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 SeptemberJune 30, 20202021
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, 2020,July 29, 2021, the registrant had 20,059,39020,475,915 shares of common stock, no par value per share, outstanding.
Table of Contents
|
|
|
|
|
|
|
| Page |
|
|
|
PART I. |
| |
|
|
|
Item 1. |
| |
|
|
|
| 4 | |
Condensed Consolidated Statements of Comprehensive Income (Loss) | 5 | |
|
|
|
| Condensed Consolidated Statements of | 6 |
|
|
|
| Condensed Consolidated Statements of | 7 |
|
|
|
|
| |
Notes to Unaudited Condensed Consolidated Financial Statements |
| |
|
|
|
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
Item 3. |
| |
|
|
|
Item 4. |
| |
|
|
|
PART II. |
| |
|
|
|
Item 1. |
| |
|
|
|
Items 1A. | | |
|
|
|
Item 2. |
| |
|
| |
|
|
|
Item 6. |
| |
|
|
|
|
| |
|
| |
|
|
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, 2019,2020, filed with the Securities and Exchange Commission (the SEC) on March 2, 2020,5, 2021, as such, were previously supplemented and amended in Part II, Item 1A of our Quarterly Report on Form 10-Q filed with the SEC on May 6, 2020 and which may be further amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:
the negative impacts the coronavirus (COVID-19) has had and will continue to have on our business, financial condition, cash flows and results of operations (including future uncertain impacts);
• | the negative impacts the coronavirus (COVID-19) has had and will continue to have on our business, financial condition, cash flows, results of operations and supply chain (including future uncertain impacts); |
failure to compete successfully in our markets;
• | failure to compete successfully in our markets; |
risks relating to developments in the industries in which our customers operate;
• | risks relating to developments in the industries in which our customers operate; |
our ability to maintain our manufacturing, engineering and technological expertise;
• | 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;
• | 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;
• | risks related to scheduling production accurately and maximizing efficiency; |
our ability to realize net sales represented by our awarded business;
• | our ability to realize net sales represented by our awarded business; |
our ability to successfully identify or integrate acquisitions;
• | our ability to successfully identify or integrate acquisitions; |
risks related to entering new markets;
• | risks related to entering new markets; |
our ability to develop new and innovative processes and gain customer acceptance of such processes;
• | 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;
• | our ability to recruit and retain our key executive officers, managers and trade-skilled personnel; |
risks related to our information technology systems and infrastructure;
• | 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;
• | 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;
• | political and economic developments, including foreign trade relations and associated tariffs; |
volatility in the prices or availability of raw materials critical to our business;
• | 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;
• | results of legal disputes, including product liability, intellectual property infringement and other claims; |
risks associated with our capital-intensive industry;
• | 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 treatment as an S Corporation prior to the consummation of our initial public offering of common stock (IPO); and |
risks related to our employee stock ownership plan’s treatment as a tax-qualified retirement plan; and
our ability to remediate the material weakness in internal control over financial reporting identified in preparing our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, and to subsequently maintain effective internal control over financial reporting.
• | 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
3
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—FINANCIALFINANCIAL INFORMATION
Mayville Engineering Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| June 30, 2021 |
|
| December 31, 2020 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 110 |
|
| $ | 1 |
|
| $ | 119 |
|
| $ | 121 |
|
Receivables, net of allowances for doubtful accounts of $1,293 at September 30, 2020 and $526 at December 31, 2019 |
|
| 48,654 |
|
|
| 40,188 |
| ||||||||
Receivables, net of allowances for doubtful accounts of $1,347 at June 30, 2021 and $1,298 at December 31, 2020 |
|
| 58,362 |
|
|
| 42,080 |
| ||||||||
Inventories, net |
|
| 37,964 |
|
|
| 45,692 |
|
|
| 50,939 |
|
|
| 41,366 |
|
Tooling in progress |
|
| 3,642 |
|
|
| 1,589 |
|
|
| 2,093 |
|
|
| 3,126 |
|
Prepaid expenses and other current assets |
|
| 2,717 |
|
|
| 3,007 |
|
|
| 3,400 |
|
|
| 2,555 |
|
Total current assets |
|
| 93,087 |
|
|
| 90,477 |
|
|
| 114,913 |
|
|
| 89,248 |
|
Property, plant and equipment, net |
|
| 107,887 |
|
|
| 125,063 |
|
|
| 114,695 |
|
|
| 106,688 |
|
Assets held for sale |
|
| 3,552 |
|
|
| — |
|
|
| 3,552 |
|
|
| 3,552 |
|
Goodwill |
|
| 71,535 |
|
|
| 71,535 |
|
|
| 71,535 |
|
|
| 71,535 |
|
Intangible assets-net |
|
| 64,143 |
|
|
| 72,173 |
|
|
| 56,114 |
|
|
| 61,467 |
|
Capital lease, net |
|
| 2,742 |
|
|
| 3,227 |
|
|
| 2,278 |
|
|
| 2,581 |
|
Other long-term assets |
|
| 1,003 |
|
|
| 1,107 |
|
|
| 3,185 |
|
|
| 3,462 |
|
Total |
| $ | 343,949 |
|
| $ | 363,582 |
|
| $ | 366,272 |
|
| $ | 338,533 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 27,606 |
|
| $ | 32,173 |
|
| $ | 49,254 |
|
| $ | 33,495 |
|
Current portion of capital lease obligation |
|
| 619 |
|
|
| 598 |
|
|
| 641 |
|
|
| 626 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes |
|
| 10,529 |
|
|
| 5,752 |
|
|
| 12,014 |
|
|
| 10,190 |
|
Profit sharing and bonus |
|
| 1,310 |
|
|
| 6,229 |
|
|
| 3,569 |
|
|
| 3,089 |
|
Other current liabilities |
|
| 4,526 |
|
|
| 3,439 |
|
|
| 5,369 |
|
|
| 5,340 |
|
Total current liabilities |
|
| 44,590 |
|
|
| 48,191 |
|
|
| 70,847 |
|
|
| 52,740 |
|
Bank revolving credit notes |
|
| 59,986 |
|
|
| 72,572 |
|
|
| 43,854 |
|
|
| 45,257 |
|
Capital lease obligation, less current maturities |
|
| 2,220 |
|
|
| 2,687 |
|
|
| 1,736 |
|
|
| 2,061 |
|
Deferred compensation and long-term incentive, less current portion |
|
| 25,183 |
|
|
| 24,949 |
|
|
| 25,461 |
|
|
| 25,631 |
|
Deferred income tax liability |
|
| 12,998 |
|
|
| 14,188 |
|
|
| 12,994 |
|
|
| 11,887 |
|
Other long-term liabilities |
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
Total liabilities |
|
| 145,077 |
|
|
| 162,687 |
|
|
| 154,992 |
|
|
| 137,676 |
|
Common shares, no par value, 75,000,000 authorized, 21,093,035 shares issued at September 30, 2020 and 20,845,693 at December 31, 2019 |
|
| — |
|
|
| — |
| ||||||||
Common shares, no par value, 75,000,000 authorized, 21,378,578 shares issued at June 30, 2021 and 21,093,035 at December 31, 2020 |
|
| — |
|
|
| — |
| ||||||||
Additional paid-in-capital |
|
| 189,780 |
|
|
| 183,687 |
|
|
| 194,754 |
|
|
| 190,793 |
|
Retained earnings |
|
| 14,026 |
|
|
| 22,090 |
|
|
| 20,835 |
|
|
| 14,998 |
|
Treasury shares at cost, 1,033,645 shares at September 30, 2020 and 1,213,482 at December 31, 2019 |
|
| (4,934 | ) |
|
| (4,882 | ) | ||||||||
Treasury shares at cost, 902,663 shares at June 30, 2021 and 1,033,645 at December 31, 2020 |
|
| (4,309 | ) |
|
| (4,934 | ) | ||||||||
Total shareholders’ equity |
|
| 198,872 |
|
|
| 200,895 |
|
|
| 211,280 |
|
|
| 200,857 |
|
Total |
| $ | 343,949 |
|
| $ | 363,582 |
|
| $ | 366,272 |
|
| $ | 338,533 |
|
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 share amounts and per share data)
(unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net sales |
| $ | 91,075 |
|
| $ | 128,511 |
|
| $ | 262,262 |
|
| $ | 417,373 |
|
Cost of sales |
|
| 81,340 |
|
|
| 113,941 |
|
|
| 241,838 |
|
|
| 362,689 |
|
Amortization of intangibles |
|
| 2,677 |
|
|
| 2,677 |
|
|
| 8,030 |
|
|
| 8,030 |
|
Profit sharing, bonuses, and deferred compensation |
|
| 2,288 |
|
|
| 678 |
|
|
| 4,807 |
|
|
| 25,258 |
|
Employee stock ownership plan expense |
|
| — |
|
|
| 1,500 |
|
|
| — |
|
|
| 4,500 |
|
Other selling, general and administrative expenses |
|
| 4,490 |
|
|
| 6,068 |
|
|
| 14,642 |
|
|
| 20,296 |
|
Contingent consideration revaluation |
|
| — |
|
|
| (9,598 | ) |
|
| — |
|
|
| (6,054 | ) |
Income (loss) from operations |
|
| 280 |
|
|
| 13,245 |
|
|
| (7,055 | ) |
|
| 2,655 |
|
Interest expense |
|
| (647 | ) |
|
| (987 | ) |
|
| (2,110 | ) |
|
| (5,811 | ) |
Loss on extinguishment of debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (154 | ) |
Income (loss) before taxes |
|
| (367 | ) |
|
| 12,258 |
|
|
| (9,165 | ) |
|
| (3,310 | ) |
Income tax expense (benefit) |
|
| 733 |
|
|
| 2,512 |
|
|
| (1,101 | ) |
|
| (231 | ) |
Net income (loss) and comprehensive income (loss) |
| $ | (1,100 | ) |
| $ | 9,746 |
|
| $ | (8,064 | ) |
| $ | (3,079 | ) |
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to shareholders |
| $ | (1,100 | ) |
| $ | 9,746 |
|
| $ | (8,064 | ) |
| $ | (3,079 | ) |
Basic and diluted earnings (loss) per share |
| $ | (0.05 | ) |
| $ | 0.49 |
|
| $ | (0.41 | ) |
| $ | (0.18 | ) |
Basic and diluted weighted average shares outstanding |
|
| 20,077,039 |
|
|
| 19,740,296 |
|
|
| 19,838,701 |
|
|
| 16,684,337 |
|
Tax-adjusted pro forma information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to shareholders |
| $ | (1,100 | ) |
| $ | 9,746 |
|
| $ | (8,064 | ) |
| $ | (3,079 | ) |
Pro forma provision for income taxes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 173 |
|
Pro forma net income (loss) |
| $ | (1,100 | ) |
| $ | 9,746 |
|
| $ | (8,064 | ) |
| $ | (3,252 | ) |
Pro forma basic and diluted earnings (loss) per share |
| $ | (0.05 | ) |
| $ | 0.49 |
|
| $ | (0.41 | ) |
| $ | (0.19 | ) |
Basic and diluted weighted average shares outstanding |
|
| 20,077,039 |
|
|
| 19,740,296 |
|
|
| 19,838,701 |
|
|
| 16,684,337 |
|
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net sales |
| $ | 120,213 |
|
| $ | 62,582 |
|
| $ | 232,833 |
|
| $ | 171,187 |
|
Cost of sales |
|
| 103,933 |
|
|
| 63,736 |
|
|
| 201,777 |
|
|
| 160,497 |
|
Amortization of intangibles |
|
| 2,677 |
|
|
| 2,677 |
|
|
| 5,353 |
|
|
| 5,353 |
|
Profit sharing, bonuses, and deferred compensation |
|
| 3,210 |
|
|
| 1,194 |
|
|
| 6,074 |
|
|
| 2,519 |
|
Employee stock ownership plan (income) expense |
|
| 228 |
|
|
| (675 | ) |
|
| 701 |
|
|
| — |
|
Other selling, general and administrative expenses |
|
| 5,362 |
|
|
| 4,552 |
|
|
| 10,059 |
|
|
| 10,153 |
|
Income (loss) from operations |
|
| 4,803 |
|
|
| (8,902 | ) |
|
| 8,869 |
|
|
| (7,335 | ) |
Interest expense |
|
| (504 | ) |
|
| (637 | ) |
|
| (1,036 | ) |
|
| (1,463 | ) |
Income (loss) before taxes |
|
| 4,299 |
|
|
| (9,539 | ) |
|
| 7,833 |
|
|
| (8,798 | ) |
Income tax expense (benefit) |
|
| 1,007 |
|
|
| (2,525 | ) |
|
| 1,996 |
|
|
| (1,834 | ) |
Net income (loss) and comprehensive income (loss) |
| $ | 3,292 |
|
| $ | (7,014 | ) |
| $ | 5,837 |
|
| $ | (6,964 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.16 |
|
| $ | (0.35 | ) |
| $ | 0.29 |
|
| $ | (0.35 | ) |
Diluted |
| $ | 0.16 |
|
| $ | (0.35 | ) |
| $ | 0.28 |
|
| $ | (0.35 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 20,454,541 |
|
|
| 19,902,912 |
|
|
| 20,316,936 |
|
|
| 19,718,222 |
|
Diluted |
|
| 20,864,531 |
|
|
| 19,902,912 |
|
|
| 20,685,741 |
|
|
| 19,718,222 |
|
Weighted average shares in 2019 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 2019.
