Mayville Engineering 10Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

☐	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

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 27, 2023, the registrant had 20,308,356 shares of common stock, no par value per share, outstanding.

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		Page

PART I.	FINANCIAL INFORMATION	5

Item 1.	Financial Statements (Unaudited)	5

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Comprehensive Income	6

	Condensed Consolidated Statements of Cash Flows	7

	Condensed Consolidated Statements of Shareholders’ Equity	9

	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION	34

Item 1.	Legal Proceedings	34

Items 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

Signatures		36

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements related to future events, business strategy, future performance, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe” and similar expressions or their negative. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. Mayville Engineering Company, Inc. (MEC, the Company, we, our, us or similar terms) believes the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon.

Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the SEC) on March 1, 2023, as such may be amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report) and the following:

●

Macroeconomic conditions, including inflation, rising interest rates and recessionary concerns, as well as ongoing supply chain challenges, labor availability and cost pressures, and the COVID-19 pandemic have had, and may continue to have, a negative impact on our business, financial condition, cash flows and results of operations (including future uncertain impacts);

●

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

●

risks related to scheduling production accurately and maximizing efficiency;

●

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

●

failure to compete successfully in our markets;

●

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

●

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

●

risks related to entering new markets;

●

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

●

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

●

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

●

our ability to successfully identify or integrate acquisitions;

●

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

●

risks related to our information technology systems and infrastructure;

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●

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

●

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

●

risks associated with our capital-intensive industry;

●

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

●

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

These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by federal securities laws.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)


	September 30,		December 31,
	2023		2022
ASSETS
Cash and cash equivalents	$	2,305	$	127
Receivables, net of allowances for doubtful accounts of $672 at September 30, 2023 and $545 at December 31, 2022		72,069		58,001
Inventories, net		73,311		71,708
Tooling in progress		5,664		7,938
Prepaid expenses and other current assets		4,513		3,529
Total current assets		157,862		141,303
Property, plant and equipment, net		178,014		145,771
Assets held for sale		81		83
Goodwill		92,650		71,535
Intangible assets, net		60,760		43,809
Operating lease assets		32,725		36,073
Other long-term assets		2,705		2,007
Total assets	$	524,797	$	440,581
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	53,366	$	53,735
Current portion of operating lease obligation		5,079		4,857
Accrued liabilities:
Salaries, wages, and payroll taxes		8,601		7,288
Profit sharing and bonus		1,627		6,860
Current portion of deferred compensation		266		18,062
Other current liabilities		12,520		11,646
Total current liabilities		81,459		102,448
Bank revolving credit notes		168,412		72,236
Operating lease obligation, less current maturities		28,550		31,891
Deferred compensation, less current portion		3,495		3,132
Deferred income tax liability		12,773		11,818
Other long-term liabilities		3,066		1,189
Total liabilities	$	297,755	$	222,714
Commitments and contingencies (see Note 9)
Common shares, no par value, 75,000,000 authorized, 21,851,249 shares issued at September 30, 2023 and 21,645,193 at December 31, 2022		—		—
Additional paid-in-capital		204,664		200,945
Retained earnings		31,891		26,274
Treasury shares at cost, 1,542,893 shares at September 30, 2023 and 1,472,447 at December 31, 2022		(9,513)		(9,352)
Total shareholders’ equity		227,042		217,867
Total	$	524,797	$	440,581

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

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except share amounts and per share data)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net sales	$	158,217	$	136,276	$	439,843	$	410,865
Cost of sales		139,197		120,812		388,351		362,782
Amortization of intangible assets		2,173		1,738		5,649		5,214
Profit sharing, bonuses, and deferred compensation		2,346		166		8,037		3,921
Employee stock ownership plan expense (income)		—		(152)		—		1,668
Other selling, general and administrative expenses		8,608		6,533		22,969		18,653
Impairment of long-lived assets and gain on contracts		—		(1,737)		—		(4,346)
Income from operations		5,893		8,916		14,837		22,973
Interest expense		(3,907)		(830)		(7,533)		(2,163)
Loss on extinguishment of debt		—		—		(216)		—
Income before taxes		1,986		8,086		7,088		20,810
Income tax expense		554		1,490		1,471		4,464
Net income and comprehensive income	$	1,432	$	6,596	$	5,617	$	16,346

Earnings per share:
Basic	$	0.07	$	0.32	$	0.28	$	0.80
Diluted	$	0.07	$	0.32	$	0.27	$	0.80

Weighted average shares outstanding:
Basic		20,439,602		20,390,221		20,416,914		20,457,001
Diluted		20,622,864		20,394,386		20,644,915		20,545,983

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

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended
	September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,617	$	16,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		19,849		16,342
Amortization		5,649		5,214
Allowance for doubtful accounts		127		(29)
Inventory excess and obsolescence reserve		277		(2)
Stock-based compensation expense		3,755		2,854
Loss (Gain) on disposal of property, plant and equipment		(342)		11
Impairment of long-lived assets and gain on contracts		—		(4,346)
Deferred compensation		(17,433)		(5,368)
Loss on extinguishment of debt		216		—
Non-cash lease expense		3,348		3,006
Other non-cash adjustments		202		259
Changes in operating assets and liabilities:
Accounts receivable		(6,819)		(11,961)
Inventories		7,818		(4,762)
Tooling in progress		2,348		(2,745)
Prepaids and other current assets		(769)		(1,093)
Accounts payable		(4,134)		10,241
Deferred income taxes		1,017		5,491
Operating lease obligations		(3,119)		(2,698)
Accrued liabilities		(3,911)		6,555
Net cash provided by operating activities		13,696		33,315
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(9,814)		(38,808)
Proceeds from sale of property, plant and equipment		753		7,736
Payment for acquisition, net of cash acquired		(88,593)		—
Net cash used in investing activities		(97,654)		(31,072)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit notes		454,587		327,170
Payments on bank revolving credit notes		(358,411)		(323,410)
Repayments of other long-term debt		(5,877)		(825)
Payments of financing costs		(1,206)		—
Purchase of treasury stock		(2,661)		(4,947)
Payments on finance leases		(296)		(237)
Net cash provided by (used in) financing activities		86,136		(2,249)
Net increase (decrease) in cash and cash equivalents		2,178		(6)
Cash and cash equivalents at beginning of period		127		118
Cash and cash equivalents at end of period	$	2,305	$	112

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


Supplemental disclosure of cash flow information:
Cash paid for interest	$	7,209	$	1,761
Cash paid for taxes	$	508	$	640
Non-cash property, plant & equipment, net	$	1,981	$	6,085
Non-cash 401(k) contribution of treasury stock	$	2,500	$	2,507
In conjunction with the acquisition, assets acquired and liabilities assumed were as follows:
Fair value of assets acquired, net of cash acquired	$	102,356	$	—
Liabilities assumed		(13,763)		—
Cash paid for acquisition, net of cash acquired	$	88,593	$	—

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

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Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands)

(unaudited)


	Shareholders' Equity
	Additional		Treasury		Retained
	Paid-in-Capital		Shares		Earnings		Total
Balance as of December 31, 2022	$	200,945	$	(9,352)	$	26,274	$	217,867
Net income		—		—		2,571		2,571
401(k) plan contribution		—		2,500		—		2,500
Purchase of treasury stock		—		(661)		—		(661)
Stock-based compensation		1,066		—		—		1,066
Balance as of March 31, 2023	$	202,011	$	(7,513)	$	28,845	$	223,343
Net income		—		—		1,614		1,614
Purchase of treasury stock		—		(1,000)		—		(1,000)
Stock-based compensation		1,354		—		—		1,354
Stock options exercised		58		—		—		58
Balance as of June 30, 2023	$	203,423	$	(8,513)	$	30,459	$	225,369
Net income		—		—		1,432		1,432
Purchase of treasury stock		—		(1,000)		—		(1,000)
Stock-based compensation		1,336		—		—		1,336
Restricted stock units employee tax withholding		(115)		—		—		(115)
Stock options exercised		20		—		—		20
Balance as of September 30, 2023	$	204,664	$	(9,513)	$	31,891	$	227,042

