S-1 1 d725632ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on April 12, 2019.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Mayville Engineering Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Wisconsin   3460   39-0944729
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

 

715 South Street

Mayville, Wisconsin 53050

(920) 387-4500

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Robert D. Kamphuis

Chairman, President & Chief Executive Officer

Mayville Engineering Company, Inc.

715 South Street

Mayville, Wisconsin 53050

(920) 387-4500

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Russell E. Ryba

Foley & Lardner LLP

777 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

(414) 297-5668

 

Christopher D. Lueking

Latham & Watkins LLP

330 North Wabash Avenue, Suite 2800

Chicago, Illinois 60611

(312) 876-7700

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 7(a)(2)(B) of the Securities Act.

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering  Price(1)(2)
  Amount of
Registration Fee

Common Stock, no par value per share

  $100,000,000   $12,120

 

 

 

(1)

Includes the aggregate offering price of additional shares that the underwriters have the right to purchase from the registrant.

(2)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated April 12, 2019

PRELIMINARY PROSPECTUS

             Shares

 

 

LOGO

MAYVILLE ENGINEERING COMPANY, INC.

COMMON STOCK

This is the initial public offering of common stock of Mayville Engineering Company, Inc. We are offering              shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price for our common stock will be between $             and $             per share. We intend to apply to list our shares of common stock on the New York Stock Exchange under the symbol “MEC.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, will be subject to reduced public company reporting requirements.

Investing in our common stock involves substantial risk. See “Risk Factors” on page 18.

 

      Per Share    Total

Initial public offering price

     $                    $              

Underwriting discounts and commissions(1)

     $        $  

Proceeds to us, before expenses

     $        $  

 

(1)

We have agreed to reimburse the underwriters for certain expenses. See “Underwriting.”

Delivery of the shares of common stock is expected to be made on or about                 , 2019.

We have granted the underwriters a 30-day option to purchase up to an additional              shares of our common stock at the initial public offering price less underwriting discounts and commissions.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Baird   Citigroup   Jefferies

 

UBS Investment Bank     William Blair

 

 

                , 2019.


Table of Contents

TABLE OF CONTENTS

 

     Page  

MARKET AND INDUSTRY DATA

     ii  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     ii  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     18  

USE OF PROCEEDS

     37  

DIVIDEND POLICY

     38  

CAPITALIZATION

     39  

DILUTION

     41  

SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

     43  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     47  

BUSINESS

     62  

MANAGEMENT

     76  

EXECUTIVE COMPENSATION

     82  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     93  

PRINCIPAL SHAREHOLDERS

     94  

DESCRIPTION OF OUR CAPITAL STOCK

     98  

SHARES ELIGIBLE FOR FUTURE SALE

     105  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS

     107  

UNDERWRITING

     111  

LEGAL MATTERS

     118  

EXPERTS

     118  

CHANGE IN ACCOUNTANTS

     118  

WHERE YOU CAN FIND MORE INFORMATION

     120  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with any information, or to make any representations, other than as contained in this prospectus, in any amendment or supplement hereto or in any free writing prospectus prepared by us or on our behalf and delivered or made available to you. Neither we nor the underwriters take responsibility for or provide assurance as to the reliability of any information or representations that others may give you. This prospectus is an offer to sell only the shares of our common stock offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date hereof, and we undertake no obligation to update such information, except as may be required by law.

 

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MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry, our market share and the markets that we serve is based on information from third-party sources (including industry publications, surveys and forecasts) and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets that we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any such information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by third-parties and by us.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus 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.” We believe the expectations reflected in the forward-looking statements contained in this prospectus 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” 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;

 

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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 this offering;

 

   

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 this prospectus and to subsequently maintain effective internal control over financial reporting; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

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.” 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.

 

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PROSPECTUS SUMMARY

This summary highlights basic information about us and this offering contained elsewhere in this prospectus. Because it is a summary, it does not contain all the information you should consider before investing in our common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information in “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes. Except as otherwise indicated or required by the context, all references in this prospectus to the “Company,” “MEC,” “we,” “us” or “our” refer to Mayville Engineering Company, Inc. and its consolidated subsidiaries.

Our Company

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. “We Make Things Simple” by providing a diverse set of process offerings and a “one stop shop” for end-to-end solutions with benefits throughout the entire product lifecycle, including front-end collaboration in design and prototyping, product manufacturing, aftermarket components and ancillary supply chain benefits. Founded in 1945 and headquartered in Mayville, WI, we are a leading Tier I U.S. supplier of highly engineered components to original equipment manufacturer, which we sometimes refer to as an OEM, customers with leading positions in their respective markets. We are focused on producing the highest quality components using complex processes at the lowest cost by working with customers throughout the product design and development process to establish optimal solutions. Our engineering expertise and technical know-how allows us to add value through every product redevelopment cycle (generally every three to five years for our customers). According to The Fabricator, we have been ranked as the largest fabricator in the United States for the past eight years in a row (2011—2018). We are more than two times the size of our next largest competitor, based on The Fabricator’s projections for 2018 revenue for metal fabricating companies.

Our customers’ complex products require a unique combination of our capabilities that allow us to achieve a customized offering to satisfy our customers’ desired outcomes. Our capabilities, which include, but are not limited to: metal fabrication, metal stamping, tube bending and forming, robotic part forming, robotic welding, resistance welding, five-axis tube and fiber laser cutting and custom coatings, including high heat and chemical agent resistant coating, or CARC, painting, are used in a variety of applications and represent the building blocks of what we produce.



 

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The graphic below includes representative examples of our product applications across various customer end products.

 

LOGO

 

LOGO

 

LOGO

Our key customers have globally recognized brands and demand the highest product quality and expertise. Over our nearly 75-year history, we have developed capabilities and provide solutions that result in customer loyalty and long-standing relationships, which we call “Experience You Can Trust.” We have a diverse and market-leading customer base that serves broad end markets representing favorable near- and long-term growth prospects for us. We have a track record of growth and are well-positioned to increase our market share and benefit from growth in customer demand as well as consolidate demand across the end markets that we serve. To help pursue our strategic mission, we have more than 3,100 employees who are tactically aligned around our core values and will continue to participate in our employee ownership culture. We are led by an experienced management team that has contributed to our growth by establishing deep and long-standing relationships with key customers, and has worked to expand the customer base both organically and through strategic acquisitions.



 

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We maintain an established base of long-standing customers comprised of leading, blue-chip OEM manufacturers across the United States. Our broad capabilities offering and track record of producing the highest quality solutions have allowed us to establish, and subsequently deepen, relationships with additional products and platforms over time. For example, our more than 40 year relationship with Deere & Company, which we sometimes refer to as John Deere, began with a small order of simple stamped parts for a farm tractor in its agricultural segment that expanded over time and represented 2018 pro forma sales in excess of $90.0 million across five market segments, representing over 60 model platforms. We have also been successful in winning customers and rapidly expanding relationships with high-growth customers by utilizing our diversified “one-stop” offering. For instance, our relationship with Volvo Truck began with fuel tanks and has expanded over the last six years to include exhaust tubing, new sleeper cab and chassis fabrications and air tanks. Through the expansion of multiple fabricated components from multiple facilities, we have been able to deepen our relationship with this customer and solidify our position as an important strategic sourcing partner.

Operational Footprint

 

 

LOGO

We serve customers through 21 strategically located U.S. facilities across eight states, with almost three million square feet of manufacturing capacity. Our expansive footprint enables us to service and maintain strong relationships with existing key customers across the United States with a “local” presence, as well as target new customer opportunities. We have a proven track record of improving financial results by thoroughly understanding our capabilities and the markets we serve, and aligning our people and resources to optimize results. Coupled with our focus on market alignment and execution, we constantly strive to improve and refine capabilities and capacities. In addition, the ongoing investment in flexible, re-deployable automation allows us to expand output while reducing cost and improving quality, productivity and consistency for margin enhancement and market leading competitiveness. Through this continuum of activities, we have generated approximately $34.3 million in improved results from the beginning of 2014 through December 31, 2018.



 

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Our leading market position, embedded customer relationships with leading OEMs, unique value proposition and proven acquisition strategy has allowed us to achieve attractive financial performance and has positioned us for further growth. Our historical financial success is a function of our engineering expertise, extensive manufacturing capabilities, limited commodity exposure, investment in automation and embedded relationships with the contractual ability to pass input costs through prices. We believe we are poised to grow through economic cycles due to our:

 

   

market positioning and reputation;

 

   

product breadth;

 

   

flexible and re-deployable capital investment in automation and process capabilities; and

 

   

our geographic, end market and product diversification.

Our diversified profile today best positions us for stability and leading market performance through all phases of an economic cycle. For the year ended December 31, 2018, we reported net sales of $354.5 million, net income of $17.9 million and Adjusted EBITDA of $43.7 million. See “Selected Historical and Pro Forma Financial Information” for the reconciliation of Adjusted EBITDA to net income, its most comparable financial measure prepared in accordance with accounting principles generally accepted in the United States, or GAAP.

Recent Acquisition

Acquisition of Defiance Metal Products. On December 14, 2018, we acquired Defiance Metal Products Co., Inc., which we sometimes refer to as DMP, an Ohio-based manufacturer of metal products for the heavy- and medium- duty commercial vehicles, construction, agriculture and military industries. The purchase price was approximately $115.0 million, subject to customary purchase price adjustments, and an additional one-time earn out payment up to $10.0 million. Founded in 1939 and headquartered in Defiance, OH, DMP is a full-service metal fabricator and contract manufacturer with two facilities in the Defiance, OH area, one in Heber Springs, AR, and one in Bedford, PA. The DMP acquisition provides us with enhanced product, customer and geographic diversification with minimal (i.e., less than $15.0 million) customer overlap. We expect a variety of net sales, operating and purchasing synergies to be realized from the acquisition over the course of the next several years.

Our Industry

We compete in the highly fragmented market of contract manufacturers, the majority of which are small local players that are limited in scale, capabilities and technology. Many of these local manufacturers have single or limited production capabilities and provide niche components in specific geographic markets. Accordingly, there are a limited number of competitors in the contract manufacturing market in which we operate with the capacity and expertise to deliver the full range of solutions we offer. For example, our diverse manufacturing capabilities across product lines have contributed to us being the recipient of The Fabricator’s “FAB 40” #1 Largest Fabricator in the attractive U.S. markets for the past eight years in a row (2011—2018). While we compete with certain manufacturers across selected product lines, we believe that no single manufacturer directly competes with us across our full offering and end market applications.

Our end market diversification coupled with our extensive product breadth allows us to maintain financial stability as individual end markets fluctuate. The primary end markets we serve include heavy- and medium-duty commercial vehicles, construction, powersports, agriculture and military, among other machinery markets. As markets strengthen or weaken, our output is redirected and realigned to support ongoing change. Further, as these fluctuations affect the market, we are favorably positioned to benefit from the broader trend of our OEM



 

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customers to consolidate to fewer and more sophisticated suppliers in order to improve quality and delivery while lowering the total cost of doing business. This consolidation trend will allow us to grow and protects our cash flow as markets change and shift.

We have also experienced, and benefitted from, an OEM trend of seeking to improve their strategy execution and simplify their business through outsourcing. Based on our history, OEMs pursue a strategy that focuses on core component market differentiation, such as structural frames and complete powertrain assemblies, and prefer to outsource the remaining product components to third parties rather than manufacturing them in-house. This is done in order to maintain their strategic focus, drive cost savings and reduce their own investment in manufacturing, thereby allowing them to focus on the most important aspects of their value creation process, namely product design and development, final product assembly and testing, branding, sales, marketing and distribution. While each specific OEM differs in its strategy, we see this trend continuing as customers deal with workforce constraints and look for optimum return on investments and improving cash flow. This trend is further magnified as international labor costs continue to rise, and OEMs have an increased focus on reshoring manufacturing operations to further shorten their supply chain and lower logistics costs. Moreover, our OEM customers focus on the production of the core components of their products, which leads them to rely on outsourced providers like us for the remaining components of their finished product needs. We believe we will benefit from this continued shift in our customers’ focus and ongoing desire for OEMs to improve efficiencies, reduce costs and simplify supply chains. Our established and embedded relationships, breadth of capabilities and scalability will allow us to simplify the supply chain process for our customers by acting as a single point of contact in the supply chain. In addition, we believe OEMs are increasingly favoring platforms supported by larger, more sophisticated and financially stable suppliers with the ability to serve large national and international operations all while maintaining a local touch. Our extensive manufacturing footprint, competitive cost structure and integrated design, engineering, production planning and quality program management capabilities positions us favorably to take advantage of these opportunities and trends.

Our Competitive Strengths

We believe that customers turn to us for their manufacturing needs because we are the ultimate “ReSource”. ReSource is a dual-purpose acronym we use to describe the breadth of our capabilities and our goal to be the one-stop solution allowing customers to re-source all of their fabrication needs through us. We collaborate with our customers to generate a strategic alignment and position ourselves as an essential part of our customers’ product development and manufacturing process by drawing on our deep product and engineering knowledge to deliver best-in-class solutions. We offer a broad portfolio of end-to-end solutions comprised of advanced and innovative processes and capabilities that enhance quality and simplify supply chains. We are focused on producing the highest quality components using complex processes at the lowest cost by working with customers throughout the product design and development process to establish optimal solutions. Our engineering expertise and technical know-how allows us to add value through every product redevelopment cycle (generally every three to five years for our customers).

Value-Added Supply Chain Partner with Embedded Relationships. Our embedded relationships with our large and diverse customer base are driven by the P.R.I.D.E. (“Personal Responsibility In Daily Excellence”) approach our employees take in their work, which emphasizes the highest quality and performance in all facets of our business, including our ability to partner with our customers and deliver to them complex solutions across a wide range of products. Our unique, end-to-end offering provides solutions throughout the life cycle of a product, including upfront product manufacturability advice and prototyping, production volumes and aftermarket



 

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components. We strive to maintain operational alignment (and continuous re-alignment) with our customers’ strategy and production activities as they evolve, allowing us to remain agile in response to market changes, while enabling our customers to be successful, and to remain adaptable to changes in customer needs to retain flexibility to adjust appropriately. Together, these items comprise “The MEC Mission.” Our focus on collaboration with our customers and our breadth of capabilities also generates strategic alignment with our customers, resulting in sticky relationships, driving vendor reduction and providing other ancillary benefits such as optimization of working capital investments. Our track record of engineering expertise has resulted in our consistent inclusion in customer design and prototyping activities, enabling customers to view us as an invaluable extension of their own teams. In turn, this collaboration allows our customers to focus on the development of their core technologies and products. Our position as a deeply embedded supply chain partner of scale allows us to provide a multitude of solutions, driving strong customer relationships with high switching costs.

Leading and Defendable Market Position in Attractive North American Market. According to The Fabricator, we have been ranked as the largest fabricator in the United States for the past eight years in a row (2011 – 2018). The market is highly fragmented and characterized by high barriers to entry given the complex nature of the work, established relationships and high customer switching costs. While there are numerous competitors in the markets in which we operate, few maintain the product breadth, manufacturing capabilities, scale or engineering expertise that we do. Our depth of capabilities allows us to offer our customers:

 

   

low volume production capability;

 

   

customized and sophisticated solutions;

 

   

unique engineering and manufacturing capabilities throughout the product lifecycle;

 

   

critical scale to service large national and regional customers as well as local customers; and

 

   

the ability to act as a single point of contact and offer seamless customer service.

Our position in the market, along with our acquisition experience and reputation as the go-to consolidator, will result in continued organic and acquisitive growth in the future.

