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 June 30, 2019

OR

 

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

For the transition period from                      to                     

Commission File Number: 001-38894

 

 

Mayville Engineering Company, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Wisconsin		39-0944729
( State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
715 South Street Mayville, Wisconsin		53050
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (920) 387-4500

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, no par value		MEC		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☐
Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 9, 2019, the registrant had 19,740,296 shares of common stock, no par value per share, outstanding.

 

 

 

Table of Contents

 

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)			1
		Condensed Consolidated Balance Sheets			1
		Condensed Consolidated Statements of Comprehensive Income (Loss)			3
		Condensed Consolidated Statements of Cash Flows			4
		Condensed Consolidated Statements of Shareholders Equity			5
		Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			28
Item 4.		Controls and Procedures			28
PART II.		OTHER INFORMATION			29
Item 1.		Legal Proceedings			29
Item 1A.		Risk Factors			29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 6.		Exhibits			42
Signatures					43

 

 

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains 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. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described in “Risk Factors” in Part II, Item 1A of this filing. We believe 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 II, Item 1A of this filing, and the following:

 

•

failure to compete successfully in our markets;

 

•

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

 

•

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

 

•

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

 

•

risks related to scheduling production accurately and maximizing efficiency;

 

•

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

 

•

our ability to successfully identify or integrate acquisitions;

 

•

risks related to entering new markets;

 

•

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

 

•

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

 

•

risks related to our information technology systems and infrastructure;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

risks associated with our capital-intensive industry;

 

•

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

 

•

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

 

•

our ability to remediate the material weaknesses in internal control over financial reporting identified in preparing our financial statements included in the Prospectus and to subsequently maintain effective internal control over financial reporting; and

 

•

other risks and factors listed under “Risk Factors” in Part II, Item 1A of this filing.

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. Our future results will depend upon various other risks and

uncertainties, including those described in “Risk Factors” in Part II, Item 1A of this filing. 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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands except shares)

(unaudited)

 

		June 30, 2019				December 31, 2018
ASSETS
Cash and cash equivalents		$	1			$	3,089
Receivables, net of allowances for doubtful accounts of $778 as of June 30, 2019 and $801 as of December 31, 2018			65,220				52,298
Inventories, net			50,582				53,405
Tooling in progress			2,539				2,318
Prepaid expenses and other current assets			3,394				1,649
Total current assets			121,736				112,759
Property, plant and equipment, net			127,721				123,883
Goodwill			72,430				69,437
Intangible assets-net			77,526				82,879
Capital lease, net			1,807				1,953
Other long-term assets			5,441				814
Total		$	406,661			$	391,725

 

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

 

1

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands except shares)

(unaudited)

 

		June 30, 2019				December 31, 2018
LIABILITIES, TEMPORARY EQUITY, AND SHAREHOLDERS’ EQUITY
Accounts payable		$	48,411			$	45,992
Current portion of capital lease obligation			269				281
Current portion of long-term debt			8,392				8,606
Accrued liabilities:
Salaries, wages, and payroll taxes			7,897				7,548
Profit sharing and bonus			6,528				6,124
Other current liabilities			17,291				14,610
Total current liabilities			88,788				83,161
Bank revolving credit notes			41,485				59,629
Capital lease obligation, less current maturities			1,562				1,697
Other long-term debt, less current maturities			39,168				111,675
Deferred compensation and long-term incentive, less current portion			24,602				13,351
Deferred income taxes			19,824				19,123
Other long-term liabilities			100				100
Total liabilities			215,529				288,736
Commitments and contingencies (see Note 10)
Redeemable common shares, no par value, stated at redemption value of outstanding shares, 60,045,300 authorized, 38,623,806 shares issued at December 31, 2018			—				133,806
Retained earnings			—				26,842
Treasury shares at cost, 25,180,330 shares at December 31, 2018			—				(57,659	)
Total temporary equity			—				102,989
Common shares, no par value, 75,000,000 authorized, 20,845,693 shares issued at June 30, 2019.			—				—
Additional paid-in-capital			180,997
Retained earnings			14,017				—
Treasury shares at cost, 1,105,397 shares at June 30, 2019			(3,882	)			—
Total shareholders’ equity			191,132				—
Total		$	406,661			$	391,725

Share counts as of December 31, 2018 give effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the Company’s May 2019 IPO. There were 45,000 shares authorized, 28,946 shares issued and 18,871 treasury shares at December 31, 2018.

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

 

2

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands except shares and per share data)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2019				2018				2019				2018
Net sales		$	145,130			$	91,535			$	288,862			$	178,757
Cost of sales			124,595				75,986				248,748				151,396
Amortization of intangibles			2,677				939				5,353				1,878
Profit sharing, bonuses, and deferred compensation			22,830				1,365				24,580				3,005
Employee Stock Ownership Plan expense			1,500				1,000				3,000				2,000
Other selling, general and administrative expenses			10,180				2,713				17,772				5,581
Income (loss) from operations			(16,652	)			9,532				(10,591	)			14,897
Interest expense			(1,991	)			(853	)			(4,824	)			(1,760	)
Loss on extinguishment of debt			(154	)			(588	)			(154	)			(588	)
Income (loss) before taxes			(18,797	)			8,091				(15,569	)			12,549
Income tax expense (benefit)			(3,513	)			—				(2,744	)			29
Net income (loss) and comprehensive income (loss)		$	(15,284	)		$	8,091			$	(12,825	)		$	12,520
Earnings (loss) per share
Net income (loss) available to shareholders		$	(15,284	)		$	8,091			$	(12,825	)		$	12,520
Basic and diluted earnings (loss) per share		$	(0.91	)		$	0.56			$	(0.85	)		$	0.87
Basic and diluted weighted average shares outstanding			16,799,915				14,341,538				15,131,012				14,341,538
Tax-adjusted pro forma information
Net income (loss) available to shareholders		$	(15,284	)		$	8,091			$	(12,825	)		$	12,520
Pro forma provision for income taxes			103				2,104				173				3,234
Pro forma net income (loss)		$	(15,387	)		$	5,987			$	(12,998	)		$	9,286
Pro forma basic and diluted earnings (loss) per share		$	(0.92	)		$	0.42			$	(0.86	)		$	0.65
Basic and diluted weighted average shares outstanding			16,799,915				14,341,538				15,131,012				14,341,538

Weighted average shares give effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the IPO, as if the IPO occurred at the beginning of 2018.

Tax adjusted pro forma amounts reflect income tax adjustments as if the Company was a taxable entity as of the beginning of 2018 using a 26% effective tax rate.