	Shareholders' Equity
	Additional		Treasury		Retained
	Paid-in-Capital		Shares		Earnings		Total
Balance as of December 31, 2021	$	197,186	$	(6,462)	$	7,547	$	198,271
Net income		—		—		3,822		3,822
401(k) plan contribution		—		2,057		—		2,057
Purchase of treasury stock		—		(2,323)		—		(2,323)
Stock-based compensation		1,257		—		—		1,257
Balance as of March 31, 2022	$	198,443	$	(6,728)	$	11,369	$	203,084
Net income		—		—		5,929		5,929
Stock-based compensation		1,456		—		—		1,456
Balance as of June 30, 2022	$	199,899	$	(6,728)	$	17,298	$	210,469
Net income		—		—		6,596		6,596
Purchase of treasury stock		—		(2,624)		—		(2,624)
Stock-based compensation		141		—		—		141
Stock options exercised		—		—		—		—
Balance as of September 30, 2022	$	200,040	$	(9,352)	$	23,894	$	214,582

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

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Mayville Engineering Company, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except share amounts, per share data, years and ratios)

(unaudited)

Note 1. Basis of presentation

The interim unaudited condensed consolidated financial statements of Mayville Engineering Company, Inc. and subsidiaries (MEC, the Company, we, our, us or similar terms) presented here have been prepared in accordance with the accounting principles generally accepted in the United States of America (GAAP) and with instructions to Form 10-Q and Article 10 of Regulation S-X. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations and financial position for the interim unaudited periods presented. All intercompany balances and transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These interim unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K. A summary of the Company’s significant accounting policies is included in the Company’s 2022 financial statements in the Annual Report on Form 10-K. The Company followed these policies in preparation of the interim unaudited Condensed Consolidated Financial Statements except for new accounting pronouncements adopted as described below.

Nature of Operations

MEC is a leading U.S.-based, vertically-integrated, value-added manufacturing partner providing a full suite of manufacturing solutions from concept to production, including design, prototyping and tooling, fabrication, aluminum extrusion, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military and other end markets. Founded in 1945 and headquartered in Mayville, Wisconsin, we are a leading Tier I U.S. supplier of highly engineered components to original equipment manufacturer (OEM) customers with leading positions in their respective markets. The Company operates 22 facilities located in Arkansas, Michigan, Mississippi, Ohio, Pennsylvania, Virginia, and Wisconsin. Our engineering expertise and technical know-how allow us to add value through every product redevelopment cycle (generally every three to five years for our customers).

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

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes Accounting Standards Codification (ASC) 326, Financial Instruments – Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. For as long as the Company remains an emerging growth company (EGC), the new guidance is effective for annual reporting periods beginning after December 15, 2022. The Company adopted the new standard as of January 1, 2023. As our customer base is principally made of blue-chip OEMs with high credit ratings and our trade receivables are due within one year or less, the adoption of this standard did not have a material impact on our consolidated financial statements.

Business Combinations

The Company accounts for all business combinations in accordance with FASB ASC 805, Business Combinations. In connection with a business combination, the acquiring company must allocate the cost of the acquisition to assets acquired and liabilities assumed based on fair values as of the acquisition date. Any excess or shortage of amounts assigned to assets and liabilities over or under the purchase price is recorded as a gain on bargain purchase or goodwill. Transaction costs associated with acquisitions are expensed as incurred within selling, general and administrative expenses.

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Note 2. Acquisition

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

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

The Company accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with MEC being the acquiring entity, and reflects estimates and assumptions deemed appropriate by Company management. Transaction costs related to the acquisition were expensed as incurred within other selling, general and administrative expenses and totaled $499 and $1,398 for the three and nine months ended September 30, 2023, respectively. The net sales and operating income of MSA consolidated into MEC’s financial statements since the date of acquisition were $13,491 and $998, respectively, for both the three months and nine months ended September 30, 2023.

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

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


	Preliminary		Estimated
	Opening Balance		Useful
	Sheet Allocation		Life
Cash	$	324
Accounts receivable, net		7,381
Inventory		9,698
Property, plant and equipment		41,271
Other assets		291
Intangible assets
Developed technology		4,900	7 Years
Customer relationships		17,700	17 Years
Goodwill		21,115	Indefinite
Total assets acquired		102,680
Accounts payable		(2,386)
Accrued expenses		(1,509)
Other liabilities		(1,984)
Debt		(7,884)
Total consideration	$	88,917

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

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

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

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

The Company believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, the purchase price allocations are preliminary as we continue to gather the necessary information to finalize our fair value estimates and provisional amounts. Provisional amounts include items related to working capital adjustments, intangibles, indemnification of assets and liabilities and deferred taxes. The Company finalized the net working capital true-up in conjunction with the fair value estimates for assets acquired, liabilities assumed, identifiable assets and the net income tax provision. During the three months ended September 30, 2023, the Company adjusted the purchase price by ($1,084) related to working capital adjustments. The offsetting adjustment was primarily related to goodwill.

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

Pro Forma Financial Information (Unaudited)

In accordance with ASC 805, the following unaudited pro forma combined results of operations have been prepared and presented to give effect to the MSA acquisition as if it had occurred on January 1, 2022, the beginning of the comparable period, applying certain assumptions and pro forma adjustments. These pro forma adjustments primarily relate to the estimated depreciation expense associated with the fair value of the acquired property, plant and equipment, amortization of identifiable intangible assets, interest expense related to additional debt needed to fund the acquisition, and the tax impact of these adjustments. Additionally, the pro forma adjustments include non-recurring expenses related to transaction costs and the sale of stepped-up inventory. The unaudited pro forma consolidated results are provided for illustrative purposes only, are not indicative of the Company’s actual consolidated results of operations or consolidated financial position and do not reflect any revenue and operating synergies or cost savings that may result from the acquisition.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net sales	$	158,217	$	156,683	$	470,799	$	479,490
Net income	$	2,371	$	6,874	$	4,052	$	18,716

Note 3. Select balance sheet data

Inventory

Inventories are stated at the lower of cost, determined on the first-in, first-out method, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Work-in-process and finished goods are valued at production costs consisting of material, labor, and overhead.

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Inventories as of September 30, 2023 and December 31, 2022 consist of:


	September 30,		December 31,
	2023		2022
Finished goods and purchased parts	$	32,413	$	44,728
Raw materials		29,053		17,003
Work-in-process		11,845		9,977
Total	$	73,311	$	71,708

The MSA inventory fair value step-up of $891 was fully expensed and included within cost of goods sold in the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023.

Property, plant and equipment

Property, plant and equipment as of September 30, 2023 and December 31, 2022 consist of:


	Useful Lives		September 30,		December 31,
	Years		2023		2022
Land		Indefinite	$	1,030	$	1,030
Land improvements		15-39		5,988		3,169
Building and building improvements		15-39		79,573		59,664
Machinery, equipment and tooling		3-10		294,052		250,110
Vehicles		5		4,659		4,359
Office furniture and fixtures		3-7		21,132		19,585
Construction in progress		N/A		8,003		26,435
Total property, plant and equipment, gross				414,437		364,352
Less accumulated depreciation				236,423		218,581
Total property, plant and equipment, net			$	178,014	$	145,771

Depreciation expense was $7,434 and $5,367 for the three months ended September 30, 2023 and 2022, respectively, and $19,849 and $16,342 for the nine months ended September 30, 2023 and 2022, respectively.

At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from the former fitness customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company had committed to purchase, to meet obligations under the agreement with the former fitness customer as of December 31, 2021. As a result, at December 31, 2021, the Company recorded a long-lived asset impairment of $12,875.

