total	$	528,602	$	440,581

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

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

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

(unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net sales	$	138,980	$	138,337	$	281,626	$	274,589
Cost of sales		122,885		120,079		249,154		241,449
Amortization of intangible assets		1,738		1,738		3,476		3,476
Profit sharing, bonuses, and deferred compensation		2,688		1,208		5,690		3,755
Employee stock ownership plan expense		—		1,330		—		1,820
Other selling, general and administrative expenses		7,396		6,396		14,363		12,121
Impairment of long-lived assets and gain on contracts		—		(906)		—		(2,089)
Income from operations		4,273		8,492		8,943		14,057
Interest expense		(1,968)		(765)		(3,626)		(1,332)
Loss on extinguishment of debt		(216)		—		(216)		—
Income before taxes		2,089		7,727		5,101		12,725
Income tax expense		475		1,798		916		2,974
Net income and comprehensive income	$	1,614	$	5,929	$	4,185	$	9,751

Earnings per share:
Basic	$	0.08	$	0.29	$	0.21	$	0.48
Diluted	$	0.08	$	0.29	$	0.20	$	0.47

Weighted average shares outstanding:
Basic		20,494,437		20,581,945		20,405,383		20,490,944
Diluted		20,827,728		20,650,551		20,789,175		20,807,677

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

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Six Months Ended
	June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,185	$	9,751
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		12,415		10,975
Amortization		3,476		3,476
Allowance for doubtful accounts		6		168
Inventory excess and obsolescence reserve		41		87
Stock-based compensation expense		2,420		2,714
Gain on disposal of property, plant and equipment		(135)		(625)
Impairment of long-lived assets and gain on contracts		—		(2,089)
Deferred compensation		(17,475)		(4,637)
Loss on extinguishment of debt		216		—
Non-cash lease expense		2,144		2,482
Other non-cash adjustments		184		176
Changes in operating assets and liabilities:
Accounts receivable		(11,071)		(15,973)
Inventories		4,839		(4,033)
Tooling in progress		111		(1,367)
Prepaids and other current assets		(897)		(1,561)
Accounts payable		(3,061)		9,275
Deferred income taxes		638		2,504
Operating lease obligations		(1,986)		(2,270)
Accrued liabilities		(1,915)		6,631
Net cash provided by (used in) operating activities		(5,865)		15,684
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(6,320)		(26,351)
Proceeds from sale of property, plant and equipment		153		5,228
Net cash used in investing activities		(6,167)		(21,123)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit notes		347,324		218,867
Payments on bank revolving credit notes		(241,618)		(210,414)
Repayments of other long-term debt		(575)		(547)
Payments of financing costs		(1,248)		—
Purchase of treasury stock		(1,661)		(2,323)
Payments on finance leases		(192)		(157)
Net cash provided by financing activities		102,030		5,426
Net increase (decrease) in cash and cash equivalents		89,998		(13)
Cash and cash equivalents at beginning of period		127		118
Cash and cash equivalents at end of period	$	90,125	$	105
Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,383	$	999
Cash paid for taxes	$	278	$	450
Non-cash 401(k) contribution of treasury stock	$	2,500	$	—
Non-cash property, plant & equipment, net	$	2,283	$	5,633

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

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands)

(unaudited)


	Shareholders' Equity
	Additional		Treasury		Retained
	Paid-in-Capital		Shares		Earnings		Total
Balance as of December 31, 2022	$	200,945	$	(9,352)	$	26,274	$	217,867
Net income		—		—		2,571		2,571
401(k) plan contribution		—		2,500		—		2,500
Purchase of treasury stock		—		(661)		—		(661)
Stock-based compensation		1,066		—		—		1,066
Balance as of March 31, 2023	$	202,011	$	(7,513)	$	28,845	$	223,343
Net income		—		—		1,614		1,614
Purchase of treasury stock		—		(1,000)		—		(1,000)
Stock-based compensation		1,354		—		—		1,354
Stock options exercised		58		—		—		58
Balance as of June 30, 2023	$	203,423	$	(8,513)	$	30,459	$	225,369

	Shareholders' Equity
	Additional		Treasury		Retained
	Paid-in-Capital		Shares		Earnings		Total
Balance as of December 31, 2021	$	197,186	$	(6,462)	$	7,547	$	198,271
Net income		—		—		3,822		3,822
401(k) plan contribution		—		2,057		—		2,057
Purchase of treasury stock		—		(2,323)		—		(2,323)
Stock-based compensation		1,257		—		—		1,257
Balance as of March 31, 2022	$	198,443	$	(6,728)	$	11,369	$	203,084
Net income		—		—		5,929		5,929
Stock-based compensation		1,456		—		—		1,456
Balance as of June 30, 2022	$	199,899	$	(6,728)	$	17,298	$	210,469

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

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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 condensed 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, 2022, 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 2022 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 except for new accounting pronouncements adopted as described below.