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

 

3

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(12,825	)		$	12,520
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			16,355				9,902
Stock-based compensation expense			797				—
Costs recognized on step-up of acquired inventory			395				—
Expense recognized on contingent consideration fair value adjustment			3,544				—
Gain on disposal of property, plant and equipment			(24	)			—
Deferred compensation and long-term incentive			11,251				173
Loss (gain) on extinguishment or forgiveness of debt			(367	)			558
Non-cash adjustments			290				103
Changes in operating assets and liabilities – net of effects of acquisition:
Accounts receivable			(12,417	)			(3,659	)
Inventories			2,296				(2,928	)
Tooling in progress			(221	)			214
Prepaids and other current assets			(1,744	)			(1,129	)
Accounts payable			4,363				1,356
Other long-term assets			(4,730	)			—
Accrued liabilities, excluding long-term incentive			(504	)			(341	)
Net cash provided by operating activities			6,459				16,769
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment			(16,637	)			(5,990	)
Proceeds from sale of property, plant and equipment			24				—
Acquisitions, net of cash acquired			(2,368	)			—
Net cash used in investing activities			(18,981	)			(5,990	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit notes			223,835				135,499
Payments on bank revolving credit notes			(241,979	)			(142,919	)
Proceeds from issuance of other long-term debt			—				42,053
Repayments of other long-term debt			(72,446	)			(44,083	)
Deferred financing costs			—				(569	)
Proceeds from IPO, net			101,763				—
Purchase of treasury stock			(1,592	)			(753	)
Payments on capital leases			(147	)			—
Net cash provided by (used in) financing activities			9,434				(10,772	)
Net increase (decrease) in cash and cash equivalents			(3,088	)			7
Cash and cash equivalents at beginning of period			3,089				76
Cash and cash equivalents at end of period		$	1			$	83
Supplemental disclosure of cash flow information:
Cash paid for interest		$	4,524			$	2,349

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

 

4

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity

(in thousands)

(unaudited)

 

		Shareholder’s Equity
		Additional Paid-in-Capital				Treasury Shares				Retained Earnings				Total
Balance as of December 31, 2018		$	—			$	—			$	—			$	—
March 31, 2019		$	—			$	—			$	—			$	—
Transfer from Temporary Equity (see Note 16)			133,806				(57,659	)			29,698				105,845
Net loss post IPO											(15,681	)			(15,681	)
Share issuance – IPO			101,763												101,763
Stock-based compensation			797												797
Share repurchases							(1,592	)							(1,592	)
Cancellation of Treasury Stock			(55,369	)			55,369								—
Balance as of June 30, 2019		$	180,997			$	(3,882	)		$	14,017			$	191,132

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

 

5

Mayville Engineering Company, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except shares and per share amounts)

(unaudited)

Note 1. Basis of presentation

The interim consolidated unaudited 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 and 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, 2018, included in the Company’s Prospectus. A summary of the Company’s significant accounting policies is included in the Company’s 2018 financial statements in the Prospectus. The Company followed these policies in preparation of the interim unaudited Condensed Consolidated Financial Statements.

Nature of Operations

MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture, military and other end markets.

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

On December 14, 2018, we acquired Defiance Metal Products Co. (DMP), a leading U.S. based manufacturer of component parts for the heavy-and medium-duty commercial vehicles, construction, and agriculture and military markets.

In May 2019, we completed our initial public offering (IPO). In conjunction with the IPO, the Company’s legacy business converted from an S corporation to a C corporation. As a result, the consolidated business is subject to paying federal and state corporate income taxes on its taxable income from May 9, 2019 forward.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), specific to the principles for recognizing revenue. This guidance replaces most existing revenue recognition guidance. It provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. As amended, this new revenue guidance will be effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. For as long as the Company remains an Emerging Growth Company (EGC), the new guidance is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods beginning after December 15, 2019. Early adoption is permitted for annual periods beginning after December 15, 2016. The Company has elected to adopt the standard using a modified retrospective approach and has determined that the standard does not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, creating Topic 842, which requires lessees to record the assets and liabilities arising from all leases in the statement of financial position. Under ASU 2016-02, lessees will recognize a liability for lease payments and a right-of-use asset. When measuring assets and liabilities, a lessee should include amounts related to option terms, such as the option of extending or terminating the lease or purchasing the underlying asset, that are reasonably certain to be exercised. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election to not recognize lease assets and liabilities. This guidance retains the distinction between finance leases and operating leases and the classification criteria remains similar to existing guidance. For financing leases, a lessee will recognize the interest on a lease liability separate from amortization of the right-of-use asset. In addition, repayments of principal will be presented within financing activities, and interest payments will be presented within operating activities in the statement of cash flows. For operating leases, a lessee will recognize a single lease cost on a straight-line basis and classify all cash payments within operating activities in the statement of cash flows. For public companies, this guidance will

 

6

be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as the Company remains an emerging growth company, the new guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

A summary of the Company’s evaluation of other recent accounting pronouncements is included in the Company’s 2018 financial statements in the Prospectus.

Note 2. IPO

Our IPO of shares of our common stock was completed in May 2019. In connection with the offering, we sold 6,250,000 shares of common stock at $17 per share generating proceeds of $99,344, net of underwriting discounts and commissions. Initially, additional shares were sold under an option granted to the underwriters that same month resulting in a sale of an additional 152,209 shares of common stock at $17 per share and proceeds of $2,419, net of underwriting discounts and commissions. In conjunction with the IPO, the Company issued a stock dividend specific to pre-IPO shares, of approximately 1,334.34-for-1, resulting in the conversion of 10,075 shares in the ESOP to 13,443,484 shares.

IPO proceeds were used to pay down debt including $43,000 pay down of the Term A loan and $25,000 pay-off of the subordinated debt balance. Remaining proceeds were used to pay down the revolver.

Further, and due to the IPO, the Company revalued the liability of its Long-Term Incentive Compensation Program (LTIP), resulting in an increase of $9,921 and payout of the $10,483 balance in May 2019, ending the LTIP. Also due to the IPO, the deferred compensation liability was revalued resulting in an increase of $9,990 from the March 31, 2019 balance of $14,498

Note 3. Acquisition

On December 14, 2018, the Company acquired Defiance Metal Products Co. (DMP), a full-service metal fabricator and contract manufacturer with two facilities in Defiance, OH, one in Heber Springs, AR, and one in Bedford, PA.

The Company acquired DMP for $117,068, net of cash received plus contingent consideration of up to $10,000. The Company will pay DMP’s previous shareholders $7,500 if DMP generates $19,748 of earnings before interest expense, income taxes, depreciation and amortization (EBITDA) over the twelve-month period ended September 30, 2019. In addition, the Company will pay one dollar for each additional dollar of EBITDA in excess of $19,748 generated over this period; however, in no event shall the total payment exceed $10,000.

The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. The excess purchase price over the estimated fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill. The Company engaged a reputable independent third party to assist with the identification and valuation of the intangible assets. Management made 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 15) not observable in the market.

The preliminary estimated fair values of assets acquired, and liabilities assumed are as follows:

 

		Preliminary Opening Balance Sheet Allocation
Cash consideration at acquisition date, net of cash received		$	114,700
Cash consideration for net working capital adjustment			2,368
Contingent consideration fair value as of acquisition date			6,075
Total purchase price		$	123,143
Accounts receivable, net		$	27,373
Tooling in progress			1,318
Inventory, net			11,729
Property, plant and equipment, net			30,053
Other assets, net of cash			416
Intangible assets
Trade name			14,780
Customer relationships			44,550
Non-compete			8,800
Goodwill			32,228
Total assets acquired			171,247
Deferred income taxes			20,220
Other liabilities			27,884
Net assets acquired		$	123,143

 

7

In connection with the DMP acquisition, inventory was valued at its estimated fair value which is defined as expected sales price less costs to sell. The valuation resulted in an inventory fair value step-up of $978. This amount is amortized based on inventory turns, with the amortization resulting in a reduction of inventory and an expense reflected in cost of sales on the Condensed Consolidated Statement of Comprehensive Income (Loss). The Company amortized $395 and $583 of the inventory fair value step-up during the three months ended March 31, 2019 and the year ended December 31, 2018, respectively. The inventory fair value step-up was fully amortized as of March 31, 2019.

The Company recorded $14,780 of trade name intangible assets with an estimated useful life of 10 years, $44,550 of customer relationship intangible assets with an estimated useful life of 12 years, and $8,800 of non-compete agreements with an estimated useful life of 5 years. These intangibles are amortized on a straight-line basis. The Company believes that the estimated useful lives and the straight-line amortization methodology most appropriately reflect when and how the Company expects to benefit from the identifiable intangible assets. Amortization expense related to these intangible assets is reflected in amortization of intangible expenses on the Condensed Consolidated Statement of Comprehensive Income (Loss).

