Company Quick10K Filing
Mayville Engineering
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 17 $245
10-Q 2019-10-31 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
S-1 2019-04-12 Public Filing
10-Q 2019-06-18 Quarter: 2019-03-31
8-K 2019-10-29 Earnings, Exhibits
8-K 2019-09-26 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-06-12 Officers, Exhibits
8-K 2019-05-28 Earnings, Exhibits
8-K 2019-05-13 Leave Agreement, Exhibits
MEC 2019-09-30
Part I-Financial Information
Item 1. Financial Statements.
Note 1. Basis of Presentation
Note 2. Ipo
Note 3. Acquisition
Note 4. Select Balance Sheet Data
Note 5. Bank Revolving Credit Notes
Note 6. Other Long-Term Debt
Note 7. Capital Lease Obligation
Note 8. Employee Stock Ownership Plan
Note 9. Income Taxes
Note 10. Contingencies
Note 11. Deferred Compensation
Note 12. Long-Term Incentive Plan
Note 13. Self-Funded Insurance
Note 14. Segments
Note 15. Fair Value of Financial Instruments
Note 16 - Temporary Equity
Note 17 - Common Equity
Note 18 - Concentration of Major Customers
Note 19 - Stock Based Compensation
Note 20 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part Ii-Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 mec-ex311_8.htm
EX-31.2 mec-ex312_7.htm
EX-32 mec-ex32_6.htm

Mayville Engineering Earnings 2019-09-30

MEC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ZOES 250 223 116 334 0 -29 -5 268 0% -56.0 -13%
REIS 248 119 33 48 35 -5 4 233 74% 53.0 -4%
MEC 245 407 216 289 40 -13 6 245 14% 42.7 -3%
CMBM 244 215 177 69 34 -20 -8 271 50% -32.9 -9%
DFBG 242 2,165 2,238 1,963 361 -275 -84 1,719 18% -20.5 -13%
NFE 241 1,057 590 70 -8 -20 -6 -17 -11% 2.8 -2%
FXE 239 228 6 0 0 -2 -1 11 -20.5 -1%
PALL 238 209 0 0 0 73 73 238 3.2 35%
ABVC 236 7 10 0 0 -5 -5 235 96% -50.0 -70%
NVOS 235 32 6 7 4 -1 -1 232 50% -426.2 -2%

10-Q 1 mec-10q_20190930.htm 10-Q mec-10q_20190930.htm

 

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 September 30, 2019

OR

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

For the transition period from                      to                     

Commission File Number: 001-38894

 

Mayville Engineering Company, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

Wisconsin

39-0944729

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

715 South Street

Mayville, Wisconsin

53050

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, no par value

 

MEC

 

New York Stock Exchange

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

As of October 30, 2019, the registrant had 19,740,296 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 (Loss)

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Items 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

 

33

 

 

 

 

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains 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. We believe 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 II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed with the Securities and Exchange Commission (the SEC) on August 9, 2019, 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:

 

failure to compete successfully in our markets;

 

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

 

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

 

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

 

risks related to scheduling production accurately and maximizing efficiency;

 

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

 

our ability to successfully identify or integrate acquisitions;

 

risks related to entering new markets;

 

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

 

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

 

risks related to our information technology systems and infrastructure;

 

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

 

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

 

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

 

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

 

risks associated with our capital-intensive industry;

 

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

 

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

 

the possibility that the previous shareholders of Defiance Metal Products Co., which we acquired in December 2018, disagree with our calculations of whether the contingent consideration in such acquisition is payable and an arbitrator decides that some or all of such contingent consideration is payable; and

 

our ability to remediate the material weaknesses in internal control over financial reporting identified in preparing our financial statements included in our final prospectus, dated May 8, 2019 (the Prospectus), filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on May 10, 2019 (included as part of our Registration Statement on Form S-1, Registration No. 333-230840), and to subsequently maintain effective internal control over financial reporting.

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

3


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 shares)

(unaudited)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1

 

 

$

3,089

 

Receivables, net of allowances for doubtful accounts of $540 as of September 30, 2019

   and $801 as of December 31, 2018

 

 

62,565

 

 

 

52,298

 

Inventories, net

 

 

50,653

 

 

 

53,405

 

Tooling in progress

 

 

1,493

 

 

 

2,318

 

Prepaid expenses and other current assets

 

 

3,282

 

 

 

1,649

 

Total current assets

 

 

117,994

 

 

 

112,759

 

Property, plant and equipment, net

 

 

128,098

 

 

 

123,883

 

Goodwill

 

 

70,922

 

 

 

69,437

 

Intangible assets-net

 

 

74,850

 

 

 

82,879

 

Capital lease, net

 

 

3,267

 

 

 

1,953

 

Other long-term assets

 

 

4,976

 

 

 

814

 

Total

 

 

400,107

 

 

$

391,725

 

LIABILITIES, TEMPORARY EQUITY, AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

42,494

 

 

$

45,992

 

Current portion of capital lease obligation

 

 

573

 

 