Nature of Operations

MEC is a leading U.S.-based, vertically-integrated, value-added manufacturing partner providing a full suite of manufacturing solutions from concept to production, including design, prototyping and tooling, fabrication, aluminum extrusion, 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 and other end markets. Founded in 1945 and headquartered in Mayville, Wisconsin, we are a leading Tier I U.S. supplier of highly engineered components to original equipment manufacturer (OEM) customers with leading positions in their respective markets. The Company operates 22 facilities located in Arkansas, Michigan, Mississippi, Ohio, Pennsylvania, Virginia, and Wisconsin. Our engineering expertise and technical know-how allow us to add value through every product redevelopment cycle (generally every three to five years for our customers).

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 and other products.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes Accounting Standards Codification (ASC) 326, Financial Instruments – Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. 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, 2022. The Company adopted the new standard as of January 1, 2023. As our customer base is principally made of blue-chip OEMs with high credit ratings and our trade receivables are due within one year or less, the adoption of this standard did not have a material impact on our consolidated financial statements.

Note 2. Select balance sheet data

Inventory

Inventories are stated at the lower of cost, determined on the first-in, first-out method, or 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.

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Inventories as of June 30, 2023 and December 31, 2022 consist of:


	June 30,		December 31,
	2023		2022
Finished goods and purchased parts	$	31,069	$	44,728
Raw materials		26,998		17,003
Work-in-process		8,761		9,977
Total	$	66,828	$	71,708

Property, plant and equipment

Property, plant and equipment as of June 30, 2023 and December 31, 2022 consist of:


	Useful Lives		June 30,		December 31,
	Years		2023		2022
Land		Indefinite	$	1,030	$	1,030
Land improvements		15-39		3,169		3,169
Building and building improvements		15-39		65,487		59,664
Machinery, equipment and tooling		3-10		264,307		250,110
Vehicles		5		4,360		4,359
Office furniture and fixtures		3-7		20,453		19,585
Construction in progress		N/A		13,091		26,435
Total property, plant and equipment, gross				371,897		364,352
Less accumulated depreciation				230,571		218,581
Total property, plant and equipment, net			$	141,326	$	145,771

Depreciation expense was $6,273 and $5,507 for the three months ended June 30, 2023 and 2022, respectively, and $12,415 and $10,975 for the six months ended June 30, 2023 and 2022, respectively.

At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from the former fitness customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company had committed to purchase, to meet obligations under the agreement with the former fitness customer as of December 31, 2021. As a result, at December 31, 2021, the Company recorded a long-lived asset impairment of $12,875.

During the three and six months ended June 30, 2022, the Company was able to cancel $906 and $2,089 respectively, of purchase commitments for property, plant and equipment relating to the former fitness customer that had previously been recorded in the Consolidated Statements of Comprehensive Income as an impairment of long-lived assets and loss on contracts as of December 31, 2021. The cancellation of loss contracts has resulted in the reversal of these amounts from other current liabilities in the Condensed Consolidated Balance Sheets and recorded in the Condensed Consolidated Statements of Comprehensive Income as an impairment of long-lived assets and gain on contracts for the three and six months ended June 30, 2022.

The Company adopted ASC 842 on January 1, 2022, classifying finance leases of $914 and $1,103 in property, plant and equipment on the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, respectively. Please refer to Note 4 – Leases for additional information.

Goodwill

There were no changes to the goodwill balance of $71,535 between December 31, 2022 and June 30, 2023.

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Intangible Assets

The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of June 30, 2023 and December 31, 2022:


	Useful Lives		June 30,		December 31,
	Years		2023		2022
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				(65,422)		(61,946)
Total amortizable intangible assets, net				36,522		39,998
Non-amortizable brand name				3,811		3,811
Total intangible assets, net			$	40,333	$	43,809

Non-amortizable brand name is tested annually during the fourth quarter for impairment, or more frequently if triggering events occur indicating there may be impairment.