The Company also estimated and recorded the fair value of the contingent consideration payable to be $6,075 as of the acquisition date. The Company remeasures this liability utilizing a Monte Carlo valuation model through the conclusion of the earnout period, September 30, 2019, with the change in value resulting in a gain or loss reflected in other selling, general, and administrative expenses on the Condensed Consolidated Statement of Comprehensive Income (Loss). The primary inputs utilized in the Monte Carlo valuation model include actual and projected EBITDA along with a discount rate. Contingent consideration payable was revalued to $9,598, $6,924 and $6,054 as of June 30, 2019, March 31, 2019 and December 31, 2018, respectively. The change between these balances resulted in a (gain)/loss of $2,674, $869, and ($21) for the three months ended June 30, 2019, March 31, 2019, and the year ended December 31, 2018, respectively.

The purchase price of DMP 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 has recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the respective valuations. 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. The Company is in the process of finalizing the fair value estimates for certain assets acquired and liabilities assumed including income tax balances. 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.    

As of June 30, 2019, the Company has adjusted the fair value on the opening balance sheet by increasing deferred income taxes by $1,097 and increasing accounts receivable by $473. In addition, the Company finalized the net working capital adjustment during the three month period ended June 30, 2019, resulting in an additional payout of $2,368 by the Company to the seller, bringing the Company’s acquisition of DMP to $117,068 in total cash paid, net of cash acquired. The offsetting entries of these adjustments was to goodwill.

The DMP acquired entities accounted for $53,559 and $103,734 of net sales and $74 and $911 of net income for the three and six months ended June 30, 2019, respectively.

Pro Forma Financial Information (Unaudited): In accordance with Accounting Standard Codification 805, the following unaudited pro forma combined results of operations have been prepared and presented to give effect to the DMP acquisition as if it had occurred on January 1, 2018, the beginning of the comparable period, applying certain assumptions and proforma adjustments. These proforma adjustments primarily relate to the depreciation expense on stepped-up fixed assets, amortization of identifiable intangible assets, costs of goods sold expense on the sale of stepped inventory, interest expense related to additional debt needed to fund the acquisition, and the tax impact of these adjustments. The unaudited pro forma consolidated results are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results of operations or consolidated financial position.

 

8

The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the acquisition.

 

		Three Months Ended June 30, 2018				Six Months Ended June 30, 2018
Net sales		$	137,506			$	265,780
Net income			5,638				10,135

Note 4. Select balance sheet data

Inventory

Inventories as of June 30, 2019 and December 31, 2018 consist of :

 

		June 30, 2019				December 31, 2018
Finished goods and purchased parts		$	31,025			$	32,589
Raw materials			12,735				12,329
Work-in-process			6,822				8,487
Total		$	50,582			$	53,405

The change in inventory from $53,405 as of December 31, 2018 to $50,582 as of June 30, 2019 includes a $395 reduction related to the amortization of the DMP inventory fair value step-up. The DMP inventory fair value step-up was fully amortized as of March 31, 2019.

Property, plant and equipment

Property, plant and equipment as of June 30, 2019 and December 31, 2018 consist of :

 

		Useful Lives Years*				June 30, 2019				December 31, 2018
Land			Indefinite			$	1,264			$	1,264
Land improvements			15-39				3,051				3,169
Building and building improvements			15-39				56,451				55,269
Machinery, equipment and tooling			3-10				191,299				182,045
Vehicles			5				3,636				3,613
Office furniture and fixtures			3-7				14,530				14,253
Construction in progress			N/A				10,817				6,786
Total property, plant and equipment, gross							281,048				266,399
Less accumulated depreciation							153,327				142,516
Total property, plant and equipment, net						$	127,721			$	123,883

Goodwill

Changes in goodwill between December 31, 2018 and June 30, 2019 consist of :

 

Balance as of December 31, 2018		$	69,437
DMP purchase accounting adjustments, net			625
DMP net working capital true-up			2,368
Impairment			—
Balance as of June 30, 2019		$	72,430

 

9

Intangible Assets

The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of June 30, 2019 and December 31, 2018:

 

		Useful Lives Years				June 30, 2019				December 31, 2018
Amortizable intangible assets:
Customer relationships and contracts			9-12			$	78,340			$	78,340
Trade name			10				14,780				14,780
Non-compete agreements			5				8,800				8,800
Patents			19				24				24
Accumulated amortization							(28,229	)			(22,876	)
Total amortizable intangible assets, net							73,715				79,068
Non-amortizable brand name							3,811				3,811
Total intangible assets, net						$	77,526			$	82,879

Non-amortizable brand name is tested annually for impairment.

Changes in intangible assets between December 31, 2018 and June 30, 2019 consist of:

 

Balance as of December 31, 2018		$	82,879
Amortization expense			(5,353	)
Balance as of June 30, 2019		$	77,526

Amortization expense was $2,677 and $939 for the three months ended June 30, 2019 and 2018, respectively, and $5,353 and $1,878 for the six months ended June 30, 2019 and 2018, respectively.

Note 5. Bank revolving credit notes

The Company maintains a credit agreement providing for $90 million borrowing capacity through December 14, 2023. Interest is payable monthly at the adjusted London Interbank Offered Rate (LIBOR) plus an applicable margin based on the current funded indebtedness to adjusted EBITDA ratio. The interest rate was 4.75% and 4.69% as of June 30, 2019 and December 31, 2018, respectively. Additionally, the agreement has a fee on the average daily unused portion of the aggregate unused revolving commitments. This fee was 0.20% as of June 30, 2019 and December 31, 2018.

The Company was in compliance with all financial covenants of it’s credit agreements as of June 30, 2019 and December 31, 2018. The amount borrowed on the revolving credit notes was $41,485 and $59,629 as of June 30, 2019 and December 31, 2018, respectively.

Note 6. Other long-term debt

The Company has maintained a facility financing package with borrowings of $95,000 and a maturity date of December 14, 2023. The strategic capital loan with borrowings of $25,000 had a maturity date of June 14, 2024. Government loan balances include forgiveness clauses based upon capital spending and headcount increases at the noted manufacturing locations.

As previously disclosed, the Company completed its IPO in May 2019. Proceeds from the IPO were used to pay down debt including $43,000 pay down of the Term A loan and $25,000 pay-off of the strategic capital loan.

In June 2019, the Company received written notification that the $521 balance remaining of the Smyth County, Virginia loan was forgiven. Due to the nature of the requirements to obtain forgiveness, the gain associated with the forgiveness is reflected in cost of sales on the Condensed Consolidated Statement of Comprehensive Income (Loss).

Other long-term debt as of June 30, 2019 and December 31, 2018 consisted of the following:

 

		June 30, 2019								December 31, 2018
		Interest Rate				Balance				Interest Rate				Balance
Term A loans – 2018 financing package			4.64	%		$	22,600				4.69	%		$	69,000
Real estate term loan – 2018 financing package			4.64	%			25,350				4.69	%			26,000
Strategic capital loan			0.00	%			—				11.78	%			25,000
Wisconsin Economic Development Corporate (Neillsville)			2.00	%			192				2.00	%			406
Smyth County, Virginia			0.00	%			—				0.00	%			700
Total principal outstanding							48,142								121,106
Less: Unamortized debt issuance costs							(582	)							(825	)
Less: Current maturities							(8,392	)							(8,606	)
Long-term debt, less current maturities, net						$	39,168							$	111,675

 

10

Scheduled principal payment of debt subsequent to June 30, 2019 are as follows:

 

Year ending December 31,
2019 (remainder)		$	4,292
2020			8,200
2021			8,200
2022			6,650
Thereafter			20,800
Total		$	48,142

The Company was in compliance with all financial covenants of its long-term debt agreements as of June 30, 2019.

