10-Q 1 tmb-20240331x10q.htm 10-Q
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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 March 31, 2024

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.)

135 S. 84th Street, Suite 300

Milwaukee, Wisconsin

53214

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (414) 381-2860

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 May 3, 2024, the registrant had 20,526,787 shares of common stock, no par value per share, outstanding.

Table of Contents

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29

PART II.

OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Items 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

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, 2023, filed with the Securities and Exchange Commission (the SEC) on March 6, 2024, 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, elevated interest rates and recessionary concerns, as well as continuing supply chain constraints affecting some of our customers, labor availability and material cost pressures, 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, including cybersecurity risk and data leakage risks;

3

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; 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.

4

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

    

March 31, 

    

December 31, 

2024

2023

ASSETS

  

  

Cash and cash equivalents

$

314

$

672

Receivables, net of allowances for doubtful accounts of $669 at March 31, 2024
and $685 at December 31, 2023

 

70,331

 

57,445

Inventories, net

 

66,106

 

67,782

Tooling in progress

 

5,232

 

5,457

Prepaid expenses and other current assets

 

3,523

 

3,267

Total current assets

 

145,506

 

134,623

Property, plant and equipment, net

 

172,095

 

175,745

Goodwill

 

92,650

 

92,650

Intangible assets, net

 

56,934

 

58,667

Operating lease assets

31,018

32,233

Other long-term assets

 

1,698

 

2,743

Total assets

$

499,901

$

496,661

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Accounts payable

$

54,457

$

46,526

Current portion of operating lease obligation

5,010

5,064

Accrued liabilities:

 

 

Salaries, wages, and payroll taxes

 

6,131

 

6,368

Profit sharing and bonus

 

1,455

 

3,107

Other current liabilities

 

12,093

 

10,644

Total current liabilities

 

79,146

 

71,709

Bank revolving credit notes

 

139,817

 

147,493

Operating lease obligation, less current maturities

27,532

28,606

Deferred compensation, less current portion

 

4,182

 

3,816

Deferred income tax liability

 

12,847

 

12,606

Other long-term liabilities

 

2,340

 

2,453

Total liabilities

$

265,864

$

266,683

Commitments and contingencies (see Note 9)

 

  

 

  

Common shares, no par value, 75,000,000 authorized, 22,009,409 shares issued at
March 31, 2024 and 21,853,477 at December 31, 2023

 

 

Additional paid-in-capital

 

206,191

 

205,373

Retained earnings

 

37,359

 

34,118

Treasury shares at cost, 1,542,893 shares at March 31, 2024 and December 31, 2023

 

(9,513)

 

(9,513)

Total shareholders’ equity

 

234,037

 

229,978

Total

$

499,901

$

496,661

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

5

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

March 31, 

    

2024

    

2023

Net sales

$

161,269

$

142,645

Cost of sales

 

140,336

 

126,268

Amortization of intangible assets

 

1,733

 

1,738

Profit sharing, bonuses, and deferred compensation

 

3,800

 

3,003

Other selling, general and administrative expenses

 

7,769

 

6,966

Income from operations

 

7,631

 

4,670

Interest expense

 

(3,356)

 

(1,658)

Income before taxes

 

4,275

 

3,012

Income tax expense

 

1,034

 

441

Net income and comprehensive income

$

3,241

$

2,571

Earnings per share:

 

  

 

  

Basic

$

0.16

$

0.13

Diluted

$

0.16

$

0.12

Weighted average shares outstanding:

 

  

 

  

Basic

 

20,485,933

 

20,315,338

Diluted

 

20,700,046

 

20,749,948

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

6

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2024

    

2023

    

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

3,241

$

2,571

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

Depreciation

 

7,521

6,142

Amortization

 

1,733

1,738

Allowance for doubtful accounts

 

(16)

27

Inventory excess and obsolescence reserve

 

(247)

11

Stock-based compensation expense

 

1,157

1,066

Loss (gain) on disposal of property, plant and equipment

 

2

(138)

Deferred compensation

 

316

(163)

Non-cash lease expense

1,215

1,286

Other non-cash adjustments

 

69

83

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(12,870)

(16,265)

Inventories

 

1,923

2,749

Tooling in progress

 

225

(100)

Prepaids and other current assets

 

(199)

110

Accounts payable

 

