Mayville Engineering Company, Inc. Announces Third Quarter 2019 Results

Performance & Outlook Impacted by Near-Term Market Demand Changes; Integration of Former Defiance Metal Products (“DMP”) Nearing Completion

MAYVILLE, Wis.–(BUSINESS WIRE)–Mayville Engineering Company (NYSE: MEC) (the “Company” or “MEC”), a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket services, today announced results for the third quarter ended September 30, 2019.

Third Quarter Highlights:

  • Produced net sales of $128.5 million
  • Generated net income of $9.7 million
  • Recorded Adjusted EBITDA of $13.6 million
  • Increased share buyback program to $25 million through 2021
  • Credit Agreement amended and extended increasing borrowing capacity with more favorable rates
  • Company updates 2019 full-year outlook based on recent market demand changes

Third Quarter 2019 Results

Net sales were $128.5 million for the third quarter of 2019 as compared to $84.3 million for the same prior year period, an increase of $44.2 million, which includes contributions from the former DMP locations of $51.8 million. Both the legacy MEC and former DMP businesses were impacted by recent declines in market demand, particularly in the Heavy and Medium Duty Truck, Agricultural and Construction markets. These changes in production demand stem from customer decisions to reduce dealer inventory levels by reducing and curtailing near-term production schedules. Customer union labor issues in the Heavy and Medium duty vehicle sectors added to the reduction in demand.

Our results for the third quarter reflect a rapidly changing market environment, with customer concerns regarding uncertain macroeconomic and political factors leading to numerous near-term changes to production schedules across our customer base during September,” explained Robert D. Kamphuis, Chairman, President and CEO. “The long-term prospects for our Company remain bright and we are focused on leveraging our diversified market agility to realign our capacity. At the same time, we are making the necessary cost adjustments in light of the rapidly changing market conditions, that will allow us to adapt and thrive in 2020 and beyond.”

Manufacturing margins were $14.6 million for the third quarter of 2019 as compared to $12.8 million for the same prior year period, an increase of $1.8 million, which includes contribution from the former DMP entities of $5.8 million. Both the legacy MEC and former DMP businesses were impacted by recent declines in market demand.

Amortization expenses were $2.7 million for the third quarter of 2019 as compared to $0.9 million for the same prior year period. The increase was solely driven by the amortization of identifiable intangible assets related to the DMP acquisition.

Depreciation expenses were $5.6 million for the third quarter of 2019 as compared to $4.0 million for the same prior year period. The increase relates to the addition of DMP and investments in new technology and automation.

Profit sharing, bonuses, and deferred compensation expenses were $0.7 million for the third quarter of 2019 as compared to $2.3 million for the same prior year period. The decrease of $1.6 million was primarily driven by the year-to-date downward bonus adjustments related to financial performance attributable directly to the recent declines in market conditions.

Other selling, general and administrative expenses were $6.1 million for the third quarter of 2019 as compared to $2.9 million for the same prior year period. The increase of $3.2 million was driven by expenses related to the DMP acquired entities, plus additional costs associated with being a public company.

The contingent consideration payable related to the DMP earnout was adjusted to zero during the third quarter of 2019, resulting in a $9.6 million revaluation.

Income tax expense was $2.5 million for the third quarter of 2019. The expense is the result of the Company’s legacy business converting from an S to a C corporation on May 12, 2019.

EBITDA and EBITDA Margin percent were $21.5 million and 16.8%, respectively, for the third quarter of 2019 as compared to $10.7 million and 12.6%, respectively, for the third quarter of 2018. The increase in EBITDA was primarily driven by the DMP contingent consideration revaluation along with the addition of DMP.

Adjusted EBITDA and Adjusted EBITDA Margin percent were $13.6 million and 10.6%, respectively, for the third quarter of 2019, as compared to $10.6 million and 12.6%, respectively, for the third quarter of 2018. The increase in Adjusted EBITDA was primarily driven by the acquisition of DMP. The decline in Adjusted EBITDA Margin percent was primarily driven by recent declines in market demand.