Tax adjusted pro forma amounts reflect income tax adjustments as if the Company was a taxable entity as of the beginning of 2019 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, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (8,064 | ) |
| $ | (3,079 | ) | ||||||||
Net income (loss) |
| $ | 5,837 |
|
| $ | (6,964 | ) | ||||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 16,304 |
|
|
| 16,622 |
|
|
| 10,236 |
|
|
| 11,086 |
|
Amortization |
|
| 8,030 |
|
|
| 8,030 |
|
|
| 5,353 |
|
|
| 5,353 |
|
Stock-based compensation expense |
|
| 3,719 |
|
|
| 2,135 |
|
|
| 2,588 |
|
|
| 2,741 |
|
Allowance for doubtful accounts |
|
| 767 |
|
|
| (271 | ) |
|
| 49 |
|
|
| 591 |
|
Inventory excess and obsolescence reserve |
|
| 279 |
|
|
| 165 |
|
|
| (589 | ) |
|
| 1,413 |
|
Costs recognized on step-up of acquired inventory |
|
| — |
|
|
| 395 |
| ||||||||
Contingent consideration revaluation |
|
| — |
|
|
| (6,054 | ) | ||||||||
Loss (gain) on disposal of property, plant and equipment |
|
| 688 |
|
|
| (74 | ) | ||||||||
Loss on disposal of property, plant and equipment |
|
| 66 |
|
|
| 618 |
| ||||||||
Deferred compensation and long-term incentive |
|
| 234 |
|
|
| 11,392 |
|
|
| (170 | ) |
|
| (86 | ) |
Gain on extinguishment or forgiveness of debt |
|
| — |
|
|
| (367 | ) | ||||||||
Other non-cash adjustments |
|
| 262 |
|
|
| 1,892 |
|
|
| 151 |
|
|
| 168 |
|
Changes in operating assets and liabilities – net of effects of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (9,233 | ) |
|
| (9,524 | ) |
|
| (16,331 | ) |
|
| (35 | ) |
Inventories |
|
| 7,449 |
|
|
| 3,700 |
|
|
| (8,984 | ) |
|
| 3,936 |
|
Tooling in progress |
|
| (2,053 | ) |
|
| 826 |
|
|
| 1,033 |
|
|
| (1,463 | ) |
Prepaids and other current assets |
|
| 338 |
|
|
| (1,633 | ) |
|
| (1,094 | ) |
|
| (222 | ) |
Accounts payable |
|
| (4,016 | ) |
|
| (1,175 | ) |
|
| 14,324 |
|
|
| (14,356 | ) |
Deferred income taxes |
|
| (1,189 | ) |
|
| (4,266 | ) |
|
| 1,484 |
|
|
| (1,895 | ) |
Accrued liabilities, excluding long-term incentive |
|
| 5,776 |
|
|
| (2,290 | ) |
|
| 4,277 |
|
|
| 2,226 |
|
Net cash provided by operating activities |
|
| 19,291 |
|
|
| 16,424 |
|
|
| 18,230 |
|
|
| 3,111 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
| (5,354 | ) |
|
| (22,820 | ) |
|
| (16,986 | ) |
|
| (3,652 | ) |
Proceeds from sale of property, plant and equipment |
|
| 1,920 |
|
|
| 76 |
|
|
| 414 |
|
|
| 1,766 |
|
Non-cash adjustments |
|
| — |
|
|
| (1,656 | ) | ||||||||
Acquisitions, net of cash acquired |
|
| — |
|
|
| (2,368 | ) | ||||||||
Net cash used in investing activities |
|
| (3,434 | ) |
|
| (26,768 | ) |
|
| (16,572 | ) |
|
| (1,886 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank revolving credit notes |
|
| 209,857 |
|
|
| 367,364 |
|
|
| 157,388 |
|
|
| 158,643 |
|
Payments on bank revolving credit notes |
|
| (222,443 | ) |
|
| (339,993 | ) |
|
| (158,791 | ) |
|
| (156,743 | ) |
Repayments of other long-term debt |
|
| — |
|
|
| (119,963 | ) | ||||||||
Deferred financing costs |
|
| (206 | ) |
|
| — |
|
|
| — |
|
|
| (200 | ) |
Proceeds from IPO, net |
|
| — |
|
|
| 101,763 |
| ||||||||
Purchase of treasury stock |
|
| (2,510 | ) |
|
| (1,592 | ) |
|
| — |
|
|
| (2,510 | ) |
Payments on capital leases |
|
| (446 | ) |
|
| (323 | ) |
|
| (310 | ) |
|
| (296 | ) |
Net cash provided (used in) by financing activities |
|
| (15,748 | ) |
|
| 7,256 |
| ||||||||
Proceeds from the exercise of stock options |
|
| 80 |
|
|
| — |
| ||||||||
Other financing activities |
|
| (27 | ) |
|
| — |
| ||||||||
Net cash used in financing activities |
|
| (1,660 | ) |
|
| (1,106 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 109 |
|
|
| (3,088 | ) |
|
| (2 | ) |
|
| 119 |
|
Cash and cash equivalents at beginning of period |
|
| 1 |
|
|
| 3,089 |
|
|
| 121 |
|
|
| 1 |
|
Cash and cash equivalents at end of period |
| $ | 110 |
|
| $ | 1 |
|
| $ | 119 |
|
| $ | 120 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 2,366 |
|
| $ | 6,288 |
|
| $ | 1,077 |
|
| $ | 1,714 |
|
Cash paid for taxes |
| $ | 351 |
|
| $ | 538 |
|
| $ | 716 |
|
| $ | 15 |
|
Non-cash construction in progress in accounts payable |
| $ | 201 |
|
| $ | 1,238 |
|
| $ | 2,994 |
|
| $ | 265 |
|
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)
|
| Shareholder’s Equity |
| |||||||||||||||||||||||||||||
|
| Additional Paid-in-Capital |
|
| Treasury Shares |
|
| Retained Earnings |
|
| Total |
| ||||||||||||||||||||
Balance as of December 31, 2020 |
| $ | 190,793 |
|
| $ | (4,934 | ) |
| $ | 14,998 |
|
| $ | 200,857 |
| ||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| 2,545 |
|
|
| 2,545 |
| ||||||||||||||||
401(k) plan contribution |
|
| 1,319 |
|
|
| 625 |
|
|
| — |
|
|
| 1,944 |
| ||||||||||||||||
Stock-based compensation |
|
| 1,200 |
|
|
| — |
|
|
| — |
|
|
| 1,200 |
| ||||||||||||||||
Balance as of March 31, 2021 |
| $ | 193,312 |
|
| $ | (4,309 | ) |
| $ | 17,543 |
|
| $ | 206,546 |
| ||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| 3,292 |
|
|
| 3,292 |
| ||||||||||||||||
Stock-based compensation |
|
| 1,388 |
|
|
| — |
|
|
| — |
|
|
| 1,388 |
| ||||||||||||||||
Stock options exercised |
|
| 54 |
|
|
| — |
|
|
| — |
|
|
| 54 |
| ||||||||||||||||
Balance as of June 30, 2021 |
| $ | 194,754 |
|
| $ | (4,309 | ) |
| $ | 20,835 |
|
| $ | 211,280 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Shareholder’s Equity |
|
| Shareholder’s Equity |
| ||||||||||||||||||||||||||
|
| Additional Paid-in-Capital |
|
| Treasury Shares |
|
| Retained Earnings |
|
| Total |
|
| Additional Paid-in-Capital |
|
| Treasury Shares |
|
| Retained Earnings |
|
| Total |
| ||||||||
Balance as of December 31, 2019 |
| $ | 183,687 |
|
| $ | (4,882 | ) |
| $ | 22,090 |
|
| $ | 200,895 |
|
| $ | 183,687 |
|
| $ | (4,882 | ) |
| $ | 22,090 |
|
| $ | 200,895 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 50 |
|
|
| 50 |
|
|
| — |
|
|
| — |
|
|
| 50 |
|
|
| 50 |
|
Purchase of treasury stock |
|
| — |
|
|
| (2,435 | ) |
|
| — |
|
|
| (2,435 | ) |
|
| — |
|
|
| (2,435 | ) |
|
| — |
|
|
| (2,435 | ) |
ESOP contribution |
|
| 2,374 |
|
|
| 2,457 |
|
|
| — |
|
|
| 4,831 |
| ||||||||||||||||
ESOP Contribution |
|
| 2,374 |
|
|
| 2,457 |
|
|
| — |
|
|
| 4,831 |
| ||||||||||||||||
Stock-based compensation |
|
| 1,582 |
|
|
| — |
|
|
| — |
|
|
| 1,582 |
|
|
| 1,582 |
|
|
| — |
|
|
| — |
|
|
| 1,582 |
|
Balance as of March 31, 2020 |
|
| 187,643 |
|
|
| (4,860 | ) |
|
| 22,140 |
|
|
| 204,923 |
|
| $ | 187,643 |
|
| $ | (4,860 | ) |
| $ | 22,140 |
|
| $ | 204,923 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (7,014 | ) |
|
| (7,014 | ) |
|
| — |
|
|
| — |
|
|
| (7,014 | ) |
|
| (7,014 | ) |
Purchase of treasury stock |
|
| — |
|
|
| (74 | ) |
|
| — |
|
|
| (74 | ) |
|
| — |
|
|
| (74 | ) |
|
| — |
|
|
| (74 | ) |
Stock-based compensation |
|
| 1,159 |
|
|
| — |
|
|
| — |
|
|
| 1,159 |
|
|
| 1,159 |
|
|
| — |
|
|
| — |
|
|
| 1,159 |
|
Balance as of June 30, 2020 |
|
| 188,802 |
|
|
| (4,934 | ) |
|
| 15,126 |
|
|
| 198,994 |
|
| $ | 188,802 |
|
| $ | (4,934 | ) |
| $ | 15,126 |
|
| $ | 198,994 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (1,100 | ) |
|
| (1,100 | ) | ||||||||||||||||
Stock-based compensation |
|
| 978 |
|
|
| — |
|
|
| — |
|
|
| 978 |
| ||||||||||||||||
Balance as of September 30, 2020 |
| $ | 189,780 |
|
| $ | (4,934 | ) |
| $ | 14,026 |
|
| $ | 198,872 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| 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 17) |
|
| 133,806 |
|
|
| (57,659 | ) |
|
| 29,698 |
|
|
| 105,845 |
| ||||||||||||||||
Net loss post IPO |
|
| — |
|
|
| — |
|
|
| (15,681 | ) |
|
| (15,681 | ) | ||||||||||||||||
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 |
|
| 180,997 |
|
|
| (3,882 | ) |
|
| 14,017 |
|
|
| 191,132 |
| ||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| 9,746 |
|
|
| 9,746 |
| ||||||||||||||||
Stock-based compensation |
|
| 1,338 |
|
|
| — |
|
|
| — |
|
|
| 1,338 |
| ||||||||||||||||
Balance as of September 30, 2019 |
| $ | 182,335 |
|
| $ | (3,882 | ) |
| $ | 23,763 |
|
| $ | 202,216 |
|
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 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, 2019,2020, 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 20192020 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.
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 & access equipment, powersports, agriculture, military, fitness equipment and other end markets. Along with process engineering and development services, MEC maintains an extensive manufacturing infrastructure with 19 facilities across seven7 states. These facilities make it possible to offer conventional and computer numerical control (CNC) stamping, shearing, fiber laser cutting, forming, drilling, tapping, grinding, tube bending, machining, welding, assembly and logistic services. MEC also possesses a broad range of finishing capabilities including shot blasting, e-coating, powder coating, wet spray and military grade chemical agent resistant coating (CARC) painting.
Our one1 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, fitness equipment and other products.
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.
COVID-19 has had and will continue to have a negative impact on our business, financial condition, cash flows, and results of operations (including future uncertain impacts).and supply chain, although the full extent is still uncertain.
9
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 “emerging growth company” (EGC), the new guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Further, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. For public companies, this guidance is effective for annual or any interim goodwill impairment test in annual reporting periods beginning after December 15, 2018. For as long as the Company remains an EGC, the new guidance is effective for any annual or interim goodwill impairment test in annual reporting periods beginning after December 15, 2021. During the period ended March 31, 2020, the Company elected to early adopt this guidance. This adoption had no impact on the financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes, creating Topic 740, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2020. For as long as the Company remains an EGC, the new guidance is effective for annual reporting periods
beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. EarlyDuring the period ended March 31, 2021, the Company adopted this guidance. This adoption is permitted. The Company is evaluating the potentialhad no 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 20192020 financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Note 2. IPO
The IPO of shares of the Company’s common stock was completed in May 2019. In connection with the offering, the Company 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. IPO proceeds were used to pay down certain indebtedness.
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.
10
Note 3.2. Select balance sheet data
Inventory
Inventories are stated at the lower of cost, determined on the first-in, first-out method (FIFO) and 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.
Inventories as of SeptemberJune 30, 20202021 and December 31, 20192020 consist of:
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| June 30, 2021 |
|
| December 31, 2020 |
| ||||
Finished goods and purchased parts |
| $ | 23,525 |
|
| $ | 28,664 |
|
| $ | 29,205 |
|
| $ | 24,561 |
|
Raw materials |
|
| 8,634 |
|
|
| 10,834 |
|
|
| 14,884 |
|
|
| 11,266 |
|
Work-in-process |
|
| 5,805 |
|
|
| 6,194 |
|
|
| 6,850 |
|
|
| 5,539 |
|
Total |
| $ | 37,964 |
|
| $ | 45,692 |
|
| $ | 50,939 |
|
| $ | 41,366 |
|
Property, plant and equipment
Property, plant and equipment as of SeptemberJune 30, 20202021 and December 31, 20192020 consist of:
|
| Useful Lives Years* |
| September 30, 2020 |
|
| December 31, 2019 |
|
| Useful Lives Years* |
| June 30, 2021 |
|
| December 31, 2020 |
| ||||
Land |
| Indefinite |
| $ | 1,033 |
|
| $ | 1,264 |
|
| Indefinite |
| $ | 1,033 |
|
| $ | 1,033 |
|
Land improvements |
| 15-39 |
|
| 3,169 |
|
|
| 3,169 |
|
| 15-39 |
|
| 3,169 |
|
|
| 3,169 |
|
Building and building improvements |
| 15-39 |
|
| 55,022 |
|
|
| 58,021 |
|
| 15-39 |
|
| 55,556 |
|
|
| 55,172 |
|
Machinery, equipment and tooling |
| 3-10 |
|
| 198,951 |
|
|
| 204,248 |
|
| 3-10 |
|
| 208,170 |
|
|
| 199,854 |
|
Vehicles |
| 5 |
|
| 3,712 |
|
|
| 3,738 |
|
| 5 |
|
| 3,841 |
|
|
| 3,778 |
|
Office furniture and fixtures |
| 3-7 |
|
| 16,243 |
|
|
| 15,469 |
|
| 3-7 |
|
| 17,126 |
|
|
| 16,242 |
|
Construction in progress |
| N/A |
|
| 1,677 |
|
|
| 3,154 |
|
| N/A |
|
| 11,717 |
|
|
| 3,931 |
|
Total property, plant and equipment, gross |
|
|
|
| 279,807 |
|
|
| 289,063 |
|
|
|
|
| 300,612 |
|
|
| 283,179 |
|
Less accumulated depreciation |
|
|
|
| 171,920 |
|
|
| 164,000 |
|
|
|
|
| 185,917 |
|
|
| 176,491 |
|
Total property, plant and equipment, net |
|
|
| $ | 107,887 |
|
| $ | 125,063 |
|
|
|
| $ | 114,695 |
|
| $ | 106,688 |
|
Additionally, theThe Company completed the closure of its Greenwood, SC manufacturing facility during the quarter.third quarter of the prior year. The net amount of property, plant and equipment associated with the facility was $3,552, which is classified in assets held for sale on the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 2021 and December 31, 2020.
Additionally, the Company finalized an agreement to open a new facility in Hazel Park, MI during the quarter ended June 30, 2021. As of June 30, 2021, the Company invested $5,271 for the ramp-up of production which is classified in construction in progress.
