Mayville Engineering Company (MEC): A Resilient Manufacturer Navigating Market Challenges

Business Overview

Mayville Engineering Company (MEC) is a leading U.S.-based, vertically-integrated, value-added manufacturing partner providing a full suite of manufacturing solutions from concept to production. With a rich history spanning over 75 years, the company has established itself as a trusted supplier of highly engineered components to diverse end markets, including heavy- and medium-duty commercial vehicles, construction access equipment, powersports, agriculture, military, and other industries.

Established in 1945 and headquartered in Milwaukee, Wisconsin, MEC operates 23 facilities across seven states, strategically positioned to serve its blue-chip customer base. The company's engineering expertise and technical know-how have allowed it to add value through every product redevelopment cycle, generally every three to five years, for its customers. MEC's journey began as a small machine shop, and it has since grown to become a Tier I supplier with leading positions in its respective markets. The company's commitment to "Unmatched Excellence" in manufacturing solutions has been a cornerstone of its long-standing relationships with OEM customers.

Recent Challenges and Strategic Moves

In recent years, MEC has faced significant challenges, particularly during the COVID-19 pandemic in 2021, which disrupted supply chains and led to a sharp decline in demand across many of its end markets. The company demonstrated its resilience by implementing cost-saving measures and working closely with customers to manage production schedules. Despite these headwinds, MEC remained focused on its strategic priorities, including investments in technology and process improvements to enhance operational efficiency.

A key milestone in MEC's recent history was the acquisition of Mid-States Aluminum (MSA) in 2023. This strategic move expanded the company's capabilities in light-weight materials fabrication and provided significant new cross-selling opportunities with both new and existing customers. The smooth integration of MSA has contributed to MEC's growth and diversification efforts.

Financials

MEC's financial performance has been marked by both resilience and agility in the face of evolving market dynamics. In 2023, the company reported annual revenue of $588.42 million and net income of $7.84 million, demonstrating its ability to navigate challenging macroeconomic conditions. Operating cash flow for the fiscal year 2023 stood at $40.36 million, with free cash flow of $23.77 million.

The most recent quarter (Q3 2024) saw revenue of $135.39 million, representing a 14.4% decrease year-over-year. This decline was primarily driven by a decrease in demand across all key end markets and customer de-stocking channel inventory, partially offset by incremental volumes associated with new project wins. Net income for the quarter was $2.97 million, with operating cash flow of $17.95 million and free cash flow of $15.07 million.

Manufacturing margins for Q3 2024 were $17.09 million, a 10.1% decrease compared to the prior year period, primarily due to the lower end market demand, partially offset by the company's cost reduction initiatives. Adjusted EBITDA was $17.06 million, an 11.2% decrease, with the Adjusted EBITDA margin increasing 50 basis points to 12.6% due to the offset of cost reduction actions.

The company's diversified end markets, long-standing customer relationships, and disciplined operational execution have been instrumental in driving its overall financial performance. MEC operates primarily in the United States, serving a broad range of industries through its single operating segment focused on producing metal components.

Liquidity and Capital Structure

MEC maintains a strong liquidity position, with $672,000 in cash and cash equivalents as of December 31, 2023. The company's current ratio stood at 1.87, indicating a healthy ability to meet short-term obligations. As of September 30, 2024, the current ratio was 1.77, and the quick ratio was 0.91.

MEC's total debt stood at $181.16 million as of December 31, 2023, with a net debt position of $146.82 million, resulting in a net debt to EBITDA ratio of 2.67x. The debt-to-equity ratio was 0.107 as of September 30, 2024.

In June 2023, the company entered into an amended and restated credit agreement, providing a $250 million revolving credit facility with a maturity date of June 2028. This facility includes a $25 million letter of credit sub-facility and a $25 million swingline facility. As of September 30, 2024, MEC had $138.96 million available under the revolving credit facility. The credit facility contains financial covenants, including a minimum interest coverage ratio of 3.0x and a maximum consolidated total leverage ratio of 3.5x. As of September 30, 2024, the company was in compliance with these covenants, with an interest coverage ratio of 4.92x and a consolidated total leverage ratio of 1.59x.