Changes in intangible assets between December 31, 2022 and June 30, 2023 consist of:


Balance as of December 31, 2022	$	43,809
Amortization expense		(3,476)
Balance as of June 30, 2023	$	40,333

Amortization expense was $1,738 for the three months ended June 30, 2023, and 2022, and $3,476 for the six months ended June 30, 2023 and 2022.

Future amortization expense is expected to be as followed:


Year ending December 31,
2023 (remainder)	$	3,390
2024	$	5,192
2025	$	5,192
2026	$	5,192
2027	$	5,192
Thereafter	$	12,364

Note 3. Bank revolving credit notes

On June 28, 2023, we entered into an amended and restated credit agreement (the Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The Credit Agreement provides for a $250,000 revolving credit facility, with a letter of credit sub-facility, and a swingline facility in an aggregate amount of $25,000. The Credit Agreement also provides the availability of incremental facilities to the greater of $100,000 and 125% of the Company’s twelve month trailing Consolidated EBITDA through an accordion feature. All amounts borrowed under the credit agreement mature on June 28, 2028.

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, incur, assume or suffer to exist liens; make certain investments; allow our subsidiaries to merge or consolidate with another entity; make certain asset dispositions; pay certain dividends or other distributions to shareholders; enter into transactions with affiliates; enter into sale leaseback transactions; and exceed the limits on annual capital expenditures. The Credit Agreement also requires us to satisfy certain

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financial covenants, including a minimum consolidated interest coverage ratio of 3.00 to 1.00 as well as a consolidated total leverage ratio not to exceed 3.50 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions.

The Company incurred deferred financing costs of $1,248 associated with executing the Credit Agreement, which has been recorded as an other long-term asset in the Condensed Consolidated Balance Sheets and will be amortized over the duration of the agreement.

At June 30, 2023 our consolidated interest coverage ratio was 5.93 to 1.00 as compared to a covenant minimum of 3.00 to 1.00 under the Credit Agreement.

At June 30, 2023, our consolidated total leverage ratio was 1.61 as compared to a covenant maximum of 3.50 to 1.00 under the Credit Agreement.

Under the Credit Agreement, interest is payable quarterly at the adjusted secured overnight financing rate (SOFR) plus an applicable margin based on the current consolidated total leverage ratio. The interest rate was 7.69% and 5.69% as of June 30, 2023 and December 31, 2022, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.30% and 0.25% as of June 30, 2023 and December 31, 2022, respectively.

Prior to June 28, 2023, the Company maintained a credit agreement (Former Credit Agreement) with certain lenders and the Agent. The Former Credit Agreement provided for a $200,000 revolving credit facility, 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 Former Credit Agreement also provided for an additional $100,000 of debt capacity through an accordion feature.

The Company was in compliance with all financial covenants of its credit agreements as of June 30, 2023 and December 31, 2022. The amount borrowed on the revolving credit notes was $177,943 and $72,236 as of June 30, 2023 and December 31, 2022, respectively.

Note 4. Leases

The Company has real property operating leases for office and light manufacturing space. Operating leases for the Company’s personal property consist of leases for office equipment, vehicles, forklifts and storage tanks for bulk gases. The Company recognizes a right-of-use (ROU) asset and a lease liability for operating leases based on the net present value of future minimum lease payments. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term, including renewal periods that are considered reasonably certain.

The Company has finance leases for two laser cutting systems and three vehicles. The Company recognizes an ROU asset and a lease liability for finance leases based on the net present value of future minimum lease payments. Lease expense for the Company’s finance leases is comprised of the amortization of the ROU asset and interest expense recognized based on the effective interest method.

Variable lease expense is related to certain of the Company’s real property leases and personal property leases, and it generally consists of property tax and insurance components that are for the benefit of the lessor (real property leases) and variable overage fees (personal property leases) that are remitted as part of the Company’s lease payments.