Goodwill
Changes in goodwill between December 31, 20192020 and SeptemberJune 30, 20202021 consist of:
Balance as of December 31, 2019 |
| $ | 71,535 |
|
Impairment |
|
| — |
|
Balance as of September 30, 2020 |
| $ | 71,535 |
|
Balance as of December 31, 2020 |
| $ | 71,535 |
|
Impairment |
|
| 0 |
|
Balance as of June 30, 2021 |
| $ | 71,535 |
|
Intangible Assets
The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
|
| Useful Lives Years |
| September 30, 2020 |
|
| December 31, 2019 |
|
| Useful Lives Years |
| June 30, 2021 |
|
| December 31, 2020 |
| ||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and contracts |
| 9-12 |
| $ | 78,340 |
|
| $ | 78,340 |
|
| 9-12 |
| $ | 78,340 |
|
| $ | 78,340 |
|
Trade name |
| 10 |
|
| 14,780 |
|
|
| 14,780 |
|
| 10 |
|
| 14,780 |
|
|
| 14,780 |
|
Non-compete agreements |
| 5 |
|
| 8,800 |
|
|
| 8,800 |
|
| 5 |
|
| 8,800 |
|
|
| 8,800 |
|
Patents |
| 19 |
|
| 24 |
|
|
| 24 |
|
| 19 |
|
| 24 |
|
|
| 24 |
|
Accumulated amortization |
|
|
|
| (41,612 | ) |
|
| (33,582 | ) |
|
|
|
| (49,641 | ) |
|
| (44,288 | ) |
Total amortizable intangible assets, net |
|
|
|
| 60,332 |
|
|
| 68,362 |
|
|
|
|
| 52,303 |
|
|
| 57,656 |
|
Non-amortizable brand name |
|
|
|
| 3,811 |
|
|
| 3,811 |
|
|
|
|
| 3,811 |
|
|
| 3,811 |
|
Total intangible assets, net |
|
|
| $ | 64,143 |
|
| $ | 72,173 |
|
|
|
| $ | 56,114 |
|
| $ | 61,467 |
|
11
Non-amortizable brand name is tested annually for impairment.
Changes in intangible assets between December 31, 20192020 and SeptemberJune 30, 20202021 consist of:
Balance as of December 31, 2019 |
| $ | 72,173 |
|
Amortization expense |
|
| (8,030 | ) |
Balance as of September 30, 2020 |
| $ | 64,143 |
|
Balance as of December 31, 2020 |
| $ | 61,467 |
|
Amortization expense |
|
| (5,353 | ) |
Balance as of June 30, 2021 |
| $ | 56,114 |
|
Amortization expense was $2,677 for each of the three months ended SeptemberJune 30, 2021 and 2020, and 2019, and $8,030$5,353 for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
Future amortization expense is expected to be as followed:
Year ending December 31, |
|
|
|
|
|
|
|
|
2020 (remainder) |
| $ | 2,676 |
| ||||
2021 |
| $ | 10,706 |
| ||||
2021 (remainder) |
| $ | 5,353 |
| ||||
2022 |
| $ | 6,952 |
|
| $ | 6,952 |
|
2023 |
| $ | 6,866 |
|
| $ | 6,866 |
|
2024 |
| $ | 5,192 |
|
| $ | 5,192 |
|
2025 |
| $ | 5,192 |
| ||||
Thereafter |
| $ | 27,940 |
|
| $ | 22,748 |
|
Note 4.3. Bank revolving credit notes
On September 26, 2019, and as last amended as of June 30, 2020,on March 31, 2021, we entered into an amended and restated credit agreement (Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent.agent (the Agent). The Credit Agreement provides for a $200,000 revolving credit facility (the Revolving Loan), 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 Credit Agreement also provides for an additional $100,000 of debt capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.
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 or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00 as well as a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions.
In order to provide a means of insurance against future macroeconomic events, we entered into an amendment (Second Amendment) to the Credit Agreement on June 30, 2020. The Second Amendment provides the Company with temporary changes to the total leverage ratio covenant for the period from June 30, 2020, through December 31, 2021, or such earlier date as the Company may elect (Covenant Relief Period), in return for certain increases in interest rates, fees and restrictions on certain activities of the Company, including capital expenditures, acquisitions, dividends and share repurchases. New pricing, which takes effect for the quarters ending on and after September 30, 2020, includes interest at a fluctuating London Interbank Offered Rate (LIBOR) (at a floor of 75 basis points), plus 1.00% –to 2.75%, along with the commitment fee ranging from 20 to 50 basis points.
During the Covenant Relief Period, the required ceiling on the Company’s total leverage ratio will be 4.25 to 1.00 for quarters ending June 30, 2020 through and including December 31, 2020, and will decline in quarterly increments to 3.25 to 1.00 through the quarter ending December 31, 2021.
Due to our recently announced relationship with a strategic new customer, we entered into an amendment (Third Amendment) to the Credit Agreement on March 31, 2021. The Third Amendment allows the Company to incur up to $70,000 of capital expenditures in 2021, as opposed to $35,000.
At SeptemberJune 30, 2020,2021, our consolidated total leverage ratio was 2.161.00 to 1.00 as compared to a covenant maximum of 4.253.75 to 1.00 in accordance with the Second Amendment of the Credit Agreement.
At SeptemberJune 30, 2020,2021, our interest coverage ratio was 7.4415.24 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 LIBOR plus an applicable margin based on the current funded indebtedness to adjusted EBITDA ratio. The interest rate was 2.50%2.25% and 3.25%2.50% as of SeptemberJune 30, 20202021 and December 31,
12
2019, 2020, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.25% and 0.20% as of SeptemberJune 30, 20202021 and December 31, 2019.2020, respectively.
The Company was in compliance with all financial covenants of its credit agreements as of SeptemberJune 30, 20202021 and December 31, 2019.2020. The amount borrowed on the revolving credit notes was $59,986$43,854 and $72,572$45,257 as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively.
Note 5.4. Capital lease obligation
Capital leases consist of equipment with a capitalized cost of $3,825 at September 30, 2020$3,847 and December 31, 2019,$3,825 and accumulated depreciation of $1,084$1,569 and $598$1,245 at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Depreciation of $161$163 and $483$324 was recognized on the capital lease assets during the threethree- and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and $196$161 and $342$322 during the threethree- and ninesix months ended SeptemberJune 30, 2019,2020, respectively. Non-cash capital lease transactions amounted to zero$0 forthe threethree- and ninesix months ended SeptemberJune 30, 2021 and 2020. Future minimum lease payments required under the lease are as follows:
Year ending December 31, |
|
|
|
|
|
|
|
|
2020 (remainder) |
| $ | 184 |
| ||||
2021 |
|
| 734 |
| ||||
2021 (remainder) |
| $ | 367 |
| ||||
2022 |
|
| 734 |
|
|
| 734 |
|
2023 |
|
| 734 |
|
|
| 734 |
|
2024 |
|
| 514 |
|
|
| 514 |
|
2025 |
|
| 226 |
| ||||
Thereafter |
|
| 226 |
|
|
| — |
|
Total |
|
| 3,126 |
|
|
| 2,575 |
|
Less payment amount allocated to interest |
|
| 287 |
|
|
| 198 |
|
Present value of capital lease obligation |
| $ | 2,839 |
|
| $ | 2,377 |
|
Current portion of capital lease obligation |
|
| 619 |
|
|
| 641 |
|
Long-term portion of capital lease obligation |
|
| 2,220 |
|
|
| 1,736 |
|
Total capital lease obligation |
| $ | 2,839 |
|
| $ | 2,377 |
|
Note 6.5. Operating lease obligation
Operating leases relate to property, plant and equipment. Future minimum lease payments required under the leases are as follows:
Year ending December 31, |
|
|
|
|
|
|
|
|
2020 (remainder) |
| $ | 877 |
| ||||
2021 |
|
| 3,112 |
| ||||
2021 (remainder) |
| $ | 2,647 |
| ||||
2022 |
|
| 2,300 |
|
|
| 5,528 |
|
2023 |
|
| 2,260 |
|
|
| 5,521 |
|
2024 |
|
| 1,473 |
|
|
| 4,786 |
|
2025 |
|
| 4,282 |
| ||||
Thereafter |
|
| 2,981 |
|
|
| 21,912 |
|
Total |
| $ | 13,003 |
|
| $ | 44,676 |
|
The Company leases certain office space, warehousing facilities, equipment and vehicles under operating lease arrangements with third-party lessors. These lease arrangements expire at various timetimes through December 2028.August 2031. Total rent expense under the arrangements was approximately $1,128$1,081 and $1,223$1,094 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $3,283$2,165 and $3,624$2,155 for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively.
Note 7.6. Employee stock ownership plan
Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (the ESOP), the Company can make annual discretionary contributions to the trust for the benefit of eligible employees in the form of cash or shares of common stock of the Company. PriorCompany subject to December 31, 2019, the annual contribution was discretionary except that it must have been at least 3%board of the compensation for all safe harbor participants for the plan year. Beginning on January 1, 2020, all contributions are discretionary. directors’ approval.For the three months ended SeptemberJune 30, 20202021 and 2019,2020, the Company’s estimated ESOP expense was $228 and income of $675, respectively. For the six months ended June 30, 2021 and 2020, the Company’s estimated ESOP expense amounted to zero$701 and $1,500, respectively. For the nine months ended September 30, 2020 and 2019, the Company’s ESOP expense amounted to zero and $4,500,$0, respectively.
13
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. Prior to the IPO, all distributions were paid to participants in cash.
As of SeptemberJune 30, 2020,2021, and December 31, 2019,2020, the ESOP shares, excluding safe harbor shares held in the Company’s 401(k) plan, consisted of 10,032,6417,292,392 and 11,790,1138,253,533 in allocated shares, respectively. 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. Subsequent to the IPO, shares are sold in the public market.
Note 8.7. 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 contributions to save for retirement. Employees may contribute up to 50% of their eligible compensation plan to the 401(k) Plan, subject to the limits of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan also 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).
Note 9.8. 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. As the year progresses, the Company will refine its estimate based on facts and circumstances by each tax jurisdiction.
For the nine months ended September 30, 2020 our annual effective tax rate (EFT) is 26.80%, excluding discrete items. Income tax expense (benefit) was $733$1,007 and ($1,101),$1,996, and the effective tax rate (ETR) from continuing operations was -199.82%23.43% and 12.17%25.48% for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively. The following caused theOur ETR to beis different from ourthe expected annual ETR at statutory tax rates:rate due to state taxes, non-deductible items, research and development credits and benefit from excess tax deductions related to share based compensation items.
For the three and ninesix months ended SeptemberJune 30, 2020, we recorded a discreteincome tax expense of zero and $483, respectively, as a result of the removal of a deferred tax asset related to loan fee amortization.
For the three and nine months ended September 30, 2020, we recorded a discrete tax expense of $853 for both periods due to the vesting of certain stock-based compensation awards and the change in stock price. The Company expects to have discrete adjustments in the future as long as it continues to issue and have outstanding stock-based compensation awards.
For the nine months ended September 30, 2019, our annual EFT was 23.35% excluding discrete items. Income tax expense (benefit)benefit was estimated at $2,512$2,525 and ($231)$1,834 and the ETR from continuing operations was 19.60%27.69% and 3.50% for the three and nine months ended September 30, 2019,28.77% respectively.
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 for the three and nine months ended September 30, 2020 and 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.expense (benefit). There were no0 amounts for penalties or interest recorded as of SeptemberJune 30, 2020.2021. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its positions.
14Uncertain Tax Positions
Based on the Company’s evaluation, it has been concluded that there is one tax position related to the research and development tax credit requiring recognition in the Company’s financial statements as of June 30, 2021. 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. NaN amounts have been recorded as tax expense for interest and penalties for the three months ended June 30, 2021, as the amount for the utilized portion for the research and development credit on the Wisconsin return is considered to be immaterial. At June 30, 2021 and December 31, 2020, a total of $307 and $208, respectively, of unrecognized tax benefits would, if recognized, impact the Company’s ETR.
The Company files income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. Federal tax returns for tax years beginning January 1, 2017, and state tax returns beginning January 1, 2016, are open for examination.
Note 10.9. 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 11.10. 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’s common 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 and investment income or loss, reduced for charges, if any.
For the period subsequent to the IPO, deferralsDeferrals 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 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 SeptemberJune 30, 20202021 and 2019,2020, eligible employees elected to defer compensation of $10 for both periods.$0 and $12, respectively. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, eligible employees elected to defer compensation of $51$0 and $1,064,$41, respectively. As of SeptemberJune 30, 2020,2021, and December 31, 2019,2020, the total amount accrued for all benefit years under this plan was $25,183$25,461 and $24,949,$25,631, 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 SeptemberJune 30, 20202021 and 20192020 amounted to $310$575 and $141,$586, respectively. Total (income) expense for the deferred compensation plan for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 amounted to $289$405 and $10,405, respectively.$(21), respectively These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).
15
Note 12. Long-Term incentive plan
Prior to the IPO, 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. Total expense for the long-term incentive plan for the three and nine months ended September 30, 2019 amounted to zero and $10,000, respectively. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).
Note 13.11. 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.
As of March 31, 2020, the Company has consolidated benefit plans with no specific stop loss and an aggregate stop loss to limit risk. Expense related to this contract is approximately $4,757$3,290 and $4,709$5,411 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $16,072$7,011 and $14,875$11,135 for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. An estimated accrued liability of approximately $1,567$1,262 and $1,316$1,721 was recorded as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, for estimated unpaid claims and is included within other current liabilities on the Condensed Consolidated Balance Sheets.
Note 14.12. 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 and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined it has one1 operating segment. The Company does not earn revenues or have long-lived assets located in foreign countries.
Note 15.13. 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 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 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.
• | 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. |
16
The following table lists the Company’s financial assets and liabilities accounted for at fair value by the fair value hierarchy:
|
|
|
|
|
| Fair Value Measurements at Report Date Using |
|
|
|
|
|
| Fair Value Measurements at Report Date Using |
| ||||||||||||||||||
|
| Balance at September 30, 2020 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Balance at June 30, 2021 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||||||
Deferred compensation |
| $ | 25,183 |
|
| $ | 4,542 |
|
| $ | 20,641 |
|
| $ | — |
| ||||||||||||||||
Deferred compensation liability |
| $ | 25,461 |
|
| $ | 18,296 |
|
| $ | 7,165 |
|
| $ | 0 |
| ||||||||||||||||
Total |
| $ | 25,183 |
|
| $ | 4,542 |
|
| $ | 20,641 |
|
| $ | — |
|
| $ | 25,461 |
|
| $ | 18,296 |
|
| $ | 7,165 |
|
| $ | 0 |
|
|
|
|
|
|
| Fair Value Measurements at Report Date Using |
|
|
|
|
|
| Fair Value Measurements at Report Date Using |
| ||||||||||||||||||
|
| Balance at December 31, 2019 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Balance at December 31, 2020 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||||||
Deferred compensation |
| $ | 24,949 |
|
| $ | 2,470 |
|
| $ | 22,479 |
|
| $ | — |
| ||||||||||||||||
Deferred compensation liability |
| $ | 25,631 |
|
| $ | 4,865 |
|
| $ | 20,766 |
|
| $ | 0 |
| ||||||||||||||||
Total |
| $ | 24,949 |
|
| $ | 2,470 |
|
| $ | 22,479 |
|
| $ | — |
|
| $ | 25,631 |
|
| $ | 4,865 |
|
| $ | 20,766 |
|
| $ | 0 |
|
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 financial statements 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 majority of the balance as Level 2.1. 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 (Loss). The balance due to participants is reflected on the Deferreddeferred compensation and long-term incentive line item on the Condensed Consolidated Balance Sheets.