During the three and nine months ended September 30, 2022, the Company was able to cancel $168 and $2,257 respectively, of purchase commitments for property, plant and equipment relating to the former fitness customer that had previously been recorded in the Consolidated Statements of Comprehensive Income as an impairment of long-lived assets and loss on contracts as of December 31, 2021. The cancellation of loss contracts has resulted in the reversal of these amounts from other current liabilities in the Condensed Consolidated Balance Sheets and recorded in the Condensed Consolidated Statements of Comprehensive Income as an impairment of long-lived assets and gain on contracts for the three and nine months ended September 30, 2022.

Throughout the three and nine months ended September 30, 2022, the Company sold $126 and $5,097, respectively, of machinery and equipment originally intended to support production for the former fitness customer, resulting in a gain on sale of the assets of $1,569 and $2,089, respectively. The gain on sale of assets is classified in impairment of long-lived assets and gain on contracts on the Condensed Consolidated Statements of Comprehensive Income as of September 30, 2022. As a result of the previously mentioned impairment, these assets had been written down to fair value at December 31, 2021.

The Company adopted ASC 842 on January 1, 2022, classifying finance leases of $958 and $1,103 in property, plant and equipment on the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, respectively. Please refer to Note 5 – Leases for additional information.

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Goodwill

The following table sets forth the changes in the carrying amount of goodwill as of September 30, 2023. The carrying value of goodwill was increased by $21,115 during the nine months ended September 30, 2023, related to the acquisition of MSA.


Balance as of December 31, 2022	$	71,535
Acquisition		21,115
Balance as of September 30, 2023	$	92,650

Intangible Assets

The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of September 30, 2023 and December 31, 2022:


	Useful Lives		September 30,		December 31,
	Years		2023		2022
Amortizable intangible assets:
Customer relationships and contracts		9-17	$	96,040	$	78,340
Trade name		10		14,780		14,780
Non-compete agreements		5		8,800		8,800
Developed technology		7		4,900		—
Patents		19		24		24
Accumulated amortization				(67,595)		(61,946)
Total amortizable intangible assets, net				56,949		39,998
Non-amortizable brand name				3,811		3,811
Total intangible assets, net			$	60,760	$	43,809

Non-amortizable brand name is tested annually during the fourth quarter for impairment, or more frequently if triggering events occur indicating there may be impairment.

Changes in intangible assets between December 31, 2022 and September 30, 2023 consist of:


Balance as of December 31, 2022	$	43,809
Amortization expense		(5,649)
Acquisition (see Note 2)		22,600
Balance as of September 30, 2023	$	60,760

Amortization expense was $2,173 and $1,738 for the three months ended September 30, 2023 and 2022, respectively, and $5,649 and $5,214 for the nine months ended September 30, 2023 and 2022, respectively.

Future amortization expense is expected to be as followed:


Year ending December 31,
2023 (remainder)	$	2,087
2024	$	6,933
2025	$	6,933
2026	$	6,933
2027	$	6,933
Thereafter	$	27,130

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Note 4. Debt

Bank Revolving Credit Notes

On June 28, 2023, we entered into an amended and restated credit agreement (the Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The Credit Agreement provides for a $250,000 revolving credit facility, with a letter of credit sub-facility, and a swingline facility in an aggregate amount of $25,000. The Credit Agreement also provides the availability of incremental facilities to the greater of $100,000 and 125% of the Company’s twelve month trailing Consolidated EBITDA through an accordion feature. All amounts borrowed under the credit agreement mature on June 28, 2028.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness; create, incur, assume or suffer to exist liens; make certain investments; allow our subsidiaries to merge or consolidate with another entity; make certain asset dispositions; pay certain dividends or other distributions to shareholders; enter into transactions with affiliates; enter into sale leaseback transactions; and exceed the limits on annual capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum consolidated interest coverage ratio of 3.00 to 1.00 as well as a consolidated total leverage ratio not to exceed 4.00 to 1.00 (which was increased as of July 1, 2023 from 3.50 to 1.00 in connection with the acquisition of MSA).

The Company incurred deferred financing costs of $1,248 associated with executing the Credit Agreement, which has been recorded as an other long-term asset in the Condensed Consolidated Balance Sheets and will be amortized over the duration of the agreement.

At September 30, 2023 our consolidated interest coverage ratio was 6.11 to 1.00 as compared to a covenant minimum of 3.00 to 1.00 under the Credit Agreement.

At September 30, 2023, our consolidated total leverage ratio was 2.46 as compared to a covenant maximum of 4.00 to 1.00 under the Credit Agreement.

Under the Credit Agreement, interest is payable quarterly at the adjusted secured overnight financing rate (SOFR) plus an applicable margin based on the current consolidated total leverage ratio. The interest rate was 7.92% and 5.69% as of September 30, 2023 and December 31, 2022, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.30% and 0.25% as of September 30, 2023 and December 31, 2022, respectively.

Prior to June 28, 2023, the Company maintained a credit agreement (Former Credit Agreement) with certain lenders and the Agent. The Former Credit Agreement provided for a $200,000 revolving credit facility, with a letter of credit sub-facility in an aggregate amount not to exceed $5,000, and a swingline facility in an aggregate amount of $20,000. The Former Credit Agreement also provided for an additional $100,000 of debt capacity through an accordion feature.

The Company was in compliance with all financial covenants of its credit agreements as of September 30, 2023 and December 31, 2022. The amount borrowed on the revolving credit notes was $168,412 and $72,236 as of September 30, 2023 and December 31, 2022, respectively.

Other Debt

With the consummation of the MSA acquisition, the Company assumed a Small Business Administration (SBA) loan and a Fond du Lac County and Fond du Lac Economic Development Corporation term note (Fond du Lac Term Note) in the amounts of $5,009 and $2,875, respectively. The SBA loan is secured by specific equipment, payable in monthly installments of $27, including interest at 1.17% and due in full in September 2045. Due to the nature of the SBA loan, the Company did not meet the necessary criteria to qualify for this type of loan, so the Company paid off the full loan amount of $5,009 during the current period. The Fond du Lac Term Note is secured by a security agreement, payable in annual installments of $500 plus interest at 2.00% and is due in full in December 2028. The short-term and long-term balance of $500 and $2,375, respectively, are recorded in other current liabilities and other long-term liabilities in the Condensed Consolidated Balance Sheets.

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Note 5. Leases

The Company has real property operating leases for office and light manufacturing space. Operating leases for the Company’s personal property consist of leases for office equipment, vehicles, forklifts and storage tanks for bulk gases. The Company recognizes a right-of-use (ROU) asset and a lease liability for operating leases based on the net present value of future minimum lease payments. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term, including renewal periods that are considered reasonably certain.

The Company has finance leases for two laser cutting systems and three vehicles. The Company recognizes an ROU asset and a lease liability for finance leases based on the net present value of future minimum lease payments. Lease expense for the Company’s finance leases is comprised of the amortization of the ROU asset and interest expense recognized based on the effective interest method.

Variable lease expense is related to certain of the Company’s real property leases and personal property leases, and it generally consists of property tax and insurance components that are for the benefit of the lessor (real property leases) and variable overage fees (personal property leases) that are remitted as part of the Company’s lease payments.

The components of lease expense were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Finance lease cost:
Amortization of finance lease assets	$	122	$	79	$	310	$	236
Interest on finance lease liabilities		14		10		35		32
Total finance lease expense		136		89		345		268
Operating lease expense		1,310		1,512		3,917		4,546
Short-term lease expense		169		198		439		516
Variable lease expense		22		62		139		170
Sublease income ⁽¹⁾		(513)		(507)		(1,548)		(653)
Total lease expense	$	1,124	$	1,354	$	3,292	$	4,847

(1)	The Company subleased a portion of its Hazel Park, MI facility starting in June 2022.