6,727

(2,290)

Deferred income taxes

 

1,159

441

Operating lease obligations

(1,128)

(1,206)

Accrued liabilities

 

(203)

(2,105)

Net cash provided by (used in) operating activities

 

10,625

 

(6,043)

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchase of property, plant and equipment

 

(2,775)

(2,408)

Proceeds from sale of property, plant and equipment

 

107

153

Net cash used in investing activities

 

(2,668)

 

(2,255)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

Proceeds from bank revolving credit notes

 

119,351

119,700

Payments on bank revolving credit notes

 

(127,026)

(110,360)

Repayments of other long-term debt

 

(195)

(286)

Shares withheld for employees' taxes

 

(683)

(661)

Payments on finance leases

 

(107)

(96)

Proceeds from the exercise of stock options

 

345

Net cash provided by (used in) financing activities

 

(8,315)

 

8,297

Net decrease in cash and cash equivalents

 

(358)

 

(1)

Cash and cash equivalents at beginning of period

 

672

 

127

Cash and cash equivalents at end of period

$

314

$

126

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

2,094

$

112

Cash paid for taxes

$

2

$

Non-cash property, plant & equipment, net

$

1,650

$

1,534

Non-cash 401(k) contribution of treasury stock

$

$

2,500

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

7

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, 2023

$

205,373

$

(9,513)

$

34,118

$

229,978

Net income

3,241

3,241

Stock-based compensation

1,157

1,157

Stock options exercised net of employee tax withholding

185

185

Restricted stock units net of employee tax withholding

 

(524)

 

(524)

Balance as of March 31, 2024

$

206,191

$

(9,513)

$

37,359

$

234,037

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

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

8

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, 2023, 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 2023 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 Milwaukee, 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 23 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 December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-09, Improvements to Income Tax Disclosures, amending Accounting Standards Codification (ASC) 740, Income Taxes. The amendment is intended to enhance the transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The amendments require that on an annual basis, entities disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, the amendments require that entities disclose additional information about income taxes paid as well as additional disclosures of pretax income and income tax expense and remove the requirement to disclose certain items that are no longer considered cost beneficial or relevant. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, may be applied prospectively or retrospectively and allows for early adoption. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures, amending ASC 280, Segment Reporting. The amendment is intended to improve reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment and contain other disclosure requirements. ASU 2023-07 is effective for fiscal years beginning after

9

December 15, 2023 and for interim periods after December 15, 2024. Early adoption is permitted and may be applied prospectively or retrospectively. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

Note 2. Acquisition

On July 1, 2023, the Company completed its acquisition of Mid-States Aluminum (MSA). The acquisition was consummated in accordance with terms and conditions of the certain Unit Purchase Agreement, dated as of June 19, 2023, among the Company and shareholders of MSA. The purchase price of the acquisition was $95,945, subject to adjustments for the amount of cash, indebtedness, net working capital and certain expenses of MSA as of the closing. At the closing of the acquisition, the Company applied an estimate of the adjustments and paid total net consideration of $90,002. The Company financed the acquisition by borrowing under its amended and restated credit agreement, as described in Note 4 – Debt in the Notes to Condensed Consolidated Financial Statements.

Located in Fond du Lac, WI, MSA is an industry leading, vertically-integrated manufacturer of custom aluminum extrusions and fabrications that also offers related services including design, engineering, anodizing and finishing, assembly and packaging. The acquisition enables MEC to secure an attractive entry point within light-weight materials fabrication, while providing significant new cross-selling opportunities with both new and existing customers.

The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values at the acquisition date. The estimate of the excess purchase price over the preliminary estimated fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill. The Company engaged an independent third party to assist with the identification and valuation of these intangible assets. Management makes significant estimates and assumptions when determining the fair value of assets acquired and liabilities assumed. These estimates include, but are not limited to, discount rates, projected future net sales, projected future expected cash flows, useful lives, attrition rates, royalty rates and growth rates. These measures are based on significant Level 3 inputs (see Note 13) not observable in the market.