End Market and Customer Diversification. Our value-added manufacturing focus enables us to remain diversified across a variety of customer end markets, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture and military, among others. These end markets are representative of our globally recognized customers, which are comprised of large OEM manufacturers. In 2018, our top customer and top ten customers accounted for 23% and 81% of net sales, respectively, which collectively represent hundreds of platforms that we serve across a variety of end markets and customer operating segments. Our access to a multitude of end markets allows us to strategically shift focus to sell into current opportunities as end market demand evolves. In addition to customer and end market diversification, our customers themselves are also diversified across multiple end markets. For example, John Deere is one of our leading customers with fiscal 2018 net sales accounting for 23% of our total net sales, to whom we provide over 5,000 SKUs across over 60 individual John Deere platforms including the agriculture, forestry, turf care, power systems and construction markets. Our increasingly stable performance is a direct result of our intentional business design of agility and adaptability to realign manufacturing capacities to serve diversified and ever changing end markets.



 

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End Market Diversification

(% of Net Sales)

 

LOGO

Breadth of Capabilities Appealing to a Variety of Applications. We have many manufacturing capabilities that together represent the building blocks for the complex solutions we provide to our customers. We maintain a full spectrum of capabilities across our 21 production facilities to address a wide set of customer needs, including upfront product development advice and prototyping, unique manufacturing processes and capabilities across a variety of products and back-end finishing, assembly and aftermarket components representing a unique end-to-end offering. Our range of capabilities combined with our breadth of components, including fabrications, tubes, tanks and performance structures, expands the applicable uses and end markets in which we may offer our components. Throughout our history, our capabilities have allowed us to generate growth by expanding into new verticals and by further penetrating existing verticals through cross-selling to increase wallet share, a strategy that has driven sticky relationships with our customers. Further, our unique combination of manufacturing processes allows us to opportunistically target sophisticated, higher margin business. The diversity of our offering has provided our Company with financial stability through various end market and economic cycles.

Technology-Enabled Infrastructure. We continue to invest in a technology-enabled asset base that provides significant flexible and re-deployable capacity to support our planned growth, increases profitability and efficiency and drives a long-term cost advantage over our competitors. We have leveraged our purchasing power to make significant investments in operational infrastructure throughout our history, in items such as flexible and re-deployable automation and capacity improvements to improve throughput, quality and consistency. For example, we were one of the first in our industry to adopt fiber lasers and have continued to invest in this capability. Specifically, we have implemented two 10,000-watt fiber lasers with an automation tower, which are on average three times faster, provide a cleaner, more precise cut and use one-third of the power compared to traditional CO2 lasers, generating an internal rate of return, or IRR, of approximately 47% with a payback period of less than two years. Additionally, the implementation of three robotic brakes has improved quality through a continued shift towards precision automation. By reducing setup procedures, manual employee lifting requirements and downtime while offering additional capacity, the implementation of robotic brakes has generated an IRR of approximately 55% with a payback period of approximately two years. These two examples of investments in technology-enabled infrastructure allow us to alleviate up to 24 employees who can, with retraining,



 

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be redeployed into more technically skilled positions. In today’s tight labor market, the ability to redeploy labor to increase flexibility and capacity for our customers is of utmost importance and interest as part of our strategy. Our investments in continuous improvement and automation have driven operational efficiencies and improved metric tracking allowing our management team to more effectively run the business and improve the value we provide to our customers. We have, from time-to-time, made strategic, customer-driven investments that directly support new product and market expansion which result in further competitive advantages and higher switching costs for our customers.

Cost Structure and Operational Excellence. We have reduced our exposure to commodity price risk by structuring our customer contracts to pass through changes in commodity prices. As such, we have been able to effectively limit any potential impact from recent tariffs and commodity price volatility to our margins. Our scale and profitability have also allowed us the flexibility to implement continuous improvement initiatives in driving efficiencies, such as automation and additional capacity, which will result in long-term efficiency and margin improvements, and expanded capabilities.

Our Strategy

Achieve Sales Growth Through Organic Expansion. We believe there is ample opportunity to achieve deeper penetration of existing customers and to win new customers with our strong one-stop offerings. By leveraging our core product capabilities to expand into new markets, and establishing new offerings in attractive, adjacent or complementary platforms through new product introductions, there is significant opportunity to execute on our organic growth initiatives. Expanding our wallet share with our customers by capturing a wider variety of products and more platforms both increases customer switching costs and attracts potential new customers that seek to simplify supply chains, while also defending our market position from our competitors. Our expertise allows us to produce higher quality components at cost-effective rates while our volume, equipment and know-how establish competitive advantages. Further, an expanded offering increases our strategic alignment with customers and supports our “We Make Things Simple” value proposition by presenting customers with further vendor consolidation opportunities.

Pursue Opportunistic Acquisitions. Our management team maintains a proven track record of successfully executing and integrating strategic acquisitions. We have completed two significant acquisitions since 2012 (Center Mfg. Co. in 2012 and DMP in December 2018) and four other complementary acquisitions since 2004, which have contributed new capabilities, end markets and technologies to our legacy business, along with significant synergy opportunities that have enhanced our financial position. Our strategy is to continue to identify, and opportunistically execute on, accretive acquisitions that will allow our Company to achieve further growth. We believe that our reputation, scale and track record of performance makes us a “consolidator of choice” among industry participants, which has led to a growing pipeline of actionable acquisition opportunities. Our investment criteria for acquisitions are U.S.-based companies with revenues between $50—$200 million, long-standing customer bases comprised of leading OEMs, and specialization in fabricated metal components and metal coating/finishing capabilities in current and adjacent markets, among other criteria. It is our view that continued execution of our acquisition strategy provides significant opportunity to generate shareholder value through further consolidation of our fragmented industry. The market environment, comprised mainly of small local and regional players, provides ample add-on acquisition opportunities to sustain our growth trajectory and bolster our one-stop shop approach to broadly serving our customers. Beyond our existing served markets, we see potential acquisition opportunities within the rail, aerospace, heavy fabrication and food end markets, among others. We believe the liquidity resulting from this offering will enable us to continue to execute on our acquisition strategy and relevant opportunities.



 

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Continue Process-Driven Improvement Initiatives. Our process-driven improvement initiatives have resulted in significant savings throughout our history, leading to improved financial results and positive customer outcomes. Our strategy will continue to include a keen focus on continuous improvements in order to maintain a differentiated and defendable market-leading position, as well as ongoing cost and operating improvements. Improvement initiatives in 2018 were focused on strategic investments in automation technology and capacity, which are expected to drive immediate productivity and margin improvements as the integration efforts are completed. For example, we currently have process driven improvement plans that relate to:

 

   

the installation of a direct-to-metal paint line that will yield additional paint capacity and provide an improved cost position;

 

   

consolidation of our leased Wytheville, VA plant into our owned Atkins, VA facility that will result in reduced overhead and support costs, increased capacity and labor flexibility across various product lines; and

 

   

the recent and continued investment into collaborative robots that will reduce the need for direct labor employees by an estimated three to one ratio.

Maintain Alignment with Employee Base and Employee-Driven Results. Our rich history of employee ownership and personal responsibility in daily excellence has cultivated a strategic management-employee alignment and results-driven organization with each employee contributing to a common goal. Our employees will maintain a significant ownership stake following this offering, which we believe will benefit the entire organization as our strategic alignment will remain in place and continue to generate employee-driven results. As we continue to invest in our business and increasingly implement a more technology-enabled infrastructure, we will strive to redeploy our employees in other, higher-skilled areas of our business and invest in training where needed. Our employees are the foundation of our company; with experience across a diverse range of markets and capabilities, they drive innovation, believe in our process and the outcomes of their work and our success. We and our employees are also highly involved in, and actively support, the communities in which our facilities are located; our 3,100 employees take P.R.I.D.E. in creating value and support for both our customers and communities every day.

Risk Factors

An investment in our common stock involves a number of risks. You should carefully read and consider all of the information contained in this prospectus (including in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto) before making an investment decision. These risks could adversely affect our business, financial condition and results of operations, and cause the trading price of our common stock to decline. You could lose part or all of your investment. In reviewing this prospectus, you should bear in mind that past results are no guarantee of future performance. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of forward-looking statements, and the significance of forward-looking statements in the context of this prospectus.

These risks include, but are not limited to:

 

   

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;



 

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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 this offering;

 

   

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 this prospectus and to subsequently maintain effective internal control over financial reporting; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in annual gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, which we sometimes refer to as the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, which we sometimes refer to as the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

an option to present only two years of audited financial statements and related management’s discussion and analysis in the registration statement of which this prospectus is a part;

 

   

an exemption from compliance with the requirement for auditor attestation of the effectiveness of our internal control over financial reporting for so long as we qualify as an emerging growth company;

 

   

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

reduced disclosure about our executive compensation arrangements; and

 

   

an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or shareholder approval of any golden parachute arrangements.

We will remain an emerging growth company until the earliest to occur of: the last day of the year in which we have $1.07 billion or more in annual gross revenue; the date we qualify as a “large accelerated filer” with at least $700.0 million of equity securities held by non-affiliates as of the last day of our most recently completed second quarter; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the year ending after the fifth anniversary of this offering. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We intend to take advantage of certain of the exemptions discussed above, including the extended transition periods available under the JOBS Act for complying with new or revised accounting standards. Accordingly, the information contained herein may be different from the information you receive from other public companies. See “Risk Factors—Risks Related to Being a Public Company.” We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.



 

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Corporate Information

We are a Wisconsin corporation and commenced operations in 1945. Our principal operating offices are located at 715 South Street, Mayville, Wisconsin 53050, and our phone number is (920) 387-4500. Our website address is www.mecinc.com. Information contained on our website is not incorporated by reference in, and does not constitute a part of, this prospectus.

MEC Employee Stock Ownership Plan

In 1985, the Mayville Engineering Company, Inc. Employee Stock Ownership Plan began acquiring shares of our common stock and in 2003 became our sole shareholder. In connection with this offering, we will divide the existing employee stock ownership plan into two separate employee stock ownership plans, the 401(k) ESOP and the Traditional ESOP, which, together with the existing employee stock ownership plan, we sometimes refer to individually and/or collectively as the ESOP or ESOPs. The ESOP is a retirement plan and trust subject to the requirements of the Internal Revenue Code of 1986, as amended, or the Code, and the Employee Retirement Income Security Act of 1974, as amended, or ERISA. The independent trustee of the ESOP is GreatBanc Trust Company. Following consummation of this offering, our annual obligation to repurchase shares of our common stock held in the ESOP to satisfy legally required diversification distributions for eligible employees and distributions to employees who have terminated their employment with us or who passed away will terminate; and, thereafter, the ESOPs will be able to distribute shares of our common stock to these employees or ex-employees rather than cash. In addition, the ESOP participants (or their beneficiaries) will have the right to direct the ESOP Trustee on how to vote the shares of common stock allocated to such ESOP participant’s accounts under the ESOP. The ESOP Trustee will vote any ESOP shares for which no voting directions are timely received by the ESOP Trustee in its independent fiduciary discretion.

S Corporation Status

Since 1998, we have elected to be taxed for U.S. federal income tax purposes as an “S Corporation” under the provisions of Sections 1361 through 1379 of the Code. As a result, our earnings have not been subject to, and we have not paid, U.S. federal income tax, and no provision or liability for U.S. federal income tax has been included in our consolidated financial statements. Instead, for U.S. federal income tax purposes, our taxable income is “passed through” to our sole shareholder, the ESOP. As the ESOP is a retirement plan intended to be exempt from federal income taxes, we have not previously had to make any distributions to the ESOP for taxes. Except for the historical financial statements of DMP and the pro forma financial information for 2018 included elsewhere in this prospectus, no amount of our consolidated net income or our earnings per share presented in this prospectus, including in our consolidated financial statements and the accompanying notes appearing in this prospectus, reflects any provision for or accrual of any expense for U.S. federal income tax liability for any period presented. In connection with this offering, our status as an S Corporation will terminate. Thereafter, our taxable earnings will be subject to U.S. federal income tax and we will bear the liability for those taxes.



 

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THE OFFERING

 

Common stock offered by us

            shares (or             shares if the underwriters’ option to purchase additional shares is exercised in full)

 

Common stock to be outstanding upon the completion of this offering

            shares (or             shares if the underwriters’ option to purchase additional shares is exercised in full)

 

Option to purchase additional shares from us

We have granted to the underwriters a 30-day option to purchase up to             shares of our common stock at the initial public offering price less underwriting discounts and commissions

 

Use of proceeds

We estimate that our net proceeds from this offering, after deducting estimated underwriting discounts and approximately $             million of estimated offering expenses payable by us, will be approximately $             million, assuming an initial public offering price of $             per share (the midpoint of the range set forth on the cover of this prospectus). We intend to use these net proceeds to repay our outstanding indebtedness (which may include setting funds aside in a deferred compensation trust to cover part or all of our deferred compensation obligations) and for general corporate purposes (which may include future acquisitions). See “Use of Proceeds.”

 

Dividend policy

We anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. See “Dividend Policy.”

 

Concentration of ownership

Upon completion of this offering, our executive officers, directors and holders of 5% or more of our common stock, including the ESOP, will beneficially own, in the aggregate, approximately     % of our outstanding shares of common stock.

 

Proposed listing symbol

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “MEC.”

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” on page 18 of this prospectus and all other information in this prospectus before investing in our common stock.

Unless the context otherwise requires, the information in this prospectus:

 

   

assumes that the shares of our common stock to be sold in this offering are sold at $        per share (the midpoint of the range set forth on the cover of this prospectus);

 

   

assumes that all shares of our common stock offered hereby are sold;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares;



 

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gives effect to the filing and effectiveness of our amended and restated articles of incorporation and the adoption of our amended bylaws, each of which will occur immediately prior to the completion of this offering; and

 

   

gives retroactive effect to the issuance of an approximately                 -for-1 stock dividend in connection with this offering.



 

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SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following sets forth our selected consolidated financial and operating information on a historical and pro forma basis. You should read the following summary of selected consolidated financial information in conjunction with our historical consolidated financial statements, the historical consolidated financial statements of DMP, our unaudited pro forma condensed combined statement of comprehensive income, and the related notes thereto, and with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

Our summary selected historical consolidated statement of comprehensive income information for the years ended December 31, 2018 and 2017, and our related summary selected historical consolidated balance sheet information as of December 31, 2018 and 2017, have been derived from our historical audited consolidated financial statements as of and for the year ended December 31, 2018 and 2017, which are included elsewhere in this prospectus.

The unaudited pro forma condensed combined statement of comprehensive income information set forth below gives effect to the DMP acquisition as if it had occurred as of January 1, 2018, and has been prepared to reflect adjustments to our historical financial information that are (i) directly attributable to the DMP acquisition, (ii) factually supportable, and (iii) expected to have a continuing impact on our results. The unaudited pro forma condensed combined statement of comprehensive income information includes various estimates which are subject to material change and may not be indicative of what may be expected to occur in the future. The unaudited pro forma condensed combined statement of comprehensive income information does not include non-recurring items, including, but not limited to, acquisition-related legal and advisory fees. The unaudited pro forma condensed combined statement of comprehensive income information reflects the impact of:

 

   

the DMP acquisition;

 

   

other adjustments related to the DMP acquisition described in the explanatory notes to the unaudited pro forma condensed combined statement of comprehensive income information;

 

   

the reclassification of our common stock, which is, before this offering and the related amendments to our ESOP, considered temporary equity redeemable under GAAP, to shareholders’ equity, including common stock and additional paid-in capital, following this offering; and

 

   

our conversion from an S Corporation to a C Corporation for U.S. federal income tax purposes.

See the introduction and the related notes to the unaudited pro forma condensed combined statement of comprehensive income information, included elsewhere in this prospectus, for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma condensed combined statement of comprehensive income information.

Except as provided in footnote 1 below, the historical consolidated statements of operations information of DMP used in the preparation of the unaudited pro forma condensed combined statement of comprehensive income information set forth below has been derived from the historical financial statements of DMP, which are included elsewhere in this prospectus.



 

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The data for the periods presented below is not necessarily indicative of the results to be expected for any future period.