 

281

 

Current portion of long-term debt

 

 

83

 

 

 

8,606

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Salaries, wages, and payroll taxes

 

 

8,136

 

 

 

7,548

 

Profit sharing and bonus

 

 

7,246

 

 

 

6,124

 

Other current liabilities

 

 

4,452

 

 

 

14,610

 

Total current liabilities

 

 

62,985

 

 

 

83,161

 

Bank revolving credit notes

 

 

87,000

 

 

 

59,629

 

Capital lease obligation, less current maturities

 

 

2,738

 

 

 

1,697

 

Other long-term debt, less current maturities

 

 

 

 

 

111,675

 

Deferred compensation and long-term incentive, less current portion

 

 

24,743

 

 

 

13,351

 

Deferred income taxes

 

 

20,324

 

 

 

19,123

 

Other long-term liabilities

 

 

100

 

 

 

100

 

Total liabilities

 

 

197,890

 

 

 

288,736

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

 

Redeemable common shares, no par value, stated at redemption value of

   outstanding shares, 60,045,300 authorized, 38,623,806 shares issued at

   December 31, 2018

 

 

 

 

 

133,806

 

Retained earnings

 

 

 

 

 

26,842

 

Treasury shares at cost, 25,180,330 shares at December 31, 2018

 

 

 

 

 

(57,659

)

Total temporary equity

 

 

 

 

 

102,989

 

Common shares, no par value, 75,000,000 authorized, 20,845,693 shares issued at

   September 30, 2019.

 

 

 

 

 

 

Additional paid-in-capital

 

 

182,336

 

 

 

 

Retained earnings

 

 

23,763

 

 

 

 

Treasury shares at cost, 1,105,397 shares at September 30, 2019

 

 

(3,882

)

 

 

 

Total shareholders’ equity

 

 

202,217

 

 

 

 

Total

 

$

400,107

 

 

$

391,725

 

 

Share counts as of December 31, 2018 give effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the Company’s May 2019 IPO. There were 45,000 shares authorized, 28,946 shares issued and 18,871 treasury shares at December 31, 2018.

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 (Loss)

(in thousands except shares and per share data)

(unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

128,511

 

 

$

84,338

 

 

$

417,373

 

 

$

263,095

 

Cost of sales

 

 

113,941

 

 

 

71,517

 

 

 

362,689

 

 

 

222,913

 

Amortization of intangibles

 

 

2,677

 

 

 

939

 

 

 

8,030

 

 

 

2,817

 

Profit sharing, bonuses, and deferred compensation

 

 

678

 

 

 

2,340

 

 

 

25,258

 

 

 

5,346

 

Employee Stock Ownership Plan expense

 

 

1,500

 

 

 

1,000

 

 

 

4,500

 

 

 

3,000

 

Other selling, general and administrative expenses

 

 

6,068

 

 

 

2,855

 

 

 

20,296

 

 

 

8,435

 

Contingent consideration revaluation

 

 

(9,598

)

 

 

 

 

 

(6,054

)

 

 

 

Income (loss) from operations

 

 

13,246

 

 

 

5,688

 

 

 

2,655

 

 

 

20,584

 

Interest expense

 

 

(987

)

 

 

(846

)

 

 

(5,811

)

 

 

(2,606

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(154

)

 

 

(588

)

Income (loss) before taxes

 

 

12,259

 

 

 

4,841

 

 

 

(3,310

)

 

 

17,390

 

Income tax expense (benefit)

 

 

2,512

 

 

 

17

 

 

 

(231

)

 

 

46

 

Net income (loss) and comprehensive income (loss)

 

$

9,746

 

 

$

4,824

 

 

$

(3,079

)

 

$

17,344

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to shareholders

 

$

9,746

 

 

$

4,824

 

 

$

(3,079

)

 

$

17,344

 

Basic and diluted earnings (loss) per share

 

$

0.49

 

 

$

0.36

 

 

$

(0.18

)

 

$

1.24

 

Basic and diluted weighted average shares outstanding

 

 

19,740,296

 

 

 

13,453,285

 

 

 

16,684,337

 

 

 

14,042,200

 

Tax-adjusted pro forma information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to shareholders

 

$

9,746

 

 

$

4,824

 

 

$

(3,079

)

 

$

17,344

 

Pro forma provision for income taxes

 

 

 

 

 

1,254

 

 

 

173

 

 

 

4,488

 

Pro forma net income (loss)

 

$

9,746

 

 

$

3,570

 

 

$

(3,252

)

 

$

12,856

 

Pro forma basic and diluted earnings (loss) per share

 

$

0.49

 

 

$

0.27

 

 

$

(0.19

)

 

$

0.92

 

Basic and diluted weighted average shares outstanding

 

 

19,740,296

 

 

 

13,453,285

 

 

 

16,684,337

 

 

 

14,042,200

 

 

Weighted average shares give effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the IPO, as if the IPO occurred at the beginning of 2018.

Tax adjusted pro forma amounts reflect income tax adjustments as if the Company was a taxable entity as of the beginning of 2018 using a 26% effective tax rate.