The following table is a summary of the assets acquired, liabilities assumed and net cash consideration paid for MSA during 2023:

Preliminary

Estimated

Opening Balance

Useful

Sheet Allocation

Life

Cash

$

324

Accounts receivable, net

7,381

Inventory

9,698

Property, plant and equipment

41,271

Other assets

291

Intangible assets

Developed technology

4,900

7 Years

Customer relationships

17,700

17 Years

Goodwill

21,115

Indefinite

Total assets acquired

102,680

Accounts payable

(2,386)

Accrued expenses

(1,509)

Other liabilities

(1,984)

Debt

(7,884)

Total consideration

$

88,917

Inventory was valued at its estimated fair value, which is defined as expected sales price, less costs to sell, plus a reasonable margin for selling effort. The valuation resulted in an inventory fair value step-up of $891 and was fully expensed and reflected in cost of sales on the Condensed Consolidated Statements of Comprehensive Income during the three months ended September 30, 2023.

Property, plant and equipment was valued at its estimated fair value using the cost, market and sales comparison approaches. The valuation resulted in a property, plant and equipment fair value step-up of $21,157. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the respective assets.

10

The Company also recorded $17,700 of customer relationships intangible assets with an estimated useful life of 17 years and $4,900 of developed technology intangible assets with an estimated useful life of 7 years. The purchase price allocated to these assets was based on management’s forecasted cash inflows and outflows and using a relief from royalty method for developed technologies and the multi-period excess earnings method for customer relationships. Amortization expense related to these intangible assets is recorded on a straight-line basis and reflected in amortization of intangible expenses on the Condensed Consolidated Statements of Comprehensive Income.

The purchase price of MSA exceeded the preliminary estimated fair value of identifiable net assets and accordingly, the difference was allocated to goodwill, which is not tax deductible.

The Company believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, the purchase price allocations are preliminary as we continue to gather the necessary information to finalize our fair value estimates and provisional amounts. Provisional amounts include items related to working capital adjustments, intangibles, indemnification of assets and liabilities and deferred taxes. As of December 31, 2023, the Company finalized the net working capital adjustment in conjunction with the fair value estimates for assets acquired, liabilities assumed, identifiable assets and the net income tax provision. Since its preliminary estimates, the Company adjusted the purchase price by ($1,084) related to working capital adjustments. The offsetting adjustment was primarily related to goodwill.

The Company has recorded preliminary estimates for the items noted in the preceding paragraph and will record adjustments, if an, to the preliminary amounts upon finalization of the respective valuations. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as possible but no later than one year from the acquisition date.

Pro Forma Financial Information (Unaudited)

In accordance with ASC 805, the following unaudited pro forma combined results of operations have been prepared and presented to give effect to the MSA acquisition as if it had occurred on January 1, 2023, the beginning of the comparable period, applying certain assumptions and pro forma adjustments. These pro forma adjustments primarily relate to the estimated depreciation expense associated with the fair value of the acquired property, plant and equipment, amortization of identifiable intangible assets, interest expense related to additional debt needed to fund the acquisition, and the tax impact of these adjustments. Additionally, the pro forma adjustments include non-recurring expenses related to transaction costs and the sale of stepped-up inventory. The unaudited pro forma consolidated results are provided for illustrative purposes only, are not indicative of the Company’s actual consolidated results of operations or consolidated financial position and do not reflect any revenue and operating synergies or cost savings that may result from the acquisition.

Three Months Ended

March 31, 

    

2023

Net sales

 

$

158,720

Net income

 

$

1,384

Note 3. 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.

11

Inventories as of March 31, 2024 and December 31, 2023 consist of:

March 31, 

December 31, 

    

2024

    

2023

Finished goods and purchased parts

$

29,862

$

31,489

Raw materials

 

25,238

 

25,929

Work-in-process

 

11,006

 

10,363

Total

$

66,106

$

67,782

Property, plant and equipment

Property, plant and equipment as of March 31, 2024 and December 31, 2023 consist of:

    

Useful Lives

    

March 31, 

    

December 31, 

 Years

2024

2023

Land

Indefinite

$

2,640

$

2,640

Land improvements

15-39

4,378

4,378

Building and building improvements

 

15-39

 

81,558

 

79,682

Machinery, equipment and tooling

 

3-10

 

300,627

 

295,960

Vehicles

 

5

 

4,452

 

4,571

Office furniture and fixtures

 

3-7

 

22,089

 

21,325

Construction in progress

 

N/A

 

6,303

 

9,779

Total property, plant and equipment, gross

 

422,047

 

418,335

Less accumulated depreciation

 

249,952

 

242,590

Total property, plant and equipment, net

$

172,095

$

175,745

Depreciation expense was $7,521 and $6,142 for the three months ended March 31, 2024 and 2023, respectively.