Additionally, MEC has a $2.38 million Fond du Lac County and Fond du Lac Economic Development Corporation term loan. This diverse capital structure, along with the availability of incremental facilities, offers MEC the financial flexibility to support its strategic initiatives and growth plans.

Operational Excellence and Diversification

MEC's commitment to operational excellence is embodied in its MBX (Mayville Business Excellence) framework, which focuses on continuous improvement, strategic pricing, and cost discipline. The company's MBX initiatives have driven significant working capital efficiencies, with inventory turns improving from 6.2 in 2022 to 9.0 as of the end of the third quarter of 2024.

The company's diversified end market exposure has also been a key strength, as it helps mitigate the impact of cyclical downturns in any individual industry. In the third quarter of 2024, MEC's revenue mix was as follows: Commercial Vehicles (38%), Construction & Access (15%), Powersports (16%), Agriculture (8%), and Military/Other (23%).

Navigating Near-Term Headwinds

During the third quarter of 2024, MEC faced a significant demand deceleration across its key end markets, as customers implemented destocking activities to manage elevated dealer inventories. This dynamic, coupled with macroeconomic factors such as higher interest rates and inflationary pressures, led to a 14.4% year-over-year decline in net sales to $135.4 million.

In response to the shifting demand environment, the company implemented a series of cost rationalization initiatives, including a 12% reduction in its labor force, extended facility shutdowns during the holiday season, and other measures to align its cost structure with the current market conditions. These actions enabled MEC to maintain its adjusted EBITDA margin at 12.6%, a 50 basis point improvement over the prior year period, demonstrating the company's agility and operational discipline.

Looking ahead, MEC expects the fourth quarter of 2024 to represent the low point of the current cycle, with sequential sales declining by 4% to 11%. The company has revised its 2024 full-year guidance, now projecting net sales between $580 million and $590 million, adjusted EBITDA between $63 million and $66 million, and capital expenditures between $13 million and $15 million. MEC is maintaining its previous 2024 free cash flow guidance of between $45 million and $55 million. For the fourth quarter of 2024, MEC expects adjusted EBITDA to be in the range of $8 million to $11 million.

It's worth noting that the revised guidance excludes any impact from MEC's recent legal settlement with a former fitness customer, which resulted in a $25.5 million cash settlement. Despite the near-term challenges, MEC remains confident in its ability to achieve its previously stated 2026 financial targets, which include revenue between $750 million and $850 million, adjusted EBITDA margins of 14% to 16%, and free cash flow of $65 million to $75 million.

Prudent Capital Allocation and Strategic Initiatives

MEC's strong free cash flow generation has allowed the company to reduce its net leverage to 1.6x as of the end of the third quarter of 2024, well within its targeted range of 1.5x to 2.0x. The company has also remained committed to a systematic approach to share repurchases, with $23 million remaining under its existing $25 million authorization as of the end of the quarter.

In addition to debt reduction and share repurchases, MEC has been actively pursuing strategic initiatives to drive long-term growth. During the third quarter, the company secured several new customer awards, including a multi-year aluminum extrusion program related to the expansion of mass public transit, as well as new engine component and power generation programs with existing customers. These wins demonstrate MEC's ability to capitalize on regulatory changes and secular trends within its end markets.

Conclusion

Mayville Engineering Company's long-standing history, operational excellence, and diversified customer base have enabled the company to navigate the recent market challenges with agility and resilience. While facing near-term headwinds, MEC's strategic initiatives, prudent capital allocation, and commitment to continuous improvement position the company well to achieve its long-term growth and profitability targets. As the macroeconomic environment stabilizes and customer demand normalizes, MEC appears poised to capitalize on its strong competitive position and deliver sustainable value for its shareholders.

The company's focus on a single operating segment producing metal components for a variety of end markets, including heavy- and medium-duty commercial vehicles, construction access equipment, powersports, agriculture, and military applications, provides a solid foundation for growth. MEC's ability to adapt to changing market conditions, as evidenced by its recent cost reduction initiatives and strategic wins, underscores its resilience and potential for long-term success in the manufacturing sector.