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)

 

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,079

)

 

$

17,344

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,652

 

 

 

14,865

 

Stock-based compensation expense

 

 

2,135

 

 

 

 

Costs recognized on step-up of acquired inventory

 

 

395

 

 

 

 

Contingent consideration revaluation

 

 

(6,054

)

 

 

 

Gain on disposal of property, plant and equipment

 

 

(74

)

 

 

(10

)

Deferred compensation and long-term incentive

 

 

11,392

 

 

 

190

 

Loss (gain) on extinguishment or forgiveness of debt

 

 

(367

)

 

 

558

 

Non-cash adjustments

 

 

1,786

 

 

 

2,401

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(9,524

)

 

 

(4,234

)

Inventories

 

 

3,700

 

 

 

(6,668

)

Tooling in progress

 

 

826

 

 

 

615

 

Prepaids and other current assets

 

 

(1,633

)

 

 

(897

)

Accounts payable

 

 

(1,175

)

 

 

1,544

 

Other long-term assets

 

 

(4,266

)

 

 

 

Accrued liabilities, excluding long-term incentive

 

 

(2,290

)

 

 

2,861

 

Net cash provided by operating activities

 

 

16,424

 

 

 

28,570

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(22,820

)

 

 

(13,329

)

Proceeds from sale of property, plant and equipment

 

 

76

 

 

 

10

 

Non cash adjustments

 

 

(1,656

)

 

 

 

Acquisitions, net of cash acquired

 

 

(2,368

)

 

 

 

Net cash used in investing activities

 

 

(26,768

)

 

 

(13,319

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from bank revolving credit notes

 

 

367,364

 

 

 

180,061

 

Payments on bank revolving credit notes

 

 

(339,993

)

 

 

(179,592

)

Proceeds from issuance of other long-term debt

 

 

 

 

 

42,053

 

Repayments of other long-term debt

 

 

(119,963

)

 

 

(45,226

)

Deferred financing costs

 

 

 

 

 

(705

)

Proceeds from IPO, net

 

 

101,763

 

 

 

 

Purchase of treasury stock

 

 

(1,592

)

 

 

(11,833

)

Payments on capital leases

 

 

(323

)

 

 

 

Net cash provided by (used in) financing activities

 

 

7,256

 

 

 

(15,242

)

Net increase (decrease) in cash and cash equivalents

 

 

(3,088

)

 

 

8

 

Cash and cash equivalents at beginning of period

 

 

3,089

 

 

 

76

 

Cash and cash equivalents at end of period

 

$

1

 

 

$

84

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

6,288

 

 

$

2,349

 

 

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

7


Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity

(in thousands)

(unaudited)

 

 

 

Shareholder’s Equity

 

 

 

Additional

Paid-in-Capital

 

 

Treasury

Shares

 

 

Retained

Earnings

 

 

Total

 

Balance as of December 31, 2018

 

$

 

 

$

 

 

$

 

 

$

 

Balance as of March 31, 2019

 

$

 

 

$

 

 

$

 

 

$

 

Transfer from Temporary Equity (see Note 16)

 

 

133,806

 

 

 

(57,659

)

 

 

29,302

 

 

 

105,449

 

Net loss post IPO

 

 

 

 

 

 

 

 

 

 

(15,284

)

 

 

(15,284

)

Share issuance – IPO

 

 

101,763

 

 

 

 

 

 

 

 

 

 

 

101,763

 

Stock-based compensation

 

 

797

 

 

 

 

 

 

 

 

 

 

 

797

 

Share repurchases

 

 

 

 

 

 

(1,592

)

 

 

 

 

 

 

(1,592

)

Cancellation of Treasury Stock

 

 

(55,369

)

 

 

55,369

 

 

 

 

 

 

 

 

Balance as of June 30, 2019

 

$

180,998

 

 

$

(3,881

)

 

$

14,017

 

 

$

191,133

 

Net Income

 

 

 

 

 

 

 

 

 

 

9,746

 

 

 

9,746

 

Stock-based compensation

 

 

1,338

 

 

 

 

 

 

 

 

 

 

 

1,338

 

Balance as of September 30, 2019

 

$

182,336

 

 

$

(3,881

)

 

$

23,763

 

 

$

202,217

 

 

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 shares and per share amounts)

(unaudited)

Note 1. Basis of presentation

The interim consolidated unaudited 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 and 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, 2018, included in the Company’s Prospectus. A summary of the Company’s significant accounting policies is included in the Company’s 2018 financial statements in the Prospectus. The Company followed these policies in preparation of the interim unaudited Condensed Consolidated Financial Statements.

Nature of Operations

MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture, military and other end markets.

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

On December 14, 2018, we acquired Defiance Metal Products Co., a leading U.S. based manufacturer of component parts for the heavy-and medium-duty commercial vehicles, construction, and agriculture and military markets.