Goodwill

There were no changes to the goodwill balance of $92,650 between December 31, 2023 and March 31, 2024.

Intangible Assets

The following is a listing of definite-lived intangible assets, the useful lives in years (amortization period) and accumulated amortization as of March 31, 2024 and December 31, 2023:

March 31, 2024

Useful Lives 

Gross Carrying

Accumulated

 

    

Years

    

Amount

    

Amortization

 

Net

Amortizable intangible assets:

Customer relationships and contracts

9-17

$

96,040

$

54,266

$

41,774

Trade name

 

10

 

14,780

 

7,816

6,964

Non-compete agreements

 

5

 

8,800

 

8,800

Developed technology

7

4,900

525

4,375

Patents

 

19

 

24

 

14

10

Total intangible assets, net

 

$

124,544

 

$

71,421

$

53,123

12

December 31, 2023

Useful Lives 

Gross Carrying

Accumulated

 

    

Years

    

Amount

    

Amortization

 

Net

Amortizable intangible assets:

Customer relationships and contracts

9-17

$

96,040

$

53,078

$

42,962

Trade name

 

10

 

14,780

 

7,446

7,334

Non-compete agreements

 

5

 

8,800

 

8,800

Developed technology

7

4,900

350

4,550

Patents

 

19

 

24

 

14

10

Total intangible assets, net

 

$

124,544

 

$

69,688

$

54,856

Additionally, the Company reported an indefinite lived non-amortizable brand name asset with a balance of $3,811 as of March 31, 2024 and December 31, 2023.

Changes in intangible assets between December 31, 2023 and March 31, 2024 consist of:

Balance as of December 31, 2023

    

$

58,667

Amortization expense

 

(1,733)

Balance as of March 31, 2024

$

56,934

For the three months ended March 31, 2024 and 2023, amortization expense was $1,733 and $1,738, respectively.

Future amortization expense is expected to be as followed:

Year ending December 31, 

    

2024 (remainder)

$

5,200

2025

$

6,933

2026

$

6,933

2027

$

6,933

2028

$

6,877

Thereafter

$

20,247

Note 4. Debt

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 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 4.00 to 1.00 (which was increased as of July 1, 2023 from 3.50 to 1.00 in connection with the acquisition of MSA).

13

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 March 31, 2024, our consolidated total leverage ratio was 1.98 to 1.00 as compared to a covenant maximum of 4.00 to 1.00 under the Credit Agreement.

At March 31, 2024, our consolidated interest coverage ratio was 4.87 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 secured overnight financing rate (SOFR) plus an applicable margin based on the current consolidated total leverage ratio. The interest rate was 7.68% and 7.71% as of March 31, 2024 and December 31, 2023, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.30% as of March 31, 2024 and December 31, 2023.

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 March 31, 2024 and December 31, 2023. The amount borrowed on the revolving credit notes was $139,817 and $147,493 as of March 31, 2024 and December 31, 2023, respectively.

Other Debt

With the consummation of the MSA acquisition, the Company assumed a Fond du Lac County and Fond du Lac Economic Development Corporation term note (Fond du Lac Term Note). The Fond du Lac Term Note is secured by a security agreement, payable in annual installments of $500 plus interest at 2.00% and is due in full in December 2028. The balance outstanding as of March 31, 2024 and December 31, 2023 was $2,375. The short-term and long-term balance of $500 and $1,875, respectively, are recorded in other current liabilities and other long-term liabilities in the Condensed Consolidated Balance Sheets.

Note 5. 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, four vehicles and a number of copiers. 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.

14

The components of lease expense were as follows:

Three Months Ended

March 31, 

    

2024

2023

Finance lease cost:

Amortization of finance lease assets

$

104

$

94

Interest on finance lease liabilities

8

 

11

Total finance lease expense

112

105

Operating lease expense

1,340

1,286

Short-term lease expense

152

139

Variable lease expense

52

 

69

Lease income (1)

(532)

(631)

Total lease expense

$

1,124

$

968

(1)The Company subleased a portion of its Hazel Park, MI facility starting in June 2022. Lease income for the three months ended March 31, 2024 and 2023 was $532 and $631, respectively.