 

      For the Year Ended
December 31,
  Pro Forma
Year Ended
December 31,

2018(1)
      2018   2017
(In thousands, except share and per share data)            (Unaudited)

Statement of Comprehensive Income Data:

            

Net sales

     $ 354,526     $ 313,331     $ 523,721

Cost of sales

       303,948       278,594       454,116
    

 

 

     

 

 

     

 

 

 

Manufacturing margins

       50,578       34,737       69,605

Income from operations

       22,169       9,426       27,949

Net income

       17,935       5,246       18,065

Earnings per share—basic and diluted(2)

            

Weighted average shares outstanding(2)

            

Other Financial Data:

            

EBITDA(3)

     $ 41,823     $ 30,190     $ 57,393

EBITDA Margin(3)

       11.8 %       9.6 %       11.0 %

Transaction fees

       474            

Inventory fair value step up

       583            

Loss on debt extinguishment

       814            

Adjusted EBITDA(3)

       43,694       30,190       57,393

Adjusted EBITDA Margin(3)

       12.3 %       9.6 %       11.0 %

 

      December 31,     
      2018   2017     
(In thousands)             

Balance Sheet Data:

            

Cash and cash equivalents

     $ 3,089     $ 76                         

Total current assets

       112,759       64,173    

Total assets

       391,725       214,316    

Total current liabilities

       83,161       41,876    

Bank revolving credit notes, other long-term debt less current maturities, and other long-term liabilities

       173,101       67,919    

Deferred income taxes

       19,123        

Deferred compensation and long-term incentive, less current portion

       13,351       11,634    

Temporary equity—redeemable common shares(4)

       133,806       125,042    

Retained earnings(4)

       26,842       17,671    

Treasury stock at cost(4)

       (57,659 )       (49,826 )    

Common stock

       n/a       n/a    

Additional paid-in capital

       n/a       n/a          

 

(1)

The historical financial statements of DMP have been adjusted to eliminate DMP’s results for October 1 to December 31, 2017 and, in lieu thereof, add DMP’s results for October 1 to December 31, 2018 (excluding DMP’s results for the period in which the Company owned DMP). For additional information, see Note 2 to our consolidated financial statements.



 

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(2)

Share data gives retroactive effect to the issuance of a stock dividend of             -for-1 in connection with this offering.

 

(3)

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 this offering and the loss on debt extinguishment relating to our December 2018 credit agreement. 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.

 

(4)

Following consummation of this offering, our annual obligation to repurchase shares of our common stock held in the ESOP to satisfy legally required diversification distributions for eligible employees and distributions to employees who have terminated their employment with us or who passed away will terminate; and, thereafter, we will be able to distribute shares of our common stock to these employees or ex-employees rather than cash.

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

 

      For the Year Ended
December 31,
  Pro Forma
Year Ended
December 31,

2018
      2018   2017
(in thousands)            (Unaudited)

Net income

     $ 17,935     $ 5,246     $ 18,065

Interest expense

       3,879       4,180       8,900

Provision (benefit) for income taxes

       (459 )             984
    

 

 

     

 

 

     

 

 

 

Other

             33      

Depreciation and amortization

       20,468       20,731       29,444
    

 

 

     

 

 

     

 

 

 

EBITDA

     $ 41,823     $ 30,190     $ 57,393

Transaction fees(1)

       474            

Inventory fair value step up(2)

       583            

Loss on debt extinguishment(3)

       814            
    

 

 

     

 

 

     

 

 

 

Adjusted EBITDA

     $ 43,694     $ 30,190     $ 57,393
    

 

 

     

 

 

     

 

 

 

Net sales

       354,526       313,331       523,721

EBITDA Margin

       11.8 %       9.6 %       11.0 %

Adjusted EBITDA Margin

       12.3 %       9.6 %       11.0 %


 

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(1)

Includes transaction fees incurred in connection with the DMP acquisition and this offering. No transaction fees were incurred in 2017.

 

(2)

Relates to the purchase accounting for the one-time fair value step up of inventory.

 

(3)

Relates to the refinancing of our credit agreements.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

Failure to compete successfully in our markets could materially adversely affect our business, financial condition, results of operations or prospects.

We offer our processes and solutions in highly competitive markets. The competitors in these markets may, among other things:

 

   

respond more quickly to new or emerging technologies;

 

   

have greater name recognition, critical mass or geographic market presence;

 

   

be better positioned to take advantage of acquisition opportunities;

 

   

adapt more quickly to changes in customer requirements;

 

   

devote greater resources to the development, promotion and sale of their processes and solutions;

 

   

be better positioned to compete on price due to any combination of low-cost labor, raw materials, components, facilities or other operating items, or willingness to make sales at lower margins than us;

 

   

consolidate with other competitors in the industry which may create increased pricing and competitive pressures on our business; and

 

   

be better able to utilize excess capacity which may reduce the cost of their processes and solutions.

Competitors with lower cost structures may have a competitive advantage over us. We also expect our competitors to continue to improve the performance of their current processes and solutions, to reduce the prices of their existing processes and solutions and to introduce new processes or solutions that may offer greater performance and improved pricing. Additionally, we may face competition from new entrants to the industry in which we operate. Any of these developments could cause a decline in sales and average selling prices, loss of market share or profit margin compression. Maintaining and improving our competitive position will require successful management of these factors, including continued investment by us in research and development, engineering, marketing and customer service and support. Our future growth rate depends upon our ability to compete successfully, which is impacted by a number of factors, including, but not limited to, our ability to (i) identify emerging technological trends in our target end markets, (ii) develop and maintain a wide range of competitive and appropriately priced processes and solutions and defend our market share against an ever-expanding number of competitors including many new and non-traditional competitors, (iii) ensure that our processes and solutions remain cost-competitive and (iv) attract, develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop and sell new technologies and processes.

We are affected by developments in the industries in which our customers operate.

We derive a large amount of our net sales from customers in the following industry sectors: heavy- and medium-duty commercial vehicles, construction, powersports, agriculture and military. Factors affecting any of these

 

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industries in general, or any of our customers in particular, could adversely affect us because our net sales growth largely depends on the continued growth of our customers’ businesses in their respective industries. These factors include:

 

   

seasonality of demand for our customers’ products which may cause our manufacturing capacity to be underutilized for periods of time;

 

   

our customers’ failure to successfully market their products, to gain or retain widespread commercial acceptance of their products or to compete effectively in their industries;

 

   

loss of market share for our customers’ products, which may lead our customers to reduce or discontinue purchasing our processes and solutions and to reduce prices, thereby exerting pricing pressure on us;

 

   

economic conditions in the markets in which our customers operate, in particular, the United States, including recessionary periods such as a global economic downturn;

 

   

our customers’ decision to insource the production of components that has traditionally been outsourced to us; and

 

   

product design changes or manufacturing process changes that may reduce or eliminate demand for the components we supply.

We expect that future sales will continue to depend on the success of our customers. If economic conditions and demand for our customers’ products deteriorate, we may experience a material adverse effect on our business, operating results and financial condition.

We may not be able to maintain our manufacturing, engineering and technological expertise.

The markets for our processes and solutions are characterized by changing technology and evolving process development. The continued success of our business will depend upon our ability to:

 

   

hire, retain and expand our pool of qualified engineering and trade-skilled personnel;

 

   

maintain technological leadership in our industry;

 

   

implement new and expand upon current robotics, automation and tooling technologies; and

 

   

anticipate or respond to changes in manufacturing processes in a cost-effective and timely manner.

We cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technologies, industry standards or customer requirements may render our equipment, inventory or processes obsolete or uncompetitive. We may have to acquire new technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require us to incur significant expense and capital investment, which could reduce our margins and affect our operating results. When we establish or acquire new facilities, we may not be able to maintain or develop our manufacturing, engineering and technological expertise due to a lack of trained personnel, effective training of new staff or technical difficulties with machinery. Failure to anticipate and adapt to customers’ changing technological needs and requirements or to hire and retain a sufficient number of engineers and maintain manufacturing, engineering and technological expertise may have a material adverse effect on our business, operating results and financial condition.

We are dependent on a limited number of large customers for current and future net sales. The loss of any of these customers or the loss of market share by these customers could materially adversely affect our business, financial condition, results of operations and cash flows.

We depend on a limited number of major manufacturers for a majority of our net sales. For example, our largest customers in 2018, including John Deere, AB Volvo, Honda Motor Co. and PACCAR Inc. accounted for 17%, 14%, 12% and 12% of our pro forma net sales, respectively. Our financial performance depends in large part on our ability to continue to arrange for the purchase of our processes and solutions with these customers, and we

 

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expect these customers to continue to make up a large portion of our net sales in the foreseeable future. The loss of all or a substantial portion of our sales to any of our large-volume customers could have a material adverse effect on our business, financial condition, results of operations and cash flows by reducing cash flows and by limiting our ability to spread our fixed costs over a larger net sales base. We may make fewer sales to these customers for a variety of reasons, including, but not limited to:

 

   

loss of business relationship;

 

   

reduced or delayed customer requirements;

 

   

the insourcing of business that has been traditionally outsourced to us;

 

   

strikes or other work stoppages affecting production by our customers; or

 

   

reduced demand for our customers’ products.

Most of our customers do not commit to long-term production schedules, which makes it difficult for us to schedule production accurately and achieve maximum efficiency of our manufacturing capacity.

Most of our customers do not commit to long-term contracts or firm production schedules, and we continue to experience reduced lead-times in customer orders. Additionally, customers may change production quantities or delay production with little lead-time or advance notice. Therefore, we rely on and plan our production and inventory levels based on our customers’ advance orders, commitments and/or forecasts, as well as our internal assessments and forecasts of customer demand. The volume and timing of sales to our customers may vary due to, among others:

 

   

variation in demand for or discontinuation of our customers’ products;

 

   

our customers’ attempts to manage their inventory;

 

   

design changes;

 

   

changes in our customers’ manufacturing strategies; and

 

   

acquisitions of or consolidation among customers.

The variations in volume and timing of sales make it difficult to schedule production and optimize utilization of manufacturing capacity. This uncertainty may require us to increase staffing and incur other expenses in order to meet an unexpected increase in customer demand, potentially placing a significant burden on our resources. Additionally, an inability to respond to such increases in a timely manner may cause customer dissatisfaction, which may negatively affect our customer relationships.

Further, in order to secure sufficient production scale, we may make capital investments in advance of anticipated customer demand. Such investments may lead to low utilization levels if customer demand forecasts change and we are unable to utilize the additional capacity. Because fixed costs make up a large proportion of our total production costs, a reduction in customer demand can have a significant adverse impact on our gross profits and operating results. Additionally, we order materials and components based on customer forecasts and orders and suppliers may require us to purchase materials and components in minimum quantities that exceed customer requirements, which may have an adverse impact on our gross profits and operating results. In the past, anticipated orders from some of our customers have failed to materialize and delivery schedules have been deferred as a result of changes in our customers’ business needs.

We may be unable to realize net sales represented by our awarded business, which could materially and adversely impact our business, financial condition, results of operations and cash flows.

The realization of future net sales from awarded business is inherently subject to a number of important risks and uncertainties, including a lack of long-term commitments and production schedules with customers. Accordingly,

 

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we cannot assure you that we will realize any or all of the future net sales represented by our awarded business. Any failure to realize these net sales could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition to not having a commitment from our customers regarding the minimum number of components they must purchase from us if we obtain awarded business, typically the terms and conditions of the agreements with our customers provide that they have the contractual right to unilaterally terminate our contracts with them with no notice or limited notice. In many cases, we must commit substantial resources in preparation for production under awarded customer business well in advance of the customer’s production start date. If such contracts are terminated by our customers, our ability to obtain compensation from our customers for such termination is generally limited to the direct out-of-pocket costs that we incurred for raw materials and work-in-progress. Although we have been successful in recovering these costs under appropriate circumstances in the past, we cannot assure you that our results of operations will not be materially adversely impacted in the future if we are unable to recover these types of pre-production costs related to our customers’ cancellation of awarded business.

Our growth strategy includes acquisitions, and we may not be able to identify attractive acquisition targets or successfully integrate acquired targets without impacting our business.

Acquisitions have played a key role in our growth strategy, and we expect to continue to grow through acquisitions in the future. We expect to continue evaluating potential strategic acquisitions of businesses, assets and product lines. We may not be able to identify suitable candidates, negotiate appropriate or favorable acquisition terms, obtain financing that may be needed to consummate such transactions or complete proposed acquisitions. There is significant competition for acquisition and expansion opportunities in our businesses, which may increase the cost of any acquisition or result in the loss of attractive acquisition targets.

In addition, acquisitions involve numerous risks, including (i) incurring the time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business; (ii) using estimates and judgments to evaluate credit, operations, funding, liquidity, business, management and market risks with respect to the target entity or assets; (iii) litigation relating to an acquisition, particularly in the context of a publicly held acquisition target, could require us to incur significant expenses or result in the delaying or enjoining of the transaction; (iv) failing to properly identify an acquisition candidate’s liabilities, potential liabilities or risks; and (v) not receiving required regulatory approvals or such approvals being delayed or restrictively conditional. In addition, any acquisitions could involve the incurrence of substantial additional indebtedness or dilution to our shareholders. We cannot assure you that we will be able to successfully integrate any acquisitions that we undertake or that such acquisitions will perform as planned or prove to be beneficial to our operations and cash flow. Any such failure could seriously harm our financial condition, results of operations and cash flows.

We routinely evaluate potential acquisition candidates and engage in discussions and negotiations regarding potential acquisitions; however, even if we execute a definitive agreement for an acquisition, there can be no assurance that we will consummate the transaction within the anticipated closing timeframe, or at all. Further, acquisitions typically involve the payment of a premium over book- and market-value for the target business or asset and, therefore, some dilution of our tangible book value and/or earnings per common share may occur in connection with any future transaction.

Entering new markets, either organically or via acquisition, poses new competitive threats and commercial risks.

As we expand into new markets, either organically or via acquisition, we expect to diversify our net sales by leveraging our development, engineering and manufacturing capabilities in order to source necessary parts and

 

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components for other industries. Such diversification requires investments and resources that may not be available as needed. Furthermore, even if we sign contracts in new markets, we cannot guarantee that we will be successful in leveraging our capabilities into these new markets and thus in meeting the needs of these customers and competing favorably in these new markets. If these customers experience reduced demand for their products or financial difficulties, our future prospects will be negatively affected as well.

If we fail to develop new and innovative processes or if customers in our market do not accept them, our results would be negatively affected.

Our processes must be kept current to meet our customers’ needs. To remain competitive, we therefore must develop new and innovative processes on an ongoing basis. If we fail to make innovations or the market does not accept our new processes, our sales and results would suffer. We invest significantly in the research and development of new processes; however, these expenditures do not always result in processes that will be accepted by the market. To the extent they do not, whether as a function of the process or the business cycle, we will have increased expenses without significant sales to offset such costs. Failure to develop successful new processes may also cause potential customers to purchase from competitors.

We depend on our key executive officers, managers and trade-skilled personnel and may have difficulty retaining and recruiting qualified employees. Moreover, we operate in competitive labor markets, which may also impact our ability to hire and retain employees at our facilities.

Our success depends to a large extent upon the continued services of our executive officers, senior management, managers and trade-skilled personnel and our ability to recruit and retain skilled personnel to maintain and expand our operations. We could be affected by the loss of any of our executive officers who are responsible for formulating and implementing our business plan and strategy, and who have been instrumental in our growth and development. In addition, in order to manage our growth, we will need to recruit and retain additional management personnel and other skilled employees at our facilities. However, competition for our trade-skilled labor is high, particularly in some of the geographic locations where our facilities are located. Although we intend to continue to devote significant resources to recruit, train and retain qualified employees, we may not be able to attract, effectively train and retain these employees. Any failure to do so could impair our ability to conduct design, engineering and manufacturing activities, efficiently perform our contractual obligations, develop marketable components, timely meet our customers’ needs and ultimately win new business, all of which could adversely affect our business, financial condition and results of operations. If we are not able to do so, our business and our ability to continue to grow could be negatively affected. In addition, salaries and related costs are a significant portion of the cost of providing our solutions and, accordingly, our ability to efficiently utilize our workforce impacts our profitability. If our employees are under-utilized, our profitability could suffer.