Lease related supplemental cash flow information:


	Nine Months Ended
	September 30,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities for finance leases:
Operating cash flows	$	35	$	32
Financing cash flows	$	296	$	237

Cash paid for amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows	$	4,348	$	4,247

Right-of-use assets obtained in exchange for recorded lease obligations:
Operating leases	$	455	$	1,239
Finance leases	$	2	$	—

Note 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 subject to the Board of Directors’ approval. For the three months ended September 30, 2023 and 2022, the Company’s

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estimated ESOP (income) expense was $0 and ($152), respectively. For the nine months ended September 30, 2023 and 2022 the Company’s estimated ESOP expense was $0 and $1,668, respectively.

As of January 1, 2023, the Company amended the plan reducing the distribution period from five years to three years.

At various times following death, disability, retirement, termination of employment or the exercise of diversification rights, an ESOP participant is entitled to receive their ESOP account balance in accordance with various distribution methods as permitted under the policies adopted by the ESOP.

As of September 30, 2023 and December 31, 2022, the ESOP shares consisted of 4,062,583 and 5,684,879 in allocated shares, respectively.

Note 7. Retirement plans

The Mayville Engineering Company Inc. 401(k) Plan (the 401(k) Plan) covers substantially all employees meeting certain eligibility requirements. The 401(k) Plan is a defined contribution plan and is intended for eligible employees to defer tax-free contributions to save for retirement. Employees may contribute up to 50% of their eligible compensation to the 401(k) Plan, subject to the limits of Section 401(k) of the Internal Revenue Code.

As of January 1, 2023, the Company implemented an employer match program to the 401(k) Plan. The Company now provides a 50% match for employee contributions, up to 6%. For the three and nine months ended September 30, 2023, the Company’s employer match expense was $933 and $2,577, respectively. Additionally, the 401(k) Plan provides for employer discretionary profit-sharing contributions and the Board of Directors may authorize discretionary profit-sharing contributions (which are usually approved at the end of each calendar year). For the three months ended September 30, 2023 and 2022, the Company’s estimated discretionary profit-sharing expense (credit) was $0 and ($123), respectively. For the nine months ended September 30, 2023 and 2022, the Company’s estimated discretionary profit-sharing expense was $0 and $1,351, respectively.

Note 8. Income taxes

On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate. As the year progresses, the Company will refine its estimate based on facts and circumstances by each tax jurisdiction.

Income tax expense was $554 and $1,471, and the effective tax rate (ETR) was 27.94% and 20.76% for the three and nine months ended September 30, 2023, respectively. Our ETR is different from the expected tax 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 nine months ended September 30, 2022, income tax expense was estimated at $1,490 and $4,464 the ETR was 18.43% and 21.45%, respectively.

Uncertain Tax Positions

Based on the Company’s evaluation, it has been concluded that there is one tax position related to the research and development tax credit requiring recognition in the Company’s financial statements as of September 30, 2023. The Company does not anticipate that there will be a material change in the balance of the unrecognized tax benefits in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in income tax expense. No amounts have been recorded as tax expense for interest and penalties for the three and nine months ended September 30, 2023, as the amount for the utilized portion for the research and development credit on the Wisconsin return is considered to be immaterial. At September 30, 2023 and December 31, 2022, a total of $652 and $384, 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, 2019, and state tax returns beginning January 1, 2018, are open for examination.

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Note 9. Contingencies

On August 4, 2022, the Company filed a lawsuit against Peloton Interactive, Inc. (“Peloton”) in the Supreme Court of the State of New York, New York County. The lawsuit arises from a March 2021 “Supply Agreement” between the parties, pursuant to which MEC was to manufacture and supply custom component parts for Peloton’s exercise bikes (the “Manufacturing Project”). In the lawsuit, the Company originally asserted two claims (1) breach and anticipatory repudiation of contract and (2) breach of the duty of good faith and fair dealing (pleaded in the alternative). In January 2023, in response to Peloton’s motion to dismiss, the court allowed the first claim to proceed and dismissed the alternative claim. In the remaining claim, MEC asserts that Peloton breached and anticipatorily repudiated the Supply Agreement by unilaterally cancelling the Manufacturing Project and refusing to pay MEC certain monthly fixed revenue payments owed under the terms of the Supply Agreement. The total amount for damages claimed is substantial but the amount and timing of the ultimate recovery is uncertain. As a result, any recovery from this litigation or settlement of this claim is a contingent gain and will be recognized if, and when, realized or realizable.

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

Note 10. Deferred compensation

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

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

Deferrals are assumed to be invested in an investment vehicle based on the options made available to the participant (which does not include Company stock).

The deferred compensation plan provides benefits payable upon separation of service or death. Payments are to be made 30 or 180 days after date of separation from service, either in a lump-sum payment or up to five annual installments as elected by the participant when the participant first elects to defer compensation.

The deferred compensation plan is non-funded, and all future contributions are unsecured in that the employees have the status of a general unsecured creditor of the Company and the agreements constitute a promise by the Company to make benefit payments in the future. During the three and nine months ended September 30, 2023, eligible employees elected to defer compensation of $94 and $410, respectively. Eligible employees elected to defer compensation of $39 for the three and nine months ended September 30, 2022. As of September 30, 2023 and December 31, 2022, the short-term portion accrued for all benefit years less than 12 months under this plan was $266 and $18,062, respectively. As of September 30, 2023 and December 31, 2022, the long-term portion accrued for all benefit years greater than 12 months under this plan was $3,495 and $3,132. These amounts include the initial deferral of compensation and were adjusted for changes in the value of investment options chosen by the participants. Total credit for the deferred compensation plan for the three months ended September 30, 2023 and 2022 was $52 and $771, respectively. Total expense (credit) for the deferred compensation plan for the nine months ended September 30, 2023 and 2022 was $677 and ($4,360), respectively. These expenses (credits) are included in profit-sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income. Additionally, the Company made cash distributions of $18,520 and $1,048 for the nine months ended September 30, 2023 and 2022, respectively.

Note 11. Self-Funded insurance

The Company is self-funded for the medical benefits provided to its employees and their dependents. Healthcare costs are expensed as incurred and are based upon actual claims paid, reinsurance premiums, administration fees, and estimated unpaid claims.

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Since March 31, 2020, the Company has an aggregate stop loss limit to mitigate risk. Expenses related to this were $5,741 and $3,976 for the three months ended September 30, 2023 and 2022, respectively, and $15,508 and $12,124 for the nine months ended September 30, 2023 and 2022, respectively. An estimated accrued liability of $1,522 and $900 was recorded as of September 30, 2023 and December 31, 2022, respectively, for estimated unpaid claims and is included within other current liabilities on the Condensed Consolidated Balance Sheets.

Note 12. Segments

The Company applies the provisions of ASC 280, Segment Reporting. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined it has one operating segment. The Company does not earn revenues or have long-lived assets located in foreign countries.

Note 13. Fair value of financial instruments

Fair value provides information on what the Company may realize if certain assets were sold or might pay to transfer certain liabilities based upon an exit price. Financial assets and liabilities that are measured and reported at fair value are classified into a three-level hierarchy that prioritizes the inputs used in the valuation process. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs as follows:

●

Level 1 – Quoted prices in active markets for identical assets or liabilities.

●

Level 2 – Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data. Long-term debt is classified as a Level 2 fair value input.

●

Level 3 – Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be the Company’s own data and judgements about assumptions that market participants would use in pricing the asset or liability.

The following table lists the Company’s financial assets and liabilities accounted for at fair value by the fair value hierarchy:


	Balance at		Fair Value Measurements at
	September 30,		Report Date Using
	2023		(Level 1)		(Level 2)		(Level 3)
Deferred compensation liability	$	3,761	$	3,761	$	—	$	—
Total	$	3,761	$	3,761	$	—	$	—


	Balance at		Fair Value Measurements at
	December 31,		Report Date Using
	2022		(Level 1)		(Level 2)		(Level 3)
Deferred compensation liability	$	21,194	$	21,194	$	—	$	—
Total	$	21,194	$	21,194	$	—	$	—

Fair value measurements for the Company’s cash and cash equivalents are classified based upon Level 1 measurements because such measurements are based upon quoted market prices in active markets for identical assets.