Lease related supplemental cash flow information:

Three Months Ended

March 31, 

2024

    

2023

Cash paid for amounts included in the measurement of lease liabilities for finance leases:

Operating cash flows

$

8

$

11

Financing cash flows

$

107

$

96

Cash paid for amounts included in the measurement of lease liabilities for operating leases:

Operating cash flows

$

1,481

$

1,425

 

 

Right-of-use assets obtained in exchange for recorded lease obligations:

Operating leases

$

134

$

Finance leases

$

1

$

Note 6. Employee stock ownership plan

Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (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 March 31, 2024 and 2023, the Company recorded no ESOP expense.

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 March 31, 2024 and December 31, 2023, the ESOP shares consisted of 3,732,076 and 4,062,583 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

15

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 Company provides a 50% match for employee contributions, up to 6%. For the three months ended March 31, 2024 and 2023, the Company’s employer match expense was $1,053 and $874, 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 March 31, 2024 and 2023, the Company’s estimated discretionary profit-sharing expense was $0.

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 and adjusted for discrete taxable events that may occur in the quarter. As the year progresses, the Company will refine its estimate based on facts and circumstances by each tax jurisdiction.

Income tax expense was $1,034 and $441, and the effective tax rate (ETR) was 24.19% and 14.65% for the three months ended March 31, 2024 and 2023, respectively. Our ETR is different from the expected tax rate due to state taxes, non-deductible items, research and development credits and excess tax benefit associated with stock-based compensation items.

Uncertain Tax Positions

Based on the Company’s evaluation, it has been concluded that there is one unrecognized tax benefit requiring recognition in its financial statements as of March 31, 2024. 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. At March 31, 2024 and December 31, 2023, a total of $805 and $771 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, 2020, and state tax returns beginning January 1, 2019, are open for examination.

Note 9. Commitments and contingencies

Litigation

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 parties cross-appealed the court’s order on the motion to dismiss – Peloton appealed the portion of the order that denied the motion to dismiss the claim for breach and anticipatory repudiation of contract and MEC appealed the portion of the order that dismissed the claim for breach of duty of good faith and fair dealing. On April 11, 2024, the First Department, Appellate Division issued a decision and order affirming the court’s order on the motion to dismiss and affirming the court’s dismissal of the alternate claim of good faith and fair dealing.

On November 3, 2023, Peloton filed a counterclaim alleging that Peloton was induced by fraud to enter into the Supply Agreement and seeking recission of the Supply Agreement and damages, among other forms of relief. On November 22, 2023, the Company answered Peloton’s counterclaim, denying the allegations in the counterclaim.

The total amount for damages claimed by MEC 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.

16

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 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 their 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 months ended March 31, 2024 and 2023, eligible employees elected to defer compensation of $365 and $236, respectively. As of March 31, 2024 and December 31, 2023, the short-term portion accrued for all benefit years less than twelve months under this plan was $239 and $289, respectively. As of March 31, 2024 and December 31, 2023, the long-term portion accrued for all benefit years greater than twelve months under this plan was $4,182 and $3,816. 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 for the deferred compensation plan for the three months ended March 31, 2024 and 2023 was $237 and $560, respectively. These expenses are included in profit-sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income. Additionally, the Company made cash distributions of $286 and $958 for the three months ended March 31, 2024 and 2023, respectively.

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. The Company has an aggregate stop loss limit to mitigate risk. Expenses related to this were $6,169 and $4,634 for the three months ended March 31, 2024 and 2023. An estimated accrued liability of $1,384 and $1,018 was recorded as of March 31, 2024 and December 31, 2023, 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 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.

17

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:

Balance at

Fair Value Measurements at

March 31, 

Report Date Using

    

2024

    

(Level 1)

    

(Level 2)

    

(Level 3)

Deferred compensation liability

$

4,421

$

4,421

$

$

Total

$

4,421

$

4,421

$

$

Balance at

Fair Value Measurements at

December 31, 

Report Date Using

    

2023

    

(Level 1)

    

(Level 2)

    

(Level 3)

Deferred compensation liability

$

4,105

$

4,105

$

$

Total

$

4,105

$

4,105

$

$

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 other current liabilities 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. There was no impairment recognized as of the quarter end March 31, 2024.