In May 2019, we completed our initial public offering (IPO). In conjunction with the IPO, the Company’s legacy business converted from an S corporation to a C corporation. As a result, the consolidated business is subject to paying federal and state corporate income taxes on its taxable income from May 9, 2019 forward.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), specific to the principles for recognizing revenue. This guidance replaces most existing revenue recognition guidance. It provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. As amended, this new revenue guidance will be effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. For as long as the Company remains an Emerging Growth Company (EGC), the new guidance is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods beginning after December 15, 2019. Early adoption is permitted for annual periods beginning after December 15, 2016. The Company has elected to adopt the standard using a modified retrospective approach and has determined that the standard does not have a material impact on the consolidated financial statements.

9


In February 2016, the FASB issued ASU 2016-02, Leases, creating Topic 842, which requires lessees to record the assets and liabilities arising from all leases in the statement of financial position. Under ASU 2016-02, lessees will recognize a liability for lease payments and a right-of-use asset. When measuring assets and liabilities, a lessee should include amounts related to option terms, such as the option of extending or terminating the lease or purchasing the underlying asset, that are reasonably certain to be exercised. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election to not recognize lease assets and liabilities. This guidance retains the distinction between finance leases and operating leases and the classification criteria remains similar to existing guidance. For financing leases, a lessee will recognize the interest on a lease liability separate from amortization of the right-of-use asset. In addition, repayments of principal will be presented within financing activities, and interest payments will be presented within operating activities in the statement of cash flows. For operating leases, a lessee will recognize a single lease cost on a straight-line basis and classify all cash payments within operating activities in the statement of cash flows. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as the Company remains an EGC, the new guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

A summary of the Company’s evaluation of other recent accounting pronouncements is included in the Company’s 2018 financial statements in the Prospectus.

Note 2. IPO

Our IPO of shares of our common stock was completed in May 2019. In connection with the offering, we initially sold 6,250,000 shares of common stock at $17 per share generating proceeds of $99,344, net of underwriting discounts and commissions. Additional shares were also sold under an option granted to the underwriters that same month, resulting in a sale of an additional 152,209 shares of common stock at $17 per share, generating additional proceeds of $2,419, net of underwriting discounts and commissions. In conjunction with the IPO, the Company issued a stock dividend specific to pre-IPO shares, of approximately 1,334.34-for-1, resulting in the conversion of 10,075 shares in our Employee Stock Ownership Plan to 13,443,484 shares.

IPO proceeds were used to pay down certain indebtedness.

Note 3. Acquisition

On December 14, 2018, the Company acquired Defiance Metal Products Co. (DMP), a full-service metal fabricator and contract manufacturer with two facilities in Defiance, OH, one in Heber Springs, AR, and one in Bedford, PA.

The Company acquired DMP for $117,068, net of cash received, plus contingent consideration of up to $10,000. The Company would pay DMP’s previous shareholders $7,500 if DMP generated $19,748 of earnings before interest expense, income taxes, depreciation and amortization (EBITDA) over the twelve-month period ended September 30, 2019. In addition, the Company would pay one dollar for each additional dollar of EBITDA in excess of $19,748 generated over this period; however, in no event shall the total payment exceed $10,000. Based on our calculations as of September 30, 2019, DMP’s EBITDA for the earnout period fell short of the $19,748 contingent consideration threshold; however, we have not received notification of agreement with the calculation from DMP’s previous shareholders.

The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. The excess purchase price over the estimated fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill. The Company engaged a reputable independent third party to assist with the identification and valuation of the intangible assets. Management made 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 15) not observable in the market.

10


The preliminary estimated fair values of assets acquired, and liabilities assumed are as follows:

 

 

 

Preliminary

Opening

Balance Sheet

Allocation

 

Cash consideration at acquisition date, net of cash received

 

$

114,700

 

Cash consideration for net working capital adjustment

 

 

2,368

 

Contingent consideration fair value as of acquisition date

 

 

6,076

 

Total purchase price

 

$

123,144

 

Accounts receivable, net

 

$

27,373

 

Tooling in progress

 

 

1,318

 

Inventory, net

 

 

13,237

 

Property, plant and equipment, net

 

 

30,053

 

Other assets, net of cash

 

 

416

 

Intangible assets

 

 

 

 

Trade name

 

 

14,780

 

Customer relationships

 

 

44,550

 

Non-compete

 

 

8,800

 

Goodwill

 

 

30,720

 

Total assets acquired

 

 

171,247

 

Deferred income taxes

 

 

20,221

 

Other liabilities

 

 

27,882

 

Net assets acquired

 

$

123,144

 

 

 In connection with the DMP acquisition, inventory was valued at its estimated fair value which is defined as expected sales price less costs to sell. The valuation resulted in an inventory fair value step-up of $978. This amount is amortized based on inventory turns, with the amortization resulting in a reduction of inventory and an expense reflected in cost of sales on the Condensed Consolidated Statement of Comprehensive Income (Loss). The Company amortized $395 and $583 of the inventory fair value step-up during the three months ended March 31, 2019 and the year ended December 31, 2018, respectively. The inventory fair value step-up was fully amortized as of March 31, 2019.