We are dependent on information technology and our systems and infrastructure face certain risks, including cyber security risks and data leakage risks.

We are dependent on information technology systems and infrastructure that could be damaged or interrupted by a variety of factors. Any significant breach, breakdown, destruction or interruption of these systems by employees, others with authorized access to our systems or unauthorized persons has the potential to negatively affect our operations. There is also a risk that we could experience a business interruption, theft of information or reputational damage as a result of a cyberattack, such as the infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. Although we have invested in the protection of our data and information technology to reduce these risks and periodically test the security of our information systems network, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could have a material adverse effect on our financial condition, results of operations and liquidity.

 

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We may incur additional expenses and delays due to technical problems or other interruptions at our manufacturing facilities.

Disruptions in operations due to technical problems or power interruptions as well as other interruptions such as floods, fire or other natural disasters could adversely affect the manufacturing capacity of our facilities. Such interruptions could cause delays in production and cause us to incur additional expenses such as charges for expedited deliveries for components that are delayed. Additionally, our customers have the ability to cancel purchase orders in the event of any delays in production and may decrease future orders if delays are persistent. Additionally, to the extent that such disruptions do not result from damage to our physical property, these may not be covered by our business interruption insurance. Any such disruptions may adversely affect our operations and financial results.

Political and economic developments could adversely affect our business.

Increased political instability and social unrest, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures and the related decline in consumer confidence may hinder our ability to do business. Any escalation in these events or similar future events may disrupt our operations or those of our customers and suppliers and could affect the availability of raw materials and components we need in our manufacturing operations or the means to transport those materials or components to our manufacturing facilities and finished parts to our customers. These events have had and may continue to have an adverse effect, generally, on the economy and consumer confidence and spending, which could adversely affect our net sales and operating results. The effect of these events on the volatility of the financial markets could in the future lead to volatility of the market price of our securities and may limit the capital resources available to us, our customers and our suppliers.

Volatility in the prices or availability of raw materials and energy prices and our ability to pass along increased costs to our customers could adversely affect our results of operations.

The prices and availability of raw materials critical to our business and performance are based on global supply and demand conditions. Certain raw materials used by us are only available from a limited number of suppliers, and it may be difficult to find alternative suppliers at the same or similar costs. While we strive to pass through the price of raw materials to our customers, we may not be able to do so in the future, and volatility in the prices of raw materials may affect customer demand for certain components. In addition, we, along with our suppliers and customers, rely on various energy sources for a number of activities connected with our business, such as the transportation of raw materials and finished parts. The availability and pricing of these resources are subject to market forces that are beyond our control. Furthermore, we are vulnerable to any reliability issues experienced by our suppliers, which also are beyond our control. Our suppliers contract separately for the purchase of such resources, and our sources of supply could be interrupted should our suppliers not be able to obtain these materials due to higher demand or other factors that interrupt their availability. Energy and utility prices, including electricity and water prices, and in particular prices for petroleum-based energy sources, are volatile. Increased supplier and customer operating costs arising from volatility in the prices of energy sources, such as increased energy and utility costs and transportation costs, could be passed through to us and we may not be able to increase our product prices sufficiently or at all to offset such increased costs. The impact of any volatility in the prices of energy or the raw materials on which we rely, including the reduction in demand for certain components caused by such price volatility, could result in a loss of net sales and profitability and adversely affect our results of operations.

 

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Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages.

We obtain raw materials, parts and certain components from third-party suppliers. Any delay in receiving supplies could impair our ability to timely deliver components to our customers and, accordingly, could have an adverse effect on our business, financial condition, results of operations and cash flows. The volatility in the financial markets and uncertainty in the sectors our suppliers service could result in exposure related to the financial viability of certain of our suppliers. Suppliers may also exit certain business lines, causing us to find other suppliers for materials or components and potentially delaying our ability to deliver components to customers, or our suppliers may change the terms on which they are willing to provide parts or materials to us, any of which could adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized workforces that could be subject to work stoppages as a result of labor relations issues. Some of our suppliers supply components and materials that cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the components or materials.

The impact of foreign trade relations and associated tariffs could adversely impact our business.

We currently source certain raw materials from international suppliers. Import tariffs, taxes, customs duties and/or other trade regulations imposed by the U.S. government on foreign countries, or by foreign countries on the United States, could significantly increase the prices we pay for certain raw materials, such as steel, aluminum and purchased components, that are critical to our ability to manufacture components for our customers. In addition, we may be unable to find a domestic supplier to provide the necessary raw materials on an economical basis in the amounts we require. If the cost of our raw materials increases, or if we are unable to procure the necessary raw materials required to manufacture our components, then we could experience a negative impact on our operating results, profitability, customer relationships and future cash flows.

Additionally, our customers’ businesses may be negatively impacted by import tariffs, taxes, customs duties and/or other trade regulations imposed by the U.S. government on foreign countries or by foreign countries on the United States, which could, in turn, reduce our customers’ demand for the components that we manufacture for them. Any reduction in customer demand for our components as a result such tariffs, taxes, customs duties and/or other trade regulations could have a material adverse impact on our financial position, results of operations, cash flows and liquidity.

Because our industry is capital intensive and we have significant fixed and semi-fixed costs, our profitability is sensitive to changes in volume.

The property, plants and equipment needed to produce components for our customers and provide our processes and solutions can be very expensive. We must spend a substantial amount of capital to purchase and maintain such property, plants and equipment. Although we believe our current cash balance, along with our projected internal cash flows and available financing sources, will provide sufficient cash to support our currently anticipated operating and capital needs, if we are unable to generate sufficient cash to purchase and maintain the property, plants and equipment necessary to operate our business, we may be required to reduce or delay planned capital expenditures or to incur additional indebtedness.

 

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We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions, and we may not be able to do so on favorable terms, or at all, which would impair our ability to operate our business or achieve our growth objectives.

Our ongoing ability to generate cash is important for the funding of our continuing operations, making acquisitions and servicing our indebtedness. To the extent that existing cash balances and cash flow from operations, together with borrowing capacity under our existing credit facilities, are insufficient to make investments or acquisitions or provide needed working capital, we may require additional financing from other sources. Our ability to obtain such additional financing in the future will depend in part upon prevailing capital market conditions, as well as conditions in our business and our operating results, and those factors may affect our efforts to arrange additional financing on terms that are acceptable to us. Furthermore, if economic, political or other market conditions adversely affect the financial institutions that provide credit to us, it is possible that our ability to draw upon our existing credit facilities may be impacted. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges, resulting in loss of market share, any of which could have a material adverse impact on our financial position, results of operations, cash flows and liquidity.

The risks associated with climate change, as well as climate change legislation and regulations, could adversely affect our operations and financial condition.

The physical risks of climate change, such as more frequent or more extreme weather events, changes in temperature and precipitation patterns, changes to ground and surface water availability and other related phenomena, could affect some, or all, of our operations. Severe weather or other natural disasters could be destructive, which could result in increased costs, including supply chain costs.

In addition, a number of government bodies have finalized, proposed or are contemplating legislative and regulatory changes in response to growing concerns about climate change. In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases, or GHGs. The Environmental Protection Agency has finalized a series of GHG monitoring, reporting and emissions control rules for certain large sources of GHGs, and the U.S. Congress has, from time to time, considered adopting legislation to reduce GHG emissions. Numerous states have already taken measures to reduce GHG emissions, primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While the current administration has announced that the United States will withdraw from international commitments to reduce GHG emissions, many state and local officials have announced their decisions to uphold such commitments.

Although it is not possible at this time to predict how future legislation or regulations to address GHG emissions would impact our business, any such laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations, could require us to incur costs to reduce GHG emissions associated with our operations. We cannot assure you that our costs, liabilities and obligations relating to environmental matters will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our manufacturing, painting and coating operations are subject to environmental, health and safety laws and regulations that could result in liabilities to us.

Our manufacturing, painting and coating operations are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water, the management and disposal of hazardous substances, the cleanup of contaminated sites and health and safety matters. We could incur material costs, including cleanup costs, civil and criminal fines, penalties and third-party claims for cost recovery, property

 

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damage or personal injury as a result of violations of or liabilities under such laws and regulations. The ultimate cost of remediating contaminated sites, if any, is difficult to accurately predict and could exceed estimates. In addition, as environmental, health and safety laws and regulations have tended to become stricter, we could incur additional costs complying with requirements that are promulgated in the future.

If our manufacturing processes do not comply with applicable statutory and regulatory requirements, or if we manufacture components containing manufacturing defects, demand for our capabilities may decline and we may be subject to liability claims.

Our manufacturing processes and facilities need to comply with applicable statutory and regulatory requirements. We may also have the responsibility to ensure that the processes we use satisfy safety and regulatory standards, including those applicable to our customers and to obtain any necessary certifications. In addition, our customers’ products, as well as the manufacturing processes and components that we use to produce such products, are often highly complex. As a result, components that we manufacture may at times contain manufacturing defects, and our manufacturing processes may be subject to errors or not be in compliance with applicable statutory and regulatory requirements or demands of our customers. Defects in the components we manufacture, whether caused by a manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments to customers, replacement costs or reduced or cancelled customer orders. If these defects or deficiencies are significant, our business reputation may also be damaged. The failure of the components that we manufacture for our customers to comply with applicable statutory and regulatory requirements may subject us to legal fines or penalties and, in some cases, require us to shut down or incur considerable expense to correct a manufacturing process or facility. In addition, these defects may expose us to liability to pay for the recall of a customer’s product or to indemnify our customers for the costs of any such claims or recalls which they face as a result of using items manufactured by us in their products.

Adverse judgments or settlements in legal disputes, including product liability, intellectual property infringement and other claims, could result in materially adverse monetary damages or injunctive relief and damage our business and/or our reputation.

We are subject to, and may become a party to, a variety of litigation or other claims and suits that arise from time to time in the ordinary course of our business. The results of litigation and other legal proceedings are inherently uncertain and adverse judgments or settlements in some or all of these legal disputes may result in materially adverse monetary damages or injunctive relief against us. Additionally, our insurance policies may not protect us against potential liability due to various exclusions in the policies and self-insured retention amounts. Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future.

The components we manufacture can expose us to potential liabilities. For instance, our manufacturing businesses expose us to potential product liability claims resulting from injuries caused by defects in components we design or manufacture, as well as potential claims that components we design infringe on third-party intellectual property rights. Such claims could subject us to significant liability for damages, subject the infringing portion of our business to injunction and, regardless of their merits, could be time-consuming and expensive to resolve. We may also have greater potential exposure from warranty claims and recalls due to problems caused by component or product design. Although we have product liability insurance coverage, it may not be sufficient to cover the full extent of our product liability, if at all. A successful product liability claim in excess or outside of our insurance coverage or any material claim for which insurance coverage was denied or limited and for which

 

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indemnification was not available could have a material adverse effect on our business, results of operations and/or financial condition.

We may experience work-related accidents that may expose us to liability claims.

Due to the nature of our operations, we are subject to the risks of our employees being exposed to industrial-related accidents at our premises. If such accidents occur in the future, we may be required to pay compensation and may also suffer reputational harm. Under such circumstances, our business and financial performance could be adversely affected.

Increases in the cost of employee benefits could impact our financial results and cash flows.

Our expenses relating to employee health benefits are significant. Unfavorable changes in the cost of and the unpredictability of claims under such benefits could impact our financial results and cash flows. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. Pursuant to the Affordable Care Act, employees may be ineligible for certain healthcare subsidies if such employee is eligible and offered qualifying and affordable healthcare coverage under an employer’s plan. Due to the breadth and complexity of the healthcare reform legislation, the lack of implementing regulations and interpretive guidance and the uncertainty surrounding further reform proposals, we are not able to fully determine the impact that healthcare reform will have in the future on company sponsored medical plans.

Compliance or the failure to comply with regulations and governmental policies could cause us to incur significant expense.

We are subject to a variety of local and foreign laws and regulations including those relating to labor and health and safety concerns. Such laws may require us to pay mandated compensation and penalties. Additionally, we may need to obtain and maintain licenses and permits to conduct business in various jurisdictions. If we or the businesses or companies we acquire have failed or fail in the future to comply with such laws and regulations, then we could incur liabilities and fines and our operations could be suspended. Such laws and regulations could also restrict our ability to modify or expand our facilities, could require us to acquire costly equipment, or could impose other significant expenditures.

Prior to this offering, we were treated as an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could have an adverse effect on our business, financial condition and results of operations.

Upon the consummation of this offering, our status as an S Corporation will terminate and we will be treated as a “C Corporation” for U.S. federal income tax purposes and thus will begin to be subject to U.S. federal income tax. If the unaudited, open tax years in which we were an S Corporation are audited by the Internal Revenue Service, or IRS, and we are determined not to have qualified for, or to have violated any requirement for maintaining, our S Corporation status, we will be obligated to pay back taxes, interest and possibly penalties. The amounts that we would be obligated to pay could include taxes on all our taxable income attributable to such open tax years. Any such claims could result in additional costs to us and could have a material adverse effect on our business, financial condition and results of operations.

 

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Prior to the completion of this offering we are 100% owned by the ESOP, which is a retirement plan intended to be tax-qualified. If the ESOP fails to meet the requirements of a tax-qualified retirement plan, we could be subject to substantial penalties.

The ESOP is a defined contribution retirement plan subject to the requirements of the Code and ERISA. The ESOP has received a determination letter from the IRS that it meets the requirements of a tax-qualified retirement plan in form and we endeavor to maintain and administer the ESOP in compliance with all requirements of the Code and ERISA. However, the rules regarding tax-qualified plans, and especially ESOPs, are complex and change frequently. Accordingly, it is possible that the ESOP may not have been and may not in the future be administered in full compliance with all applicable rules under the Code or ERISA.

If the IRS were to determine that the ESOP was not in material compliance with the Code or ERISA, then the ESOP could lose its tax-qualified status and we could be subject to substantial penalties under the Code and/or ERISA, which could have a material adverse effect on our business, financial condition or results of operations. Additionally, any retroactive loss of the ESOP’s tax-qualified status would adversely impact our prior treatment as an S Corporation. See “—Prior to this offering, we were treated as an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could have an adverse effect on our business, financial condition and results of operations.”

Any failure to protect our customers’ intellectual property that we use in the products we manufacture for them could harm our customer relationships and subject us to liability.

The products we manufacture for our customers often contain our customers’ intellectual property, including copyrights, patents, trade secrets and know-how. Our success depends, in part, on our ability to protect our customers’ intellectual property. The steps we take to protect our customers’ intellectual property may not adequately prevent its disclosure or misappropriation. If we fail to protect our customers’ intellectual property, our customer relationships could be harmed and we may experience difficulty in establishing new customer relationships. In addition, our customers might pursue legal claims against us for any failure to protect their intellectual property, possibly resulting in harm to our reputation and our business, financial condition and operating results.

Risks Related to Our Indebtedness

Our Credit Agreements restrict our ability and the ability of our subsidiaries to engage in some business and financial transactions.

On December 14, 2018, we entered into a credit agreement with certain lenders and Wells Fargo Bank, National Association, as administrative agent, which we sometimes refer to as the Senior Credit Agreement. The Senior Credit Agreement provides for (i) a $90.0 million revolving credit facility, 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, which we sometimes collectively refer to as the Revolving Loan, and (ii) a $69.0 million term loan facility, which we sometimes refer to as Term Loan A, and a $26.0 million real estate term loan facility, which we sometimes refer to as the Real Estate Term Loan, and, together with Term Loan A, which we sometimes collectively refer to as the Term Loans.