The Company’s non-financial assets such as intangible assets and property, plant, and equipment are re-measured at fair value when there is an indication of impairment and adjusted only when an impairment charge is recognized.
Note 16. Common Equity14. Earnings Per Share
On May 13, 2019 theThe Company issued a stock dividend specificcomputes earnings per share in accordance with ASC Topic 260, Earnings per Share. In accordance with ASC 260, outstanding options will be considered to pre-IPO shares, of approximately 1,334.34-for-1. The share dividend was accounted for as a 1,334.34-for-1 stock splithave been exercised and is retroactively reflected in these consolidated financial statements. All share redemption provisions were removed effective with the IPO.
Note 17. Temporary Equity
Prior to our IPO in May 2019, our common stock was considered redeemable under GAAP because of certain repurchase obligations related to the ESOP. As a result, all common shares were recorded as temporary equity (redeemable common shares) on the Condensed Consolidated Balance Sheets at their redemption valuesoutstanding as of the respective balance sheet dates.
All contractual redemption features were removed at the timebeginning of the IPO. As a consequence, all outstanding sharesperiod if the average market price of the common stock ceased to be considered temporary equity and were reclassified to Shareholders’ Equity, including the associated balances of retained earnings. As the common shares have no par value, the amounts recorded in temporary equity for the share redemption value were recorded to additional paid-in capital within Shareholders’ Equity upon the transfer.
The following table shows all changes to temporary equity during the nine months ended September 30, 2019.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.
Options in the money that were not included in the computation of diluted earnings per share because they would have had an anti-dilutive impact on earnings per share were as follows:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Stock options |
|
| 300,510 |
|
|
| — |
|
|
| 300,510 |
|
|
| — |
|
17
| Temporary Equity |
| ||||||||||
|
| Redeemable Common Shares |
|
| Treasury Shares |
|
| Retained Earnings |
| |||
Balance as of January 1, 2019 |
| $ | 133,806 |
|
| $ | (57,659 | ) |
| $ | 26,842 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 2,459 |
|
Balance as of March 31, 2019 |
|
| 133,806 |
|
| �� | (57,659 | ) |
|
| 29,301 |
|
Net income pre IPO |
|
|
|
|
|
|
|
|
|
| 397 |
|
Transfer from temporary equity to common equity |
|
| (133,806 | ) |
|
| 57,659 |
|
|
| (29,698 | ) |
Balance as of June 30, 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
Balance as of September 30, 2019 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
Note 18.15. Revenue Recognition
Contract Assets and Contract Liabilities
The Company has contract assets and contract liabilities, which are included in other current assets and other current liabilities on the Condensed Consolidated Balance Sheet, 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 (PPAP). At this time, the toolCost of goods sold is placed into servicerecognized and the cost to build the tooling is released from the balance sheet and includedwhen control of the tooling promised under contract is transferred to the customer either at a point in costtime or over a period of goods sold.time.
The Company’s contracts with customers are short-term in nature; therefore, revenue is typically recognized, billed and collected within a 12-month period. The following table reflects the changes in our contract assets and liabilities during the ninesix months ended SeptemberJune 30, 2020.2021.
(in thousands) |
| Contract Assets |
|
| Contract Liabilities |
| ||
As of January 1, 2020 |
| $ | 1,589 |
|
| $ | 914 |
|
Net Activity |
|
| 2,053 |
|
|
| 840 |
|
As of September 30, 2020 |
| $ | 3,642 |
|
| $ | 1,754 |
|
|
| Contract Assets |
|
| Contract Liabilities |
| ||
As of December 31, 2020 |
| $ | 3,126 |
|
| $ | 1,060 |
|
Net Activity |
|
| (1,033 | ) |
|
| 260 |
|
As of June 30, 2021 |
| $ | 2,093 |
|
| $ | 1,320 |
|
Disaggregated Revenue
The following table represents a disaggregation of revenue by product category:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Outdoor sports |
| $ | 1,898 |
|
| $ | 1,869 |
|
| $ | 5,260 |
|
| $ | 5,839 |
|
| $ | 3,006 |
|
| $ | 1,592 |
|
| $ | 5,677 |
|
| $ | 3,363 |
|
Fabrication |
|
| 56,658 |
|
|
| 84,814 |
|
|
| 169,674 |
|
|
| 267,516 |
|
|
| 78,318 |
|
|
| 43,224 |
|
|
| 147,689 |
|
|
| 113,016 |
|
Performance structures |
|
| 18,543 |
|
|
| 18,010 |
|
|
| 42,334 |
|
|
| 57,086 |
|
|
| 18,753 |
|
|
| 7,152 |
|
|
| 39,208 |
|
|
| 23,791 |
|
Tube |
|
| 12,772 |
|
|
| 16,484 |
|
|
| 37,047 |
|
|
| 57,196 |
|
|
| 15,760 |
|
|
| 9,320 |
|
|
| 30,647 |
|
|
| 24,274 |
|
Tank |
|
| 4,316 |
|
|
| 8,747 |
|
|
| 13,399 |
|
|
| 33,452 |
|
|
| 5,622 |
|
|
| 2,364 |
|
|
| 12,413 |
|
|
| 9,082 |
|
Total |
|
| 94,187 |
|
|
| 129,924 |
|
|
| 267,714 |
|
|
| 421,089 |
|
|
| 121,459 |
|
|
| 63,652 |
|
|
| 235,634 |
|
|
| 173,526 |
|
Intercompany sales elimination |
|
| (3,112 | ) |
|
| (1,413 | ) |
|
| (5,452 | ) |
|
| (3,716 | ) |
|
| (1,246 | ) |
|
| (1,070 | ) |
|
| (2,801 | ) |
|
| (2,339 | ) |
Total, net sales |
| $ | 91,075 |
|
| $ | 128,511 |
|
| $ | 262,262 |
|
| $ | 417,373 |
|
| $ | 120,213 |
|
| $ | 62,582 |
|
| $ | 232,833 |
|
| $ | 171,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Note 19.16. Concentration of major customers
The following customers accounted for 10% or greater of the Company’s recorded net sales and net trade receivables:
|
| Net Sales |
|
| Accounts Receivable |
|
| Net Sales |
|
|
| Accounts Receivable |
| |||||||||||||||||||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| As of |
|
| As of |
|
| Three Months Ended June 30, |
|
|
| Six Months Ended June 30, |
|
|
| As of |
|
| As of |
| ||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| 2021 |
|
|
| 2020 |
|
|
| 2021 |
|
| 2020 |
|
|
| June 30, 2021 |
|
| December 31, 2020 |
| |||
Customer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A |
| 13.3 | % |
| 13.6 | % |
| 15.6 | % |
| 15.4 | % |
| 10.4 | % |
| <10 | % |
| 16.7 |
| % |
|
| 18.0 |
| % |
| 16.2 | % |
| 16.9 |
| % |
| 14.0 | % |
| 11.3 | % | ||
B |
| 10.5 | % |
| 12.4 | % |
| 10.1 | % |
| 13.8 | % |
| <10 | % |
| <10 | % |
|
| 10.3 |
| % |
| <10 |
| % |
| 11.1 | % |
|
| 10.0 |
| % |
| <10 | % |
| <10 | % | |
C |
| 13.3 | % |
| 13.9 | % |
| 11.3 | % |
| 12.7 | % |
| <10 | % |
| <10 | % |
| <10 |
| % |
| <10 |
| % |
| 10.8 | % |
| <10 |
| % |
| <10 | % |
| 12.2 | % | |||
D |
| <10 | % |
| <10 | % |
| <10 | % |
| <10 | % |
| <10 | % |
| 10.4 | % |
| 15.2 |
| % |
| <10 |
| % |
| 14.3 | % |
| 10.2 |
| % |
| 10.8 | % |
| <10 | % | |||
E |
| <10 | % |
| <10 | % |
| <10 | % |
| <10 | % |
| <10 | % |
| 13.5 | % |
| <10 |
| % |
| <10 |
| % |
| <10 | % |
| <10 |
| % |
| 12.7 | % |
| <10 | % | |||
F |
| 15.7 | % |
| 10.1 | % |
| 11.7 | % |
| <10 | % |
| 12.3 | % |
| <10 | % |
Note 20.17. Stock based compensation
The Mayville Engineering Company, Inc. 2019 Omnibus Incentive Plan provides the Company the ability to grant monetary payments based on the value of its common stock, up to two million2,000,000 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 Topic 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 share-based instrument at the time of grant and are recognized as expense over the vesting period of the share-based instrument. For units, fair value is equivalent to the stock price at the date of grant. The Black-Scholes option pricing model is utilized to determine fair value for options.
Cancellations and forfeitures are accounted for as incurred.
Stock awards were granted on June 3, 2021, May 12, 2021, April 20, 2021, February 28, 2021, May 12, 2020, February 27, 2020 and May 8, 2019. There were no0 stock awards granted prior to this.
During the ninesix months ended SeptemberJune 30, 2020, 264,9912021, 314,902 units vested. For the same period, 125,414484,661 options vested with a weighted average strike price of $17.00.$11.23. There was no vestingwere 125,414 options vested for the threesix months ended SeptemberJune 30, 2020.
As of SeptemberJune 30, 2020, 843,9422021, 1,129,487 options remained outstanding with a weighted average strike price of $9.97$11.08 and a weighted average contractual life of 9.318.88 years remaining.
The Company’s stock-based compensation expense by award type is summarized as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
One-time IPO unit awards |
| $ | — |
|
| $ | 725 |
|
| $ | 1,029 |
|
| $ | 1,146 |
|
| $ | — |
|
| $ | 304 |
|
| $ | — |
|
| $ | 1,029 |
|
Unit awards |
|
| 586 |
|
|
| 412 |
|
|
| 1,670 |
|
|
| 661 |
|
|
| 849 |
|
|
| 520 |
|
|
| 1,568 |
|
|
| 1,084 |
|
Option awards |
|
| 392 |
|
|
| 201 |
|
|
| 1,020 |
|
|
| 328 |
|
|
| 539 |
|
|
| 335 |
|
|
| 1,020 |
|
|
| 628 |
|
Stock based compensation expense, net of tax |
| $ | 978 |
|
| $ | 1,338 |
|
| $ | 3,719 |
|
| $ | 2,135 |
|
| $ | 1,388 |
|
| $ | 1,159 |
|
| $ | 2,588 |
|
| $ | 2,741 |
|
One-time IPO unit awards arewere fully expensed as of September 30,December 31, 2020.
A rollforward of unrecognized stock-based compensation expense is displayed in the table below. Unrecognized stock-based compensation expense as of SeptemberJune 30, 20202021 will be expensed over the remaining requisite service period from which individual award values relate, up to February 27, 2022.28, 2023.
|
| Three Months Ended September 30, 2020 |
|
| Nine Months Ended September 30, 2020 |
|
| Units |
|
| Options |
|
| Total |
| |||||||||||||||||||||
|
| Units |
|
| Options |
|
| Total |
|
| Units |
|
| Options |
|
| Total |
| ||||||||||||||||||
Beginning Balance |
| $ | 2,975 |
|
| $ | 2,019 |
|
| $ | 4,994 |
|
| $ | 2,596 |
|
| $ | 1,124 |
|
| $ | 3,720 |
| ||||||||||||
Balance as of December 31, 2020 |
| $ | 1,545 |
|
| $ | 1,432 |
|
| $ | 2,977 |
| ||||||||||||||||||||||||
Grants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,022 |
|
|
| 2,041 |
|
|
| 5,063 |
|
|
| 2,564 |
|
|
| 2,130 |
|
|
| 4,694 |
|
Forfeitures |
|
| (25 | ) |
|
| — |
|
|
| (25 | ) |
|
| (555 | ) |
|
| (518 | ) |
|
| (1,073 | ) |
|
| (81 | ) |
|
| — |
|
|
| (81 | ) |
Expense |
|
| (586 | ) |
|
| (392 | ) |
|
| (978 | ) |
|
| (2,699 | ) |
|
| (1,020 | ) |
|
| (3,719 | ) |
|
| (719 | ) |
|
| (481 | ) |
|
| (1,200 | ) |
Balance as of September 30, 2020 |
| $ | 2,364 |
|
| $ | 1,627 |
|
| $ | 3,991 |
|
| $ | 2,364 |
|
| $ | 1,627 |
|
| $ | 3,991 |
| ||||||||||||
Balance as of March 31, 2021 |
|
| 3,309 |
|
|
| 3,081 |
|
|
| 6,390 |
| ||||||||||||||||||||||||
Grants |
|
| 892 |
|
|
| — |
|
|
| 892 |
| ||||||||||||||||||||||||
Forfeitures |
|
| (113 | ) |
|
| (69 | ) |
|
| (182 | ) | ||||||||||||||||||||||||
Expense |
|
| (849 | ) |
|
| (539 | ) |
|
| (1,388 | ) | ||||||||||||||||||||||||
Balance as of June 30, 2021 |
| $ | 3,239 |
|
| $ | 2,473 |
|
| $ | 5,712 |
|
Note 21.18. Greenwood Facility Closure and Restructuring
Based on the Company’s investments in new technology and automation, which have resulted in a smaller footprint requirement to maintain manufacturing capacity, the Company announced it would be closing its Greenwood, SC facility on May 6, 2020. The facility closure was finalized during the third quarter of 2020 with all customer components re-distributed amongstamong five other MEC manufacturing facilities. All customer relationships and manufactured components were maintained through this transition without disruption to our customers.
Costs associated with the closure are being accounted for in accordance with ASC420 Exit or Disposal Cost Obligations.
For the three and six months ended SeptemberJune 30, 2020,2021, the Company incurred $687 of$0 costs associated with the facility closure and restructuring including $51 for severance and retention bonuses, $88 for the loss on sale of manufacturing equipment not transferred to another facility, $78 for the buyout of operating leases, and the remainder mostly related to costs to close the facility and relocate equipment to other facilities.restructuring. For the ninethree and six months ended SeptemberJune 30, 2020, the Company incurred $2,524$1,838 of costs associated with the facility closure and restructuring, including $282 for severance and retention bonus, $931 for the loss on sale of manufacturing equipment not transferred to another MEC facility, $78 for the buyout of operating leases, $622 for the disposition of inventory, and the remainder mostly related to costs to close the facility and relocate equipment to other facilities.total costs. These costs were recognized on the cost of sales line item of the Condensed Consolidated Statements of Comprehensive Income (Loss). The Company expects to incur an immaterial amount of additional costs associated with, including $844 for the facility closure in the fourth quarter this year.
The Greenwood facility has a net book value of approximately $3,552 as of September 30, 2020 and is classified as assets held for saleloss on the Condensed Consolidated Balance Sheet. Based on information provided by reputable independent third parties,sale of manufacturing equipment that was not being transferred to another MEC facility, $231 for severance and retention bonus, $638 for the increase to the excess and obsolete inventory reserve for the inventory the Company has concluded that the fair valueplanned to dispose of the facility exceeds its net book value.