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

18

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.

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

March 31, 

2024

2023

Net income attributable to MEC

$

3,241

$

2,571

Average shares outstanding

20,485,933

20,315,338

Basic income per share

$

0.16

$

0.13

Average shares outstanding

20,485,933

20,315,338

Effect of dilutive stock-based compensation

214,113

434,610

Total potential shares outstanding

20,700,046

20,749,948

Diluted income per share

$

0.16

$

0.12

There were no options in the money that were excluded in the computation of diluted earnings per share for the three months ended March 31, 2024 and 2023 because they would have had an anti-dilutive impact on earnings per share.

Note 15. 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 twelve-month period. The following table reflects the changes in our contract assets and liabilities during the three months ended March 31, 2024:

Contract

Contract

    

Assets

    

Liabilities

As of December 31, 2023

$

5,457

$

3,635

Net activity

(225)

(538)

As of March 31, 2024

$

5,232

$

3,097

Disaggregated Revenue

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

Three Months Ended

March 31, 

Product Category

    

2024

    

2023

Outdoor sports

$

2,159

$

2,305

Fabrication

90,914

87,001

Performance structures

45,770

26,675

Tube

19,074

20,352

Tank

11,076

11,119

Total

168,993

147,452

Intercompany sales elimination

(7,724)

(4,807)

Total, net sales

$

161,269

$

142,645

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Three Months Ended

March 31, 

End Market

2024

2023

Commercial vehicle

$

58,954

$

59,155

Construction & access

 

28,446

26,507

Powersports

 

30,291

24,098

Agriculture

 

14,958

14,451

Military

7,952

8,569

Other

20,668

9,866

Total, net sales

$

161,269

$

142,645

Note 16. Concentration of major customers

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

Net Sales

Accounts Receivable

Three Months Ended

As of

As of

March 31, 

March 31, 

December 31, 

    

2024

    

2023

    

2024

    

2023

Customer

A

 

16.6

%

15.3

%  

11.8

%  

<10

%  

 

B

 

14.0

%

15.6

%  

11.6

%  

12.6

%  

 

C

 

<10

%

12.1

%  

<10

%  

<10

%  

 

D

 

<10

%

<10

%  

13.0

%  

12.7

%  

 

Note 17. Stock-based compensation

The Mayville Engineering Company, Inc. 2019 Omnibus Incentive Plan provided 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 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 stock-based instrument at the time of grant and are recognized as expense over the vesting period of the stock-based instrument. Our stock-based compensation consists of stock options, restricted stock units (RSUs) and performance stock units (PSUs). For all types of units, fair value is equivalent to the adjusted closing stock price at the date of the grant. The Black-Scholes option pricing model is utilized to determine fair value for options.

The actual number of PSUs, if any, to be earned by the award recipients is determined after the end of a performance measurement period. The performance measures include Adjusted EBITDA, which represents net income before interest expense, provision for income taxes, depreciation, amortization, stock-based compensation, legal costs due to the former fitness customer and adjusted for items to be determined unusual in nature or infrequent in occurrence, for the year ended December 31, 2026, and the average annual return on invested capital (ROIC), for the three-years ended December 31, 2024, 2025 and 2026, respectively. ROIC represents net operating profit after taxes divided by invested capital for an annual period. These performance targets are subject to adjustments or exclusions as deemed appropriate to account for extraordinary or unanticipated events that do not reflect the core business of the Company, and have been set for each of the minimum, target and maximum levels with the actual performance amount received determined by the Compensation Committee of the Board of Directors.

Cancellations and forfeitures are accounted for as incurred.

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Stock awards were granted on March 15, 2024, November 3, 2023, September 18, 2023, June 26, 2023, April 18, 2023, March 13, 2023, February 28, 2023 and January 25, 2023.

During the three months ended March 31, 2024, 154,372 RSUs vested. For the same period, 206,524 options vested with a weighted average strike price of $13.54. During the three months ended March 31, 2023, 132,433 RSUs vested. For the same period, 197,597 options vested with a strike price of $11.65.

As of March 31, 2024, 1,222,302 options remained outstanding with a weighted average strike price of $11.36 and a weighted average contractual life of 7.40 years remaining.

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