Note 7. Capital lease obligation

Capital leases consist of equipment with a capitalized cost of $2,051 and accumulated depreciation of $244 at June 30, 2019. Depreciation of $73 and $146 was recognized on the capital lease assets during the three and six months ended June 30, 2019, respectively. There were no capital lease obligations during the three- or six-month periods ended June 30, 2018. Future minimum lease payments required under the lease are as follows:

 

Year ending December 31,
2019 (remainder)		$	170
2020			335
2021			335
2022			335
2023			335
Thereafter			559
Total			2,069
Less payment amount allocated to interest			238
Present value of capital lease obligation		$	1,831
Current portion of capital lease obligation			269
Long-term portion of capital lease obligation			1,562
Total capital lease obligation		$	1,831

Note 8. Employee stock ownership plan

Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (collectively, ESOP), the Company makes annual contributions to the trust for the benefit of eligible employees in the form of cash or shares of the Company. The annual contribution is discretionary except that it must be at least 3% of the compensation for all safe harbor participants for the plan year. For the three months ended June 30, 2019 and 2018, the Company’s ESOP expense amounted to $1,500 and $1,000, respectively. For the six months ended June 30, 2019 and 2018, the Company’s ESOP expense amounted to $3,000 and $2,000, respectively.

At various times following death, disability, retirement or termination of employment, an ESOP participant is entitled to receive their ESOP account balance in accordance with various distribution methods as permitted under the policies adopted by the ESOP. Historically, all distributions have been paid to participants in cash, but that will not be the case following the Company’s May 2019 IPO.

 

11

During the three- and six-month periods ended June 30, 2019 the ESOP did not acquire any shares from withdrawing participants.

As of June 30, 2019, and December 31, 2018, the ESOP shares consisted of 13,443,484 in allocated shares after giving effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the Company’s May 2019 IPO. Prior to its IPO, the Company was obligated to repurchase shares in the trust that were not distributed to ESOP participants as determined by the ESOP trustees, and thus the shares were mandatorily redeemable. Based on the mandatory redemption of these shares, they represented temporary equity on the consolidated balance sheets for periods prior to the IPO. The total estimated fair value of all allocated shares subject to this repurchase obligation approximated $133,806 as of December 31, 2018. The estimated fair value as of December 31, 2018 was based on the most recent available appraisals of the common stock which was approximately $9.95 per share after giving effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the Company’s May 2019 IPO. Subsequent to the IPO, ESOP shares are sold in the public market.

Note 9. 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 benefit was estimated at $3,513 and $2,744 and the effective tax rate (ETR) from continuing operations was 16.21% and 14.13% for the three and six months ended June 30, 2019. The following items caused the quarterly ETR to be significantly different from our expected annual ETR at statutory tax rates:

 

•

For the three and six months ending June 30, 2019, we recorded a discrete tax expense of approximately $0 and $84, respectively, as a result of a greater state tax expense than was originally estimated in our tax provision for our year ended December 31, 2018. This decreased the effective tax rate by 0.00% and 0.43% for the three and six months ending June 30, 2019, respectively.

 

•

For the three and six months ending June 30, 2019, we recorded a discrete tax benefit of approximately $784 as a result of a establishing the opening deferred tax asset upon MEC’s conversion from S to C on May 9, 2019. This increased the effective tax rate by 3.62% and 4.04% for the three and six months ending June 30, 2019, respectively.

 

•

For the three and six months ending June 30, 2019, we recorded a discrete tax expense of approximately $1,800 as a result of estimated non-deductible executive compensation in excess of the $1,000 per individual limitation under Section 162(m) of the Internal Revenue Code. This decreased the effective tax rate by 8.44% and 9.43% for the three and six months ending June 30, 2019, respectively.

The acquired DMP entities are subject to taxation in the United States and five state jurisdictions. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in these jurisdictions. Accounting Standards Codification (ASC) Topic 740, Income Taxes, states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of technical merits.

Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of June 30, 2019.

Prior to the Company’s IPO, the Company’s legacy business was an S Corporation, where substantially all taxes were passed to the shareholders and the Company did not pay federal or state corporate income taxes on its taxable income. In connection with the IPO, the Company’s legacy business converted to a C Corporation. As a result, the consolidated business will be subject to paying federal and state corporate income taxes on its taxable income from May 9, 2019 forward. Upon the Company’s conversion from a non-taxable entity to a taxable entity, we established an opening deferred tax asset of $784 as a result of evaluating estimated temporary differences that existed on this date.

The Company’s policy for recording interest and penalties associated with potential income tax audits is to record such expense as a component of income tax expense. There were no amounts for penalties or interest recorded as of June 30, 2019. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its positions.

Note 10. Contingencies

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

Note 11. Deferred compensation

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

 

12

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

Prior to the IPO, all deferrals were deemed to have been invested in the Company stock at a price equal to the share value on the date of deferral and the value of the account increased or decreased with the change in the value of the stock. Individual accounts are maintained for each participant. Each participant’s account is credited with the participant’s deferred compensation, the Company’s contributions, and investment income or loss, reduced for charges, if any.

For the period subsequent to the IPO, deferrals will be invested in an investment vehicle based on the options made available to the participant.

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

The deferred compensation plan is non-funded, and all future contributions are unsecured in that the employees have the status of a general unsecured creditor of the Company and the agreements constitute a promise by the Company to make benefit payments in the future. During the three months ended June 30, 2019 and 2018, eligible employees elected to defer compensation of $11 and $18, respectively. During the six months ended June 30, 2019 and 2018, eligible employees elected to defer compensation of $1,054 and $821, respectively. As of June 30, 2019, and December 31, 2018, the total amount accrued for all benefit years under this plan was $24,602 and $13,351, respectively, which is included within the deferred compensation and long-term incentive on the Condensed Consolidated Balance Sheets. These amounts include the initial deferral of compensation as adjusted for (a) subsequent changes in the share value of the Company stock to the IPO or (b) following the IPO in the investment options chosen by the participants. Total expense for the deferred compensation plan for the three months ended June 30, 2019 and 2018 amounted to $10,084 and $147, respectively. Total expense for the deferred compensation plan for the six months ended June 30, 2019 and 2018 amounted to $10,264 and $294. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Note 12. Long-Term incentive plan

Historically, the Company’s long-term incentive plan (LTIP) was available for any employee who had been designated to be eligible to participate by the Compensation Committee of the Board of Directors. Annually, the LTIP provided for long-term cash incentive awards to eligible participants based on the Company’s performance over a three-year performance period.

The LTIP was non-funded and each participant in the plan is considered a general unsecured creditor of the Company and each agreement constitutes a promise by the Company to make benefit payments if the future conditions are met, or if discretion is exercised in favor of a benefit payment.

The qualifying conditions for each award granted prior to December 31, 2015 under the plan included a minimum increase in the aggregate fair value of the Company of 24% during the three-year performance period and the eligible participants must be employed by the Company on the date of the cash payment or have retired after attaining age 65, died or become disabled during the period from the beginning of the performance period to the date of payment. As of January 1, 2016, all new awards granted under the plan included a minimum increase in the aggregate fair value of the Company of 12% during the three-year performance period. If the qualifying conditions were not attained, discretionary payments were made, up to a maximum amount specified in each award agreement. Discretionary payments were determined by the Compensation Committee of the Board of Directors (for payment to the Chief Executive Officer of the Company) and by the Chief Executive Officer (for payments to other participants in the plan).

If a participant was not employed throughout the performance period due to retirement, death or disability, their maximum benefit will be prorated based on the number of days employed by the Company during the performance periods.