The Company recorded $14,780 of trade name intangible assets with an estimated useful life of 10 years, $44,550 of customer relationship intangible assets with an estimated useful life of 12 years, and $8,800 of non-compete agreements with an estimated useful life of 5 years. These intangibles are amortized on a straight-line basis. The Company believes that the estimated useful lives and the straight-line amortization methodology most appropriately reflect when and how the Company expects to benefit from the identifiable intangible assets. Amortization expense related to these intangible assets is reflected in amortization of intangible expenses on the Condensed Consolidated Statement of Comprehensive Income (Loss).

The Company also estimated and recorded the fair value of the contingent consideration payable to be $6,076 as of the acquisition date. The Company remeasured this liability utilizing a Monte Carlo valuation model through the conclusion of the earnout period, September 30, 2019, with the change in value resulting in income or expense and reflected in the Contingent Consideration Revaluation line item on the Condensed Consolidated Statement of Comprehensive Income (Loss). The primary inputs utilized in the Monte Carlo valuation model include actual and projected EBITDA along with a discount rate. Contingent consideration payable was revalued to $0, $9,598, $6,924 and $6,054 as of September 30, 2019, June 30, 2019, March 31, 2019 and December 31, 2018, respectively. The change between these balances resulted in (income)/expense of ($9,598), $2,674, $869, and ($21) for the three months ended September 30, 2019, June 30, 2019, March 31, 2019, and the year ended December 31, 2018, respectively.

Based on our calculations as of September 30, 2019, DMP’s EBITDA fell short of the $19,748 contingent consideration threshold. As a result, and in accordance with GAAP, the contingent consideration balance of $9,598 was reduced to zero and reflected as income in the Contingent Consideration Revaluation line item on the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2019. We have communicated the results of our DMP EBITDA calculation to DMP’s previous shareholders; however, we have not received notification of agreement with the calculation. If they disagree with our calculation, the matter will be subject to arbitration per the stock purchase agreement.

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

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The Company has recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the respective valuations. 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. The Company is in the process of finalizing the fair value estimates for certain assets acquired and liabilities assumed including income tax balances. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the applicable acquisition date.    

As of September 30, 2019, the Company has adjusted the fair value on the opening balance sheet by increasing deferred income taxes by $1,097, increasing inventory by $1,508 and increasing accounts receivable by $473. In addition, the Company finalized the net working capital adjustment during the three month period ended June 30, 2019, resulting in an additional payout of $2,368 by the Company to the seller, bringing the Company’s acquisition of DMP to $117,068 in total cash paid, net of cash acquired. The offsetting entries of these adjustments was to goodwill.

The DMP acquired entities accounted for $51,769 and $155,503 of net sales and $11,299 and $11,531 of net income for the three and nine months ended September 30, 2019, respectively. These net income amounts include the contingent consideration fair value adjustments previously discussed.

Pro Forma Financial Information (Unaudited): In accordance with Accounting Standards Codification 805, the following unaudited pro forma combined results of operations have been prepared and presented to give effect to the DMP acquisition as if it had occurred on January 1, 2018, the beginning of the comparable period, applying certain assumptions and proforma adjustments. These proforma adjustments primarily relate to the depreciation expense on stepped-up fixed assets, amortization of identifiable intangible assets, costs of goods sold expense on the sale of stepped inventory, interest expense related to additional debt needed to fund the acquisition, and the tax impact of these adjustments. The unaudited pro forma consolidated results are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results of operations or consolidated financial position.

 The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the acquisition.

 

 

 

Three Months

Ended September 30,

2018

 

 

Nine Months

Ended September 30,

2018

 

Net sales

 

$

130,086

 

 

$

395,866

 

Net income

 

 

4,051

 

 

 

14,186

 

 

Note 4. Select balance sheet data

Inventory

Inventories as of September 30, 2019 and December 31, 2018 consist of:

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Finished goods and purchased parts

 

$

31,615

 

 

$

32,589

 

Raw materials

 

 

11,983

 

 

 

12,329

 

Work-in-process

 

 

7,055

 

 

 

8,487

 

Total

 

$

50,653

 

 

$

53,405

 

 

The change in inventory from $53,405 as of December 31, 2018 to $50,653 as of September 30, 2019 includes a $395 reduction related to the amortization of the DMP inventory fair value step-up. The DMP inventory fair value step-up was fully amortized as of March 31, 2019.

