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Section 1: 10-Q (10-Q)

mec-10q_20200630.htm

 

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, 2020

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 4, 2020, the registrant had 20,059,390 shares of common stock, no par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

 

 

 

 

 

 

Page

 

 

 

PART  I.

FINANCIAL INFORMATION

5

 

 

 

Item 1.

Financial Statements (Unaudited)

5

 

 

 

 

 

Condensed Consolidated Balance Sheets

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

Condensed Consolidated Statements of Shareholders Equity

8

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

33

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Items 1A.

Risk Factors

   33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 6.

Exhibits

34

 

 

 

Signatures

 

35

 

 

 

 

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the SEC) on March 2, 2020, as such were previously supplemented and amended in Part II, Item 1A of our Quarterly Report on Form 10-Q filed with the SEC on May 6, 2020 and which may be further amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report), and the following:

 

the negative impacts the coronavirus (COVID-19) has had and will continue to have on our business, financial condition, cash flows and results of operations (including future uncertain impacts);

 

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; and

 

our ability to remediate the material weakness in internal control over financial reporting identified in preparing our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, and to subsequently maintain effective internal control over financial reporting.

These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no

3


obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by federal securities laws.

4


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

120

 

 

$

1

 

Receivables, net of allowances for doubtful accounts of $1,117 at June 30, 2020

   and $526 at December 31, 2019

 

 

39,632

 

 

 

40,188

 

Inventories, net

 

 

40,343

 

 

 

45,692

 

Tooling in progress

 

 

3,052

 

 

 

1,589

 

Prepaid expenses and other current assets

 

 

3,275

 

 

 

3,007

 

Total current assets

 

 

86,422

 

 

 

90,477

 

Property, plant and equipment, net

 

 

115,082

 

 

 

125,063

 

Goodwill

 

 

71,535

 

 

 

71,535

 

Intangible assets-net

 

 

66,820

 

 

 

72,173

 

Capital lease, net

 

 

2,903

 

 

 

3,227

 

Other long-term assets

 

 

1,095

 

 

 

1,107

 

Total

 

$

343,857

 

 

$

363,582

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,330

 

 

$

32,173

 

Current portion of capital lease obligation

 

 

612

 

 

 

598

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Salaries, wages, and payroll taxes

 

 

7,967

 

 

 

5,752

 

Profit sharing and bonus

 

 

325

 

 

 

6,229

 

Other current liabilities

 

 

4,523

 

 

 

3,439

 

Total current liabilities

 

 

30,757

 

 

 

48,191

 

Bank revolving credit notes

 

 

74,472

 

 

 

72,572

 

Capital lease obligation, less current maturities

 

 

2,377

 

 

 

2,687

 

Deferred compensation and long-term incentive, less current portion

 

 

24,863

 

 

 

24,949

 

Deferred income tax liability

 

 

12,294

 

 

 

14,188

 

Other long-term liabilities

 

 

100

 

 

 

100

 

Total liabilities

 

 

144,863

 

 

 

162,687

 

Common shares, no par value, 75,000,000 authorized, 21,093,035 shares issued at

   June 30, 2020 and 20,845,693 at December 31, 2019

 

 

 

 

 

 

Additional paid-in-capital

 

 

188,802

 

 

 

183,687

 

Retained earnings

 

 

15,126

 

 

 

22,090

 

Treasury shares at cost, 1,033,645 shares at June 30, 2020 and 1,213,482 at

   December 31, 2019

 

 

(4,934

)

 

 

(4,882

)

Total shareholders’ equity

 

 

198,994

 

 

 

200,895

 

Total

 

$

343,857

 

 

$

363,582

 

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

5


Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

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

(unaudited)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

62,582

 

 

$

145,130

 

 

$

171,187

 

 

$

288,862

 

Cost of sales

 

 

63,736

 

 

 

124,595

 

 

 

160,497

 

 

 

248,748

 

Amortization of intangibles

 

 

2,677

 

 

 

2,677

 

 

 

5,353

 

 

 

5,353

 

Profit sharing, bonuses, and deferred compensation

 

 

1,194

 

 

 

22,830

 

 

 

2,519

 

 

 

24,580

 

Employee stock ownership plan (income) expense

 

 

(675

)

 

 

1,500

 