Balance Sheet and Liquidity

Our outstanding debt balance was $87.0 million as of September 30, 2019, as compared to $179.9 million as of December 31, 2018. The $92.9 million decline is attributable to the repayment of debt from the $101.8 million of IPO proceeds received in May 2019, offset by one-time IPO related expenses and share repurchases.

Capital expenditures were $22.8 million for the three quarters of 2019. Capital expenditures for 2019 are now expected to exceed the original forecast of approximately $20 million, by approximately $7 million. The expected increase relates to the timing of certain new technology and automation investments being moved forward from early 2020 into the fourth quarter of 2019 as equipment is becoming available sooner than expected. This timing change will allow the Company to increase its efficiency improvements sooner and at a faster rate and will be reflected in lower than planned capital expenditures in 2020.

In order to increase its borrowing capacity and simplify its debt structure, the Company entered into an Amended and Restated Credit Agreement during the quarter. The new five year agreement provides for total potential borrowing capacity of $300 million through a $200 million revolving credit facility along with a $100 million accordion feature at a favorable interest rate, with less restrictive covenants.

On October 28, 2019, the Company’s Board of Directors approved an increase in the Company’s share buyback program from $4 million to $25 million through 2021.

Outlook

Based on the Company’s recent performance, the overall economic climate, and industry trends, the Company has updated its 2019 financial outlook as follows:

  • Net sales are expected to be between $515 million to $525 million
  • Adjusted EBITDA is expected to be between $52 million and $56 million

Kamphuis explained, “Over the past 60 days, we have talked with customers regarding near-term adjustments to production schedules. While we are well positioned to adapt and redeploy our capacity over the medium-term, rapid short-term adjustments from a fairly wide cross section of our customer base have caused us to lower our guidance for the year. We are currently working through plans to redeploy capacity and confirm projections, and plan to issue our 2020 outlook in late January.”

Conference Call

The Company will host a conference call on Wednesday, October 30th, 2019 at 10:00 a.m. Eastern Time (9:00 a.m. Central Time).

For a live Internet webcast of the conference call, visit www.mecinc.com and click on the link to the live webcast on the Investors page.

For telephone access to the conference, call (888) 349-0091 within the United States, call (855) 669-9657 within Canada, or +1 (412) 317-0780 from outside the United States and Canada.

Forward Looking Statements

This press-release includes forward-looking statements that reflect plans, estimates and beliefs. Such statements involve risks and uncertainties. Actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors. 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: 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; 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; our ability to remediate the material weaknesses in internal control over financial reporting identified in preparing our audited consolidated financial statements and to subsequently maintain effective internal control over financial reporting; and other factors listed under “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, which may be amended or supplemented by subsequent Quarterly Reports on Form 10-Q or other reports filed with the Securities and Exchange Commission. This discussion should be read in conjunction with our audited consolidated financial statements included in the Company’s previously filed registration statement on Form S-1. 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.

About Mayville Engineering Company

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. We have developed long-standing relationships with our blue-chip customers based upon a high level of experience, trust and confidence.

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

Use of Non-GAAP Financial Measures

This press release contains financial information calculated in a manner other than in accordance with U.S. generally accepted accounting principles (“GAAP”).

The non-GAAP measures used in this press release are EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin.

EBITDA represents net income before interest expense, provision (benefit) for income taxes, depreciation, and amortization. EBITDA Margin represents EBITDA as a percentage of net sales for each period. Adjusted EBITDA represents EBITDA before transaction fees incurred in connection with the DMP acquisition and our initial public offering, the loss on debt extinguishment relating to our December 2018 credit agreement, non-cash purchase accounting charges including costs recognized on the step-up of acquired inventory and contingent consideration fair value adjustments, and one-time increases in deferred compensation and long term incentive plan expenses related to the initial public offering. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net sales for each period. These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin as management uses these measures as key performance indicators, and we believe they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.

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

Please reference our reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to EBITDA and Adjusted EBITDA, and the calculation of EBITDA Margin and Adjusted EBITDA Margin included in this press release.

Mayville Engineering Company, Inc.