12


Property, plant and equipment

Property, plant and equipment as of September 30, 2019 and December 31, 2018 consist of:

 

 

 

Useful Lives

Years*

 

September 30,

2019

 

 

December 31,

2018

 

Land

 

Indefinite

 

$

1,264

 

 

$

1,264

 

Land improvements

 

15-39

 

 

3,051

 

 

 

3,169

 

Building and building improvements

 

15-39

 

 

57,021

 

 

 

55,269

 

Machinery, equipment and tooling

 

3-10

 

 

198,068

 

 

 

182,045

 

Vehicles

 

5

 

 

3,704

 

 

 

3,613

 

Office furniture and fixtures

 

3-7

 

 

15,177

 

 

 

14,253

 

Construction in progress

 

N/A

 

 

8,327

 

 

 

6,786

 

Total property, plant and equipment, gross

 

 

 

 

286,612

 

 

 

266,399

 

Less accumulated depreciation

 

 

 

 

158,514

 

 

 

142,516

 

Total property, plant and equipment, net

 

 

 

$

128,098

 

 

$

123,883

 

 

Goodwill

Changes in goodwill between December 31, 2018 and September 30, 2019 consist of:

 

Balance as of December 31, 2018

 

$

69,437

 

DMP purchase accounting adjustments, net

 

 

(883

)

DMP net working capital true-up

 

 

2,368

 

Impairment

 

 

 

Balance as of September 30, 2019

 

$

70,922

 

 

 Intangible Assets

The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of September 30, 2019 and December 31, 2018:

 

 

 

Useful Lives

Years

 

September 30,

2019

 

 

December 31,

2018

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

Customer relationships and contracts

 

9-12

 

$

78,340

 

 

$

78,340

 

Trade name

 

10

 

 

14,780

 

 

 

14,780

 

Non-compete agreements

 

5

 

 

8,800

 

 

 

8,800

 

Patents

 

19

 

 

24

 

 

 

24

 

Accumulated amortization

 

 

 

 

(30,905

)

 

 

(22,876

)

Total amortizable intangible assets, net

 

 

 

 

71,039

 

 

 

79,068

 

Non-amortizable brand name

 

 

 

 

3,811

 

 

 

3,811

 

Total intangible assets, net

 

 

 

$

74,850

 

 

$

82,879

 

 

Non-amortizable brand name is tested annually for impairment.

Changes in intangible assets between December 31, 2018 and September 30, 2019 consist of:

 

Balance as of December 31, 2018

 

$

82,879

 

Amortization expense

 

 

(8,029

)

Balance as of September 30, 2019

 

$

74,850

 

 

Amortization expense was $2,677 and $939 for the three months ended September 30, 2019 and 2018, respectively, and $8,029 and $2,817 for the nine months ended September 30, 2019 and 2018, respectively.

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Note 5. Bank revolving credit notes

On September 26, 2019, we entered into an amended and restated credit agreement (A&R Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The A&R Credit Agreement provides for $200 million revolving credit facility (the Revolving Loan), with a letter of credit sub-facility in an aggregate amount not to exceed $5.0 million, and a swingline facility in an aggregate amount of $20.0 million. The A&R Credit Agreement also provides for an additional $100.0 million of capacity through an accordion feature. All amounts borrowed under the A&R Credit Agreement mature on September 26, 2024.

Prior to September 26, 2019, the Company maintained a credit agreement providing for $90 million borrowing capacity through a revolving credit note. Interest is payable monthly at the adjusted London Interbank Offered Rate (LIBOR) plus an applicable margin based on the current funded indebtedness to adjusted EBITDA ratio. The interest rate was 3.56% and 4.69% as of September 30, 2019 and December 31, 2018, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.20% as of September 30, 2019 and December 31, 2018.

The Company was in compliance with all financial covenants of its credit agreements as of September 30, 2019 and December 31, 2018. The amount borrowed on the revolving credit notes was $87,000 and $59,629 as of September 30, 2019 and December 31, 2018, respectively.

Note 6. Other long-term debt

Prior to September 26, 2019, the Company maintained a facility financing package with borrowings of $95,000 and a maturity date of December 14, 2023 and a strategic capital loan with borrowings of $25,000 and a maturity date of June 14, 2024. As of September 26, 2019, all long-term debt was paid off in connection with entering into the Amended and Restated Credit Agreement.  

Government loan balances include forgiveness clauses based upon capital spending and headcount increases at the noted manufacturing locations.

As previously disclosed, the Company completed its IPO in May 2019. Proceeds from the IPO were used to pay down debt including $43,000 pay down of the prior Term A loan and $25,000 pay-off of the prior strategic capital loan.

In June 2019, the Company received written notification that the $521 balance remaining of the Smyth County, Virginia loan was forgiven. Due to the nature of the requirements to obtain forgiveness, the gain associated with the forgiveness is reflected in cost of sales on the Condensed Consolidated Statement of Comprehensive Income (Loss).

On September 26, 2019, the Company entered into the Amended and Restated Credit Agreement resulting in the payoff of the real estate term loan and the Term A loan through the new revolving credit facility.