On December 14, 2018, we also entered into a credit agreement with certain lenders and Wells Fargo Strategic Capital Inc., as administrative agent, which we sometimes refer to as the Subordinated Credit Agreement and, together with the Senior Credit Agreement, as the Credit Agreements. The Subordinated Credit Agreement provides for a $25.0 million term loan facility, which we sometimes refer to as the Subordinated Term Loan.

 

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Our Credit Agreements contain a number of covenants that limit our ability and the ability of our subsidiaries to:

 

   

create, incur or assume indebtedness (other than certain permitted indebtedness);

 

   

create or incur liens (other than certain permitted liens);

 

   

make investments (other than certain permitted investments);

 

   

merge or consolidate with another entity or sell our stock other than to the ESOP or pursuant to an initial public offering reasonably satisfactory to the administrative agent for each of the Credit Agreements;

 

   

make asset dispositions (other than certain permitted dispositions);

 

   

declare or pay any dividend or any other distribution to shareholders;

 

   

enter into transactions with affiliates;

 

   

make certain organizational changes, including changing our fiscal year end or amending our organizational documents;

 

   

pay or amend or waive the terms of subordinated indebtedness;

 

   

enter into any agreement further restricting our ability to create or assume any lien;

 

   

sell notes receivable or accounts receivable except under certain circumstances;

 

   

enter into sale leaseback transactions;

 

   

incur capital expenditures in excess of $25,000,000, in the case of the Senior Credit Agreement, or $26,000,000, in the case of the Subordinated Credit Agreement, in any fiscal year;

 

   

permit any person or group other than the ESOP to own or control more than 20% of our equity interests; or

 

   

permit our board of directors to not be composed of a majority of our continuing directors (i.e., our directors as of December 14, 2018 and any additional or replacement directors that have been approved by at least 51% of the directors then in office).

Each Credit Agreement also requires us to maintain a fixed charge coverage ratio and a consolidated leverage ratio, and contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, certain changes of control, material money judgments and failure to maintain subsidiary guarantees). If an event of default occurs under either Credit Agreement, the lenders under such Credit Agreement will be entitled to take various actions, including the acceleration of amounts due thereunder, the termination of such credit facility and all actions permitted to be taken by a secured creditor. Our failure to comply with our obligations under either Credit Agreement may result in an event of default under such Credit Agreement. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.

We are able to incur additional debt, which could reduce our ability to satisfy our current obligations under our existing indebtedness.

At December 31, 2018, we had $95.0 million outstanding under the Term Loans, $59.6 million outstanding under the Revolving Loan and $25.0 million outstanding under the Subordinated Term Loan. In addition, we may be able to incur significant additional indebtedness in the future, and we may do so, among other reasons, to fund acquisitions as part of our growth strategy. Although each of the Credit Agreements contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and we could incur substantial additional indebtedness in compliance with these restrictions.

 

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Risks Related to Our Common Stock and This Offering

Your ability to influence corporate matters may be limited because the ESOP owns a substantial amount of our stock and will continue to have significant influence over us after this offering, which may limit your ability to influence the outcome of important transactions, including a change in control.

Upon completion of this offering, our employees and certain former employees, through their interests in the 401(k) ESOP and the Traditional ESOP, will beneficially own approximately     % of the outstanding shares of our common stock. Following completion of this offering, each ESOP participant is entitled to direct the vote of the shares allocated to his or her ESOP account, in his or her sole discretion. As a result, our employees and former employees, if acting together, will be able to influence or control matters requiring approval by our shareholders, including the election of directors, influence over our management and policies and the approval of mergers, acquisitions or other extraordinary transactions. As employees and former employees, the ESOP participants’ interests may be contrary to yours. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our non-ESOP shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

The ESOP Trustee may have the power to vote in its discretion a large block of shares on matters presented to shareholders for approval.

Following completion of this offering, ESOP participants have the right to direct the vote of the shares allocated to his or her ESOP account. However, if a participant does not timely direct the voting of his or her shares, then the ESOP Trustee will vote such shares in its independent fiduciary discretion. Additionally, the ESOP Trustee has fiduciary duties under ERISA which may cause the ESOP Trustee to override participants’ voting directions. Consequently, there may be circumstances in which the ESOP Trustee has the ability to vote a significant block of shares on matters presented to shareholders for approval. The ESOP, which as a retirement plan has the purpose of providing retirement benefits to current and former employees of the company and their beneficiaries, may have interests that are different from yours and may vote in a way with which you disagree and which may be adverse to your interests.

There is no existing market for our common stock and an active, liquid trading market for our common stock may not develop following this offering.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The initial public offering price of our common stock was determined by negotiation between us and the underwriters, and may not be indicative of prices that will prevail after the completion of this offering. In addition, the market price of our common stock may decline below the initial public offering price, and you may not be able to resell your shares at, or above, the initial public offering price.

The market price of our common stock may be volatile, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for shares of our common stock. The initial public offering price of our common stock will be determined through negotiation between us and the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the market price of our common stock following this offering is likely to be highly volatile, may be higher or lower than the initial public offering price and could be subject to wide

 

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fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

relatively small percentage of our common stock available publicly;

 

   

actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

changes in the market’s expectations about our operating results;

 

   

changes in our orders in a given period;

 

   

success of competitors;

 

   

our operating results failing to meet the expectation of securities analysts or investors in a particular period;

 

   

changes in financial estimates and recommendations by securities analysts concerning us or the markets in general;

 

   

operating and stock price performance of other companies that investors deem comparable to us;

 

   

our ability to manufacture new and enhanced components for the products of our customers on a timely basis;

 

   

changes in laws and regulations affecting our business;

 

   

commencement of, or involvement in, litigation involving us;

 

   

changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

 

   

the volume of securities available for public sale;

 

   

any major change in our board of directors or management;

 

   

sales of substantial amounts of our securities by our directors, executive officers or significant shareholders or the perception that such sales could occur; and

 

   

general economic and political conditions such as recession, interest rates, tariffs, fuel prices, international currency fluctuations and acts of war or terrorism.

In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Additionally, if our common stock is not listed on, or becomes delisted from, the New York Stock Exchange, or NYSE, for any reason, and is quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on the NYSE or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.

Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

Immediately after this offering, we will have outstanding            shares of our common stock. Of these shares, the            shares sold in this offering will be freely tradable except for any shares purchased by our “affiliates” as that term is used in Rule 144 under the Securities Act.

Of the remaining outstanding shares approximately            shares of common stock will be held by the ESOP. Additionally,            shares of common stock are reserved for issuance under the Mayville Engineering Company, Inc. 2019 Omnibus Incentive Plan, which we sometimes refer to as the Omnibus Incentive Plan, which we adopted in connection with this offering. We intend to register the shares reserved for issuance under our Omnibus Incentive Plan and the shares subject to diversification rights under the ESOP and applicable law on Form S-8 registration statements following this offering.

 

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The 2019 annual diversification election opportunity for participants in the Traditional ESOP (based upon participant share balances as of December 31, 2018) is anticipated to run until at least the 90th day following completion of this offering and the Traditional ESOP will then distribute shares of our common stock that any participants have elected to diversify 90 days following the end of the diversification election period. Therefore, no shares distributed in connection with Traditional ESOP diversification elections will be available for sale prior to 180 days following the date of this offering, but shares will be distributed to electing participants no later than December 31, 2019. As of                , 2019, approximately    % of our shares, after taking into effect this offering, will be eligible for the 2019 diversification opportunity. There are approximately 150 Traditional ESOP participants that are eligible to diversify in the 2019 diversification period, who have an average balance of 0.027% of our shares prior to this offering, and none of whom hold more than 0.386% of our shares prior to this offering. Upon completion of the 2019 diversification opportunity, eligible Traditional ESOP participants’ next opportunity to diversify will occur during the 2020 diversification election period, and annually thereafter.

As required by law, 401(k) ESOP participants who have at least three years of service will be able to elect to sell some or all the shares of our common stock held in their 401(k) ESOP accounts and invest such proceeds in the other investment options made available under the 401(k) ESOP. The initial participant diversification opportunity will take place 180 days after the date of this offering following which the trustee will sell shares on behalf of diversifying participants in an orderly fashion. Therefore, no shares distributed in connection with 401(k) ESOP diversification elections will be available for sale prior to 180 days following the date of this offering. As of                    , 2019, approximately     % of our shares, after taking into effect this offering, would be eligible for the diversification election under the 401(k) ESOP. There are approximately 2,200 401(k) ESOP participants that are eligible to diversify in the initial diversification opportunity, who have an average balance of 0.009% of our shares prior to this offering, and none of whom hold more than 0.118% of our shares prior to this offering.

Upon termination of employment or death, participants are entitled to receive distributions in equal annual installments over a period of five years of the shares of our common stock allocated to such participant’s account under the 401(k) ESOP and the Traditional ESOP. The 2019 annual distribution period for these ex-employees will occur no earlier than 180 days following the date of this offering. As of                    , 2019, approximately      % of our shares, after taking into effect this offering, will be the subject of such a distribution. There are approximately 780 ESOP participants that will receive shares of our common stock in the 2019 distribution, who will receive, on average, 0.007% of our shares prior to this offering, and none of whom will receive in the 2019 distribution more than 0.184% of our shares prior to this offering.

Following the time periods set forth above, the terms of the ESOPs may be amended to allow for more frequent sales of our common stock by participants or more frequent distributions to terminated participants.

While our officers and directors and the ESOP itself (subject to certain exceptions) are subject to lock-up agreements, other participants in the ESOP generally are not subject to lock-up agreements. Therefore, participants who fall into one of the three categories described above and who are not locked up will be eligible to sell all their shares in the market after the dates described above without restrictions. We cannot predict whether any participants will exercise their diversification elections or if they do as to how many shares. We cannot predict the effect, if any, that the sales of shares by the participants who make diversification elections or who receive shares following their termination of employment or death may have on the market price of our common stock. Sales of substantial amounts of our common stock by participants may cause the market price of our common stock to decline.

After this offering, we will have an aggregate of            shares of common stock authorized but unissued and not reserved for issuance under our Omnibus Incentive Plan or otherwise. We may issue all of these shares without any action or approval by our shareholders. The issuance of additional shares could be dilutive to existing holders.

 

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Investors in this offering will experience immediate and substantial dilution.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after this offering. Based on an assumed initial public offering price of $            per share (the mid-point of the price range set forth on the cover page of this prospectus) and our net tangible book value as of December 31, 2018, if you purchase our common stock in this offering you will pay more for your shares than the amounts paid by our existing shareholders for their shares and you will suffer immediate dilution of approximately $            per share in pro forma net tangible book value. See “Dilution.” As a result of such dilution, investors purchasing common stock in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our securities could decline.

The trading market for our securities will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who may cover us change their recommendation regarding our securities adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

We will have broad discretion over the use of the proceeds to us from this offering, and we may not use these funds in a manner of which you would approve or which would enhance the market price of our common stock.

We will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our board of directors and management regarding the use of these proceeds. We intend to use a significant portion of the net proceeds from this offering to repay existing indebtedness, including indebtedness incurred with respect to the DMP acquisition.

After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.

The continued operation and growth of our business, including acquisitions and capital expenditures, will require substantial cash. Accordingly, after the completion of this offering, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, any contractual restrictions, our indebtedness, restrictions imposed by applicable law and other factors our board of directors deems relevant. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Some provisions of Wisconsin law and our amended and restated articles of incorporation and bylaws that will be in effect at the closing of this offering could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

Upon the closing of this offering, our status as a Wisconsin corporation and the anti-takeover provisions of the Wisconsin Business Corporation Law, which we sometimes refer to as the WBCL, may discourage, delay or

 

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prevent a change in control even if a change in control would be beneficial to our shareholders by prohibiting us from engaging in a business combination with an interested shareholder for a period of three years after the person becomes an interested shareholder. We may engage in a business combination with an interested shareholder after the expiration of the three-year period with respect to that shareholder only if one or more of the following conditions is satisfied: (i) our board of directors approved the acquisition of the stock before the date on which the shareholder acquired the shares, (ii) the business combination is approved by a majority of our outstanding voting stock not beneficially owned by the interested shareholder or (iii) the consideration to be received by shareholders meets certain fair price requirements of the WBCL with respect to form and amount.

In addition, our amended and restated articles of incorporation and bylaws that will be in effect upon the closing of this offering contain provisions that may make the acquisition of the company more difficult, including the following:

 

   

establishing a classified board of directors so that not all members of our board of directors are elected at one time, which could delay the ability of shareholders to change the membership of a majority of our board of directors;

 

   

authorizing undesignated preferred stock, the terms of which may be established and shares of which may be issued by our board of directors without shareholder approval;

 

   

requiring certain procedures to be satisfied in order for a shareholder to call a special meeting of shareholders, including requiring that we receive written demands for a special meeting from holders of 10% or more of all the votes entitled to be cast on any issue proposed to be considered;

 

   

requiring that a director may be removed from office only for “cause” and with the affirmative vote of shareholders holding at least 66 2/3% of the then outstanding shares of stock entitled to vote in the election of directors;

 

   

not providing for cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors; and

 

   

establishing advance notice procedures for shareholder proposals or the nomination of candidates for election as directors.

These provisions could have the effect of discouraging, delaying or preventing a transaction involving a change in control of the company. These provisions could also have the effect of discouraging proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing or prevent us from taking other corporate actions that you desire.

Risks Related to Being a Public Company

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business.

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the United States Securities and Exchange Commission, or the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a negative effect on our business, financial condition and operating results.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which we sometimes refer to as the Exchange Act, and the requirements of the Sarbanes-Oxley Act of 2002. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we may need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements

 

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applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join the company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and operating results.

We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

We have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

As a public company, we will be required in future years to document and assess the effectiveness of our system of internal controls over financial reporting to satisfy the requirements of the Sarbanes-Oxley Act.

During the course of preparing for this offering, we identified two material weaknesses in the design and operation of our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The first material weakness relates to information technology general controls specific to segregation of duties, systems access and change management processes. The second material weakness relates to a lack of consistently documented accounting policies and procedures, a lack of controls over the preparation and review of journal entries and a limited number of personnel with a level of GAAP accounting knowledge commensurate with our financial reporting requirements, which, in the aggregate, constitute a material weakness.

We are currently evaluating a number of steps to enhance our internal control over financial reporting and address these material weaknesses, including: hiring of additional financial reporting personnel with technical accounting and financial reporting experience, enhancing our internal review procedures during the financial statement close process, and designing and implementing IT general computer controls; however, our current efforts to design and implement effective controls may not be sufficient to remediate the material weaknesses described above or prevent future material weaknesses or other deficiencies from occurring. Despite these actions, we may identify additional material weaknesses in our internal control over financial reporting in the future.

If we fail to effectively remediate these material weaknesses in our internal control over financial reporting, if we identify future material weaknesses in our internal control over financial reporting or if we are unable to comply with the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price may be adversely affected.

Commencing with our second annual report on Form 10-K that we will file after becoming a public reporting company, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our

 

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Form 10-K filing for that year, as required by Section 404 of the Sarbanes Oxley Act. We expect to expend significant resources in developing the necessary documentation and testing procedures required by Section 404. If we fail to implement the requirements of Section 404 in a timely manner, regulatory authorities such as the SEC or the Public Company Accounting Oversight Board, or the PCAOB, might subject us to sanctions or investigation. We cannot be certain that the actions we will be taking to improve our internal controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that have not made this election.

For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the last day of the year in which we have total annual gross revenue of $1.07 billion or more; (ii) the last day of the year following the fifth anniversary of the date of the closing of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Our business and stock price may suffer as a result of our lack of public company operating experience.