Accounts receivable, accounts payable, long-term debt and accrued liabilities are recorded in the Condensed Consolidated Balance Sheets at cost and approximate fair value.

Deferred compensation liabilities are recorded at amounts due to participants at the time of deferral. Deferrals are invested in an investment vehicle based on the options made available to the participant, considered to be Level 1 and Level 2 on the fair value hierarchy, with the current balance all as Level 1. The change in fair value is recorded in the profit-sharing, bonuses, and deferred

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compensation line item on the Condensed Consolidated Statements of Comprehensive Income. The short-term and long-term balances due to participants are reflected on the current portion of deferred compensation and deferred compensation, less current portion, line items, respectively, on the Condensed Consolidated Balance Sheets.

The Company’s non-financial assets such as goodwill, intangible assets and property, plant, and equipment are re-measured at fair value when there is an indication of impairment and adjusted only when an impairment charge is recognized.

Note 14. Earnings Per Share

The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share. In accordance with ASC 260, outstanding options will be considered to have been exercised and outstanding as of the beginning of the period if the average market price of the common stock during the period exceeds the exercise price of the options (they are “in the money”), and the assumed exercise of the options do not have an anti-dilutive impact on earnings per share.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net income attributable to MEC	$	1,432	$	6,596	$	5,617	$	16,346
Average shares outstanding		20,439,602		20,390,221		20,416,914		20,457,001
Basic income per share	$	0.07	$	0.32	$	0.28	$	0.80

Average shares outstanding		20,439,602		20,390,221		20,416,914		20,457,001
Effect of dilutive share-based compensation		183,262		4,165		228,001		88,982
Total potential shares outstanding		20,622,864		20,394,386		20,644,915		20,545,983
Diluted income per share	$	0.07	$	0.32	$	0.27	$	0.80

There were no options in the money that were excluded in the computation of diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 because they would have had an anti-dilutive impact on earnings per share.

Note 15. Revenue Recognition

Contract Assets and Contract Liabilities

The Company has contract assets and contract liabilities, which are included in tooling in progress and other current liabilities on the Condensed Consolidated Balance Sheets, respectively. Contract assets include products where the Company has satisfied its performance obligation, but receipt of payment is contingent upon delivery. Contract liabilities include deferred tooling revenue, where the performance obligation was not met. The performance obligation is satisfied when the tooling is completed and the customer signs off through the Product Part Approval Process or other documented customer acceptance. Cost of goods sold is recognized and released from the balance sheet when control of the tooling promised under contract is transferred to the customer.

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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 nine months ended September 30, 2023:


	Contract		Contract
	Assets		Liabilities
As of December 31, 2022	$	7,938	$	6,141
Net activity		(2,274)		(1,075)
As of September 30, 2023	$	5,664	$	5,066

Disaggregated Revenue

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Product Category	2023		2022		2023		2022
Outdoor sports	$	2,155	$	2,369	$	6,839	$	7,418
Fabrication		89,372		81,742		260,545		247,014
Performance structures		41,541		29,328		95,063		86,484
Tube		19,096		17,916		58,916		55,713
Tank		11,660		9,761		33,849		27,225
Total		163,824		141,116		455,212		423,854
Intercompany sales elimination		(5,607)		(4,840)		(15,369)		(12,989)
Total, net sales	$	158,217	$	136,276	$	439,843	$	410,865


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
End Market	2023		2022		2023		2022
Commercial vehicle	$	57,264	$	53,714	$	172,494	$	159,710
Construction & access		26,296		26,918		79,326		86,049
Powersports		25,143		23,344		73,236		68,298
Agriculture		15,029		14,373		42,924		44,989
Military		10,960		6,436		28,439		16,970
Other		23,525		11,490		43,424		34,850
Total, net sales	$	158,217	$	136,276	$	439,843	$	410,865

Note 16. Concentration of major customers

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


	Net Sales				Net Sales				Accounts Receivable
	Three Months Ended				Nine Months Ended				As of		As of
	September 30,				September 30,				September 30,		December 31,
	2023		2022		2023		2022		2023		2022
Customer
A	14.3	%	15.8	%	15.1	%	15.9	%	11.3	%	<10	%
B	13.4	%	16.5	%	14.8	%	17.7	%	12.9	%	11.0	%
C	10.1	%	11.8	%	11.2	%	11.6	%	<10	%	<10	%
D	<10	%	<10	%	<10	%	<10	%	10.5	%	12.6	%

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Note 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 2,000,000 shares.

On April 20, 2021, shareholders of the Company approved an amendment to the 2019 Omnibus Incentive Plan increasing the number of shares of common stock authorized for issuance by 2,500,000 shares.

The Company recognizes stock-based compensation using the fair value provisions prescribed by ASC 718, Compensation – Stock Compensation. Accordingly, compensation costs for awards of stock-based compensation settled in shares are determined based on the fair value of the 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 adjusted closing stock price at the date preceding 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 September 18, 2023, June 26, 2023, April 18, 2023, March 13, 2023, February 28, 2023, January 25, 2023, July 19, 2022, April 19, 2022 and February 28, 2022.

During the nine months ended September 30, 2023, 254,169 units vested. For the same period, 195,264 options vested with a weighted average strike price of $11.67. During the nine months ended September 30, 2022, 271,992 units vested. For the same period, 512,927 options vested with a strike price of $9.18.

As of September 30, 2023, 1,299,713 options remained outstanding with a weighted average strike price of $10.51 and a weighted average contractual life of 6.71 years remaining.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Unit awards	$	856	$	247	$	2,445	$	1,873
Option awards		480		(106)		1,311		982
Stock based compensation expense, net of tax	$	1,336	$	141	$	3,756	$	2,855

A roll-forward of unrecognized stock-based compensation expense is displayed in the table below. Unrecognized stock-based compensation expense as of September 30, 2023 will be expensed over the remaining requisite service period from which individual award values relate, up to July 19, 2025.


	Units		Options		Total
Balance as of December 31, 2022	$	1,739	$	1,050	$	2,789
Grants		3,560		2,585		6,145
Forfeitures		(211)		(83)		(294)
Expense		(715)		(351)		(1,066)
Balance as of March 31, 2023	$	4,373	$	3,201	$	7,574
Grants		785		—		785
Forfeitures		(48)		—		(48)
Expense		(874)		(480)		(1,354)
Balance as of June 30, 2023	$	4,236	$	2,721	$	6,957
Grants		20		—		20
Forfeitures		(50)		—		(50)
Expense		(856)		(480)		(1,336)
Balance as of September 30, 2023	$	3,350	$	2,241	$	5,591

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Note 18. Common Equity

At September 30, 2023 the authorized stock of the Company consisted of 75,000,000 shares of common stock without par value.

Changes in outstanding common shares are summarized as follows:


		Shares
		Outstanding
Shares as of December 31, 2021		20,335,934
Treasury stock purchases		(559,945)
Common stock issued (including share-based compensation impact)		396,757
Balance as of September 30, 2022		20,172,746

		Shares
		Outstanding
Balance as of December 31, 2022		20,172,746
Treasury stock purchases		(184,964)
Common stock issued (including share-based compensation impact)		320,574
Balance as of September 30, 2023		20,308,356

Note 19. Subsequent events

The Company has evaluated subsequent events since September 30, 2023, the date of these financial statements. There were no material events or transactions discovered during this evaluation that requires recognition or disclosure in the financial statements.

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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, 2022 and “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in Part II Item 1A. 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, 2022 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

Macroeconomic Conditions

The broader market dynamics over the past few years have resulted in impacts to the Company, including supply chain constraints affecting some of our customers, material cost inflation and inflationary pressures on wages and benefits due to labor availability. The Company expects some of these dynamics to continue in 2023 and could continue to have an impact on demand, material costs and labor.

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 the current macroeconomic conditions, several factors affect our net sales in any given period, including weather, timing of acquisitions and the production schedules of our customers. Net sales are recognized at the time of shipment or at delivery to the customer.