The LTIP was terminated in conjunction with the IPO, resulting in a total payout of $10,483. The total amount accrued for all grant years under this plan was $1,846 December 31, 2018. This amount is included within profit sharing and bonus on the Condensed Consolidated Balance Sheets. Total expense for the long-term incentive plan for the three months ended June 30, 2019 and on 2018 amounted to $9,921 and $111, respectively. Total expense for the long-term incentive plan for the six months ended June 30, 2019 and 2018 amounted to $10,000 and $222, respectively. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

 

13

Note 13. 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. The Company purchases reinsurance to limit the annual risk associated with their multiple medical plans. Under one plan, the Company purchases reinsurance to limit the annual risk per participant to $225 with no aggregate stop loss. Under another plan, the Company purchases reinsurance to limit the annual risk per participant to $200 and to limit the annual aggregate risk related to this contract which was approximately $5,163 and $4,467 for the three months ended June 30, 2019 and 2018, respectively and $10,166 and $8,907 for the six months ended June 30, 2019 and 2018, respectively. An estimated accrued liability of approximately $1,409 and $1,730 was recorded as of June 30, 2019 and December 31, 2018, respectively, for estimated unpaid claims and is included within other current liabilities on the Condensed Consolidated Balance Sheets.

Note 14. Segments

The Company applies the provisions of ASC Topic 280, Segment Reporting. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker (CODM) 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 asset located in foreign countries. In accordance with the enterprise-wide disclosure requirements of ASC 280, the Company’s net sales from external customers by main product lines are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Outdoor sports		$	2,104			$	1,906			$	3,944			$	3,617
Fabrication			91,871				37,622				182,925				73,233
Performance structures			19,356				21,608				39,108				44,379
Tube			19,839				21,096				40,652				40,615
Tank			13,040				10,336				24,537				19,003
Total			146,210				92,568				291,166				180,847
Intercompany sales elimination			(1,080	)			(1,033	)			(2,304	)			(2,090	)
Total, net sales		$	145,130			$	91,535			$	288,862			$	178,757

Note 15. 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.

 

•

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 June 30, 2019				Fair Value Measurements at Report Date Using
						(Level 1)				(Level 2)				(Level 3)
Deferred compensation		$	24,602			$	—			$	—			$	24,602
Contingent consideration payable			9,598				—				—				9,598
Total		$	34,200			$	—			$	—			$	34,200

 

14

		Balance at December 31, 2018				Fair Value Measurements at Report Date Using
						(Level 1)				(Level 2)				(Level 3)
Deferred compensation		$	13,351			$	—			$	—			$	13,351
Contingent consideration payable			6,054				—				—				6,054
Total		$	19,405			$	—			$	—			$	19,405

Changes in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) between December 31, 2018 and June 30, 2019 consist of:

 

Balance as of December 31, 2018		$	19,405
Contingent consideration fair value adjustment			3,544
Deferred compensation contributions			1,053
Deferred compensation fair value adjustment			10,273
Payments			(75	)
Balance as of June 30, 2019		$	34,200

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

Accounts receivable, accounts payable, long-term debt and accrued liabilities are recorded in the financial statements at cost and approximate fair value.

Deferred compensation liabilities are recorded at amounts due to participants at the time of deferral. Prior to the IPO, deferrals were deemed to have been invested in the Company stock at a price equal to the share value on the deferral date. Considered Level 3 on the fair value hierarchy, the Company computed the fair value of its stock through the utilization of an independent third-party valuation specialist. For the period subsequent to the IPO, deferrals will be invested in an investment vehicle based on the options made available to the participant. The change in fair value is recorded in deferred compensation and long-term incentive liabilities on the Condensed Consolidated Balance Sheets and deferred compensation expense on the Condensed Consolidated Statements of Comprehensive Income (Loss).

On December 14, 2018, the Company acquired DMP for $117,100, net of cash received plus contingent consideration of up to $10,000. The Company will pay DMP’s previous shareholders an additional $7,500 if DMP generates $19,748 of EBITDA over the twelve-month period ended September 30, 2019. In addition, the Company will pay one dollar for each additional dollar of EBITDA in excess of $19,748 generated over this period; however, in no event shall the total payment exceed $10,000. The Company estimated and recorded the fair value of the contingent consideration payable of $6,075 as of the acquisition date. The Company remeasures this liability through the conclusion of the earnout period, September 30, 2019, with the change in value resulting in a gain or loss reflected in other selling, general, and administrative expenses on the Condensed Consolidated Statement of Comprehensive Income (Loss). Contingent consideration payable was revalued to $9,598, $6,924 and $6,054 as of June 30, 2019, March 31, 2019 and December 31, 2018, respectively. The change between these balances resulted in a loss/(gain) of $2,674, $869, and ($21) for the three months ended June 30, 2019, March 31, 2019, and the year ended December 31, 2018, respectively.

The Company does not have any financial assets or liabilities at the Level 2 fair value hierarchy.

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

Note 16 – Temporary Equity

Prior to our IPO in May 2019, our common stock was considered redeemable under GAAP because of certain repurchase obligations related to the Mayville Engineering Company, Inc. ESOP. As a result, all common shares were recorded as temporary equity (redeemable common shares) on the consolidated balance sheets at their redemption value as of the respective balance sheet dates. Retained earnings on the consolidated balance sheet was adjusted for the changes during the period in the current redemption value of redeemable common shares.

 

15

All contractual redemption features were removed at the time of the IPO. As a consequence, all outstanding shares of common stock ceased to be considered temporary equity and were reclassified to Shareholders’ Equity, including the associated balances of retained earnings. As the common shares have no par value, the amounts recorded in temporary equity for the share redemption value were recorded to additional paid-in capital within Shareholders’ Equity upon the transfer.

The following table shows all changes to temporary equity during the six months ended June 30, 2019, excluding net income for the period of April 1, 2019 through the date of the IPO.

 

		Temporary Equity
		Redeemable Common Shares				Treasury Shares				Retained Earnings
Balance as of January 1, 2018		$	125,042			$	(49,826	)		$	17,671
Net Income											4,430
Balance as of March 31, 2018			125,042				(49,826	)			22,101
Net Income											8,091
Purchase of treasury shares							(753	)
Balance as of June 30, 2018		$	125,042			$	(50,579	)		$	30,192

 

		Temporary Equity
		Redeemable Common Shares				Treasury Shares				Retained Earnings
Balance as of January 1, 2019		$	133,806			$	(57,659	)		$	26,842
Net Income			—				—				2,459
Balance as of March 31, 2019			133,806				(57,659	)			29,301
Net income pre IPO											397
Transfer from temporary equity to common equity			(133,806	)			57,659				(29,698	)
Balance as of June 30, 2019		$	—			$	—			$	—

Note 17 – Common Equity

On May 13, 2019 the Company issued a stock dividend specific to pre-IPO shares, of approximately 1,334.34-for-1. The share dividend was accounted for as a 1,334.34-for-1 stock split and is retroactively reflected in these consolidated financial statements. All share redemption provisions mentioned in Note 16 , Temporary Equity , were removed effective with the IPO. Therefore, common shares were reclassified from temporary equity to permanent equity as of May 2019.

As disclosed in Note 2, IPO , our IPO of common stock was effective in May 2019. In connection with the offering, we sold a total of 6,402,209 shares of additional shares of common stock.

On June 28, 2019, the Company cancelled 24,180,421 shares of common stock held in the Company’s treasury and returned those shares to the status of authorized but unissued shares of common stock.