Consolidated Balance Sheet

(in thousands except share data)

 

 

(Unaudited)

September 30,

 

 

December 31,

 

 

2019

 

 

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

Mayville Engineering Company, Inc.

Consolidated Balance Sheet (continued)

(in thousands except share data)

 

 

(Unaudited)

September 30,

 

 

December 31,

 

 

2019

 

 

2018

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

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

 

 

(3,882

)

 

 

Total shareholders’ equity

 

 

202,217

 

 

 

Total

 

$

400,107

 

 

$

391,725

Share counts 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.

Mayville Engineering Company, Inc.

Consolidated Statement of Income (Loss)

(in thousands except share data)

 

 

(Unaudited)

 

(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 debt extinguishment

 

 

 

 

 

 

 

 

(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

 

$

9,746

 

 

$

4,824

 

 

$

(3,079

)

 

$

17,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net income 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 and share 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

 

Pro forma 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.

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.

Mayville Engineering Company, Inc.

Consolidated Statement 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

 

 

2,135

 

 

 

 

Costs recognized on step-up of acquired inventory

 

 

395

 

 

 

 

Contingent consideration revaluation

 

 

(6,054

)

 

 

 

Gain on sale of property, plant and equipment

 

 

(74

)

 

 

 

(10

)

Deferred compensation and long-term incentive

 

 

11,392

 

 

 

 

190

 

Loss (gain) on extinguishment or forgiveness of debt, net

 

 

(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

)

Acquisitions, net of cash acquired

 

 

(2,368

)

 

 

 

Proceeds from sale of property, plant and equipment

 

 

76

 

 

 

 

10

 

Non-cash adjustments

 

 

(1,656

)

 

 

 

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

)

Repayments of other long-term debt

 

 

(119,963

)

 

 

 

(45,226

)

Proceeds from issuance of other long-term debt

 

 

 

 

 

 

42,053

 

Proceeds from IPO, net

 

 

101,763

 

 

 

 

Purchase of treasury stock

 

 

(1,592

)

 

 

 

(11,833

)

Deferred financing costs

 

 

 

 

 

 

(705

)

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

 

Mayville Engineering Company, Inc.

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

(in thousands)

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2019

 

2018

 

2019

 

2018

Net income (loss)

 

$

9,746

 

 

$

4,824

 

 

$

(3,079

)

 

$

17,344

 

Interest expense

 

 

987

 

 

 

846

 

 

 

5,811

 

 

 

2,606

 

Provision (benefit) for income taxes

 

 

2,512

 

 

 

17

 

 

 

(231

)

 

 

46

 

Depreciation and amortization

 

 

8,297

 

 

 

4,962

 

 

 

24,652

 

 

 

14,865

 

EBITDA

 

 

21,543

 

 

 

10,650

 

 

 

27,153

 

 

 

34,861

 

Loss on debt extinguishment

 

 

 

 

 

 

 

 

154

 

 

 

588

 

Costs recognized on step-up of acquired inventory

 

 

 

 

 

 

 

 

395

 

 

 

 

Contingent consideration revaluation

 

 

(9,598

)

 

 

 

 

 

(6,054

)

 

 

 

Deferred compensation expense specific to IPO

 

 

 

 

 

 

 

 

10,159

 

 

 

 

Long term incentive plan expense specific to IPO

 

 

 

 

 

 

 

 

9,921

 

 

 

 

Other IPO and DMP acquisition related expenses

 

 

1,625

 

 

 

 

 

 

6,434

 

 

 

 

Adjusted EBITDA

 

$

13,570

 

 

$

10,650

 

 

$

48,161

 

 

$

35,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

128,511

 

 

$

84,338

 

 

$

417,373

 

 

$

263,095

 

EBITDA Margin Percentage

 

 

16.8

%

 

 

12.6

%

 

 

6.5

%

 

 

13.3

%

Adjusted EBITDA Margin Percentage

 

 

10.6

%

 

 

12.6

%

 

 

11.5

%

 

 

13.5

%

 

Contacts

Nathan Elwell

Lincoln Churchill Advisors

(847) 530-0249

nelwell@lincolnchurchilladvisors.com

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