 

 

 

 

 

3,000

 

Other selling, general and administrative expenses

 

 

4,552

 

 

 

7,506

 

 

 

10,153

 

 

 

14,228

 

Contingent consideration revaluation

 

 

 

 

 

2,674

 

 

 

 

 

 

3,544

 

Loss from operations

 

 

(8,902

)

 

 

(16,652

)

 

 

(7,335

)

 

 

(10,591

)

Interest expense

 

 

(637

)

 

 

(1,991

)

 

 

(1,463

)

 

 

(4,824

)

Loss on extinguishment of debt

 

 

 

 

 

(154

)

 

 

 

 

 

(154

)

Loss before taxes

 

 

(9,539

)

 

 

(18,797

)

 

 

(8,798

)

 

 

(15,569

)

Income tax benefit

 

 

(2,525

)

 

 

(3,513

)

 

 

(1,834

)

 

 

(2,744

)

Net loss and comprehensive loss

 

$

(7,014

)

 

$

(15,284

)

 

$

(6,964

)

 

$

(12,825

)

Loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to shareholders

 

$

(7,014

)

 

$

(15,284

)

 

$

(6,964

)

 

$

(12,825

)

Basic and diluted loss per share

 

$

(0.35

)

 

$

(0.91

)

 

$

(0.35

)

 

$

(0.85

)

Basic and diluted weighted average shares outstanding

 

 

19,902,912

 

 

 

16,799,915

 

 

 

19,718,222

 

 

 

15,131,012

 

Tax-adjusted pro forma information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to shareholders

 

$

(7,014

)

 

$

(15,284

)

 

$

(6,964

)

 

$

(12,825

)

Pro forma provision for income taxes

 

 

 

 

 

103

 

 

 

 

 

 

173

 

Pro forma net loss

 

$

(7,014

)

 

$

(15,387

)

 

$

(6,964

)

 

$

(12,998

)

Pro forma basic and diluted loss per share

 

$

(0.35

)

 

$

(0.92

)

 

$

(0.35

)

 

$

(0.86

)

Basic and diluted weighted average shares outstanding

 

 

19,902,912

 

 

 

16,799,915

 

 

 

19,718,222

 

 

 

15,131,012

 

 

Weighted average shares in 2019 give effect to the issuance of a stock dividend of approximately 1,334.34-for-1 related to the IPO, as if the IPO occurred at the beginning of 2019.

Tax adjusted pro forma amounts reflect income tax adjustments as if the Company was a taxable entity as of the beginning of 2019 using a 26% effective tax rate.

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

6


Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(6,964

)

 

$

(12,825

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

11,086

 

 

 

11,002

 

Amortization

 

 

5,353

 

 

 

5,353

 

Stock-based compensation expense

 

 

2,741

 

 

 

797

 

Allowance for doubtful accounts

 

 

591

 

 

 

(33

)

Inventory excess and obsolescence reserve

 

 

1,413

 

 

 

132

 

Costs recognized on step-up of acquired inventory

 

 

 

 

 

395

 

Contingent consideration revaluation

 

 

 

 

 

3,544

 

Loss (gain) on disposal of property, plant and equipment

 

 

618

 

 

 

(24

)

Deferred compensation and long-term incentive

 

 

(86

)

 

 

11,251

 

Other non-cash adjustments

 

 

168

 

 

 

191

 

Gain on extinguishment or forgiveness of debt

 

 

 

 

 

(367

)

Changes in operating assets and liabilities – net of effects of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(35

)

 

 

(12,417

)

Inventories

 

 

3,936

 

 

 

2,296

 

Tooling in progress

 

 

(1,463

)

 

 

(221

)

Prepaids and other current assets

 

 

(222

)

 

 

(1,744

)

Accounts payable

 

 

(14,356

)

 

 

4,363

 

Deferred income taxes

 

 

(1,895

)

 

 

(4,730

)

Accrued liabilities, excluding long-term incentive

 

 

2,226

 

 

 

(504

)

Net cash provided by operating activities

 

 

3,111

 

 

 

6,459

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(3,652

)

 

 

(16,637

)

Proceeds from sale of property, plant and equipment

 

 

1,766

 

 

 

24

 

Acquisitions, net of cash acquired

 

 

 

 

 