The following table summarizes the activityand $125 mostly related to the Greenwood restructuring through September 30, 2020:costs to close this facility and relocate equipment to other facilities.
|
| Employee Severance and Retention Bonus Reserve |
|
| Inventory Excess and Obsolescence Reserve |
|
| Other |
|
| Total |
| ||||
Balance as of March 31, 2020 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Charges |
|
| 231 |
|
|
| 638 |
|
|
| 969 |
|
|
| 1,838 |
|
Cash receipts (payments) |
|
| (34 | ) |
|
| — |
|
|
| (969 | ) |
|
| (1,003 | ) |
Accrual adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance as of June 30, 2020 |
|
| 197 |
|
|
| 638 |
|
|
| — |
|
|
| 835 |
|
Charges |
|
| 51 |
|
|
| (16 | ) |
|
| 652 |
|
|
| 687 |
|
Cash receipts (payments) |
|
| (248 | ) |
|
| 16 |
|
|
| (652 | ) |
|
| (884 | ) |
Accrual adjustments |
|
| — |
|
|
| (638 | ) |
|
| — |
|
|
| (638 | ) |
Balance as of September 30, 2020 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
As a result of the Greenwood facility closure, future earnings and cash flows will no longer be impacted by the depreciation associated with the assets disposed of or the facility, maintenance costs of the facility, and facility personnel expenses.
Assets disposed of had a net book value of $2,475 with a remaining useful life of approximately 3 years resulting in approximately $825 of annual depreciation expense that will no longer be incurred. The facility has a net book value of $3,552 as of SeptemberJune 30, 20202021 with a remaining weighted average useful life of approximately 27 years resulting in approximately $133 of annual depreciation expense that will no longer be incurred.
TheAdditionally, the Company incurredwill no longer have approximately $800 of annual facility maintenance costs, including utilities, that will no longer be incurred.costs.
Total personnel costs associated with the facility were approximately $2,250 for the first quarter 2020 resulting in approximately $9,000 of annual personnel expenses, of whichexpenses; the majority of these costs will bewere transitioned to the5 other five MEC facilities that willare now be manufacturing these components. As previously mentioned, all customer relationships and manufacturing programs were retained through the transition.
The aforementioned depreciation, maintenance costs, and personnel expenses associated with the Greenwood facility have been classified as cost of sales on the Condensed Consolidated Statements of Comprehensive Income (Loss).
Note 22.Note 19. Subsequent events
The companyCompany evaluated events and transactions for potential recognition or disclosure in theinterim unaudited Condensed Consolidated Financial Statements through November 3, 2020,August 4, 2021, the date on which theinterim unaudited Condensed Consolidated Financial Statements were available to be issued.
On July 1, 2021, the Company entered into a new contractual agreement to sell the Greenwood, SC manufacturing facility for $5,300 before commissions and fees. Finalization of the contract is contingent upon a 30-day due diligence period, that may be extended for an additional 15 days, upon written notice from the purchaser.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in the understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as such were previously supplemented and amended in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 and “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in Part II Item 1A1A. of this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20192020 and our unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item I of this Quarterly Report on Form 10-Q. In this discussion, we use certain non-GAAP financial measures. Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management Discussion and Analysis of Financial Condition and Results of Operations. Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.
All amounts are presented in thousands except share amounts, per share data, years and ratios.
Overview
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-andheavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military, fitness equipment 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-andheavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agricultural, military, fitness equipment and other products.
In May 2019, we completed our 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.
COVID-19 Impact
COVID-19 has had and will continue to have a negative impact on our business, financial condition, cash flows, and results of operations, although the full extent is still uncertain.
For the three and ninesix months ended SeptemberJune 30, 2020,2021, net sales reflected the significant disruption wesupply chain issues encountered primarily dueby original equipment manufacturers’ that led to COVID-19 with customer shutdowns,lower production demand changes, and continued destocking,at times, which were most apparentcan be directly attributed to microchip shortages in the Commercial Vehicle, Agriculturecommercial vehicle market and Construction & Access Equipmentport issues that impacted nearly all end markets served. Despite MEC and its customer base carrying the essential business designation, customer production facilities shut down 5 – 6 weeks on average during the second quarter due to COVID-19. As a direct result of the customer shutdowns, MEC temporarily halted production at some of its facilities during the second quarter. Customer manufacturing facilities gradually reopened toward the end of the second quarter, but MEC production volumes remain below pre-pandemic levels as of the end of the third quarter with all MEC facilities open. Despite the decline in volumes for the second and third quarters, all existing customer relationships and manufacturing programs remain intact. While end markets have started to stabilize, we have improved our near- and long-term cost structure through facility and process optimization and are actively working with our customers to grow our partnerships while pursuing incremental sales through a wide range of new customer and market opportunities.
The future financial effects of COVID-19 are unknown due to many factors. These factors include the uncertainty of the new Delta variant, uncertainty of the effectiveness of governmental actions to address COVID-19, including health, monetary and fiscal policies, the effect of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing, trade agreements, other geopolitical events, and the availability and volatility in the price of manyraw materials and other commodities. As a result, predicting the Company’s forecasted financial performance is difficult and subject to many assumptions.
The Company’s first priority has been to safeguard the health and well-being of its employees while fulfilling its obligations as an essential business serving its customer base. This proactive approach has kept employees safe and production facilities operational
22
based on customer demand. Our goal is to continue to successfully manage through the effects of COVID-19 and strengthen our position serving customers in the future.
How We Assess Performance
Net Sales. Net sales reflect sales of our components and products net of allowances for returns and discounts. In addition to COVID-19, several factors affect our net sales in any given period, including general economic conditions, weather, timing of acquisitions and the production schedules of our customers. Net sales are recognized at the time of shipment to the customer.
Manufacturing Margins. Manufacturing margins representsrepresent net sales less cost of sales. Cost of sales consists of all direct and indirect costs used in the manufacturing process, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other directly related overhead costs. Our cost of sales is directly affected by the fluctuations in commodity
prices, primarily sheet steel and aluminum, but these changes are largely mitigated by contractual agreements with our customers that allow us to pass through these price changes based upon certain market indexes.
Depreciation and Amortization. We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. Amortization expense is the periodic expense related to leasehold improvements and intangible assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.
Other Selling, General, and Administrative Expenses. Other selling, general and administrative expenses consist primarily of salaries and personnel costs for our sales and marketing, finance, human resources, information systems, administration and certain other certain managerial employees and certain corporate level administrative expenses such as incentive compensation, audit, accounting, legal and other consulting and professional services, travel, and insurance.
Other Key Performance Indicators
EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin
EBITDA represents net income (loss) 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 acquisition of Defiance Metal Products Co., Inc. (DMP) and the IPO, 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, one-time increases in deferredstock-based compensation and long-term incentive plan expenses related to the IPO, stock-based compensation, and restructuring expenses related to the closure of the Greenwood facility. 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 (loss) 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.
Starting in the first quarter of 2020, we excluded stock-based compensation expense from Adjusted EBITDA. Management excludes this charge when evaluating the performance of the business because it is a non-cash charge, and the Company is able to fund vesting obligations through treasury shares. Further, the exclusion of these charges aligns with the calculation of Adjusted EBITDA for purposes of our covenant calculations under the Credit Agreement. And finally, revaluations of grant date fair values can vary significantly with the passage of time without any accounting impact. For example, the fair value of the stock-based compensation awards granted in May 2019 would have been approximately half of that value had they been granted at the end of this quarter.
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.
23
The following table presents a reconciliation of net income (loss), the most directly comparable measure calculated in accordance with GAAP, to Adjusted EBITDA, and the calculation of Adjusted EBITDA Margin for each of the periods presented.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Net income (loss) |
| $ | (1,100 | ) |
| $ | 9,746 |
|
| $ | (8,064 | ) |
| $ | (3,079 | ) |
| $ | 3,292 |
|
| $ | (7,014 | ) |
| $ | 5,837 |
|
| $ | (6,964 | ) |
Interest expense |
|
| 647 |
|
|
| 987 |
|
|
| 2,110 |
|
|
| 5,811 |
|
|
| 504 |
|
|
| 637 |
|
|
| 1,036 |
|
|
| 1,463 |
|
Provision (benefit) for income taxes |
|
| 733 |
|
|
| 2,512 |
|
|
| (1,101 | ) |
|
| (231 | ) |
|
| 1,007 |
|
|
| (2,525 | ) |
|
| 1,996 |
|
|
| (1,834 | ) |
Depreciation and amortization |
|
| 7,894 |
|
|
| 8,297 |
|
|
| 24,334 |
|
|
| 24,652 |
|
|
| 7,838 |
|
|
| 8,159 |
|
|
| 15,589 |
|
|
| 16,439 |
|
EBITDA |
|
| 8,174 |
|
|
| 21,543 |
|
|
| 17,279 |
|
|
| 27,153 |
|
|
| 12,641 |
|
|
| (743 | ) |
|
| 24,458 |
|
|
| 9,104 |
|
Loss on the extinguishment of debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 154 |
| ||||||||||||||||
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 |
|
| — |
|
|
| 900 |
|
|
| — |
|
|
| 5,288 |
| ||||||||||||||||
IPO stock-based compensation expense |
|
| — |
|
|
| 725 |
|
|
| 1,029 |
|
|
| 1,146 |
| ||||||||||||||||
IPO stock based compensation expense |
|
| — |
|
|
| 304 |
|
|
| — |
|
|
| 1,029 |
| ||||||||||||||||
Stock based compensation expense |
|
| 978 |
|
|
| 613 |
|
|
| 2,690 |
|
|
| 989 |
|
|
| 1,388 |
|
|
| 855 |
|
|
| 2,588 |
|
|
| 1,712 |
|
Greenwood restructuring charges |
|
| 687 |
|
|
| — |
|
|
| 2,524 |
|
|
| — |
|
|
| — |
|
|
| 1,838 |
|
|
| — |
|
|
| 1,838 |
|
Adjusted EBITDA |
| $ | 9,839 |
|
| $ | 14,183 |
|
| $ | 23,522 |
|
| $ | 49,151 |
|
| $ | 14,029 |
|
| $ | 2,254 |
|
| $ | 27,046 |
|
| $ | 13,683 |
|
Net sales |
| $ | 91,075 |
|
| $ | 128,511 |
|
| $ | 262,262 |
|
| $ | 417,373 |
|
| $ | 120,213 |
|
| $ | 62,582 |
|
| $ | 232,833 |
|
| $ | 171,187 |
|
EBITDA Margin |
|
| 9.0 | % |
|
| 16.8 | % |
|
| 6.6 | % |
|
| 6.5 | % |
|
| 10.5 | % |
|
| -1.2 | % |
|
| 10.5 | % |
|
| 5.3 | % |
Adjusted EBITDA Margin |
|
| 10.8 | % |
|
| 11.0 | % |
|
| 9.0 | % |
|
| 11.8 | % |
|
| 11.7 | % |
|
| 3.6 | % |
|
| 11.6 | % |
|
| 8.0 | % |
Consolidated Results of Operations
Three Months Ended SeptemberJune 30, 20202021 Compared to Three Months Ended SeptemberJune 30, 20192020
|
| Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| Increase (Decrease) |
|
| 2021 |
|
| 2020 |
|
| Increase (Decrease) |
| ||||||||||||||||||||||||||||||
|
| Amount |
|
| % of Net Sales |
|
| Amount |
|
| % of Net Sales |
|
| Amount Change |
|
| % Change |
|
| Amount |
|
| % of Net Sales |
|
| Amount |
|
| % of Net Sales |
|
| Amount Change |
|
| % Change |
| ||||||||||||
Net sales |
| $ | 91,075 |
|
|
| 100.0 | % |
| $ | 128,511 |
|
|
| 100.0 | % |
| $ | (37,436 | ) |
|
| -29.1 | % |
| $ | 120,213 |
|
|
| 100.0 | % |
| $ | 62,582 |
|
|
| 100.0 | % |
| $ | 57,631 |
|
|
| 92.1 | % |
Cost of sales |
|
| 81,340 |
|
|
| 89.3 | % |
|
| 113,941 |
|
|
| 88.7 | % |
|
| (32,601 | ) |
|
| -28.6 | % |
|
| 103,933 |
|
|
| 86.5 | % |
|
| 63,736 |
|
|
| 101.8 | % |
|
| 40,197 |
|
|
| 63.1 | % |
Manufacturing margins |
|
| 9,735 |
|
|
| 10.7 | % |
|
| 14,570 |
|
|
| 11.3 | % |
|
| (4,835 | ) |
|
| -33.2 | % |
|
| 16,280 |
|
|
| 13.5 | % |
|
| (1,154 | ) |
|
| -1.8 | % |
|
| 17,434 |
|
|
| 1510.7 | % |
Amortization of intangibles |
|
| 2,677 |
|
|
| 2.9 | % |
|
| 2,677 |
|
|
| 2.1 | % |
|
| — |
|
|
| 0.0 | % |
|
| 2,677 |
|
|
| 2.2 | % |
|
| 2,677 |
|
|
| 4.3 | % |
|
| — |
|
|
| 0.0 | % |
Profit sharing, bonuses and deferred compensation |
|
| 2,288 |
|
|
| 2.5 | % |
|
| 678 |
|
|
| 0.5 | % |
|
| 1,610 |
|
|
| 237.5 | % |
|
| 3,210 |
|
|
| 2.7 | % |
|
| 1,194 |
|
|
| 1.9 | % |
|
| 2,016 |
|
|
| 168.8 | % |
Employee stock ownership plan expense |
|
| — |
|
|
| 0.0 | % |
|
| 1,500 |
|
|
| 1.2 | % |
|
| (1,500 | ) |
|
| -100.0 | % | ||||||||||||||||||||||||
Employee stock ownership plan (income) expense |
|
| 228 |
|
|
| 0.2 | % |
|
| (675 | ) |
|
| -1.1 | % |
|
| 903 |
|
|
| 133.8 | % | ||||||||||||||||||||||||
Other selling, general and administrative expenses |
|
| 4,490 |
|
|
| 4.9 | % |
|
| 6,068 |
|
|
| 4.7 | % |
|
| (1,578 | ) |
|
| -26.0 | % |
|
| 5,362 |
|
|
| 4.5 | % |
|
| 4,552 |
|
|
| 7.3 | % |
|
| 810 |
|
|
| 17.8 | % |
Contingent consideration revaluation |
|
| — |
|
|
| 0.0 | % |
|
| (9,598 | ) |
|
| -7.5 | % |
|
| 9,598 |
|
|
| 100.0 | % | ||||||||||||||||||||||||
Income from operations |
|
| 280 |
|
|
| 0.3 | % |
|
| 13,245 |
|
|
| 10.3 | % |
|
| (12,965 | ) |
|
| -97.9 | % | ||||||||||||||||||||||||
Income (loss) from operations |
|
| 4,803 |
|
|
| 4.0 | % |
|
| (8,902 | ) |
|
| -14.2 | % |
|
| 13,705 |
|
|
| 154.0 | % | ||||||||||||||||||||||||
Interest expense |
|
| (647 | ) |
|
| 0.7 | % |
|
| (987 | ) |
|
| 0.8 | % |
|
| (340 | ) |
|
| -34.4 | % |
|
| (504 | ) |
|
| 0.4 | % |
|
| (637 | ) |
|
| 1.0 | % |
|
| (133 | ) |
|
| -20.9 | % |
Provision for income taxes |
|
| 733 |
|
|
| 0.8 | % |
|
| 2,512 |
|
|
| 2.0 | % |
|
| (1,779 | ) |
|
| -70.8 | % | ||||||||||||||||||||||||
Provision (benefit) for income taxes |
|
| 1,007 |
|
|
| 0.8 | % |
|
| (2,525 | ) |
|
| -4.0 | % |
|
| 3,532 |
|
|
| 139.9 | % | ||||||||||||||||||||||||
Net income (loss) and comprehensive income (loss) |
| $ | (1,100 | ) |
|
| -1.2 | % |
| $ | 9,746 |
|
|
| 7.6 | % |
| $ | (10,846 | ) |
|
| -111.3 | % |
| $ | 3,292 |
|
|
| 2.7 | % |
| $ | (7,014 | ) |
|
| -11.2 | % |
| $ | 10,306 |
|
|
| 146.9 | % |
EBITDA |
| $ | 8,174 |
|
|
| 9.0 | % |
| $ | 21,543 |
|
|
| 16.8 | % |
| $ | (13,369 | ) |
|
| -62.1 | % |
| $ | 12,641 |
|
|
| 10.5 | % |
| $ | (743 | ) |
|
| -1.2 | % |
| $ | 13,384 |
|
|
| 1801.3 | % |
Adjusted EBITDA |
| $ | 9,839 |
|
|
| 10.8 | % |
| $ | 14,183 |
|
|
| 11.0 | % |
| $ | (4,344 | ) |
|
| -30.6 | % |
| $ | 14,029 |
|
|
| 11.7 | % |
| $ | 2,254 |
|
|
| 3.6 | % |
| $ | 11,775 |
|
|
| 522.4 | % |
Net Sales. Net sales were $91,075$120,213 for the three months ended SeptemberJune 30, 20202021 as compared to $128,511$62,582 for the three months ended SeptemberJune 30, 2019, a decrease2020, an increase of $37,436,$57,631, or 29.1%92.1%. This change is primarily attributed to increasing sales volumes due to volume reductions across nearly all end markets served driventhe continued improvement of market conditions in the current period and the impact of customer plant shutdowns caused by COVID-19 andduring the continued customer destocking activities within the Agriculture and Construction & Access Equipment end markets served. Despite the volume declines, all existing customer relationships and manufacturing programs remain intact.prior year period.
