Mayville Engineering Company (NYSE:MEC), a leading U.S.-based vertically-integrated manufacturer, has demonstrated its resilience in the face of macroeconomic challenges. The company reported annual net income of $7,844,000, annual revenue of $588,425,000, annual operating cash flow of $40,363,000, and annual free cash flow of $23,765,001 in its latest fiscal year.

In the first quarter of 2024, MEC delivered a strong performance, with net sales increasing 13.1% year-over-year to $161,269,000. This growth was driven by a combination of the successful integration of the Mid-States Aluminum (MSA) acquisition and improved organic sales volumes, partially offset by softening demand in the legacy agriculture end market and the expected falloff of certain military aftermarket programs.

Excluding the contribution from MSA, MEC's organic net sales growth was a respectable 3.3% year-over-year. The company's manufacturing margin expanded to $20,933,000, or 13.0% of net sales, compared to $16,377,000, or 11.5% of net sales, in the prior-year period. This margin improvement was primarily attributable to increased organic volumes, the successful implementation of the MBX operational excellence initiatives, and the benefits of the company's commercial pricing actions.

MEC's President and CEO, Jag Reddy, commented, "We demonstrated solid execution on our strategic priorities during the first quarter, culminating in a strong start to the year for our business." He further noted that the company remains confident in its ability to achieve its previously stated 2026 targets of $750-$850 million in revenues, 14-16% adjusted EBITDA margins, and $65-$75 million in free cash flow.

Business Overview

Mayville Engineering Company 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. The company's customers operate in diverse end markets, such as heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agriculture, military, and other industries.

MEC has developed long-standing relationships with its blue-chip customers based on its commitment to "Unmatched Excellence." The company's engineering expertise and technical know-how allow it to add value through every product redevelopment cycle, which typically occurs every three to five years for its customers.

Segmental Performance

MEC operates in a single reporting segment, focusing on producing metal components used in a broad range of heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agricultural, military, and other products.

In the first quarter of 2024, the commercial vehicle market, which represented approximately 37% of MEC's trailing 12-month revenues, saw a 0.3% year-over-year decrease in revenue. This was primarily due to softening end-market demand, as North American Class 8 production fell 1.9% year-over-year in the first quarter. However, the company expects its new CV project launches to continue ramping up and help maintain comparable sales to this end market relative to 2023.

The construction and access market, which accounted for approximately 18% of trailing 12-month revenues, saw a 7.3% year-over-year increase in revenue. This reflects steady demand in nonresidential and public infrastructure markets, which more than offset softness within residential markets.

The powersports market, representing approximately 17% of trailing 12-month revenues, increased by 25.7% year-over-year. MEC continues to benefit from market share gains, including new customer programs on high-end models, partially offset by a cooling in customer discretionary spending.

The agricultural market, which made up approximately 10% of trailing 12-month revenues, increased by 3.5% year-over-year. This was driven by market share growth and contributions from the MSA acquisition, offset by softening demand within large ag and turf markets.

Acquisition and Integration

In July 2023, MEC completed the acquisition of Mid-States Aluminum (MSA), a vertically-integrated manufacturer of custom aluminum extrusions and fabrications. The acquisition enables MEC to secure an attractive entry point within lightweight materials fabrication, while providing significant new cross-selling opportunities with both new and existing customers.

During the first quarter of 2024, revenues associated with MSA drove 9.8% of MEC's top-line growth year-over-year, with the majority of these revenues being in the "other" end market category. For 2024 as a whole, the company continues to expect MSA to generate between $20 million to $30 million of incremental net sales, with revenue synergies beginning to ramp up in the second half of the year.

Operational Excellence Initiatives

MEC has been laser-focused on driving operational excellence through its MBX framework, which has yielded tangible results. In the first quarter, the company's MBX initiatives, including sourcing optimization and labor utilization improvements, generated $1.6 million of year-over-year self-help adjusted EBITDA improvement.

The company has conducted over 150 MBX kaizen events since launching the program in late 2022, leading to increased plant utilization and improved operating leverage. For example, at the Hazel Park facility, MEC expects to achieve a $100 million annual revenue run rate by the end of 2024, consistent with its prior expectations.

Jag Reddy, the President and CEO, stated, "Our operations team has been very focused on sourcing optimization, improving labor utilization, and improving overall inventory efficiency. These initiatives have been driven by our rigorous approach to MBX lean implementation."

Financials

Financial Position and Liquidity

As of the end of the first quarter of 2024, MEC's net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents, was $142,800,000, resulting in a net leverage ratio of 1.98x.

The company's free cash flow during the first quarter of 2024 was a positive $7,900,000, compared to a negative $8,500,000 in the prior-year period. The improvement in free cash flow was primarily due to a $14,300,000 increase in cash from net working capital, reflecting the progress of the company's MBX program.

MEC remains committed to aggressively reducing its outstanding borrowings to achieve its previously stated goal of a net leverage ratio of between 1.5x and 2x by the end of 2024. The company's strong free cash flow generation during the first quarter has already enabled it to reduce its net leverage to 1.98x.

Guidance and Outlook

For the full year 2024, MEC is reiterating its financial guidance, which includes: - Net sales of between $620 million and $640 million - Adjusted EBITDA of between $72 million and $76 million - Free cash flow of between $35 million and $45 million

The company's guidance reflects organic growth of between 1.5% and 2.5%, driven by new project launches, including the ramp-up of the Hazel Park facility, offset by expected end-of-life projects and slowing macroeconomic demand in a few of its end markets.

Jag Reddy expressed confidence in the company's ability to execute on its strategic priorities, stating, "I continue to expect that our execution positions us well for ratable growth for the remainder of 2024 and above-market growth as we move through the cycle."

Risks and Challenges

MEC operates in a cyclical industry, and its performance is subject to macroeconomic conditions, including inflation, interest rates, and supply chain constraints affecting some of its customers. The company also faces risks related to its ability to maintain its manufacturing, engineering, and technological expertise, as well as the potential loss of large customers or their respective market shares.

Additionally, the company's ability to successfully identify or integrate acquisitions, develop new and innovative processes, and manage its information technology systems and infrastructure, including cybersecurity risks, could impact its future performance.

Conclusion

Mayville Engineering Company has demonstrated its resilience and operational excellence in the face of macroeconomic headwinds. The company's diversified end markets, successful integration of the MSA acquisition, and relentless focus on operational improvements through its MBX framework have positioned MEC for continued growth and margin expansion.

Despite the challenges, MEC remains confident in its ability to achieve its 2026 financial targets and capitalize on the long-term secular trends in its end markets. Investors should closely monitor the company's execution on its strategic priorities, its ability to navigate the evolving market conditions, and its progress in reducing debt and improving its financial flexibility.