(2,368

)

Net cash used in investing activities

 

 

(1,886

)

 

 

(18,981

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from bank revolving credit notes

 

 

158,643

 

 

 

223,835

 

Payments on bank revolving credit notes

 

 

(156,743

)

 

 

(241,979

)

Repayments of other long-term debt

 

 

 

 

 

(72,446

)

Deferred financing costs

 

 

(200

)

 

 

 

Proceeds from IPO, net

 

 

 

 

 

101,763

 

Purchase of treasury stock

 

 

(2,510

)

 

 

(1,592

)

Payments on capital leases

 

 

(296

)

 

 

(147

)

Net cash provided (used in) by financing activities

 

 

(1,106

)

 

 

9,434

 

Net increase (decrease) in cash and cash equivalents

 

 

119

 

 

 

(3,088

)

Cash and cash equivalents at beginning of period

 

 

1

 

 

 

3,089

 

Cash and cash equivalents at end of period

 

$

120

 

 

$

1

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,714

 

 

$

4,524

 

Cash paid for taxes

 

$

15

 

 

$

374

 

Non-cash construction in progress in accounts payable

 

$

265

 

 

$

1,617

 

 

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

7


Mayville Engineering Company, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands)

(unaudited)  

 

 

 

Shareholder’s Equity

 

 

 

Additional

Paid-in-Capital

 

 

Treasury

Shares

 

 

Retained

Earnings

 

 

Total

 

Balance as of December 31, 2019

 

$

183,687

 

 

$

(4,882

)

 

$

22,090

 

 

$

200,895

 

Net income

 

 

 

 

 

 

 

 

50

 

 

 

50

 

Purchase of treasury stock

 

 

 

 

 

(2,435

)

 

 

 

 

 

(2,435

)

ESOP contribution

 

 

2,374

 

 

 

2,457

 

 

 

 

 

 

4,831

 

Stock-based compensation

 

 

1,582

 

 

 

 

 

 

 

 

 

1,582

 

Balance as of March 31, 2020

 

$

187,643

 

 

$

(4,860

)

 

$

22,140

 

 

$

204,923

 

Net loss

 

 

 

 

 

 

 

 

(7,014

)

 

 

(7,014

)

Purchase of treasury stock

 

 

 

 

 

(74

)

 

 

 

 

 

(74

)

Stock-based compensation

 

 

1,159

 

 

 

 

 

 

 

 

 

1,159

 

Balance as of June 30, 2020

 

$

188,802

 

 

$

(4,934

)

 

$

15,126

 

 

$

198,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 17)

 

 

133,806

 

 

 

(57,659

)

 

 

29,698

 

 

 

105,845

 

Net loss post IPO

 

 

 

 

 

 

 

 

(15,681

)

 

 

(15,681

)

Share issuance - IPO

 

 

101,763

 

 

 

 

 

 

 

 

 

101,763

 

Stock-based compensation

 

 

797

 

 

 

 

 

 

 

 

 

797

 

Share repurchases

 

 

 

 

 

(1,592

)

 

 

 

 

 

(1,592

)

Cancellation of treasury stock

 

 

(55,369

)

 

 

55,369

 

 

 

 

 

 

 

Balance as of June 30, 2019

 

$

180,997

 

 

$

(3,882

)

 

$

14,017

 

 

$

191,132

 

 

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

8


Mayville Engineering Company, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

(unaudited)

Note 1. Basis of presentation

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These interim unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K. A summary of the Company’s significant accounting policies is included in the Company’s 2019 financial statements in the Annual Report on Form 10-K. The Company followed these policies in preparation of the interim unaudited Condensed Consolidated Financial Statements.

Nature of Operations

MEC is a leading U.S.-based value-added manufacturing partner that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture, military and other end markets. Along with process engineering and development services, MEC maintains an extensive manufacturing infrastructure with 20 facilities across eight states. These facilities make it possible to offer conventional and CNC stamping, shearing, fiber laser cutting, forming, drilling, tapping, grinding, tube bending, machining, welding, assembly and logistic services. MEC also possesses a broad range of finishing capabilities including shot blasting, e-coating, powder coating, wet spray and military grade chemical agent resistant coating (CARC) painting.

Our 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.