Manufacturing Margins. Manufacturing margins were $9,735$16,280 for the three months ended SeptemberJune 30, 20202021 as compared to $14,570a loss of $1,154 for the three months ended SeptemberJune 30, 2019, a decrease2020, an increase of $4,835,$17,434, or 33.2%1,510.7%. The declineincrease was driven by the aforementioned sales volume reductions resultingincreases in under-absorbed manufacturing costs.the current period coupled with the utilization of the Company’s investments in new technology and automation. In addition, $687reduced overhead costs following the closure of the Greenwood, SC facility in 2020 resulted in a significant improvement in absorbed manufacturing overhead costs in the current period, and $429 related to the reversal of inventory obsolescence and healthcare reserves specific to the estimated potential impacts of COVID-19. This was offset by the lag in contractual raw material price increases passed through to customers in the current period. The Company incurred approximately $100 in launch costs related to the new Hazel Park, MI facility for our new customer in the fitness equipment market. Additionally, the prior year period included $1,838 of restructuring costs were
24
charged to cost of sales in the current period related to the Greenwood facility closure, the details of which are outlined in Note 21 of the Condensed Consolidated Financial Statements.
Manufacturing margin percentages were 10.7% for the three months ended September 30, 2020, as compared to 11.3% for the three months ended September 30, 2019, a decline of 60 basis points. This decline was mostly attributable to lower sales volumes due to COVID-19 resulting in under-absorbed fixed overhead costs along with the $687 of restructuring charges to cost of sales in the current period related to the Greenwood facility closure. Based on the business realignment and cost reduction initiatives enacted, the Company believes manufacturing
Manufacturing margin percentages should improve beyond historical percentages when volumes returnwere 13.5% for the three months ended June 30, 2021, as compared to historical levels.a negative 1.8% for the three months ended June 30, 2020, an increase of 1,510.7%. This percentage change was attributable to the items discussed above.
Amortization of Intangibles Expense. Amortization of intangibles expense was $2,677 for both the three months ended SeptemberJune 30, 20202021 and 2019.2020.
Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses, and deferred compensation expenses were $2,288$3,210 for the three months ended SeptemberJune 30, 20202021 as compared to $678$1,194 for the three months ended SeptemberJune 30, 2019,2020, an increase of $1,610,$2,016, or 237.5%168.8%. This change was primarily driven by the re-establishmentreturn of some year-to-datenormalized discretionary employer 401(k) and bonus accruals as business activity and 401(k) related accruals that had been eliminated in the second quarter this year due to the uncertainty caused by COVID-19 at that time.sales volumes move towards pre-pandemic levels.
Employee Stock Ownership Plan (Income) Expense. Employee stock ownership plan estimated expense was zero$228 for the three months ended SeptemberJune 30, 20202021 as compared to $1,500income of $675 for the three months ended SeptemberJune 30, 2019, a decrease2020, an increase of $1,500,$903, or 100.0%133.8%. Prior to December 31, 2019, the annual ESOP contribution was discretionary except that it must have been at least 3% of the compensation for all safe harbor participants for the plan year. Beginning in 2020, all contributions are discretionary. The change is due to the discretionary nature of contributions to the ESOP plan and the decision made in the prior year period to eliminate this particularthe discretionary contributionaccrual for the fiscal year 2020 as a result of lower forecasted financial performance due to the impacts of COVID-19.
Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $4,490$5,362 for the three months ended SeptemberJune 30, 20202021 as compared to $6,068$4,552 for the three months ended SeptemberJune 30, 2019, a decrease2020, an increase of $1,578,$810, or 26.0%17.8%. The prior year period includes an additional $900 of one-time IPO related expenses. Excluding the one-time charges, these expenses decreased $678increase was principally driven by synergies achieved through the integration of DMP, lower travelhigher salary and entertainmentpayroll expenses in the current period as well as higher travel and entertainment expenses, which were artificially low in the prior year period due to the COVID-19 restrictions, and other cost saving initiatives.pandemic.
Contingent Consideration Revaluation. The DMP purchase agreement provided for a payout to the previous shareholders of DMP of $7,500, but not more than $10,000 if a certain level of EBITDAInterest Expense. Interest expense was generated during the twelve-month period ended September 30, 2019. We estimated the fair value of the contingent consideration payable balance of $6,076 as of the acquisition date of December 14, 2018. We then remeasured the fair value each quarter through September 30, 2019, with the change recorded as a contingent consideration revaluation adjustment. Based on our calculations in accordance with the purchase agreement, and as agreed to by DMP’s former shareholders, it was determined DMP’s EBITDA fell short of the payout threshold and as a result, the contingent consideration payable balance of $9,598 was adjusted to zero, resulting in income of this amount$504 for the three months ended SeptemberJune 30, 2019.
Interest Expense. Interest expense was $6472021 as compared to $637 for the three months ended SeptemberJune 30, 2020, as compareda decrease of $133, or 20.9%. The changeis due to $987lower debt levels in the current period and comparative interest rates in the prior year period.
Provision (Benefit) for Income Taxes. Income tax expense was $1,007 for the three months ended SeptemberJune 30, 2019, a decrease of $340, or 34.4%. The changeis due to lower borrowings during the third quarter of 20202021 as compared to the third quarterincome tax benefit of 2019 along with lower interest rates attributable to the more favorable terms afforded under the Amended & Restated Credit Agreement.
Provision for Income Taxes. Income tax expense was $733$2,525 for the three months ended SeptemberJune 30, 2020 as compared to $2,512 for the three months ended September 30, 2019.2020. Please reference Note 98 of the Condensed Consolidated Financial Statements for more specifics. As of SeptemberJune 30, 2020,2021, our federal operating loss (NOL) carryforward was approximately $23,000$11,833 driven by the pretax losses incurred in the current year along with the entirety of the prior year.years. The NOL does not expire and will be used to offset future pretax income. We expectestimate our long-term effective tax rate to be approximately 26%, based on current tax regulations.
Net Income (Loss) and Comprehensive Income (Loss). Net lossincome and comprehensive lossincome were $1,100$3,292 for the three months ended SeptemberJune 30, 20202021 as compared to net income and comprehensive incomea loss of $9,746$7,014 for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease of $10,846$10,306 was primarily due to the reversal of the contingent consideration payable during the prior period and other previously discussed items.
EBITDA and EBITDA Margin. EBITDA and EBITDA Margin were $8,174$12,641 and 9.0%10.5%, respectively, for the three months ended SeptemberJune 30, 20202021 as compared to $21,543negative $743 and 16.8%negative 1.2%, respectively, for the three months ended SeptemberJune 30, 2019.2020. The
25
$13,369 decrease $13,384 increase in EBITDA was primarily due to the reversalincrease in net sales caused by the aforementioned increase in sales volumes, improved manufacturing overhead absorption costs due to the utilization of our investments in new technology and automation and reduction in overhead costs from the closure of the contingent consideration payable during the prior periodGreenwood, SC facility in 2020, and the Greenwood restructuring costs and adverse impacts of COVID-19 in the currentprior period.
Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $9,839$14,029 and 10.8%11.7%, respectively, for the three months ended SeptemberJune 30, 2020,2021, as compared to $14,183$2,254 and 11.0%3.6%, respectively, for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease in Adjusted EBITDA of $4,344$11,775 was primarily due to the aforementioned items discussed above and the adverse impacts of COVID-19 in the currentprior period.
26
NineSix Months Ended SeptemberJune 30, 20202021 Compared to NineSix Months Ended SeptemberJune 30, 20192020
|
| Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| Increase (Decrease) |
|
| 2021 |
|
| 2020 |
|
| Increase (Decrease) |
| ||||||||||||||||||||||||||||||
|
| Amount |
|
| % of Net Sales |
|
| Amount |
|
| % of Net Sales |
|
| Amount Change |
|
| % Change |
|
| Amount |
|
| % of Net Sales |
|
| Amount |
|
| % of Net Sales |
|
| Amount Change |
|
| % Change |
| ||||||||||||
Net sales |
| $ | 262,262 |
|
|
| 100.0 | % |
| $ | 417,373 |
|
|
| 100.0 | % |
| $ | (155,111 | ) |
|
| -37.2 | % |
| $ | 232,833 |
|
|
| 100.0 | % |
| $ | 171,187 |
|
|
| 100.0 | % |
| $ | 61,646 |
|
|
| 36.0 | % |
Cost of sales |
|
| 241,838 |
|
|
| 92.2 | % |
|
| 362,689 |
|
|
| 86.9 | % |
|
| (120,851 | ) |
|
| -33.3 | % |
|
| 201,777 |
|
|
| 86.7 | % |
|
| 160,497 |
|
|
| 93.8 | % |
|
| 41,280 |
|
|
| 25.7 | % |
Manufacturing margins |
|
| 20,424 |
|
|
| 7.8 | % |
|
| 54,684 |
|
|
| 13.1 | % |
|
| (34,260 | ) |
|
| -62.7 | % |
|
| 31,056 |
|
|
| 13.3 | % |
|
| 10,690 |
|
|
| 6.2 | % |
|
| 20,366 |
|
|
| 190.5 | % |
Amortization of intangibles |
|
| 8,030 |
|
|
| 3.1 | % |
|
| 8,030 |
|
|
| 1.9 | % |
|
| — |
|
|
| 0.0 | % |
|
| 5,353 |
|
|
| 2.3 | % |
|
| 5,353 |
|
|
| 3.1 | % |
|
| — |
|
|
| 0.0 | % |
Profit sharing, bonuses and deferred compensation |
|
| 4,807 |
|
|
| 1.8 | % |
|
| 25,258 |
|
|
| 6.1 | % |
|
| (20,451 | ) |
|
| -81.0 | % |
|
| 6,074 |
|
|
| 2.6 | % |
|
| 2,519 |
|
|
| 1.5 | % |
|
| 3,555 |
|
|
| 141.1 | % |
Employee stock ownership plan expense |
|
| — |
|
|
| 0.0 | % |
|
| 4,500 |
|
|
| 1.1 | % |
|
| (4,500 | ) |
|
| -100.0 | % |
|
| 701 |
|
|
| 0.3 | % |
|
| — |
|
|
| 0.0 | % |
|
| 701 |
|
| N/A |
| |
Other selling, general and administrative expenses |
|
| 14,642 |
|
|
| 5.6 | % |
|
| 20,296 |
|
|
| 4.9 | % |
|
| (5,654 | ) |
|
| -27.9 | % |
|
| 10,059 |
|
|
| 4.3 | % |
|
| 10,153 |
|
|
| 5.9 | % |
|
| (94 | ) |
|
| -0.9 | % |
Contingent consideration revaluation |
|
| — |
|
|
| 0.0 | % |
|
| (6,054 | ) |
|
| -1.5 | % |
|
| 6,054 |
|
|
| 100.0 | % | ||||||||||||||||||||||||
Gain (loss) from operations |
|
| (7,055 | ) |
|
| -2.7 | % |
|
| 2,655 |
|
|
| 0.6 | % |
| �� | (9,710 | ) |
|
| -365.7 | % | ||||||||||||||||||||||||
Income (loss) from operations |
|
| 8,869 |
|
|
| 3.8 | % |
|
| (7,335 | ) |
|
| -4.3 | % |
|
| 16,204 |
|
|
| 220.9 | % | ||||||||||||||||||||||||
Interest expense |
|
| (2,110 | ) |
|
| 0.8 | % |
|
| (5,811 | ) |
|
| 1.4 | % |
|
| (3,701 | ) |
|
| -63.7 | % |
|
| (1,036 | ) |
|
| 0.4 | % |
|
| (1,463 | ) |
|
| 0.9 | % |
|
| (427 | ) |
|
| -29.2 | % |
Loss on extinguishment of debt |
|
| — |
|
|
| 0.0 | % |
|
| (154 | ) |
|
| 0.0 | % |
|
| (154 | ) |
|
| -100.0 | % | ||||||||||||||||||||||||
Benefit for income taxes |
|
| (1,101 | ) |
|
| -0.4 | % |
|
| (231 | ) |
|
| -0.1 | % |
|
| 870 |
|
|
| 376.6 | % | ||||||||||||||||||||||||
Net loss and comprehensive loss |
| $ | (8,064 | ) |
|
| -3.1 | % |
| $ | (3,079 | ) |
|
| -0.7 | % |
| $ | 4,985 |
|
|
| 161.9 | % | ||||||||||||||||||||||||
Provision (benefit) for income taxes |
|
| 1,996 |
|
|
| 0.9 | % |
|
| (1,834 | ) |
|
| -1.1 | % |
|
| 3,830 |
|
|
| 208.8 | % | ||||||||||||||||||||||||
Net income (loss) and comprehensive income (loss) |
| $ | 5,837 |
|
|
| 2.5 | % |
| $ | (6,964 | ) |
|
| -4.1 | % |
| $ | 12,801 |
|
|
| 183.8 | % | ||||||||||||||||||||||||
EBITDA |
| $ | 17,279 |
|
|
| 6.6 | % |
| $ | 27,153 |
|
|
| 6.5 | % |
| $ | (9,874 | ) |
|
| -36.4 | % |
| $ | 24,458 |
|
|
| 10.5 | % |
| $ | 9,104 |
|
|
| 5.3 | % |
| $ | 15,354 |
|
|
| 168.6 | % |
Adjusted EBITDA |
| $ | 23,522 |
|
|
| 9.0 | % |
| $ | 49,151 |
|
|
| 11.8 | % |
| $ | (25,629 | ) |
|
| -52.1 | % |
| $ | 27,046 |
|
|
| 11.6 | % |
| $ | 13,683 |
|
|
| 8.0 | % |
| $ | 13,363 |
|
|
| 97.7 | % |
Net Sales. Net sales were $262,262$232,833 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $417,373$171,187 for the ninesix months ended SeptemberJune 30, 2019, a decrease2020 for an increase of $155,111,$61,646, or 37.2%36.0%. This change is primarily attributed to volume reductions across nearly all end markets served driven by COVID-19increasing sales volumes due to the continued improvement of market conditions in the current year and the continued impact of market demand changes and related destocking activities during the first quarter of the prior year period, which was most apparent in the Commercial Vehicle, Agricultural and Construction &and Access Equipment end markets served. Despite the volume declines, all existing customer relationships andserved, along with manufacturing programs remain intact.