 

16

Note 18 – Concentration of major customers

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

 

		Net Sales																Accounts Receivable
		Three Months Ended June 30,								Six Months Ended June 30,								As of				As of
		2019				2018				2019				2018				June 30, 2019				December 31, 2018
Customer
A			15.5	%			24.1	%			16.2	%			23.2	%			<10	%			<10	%
B			14.7	%			19.0	%			14.4	%			19.7	%			<10	%			<10	%
C			<10	%			19.3	%			<10	%			18.3	%			<10	%			<10	%
D			<10	%			<10	%			<10	%			<10	%			<10	%			12.6	%
E			12.7	%			<10	%			12.2	%			<10	%			<10	%			<10	%
F			10.0	%			<10	%			<10	%			<10	%			15.7	%			<10	%
G			<10	%			<10	%			<10	%			<10	%			10.7	%			<10	%

Note 19 – Stock based compensation

In May 2019, we granted stock awards, including stock options and restricted stock units, to key employees and outside directors. These awards vest on the annual anniversary dates based on the passage of time. The related compensation expense for each award is recognized on a straight line basis over the appropriate vesting period. The fair value of each stock-based compensation awards is established on the date of grant. For grants of restricted stock units, the fair value is established based on the market price on the date of the grant.

For grants of options, we use the Black-Scholes option pricing model to estimate the fair value of share-based payment awards. The determination of the fair value of share-based awards is affected by stock price and a number of assumptions. Our assumptions included expected volatility of 21.3%, expected risk free rate of 2.42%, exercise price of $17 per share, and a ten year period to exercise.

There were 331,436 restricted units granted in May 2019 at a fair value of $17/unit. The total fair value of these award grants was $3,600 and $2,034, which vest over a 1- and 2-year period, respectively.

There were 287,895 options granted in May 2019 at a fair value of $6.07/option. The total fair value of these award grants was $1,748, which vest over a 2-year period.

The company recognized $797 of stock-based compensation expense for the three- and six months ended June 30, 2019.

 

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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 II, Item 1A of this filing and “Cautionary Statement Regarding Forward-Looking Statements” above. This discussion should be read in conjunction with our audited consolidated financial statements included in the Company’s Prospectus. 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.

Overview

MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy-and medium-duty commercial vehicles, construction, powersports, agriculture, military and other end markets. We have developed long-standing relationships with our blue-chip customers based upon a high level of experience, trust and confidence.

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

On December 14, 2018, we acquired DMP, a leading U.S. based manufacturer of component parts for the heavy-and medium-duty commercial vehicles, construction, and agriculture and military markets. We paid $117.1 million, net of cash acquired, and assumed certain liabilities. There is also an additional one-time earn-out of up to $10 million that could be paid in the fourth quarter of 2019 if DMP meets certain financial performance metrics (see Note 3 – Acquisition, in the Notes to the Condensed Consolidated Financial Statements.

In May 2019, we completed our initial public offering (IPO). In conjunction with the IPO, the Company’s legacy business converted from an S corporation to a C corporation. As a result, the consolidated business is subject to paying federal and state corporate income taxes on its taxable income from May 12, 2019 forward.

How We Assess Performance

Net Sales. Net sales reflect sales of our components and products net of allowances for returns and discounts. Several factors affect our net sales in any given period, including general economic conditions, weather, timing of acquisitions and the production schedules of our customers. Net sales are recognized at the time of shipment to the customer.

Manufacturing Margins. Manufacturing margins represents net sales less cost of sales. Cost of sales consists of all direct and indirect costs used in the manufacturing process, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other directly related overhead costs. Our cost of sales is directly affected by the fluctuations in commodity prices, primarily sheet steel and aluminum, but these changes are largely mitigated by contractual agreements with our customers that allow us to pass through these price changes based upon certain market indexes.

Depreciation and Amortization. We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. Amortization expense is the periodic expense related to leasehold improvements and intangible assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.

Other Selling, General, and Administrative Expenses. Other selling, general and administrative expenses consist primarily of salaries and personnel costs for our sales and marketing, finance, human resources, information systems, administration and other certain managerial employees and certain corporate level administrative expenses such as incentive compensation, audit, accounting, legal and other consulting and professional services, travel, and insurance.

 

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Other Key Performance Indicators

EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin

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

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

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

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2019				2018				2019				2018
Net income (loss)		$	(15,284	)		$	8,091			$	(12,825	)		$	12,520
Interest expense			1,991				853				4,824				1,760
Provision (benefit) for income taxes			(3,513	)			—				(2,744	)			29
Depreciation and amortization			8,704				4,911				16,355				9,902
EBITDA			(8,102	)			13,855				5,610				24,211
Loss on the extinguishment of debt			154				588				154				588
Costs recognized on step-up of acquired inventory			—				—				395				—
Contingent consideration fair value adjustment			2,674				—				3,544				—
Deferred compensation expense specific to IPO			10,159				—				10,159				—
Long term incentive plan expense specific to IPO			9,921				—				9,921				—
Other IPO and DMP acquisition related expenses			2,997				—				4,809				—
Adjusted EBITDA		$	17,803			$	14,443			$	34,592			$	24,799
Net sales		$	145,130			$	91,535			$	288,862			$	178,757
EBITDA Margin			-5.6	%			15.1	%			1.9	%			13.5	%
Adjusted EBITDA Margin			12.3	%			15.8	%			12.0	%			13.9	%

 

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Consolidated Results of Operations

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

 

		Three Months Ended June 30,
		2019								2018								Increase (Decrease)
(in thousands)		Amount				% of Net Sales				Amount				% of Net Sales				Amount Change				% Change
Net sales		$	145,130				100.0	%		$	91,535				100.0	%		$	53,595				58.6	%
Cost of sales			124,595				85.9	%			75,986				83.0	%			48,609				64.0	%
Manufacturing margins			20,535				14.1	%			15,549				17.0	%			4,985				32.1	%
Amortization of intangibles			2,677				1.8	%			939				1.0	%			1,738				185.1	%
Profit sharing, bonuses and deferred compensation			22,830				15.7	%			1,365				1.5	%			21,465				1,572.5	%
Employee stock ownership plan expense			1,500				1.0	%			1,000				1.1	%			500				50.0	%
Other selling, general and administrative expenses			10,180				7.0	%			2,713				3.0	%			7,466				275.2	%
Income (loss) from operations			(16,652	)			-11.5	%			9,532				10.4	%			(26,184	)			-274.7	%
Interest expense			(1,991	)			1.4	%			(853	)			1.6	%			1,138				133.4	%
Loss on the extinguishment of debt			(154	)			0.1	%			(588	)			0.0	%			(434	)			-73.8	%
Provision (benefit) for income taxes			(3,513	)			-3.4	%			—				0.0	%			(3,513	)			N/A
Net income (loss) and comprehensive income (loss)		$	(15,284	)			-9.5	%		$	8,091				8.8	%			(23,375	)			-288.9	%
EBITDA		$	(8,102	)			-5.6	%		$	13,855				15.1	%			(21,957	)			-158.5	%
Adjusted EBITDA		$	17,803				12.3	%		$	14,443				15.8	%		$	3,360				23.3	%

Net Sales. Net sales were $145.1 million for the three months ended June 30, 2019 as compared to $91.5 million for the three months ended June 30, 2018. The increase of $53.6 million, or 58.6%, was due to our recent acquisition of DMP. Net sales for our legacy business were comparable to the same quarter last year.

Manufacturing Margins. Manufacturing margins were $20.5 million for the three months ended June 30, 2019 as compared to $15.6 million for the three months ended June 30, 2018, an increase of $5.0 million, or 32.1%, driven by our recent acquisition of DMP. Manufacturing margin percentage was 14.1% for the three months ended June 30, 2019 as compared to 17.0% for the three months ended June 20, 2018. The decrease is attributed to the dilution created by the acquisition of DMP as well as some shifts in our customer mix within the legacy business.