Manufacturing Margins. Manufacturing margins represent 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 variations based upon certain market indexes.

Depreciation and Amortization. We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. The periodic expense related to leasehold improvements and intangible assets is depreciation and amortization expense, respectively. Leasehold improvements are depreciated 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.

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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 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 before interest expense, provision for income taxes, depreciation and amortization. EBITDA Margin represents EBITDA as a percentage of net sales for each period.

Adjusted EBITDA represents EBITDA before CEO transition costs, stock-based compensation expense, MSA acquisition related costs, loss on extinguishment of debt, field replacement claim, Hazel Park transition and legal costs due to the former fitness customer, costs recognized on step-up of MSA acquired inventory and impairment charges on long-lived assets and inventory and gain on contracts specifically purchased to meet obligations under the agreement with our former fitness customer. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net sales for each period. These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin as management uses these measures as key performance indicators, and we believe they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.

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

The following table presents a reconciliation of net income and comprehensive income, the most directly comparable measure calculated in accordance with GAAP, to EBITDA and Adjusted EBITDA, and the calculation of EBITDA Margin and Adjusted EBITDA Margin for each of the periods presented.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
Net income and comprehensive income	$	1,432		$	6,596		$	5,617		$	16,346
Interest expense		3,907			830			7,533			2,163
Provision for income taxes		554			1,490			1,471			4,464
Depreciation and amortization		9,608			7,105			25,498			21,556
EBITDA		15,501			16,021			40,119			44,529
CEO transition costs ⁽¹⁾		—			861			—			1,512
Loss on extinguishment of debt ⁽²⁾		—			—			216			—
MSA acquisition related costs ⁽³⁾		499			—			1,398			—
Stock-based compensation expense ⁽⁴⁾		1,336			141			3,756			2,855
Field replacement claim ⁽⁵⁾		—			—			490			—
Hazel Park transition and legal costs due to former fitness customer ⁽⁶⁾		984			862			1,479			4,678
Costs recognized on step-up of MSA acquired inventory ⁽⁷⁾		891			—			891			—
Impairment of long-lived assets and gain on contracts ⁽⁸⁾		—			(1,737)			—			(4,346)
Adjusted EBITDA	$	19,211		$	16,148		$	48,349		$	49,228
Net sales	$	158,217		$	136,276		$	439,843		$	410,865
EBITDA Margin		9.8	%		11.8	%		9.1	%		10.8	%
Adjusted EBITDA Margin		12.1	%		11.8	%		11.0	%		12.0	%

(1)	Costs, primarily professional services and legal fees, associated with the retirement and replacement of the former CEO.

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(2)	Unamortized debt issue costs written off from the prior five-year credit agreement attributable to lenders that are no longer included in the amended and restated credit agreement or decreased their capacity in the amended and restated credit agreement.

(3)	Transaction costs, primarily legal and professional services, related to the acquisition of MSA.

(4)	Non-cash employee compensation based on the value of common stock issued pursuant to the 2019 Omnibus Incentive Plan.

(5)

Represents a one-time charge related to a COVID related sourcing issue that caused the company to change suppliers and ultimately lead to a product being produced outside of customer specifications. These costs are not expected to be incurred on an ongoing basis and therefore are not indicative of ongoing operations.

(6)	Costs incurred to re-purpose the Hazel Park facility from products for the former fitness customer use to general use for the time period through July 31, 2022, and legal costs associated with the enforcement of the Company’s supply contract with the former fitness customer.

(7)	Expense associated with the recognized fair value step-up of inventory in correlation with the MSA acquisition. See Note – 2 for additional detail.

(8)	Gain on the sale of fixed assets that were previously impaired as a result of the change in forecast of our former fitness customer.

Consolidated Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022


	Three Months Ended September 30,
	2023				2022				Increase (Decrease)
			% of Net				% of Net		Amount
	Amount		Sales		Amount		Sales		Change		% Change
Net sales	$	158,217	100.0	%	$	136,276	100.0	%	$	21,941	16.1	%
Cost of sales		139,197	88.0	%		120,812	88.7	%		18,385	15.2	%
Manufacturing margins		19,020	12.0	%		15,464	11.3	%		3,556	23.0	%
Amortization of intangible assets		2,173	1.4	%		1,738	1.3	%		435	25.0	%
Profit sharing, bonuses and deferred compensation		2,346	1.5	%		166	0.1	%		2,180	1,313.3	%
Employee stock ownership plan income		—	—	%		(152)	(0.1)	%		152	N/A
Other selling, general and administrative expenses		8,608	5.4	%		6,533	4.8	%		2,075	31.8	%
Impairment of long-lived assets and gain on contracts		—	—	%		(1,737)	(1.3)	%		1,737	N/A
Income from operations		5,893	3.7	%		8,916	6.5	%		(3,023)	(33.9)	%
Interest expense		(3,907)	2.5	%		(830)	0.6	%		3,077	370.7	%
Provision for income taxes		554	0.4	%		1,490	1.1	%		(936)	(62.8)	%
Net income and comprehensive income	$	1,432	0.9	%	$	6,596	4.8	%	$	(5,164)	(78.3)	%
EBITDA	$	15,501	9.8	%	$	16,021	11.8	%	$	(520)	(3.2)	%
Adjusted EBITDA	$	19,211	12.1	%	$	16,148	11.8	%	$	3,063	19.0	%

Net Sales. Net sales were $158,217 for the three months ended September 30, 2023 as compared to $136,276 for the three months ended September 30, 2022, an increase of $21,941, or 16.1%. This increase was primarily driven by the recent acquisition of MSA and increased organic sales volumes within our commercial vehicle, powersports and military end markets, partially offset by softening demand in our construction and agriculture end markets.

Manufacturing Margins. Manufacturing margins were $19,020 for the three months ended September 30, 2023 as compared to $15,464 for the three months ended September 30, 2022, an increase of $3,556, or 23.0%. The increase was primarily driven by the increased organic volumes and MSA acquisition, partially offset by unabsorbed fixed costs associated with new project launches and the non-recurring inventory step-up expense associated with the MSA acquisition.

Manufacturing margin percentages were 12.0% for the three months ended September 30, 2023, as compared to 11.3% for the three months ended September 30, 2022, an increase of 0.7%. The increase was attributable to the items discussed in the preceding paragraph.

Amortization of Intangibles Assets. Amortization of intangible assets were $2,173 for the three months ended September 30, 2023 as compared to $1,738 for the three months ended September 30, 2022, an increase of $435, or 25%. The increase

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was solely due to the amortization expense associated with the identifiable intangible assets from the MSA acquisition. Refer to Note 2 – Acquisitions for additional information related to these identifiable intangible assets.

Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit-sharing, bonuses, and deferred compensation expenses were $2,346 for the three months ended September 30, 2023 as compared to $166 for the three months ended September 30, 2022, an increase of $2,180, or 1313.3%. The increase was primarily due to lower deferred compensation credit during the current year period related to fluctuations within the financial markets and less stock-based compensation expense in the prior year period due to forfeitures of unvested awards.

Employee Stock Ownership Plan Income. Employee stock ownership plan estimated income was $0 for the three months ended September 30, 2023 as compared to $152 for the three months ended September 30, 2022, a decrease of $152 as the Company transitioned to a 401(k) company match beginning January 1, 2023.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $8,608 for the three months ended September 30, 2023 as compared to $6,533 for the three months ended September 30, 2022, an increase of $2,075, or 31.8%. The increase was predominantly attributable to transaction costs associated with the MSA acquisition, increased legal costs associated with litigation against the former fitness customer and increased salaries, wages and benefits.

Impairment of Long-Lived Assets and Gain on Contracts. At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from this customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company committed to purchase, to meet obligations under the agreement with the former fitness customer as December 31, 2021. The notification informed the Company that it did not forecast any demand for any products or parts that were the subject of the agreement between the Company and the customer for the remainder of the agreement’s term, which ends in March 2026. Given the circumstances, GAAP required the Company to assess whether the assets were impaired. As a result of this assessment, the Company recorded an impairment on the assets specifically purchased to meet obligations under the agreement with the former fitness customer. Consequently, the Company recorded an impairment of long-lived assets and loss on contracts of $16,151 in the fourth quarter of 2021.