We have never operated as a public company, and we expect that the obligations of being a public company, including substantial public reporting, auditing and investor relations obligations, will require significant additional expenditures, place additional demands on our management and require the hiring of additional personnel. These obligations will increase our operating expenses and could divert our management’s attention from our operations. The Sarbanes-Oxley Act and the SEC rules and regulations implementing such Act, as well as various NYSE rules, will require us to implement additional corporate governance practices and may require further changes. These rules and regulations will increase our legal and financial compliance costs, and make some activities more difficult, time-consuming and/or costly. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors and qualified members of our management team.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering, after deducting estimated underwriting discounts and commissions and approximately $                million of estimated offering expenses payable by us, will be $                million, assuming an initial public offering price of $                per share (the midpoint of the range set forth on the cover of this prospectus). We intend to use these net proceeds to repay our outstanding indebtedness (which may include setting funds aside in a deferred compensation trust to cover part or all of our deferred compensation obligations) and for general corporate purposes (which may include future acquisitions). We are continuously reviewing possible acquisitions, however, as of the date of this prospectus, we have no current plan or agreements in place with respect to any future acquisitions.

At                , 2019, we had total borrowings of $                million outstanding under the Term Loans, $                million outstanding under the Subordinated Term Loan and $                million outstanding under the Revolving Loan with an average interest rate of    % on outstanding borrowings. At                , 2019, the interest rates on our Term Loan A, Real Estate Term Loan, Subordinated Term Loan and Revolving Loan were    %,    %,    % and    %, respectively.

A $1.00 increase or decrease in the assumed initial public offering price per share of our common stock would cause our net proceeds from this offering to increase or decrease by approximately $                million, assuming the number of shares of our common stock offered by us remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Each increase or decrease of                shares in the number of shares offered by us at the assumed initial public offering price per share of our common stock would increase or decrease our net proceeds from this offering by $                million after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. In addition, the terms of the Senior Credit Agreement and the Subordinated Credit Agreement restrict our ability to pay cash dividends to the holders of our common stock.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents, as well as our capitalization, as of December 31, 2018 (after giving retroactive effect to our amended and restated articles of incorporation and the issuance of a stock dividend of approximately      -for-1 in connection with this offering):

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis, to give effect to the sale and issuance by us of                shares of our common stock in this offering (assuming no exercise of the underwriters’ option to purchase additional shares) at an assumed initial public offering price of $                per share (the midpoint of the range set forth on the cover of this prospectus) and application of an estimated $                million of net proceeds from this offering as described in “Use of Proceeds.”

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

      As of December 31, 2018
      Actual   Pro Forma
As Adjusted(1)
(in thousands, except per share data)        (unaudited)

Cash and cash equivalents

     $ 3,089     $              
    

 

 

     

 

 

 

Term loans(2)

       95,000    

Subordinated term loan(3)

       25,000    

Revolving loan(2)

       59,629    

Deferred compensation and long-term incentive, less current portion(4)

       13,351    

Other long-term debt

       1,106    

Debt financing costs

       (825 )    
    

 

 

     

 

 

 

Total debt and deferred compensation and long-term incentive

     $ 193,261     $  
    

 

 

     

 

 

 

Preferred stock, par value $0.01; n/a shares authorized and no shares issued and outstanding, actual;              shares authorized and no shares issued and outstanding, pro forma as adjusted

     $ n/a     $  

Temporary equity—redeemable common shares, no par value;              shares authorized,              shares issued and shares outstanding, actual; n/a shares authorized, issued and outstanding, pro forma as adjusted

       133,806       n/a

Common stock, no par value; n/a shares authorized, issued and outstanding, actual;              shares authorized,              shares issued and              shares outstanding, pro forma as adjusted

       n/a    

Additional paid-in capital

       0    

Retained earnings

       26,842    

Treasury stock, at cost

       (57,659 )    
    

 

 

     

 

 

 

Total capitalization

     $ 102,989     $  
    

 

 

     

 

 

 

    

 

 

(1)

A $1.00 increase or decrease in the assumed initial public offering price per share of our common stock would increase or decrease each of cash, additional paid-in-capital and total capitalization by approximately $                million, assuming the number of shares of our common stock offered by us remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The pro forma as adjusted information is illustrative only, and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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(2)

Represents borrowings outstanding under the Senior Credit Agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Credit Agreement.”

 

(3)

Represents borrowings outstanding under the Subordinated Credit Agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Subordinated Credit Agreement.”

 

(4)

Prior to this offering, all amounts deferred under the Mayville Engineering Company Deferred Compensation Plan are deemed invested in shares of our common stock (which deemed investment will be eliminated in connection with this offering). The obligation set forth on our consolidated balance sheet at December 31, 2018 is based on the latest ESOP appraisal of the Company, performed under Code Section 401(a)(28), as a privately held company. Upon completion of this offering, the amount of this obligation will increase to reflect the valuation of the Company based on the price established by the underwriters for our sale of stock in this offering. For additional information in this plan, see “Executive Compensation—Pension Benefits and Nonqualified Deferred Compensation; 401(k) Plan; ESOP.”

 

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DILUTION

Dilution is the amount by which the offering price paid by purchasers of our common stock sold in this offering will exceed the pro forma as adjusted net tangible book value per share of our common stock after the completion of this offering. The pro forma net tangible book value of our common stock at December 31, 2018 was $                million, or $                per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of our common stock.

After giving effect to the sale by us of shares of our common stock in this offering at the assumed initial public offering price of $                per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2018 would have been $                million, or $                per share. This represents an immediate increase in pro forma net tangible book value of $                per share to our existing shareholders and an immediate dilution in pro forma net tangible book value of $                per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price.

The following table illustrates the per share dilution:

 

 

Assumed initial public offering price per share

          $              

Pro forma net tangible book value (deficit) per share at December 31, 2018

     $                   

Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering

     $       
    

 

 

      

Pro forma as adjusted net tangible book value per share immediately after this offering

          $  
         

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

          $  
         

 

 

 
                 

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price per share of our common stock would increase or decrease our pro forma as adjusted net tangible book value after the completion of this offering by approximately $                , and increase or decrease the dilution to purchasers in this offering by approximately $                per share, assuming the number of shares of our common stock offered by us remains the same and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $                per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $                per share.

 

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The following table summarizes, at December 31, 2018, on the pro forma as adjusted basis described above, the difference between the total cash consideration paid and the average price per share paid by existing shareholders and the purchasers of our common stock in this offering with respect to the number of shares of our common stock purchased from us, before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

      Shares Purchased   Total Consideration   Average Price
Per Share
      Number    Percent   Amount    Percent

Existing shareholders

                                %     $                           %     $              

Purchasers of common stock in this offering

                 %                 %    
    

 

 

      

 

 

     

 

 

      

 

 

     

Total

            100 %     $          100 %    
    

 

 

      

 

 

     

 

 

      

 

 

     

    

 

Each $1.00 increase or decrease in the assumed initial public offering price of $                per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all shareholders by approximately $                , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us. If the underwriters’ option to purchase additional shares of our common stock were exercised in full, our existing shareholders would own    % and our new investors would own    % of the total number of shares of our common stock outstanding upon the completion of this offering.

The total number of shares of our common stock that will be outstanding after this offering is based on                shares of our common stock outstanding as of December 31, 2018.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following sets forth our selected consolidated financial and operating information on a historical and pro forma basis. You should read the following summary of selected consolidated financial information in conjunction with our historical consolidated financial statements, the historical consolidated financial statements of DMP, our unaudited pro forma condensed combined statement of comprehensive income, and the related notes thereto, and with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this prospectus.

Our selected historical consolidated statement of comprehensive income information for the years ended December 31, 2018 and 2017, and our related selected historical consolidated balance sheet information as of December 31, 2018 and 2017, have been derived from our historical audited consolidated financial statements as of and for the year ended December 31, 2018 and 2017, which are included elsewhere in this prospectus.

On December 14, 2018, we acquired all of the issued and outstanding shares of common stock of DMP. The unaudited pro forma condensed combined statement of comprehensive income information set forth below gives effect to the DMP acquisition as if it had occurred as of January 1, 2018, and has been prepared to reflect adjustments to our historical financial information that are (i) directly attributable to the DMP acquisition, (ii) factually supportable, and (iii) expected to have a continuing impact on our results. The unaudited pro forma condensed combined statement of comprehensive income information includes various estimates which are subject to material change and may not be indicative of what may be expected to occur in the future. The unaudited pro forma condensed combined statement of comprehensive income information does not include non-recurring items, including, but not limited to, acquisition-related legal and advisory fees. The unaudited pro forma condensed combined statement of comprehensive income information reflects the impact of:

 

   

the DMP acquisition;

 

   

other adjustments related to the DMP acquisition described in the explanatory notes to the unaudited pro forma condensed combined statement of comprehensive income information;

 

   

the reclassification of our common stock, which is, before this offering and the related amendments to our ESOP, considered temporary equity redeemable under GAAP, to shareholders’ equity, including common stock and additional paid-in capital, following this offering; and

 

   

our conversion from an S Corporation to a C Corporation for U.S. federal income tax purposes.

See the introduction and the related notes to the unaudited pro forma condensed combined statement of comprehensive income information, included elsewhere in this prospectus, for a complete description of the adjustments and assumptions underlying the selected unaudited pro forma condensed combined statement of comprehensive income information.

Except as provided in footnote 1 below, the historical consolidated statements of operations information of DMP used in the preparation of the unaudited pro forma condensed combined statement of comprehensive income information set forth below has been derived from the historical financial statements of DMP, which are included elsewhere in this prospectus.

 

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The data for the periods presented below is not necessarily indicative of the results to be expected for any future period.

 

      For the Year Ended
December 31,
 

Pro Forma
Year Ended
December 31,

2018(1)

      2018   2017
(In thousands, except share and per share data)            (Unaudited)

Statement of Comprehensive Income Data:

            

Net sales

     $ 354,526     $ 313,331     $ 523,721

Cost of sales

       303,948       278,594       454,116
    

 

 

         

 

 

 

Manufacturing margins

       50,578       34,737       69,605

Income from operations

       22,169       9,426       27,949

Net income

       17,935       5,246       18,065

Earnings per share—basic and diluted(2)

            

Weighted average shares outstanding(2)

            

Other Financial Data:

            

EBITDA(3)

     $ 41,823     $ 30,190     $ 57,393

EBITDA Margin(3)

       11.8 %       9.6 %       11.0 %

Transaction fees

       474            

Inventory fair value step up

       583            

Loss on debt extinguishment

       814            

Adjusted EBITDA(3)

       43,694       30,190       57,393

Adjusted EBITDA Margin(3)

       12.3 %       9.6 %       11.0 %

 

      December 31,     
      2018   2017     
(In thousands)             

Balance Sheet Data:

            

Cash and cash equivalents

     $ 3,089     $ 76                         

Total current assets

       112,759       64,173    

Total assets

       391,725       214,316    

Total current liabilities

       83,161       41,876    

Bank revolving credit notes, other long-term debt less current maturities, and other long-term liabilities

       173,101       67,919    

Deferred income taxes

       19,123        

Deferred compensation and long-term incentive, less current portion

       13,351       11,634    

Temporary equity—redeemable common shares(4)

       133,806       125,042    

Retained earnings(4)

       26,842       17,671    

Treasury stock at cost(4)

       (57,659 )       (49,826 )    

Common stock

       n/a       n/a    

Additional paid-in capital

       n/a       n/a          

 

(1)

The historical financial statements of DMP have been adjusted to eliminate DMP’s results for October 1 to December 31, 2017 and, in lieu thereof, add DMP’s results for October 1 to December 31, 2018 (excluding DMP’s results for the period in which the Company owned DMP). For additional information, see Note 2 to our consolidated financial statements.

 

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(2)

Share data gives retroactive effect to the issuance of a stock dividend of      -for-1 in connection with this offering.

 

(3)

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 this offering and the loss on debt extinguishment relating to our December 2018 credit agreement. 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.

 

(4)

Following consummation of this offering, our annual obligation to repurchase shares of our common stock held in the ESOP to satisfy legally required diversification distributions for eligible employees and distributions to employees who have terminated their employment with us or who passed away will terminate; and, thereafter, we will be able to distribute shares of our common stock to these employees or ex-employees rather than cash.

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

 

      For the Year Ended
December 31,
 

Pro Forma
Year Ended
December 31,

2018

      2018   2017
(in thousands)            (Unaudited)

Net income

     $ 17,935     $ 5,246     $ 18,065

Interest expense

       3,879       4,180       8,900

Provision (benefit) for income taxes

       (459 )             984
    

 

 

     

 

 

     

 

 

 

Other

             33      

Depreciation and amortization

       20,468       20,731       29,444
    

 

 

     

 

 

     

 

 

 

EBITDA

     $ 41,823     $ 30,190     $ 57,393

Transaction fees(1)

       474            

Inventory fair value step up(2)

       583            

Loss on debt extinguishment(3)

       814            
    

 

 

     

 

 

     

 

 

 

Adjusted EBITDA

     $ 43,694     $ 30,190     $ 57,393
    

 

 

     

 

 

     

 

 

 

Net sales

       354,526       313,331       523,721

EBITDA Margin

       11.8 %       9.6 %       11.0 %

Adjusted EBITDA Margin

       12.3 %       9.6 %       11.0 %

 

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(1)

Includes transaction fees incurred in connection with the DMP acquisition and this offering. No transaction fees were incurred in 2017.

 

(2)

Relates to the purchase accounting for the one-time fair value step up of inventory.

 

(3)

Relates to the refinancing of our credit agreements.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in 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 result of various factors, including those set forth in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” This discussion should be read in conjunction with “Prospectus Summary—Summary Selected Historical and Pro Forma Financial Data,” “Selected Historical and Pro Forma Financial Information,” our audited consolidated financial statements and the notes thereto and the audited consolidated financial statements of DMP and the notes thereto, all of which are included elsewhere in this 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’s Discussion and Analysis of Financial Condition and Results of Operations as well as “Selected Historical and Pro Forma Financial Information.” 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, agriculture and military markets. At the closing, we paid cash of $114.7 million dollars, net of acquired cash, and assumed certain liabilities. There is also an additional one-time earn-out payment of up to $10 million that could be paid in 2019 if DMP meets certain financial performance metrics during 2019. The DMP acquisition provides us with enhanced product, customer and geographic diversification with minimal customer overlap. DMP’s business is included in our results of operations since the date of acquisition.

How We Assess Performance of Our Business

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.

 

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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 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 on 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 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.

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 this offering and the loss on debt extinguishment relating to our December 2018 credit agreement. 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 Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly named measures reported by other companies. Potential differences between our measure of Adjusted EBITDA compared to other similar companies’ measures of Adjusted EBITDA may include differences in capital structures and tax positions.

 

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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.

 

      For the Year Ended
December 31,
  Pro Forma
Year Ended
December 31,
      2018   2017   2018
(in thousands)            (Unaudited)

Net income

     $ 17,935     $ 5,246     $ 18,065

Interest expense

       3,879       4,180       8,900

Provision (benefit) for income taxes

       (459 )             984
    

 

 

     

 

 

     

 

 

 

Other

             33      

Depreciation and amortization

       20,468       20,731       29,444
    

 

 

     

 

 

     

 

 

 

EBITDA

     $ 41,823     $ 30,190     $ 57,393

Transaction fees(1)

       474            

Inventory fair value step up(2)

       583            

Loss on debt extinguishment(3)

       814            
    

 

 

     

 

 

     

 

 

 

Adjusted EBITDA

     $ 43,694     $ 30,190     $ 57,393
    

 

 

     

 

 

     

 

 

 

Net sales

       354,526       313,331       523,721

EBITDA Margin

       11.8 %       9.6 %       11.0 %

Adjusted EBITDA Margin

       12.3 %       9.6 %       11.0 %

 

(1)

Includes transaction fees incurred in connection with the DMP acquisition and this offering. No transaction fees were incurred in 2017.