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

COVID-19 has had and will continue to have a negative impact on our business, financial condition, cash flows and results of operations (including future uncertain impacts).

9


Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, creating Topic 842, which requires lessees to record the assets and liabilities arising from all leases in the statement of financial position. Under ASU 2016-02, lessees will recognize a liability for lease payments and a right-of-use asset. When measuring assets and liabilities, a lessee should include amounts related to option terms, such as the option of extending or terminating the lease or purchasing the underlying asset, that are reasonably certain to be exercised. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election to not recognize lease assets and liabilities. This guidance retains the distinction between finance leases and operating leases and the classification criteria remains similar to existing guidance. For financing leases, a lessee will recognize the interest on a lease liability separate from amortization of the right-of-use asset. In addition, repayments of principal will be presented within financing activities, and interest payments will be presented within operating activities in the statement of cash flows. For operating leases, a lessee will recognize a single lease cost on a straight-line basis and classify all cash payments within operating activities in the statement of cash flows. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For as long as the Company remains an “emerging growth company”, the new guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Further, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. For public companies, this guidance is effective for annual or any interim goodwill impairment test in annual reporting periods beginning after December 15, 2018. For as long as the Company remains an EGC, the new guidance is effective for any annual or interim goodwill impairment test in annual reporting periods beginning after December 15, 2021. During the period ended March 31, 2020, the Company elected to early adopt this guidance. This adoption had no impact on the financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes, creating Topic 740, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public companies, this guidance will be effective for fiscal years beginning after December 15, 2020. For as long as the Company remains an “emerging growth company”, the new guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the consolidated financial statements.

A summary of the Company’s evaluation of other recent accounting pronouncements is included in the Company’s 2019 financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019.

Note 2. IPO

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

IPO proceeds were used to pay down certain indebtedness.

10


Note 3. Select balance sheet data

Inventory

Inventories as of June 30, 2020 and December 31, 2019 consist of:

 

 

 

June 30,

2020

 

 

December 31,

2019

 

Finished goods and purchased parts

 

$

25,221

 

 

$

28,664

 

Raw materials

 

 

9,834

 

 

 

10,834

 

Work-in-process

 

 

5,288

 

 

 

6,194

 

Total

 

$

40,343

 

 

$

45,692

 

Property, plant and equipment

Property, plant and equipment as of June 30, 2020 and December 31, 2019 consist of:

 

 

 

Useful Lives

Years*

 

June 30,

2020

 

 

December 31,

2019

 

Land

 

Indefinite

 

$

1,264

 

 

$

1,264

 

Land improvements

 

15-39

 

 

3,169

 

 

 

3,169

 

Building and building improvements

 

15-39

 

 

58,501

 

 

 

58,021

 

Machinery, equipment and tooling

 

3-10

 

 

199,012

 

 

 

204,248

 

Vehicles

 

5

 

 

3,722

 

 

 

3,738

 

Office furniture and fixtures

 

3-7

 

 

15,913

 

 

 

15,469

 

Construction in progress

 

N/A

 

 

2,854

 

 

 

3,154

 

Total property, plant and equipment, gross

 

 

 

 

284,435

 

 

 

289,063

 

Less accumulated depreciation

 

 

 

 

169,353

 

 

 

164,000

 

Total property, plant and equipment, net

 

 

 

$

115,082

 

 

$

125,063

 

Goodwill

Changes in goodwill between December 31, 2019 and June 30, 2020 consist of:

 

Balance as of December 31, 2019

 

$

71,535

 

Impairment

 

 

 

Balance as of June 30, 2020

 

$

71,535

 

 Intangible Assets

The following is a listing of intangible assets, the useful lives in years (amortization period) and accumulated amortization as of June 30, 2020 and December 31, 2019:

 

 

 

Useful Lives

Years

 

June 30,

2020

 

 

December 31,

2019

 

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

 

 

 

 

(38,935

)

 

 

(33,582

)

Total amortizable intangible assets, net

 

 

 

 

63,009

 

 

 

68,362

 

Non-amortizable brand name

 

 

 

 

3,811

 

 

 

3,811

 

Total intangible assets, net

 

 

 

$

66,820

 

 

$

72,173

 

 

Non-amortizable brand name is tested annually for impairment.

