UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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 | ☐ | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
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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
As of July 28, 2023, the registrant had
Table of Contents
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Notes to Unaudited Condensed Consolidated Financial Statements | 9 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
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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 |
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Cash and cash equivalents | $ | | $ | | ||
Receivables, net of allowances for doubtful accounts of $ |
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Inventories, net |
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Tooling in progress |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Assets held for sale | | | ||||
Goodwill |
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Intangible assets, net |
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Operating lease assets | | | ||||
Other long-term assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Accounts payable | $ | | $ | | ||
Current portion of operating lease obligation | | | ||||
Accrued liabilities: |
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Salaries, wages, and payroll taxes |
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Profit sharing and bonus |
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Current portion of deferred compensation | | | ||||
Other current liabilities |
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Total current liabilities |
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Bank revolving credit notes |
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Operating lease obligation, less current maturities | | | ||||
Deferred compensation, less current portion |
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Deferred income tax liability |
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Other long-term liabilities |
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Total liabilities | $ | | $ | | ||
Commitments and contingencies (see Note 8) |
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Common shares, |
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Additional paid-in-capital |
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Retained earnings |
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Treasury shares at cost, |
| ( |
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Total shareholders’ equity |
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Total | $ | | $ | |
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 | $ | | $ | | $ | | $ | | ||||
Cost of sales |
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Amortization of intangible assets |
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Profit sharing, bonuses, and deferred compensation |
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Employee stock ownership plan expense |
| — |
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| — |
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Other selling, general and administrative expenses |
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Impairment of long-lived assets and gain on contracts | — | ( | — | ( | ||||||||
Income from operations |
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Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Loss on extinguishment of debt | ( | — | ( | — | ||||||||
Income before taxes |
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Income tax expense |
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Net income and comprehensive income | $ | | $ | | $ | | $ | | ||||
Earnings per share: |
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Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding: |
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Basic |
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Diluted |
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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 | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation |
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Amortization |
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Allowance for doubtful accounts |
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Inventory excess and obsolescence reserve |
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Stock-based compensation expense |
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Gain on disposal of property, plant and equipment |
| ( | ( | |||
Impairment of long-lived assets and gain on contracts |
| — | ( | |||
Deferred compensation |
| ( | ( | |||
Loss on extinguishment of debt | | — | ||||
Non-cash lease expense | | | ||||
Other non-cash adjustments |
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Changes in operating assets and liabilities: |
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Accounts receivable |
| ( | ( | |||
Inventories |
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Tooling in progress |
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Prepaids and other current assets |
| ( | ( | |||
Accounts payable |
| ( | | |||
Deferred income taxes |
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Operating lease obligations | ( | ( | ||||
Accrued liabilities |
| ( | | |||
Net cash provided by (used in) operating activities |
| ( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property, plant and equipment |
| ( | ( | |||
Proceeds from sale of property, plant and equipment |
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Net cash used in investing activities |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from bank revolving credit notes |
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Payments on bank revolving credit notes |
| ( | ( | |||
Repayments of other long-term debt |
| ( | ( | |||
Payments of financing costs |
| ( | — | |||
Purchase of treasury stock |
| ( | ( | |||
Payments on finance leases |
| ( | ( | |||
Net cash provided by financing activities |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: |
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Cash paid for interest | $ | | $ | | ||
Cash paid for taxes | $ | | $ | | ||
Non-cash 401(k) contribution of treasury stock | $ | | $ | — | ||
Non-cash property, plant & equipment, net | $ | | $ | |
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 | $ | | $ | ( | $ | | $ | | ||||
Net income | — | — | | | ||||||||
401(k) plan contribution |
| — | | — |
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Purchase of treasury stock | — | ( | — | ( | ||||||||
Stock-based compensation |
| | — | — |
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Balance as of March 31, 2023 | $ | | $ | ( | $ | | $ | | ||||
Net income |
| — |
| — |
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Purchase of treasury stock | — | ( | — | ( | ||||||||