 

(2)

Relates to the purchase accounting for the one-time fair value step up of inventory.

 

(3)

Relates to the refinancing of our credit agreements.

 

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Consolidated Results of Operations

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table sets forth selected financial data for the year ended December 31, 2018 and December 31, 2017:

 

      For the Year Ended December 31,           
     2018   2017    Increase (Decrease)
      Dollars   % of
Revenues
  Dollars    % of
Revenues
   $ Change   % Change
(dollars in thousands)                           

Net sales

     $ 354,526       100.0     $ 313,331        100.0      $ 41,195       13.2

Cost of sales

       303,948       85.7       278,594        88.9        25,354       9.1
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

     

 

 

 

Manufacturing margins

       50,578       14.3       34,737        11.1        15,841       45.6

Amortization of intangibles

       4,096       1.2       3,756        1.2        340       9.1

Profit sharing, bonuses and deferred compensation

       8,058       2.3       5,397        1.7        2,661       49.3

Employee Stock Ownership Plan expense

       4,000       1.1       4,000        1.3             

Other selling, general and administrative expenses

       12,255       3.5       12,158        3.9        97       0.8
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

     

 

 

 

Income from operations

       22,169       6.2       9,426        3.0        12,743       135.2

Interest expense

       3,879       1.1       4,180        1.3        (301 )       (7.2 )

Loss on extinguishment of debt

       814       0.2                     814       nm

Provision (benefit) for income taxes

       (459 )       (0.1 )                     (459 )       nm
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

     

 

 

 

Net income and comprehensive Income

     $ 17,935       5.0     $ 5,246        1.7      $ 12,689       241.9
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

     

 

 

 

EBITDA

     $ 41,823       11.8     $ 30,190        9.6      $ 11,633       38.5

Transaction fees

     $ 474       0.1     $             $ 474       nm

Inventory fair value step up

       583       0.2                     583       nm

Loss on debt extinguishment

     $ 814       0.2     $             $ 814       nm
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

     

 

 

 

Adjusted EBITDA

     $ 43,694       12.3     $ 30,190        9.6      $ 13,504       44.7

Net Sales. Net sales were $354.5 million for the year ended December 31, 2018 compared to $313.3 million for the year ended December 31, 2017. The increase of $41.2 million, or 13.2%, was due in part to our recent acquisition of DMP, which accounted for $4.8 million, or 1.5%, of the increase, general market demand increases, which accounted for $27.5 million, or 8.8%, of the increase, and sales price increases passed along to our customers for increased material cost and other labor related inflationary reasons, which accounted for $8.9 million, or 2.9%, of the increase.

Manufacturing Margins. Manufacturing margins were $50.6 million for the year ended December 31, 2018 compared to $34.7 million for the year ended December 31, 2017. Of the increase of $15.8 million, or 45.6%, $7.5 million, or 47.2%, was related to the increased market demand noted above, $6.0 million, or 37.7%, was related to sales price realization, and $2.4 million, or 15.1%, was related to realized operational efficiencies and cost improvements.

 

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Amortization of Intangibles. Amortization of intangibles were $4.1 million for the year ended December 31, 2018 compared to $3.8 million for the year ended December 31, 2017. The increase of $0.3 million, or 9.1%, related to our recent acquisition of DMP.

Profit Sharing, Bonuses and Deferred Compensation. Profit sharing, bonuses and deferred compensation expense was $8.1 million for the year ended December 31, 2018 compared to $5.4 million for the year ended December 31, 2017. The increase of $2.7 million, or 49.3%, related to the financial performance and increased valuation of the Company.

Employee Stock Ownership Plan Expense. Employee stock ownership plan expense was $4.0 million for both the year ended December 31, 2018 and the year ended December 31, 2017. This expense relates to stock that was repurchased during the year from our employees.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $12.3 million for the year ended December 31, 2018 compared to $12.2 million for the year ended December 31, 2017. The increase of $0.1 million, or 0.8%, related to salary increases.

Interest Expense. Interest expense was $3.9 million for the year ended December 31, 2018 compared to $4.2 million for the year ended December 31, 2017. The decrease of $0.3 million, or 7.2%, related to debt reduction that occurred prior to the December 2018 acquisition of DMP.

Net Income and Comprehensive Income. Net income and comprehensive income was $17.9 million for the year ended December 31, 2018 compared to $5.2 million for the year ended December 31, 2017. The increase of $12.7 million, or 241.9%, was due to the factors described above.

EBITDA and EBITDA Margin. EBITDA and EBITDA Margin were $41.8 million and 11.8%, respectively, for the year ended December 31, 2018, as compared to $30.2 million and 9.6%, respectively, for the year ended December 31, 2017. The increase in EBITDA and EBITDA Margin was primarily due to the factors described above.

Liquidity and Capital Resources

Cash Flows Analysis

The following table sets forth our cash flows for the periods indicated.

 

      For the Year Ended
December 31,
      2018   2017
(in thousands)         

Net cash provided by operating activities

     $ 36,715     $ 30,801

Net cash used in investing activities

       (132,569 )       (11,235 )

Net cash provided by (used in) financing activities

       98,867       (19,633 )
    

 

 

     

 

 

 

Net change in cash

     $ 3,013     $ (67 )

Operating Activities

Cash provided by operating activities was $36.7 million for the year ended December 31, 2018, as compared to $30.8 million for the year ended December 31, 2017. The $5.9 million, or 19.2%, increase in cash provided by

 

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operating activities was primarily due to the increase in net income of $12.7 million, partially offset by changes in working capital items including $4.4 million of additional inventory primarily driven by higher forecasted volumes year over year and increases in prepaid and other assets primarily due to the timing of payments. Changes to pricing, payment terms and credit terms did not have a significant impact to working capital items, or any other element of operating cash flow activities, for the periods presented.

Investing Activities

Cash used in investing activities was $132.6 million for the year ended December 31, 2018, as compared to $11.2 million for the year ended December 31, 2017. The $121.4 million increase in cash used in investing activities was primarily due to the $114.7 million net payment to acquire DMP in addition to an $6.6 million increase in capital expenditures.

Financing Activities

Cash provided by financing activities was $98.9 million for the year ended December 31, 2018, as compared to $19.6 million used in the year ended December 31, 2017. The increase of $118.5 million in cash provided by financing activities was primarily due to the DMP acquisition facilitated by the restructuring of our debt facilities.

Senior Credit Agreement

On December 14, 2018, we entered into the Senior Credit Agreement with the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent for the lenders, who we sometimes refer to as the Agent, and Wells Fargo Securities, LLC, as sole lead arranger and sole bookrunner. The Senior Credit Agreement provides for the Revolving Loan and the Term Loans. We are required to repay the aggregate outstanding principal amount of the Term Loan A in consecutive quarterly installments equal to $1,725,000 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 $325,000 on the last business day of each of March, June, September and December commencing March 31, 2019. All amounts borrowed under the Senior Credit Agreement mature on December 14, 2023.

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

Under the Senior 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 the quotient of the rate published by the ICE Benchmark Administration Limited, a United Kingdom company, or a comparable successor quoting service approved by the Agent two London Banking Days (as defined in the Senior Credit Agreement) before the first day of the applicable interest period, which we sometimes refer to as LIBOR, divided by 1.00 minus the Euro-Dollar Reserve Percentage (as defined in the Senior Credit Agreement) plus 1.00-2.25% depending on the current Consolidated Adjusted Total Leverage Ratio (as defined in the Senior Credit Agreement). The interest rate for DBLR Loans and Swingline Loans fluctuates and is equal to the one month London Interbank Offered Rate as determined at approximately 11:00 a.m., London time, two Business Days (as defined in the Senior 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

 

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Adjusted Total Leverage Ratio (as defined in the Senior 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 Senior 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 Senior Credit Agreement to honor its obligations or make or maintain any LIBOR Rate Loan or DBLR Loan, then until such circumstances no longer exist, (i) any existing LIBOR Rate Loans or DBLR Loans shall be immediately converted into a Base Rate Loan and (ii) the obligation of the lenders to make LIBOR Rate Loans or DBLR Loans are suspended and we may select only Base Rate Loans. The interest rate for Base Rate Loans is equal to the highest of (x) the prime rate (as publicly announced by the Agent from time to time) and (y) the Federal Funds Rate plus 0.50%.

At December 31, 2018, the interest rate on outstanding borrowings under each of the Term Loans and Revolving Loan was 4.69%. At December 31, 2018, we had availability of $30.4 million under the Revolving Loan.

We must pay a commitment fee at a rate of 0.20% per annum on the average daily unused portion of the aggregate unused revolving commitments under the Senior Credit Agreement. We must also pay fees as specified in the Fee Letters (as defined in the Senior Credit Agreement) and with respect to any letters of credit issued under the Senior Credit Agreement.

The Senior 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, sell our stock other than to the ESOP or pursuant to an initial public offering reasonably satisfactory to the Agent, make certain asset dispositions, pay any dividend or other distribution to shareholders, enter into transactions with affiliates, pay any subordinated indebtedness unless certain financial tests are met, enter into sale leaseback transactions, incur capital expenditures in excess of $25,000,000 in any fiscal year or permit any person or group other than the ESOP to own or control more than 20% of our equity interests or permit our board of directors to not be composed of a majority of our continuing directors (i.e., our directors as of December 14, 2018 and any additional or replacement directors that have been approved by at least 51% of the directors then in office), which we sometimes refer to as a Change in Control.

The Senior Credit Agreement also requires us to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20 to 1.00. At December 31, 2018, our fixed charge ratio was 2.72 to 1.00. The Senior Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 3.75 to 1.00 for the period from September 30, 2018 through September 30, 2019, and to be reduced periodically thereafter. At December 31, 2018, our consolidated total leverage ratio was 2.96 to 1.00.

The Senior Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, certain changes of control, material money judgments and failure to maintain subsidiary guarantees. If an event of default occurs, the Agent will be entitled to take various actions, including the acceleration of amounts due under the Senior Credit Agreement, termination of the credit facility and all other actions permitted to be taken by a secured creditor.

Our obligations under the Senior Credit Agreement and Subordinated Credit Agreement are subject to a subordination agreement, which we sometimes refer to as the Subordination Agreement, among us, the Agent,

 

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and the Subordinated Agent (as defined below), whereby any payment default under the Subordinated Credit Agreement constitutes a cross-default of the Senior Credit Agreement.

At December 31, 2018, we were in compliance with all covenants under the Senior Credit Agreement.

Subordinated Credit Agreement

On December 14, 2018, we entered into the Subordinated Credit Agreement with the lenders from time to time party thereto and Wells Fargo Strategic Capital Inc., as administrative agent for the lenders, who we sometimes refer to as the Subordinated Agent. The Subordinated Credit Agreement provides for the Subordinated Term Loan. We are required to repay the Subordinated Term Loan on June 14, 2024.

Our obligations under the Subordinated Credit Agreement are guaranteed by, and secured by subordinated security interests in substantially all of the assets (including the equity interests) of, our direct and indirect subsidiaries: Center Manufacturing, Inc., Center Manufacturing Holdings, Inc., Center—Moeller Products LLC, Defiance Metal Products Co., Inc., Defiance Metal Products of Arkansas, Inc., Defiance Metal Products of PA., Inc. and Defiance Metal Products of WI, Inc.

The interest rate for the Subordinated Term Loan fluctuates and is equal to 9.0% plus the higher of (i) 1.50% per annum and (ii) LIBOR divided by 1.00 minus the Euro-Dollar Reserve Percentage (as defined in the Subordinated Credit Agreement).

At December 31, 2018, the interest rate for the Subordinated Term Loan was 11.8%.

We must pay fees specified in the Fee Letter (as defined in the Subordinated Credit Agreement). Any prepayment of the Subordinated Term Loan (other than as a result of a Change in Control) is subject to: (i) prior to December 14, 2019, a make-whole premium in an amount equal to 3% of the amount to be prepaid plus the applicable make-whole payment premium amount (an amount in cash equal to the present value of all required interest payments due on the outstanding principal balance of the facility from the date of any prepayment to December 14, 2019); (ii) after December 14, 2019 but prior to December 14, 2020, a prepayment premium in an amount equal to 3% of the amount to be prepaid; (iii) after December 14, 2020 but prior to December 14, 2021, a prepayment premium in an amount equal to 2% of the amount to be prepaid; and (iv) thereafter, no prepayment premium. Any prepayment in connection with a Change of Control (as defined in the Subordinated Credit Agreement) is subject to: (x) prior to December 14, 2019, a prepayment premium in an amount equal to 3% of the amount to be prepaid; (y) after December 14, 2019 but prior to December 14, 2020, a prepayment premium in an amount equal to 2% of the amount to be prepaid; and (z) thereafter, no prepayment premium. Prepayments of the Subordinated Term Loan require consent from the senior lenders under the Subordination Agreement.

The Subordinated Credit Agreement contains usual and customary negative covenants for agreements of this type, which are substantially the same as the negative covenants in the Senior Credit Agreement (as set forth above).

The Subordinated Credit Agreement also requires us to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.10 to 1.00. At December 31, 2018, our fixed charge ratio was 2.72 to 1.00. The Subordinated Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 4.00 to 1.00 for the period from September 30, 2018 through September 30, 2019, and to be reduced periodically thereafter. At December 31, 2018, our consolidated total leverage ratio was 2.96 to 1.00.

The Subordinated Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events,

 

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certain changes of control, material money judgments and failure to maintain subsidiary guarantees. Our obligations under the Senior Credit Agreement and Subordinated Credit Agreement are subject to the Subordination Agreement, whereby any payment default under the Senior Credit Agreement constitutes a cross-default of the Subordinated Credit Agreement. If an event of default occurs, subject to the Subordination Agreement, the Subordinated Agent will be entitled to take various actions, including the acceleration of amounts due under the Subordinated Credit Agreement, termination of the credit facility, and all other actions permitted to be taken by a secured creditor.

At December 31, 2018, we were in compliance with all covenants under the Subordinated Credit Agreement.

Capital Requirements and Sources of Liquidity

During the years ended December 31, 2018 and 2017, our capital expenditures were approximately $17.9 million and $11.3 million, respectively. The increase of $6.6 million related to the continued investment in new technologies such as fiber optic lasers with automation, robotic brake presses, and other general purpose equipment.

Historically, we have had significant cash requirements in order to organically expand our business to meet the market related needs of our customers, continue our investment in new technologies and automation, as well as fund new projects. Additionally, prior to this offering, we have been required to use cash to repurchase shares of our common stock from the ESOP in connection with legally required diversification and other distributions to eligible ESOP participants. Following the consummation of this offering, this requirement will terminate, which will allow us to direct this previously allocated cash to operating- and growth-related purposes. Our cash requirements include costs related to capital expenditures, purchase of materials and production of materials and cash to fund these needs. Our working capital needs are driven by the growth of our business, with our cash requirements greater in periods of growth. Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, enhancing our information systems and, our integration of DMP and any future acquisitions and, in the future, our compliance with laws and rules applicable to being a public company. Following the completion of this offering, our primary uses of cash will be investing in flexible, re-deployable automation used to provide our components and products and funding organic and acquisitive growth initiatives.

We have historically relied upon cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. At December 31, 2018, we had availability of $30.4 million under our Credit Agreements. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependent on our ability to access outside sources of capital.