11


Changes in intangible assets between December 31, 2019 and June 30, 2020 consist of:

 

Balance as of December 31, 2019

 

$

72,173

 

Amortization expense

 

 

(5,353

)

Balance as of June 30, 2020

 

$

66,820

 

 

Amortization expense was $2,677 for the three months ended June 30, 2020 and 2019, and $5,353 for the six months ended June 30, 2020 and 2019.

Future amortization expense is expected to be as followed:

 

Year ending December 31,

 

 

 

 

2020

 

$

10,706

 

2021

 

$

10,706

 

2022

 

$

6,952

 

2023

 

$

6,866

 

2024

 

$

5,192

 

 

Note 4. Bank revolving credit notes

On September 26, 2019, and as last amended as of June 30, 2020, we entered into an amended and restated credit agreement (Credit Agreement) with certain lenders and Wells Fargo Bank, National Association, as administrative agent. The Credit Agreement provides for a $200,000  revolving credit facility (the Revolving Loan), with a letter of credit sub-facility in an aggregate amount not to exceed $5,000, and a swingline facility in an aggregate amount of $20,000. The Credit Agreement also provides for an additional $100,000 of debt capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness, create or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00 as well as a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions.

In order to provide insurance against future macroeconomic events, we entered into an amendment (Second Amendment) to the Credit Agreement on June 30, 2020. The Second Amendment provides the Company with temporary changes to the total leverage ratio covenant for the period from June 30, 2020, through December 31, 2021, or such earlier date as the Company may elect (Covenant Relief Period), in return for certain increases in interest rates, fees and restrictions on certain activities of the Company, including capital expenditures, acquisitions, dividends and share repurchases. New pricing, which takes effect for the quarters ending on and after September 30, 2020, includes interest at a fluctuating LIBOR (at a floor of 75 basis points), plus 1.00% – 2.75%, along with the commitment fee ranging from 20 to 50 basis points.

During the Covenant Relief Period, the required ceiling on the Company’s total leverage ratio will be 4.25 to 1.00 for quarters ending June 30, 2020 through and including December 31, 2020, and will decline in quarterly increments to 3.25 to 1.00 through the quarter ending December 31, 2021.

At June 30, 2020, our consolidated total leverage ratio was 2.35 to 1.00 as compared to a covenant maximum of 4.25 to 1.00 in accordance with the Second Amendment of the Credit Agreement.

At June 30, 2020, our interest coverage ratio was 7.38 to 1.00 as compared to a covenant minimum of 3.00 to 1.00 under the Credit Agreement.

Under the Credit Agreement, interest is payable quarterly at the adjusted London Interbank Offered Rate (LIBOR) plus an applicable margin based on the current funded indebtedness to adjusted EBITDA ratio. The interest rate was 1.938% and 3.25% as of June 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019.

12


The Company was in compliance with all financial covenants of its credit agreements as of June 30, 2020 and December 31, 2019. The amount borrowed on the revolving credit notes was $74,472 and $72,572 as of June 30, 2020 and December 31, 2019, respectively.

Note 5. Capital lease obligation

Capital leases consist of equipment with a capitalized cost of $3,825 at June 30, 2020 and December 31, 2019, and accumulated depreciation of $923 and $598 at June 30, 2020 and December 31, 2019, respectively. Depreciation of $161 and $322 was recognized on the capital lease assets during the three- and six months ended June 30, 2020, respectively, and $73 and $146 during the three- and six months ended June 30, 2019, respectively. Non-cash capital lease transactions amounted to zero for the three- and six months ended June 30, 2020. Future minimum lease payments required under the lease are as follows:

 

Year ending December 31,

 

 

 

 

2020 (remainder)

 

$

367

 

2021

 

 

734

 

2022

 

 

734

 

2023

 

 

734

 

2024

 

 

514

 

Thereafter

 

 

226

 

Total

 

 

3,309

 

Less payment amount allocated to interest

 

 

321

 

Present value of capital lease obligation

 

$

2,988

 

Current portion of capital lease obligation

 

 

612

 

Long-term portion of capital lease obligation

 

 

2,377

 

Total capital lease obligation

 

$

2,989

 

 

Note 6. Operating lease obligation

Operating leases relate to property, plant and equipment. Future minimum lease payments required under the leases are as follows:

Year ending December 31,

 

 

 

 

2020 (remainder)

 

$

1,702

 

2021

 

 

3,043

 

2022

 

 

2,227

 

2023

 

 

2,099

 

2024

 

 

1,307

 

Thereafter

 

 

2,280

 

Total

 

$

12,658

 

The Company leases certain office space, warehousing facilities, equipment and vehicles under operating lease arrangements with third-party lessors. These lease arrangements expire at various time through December 2028. Total rent expense under the arrangements was approximately $1,094 and $1,271 for the three months ended June 30, 2020 and 2019, respectively, and $2,155 and $2,401 for the six months ended June 30, 2020 and 2019, respectively.

Note 7. Employee stock ownership plan

Under the Mayville Engineering Company, Inc. Employee Stock Ownership Plan (the ESOP), the Company makes annual contributions to the trust for the benefit of eligible employees in the form of cash or shares of common stock of the Company. Prior to December 31, 2019, the annual contribution was discretionary except that it must have been at least 3% of the compensation for all safe harbor participants for the plan year. Beginning on January 1, 2020, all contributions are discretionary. For the three months ended June 30, 2020 and 2019, the Company’s ESOP (income) expense amounted to $(675) and $1,500, respectively. For the six months ended June 30, 2020 and 2019, the Company’s ESOP expense amounted to zero and $3,000, 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. Prior to the IPO, all distributions were paid to participants in cash.

13


As of June 30, 2020, and December 31, 2019, the ESOP shares consisted of 10,165,918 and 11,790,113 in allocated shares, respectively. Prior to its IPO, the Company was obligated to repurchase shares in the trust that were not distributed to ESOP participants as determined by the ESOP trustees, and thus the shares were mandatorily redeemable. Subsequent to the IPO, shares are sold in the public market.

Note 8. Retirement plans

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

The 401(k) Plan also provides for employer discretionary profit sharing contributions and the Board of Directors may authorize discretionary profit sharing contributions (which are usually approved at the end of each calendar year).

Note 9. 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 $2,525 and $1,834, and the effective tax rate (ETR) from continuing operations was 27.69% and 28.77% for the three and six months ended June 30, 2020, respectively. The following caused the ETR to be different from our expected annual ETR at statutory tax rates:

 

For the three and six months ended June 30, 2020, we recorded a discrete tax expense of approximately $483 for both periods as a result of the removal of a deferred tax asset related to loan fee amortization. This decreased the effective tax rate by 5.06% and 5.49% for the three and six months ended June 30, 2020, respectively.

For the three and six months ended June 30, 2019, income tax benefit was estimated at $3,513 and $2,744 and the ETR from continuing operations was 16.21% and 14.13%, respectively.

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

Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements for the three and six months ended June 30, 2020 and 2019.

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

The Company’s policy for recording interest and penalties associated with potential income tax audits is to record such expense as a component of income tax expense. There were no amounts for penalties or interest recorded as of June 30, 2020. 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.

14


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.

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

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

For the period subsequent to the IPO, deferrals are invested in an investment vehicle based on the options made available to the participant (which does not include Company stock).

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

The deferred compensation plan is non-funded, and all future contributions are unsecured in that the employees have the status of a general unsecured creditor of the Company and the agreements constitute a promise by the Company to make benefit payments in the future. During the three months ended June 30, 2020 and 2019, eligible employees elected to defer compensation of $12 and $11, respectively. During the six months ended June 30, 2020 and 2019, eligible employees elected to defer compensation of $41 and $1,054, respectively. As of June 30, 2020, and December 31, 2019, the total amount accrued for all benefit years under this plan was $24,863 and $24,949, respectively, which is included within the deferred compensation and long-term incentive on the Condensed Consolidated Balance Sheets. These amounts include the initial deferral of compensation as adjusted for (a) subsequent changes in the share value of the Company stock pursuant to the IPO or (b) following the IPO in the investment options chosen by the participants. Total expense for the deferred compensation plan for the three months ended June 30, 2020 and 2019 amounted to $586 and $10,084, respectively. Total (income) expense for the deferred compensation plan for the six months ended June 30, 2020 and 2019 amounted to $(21) and $10,264, respectively. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

15


Note 12. Long-Term incentive plan

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

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

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

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

The LTIP was terminated in May 2019 in conjunction with the IPO. Total expense for the long-term incentive plan for the three and six months ended June 30, 2019 amounted to $9,921 and $10,000, respectively. These expenses are included in profit sharing, bonuses and deferred compensation on the Condensed Consolidated Statements of Comprehensive Income (Loss).