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The components of lease expense were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Finance lease cost:
Amortization of finance lease assets	$	94	$	78	$	188	$	157
Interest on finance lease liabilities		10		11		21		22
Total finance lease expense		104		89		209		179
Operating lease expense		1,321		1,512		2,607		3,034
Short-term lease expense		131		139		270		318
Variable lease expense		48		61		117		108
Sublease income ⁽¹⁾		(404)		(146)		(1,035)		(146)
Total lease expense	$	1,200	$	1,655	$	2,168	$	3,493

(1)	The Company subleased a portion of its Hazel Park, MI facility starting in June 2022.

Lease related supplemental cash flow information:


	Six Months Ended
	June 30,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities for finance leases:
Operating cash flows	$	21	$	22
Financing cash flows	$	192	$	157

Cash paid for amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows	$	2,891	$	2,837

Right-of-use assets obtained in exchange for recorded lease obligations:
Operating leases	$	363	$	106
Finance leases	$	—	$	—

Note 5. 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, 2023 and 2022, the Company’s estimated ESOP expense was $0 and $1,330, respectively. For the six months ended June 30, 2023 and 2022 the Company’s estimated ESOP expense was $0 and $1,820, respectively.

As of January 1, 2023, the Company amended the plan reducing the distribution period from five years to three years.

At various times following death, disability, retirement, termination of employment or the exercise of diversification rights, 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, 2023 and December 31, 2022, the ESOP shares consisted of 4,062,583 and 5,684,879 in allocated shares, respectively.

Note 6. 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

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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.

As of January 1, 2023, the Company implemented an employer match program to the 401(k) Plan. The Company now provides a 50% match for employee contributions, up to 6%. For the three and six months ended June 30, 2023, the Company’s employer match expense was $770 and $1,644, respectively. Additionally, the 401(k) Plan 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). For the three months ended June 30, 2023 and 2022, the Company’s estimated discretionary profit-sharing expense was $0 and $1,083, respectively. For the six months ended June 30, 2023 and 2022, the Company’s estimated discretionary profit-sharing expense was $0 and $1,474, respectively.

Note 7. 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 $475 and $916, and the effective tax rate (ETR) was 22.73% and 17.96% for the three and six months ended June 30, 2023, 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, 2022, income tax expense was estimated at $1,798 and $2,974 the ETR was 23.27% and 23.37%, respectively.

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, 2023. The Company does not anticipate that there will be a material change in the balance of the unrecognized tax benefits in the next 12 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 and six months ended June 30, 2023, 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, 2023 and December 31, 2022, a total of $429 and $384, 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, 2019, and state tax returns beginning January 1, 2018, are open for examination.

Note 8. Contingencies

On August 4, 2022, the Company filed a lawsuit against Peloton Interactive, Inc. (“Peloton”) in the Supreme Court of the State of New York, New York County. The lawsuit arises from a March 2021 “Supply Agreement” between the parties, pursuant to which MEC was to manufacture and supply custom component parts for Peloton’s exercise bikes (the “Manufacturing Project”). In the lawsuit, the Company originally asserted two claims (1) breach and anticipatory repudiation of contract and (2) breach of the duty of good faith and fair dealing (pleaded in the alternative). In January 2023, in response to Peloton’s motion to dismiss, the court allowed the first claim to proceed and dismissed the alternative claim. In the remaining claim, MEC asserts that Peloton breached and anticipatorily repudiated the Supply Agreement by unilaterally cancelling the Manufacturing Project and refusing to pay MEC certain monthly fixed revenue payments owed under the terms of the Supply Agreement. The total amount for damages claimed is substantial but the amount and timing of the ultimate recovery is uncertain. As a result, any recovery from this litigation or settlement of this claim is a contingent gain and will be recognized if, and when, realized or realizable.

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.

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Note 9. Deferred compensation

The Mayville Engineering Company 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 or 180 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 and six months ended June 30, 2023, eligible employees elected to defer compensation of $80 and $316, respectively. Eligible employees elected to defer compensation of $0 for the three and six months ended June 30, 2022. As of June 30, 2023 and December 31, 2022, the short-term portion accrued for all benefit years less than 12 months under this plan was $273 and $18,062, respectively. As of June 30, 2023 and December 31, 2022, the long-term portion accrued for all benefit years greater than 12 months under this plan was $3,446 and $3,132. These amounts include the initial deferral of compensation and were adjusted for changes in the value of investment options chosen by the participants. Total expense (credit) for the deferred compensation plan for the three months ended June 30, 2023 and 2022 was $169 and $(2,461), respectively. Total expense (credit) for the deferred compensation plan for the six months ended June 30, 2023 and 2022 was $729 and $(3,589), respectively. These expenses (credits) are included in profit-sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income. Additionally, the Company made cash distributions of $17,562 and $1,048 for the six months ended June 30, 2023 and 2022, respectively.