Amortization of Intangibles Expense. Amortization of intangibles expense was $2.7 million for the three months ended June 30, 2019 as compared to $0.9 million for the three months ended June 30, 2018. The increase of $1.7 million, or 185.1%, was solely due to the amortization expense associated with the identifiable intangible assets from the DMP acquisition. Please see Note 3 – Acquisition, of the Condensed Consolidated Financial Statements for more information related to these identifiable intangible assets.

Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses, and deferred compensation expenses were $22.8 million for the three months ended June 30, 2019 compared to $1.4 million for the three months ended June 30, 2018. The increase of $21.5 million was primarily driven by a one-time $10.2 million increase in deferred compensation plan expense and a one-time $9.9 million increase in long term incentive plan expense, both of which relate to the IPO. The remaining increase is attributable to the expansion of other bonus and profit-sharing programs to additional employees.

Employee Stock Ownership Plan Expense. Employee stock ownership plan expense was $1.5 million for the three months ended June 30, 2019 as compared to $1.0 million for the three months ended June 30, 2018. The increase of $0.5 million, or 50.0%, was primarily due to the addition of plan participants as a result of the DMP acquisition.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $10.2 million for the three months ended June 30, 2019 compared to $2.7 million for the three months ended June 30, 2018. The increase of $7.5 million, or 275.2 %, was driven by $3.0 million of one-time IPO expenses mostly related to travel and professional fees, along with $2.7 million for the DMP contingent consideration fair value adjustment. The DMP acquired entities accounted for another $1.7 million of the increase. The remainder is mostly attributable to personnel additions needed to enhance the Company’s structure of being a publicly traded company and to support future growth.

Interest Expense. Interest expense was $2.0 million for the three months ended June 30, 2019 as compared to $0.9 million for the three months ended June 30, 2018. The increase of $1.1 million, or 133.4%, is due to additional debt used to fund the DMP acquisition slightly offset by the partial paydown with use of the IPO proceeds.

 

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Provision (Benefit) for Income Taxes. Income tax benefits were $3.5 million for the three months ended June 30, 2019 as compared to no provision or benefit for the three months ended June 30, 2018. The current period benefit is the result of the Company’s legacy business converting to a C Corporation on May 12, 2019 and the one-time IPO expenses incurred during the quarter which are deductible, causing the benefit. Prior to the Company’s IPO, the Company’s legacy business was an S Corporation, where substantially all taxes were passed to the shareholders and the Company did not pay federal or state corporate income taxes on its taxable income. The DMP entities have been taxable under the provisions of the Internal Revenue Code and certain state statutes since being acquired. The consolidated business is subject to paying federal and state corporate income taxes on its taxable income from May 12, 2019 forward.

Net Income (Loss) and Comprehensive Income (Loss). Net loss and comprehensive loss was $15.3 million for the three months ended June 30, 2019 as compared to net income and comprehensive income of $8.1 million for the three months ended June 30, 2018. The decrease of $23.4 million was due to the previously discussed expense increases, most notably the increase in LTIP and deferred compensation plan expenses related to the IPO, other one-time IPO expenses, and expenses for the DMP contingent consideration fair value adjustment, slightly offset by net income generated by DMP.

EBITDA and EBITDA Margin. EBITDA and EBITDA Margin percent were ($8.1) million and -5.6%, respectively, for the three months ended June 30, 2019, compared to $13.9 million and 15.1%, respectively, for the three months ended June 30, 2018. The $22.0 million decline in EBITDA was due to the previously mentioned $10.2 million increase in LTIP expense and $9.9 million increase in deferred compensation plan expenses related to the IPO, $3.0 million of one-time IPO expenses, and a $2.7 expense for the DMP contingent consideration fair value adjustment. These one-time expenses and charges were slightly offset by the addition of DMP.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin percent were $17.8 million and 12.3%, respectively, for the three months ended June 30, 2019, compared to $14.4 million and 15.8%, respectively, for the three months ended June 30, 2018. The increase in Adjusted EBITDA of $3.3 million was primarily driven by our recent acquisition of DMP.

 

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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

		Six Months Ended June 30,
		2019								2018								Increase (Decrease)
(in thousands)		Amount				% of Net Sales				Amount				% of Net Sales				Amount Change				% Change
Net sales		$	288,862				100.0	%			178,757				100.0	%			110,105				61.6	%
Cost of sales			248,748				86.1	%			151,396				84.7	%			97,352				64.3	%
Manufacturing margins			40,114				13.9	%			27,361				15.3	%			12,753				46.6	%
Amortization of intangibles			5,353				1.9	%			1,878				1.1	%			3,475				185.0	%
Profit sharing, bonuses and deferred compensation			24,580				8.5	%			3,005				1.7	%			21,575				718.0	%
Employee stock ownership plan expense			3,000				1.0	%			2,000				1.1	%			1,000				50.0	%
Other selling, general and administrative expenses			17,772				6.2	%			5,581				3.1	%			12,191				218.4	%
Income (loss) from operations			(10,591	)			-3.7	%			14,897				8.3	%			(25,488	)			-171.1	%
Interest expense			(4,824	)			1.7	%			(1,760	)			1.0	%			3,064				174.1	%
Loss on extinguishment of debt			(154	)			0.1	%			(588	)			0.3	%			(434	)			-73.8	%
Provision (benefit) for income taxes			(2,744	)			-1.5	%			29				0.0	%			(2,723	)			-9,562.1	%
Net income (loss) and comprehensive income		$	(12,825	)			-3.9	%		$	12,520				7.0	%			(25,345	)			-202.4	%
EBITDA		$	5,610				1.9	%		$	24,212				13.5	%			(18,602	)			-76.8	%
Adjusted EBITDA		$	34,592				12.0	%		$	24,799				13.9	%		$	9,793				39.5	%

Net Sales. Net sales were $288.9 million for the six months ended June 30, 2019 as compared to $178.8 million for the six months ended June 30, 2018 for an increase of $110.1 million, or 61.6%. DMP contributed $103.7 million of the change with the legacy business contributing the remainder.

Manufacturing Margins. Manufacturing margins were $40.1 million for the six months ended June 30, 2019 as compared to $27.4 million for the six months ended June 30, 2018, an increase of $12.8 million, or 46.6%, driven by our recent acquisition of DMP. Manufacturing margin percentage was 13.9% for the six months ended June 30, 2019 as compared to 15.3% for the six months ended June 20, 2018. The decrease is attributed to the dilution created by the acquisition of DMP as well as some shifts in our customer mix within the legacy business.

Amortization of Intangibles Expense. Amortization of intangibles expense was $5.4 million for the six months ended June 30, 2019 as compared to $1.9 million for the six months ended June 30, 2018. The increase of $3.5 million, or 185.1%, was solely due to the amortization expense associated with the identifiable intangible assets from the DMP acquisition. Please see Note 3 – Acquisition of the Condensed Consolidated Financial Statements for more information related to these identifiable intangible assets.

Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses, and deferred compensation expenses were $24.6 million for the six months ended June 30, 2019 compared to $3.0 million for the six months ended June 30, 2018. The increase of $21.6 million was primarily driven by a one-time $10.2 million increase in deferred compensation plan expense and a one-time $9.9 million increase in long term incentive plan expense, both of which relate to the IPO. The remaining increase is attributable to the expansion of other bonus and profit-sharing programs to additional employees.