During the three months ended September 30, 2022, the Company was able to cancel $168 of purchase commitments for property, plant and equipment relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and loss on contracts at December 31, 2021. The cancellation of purchase commitments resulted in the reversal of this amount and the recording of a gain on contracts. Additionally, the Company was able to sell property, plant and equipment resulting in a gain of $1,569 relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and written down to fair value at December 31, 2021.

Interest Expense. Interest expense was $3,907 for the three months ended September 30, 2023 as compared to $830 for the three months ended September 30, 2022, an increase of $3,077, or 370.7%. The change is due to higher interest rates and an increase in borrowings. The increase in borrowings relative to the prior year period is due to the acquisition of MSA, which closed on July 1, 2023.

Provision for Income Taxes. Income tax expense was $554 for the three months ended September 30, 2023 as compared to $1,490 for the three months ended September 30, 2022. The decrease of $936 is primarily due to higher net income and comprehensive income in the prior year period. Please reference Note 8 – Income Taxes of the Condensed Consolidated Financial Statements for further details.

Due to the factors described in the preceding paragraphs, net income, comprehensive income, EBITDA and EBITDA Margin decreased, while Adjusted EBITDA and Adjusted EBITDA Margin increased during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

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Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022


	Nine Months Ended September 30,
	2023				2022				Increase (Decrease)
			% of Net				% of Net		Amount
	Amount		Sales		Amount		Sales		Change		% Change
Net sales	$	439,843	100.0	%	$	410,865	100.0	%	$	28,978	7.1	%
Cost of sales		388,351	88.3	%		362,782	88.3	%		25,569	7.0	%
Manufacturing margins		51,492	11.7	%		48,083	11.7	%		3,409	7.1	%
Amortization of intangible assets		5,649	1.3	%		5,214	1.3	%		435	8.3	%
Profit sharing, bonuses and deferred compensation		8,037	1.8	%		3,921	1.0	%		4,116	105.0	%
Employee stock ownership plan expense		—	—	%		1,668	0.4	%		(1,668)	N/A
Other selling, general and administrative expenses		22,969	5.2	%		18,653	4.5	%		4,316	23.1	%
Impairment of long-lived assets and gain on contracts		—	—	%		(4,346)	(1.1)	%		4,346	N/A
Income from operations		14,837	3.4	%		22,973	5.6	%		(8,136)	35.4	%
Interest expense		(7,533)	1.7	%		(2,163)	0.5	%		5,370	248.3	%
Loss on extinguishment of debt		(216)	0.1	%		—	—	%		216	N/A
Provision for income taxes		1,471	0.3	%		4,464	1.1	%		(2,993)	(67.0)	%
Net income and comprehensive income	$	5,617	1.3	%	$	16,346	4.0	%	$	(10,729)	65.6	%
EBITDA	$	40,119	9.1	%	$	44,529	10.8	%	$	(4,410)	(9.9)	%
Adjusted EBITDA	$	48,349	11.0	%	$	49,228	12.0	%	$	(879)	(1.8)	%

Net Sales. Net sales were $439,843 for the nine months ended September 30, 2023 as compared to $410,865 for the nine months ended September 30, 2022 for an increase of $28,978, or 7.1%. This increase was primarily driven by the recent acquisition of MSA, increased organic sales volumes within our commercial vehicle, powersports and military end markets and continued price discipline, partially offset by supply chain challenges affecting some of our customers, lower material price pass-throughs to customers and softening demand in our construction and agriculture end markets.

Manufacturing Margin. Manufacturing margins were $51,492 for the nine months ended September 30, 2023 as compared to $48,083 for the nine months ended September 30, 2022, an increase of $3,409, or 7.1%. This increase was mainly driven by the above-mentioned organic volume growth and MSA acquisition, along with commercial price actions. These items were partially negated by unabsorbed fixed costs associated with new project launches, a one-time field replacement claim, higher employee healthcare expenses and the non-recurring inventory step-up expense associated with the MSA acquisition.

Manufacturing margin percentages were 11.7% for both the nine months ended September 30, 2023 and September 30, 2022 attributable to the items discussed in the preceding paragraph.

Amortization of Intangibles Assets. Amortization of intangible assets were $5,649 for the nine months ended September 30, 2023 as compared to $5,214 for the nine months ended September 30, 2022, an increase of $435 or 8.3%. This increase was solely due to the amortization expense associated with the identifiable intangible assets from the MSA acquisition. Refer to Note 2 – Acquisitions for additional information related to these identifiable intangible assets.

Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit-sharing, bonuses, and deferred compensation expenses were $8,037 for the nine months ended September 30, 2023 as compared to $3,921 for the nine months ended September 30, 2022, an increase of $4,116, or 105%. The increase was primarily due to deferred compensation expense during the current year period versus a credit during the prior year period due to fluctuations within the financial markets, the Company’s 401(k) company match program being higher than the prior year period discretionary 401(k) accrual and less stock-based compensation expense in the prior year period due to forfeitures of unvested awards.

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Employee Stock Ownership Plan Expense. Employee stock ownership plan estimated expense was $0 for the nine months ended September 30, 2023 as compared to $1,668 for the nine months ended September 30, 2022, a decrease of $1,668 as the Company transitioned to a 401(k) company match as of January 1, 2023.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $22,969 for the nine months ended September 30, 2023 as compared to $18,653 for the nine months ended September 30, 2022, an increase of $4,316 or 23.1%. The increase was predominantly attributable to increasing salaries, wages and benefits, recruiting fees and higher professional fees related to the Company preparing to be Sarbanes-Oxley Act Section 404(b) compliant for 2024 and the transaction costs related to the acquisition of MSA, partially offset by CEO transition costs incurred during the prior year period.

During the nine months ended September 30, 2022, the Company was able to cancel $2,257 of purchase commitments for property, plant and equipment relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and loss on contracts at December 31, 2021. The cancellation of purchase commitments resulted in the reversal of this amount and the recording of a gain on contracts. Additionally, the Company was able to sell property, plant and equipment resulting in a gain of $2,089 relating to the former fitness customer that had been previously recorded as an impairment of long-lived assets and written down to fair value at December 31, 2021.

Interest Expense. Interest expense was $7,533 for the nine months ended September 30, 2023 as compared to $2,163 for the nine months ended September 30, 2022, an increase of $5,370, or 248.3%. The change is due to higher interest rates and average debt levels as compared to the prior year period. The increase in debt levels is due to the acquisition of MSA, which closed on July 1, 2023.

Provision for Income Taxes. Income tax expense was $1,471 for the nine months ended September 30, 2023 as compared to $4,464 for the nine months ended September 30, 2022. The decrease of $2,993 is primarily due to higher net income and comprehensive income in the prior year period. Please reference Note 8 – Income Taxes of the Condensed Consolidated Financial Statements for more specifics. As of September 30, 2023, our federal net operating loss (NOL) carryforward was $21,210 driven by the pretax losses incurred in prior years. The NOL does not expire and will be used to offset future pretax income. We estimate our long-term effective tax rate to be approximately 27%, based on current tax regulations.