Stock-based compensation |
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| — |
| — |
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Stock options exercised | | — | — | | ||||||||
Balance as of June 30, 2023 | $ | | $ | ( | $ | | $ | | ||||
Shareholders' Equity | ||||||||||||
Additional | Treasury | Retained | ||||||||||
| Paid-in-Capital |
| Shares |
| Earnings |
| Total | |||||
Balance as of December 31, 2021 | $ | | $ | ( | $ | | $ | | ||||
Net income | — | — | | | ||||||||
401(k) plan contribution | — |
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| — |
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Purchase of treasury stock | — | ( | — | ( | ||||||||
Stock-based compensation |
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| — |
| — |
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Balance as of March 31, 2022 | $ | | $ | ( | $ | | $ | | ||||
Net income |
| — |
| — |
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Stock-based compensation |
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| — |
| — |
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Balance as of June 30, 2022 | $ | | $ | ( | $ | | $ | |
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
Our
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 | $ | | $ | | ||
Raw materials |
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Work-in-process |
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Total | $ | | $ | |
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 | $ | | $ | | |||||
Land improvements | | | |||||||
Building and building improvements |
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Machinery, equipment and tooling |
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Vehicles |
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Office furniture and fixtures |
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Construction in progress |
| N/A |
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Total property, plant and equipment, gross |
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Less accumulated depreciation |
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Total property, plant and equipment, net | $ | | $ | |
Depreciation expense was $
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
During the three and six months ended June 30, 2022, the Company was able to cancel $
The Company adopted ASC 842 on January 1, 2022, classifying finance leases of $
Goodwill
There were
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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 | | $ | | $ | | ||||
Trade name |
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Non-compete agreements |
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Patents |
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Accumulated amortization |
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| ( |
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Total amortizable intangible assets, net |
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Non-amortizable brand name |
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Total intangible assets, net | $ | | $ | |
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 |
| $ | |
Amortization expense |
| ( | |
Balance as of June 30, 2023 | $ | |
Amortization expense was $
Future amortization expense is expected to be as followed:
Year ending December 31, |
| ||
2023 (remainder) | $ | | |
2024 | $ | | |
2025 | $ | | |
2026 | $ | | |
2027 | $ | | |
Thereafter | $ | |
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 $
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
The Company incurred deferred financing costs of $
At June 30, 2023 our consolidated interest coverage ratio was
At June 30, 2023, our consolidated total leverage ratio was
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
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 $
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 $
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 | $ | | $ | | $ | | $ | | ||||
Interest on finance lease liabilities | |
| | |
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Total finance lease expense | | | | | ||||||||
Operating lease expense | | | | | ||||||||
Short-term lease expense | | | | | ||||||||
Variable lease expense | |
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Sublease income (1) | ( | ( | ( | ( | ||||||||
Total lease expense | $ | | $ | | $ | | $ | |
(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 | $ | | $ | | ||
Financing cash flows | $ | | $ | | ||
Cash paid for amounts included in the measurement of lease liabilities for operating leases: | ||||||
Operating cash flows | $ | | $ | | ||
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Right-of-use assets obtained in exchange for recorded lease obligations: | ||||||
Operating leases | $ | | $ | | ||
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 $
As of January 1, 2023, the Company amended the plan reducing the distribution period from
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
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
As of January 1, 2023, the Company implemented an employer match program to the 401(k) Plan. The Company now provides a
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 $
For the three and six months ended June 30, 2022, income tax expense was estimated at $
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.
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
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
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 $
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 $
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
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 | $ | | $ | | $ | — | $ | — | ||||
Total | $ | | $ | | $ | — | $ | — |
Balance at | Fair Value Measurements at | |||||||||||
December 31, | Report Date Using | |||||||||||
| 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Deferred compensation liability | $ | | $ | | $ | — | $ | — | ||||
Total | $ | | $ | | $ | — | $ | — |
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 | $ | | $ | | $ | | $ | | |||||
Average shares outstanding | | | | | |||||||||
Basic income per share | $ | | $ | | $ | | $ | | |||||
Average shares outstanding | | | | | |||||||||
Effect of dilutive share-based compensation | | | | | |||||||||
Total potential shares outstanding | | | | | |||||||||
Diluted income 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, | |||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |
Stock options | | — | | — |
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.
Contract | Contract | |||||
| Assets |
| Liabilities | |||
As of December 31, 2022 | $ | | $ | | ||
Net activity | ( | ( | ||||
As of June 30, 2023 | $ | | $ | |
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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 | $ | | $ | | $ | | $ | | ||||
Fabrication | | | | | ||||||||
Performance structures | | | | | ||||||||
Tube | | | | | ||||||||
Tank | | | | |