Employee Stock Ownership Plan Expense. Employee stock ownership plan expense was $3.0 million for the six months ended June 30, 2019 as compared to $2.0 million for the six months ended June 30, 2018. The increase of $1.0 million, or 50.0%, was primarily due to the addition of plan participants as a result of the DMP acquisition.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $17.8 million for the six months ended June 30, 2019 compared to $5.6 million for the six months ended June 30, 2018. The increase of $12.2 million, or 218.5 %, was driven by $4.8 million of one-time IPO and DMP acquisition expenses, along with $3.5 million for the DMP contingent consideration fair value adjustment. The DMP acquired entities accounted for another $3.2 million of the increase. The remainder is mostly attributable to personnel additions needed to enhance the Company’s structure of being a publicly traded company and to support future growth.

Interest Expense. Interest expense was $4.8 million for the six months ended June 30, 2019 as compared to $1.8 million for the six months ended June 30, 2018. The increase of $3.0 million, or 174.1%, is due to additional debt used to fund the DMP acquisition slightly offset by the partial paydown of our debt from the IPO proceeds.

 

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Provision (Benefit) for Income Taxes. Income tax benefits were $2.7 million for the six months ended June 30, 2019 as compared to $29 thousand provision for the six months ended June 30, 2018. The current period benefit is the result of the Company’s legacy business converting to a C Corporation on May 12, 2019 and the one-time IPO expenses, which are deductible, causing the benefit. Prior to the Company’s IPO, the Company’s legacy business was an S Corporation, where substantially all taxes were passed to the shareholders and the Company did not pay federal or state corporate income taxes on its taxable income. The DMP entities have been taxable under the provisions of the Internal Revenue Code and certain state statutes since being acquired. The consolidated business is subject to paying federal and state corporate income taxes on its taxable income from May 12, 2019 forward.

Net Income (Loss) and Comprehensive Income (Loss). Net loss and comprehensive loss was $12.8 million for the six months ended June 30, 2019 as compared to net income and comprehensive income of $12.5 million for the six months ended June 30, 2018. The decrease of $25.3 million was due to the previously discussed expense increases, most notably the one-time LTIP and deferred compensation plan expenses related to the IPO, other one-time IPO and DMP acquisition related expenses, and expenses for the DMP contingent consideration fair value adjustment, slightly offset by net income generated by DMP.

EBITDA and EBITDA Margin. EBITDA and EBITDA Margin percent were $5.6 million and 1.9%, respectively, for the six months ended June 30, 2019, compared to $24.2 million and 13.5%, respectively, for the six months ended June 30, 2018. The $18.6 million decline in EBITDA was due to the previously mentioned one-time $10.2 million increase in LTIP expense and one-time $9.9 million increase in deferred compensation plan expenses related to the IPO, $4.8 million of one-time IPO expenses, and a $3.5 expense for the DMP contingent consideration fair value adjustment. These one-time expenses and charges were slightly offset by the addition of DMP.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin percent were $34.6 million and 12.0%, respectively, for the six months ended June 30, 2019, compared to $24.8 million and 13.9%, respectively, for the six months ended June 30, 2018. The increase in Adjusted EBITDA of $9.8 million was primarily driven by our recent acquisition of DMP.

 

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Liquidity and Capital Resources

Cash Flows Analysis

 

		Six Months Ended June 30,								Increase (Decrease)
(in thousands)		2019				2018				$Change				% Change
Net cash provided by operating activities		$	6,459			$	16,769				(10,310	)			-61.5	%
Net cash used in investing activities			(18,981	)			(5,990	)			(12,991	)			216.9	%
Net cash provided by (used in) financing activities			9,434				(10,772	)			20,206				-187.6	%
Net change in cash		$	(3,088	)		$	7			$	(3,095	)			-44,214	%

Operating Activities. Cash provided by operating activities was $6.5 million for the six months ended June 30, 2019, as compared to $16.8 million for the six months ended June 30, 2018. The $10.3 million, or 61.5% decline in operating cash flows was mostly due to changes in net working capital items, most notably the $8.8 million increase in accounts receivable changes primarily due to sales growth along with a $6.7 million increase in income taxes receivable, slightly offset by a $5.2 million increase in inventories changes due to timing of purchases. Changes to pricing, payment terms and credit terms did not have a significant impact on changes to working capital items, or any other element of the operating cash flow activities, for the periods presented.

Investing Activities. Cash used in investing activities was $19.0 million for the six months ended June 30, 2019, as compared to $6.0 million for the six months ended June 30, 2018. The $13.0 million, or 216.9% increase in cash used in investing activities was primarily driven by the continued investment in automation and new technology along with a $2.4 million payment related to the DMP net working capital true-up.

Financing Activities. Cash provided by financing activities was $9.4 million for the six months ended June 30, 2019, as compared to cash used in financing activities of $10.8 million for the six months ended June 30, 2018. The $20.2 million change was primarily due to the IPO proceeds received in May of 2019, net of debt repayments.

Credit Agreement

On December 14, 2018, we entered into a credit agreement (the Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The Credit Agreement provides for (i) a $90.0 million revolving credit facility (the Revolving Loan), with a letter of credit sub-facility in an aggregate amount not to exceed $5.0 million, and a swingline facility in an aggregate amount of $15.0 million, and (ii) a $69.0 million term loan facility (Term Loan A), and a $26.0 million real estate term loan facility (the Real Estate Term Loan and, together with Term Loan A, the Term Loans). We are required to repay the aggregate outstanding principal amount of the Term Loan A in consecutive quarterly installments equal to $1,725 thousand on the last business day of each of March, June, September and December commencing March 31, 2019. We are required to repay the aggregate outstanding principal amount of the Real Estate Term Loan in consecutive quarterly installments equal to $325 thousand on the last business day of each of March, June, September and December commencing March 31, 2019. All amounts borrowed under the Credit Agreement mature on December 14, 2023.

Our obligations under the Credit Agreement are guaranteed by, and secured by first priority security interests in substantially all of the assets of, our direct and indirect subsidiaries: Center Manufacturing, Inc., Center Manufacturing Holdings, Inc., Center—Moeller Products LLC, DMP, Defiance Metal Products of Arkansas, Inc., Defiance Metal Products of PA., Inc. and Defiance Metal Products of WI, Inc.

Under the Credit Agreement, borrowings under the Revolving Loan and the Term Loans can be designated as LIBOR Rate Loans or DBLR Loans. The interest rate for LIBOR Rate Loans fluctuates and is equal to LIBOR divided by 1.00 minus the Euro-Dollar Reserve Percentage (as defined in the Credit Agreement) plus 1.00-2.25% depending on the current Consolidated Adjusted Total Leverage Ratio (as defined in the Credit Agreement). The interest rate for DBLR Loans and Swingline Loans fluctuates and is equal to the one month LIBOR as determined at approximately 11:00 a.m., London time, two Business Days (as defined in the Credit Agreement) prior to the first day of each month, for deposits in dollars, as published in the “Money Rates” section of the Wall Street Journal, plus 1.00-2.25% depending on the current Consolidated Adjusted Total Leverage Ratio (as defined in the Credit Agreement). If the Agent determines that dollar deposits are not being offered to banks in the London interbank Eurodollar market, that reasonable and adequate means do not exist for ascertaining the LIBOR Rate, or the Required Lenders (as defined in the Credit Agreement) determine that the LIBOR Rate does not adequately and fairly reflect the cost to such lenders of making or maintaining such loans, then we must either repay in full the outstanding principal amount of each LIBOR Rate Loan and DBLR Loan or convert the then outstanding principal amount of each such LIBOR Rate Loan and DBLR Loan to a Base Rate Loan. If any change in applicable law occurs that makes it unlawful or impossible for any of the lenders under the Credit Agreement to honor its obligations or make or maintain any LIBOR Rate Loan or DBLR Loan, then until such circumstances no

 

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