Due to the factors described in the preceding paragraphs, net income, comprehensive income, EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin decreased during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Liquidity and Capital Resources

Cash Flows Analysis


	Nine Months Ended
	September 30,				Increase (Decrease)
	2023		2022		$ Change		% Change
Net cash provided by operating activities	$	13,696	$	33,315		(19,619)	(59)	%
Net cash used in investing activities		(97,654)		(31,072)		(66,582)	(214)	%
Net cash provided by (used in) financing activities		86,136		(2,249)		88,385	3,930	%
Net change in cash	$	2,178	$	(6)	$	2,184	36,400	%

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Operating Activities. Cash provided by operating activities was $13,696 for the nine months ended September 30, 2023, as compared to $33,315 for the nine months ended September 30, 2022. Of the $19,619 decrease in operating cash flows, $17,562 is due to a payout of deferred compensation to a retired Company executive. The remaining decrease of $2,057 as compared to the prior year period is largely driven by a decrease in accounts payable resulting from reduced capital expenditures, partially offset by inventory decreasing due to the Company’s ongoing initiatives to implement lean inventory management processes. Additionally, a decrease in accrued liabilities due to the Company implementing a match program in the 401(k) Plan requiring the employer contribution to be paid concurrently with payroll. In the prior year period, a discretionary employer contribution was accrued throughout the year and paid after the year ended December 31, 2022.

Investing Activities. Cash used in investing activities was $97,654 for the nine months ended September 30, 2023, as compared to $31,072 for the nine months ended September 30, 2022. The $66,582 increase in cash used in investing activities was mainly driven by the acquisition of MSA, which was completed on July 1, 2023, slightly offset by less capital investments in the current year period due to the completion of the capital investment in the Company’s Hazel Park, MI facility at the end of 2022.

Financing Activities. Cash provided by financing activities was $86,136 for the nine months ended September 30, 2023, as compared to cash used of $2,249 for the nine months ended September 30, 2022. The $88,385 increase was mainly due to the use of funds to purchase MSA. Additionally, in conjunction with the acquisition of MSA, the Company assumed a Small Business Administration loan in the amount of $5,009 and paid off the full loan amount as the Company did not meet the required criteria to qualify for this type of loan. Under our share repurchase program, the Company purchased $2,661 of common stock in the first nine months of 2023 as compared to $4,947 of its common stock in the first nine months of 2022. The Company’s decision to repurchase additional shares in 2023 will depend on business conditions, free cash flow generation, other cash requirements and stock price. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information regarding share repurchases.

Amended and Restated Credit Agreement

On June 28, 2023, we entered into an amended and restated credit agreement (the Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, the Agent. The Credit Agreement provides for a $250,000 revolving credit facility, with a letter of credit sub-facility, and a swingline facility in an aggregate amount of $25,000. The Credit Agreement also provides for the availability of incremental facilities to the greater of $100,000 and 125% of the Company’s twelve month trailing Consolidated EBITDA through an accordion feature. All amounts borrowed under the credit agreement mature on June 28, 2028.

Borrowings under the Credit Agreement bear interest at a fluctuating SOFR plus an applicable margin based on the current consolidated total leverage ratio (which may be adjusted for certain reserve requirements), plus 1.25% to 2.75% 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 SOFR. 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), (ii) the Federal Funds Rate plus 0.50%, and (iii) Adjusted Term SOFR for a one-month tenor in effect on such day plus 1.00%. The Credit Agreement also includes provisions for determining a replacement rate when SOFR is no longer available.

At September 30, 2023, the interest rate on outstanding borrowings under the Revolving Loan was 7.92%. We had availability of $81,588 under the revolving credit facility at September 30, 2023.

We must pay a commitment fee of 0.20% to 0.35% 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.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness; create, incur, assume or suffer to exist liens; make certain investments; allow our subsidiaries to merge or consolidate with another entity; make certain asset dispositions; pay certain dividends or other distributions to shareholders; enter into transactions with affiliates; enter into sale leaseback transactions; and exceed the limits on annual capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00. At September 30, 2023, our interest coverage ratio was 6.11 to 1.00. The Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 4.00 to 1.00

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(which was increased as of July 1, 2023 from 3.50 to 1.00 in connection with the acquisition of MSA). As of September 30, 2023, our consolidated total leverage ratio was 2.46 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.

Other Debt

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

Capital Requirements and Sources of Liquidity

During the nine months ended September 30, 2023 and 2022, our capital expenditures were $9,814 and $38,808, respectively. The decrease of $28,994 was driven by the completion of the capital investment in the Company’s Hazel Park, MI facility at the end of 2022. Capital expenditure expectations for the full year 2023 are expected to be between $15,000 and $20,000.

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 September 30, 2023, we had immediate availability of $81,588 through our revolving credit facility and the availability of incremental facilities to the greater of $100,000 and 125% of the Company’s twelve month trailing Consolidated EBITDA through an accordion feature under our Credit Agreement, subject to the covenants under the Credit Agreement. 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 at this time, we expect to be in compliance with these financial covenants through 2023 and the foreseeable future.

We believe that our operating cash flow and available borrowings under the Credit Agreement are sufficient to fund our operations for 2023 and beyond when taking into consideration the estimated impacts of the current macroeconomic conditions 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 additional 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.

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Contractual Obligations

The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at September 30, 2023:


			Payments Due by Period
	Total		2023 (Remainder)		2024 – 2025		2026 – 2027		Thereafter
Long-term debt principal payment obligations ⁽¹⁾	$	171,287	$	500	$	1,000	$	1,000	$	168,787
Equipment financing agreements ⁽²⁾		602		602		—		—		—
Forecasted interest on debt payment obligations ⁽³⁾		33,056		3,039		14,239		12,428		3,350
Finance lease obligations ⁽⁴⁾		1,079		117		802		160		—
Operating lease obligations ⁽⁴⁾		36,955		1,476		10,766		9,556		15,157
Total	$	242,979	$	5,734	$	26,807	$	23,144	$	187,294

(1)	Principal payments under the Company’s Credit Agreement, which expires in 2028 and the Fond du Lac Term Note, which is due in full in December 2028.

(2)	Financing agreements entered into to purchase manufacturing equipment. Current and long-term portions are classified in other current liabilities and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets.

(3)

Forecasted interest on debt obligations are based on the debt balance, interest rate, and unused fee of the Company’s revolving credit facility, debt balance and interest rate of the Company’s Fond due Lac Term Note and the debt balances and interest rates of the Company’s equipment finance agreements as of September 30, 2023.

(4)	See Note 5 – Leases in the Notes to Condensed Consolidated Financial Statements for additional information.

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-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 SOFR-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 revolving credit facility under the Credit Agreement was $168.4 million with an interest rate of 7.92% as of September 30, 2023. Please see “Liquidity and Capital Resources – Amended and Restated Credit Agreement” in Part I, Item 2 and Note 4 in the Notes to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for more specifics.

A hypothetical 100-basis-point increase in interest rates would have resulted in an additional $0.9 million of interest expense based on our variable rate debt at September 30, 2023. 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. 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

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September 30, 2023, 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 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.

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the 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 and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, 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. Also see Note 9 – Contingencies in the Notes to the Consolidated Financial Statements for additional information.

Item 1A. Risk 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, 2022, which was filed with the SEC on March 1, 2023.

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 September 30, 2023:


				Total Number	Dollar Value of
				of Shares	Shares that
	Total			Purchased as	May Yet Be
	Number			Part of Publicly	Purchased
	of Shares	Average Price		Announced Plans	Under the Plans
Period	Purchased	Paid per Share		or Programs⁽¹⁾	or Programs⁽¹⁾
July 2023	—	$	—	—	$	17,552,686
August 2023	84,238	$	11.87	84,238	$	16,552,689
September 2023	—	$	—	—	$	16,552,689
Total	84,238			84,238

(1)

On October 19, 2021, the Board of Directors approved a share repurchase program of up to $25 million of shares through 2023. On October 26, 2023, the Board of Directors approved a new share repurchase program of up to $25 million of shares through 2026. The new share repurchase program replaced the prior program.

Item 5. Other Information

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Item 6. Exhibits.

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		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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)

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SIGNATURES

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: November 1, 2023	By:	/s/ Jagadeesh A. Reddy
		Jagadeesh A. Reddy
		President & Chief Executive Officer

	By:	/s/ Todd M. Butz
		Todd M. Butz
		Chief Financial Officer

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Mayville Engineering (MEC) 10-Q2023 Q3 Quarterly report

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