Manufacturing Margins. Manufacturing margins were $20,424 for the nine months ended September 30, 2020 as compared to $54,684 for the nine months ended September 30, 2019, a decrease of $34,260, or, 62.7%. The decline was mainly driven by the aforementioned volume reductions driven by COVID-19 alongin the second quarter of the prior year due to forced customer plant shutdowns, which averaged 5 – 6 weeks per customer.
Manufacturing Margins. Manufacturing margins were $31,056 for the six months ended June 30, 2021 as compared to $10,690 for the six months ended June 30, 2020, an increase of $20,366, or 190.5%. The increase was driven by the aforementioned sales volume increases in the current period, coupled with the continued impactutilization of the Company’s investments in new technology and automation. In addition, reduced overhead costs following the closure of the Greenwood, SC facility in 2020 resulted in a significant improvement in absorbed manufacturing overhead costs and $429 related to the reversal of inventory obsolescence and healthcare reserves specific to the estimated potential impacts of COVID-19. This was offset by the lag in contractual raw material price increases passed through to customers in the second quarter of the current year. Further, the prior year period was negatively impacted by the following: previously discussed market demand changes, and destocking activities, and $2,524 of restructuring costscustomer shutdowns related to the Greenwood facility consolidation, the details of which are outlined in Note 21 of the Condensed Consolidated Financial Statements. In addition, costs of sales includesCOVID-19, approximately $775 of inventory obsolescence and health care charges specific to the estimated potential impacts of COVID-19.
Our traditional methodsCOVID-19, and $1,838 of determining inventory obsolescence and health care accruals significantly rely upon historical data. When estimating the approximately $775 of COVID-19 reserves during the first quarter of the current year, we had neither historical information, nor much other data from which to compute an estimated impact for this type of event. Nevertheless, the Company believes the obvious risk posed by the pandemic may have a financial impact in these areas. This charge for these COVID-19 specific accruals represents our best good faith estimate of the potential financial impactrestructuring costs related to the Company based on information available to us. Due to the continued risk posed by COVID-19, these reserves have remained mostly unchanged since establishment. We will continue to evaluate and report on our position with respect to these reserves as we work through the pandemic.Greenwood facility closure.
Manufacturing margin percentages were 7.8%13.3% for the ninesix months ended SeptemberJune 30, 20202021 as compared to 13.1%, of net sales6.2% for the ninesix months ended SeptemberJune 30, 2019, a decline2020, an increase of 530 basis points.190.5%. This declineincrease was mostly attributable to the aforementioned impacts of COVID-19, market demand changes, destocking activities, Greenwood facility restructuring costs, and COVID-19 specific accruals. Based on the cost reduction initiatives enacted, the Company believes manufacturing margin percentages should improve beyond historical percentages when volumes return to historical levels.items discussed above.
Amortization of Intangibles Expense. Amortization of intangibles expense was $8,030$5,353 for both the ninesix months ended SeptemberJune 30, 2020,2021, and 2019.2020.
Profit Sharing, Bonuses and Deferred Compensation Expense. Profit sharing, bonuses and deferred compensation expenses were $4,807$6,074 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $25,258$2,519 for the ninesix months ended SeptemberJune 30, 2019, a decrease2020, an increase of $20,451,$3,555, or 81.0%141.1%. The prior year included $20,080This change was primarily driven by the return of one-time IPO expenses, including $10,159 for deferred compensationnormalized discretionary employer 401(k) and $9,921 for long-term incentive plan. Excluding these items from the prior year, these expenses decreased by $371. The decrease is primarily duebonus accruals as business activity and sales volumes have improved to lower financial performance mostly from the impacts of COVID-19.more normalized levels.
27
Employee Stock Ownership Plan Expense. Employee stock ownership plan expense was zero$701 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $4,500,$0 for the ninesix months ended SeptemberJune 30, 2019, a decrease2020, an increase of $4,500, or 100.0%. Prior to December 31, 2019, the annual ESOP contribution was discretionary except that it must have been at least 3% of the compensation for all safe harbor participants for the plan year. Beginning in 2020, all contributions are discretionary.$701. The change is primarily due to the discretionary nature of contributions to the ESOP plan and the decision made in the prior year period to eliminate this particularthe discretionary contributionaccrual for the fiscal year 2020 as a result of lower forecasted financial performance mostly due to the impacts of COVID-19.
Other Selling, General and Administrative Expenses.Other selling, general and administrative expenses were $14,642$10,059 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $20,296$10,153 for the ninesix months ended SeptemberJune 30, 2019,2020, a decrease of $5,654,$94, or 27.9%0.9%. The prior year period includes $5,288 of one-time other IPO and DMP acquisition related expenses. Excluding these one-time charges, these expenses decreased $366. The decrease was driven by lower public company costs attributable to process improvements, continued synergies achieved through the integration of DMP, lower travel and entertainment expenses in the current period due to COVID-19 restrictions,Defiance Metal Products and other cost saving initiatives, initiatedoffset by higher salary and payroll expenses in the current year.year period.
Contingent Consideration Revaluation. The DMP purchase agreement provided for a payout to the previous shareholders of DMP of $7,500, but not more than $10,000 if a certain level of EBITDA was generated during the twelve-month period ended September 30, 2019. We estimated the fair value of the contingent consideration payable balance of $6,076 as of the acquisition date of December 14, 2018. We then remeasured the fair value each quarter through September 30, 2019, with the change recorded as a contingent consideration revaluation adjustment. Based on our calculations in accordance with the purchase agreement, and as agreed to by DMP’s former shareholders, it was determined DMP’s EBITDA fell short of the payout threshold and as a result, the contingent consideration payable balance of $9,598 was adjusted to zero, resulting in income of $6,054 for the nine months ended September 30, 2019.
Interest Expense. Interest expense was $2,110$1,036 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $5,811$1,463 for the ninesix months ended SeptemberJune 30, 2019,2020, a decrease of $3,701,$427, or 63.7%29.2%. The change is due to lower borrowings and interest rates during the current period as compared to the same prior year period along with lower interest rates attributable to the more favorable terms afforded under the Amended & Restated Credit Agreement.period.
BenefitProvision (Benefit) for Income Taxes. Income tax benefitexpense was $1,101$1,996 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $231income tax benefit of $1,834 for the ninesix months ended SeptemberJune 30, 2019.2020. The increasechange is due to pretax income in the current period as compared to a greater pretax loss infor the currentsame prior year period. Please reference Note 98 of the Condensed Consolidated Financial Statements for more specifics. As of SeptemberJune 30, 2020,2021, our federal NOLoperating loss (NOL) carryforward was approximately $23,000$11,833 driven by the pretax losses incurred during the current year and the entirety ofin the prior year.years. The NOL does not expire and will be used to offset future pretax income. We expectestimate our long-term effective tax rate to be approximately 26%, based on current tax regulations.
Net LossIncome (Loss) and Comprehensive Loss.Income (Loss). Net lossincome and comprehensive lossincome were $8,064$5,837 for the ninesix months ended SeptemberJune 30, 20202021 as compared to $3,079a loss of $6,964 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase of $4,984$12,801 was due to the previously discussed items.
EBITDA and EBITDA Margin. EBITDA and EBITDA Margin were $17,279$24,458 and 6.6%10.5%, respectively, for the ninesix months ended SeptemberJune 30, 20202021 as compared to $27,153$9,104 and 6.5%5.3%, respectively, for the ninesix months ended SeptemberJune 30, 2019.2020. The $9,874 decrease$15,354 increase in EBITDA was primarily driven by increasing sales volumes due to the continued improvement of market conditions, improved manufacturing overhead absorption costs with the utilization of the Company’s investments in new technology and automation and a reduction in sales volumes driven by COVID-19,overhead costs following the decline in market demand, destocking activities, along withclosure of the Greenwood, SC facility closure costsin 2020, offset by the lag in contractual raw material price increases passed through to customers in the second quarter of the current period collectively having a greater impact than the one-time IPO costs incurred during the prior period.year.
Adjusted EBITDA and Adjusted EBITDA Margin.Adjusted EBITDA and Adjusted EBITDA Margin were $23,522$27,046 and 9.0%11.6%, respectively, for the ninesix months ended SeptemberJune 30, 20202021, as compared to $49,151$13,683 and 11.8%8.0%, respectively, for the ninesix months ended SeptemberJune 30, 2019.2020. The decreaseincrease in Adjusted EBITDA of $25,629$13,363 was primarily due to the reductionaforementioned items discussed above offset by the lag in sales volumescontractual raw material price increases passed through to customers in the current year period driven byand the adverse impacts of COVID-19 in the decline in market demand, and destocking activities.prior year period.
28
Liquidity and Capital Resources
Cash Flows Analysis
|
| Nine Months Ended September 30, |
|
| Increase (Decrease) |
|
| Six Months Ended June 30, |
|
| Increase (Decrease) |
| ||||||||||||||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| $Change |
|
| % Change |
| ||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| $ Change |
|
| % Change |
| ||||||||||||||||||||
Net cash provided by operating activities |
| $ | 19,291 |
|
| $ | 16,424 |
|
|
| 2,867 |
|
|
| 17.5 | % |
| $ | 18,230 |
|
| $ | 3,111 |
|
|
| 15,119 |
|
|
| 486.0 | % |
Net cash used in investing activities |
|
| (3,434 | ) |
|
| (26,768 | ) |
|
| 23,334 |
|
|
| 87.2 | % |
|
| (16,572 | ) |
|
| (1,886 | ) |
|
| (14,686 | ) |
|
| -778.7 | % |
Net cash provided by (used in) financing activities |
|
| (15,748 | ) |
|
| 7,256 |
|
|
| (23,004 | ) |
|
| -317.0 | % | ||||||||||||||||
Net cash used in financing activities |
|
| (1,660 | ) |
|
| (1,106 | ) |
|
| (554 | ) |
|
| -50.1 | % | ||||||||||||||||
Net change in cash |
| $ | 109 |
|
| $ | (3,088 | ) |
| $ | 3,197 |
|
|
| 103.5 | % |
| $ | (2 | ) |
| $ | 119 |
|
| $ | (121 | ) |
|
| 101.7 | % |
Operating Activities. Cash provided by operating activities was $19,291$18,230 for the ninesix months ended SeptemberJune 30, 2020,2021, as compared to $16,424$3,111 for the ninesix months ended SeptemberJune 30, 2019.2020. The $2,867,$15,119, or 17.5%486.0% increase in operating cash flows was primarily due to a greater reductionchanges in inventory, prepaidsnet working capital. More specifically, accounts receivable rose relative to the growth in sales, while inventories and other assets, along with beneficialaccounts payable were higher as production levels rebounded from COVID-19 lows. Beneficial changes in a variety of other operating assetsasset and liability categories increased operating cash flows for the current period as well. Additionally, income was reported in the current yearperiod as compared to a loss in the same prior year period. Changes to customer pricing, payment terms and credit terms did not have a significant impact on changes to working capital items, or any other element of the operating cash flow activities, for the periods presented.
Investing Activities. Cash used in investing activities was $3,434$16,572 for the ninesix months ended SeptemberJune 30, 2020,2021, as compared to $26,768$1,886 for the ninesix months ended SeptemberJune 30, 2019.2020. The $23,334,$14,686, or 87.2% decrease778.7% increase in cash used in investing activities was driven by our capital spend changing from a focus on investmentsthe Company’s continued investment in new technology and automation in 2019 to leveraging those investments and preserving cash in 2020. In addition, due to the Greenwood facility closure, the company generated more proceeds for the sale of equipment in the current period as compared to leveraging our investments in new technology and automation and preserving cash during the same prior year period. Additionally, the Company invested $5,271 into the new Hazel Park, MI facility during the current year period for the ramp-up of production for our new customer in the fitness equipment end market.
Financing Activities. Cash used in financing activities was $15,748$1,660 for the ninesix months ended SeptemberJune 30, 2020,2021, as compared to cash provided by financing activities of $7,256$1,106 for the ninesix months ended SeptemberJune 30, 2019.2020. The $23,004$554 change was primarily driven by lower borrowings and higher debt repayments due to the use of operating cash flowaforementioned items in the current period, compared to pay down debt andhigher borrowings offset by the purchase of treasury stock as compared to net cash provided by financing activities infor the prior year driven by the IPO proceeds.period.
Amended and Restated Credit Agreement
On September 26, 2019, and as last amended as of June 30, 2020,March 31, 2021, we entered into the amended and restated credit agreement (Credit Agreement)Credit Agreement with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent).the Agent. The Credit Agreement provides for a $200,000 Revolving Loan, 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 Credit Agreement also provides for an additional $100,000 of capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.
Our obligations under the Credit Agreement are secured by first priority security interests in substantially all of our personal property and guaranteed by, and secured by first priority security interests in, substantially all of the personal property of, our direct and indirect subsidiaries: Center Manufacturing, Inc., Center Manufacturing Holdings, Inc., Center—Moeller Products LLC, Defiance Metal Products Co., Defiance Metal Products of Arkansas, Inc., Defiance Metal Products of PA., Inc. and Defiance Metal Products of WI, Inc.