Other long-term debt as of September 30, 2019 and December 31, 2018 consisted of the following:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

Interest

Rate

 

 

Balance

 

 

Interest

Rate

 

 

Balance

 

Term A loans – 2018 financing package

 

N/A

 

 

$

 

 

 

4.69

%

 

$

69,000

 

Real estate term loan – 2018 financing package

 

N/A

 

 

 

 

 

 

4.69

%

 

 

26,000

 

Strategic capital loan

 

N/A

 

 

 

 

 

 

11.78

%

 

 

25,000

 

Wisconsin Economic Development Corporate (Neillsville)

 

 

2.00

%

 

 

83

 

 

 

2.00

%

 

 

406

 

Smyth County, Virginia

 

N/A

 

 

 

 

 

 

0.00

%

 

 

700

 

Total principal outstanding

 

 

 

 

 

 

83

 

 

 

 

 

 

 

121,106

 

Less: Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(825

)

Less: Current maturities

 

 

 

 

 

 

(83

)

 

 

 

 

 

 

(8,606

)

Long-term debt, less current maturities, net

 

 

 

 

 

$

 

 

 

 

 

 

$

111,675

 

 

The Company was in compliance with all financial covenants of its long-term debt agreements as of September 30, 2019.

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Note 7. Capital lease obligation

Capital leases consist of equipment with a capitalized cost of $3,707 and accumulated depreciation of $440 at September 30, 2019. Depreciation of $196 and $342 was recognized on the capital lease assets during the three and nine months ended September 30, 2019, respectively. Capitalized costs of $2,051 and accumulated depreciation of $24 was recognized for the three- and nine-month periods ended September 30, 2018 respectively. Future minimum lease payments required under the lease are as follows:

 

Year ending December 31,

 

 

 

 

2019 (remainder)

 

$

178

 

2020

 

 

712

 

2021

 

 

712

 

2022

 

 

712

 

2023

 

 

712

 

Thereafter

 

 

702

 

Total

 

 

3,728

 

Less payment amount allocated to interest

 

 

417

 

Present value of capital lease obligation

 

$

3,311

 

Current portion of capital lease obligation

 

 

573

 

Long-term portion of capital lease obligation

 

 

2,738

 

Total capital lease obligation

 

$

3,311

 

 

Note 8. Employee stock ownership plan

Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (the ESOP), the Company makes annual contributions to the trust for the benefit of eligible employees in the form of cash or shares of the Company. The annual contribution is discretionary except that it must be at least 3% of the compensation for all safe harbor participants for the plan year. For the three months ended September 30, 2019 and 2018, the Company’s ESOP expense amounted to $1,500 and $1,000, respectively. For the nine months ended September 30, 2019 and 2018, the Company’s ESOP expense amounted to $4,500 and $3,000, respectively.

At various times following death, disability, retirement or termination of employment, an ESOP participant is entitled to receive their ESOP account balance in accordance with various distribution methods as permitted under the policies adopted by the ESOP. Historically, all distributions have been paid to participants in cash, but that will not be the case following the Company’s May 2019 IPO.

 During the three- and nine-month periods ended September 30, 2019 the ESOP did not acquire any shares from withdrawing participants.

As of September 30, 2019, and December 31, 2018, the ESOP shares consisted of 13,443,484 in allocated shares after giving effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the Company’s May 2019 IPO. Prior to its IPO, the Company was obligated to repurchase shares in the trust that were not distributed to ESOP participants as determined by the ESOP trustees, and thus the shares were mandatorily redeemable. Based on the mandatory redemption of these shares, they represented temporary equity on the consolidated balance sheets for periods prior to the IPO. The total estimated fair value of all allocated shares subject to this repurchase obligation approximated $133,806 as of December 31, 2018. The estimated fair value as of December 31, 2018 was based on the most recent available appraisals of the common stock which was approximately $9.95 per share after giving effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the Company’s May 2019 IPO. Subsequent to the IPO, ESOP shares are sold in the public market.

Note 9. 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.

15


Income tax expense (benefit) was estimated at $2,512 and ($231), and the effective tax rate (ETR) from continuing operations was 19.60% and 3.50% for the three and nine months ended September 30, 2019, respectively. The following items caused the quarterly ETR to be significantly different from our expected annual ETR at statutory tax rates:

 

For the three and nine months ended September 30, 2019, we recorded a discrete tax expense of approximately $0 and $84, respectively, as a result of a greater state tax expense than was originally estimated in our tax provision for our year ended December 31, 2018. This decreased the effective tax rate by 0.00% and 1.27% for the three and nine months ended September 30, 2019, respectively.

 

For the three and nine months ended September 30, 2019, we recorded a discrete tax benefit of approximately $0 and $784, respectively, as a result of establishing an opening deferred tax asset upon MEC’s conversion from an S Corporation to a C Corporation on May 9, 2019. This increased the effective tax rate by 0.00% and 11.9% for the three and nine months ended September 30, 2019, respectively.

 

For the three and nine months ended September 30, 2019, we recorded a discrete tax expense of approximately $0 and $1,800, respectively as a result of estimated non-deductible executive compensation in excess of the $1,000 per individual limitation under Section 162(m) of the Internal Revenue Code. This decreased the effective tax rate by 0.00% and 27.76% for three and nine months ended September 30, 2019, respectively.

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

Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of September 30, 2019.