Note 10. 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. Since March 31, 2020, the Company has an aggregate stop loss limit to mitigate risk. Expenses related to this were $5,133 and $3,388 for the three months ended June 30, 2023 and 2022, respectively, and $9,768 and $8,148 for the six months ended June 30, 2023 and 2022, respectively. An estimated accrued liability of $996 and $900 was recorded as of June 30, 2023 and December 31, 2022, respectively, for estimated unpaid claims and is included within other current liabilities on the Condensed Consolidated Balance Sheets.

Note 11. Segments

The Company applies the provisions of ASC 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 12. 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

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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:


	Balance at		Fair Value Measurements at
	June 30,		Report Date Using
	2023		(Level 1)		(Level 2)		(Level 3)
Deferred compensation liability	$	3,719	$	3,719	$	—	$	—
Total	$	3,719	$	3,719	$	—	$	—


	Balance at		Fair Value Measurements at
	December 31,		Report Date Using
	2022		(Level 1)		(Level 2)		(Level 3)
Deferred compensation liability	$	21,194	$	21,194	$	—	$	—
Total	$	21,194	$	21,194	$	—	$	—

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 Condensed Consolidated Balance Sheets 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 current balance all as Level 1. The change in fair value is recorded in the profit-sharing, bonuses, and deferred compensation line item on the Condensed Consolidated Statements of Comprehensive Income. The short-term and long-term balances due to participants are reflected on the current portion of deferred compensation and deferred compensation, less current portion, line items, respectively, on the Condensed Consolidated Balance Sheets.

The Company’s non-financial assets such as goodwill, 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 13. 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.

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A reconciliation of basic and diluted net income per share attributable to the Company were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net income attributable to MEC	$	1,614	$	5,929	$	4,185	$	9,751
Average shares outstanding		20,494,437		20,581,945		20,405,383		20,490,944
Basic income per share	$	0.08	$	0.29	$	0.21	$	0.48

Average shares outstanding		20,494,437		20,581,945		20,405,383		20,490,944
Effect of dilutive share-based compensation		333,291		68,606		383,792		316,733
Total potential shares outstanding		20,827,728		20,650,551		20,789,175		20,807,677
Diluted income per share	$	0.08	$	0.29	$	0.20	$	0.47

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,
	2023	2022	2023	2022
Stock options	219,885	—	247,278	—

Note 14. Revenue Recognition

Contract Assets and Contract Liabilities

The Company has contract assets and contract liabilities, which are included in tooling in progress and other current liabilities on the Condensed Consolidated Balance Sheets, 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 or other documented customer acceptance. 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.

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, 2023:


	Contract		Contract
	Assets		Liabilities
As of December 31, 2022	$	7,938	$	6,141
Net activity		(111)		(600)
As of June 30, 2023	$	7,827	$	5,541

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Disaggregated Revenue

The following tables represent a disaggregation of revenue by product category and end market:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
Product Category	2023		2022		2023		2022
Outdoor sports	$	2,379	$	2,522	$	4,684	$	5,049
Fabrication		84,172		83,038		171,174		165,271
Performance structures		26,846		28,197		53,521		57,157
Tube		19,468		19,488		39,820		37,796
Tank		11,070		8,915		22,189

Mayville Engineering Company, Inc. [MEC] Filings
10-Q	[2023-08-02]
10-Q	[2023-05-03]
10-K	[2023-03-01]
10-Q	[2022-11-02]
10-Q	[2022-08-03]
10-Q	[2022-05-04]
10-K	[2022-03-02]
10-Q	[2021-11-04]
10-Q	[2021-08-04]
10-Q	[2021-05-05]
10-K	[2021-03-05]
10-Q	[2020-11-03]
10-Q	[2020-08-05]
10-Q	[2020-05-06]
10-K	[2020-03-02]
10-Q	[2019-10-31]
10-Q	[2019-08-09]
10-Q	[2019-06-18]
S-1	[2019-04-12]