Note 13. Self-Funded insurance

The Company is self-funded for the medical benefits provided to its employees and their dependents. Healthcare costs are expensed as incurred and are based upon actual claims paid, reinsurance premiums, administration fees, and estimated unpaid claims. As of March 31, 2020, the Company consolidated benefit plans with no specific stop loss and an aggregate stop loss to limit risk. Annual expense related to this contract is approximately $5,411 and $5,004 for the three months ended June 30, 2020 and 2019, respectively, and $11,135 and $10,166 for the six months ended June 30, 2020 and 2019, respectively. An estimated accrued liability of approximately $1,710 and $1,316 was recorded as of June 30, 2020 and December 31, 2019, 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 and for which discrete financial information is available. Based on the provisions of ASC 280, the Company has determined it has one operating segment. The Company does not earn revenues or have long-lived assets located in foreign countries.

 

Note 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. Long-term debt is classified as a Level 2 fair value input.

 

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

16


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

 

 

 

 

 

 

 

Fair Value Measurements at

Report Date Using

 

 

 

Balance at June 30,

2020

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Deferred compensation

 

$

24,863

 

 

$

4,372

 

 

$

20,491

 

 

$

 

Total

 

$

24,863

 

 

$

4,372

 

 

$

20,491

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at

Report Date Using

 

 

 

Balance at December 31,

2019

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Deferred compensation

 

$

24,949

 

 

$

2,470

 

 

$

22,479

 

 

$

 

Total

 

$

24,949

 

 

$

2,470

 

 

$

22,479

 

 

$

 

 

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

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

Deferred compensation liabilities are recorded at amounts due to participants at the time of deferral. Deferrals are invested in an investment vehicle based on the options made available to the participant, considered to be Level 1 and Level 2 on the fair value hierarchy, with the majority of the balance as Level 2. The change in fair value is recorded in the Profit sharing, bonuses, and deferred compensation line item on the Condensed Consolidated Statements of Comprehensive Income (Loss). The balance due to participants is reflected on the Deferred compensation and long-term incentive line item on the Condensed Consolidated Balance Sheets.

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

Note 16. Common 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 were removed effective with the IPO.

Note 17. Temporary Equity

Prior to our IPO in May 2019, our common stock was considered redeemable under GAAP because of certain repurchase obligations related to the 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 values as of the respective balance sheet dates.

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, 2020.

 

17


 

 

Temporary Equity

 

 

 

Redeemable Common Shares

 

 

Treasury Shares

 

 

Retained Earnings

 

As of January 1, 2019

 

$

133,806

 

 

$

(57,659

)

 

$

26,842

 

Net income

 

 

 

 

 

 

 

 

2,459

 

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

)

As of June 30, 2019

 

$

 

 

$

 

 

$

 

 

Note 18. Revenue Recognition

Contract Assets and Contract Liabilities

The Company has contract assets and contract liabilities, which are included in other current assets and other current liabilities on the consolidated balance sheet, respectively. Contract assets include products where the Company has satisfied its performance obligation, but receipt of payment is contingent upon delivery. Contract liabilities include deferred tooling revenue, where the performance obligation was not met. The performance obligation is satisfied when the tooling is completed and the customer signs off through the Product Part Approval Process (PPAP). At this time, the tool is placed into service and the cost to build the tooling is released from the balance sheet and included in cost of goods sold.

The Company’s contracts with customers are short-term in nature; therefore, revenue is typically recognized, billed and collected within a 12-month period. The following table reflects the changes in our contract assets and liabilities during the six months ended June 30, 2020.

 

(in thousands)

 

Contract Assets

 

 

Contract Liabilities

 

As of January 1, 2020

 

$

1,589

 

 

$

914

 

Net Activity

 

 

1,462

 

 

 

401

 

As of June 30, 2020

 

$

3,051

 

 

$

1,315

 

 

Disaggregated Revenue

The following table represents a disaggregation of revenue by product category:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020