Prior to the Company’s IPO, the Company’s legacy business was an S Corporation, where substantially all taxes were passed to the shareholders and the Company did not pay federal or state corporate income taxes on its taxable income. In connection with the IPO, the Company’s legacy business converted to a C Corporation. As a result, the consolidated business is subject to paying federal and state corporate income taxes on its taxable income from May 9, 2019 forward. Upon the Company’s conversion from a non-taxable entity to a taxable entity, we established an opening deferred tax asset of $784 as a result of evaluating estimated temporary differences that existed on this date.

The Company’s policy for recording interest and penalties associated with potential income tax audits is to record such expense as a component of income tax expense. There were no amounts for penalties or interest recorded as of September 30, 2019. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its positions.

Note 10. Contingencies

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

Note 11. Deferred compensation

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

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

Prior to the IPO, all deferrals were deemed to have been invested in the Company stock at a price equal to the share value on the date of deferral and the value of the account increased or decreased with the change in the value of the stock. Individual accounts are maintained for each participant. Each participant’s account is credited with the participant’s deferred compensation, the Company’s contributions, and investment income or loss, reduced for charges, if any.

16


For the period subsequent to the IPO, deferrals are invested in an investment vehicle based on the options made available to the participant (which does not include Company stock).

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

The deferred compensation plan is non-funded, and all future contributions are unsecured in that the employees have the status of a general unsecured creditor of the Company and the agreements constitute a promise by the Company to make benefit payments in the future. During the three months ended September 30, 2019 and 2018, eligible employees elected to defer compensation of $10 and $16, respectively. During the nine months ended September 30, 2019 and 2018, eligible employees elected to defer compensation of $1,064 and $837, respectively. As of September 30, 2019, and December 31, 2018, the total amount accrued for all benefit years under this plan was $24,743 and $13,351, respectively, which is included within the deferred compensation and long-term incentive on the Condensed Consolidated Balance Sheets. These amounts include the initial deferral of compensation as adjusted for (a) subsequent changes in the share value of the Company stock pursuant to the IPO or (b) following the IPO in the investment options chosen by the participants. Total expense for the deferred compensation plan for the three months ended September 30, 2019 and 2018 amounted to $141 and $16, respectively. Total expense for the deferred compensation plan for the nine months ended September 30, 2019 and 2018 amounted to $10,405 and $310. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Note 12. Long-Term incentive plan

Historically, the Company’s long-term incentive plan (LTIP) was available for any employee who had been designated to be eligible to participate by the Compensation Committee of the Board of Directors. Annually, the LTIP provided for long-term cash incentive awards to eligible participants based on the Company’s performance over a three-year performance period.

The LTIP was non-funded and each participant in the plan was considered a general unsecured creditor of the Company and each agreement constituted a promise by the Company to make benefit payments if the future conditions were met, or if discretion is exercised in favor of a benefit payment.

The qualifying conditions for each award granted under the plan included a minimum increase in the aggregate fair value of the Company of 12% during the three-year performance period and the eligible participants must have been employed by the Company on the date of the cash payment or have retired after attaining age 65, died or become disabled during the period from the beginning of the performance period to the date of payment. If the qualifying conditions were not attained, discretionary payments were made, up to a maximum amount specified in each award agreement. Discretionary payments were determined by the Compensation Committee of the Board of Directors (for payment to the Chief Executive Officer of the Company) and by the Chief Executive Officer (for payments to other participants in the plan).

If a participant was not employed throughout the performance period due to retirement, death or disability, their maximum benefit was prorated based on the number of days employed by the Company during the performance periods.

The LTIP was terminated in May 2019 in conjunction with the IPO, resulting in a total payout of $10,483. The total amount accrued for all grant years under this plan was $1,846 at December 31, 2018. This amount is included within profit sharing and bonus on the Condensed Consolidated Balance Sheets. Total expense for the long-term incentive plan for the three months ended 2018 amounted to $969. Total expense for the long-term incentive plan for the nine months ended September 30, 2019 and 2018 amounted to $10,000 and $1,191, respectively. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Note 13. 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 purchases reinsurance to limit the annual risk associated with their multiple medical plans. Under one plan, the Company purchases reinsurance to limit the annual risk per participant to $225 with no aggregate stop loss. Under another plan, the Company purchases reinsurance to limit the annual risk per participant to $200 and to limit the annual aggregate risk related to this contract which was approximately $4,709 and $4,393 for the three months ended September 30, 2019 and 2018, respectively and $14,875 and $14,775 for the nine months ended September 30, 2019 and 2018, respectively. An estimated accrued liability of approximately $1,349 and $1,730 was recorded as of September 30, 2019 and December 31, 2018, respectively, for estimated unpaid claims and is included within other current liabilities on the Condensed Consolidated Balance Sheets.

17


Note 14. Segments

The Company applies the provisions of ASC Topic 280, Segment Reporting. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker (CODM) 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 asset located in foreign countries. In accordance with the enterprise-wide disclosure requirements of ASC 280, the Company’s net sales from external customers by main product lines are as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Outdoor sports

 

$

1,869

 

 

$

1,657

 

 

$