Borrowings under the Credit Agreement bear interest at a fluctuating LIBOR (which may be adjusted for certain reserve requirements), plus 1.00-2.00%1.00% to 2.00% depending on the current Consolidated Total Leverage Ratio (as defined in the Credit Agreement). Under certain circumstances, we may not be able to pay interest based on LIBOR. If that happens, we will be required to pay interest at the Base Rate, which is the sum of (a) the higher of (i) the Prime Rate (as publicly announced by the Agent from time to time) and (ii) the Federal Funds Rate plus 0.50%, plus (b) 0.00% to 1.00%, depending on the current Total Consolidated Leverage Ratio. The Credit Agreement also includes provisions for determining a replacement rate when LIBOR is no longer available.
At SeptemberJune 30, 2020,2021, the interest rate on outstanding borrowings under the Revolving Loan was 2.50%2.25%. At SeptemberJune 30, 2020,2021, we had availability of approximately $140,000$156,146 under the Revolving Loan.
We must pay a commitment fee at a rate of 0.20% per annum on the average daily unused portion of the aggregate unused revolving commitments under the Credit Agreement. We must also pay fees as specified in the Fee Letter (as defined in the Credit Agreement) and with respect to any letters of credit issued under the Credit Agreement.
29
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 or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00. At SeptemberJune 30, 2020,2021, our interest coverage ratio was 7.4415.24 to 1.00. The Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions. This ratio was increased through the Second Amendment to the Credit Agreement to 4.253.75 to 1.00 for this quarter, as discussed in more detail below. As of SeptemberJune 30, 2020,2021, our consolidated total leverage ratio was 2.161.00 to 1.00.
The Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, material money judgments, and failure to maintain subsidiary guarantees. If an event of default occurs, the Agent will be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of the credit facility, and all other actions permitted to be taken by a secured creditor.
Second Amendment to the Credit Agreement
On June 30, 2020, the Company entered into an amendment (Second Amendment)the Second Amendment to the Credit Agreement. The Second Amendment provides the Company with temporary relief regarding a financial covenant (the consolidated total leverage ratio) for the period from June 30, 2020, through December 31, 2021, or such earlier date as the Company may elect (Covenant Relief Period), in return for certain increases in interest rates and fees and restrictions on certain activities of the Company, including capital expenditures, acquisitions, dividends and share repurchases. New pricing, which takes effect for the quarters ended on and after September 30, 2020, includes interest at a fluctuating LIBOR (at a floor of 75 basis points), plus 1.00% –to 2.75%, along with the commitment fee ranging from 20 to 50 basis points.
During the Covenant Relief Period, the required ceiling on the Company’s consolidated total leverage ratio will be 4.25 to 1.00 for quarters ending June 30, 2020 through and including December 31, 2020 and will decline in quarterly increments to 3.25 to 1.00 for the quarter ending December 31, 2021.
As of SeptemberJune 30, 2020,2021, our consolidated total leverage ratio was 2.161.00 to 1.00 in accordance with the Second Amendment of the Credit Agreement.
At SeptemberJune 30, 2020,2021, we were in compliance with all covenants under the Credit Agreement and the Second Amendment.
Third Amendment to the Credit Agreement
On March 31, 2021, the Company entered into the Third Amendment to the Credit Agreement. The Third amendment allows the Company to incur up to $70,000 of capital expenditures during 2021, versus $35,000 in the prior period.
Capital Requirements and Sources of Liquidity
During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, our capital expenditures were $5,354$16,986 and $22,820,$3,652, respectively. The decreaseincrease of $17,466$13,334 was driven by shiftsour continued focus on investment in focuses from investments in new technology and automation in 2019the current period as compared to leveraging thoseour investments and controlling spend in 2020.preserving cash during the same prior year period. Additionally, the Company invested $5,271 into the new Hazel Park, MI facility during the current year period for the ramp-up of production. Capital expenditures for the full year 20202021 are expected to be approximately $10,000$55,000 to $13,000.$65,000. The greateraddition of our new strategic customer is generating the adverse impact COVID-19 has on the business, the closer we expectrequirement of $35,000 to be on the lower end of this range.$45,000 in additional capital investments.
We have historically relied upon cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. At SeptemberJune 30, 2020,2021, we had immediate availability of approximately $140,000$156,146 through our Revolving Loan and another $100,000 through an accordion feature under our Credit Agreement, subject to the covenants under the Credit Agreement and Second Amendment. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependent on our ability to access outside sources of capital.We will continue to have access to the availability currently provided under the Credit Agreement as long as we remain compliant with the financial covenants. Based on our estimates of the impact of COVID-19 at this time, we expect to be in compliance with these financial covenants through 20202021 and beyond.the foreseeable future.
We believe that our operating cash flow and available borrowings under the Credit Agreement are sufficient to fund our operations for 20202021 when taking into consideration the estimated impacts of COVID-19 based on the information we have available at
this time. However, future cash flows are subject to a number of variables, and additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.
30
The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at SeptemberJune 30, 2020:
2021:
|
|
|
|
|
| Payments Due by Period |
|
|
|
|
|
| Payments Due by Period |
| ||||||||||||||||||||||||||
(in thousands) |
| Total |
|
| 2020 (Remainder) |
|
| 2021 – 2022 |
|
| 2023 – 2024 |
|
| Thereafter |
| |||||||||||||||||||||||||
|
| Total |
|
| 2021 (Remainder) |
|
| 2022 – 2023 |
|
| 2024 – 2025 |
|
| Thereafter |
| |||||||||||||||||||||||||
Long-term debt principal payment obligations (1) |
| $ | 59,986 |
|
| $ | — |
|
| $ | — |
|
| $ | 59,986 |
|
| $ | — |
|
| $ | 43,854 |
|
| $ | — |
|
| $ | — |
|
| $ | 43,854 |
|
| $ | — |
|
Forecasted interest on debt payment obligations (2) |
|
| 6,478 |
|
|
| 405 |
|
|
| 3,239 |
|
|
| 2,834 |
|
|
| — |
|
|
| 4,475 |
|
|
| 688 |
|
|
| 2,754 |
|
|
| 1,033 |
|
|
| — |
|
Capital lease obligations |
|
| 3,126 |
|
|
| 184 |
|
|
| 1,468 |
|
|
| 1,248 |
|
|
| 226 |
|
|
| 2,575 |
|
|
| 367 |
|
|
| 1,468 |
|
|
| 740 |
|
|
| — |
|
Operating lease obligations |
|
| 13,003 |
|
|
| 877 |
|
|
| 5,412 |
|
|
| 3,733 |
|
|
| 2,981 |
|
|
| 44,676 |
|
|
| 2,647 |
|
|
| 11,049 |
|
|
| 9,068 |
|
|
| 21,912 |
|
Total |
| $ | 82,593 |
|
| $ | 1,466 |
|
| $ | 10,119 |
|
| $ | 67,801 |
|
| $ | 3,207 |
|
| $ | 95,580 |
|
| $ | 3,702 |
|
| $ | 15,271 |
|
| $ | 54,695 |
|
| $ | 21,912 |
|
(1) | The long-term amounts in the table include principal payments under the Company’s Credit Agreement, which expires in 2024. |
(2) | Forecasted interest on debt obligations based on the debt balance, interest rate and unused fee as of |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in customer forecasts, interest rates, and, to a lesser extent, commodities. To reduce such risks, we selectively use financial instruments and other proactive management techniques.
Customer Forecasts
The use and consumption of our components, products and services fluctuates depending on order forecasts we receive from our customers. These order forecasts can change dramatically from quarter to quarterquarter-to-quarter dependent upon the respective markets that our customers provide products in.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the Credit Agreement, which exposes us to variability in interest payments due to changes in the referenced interest rates.
The amount borrowed under the RevolverRevolving Loan under the Credit Agreement was $60.0$43.9 million as of SeptemberJune 30, 2020.2021. The interest rate was 2.50%2.25% as of SeptemberJune 30, 2020.2021. Please see “Liquidity and Capital Resources - Amended and Restated Credit Agreement” in Part I, Item 2 of this Quarterly Report on Form 10-Q and Note 43 in the Notes to the Unaudited Condensed Consolidated Financial Statements for more specifics.
A hypothetical 100-basis-point increase in interest rates would have resulted in an additional $0.2$0.1 million of interest expense based on our variable rate debt at SeptemberJune 30, 2020.2021. We do not use derivative financial instruments to manage interest risk or to speculate on future changes in interest rates. A rise in interest rates could negatively affect our cash flow.
Commodity Risk
We source a wide variety of materials and components from a network of suppliers. While such materials are generally available from numerous suppliers, COVID-19 has resulted in availability delays at times. In addition, commodity raw materials, such as steel, aluminum, copper, paint and paint chemicals, and other production costs are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion and in many cases utilize contracts with those customers to mitigate the impact of commodity raw material price fluctuations. As of SeptemberJune 30, 2020,2021, we did not have any commodity hedging instruments in place.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.
31
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. As a result of the material weakness described below, our Chief Executive Officer10-Q and Chief Financial Officer havehas concluded that, as of the end of such period, the period covered by this Quarterly Report on Form 10-Q, ourCompany’s disclosure controls and procedures were not effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
As a newly public company, neither we nor our independent registered public accounting firm are required at this time to perform an evaluation of ourThere were no changes in the Company’s internal control over financial reporting (as defined in accordance with Section 404Rules 13a-15(f) and 15d-15(f) of the Sarbanes-OxleyExchange Act and neither we nor our independent registered public accounting firmduring the fiscal quarter covered by this report that have performed such an evaluation.
Duringmaterially affected, or are reasonably likely to materially affect, the course of the quarterly and year-end processes in 2019, we identified a material weakness in the design and operation of ourCompany’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness relates to a lack of consistently documented accounting policies and procedures and a lack of formalized controls over the accounting and recording of complex and significant unusual transactions which, in the aggregate, constitute a material weakness.
We have taken numerous steps to enhance our internal control environment during 2019 and to date in 2020. While preparing for our initial public offering, as of December 31, 2018, we had identified two material weaknesses in the design and operation of our internal control over financial reporting. As of December 31, 2019, we have concluded that one of the previously identified material weaknesses has been remediated and the other has been partially remediated. The previously identified deficiencies, that represented the two material weaknesses, included the preparation and review of journal entries, a limited number of personnel with a level of GAAP accounting knowledge commensurate with our financial reporting requirements and certain information technology general controls specific to segregation of duties, systems access and change management processes. However, deficiencies in our control environment, specifically deficiencies related to a lack of consistently documented accounting policies and procedures and a lack of formalized controls over the accounting and recording of complex and significant unusual transactions, which we have collectively determined aggregate to a material weakness, remained as of September 30, 2020. We are currently enacting a number of steps to enhance our control over financial reporting and address this material weakness, including: enhancing our internal review procedures during the financial statement close process, and designing and implementing consistent policies throughout the Company; however, our current efforts to design and implement effective controls may not be sufficient to remediate the material weakness described above or prevent future material weaknesses or other deficiencies from occurring. Despite these actions, we may identify additional material weaknesses in our internal control over financial reporting in the future.
If we fail to effectively remediate this material weakness in our internal control over financial reporting, if we identify future material weaknesses in our internal control over financial reporting or if we are unable to comply with the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price may be adversely affected.
Commencing with our Annual Report on Form 10-K for the year ending December 31, 2020 we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes Oxley Act. We have expended significant resources in developing the necessary documentation and testing procedures required by Section 404. If we fail to implement the requirements of Section 404 in a timely manner, regulatory authorities such as the SEC or the Public Company Accounting Oversight Board, might subject us to sanctions or investigation. We cannot be certain that the actions we have undertaken to improve our internal controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner.
32
We are not currently a party to any material litigation proceedings. From time to time, however, we may be a party to litigation and subject to claims incident to the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed with the SEC on March 2, 2020, other than as such were previously supplemented and amended in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 which was filed with the SEC on May 6, 2020.5, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The table below sets forth information with respect to purchases we made of shares of our common stock during the quarter ended SeptemberJune 30, 2020:2021:
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
|
| Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| ||||
July 1-31, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 19,896,405 |
|
August 1-31, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 19,896,405 |
|
September 1-30, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 19,896,405 |
|
Total |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
|
| Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| ||||
April 2021 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 19,896,406 |
|
May 2021 |
|
| — |
|
| $ | - |
|
|
| — |
|
| $ | 19,896,406 |
|
June 2021 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 19,896,406 |
|
Total |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
(1) | On |
On November 3, 2020, the Company entered into Change in Control Employment and Severance Agreements (“Change in Control Agreements”) with Robert D. Kamphuis, the Company’s Chairman, President and Chief Executive Officer; Todd M. Butz, the Company’s Chief Financial Officer; Ryan F. Raber, the Company’s Executive Vice President – Strategy, Sales & Marketing; and Randall P. Stille, the Company’s Chief Operating Officer.
The Change in Control Agreements will provide for certain protections relating to the executive officers’ employment during a two-year period following a change in control of the Company. If, during the protected period, the executive officer’s employment is terminated by the Company without cause, other than by reason of death or disability, or the executive officer terminates his employment with good reason, then, if the executive officer provides a release of claims, he will be entitled to a severance payment of two times (three times, in the case of the CEO) the sum of his annual base salary and target annual bonus.
In addition, the executive officer will be entitled to continued life insurance, hospitalization, medical and dental coverage for 24 months (36 months, in case of the CEO) following the termination of employment. Any equity-based and cash incentive awards granted after the change of control will be deemed immediately earned or vested in full as of the termination of employment.
Prior to a change in control, the Change in Control Agreements do not restrict the Company’s right to terminate the executive officer’s employment for any reason. However, if the executive officer’s employment is terminated by the Company without cause within 180 days prior to a change in control and the executive officer reasonably demonstrates that the termination was at the request of the acquirer or otherwise arose in connection with or in anticipation of the change in control, the executive officer will be entitled to the protections described above.
The Change in Control Agreements impose restrictive covenants on the executive officers, including non-solicitation of Company customers, non-competition with the Company and non-interference with Company employees during the executive
33
officer’s employment and for 12 months after employment ends. The Change in Control Agreements also obligate executive officers to protect the Company’s confidential information.
The Change in Control Agreements do not provide for any tax gross-ups. To the extent payments in connection with the change in control would trigger the parachute payment excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, then the executive officer will either receive the total payments and pay the excise tax or have the total payments reduced such that no excise tax will be imposed, whichever is better for the executive officer on an after-tax basis.
The foregoing summary of the Change in Control Agreements is not complete and is qualified in its entirety by reference to the full text of the forms of Change in Control Agreements, copies of which are filed herewith as Exhibits 10.1 and 10.2 and are incorporated herein by reference.
34
The exhibits listed in the Exhibit Index below are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
Exhibit Number |
| Description |
|
|
|
| ||
| ||
| ||
31.1 |
| |
|
|
|
31.2 |
| |
|
|
|
32 |
| |
|
|
|
101.INS |
| Inline XBRL Instance Document |
|
|
|
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
35
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
| Mayville Engineering Company, Inc. | ||
|
|
|
|
|
Date: |
| By: |
| /s/ Robert D. Kamphuis |
|
|
|
| Robert D. Kamphuis |
|
|
|
| Chairman, President & Chief Executive Officer |
|
|
|
|
|
|
| By: |
| /s/ Todd M. Butz |
|
|
|
| Todd M. Butz |
|
|
|
| Chief Financial Officer |
3631