We believe that our operating cash flow and available borrowings under the Credit Agreements are sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, and additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreements, joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

 

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Contractual Obligations

The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at December 31, 2018:

 

            Payments Due by Period
      Total    2019    2020 -
2021
   2022 -
2023
   Thereafter
(in thousands)                         

Long-term debt obligations:

                        

Principal payment obligations(1)

     $ 180,735      $ 8,606      $ 16,400      $ 130,729      $ 25,000

Forecasted interest on long-term debt obligations(2)

       45,143        10,047        18,922        14,702        1,473

Capital lease obligations

       2,225        354        670        670        531

Operating lease obligations

       13,223        3,275        4,861        2,404        2,683

Purchase obligations

                                  

Other

                                  

Total

     $ 241,326      $ 22,282      $ 40,853      $ 148,505      $ 29,687

 

(1)

The long-term amounts in the table include principal payments under the Term Loans of $121,106 and $59,629 outstanding under the Revolving Loan, which expires in 2023.

 

(2)

Interest calculated on the payment obligation based on the interest rate as of December 31, 2018.

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition and results of operations. The notes to the consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Those critical accounting policies and estimates that require the most significant judgment are discussed further below.

Revenue Recognition

We recognize revenue for sales when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivables are reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed and determinable. Sales are supported by documentation such as supply

 

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agreements and purchase orders which specify certain terms and conditions including product specifications, quantities, fixed prices, delivery dates and payment terms. Revenues related to services are recognized in the period services are performed.

For many customers, we design, engineer and build production tooling, which is purchased by the customer. Revenue is recognized when the tooling is completed, the customer signs off on the product through the Product Part Approval Process and the tool is placed into service. At that time, the cost to build the tooling is released from the balance sheet and included in cost of goods sold.

We offer certain customers discounts for early payments. These discounts are recorded against net sales in the consolidated statement of comprehensive income and accounts receivable in the consolidated balance sheet. We do not offer any other customer incentives, rebates or allowances.

Goodwill, Other Intangibles and Other Long-Lived Assets

Our long-lived assets consist primarily of property, equipment, purchased intangible assets and goodwill. The valuation and the impairment testing of these long-lived assets involve significant judgments and assumptions, particularly as they relate to the identification of reporting units, asset groups and the determination of fair market value.

We test our tangible and intangible long-lived assets subject to amortization for impairment whenever facts and circumstances indicate that the carrying amount of an asset may not be recoverable. We test goodwill and indefinite lived intangible assets for impairment annually, or more frequently if triggering events occur indicating that there may be impairment.

We have recorded goodwill and perform testing for potential goodwill impairment at a reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment for which discrete financial information is available, and for which management regularly reviews the operating results. Additionally, components within an operating segment can be aggregated as a single reporting unit if they have similar economic characteristics. We have performed testing on each of our reporting units which contain goodwill.

We determine the fair value of our reporting units using multiple valuation methodologies, relying largely on an income approach but also incorporating value indicators from a market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. The income approach is dependent on several key management assumptions, including estimates of future sales, gross margins, operating costs, interest expense, income tax rates, capital expenditures, changes in working capital requirements and the weighted average cost of capital or the discount rate. Discount rate assumptions include an assessment of the risk inherent in the future cash flows of the reporting unit. Expected cash flows used under the income approach are developed in conjunction with our budgeting and forecasting process. Under the market approach, we estimate fair value of the reporting units using EBITDA multiples. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics as the respective reporting units.

During the fourth fiscal quarters of 2018 and 2017, we performed our annual impairment assessments of goodwill, which did not indicate an impairment existed. For the year ended December 31, 2018 we had two reporting units, DMP and MEC. The DMP reporting unit was acquired on December 14, 2018 and had preliminarily estimated goodwill of $29.2 million as of December 31, 2018. For the 18-day period from December 14 through December 31, 2018, DMP’s actual results of operations were above estimates utilized to determine the preliminary

 

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purchase price allocation. As a result, the fair value of the DMP reporting unit at December 31, 2018 is nominally above its carrying value. At December 31, 2018 and 2017, the MEC reporting unit had goodwill with a carrying amount of approximately $40.2 million. The fair value of the MEC reporting unit substantially exceeded carrying value for both 2018 and 2017.

Changes to management assumptions and estimates utilized in the income and market approaches could negatively impact the fair value conclusions for our reporting units resulting in goodwill impairment. All key assumptions and valuations are determined by and are the responsibility of management. The factors used in the impairment analysis are inherently subject to uncertainty. We believe that the estimates and assumptions are reasonable to determine the fair value of our reporting units, however, if actual results are not consistent with these estimates and assumptions, goodwill and other intangible assets may be overstated which could trigger an impairment charge.

For impairment testing of long-lived assets, we identify asset groups at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flow expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. For the years ended December 31, 2018 and 2017, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.

Determining the useful life of an intangible asset also requires judgment. Certain intangible assets are expected to have indefinite lives based on their history and our plans to continue to support and build the acquired brands. Other acquired intangible assets such as customer relationships, trade names, and non-compete agreements are expected to have determinable useful lives. The costs of determinable-lived intangibles are amortized to expense over their estimated lives.

Income Taxes

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and, where necessary, establish a valuation allowance. Valuation allowances are established to reduce deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized in future periods.

To assess this likelihood, we use historical three-year accumulated losses, estimates and judgments regarding our future taxable income as well as the jurisdiction in which this taxable income is generated to determine whether a valuation allowance is required. Such evidence can include our current financial position, results of operations, actual and forecasted results, the reversal of deferred tax liabilities, tax planning strategies and the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in jurisdictions in which we operate.

On the basis of our evaluations, at December 31, 2018 and 2017, no valuation allowance was recorded on our net deferred tax assets, and we had no material uncertain tax positions. If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material impacts on our earnings.

 

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Use of Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make certain estimates and assumptions that affect the reported amounts and disclosures. Estimates are used for, but not limited to, determining the net carrying value of trade receivables, inventories, property, plant and equipment, goodwill, intangible assets, health insurance reserves, loss contingencies and ESOP valuation. Accordingly, our actual results could differ from those estimates.

ESOP

Prior to completion of this offering, shares of our common stock held by the ESOP are presented as temporary equity as they include a cash redemption feature that is not solely within our control. Throughout the year, as employee services are rendered, we record compensation expense based on a percentage of salaries or wages for eligible employees. The stock in the ESOP is held in trust for the sole benefit of the participants. Shares allocated to a participant’s account are fully vested.

Upon retirement, death, termination of employment or exercise of diversification rights, the eligible portion of a participant’s ESOP account is redeemable annually at the current price per share of the stock. Such per share price is established annually by an independent valuation firm as of the end of the plan year preceding the redemption. Under the current terms of the ESOP, we are obligated to redeem eligible participant account balances for cash (in accordance with the redemption schedule and subject to the limitations set forth in the ESOP). Prior to this offering, we present all shares held by the ESOP as temporary equity on the consolidated balance sheet at their maximum redemption value. Following this offering, (i) we will no longer redeem participants’ ESOP interests, as distributions from the ESOP made to a participant following retirement, death or termination of employment, or the exercise of diversification rights under the Traditional ESOP, will be made in our common stock, and upon receiving a distribution of our common stock from the ESOP a participant will be able to sell such shares of common stock in the market, subject to any requirements of federal securities law; and (ii) with respect to any participant who exercises statutory diversification rights under the 401(k) ESOP, the ESOP Trustee will sell, on behalf of the participant, the shares that the participant has elected to diversify and reinvest the sale proceeds in an alternate investment option as directed by the participant.

Emerging Growth Company

The JOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to use this provision and, as a result, we will comply with new or revised accounting standards as required for private companies.

Internal Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal

 

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control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control, and misstatements due to error or fraud may occur and not be detected on a timely basis.

In the course of preparing the consolidated financial statements that are included in this prospectus, our management has determined that we have two material weaknesses in our internal control over financial reporting. The first material weakness relates to information technology general controls specific to segregation of duties, systems access and change management processes. The second material weakness relates to a lack of consistently documented accounting policies and procedures, a lack of controls over the preparation and review of journal entries and a limited number of personnel with a level of GAAP accounting knowledge commensurate with our financial reporting requirements, which, in the aggregate, constitute a material weakness. We have concluded that these material weaknesses in our internal control over financial reporting are due to the fact that, prior to this offering, we were a private company with limited resources and consequently, we did not have the necessary internal controls formally designed and implemented.

We are currently in the process of planning or implementing a number of steps to enhance our internal control over financial reporting and to address these material weaknesses, including taking the following actions: (i) in January 2019, we have hired additional accounting and finance staff members, including a senior accounting officer with public company reporting experience, to augment our current staff and to improve the effectiveness of our closing and financial reporting processes; and (ii) we have engaged a third party to assist us with formalizing our business processes, accounting policies and internal controls documentation, enhancing related internal controls and strengthening supervisory reviews by our management.

Our management has concluded that the consolidated financial statements included elsewhere in this prospectus present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.

If we fail to remediate the above material weaknesses and maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered public accounting firm has not assessed the effectiveness of our internal control over financial reporting and, under the JOBS Act, will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

Quantitative and Qualitative Disclosure about Market Risks

We are exposed to market risk from changes in customer forecasts, interest rates, inflation, and, to a lesser extent, commodities. To reduce such risks, we selectively use financial instruments and other proactive management techniques.

Customer Forecasts

The use and consumption of our components, products and services fluctuates depending on order forecasts we receive from our customers. These order forecasts can change dramatically from quarter to quarter dependent upon the respective markets that our customers provide products.

 

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Interest Rate Risk

We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the Credit Agreements, which expose us to variability in interest payments due to changes in the reference interest rates.

At December 31, 2018, we had a total of $179.6 million of variable rate borrowings outstanding. Holding other factors constant and absent the interest rate swap agreement described above, a hypothetical 1% change in our borrowing rates would result in a $1.8 million change in our annual interest expense based on our variable rate debt at December 31, 2018.

Commodity Risk

We source a wide variety of materials and components from a network of suppliers. While such materials are generally available from numerous suppliers, commodity raw materials, such as steel, aluminum, copper, paint and paint chemicals, and other production costs are subject to price fluctuations, which could have a negative impact on our results. We strive to pass along such commodity price increases to customers to avoid profit margin erosion and in many cases utilize contracts with those customers to mitigate the impact of commodity raw material price fluctuations. As of December 31, 2018, we did not have any commodity hedging instruments in place.

 

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BUSINESS

Our Company

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. “We Make Things Simple” by providing a diverse set of process offerings and a “one stop shop” for end-to-end solutions with benefits throughout the entire product lifecycle, including front-end collaboration in design and prototyping, product manufacturing, aftermarket components and ancillary supply chain benefits. Founded in 1945 and headquartered in Mayville, WI, we are a leading Tier I U.S. supplier of highly engineered components to OEM customers with leading positions in their respective markets. We are focused on producing the highest quality components using complex processes at the lowest cost by working with customers throughout the product design and development process to establish optimal solutions. Our engineering expertise and technical know-how allows us to add value through every product redevelopment cycle (generally every three to five years for our customers). According to The Fabricator, we have been ranked as the largest fabricator in the United States for the past eight years in a row (2011 – 2018). We are more than two times the size of our next largest competitor, based on The Fabricator’s projections for 2018 revenue for metal fabricating companies.

Our customers’ complex products require a unique combination of our capabilities that allow us to achieve a customized offering to satisfy our customers’ desired outcomes. Our capabilities, which include, but are not limited to: metal fabrication, metal stamping, tube bending and forming, robotic part forming, robotic welding, resistance welding, five-axis tube and fiber laser cutting and custom coatings, including high heat and CARC painting, are used in a variety of applications and represent the building blocks of what we produce.

The graphic below includes representative examples of our product applications across various customer end products.

 

LOGO

 

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LOGO

 

LOGO

Our key customers have globally recognized brands and demand the highest product quality and expertise. Over our nearly 75-year history, we have developed capabilities and provide solutions that result in customer loyalty and long-standing relationships, which we call “Experience You Can Trust.” We have a diverse and market-leading customer base that serves broad end markets representing favorable near- and long-term growth prospects for us. We have a track record of growth and are well-positioned to increase our market share and benefit from growth in customer demand as well as consolidate demand across the end markets that we serve. To help pursue our strategic mission, we have more than 3,100 employees who are tactically aligned around our core values and will continue to participate in our employee ownership culture. We are led by an experienced management team that has contributed to our growth by establishing deep and long-standing relationships with key customers, and has worked to expand the customer base both organically and through strategic acquisitions.

 

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We maintain an established base of long-standing customers comprised of leading, blue-chip OEM manufacturers across the United States. Our broad capabilities offering and track record of producing the highest quality solutions have allowed us to establish, and subsequently deepen, relationships with additional products and platforms over time. For example, our more than 40 year relationship John Deere began with a small order of simple stamped parts for a farm tractor in its agricultural segment that expanded over time and represented 2018 pro forma sales in excess of $90.0 million across five market segments, representing over 60 model platforms. We have also been successful in winning customers and rapidly expanding relationships with high-growth customers by utilizing our diversified “one-stop” offering. For instance, our relationship with Volvo Truck began with fuel tanks and has expanded over the last six years to include exhaust tubing, new sleeper cab and chassis fabrications and air tanks. Through the expansion of multiple fabricated components from multiple facilities, we have been able to deepen our relationship with this customer and solidify our position as an important strategic sourcing partner.

Operational Footprint

 

LOGO

 

We serve customers through 21 strategically located U.S. facilities across eight states, with almost three million square feet of manufacturing capacity. Our expansive footprint enables us to service and maintain strong relationships with existing key customers across the United States with a “local” presence, as well as target new customer opportunities. We have a proven track record of improving financial results by thoroughly understanding our capabilities and the markets we serve, and aligning our people and resources to optimize results. Coupled with our focus on market alignment and execution, we constantly strive to improve and refine capabilities and capacities. In addition, the ongoing investment in flexible, re-deployable automation allows us to expand output while reducing cost and improving quality, productivity and consistency for margin enhancement and market leading competitiveness. Through this continuum of activities, we have generated approximately $34.3 million in improved results from the beginning of 2014 through December 31, 2018.

Our leading market position, embedded customer relationships with leading OEMs, unique value proposition and proven acquisition strategy has allowed us to achieve attractive financial performance and has positioned us for further growth. Our historical financial success is a function of our engineering expertise, extensive manufacturing capabilities, limited commodity exposure, investment in automation and embedded relationships with the contractual ability to pass input costs through prices. We believe we are poised to grow through economic cycles due to our:

 

   

market positioning and reputation;

 

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product breadth;

 

   

flexible and re-deployable capital investment in automation and process capabilities; and

 

   

our geographic, end market and product diversification.

Our diversified profile today best positions us for stability and leading market performance through all phases of an economic cycle. For the year ended December 31, 2018, we reported net sales of $354.5 million, net income of $17.9 million and Adjusted EBITDA of $43.7 million. See “Selected Historical and Pro Forma Financial Information” for the reconciliation of Adjusted EBITDA to net income, its most comparable GAAP financial measure.

Recent Acquisition

Acquisition of Defiance Metal Products. On December 14, 2018, we acquired DMP, an Ohio-based manufacturer of metal products for the heavy- and medium- duty commercial vehicles, construction, agriculture and military industries. The purchase price was approximately $115.0 million, subject to customary purchase price adjustments, and an additional one-time earn out payment up to $10.0 million. Founded in 1939 and headquartered in Defiance, OH, DMP is a full-service metal fabricator and contract manufacturer with two facilities in the Defiance, OH area, one in Heber Springs, AR, and one in Bedford, PA. The DMP acquisition provides us with enhanced product, customer and geographic diversification with minimal (i.e., less than $15.0 million) customer overlap. We expect a variety of net sales, operating and purchasing synergies to be realized from the acquisition over the course of the next several years.

Our Industry

We compete in the highly fragmented market of contract manufacturers, the majority of which are small local players that are limited in scale, capabilities and technology. Many of these local manufacturers have single or limited production capabilities and provide niche components in specific geographic markets. Accordingly, there are a limited number of competitors in the contract manufacturing market in which we operate with the capacity and expertise to deliver the full range of solutions we offer. For example, our diverse manufacturing capabilities across product lines have contributed to us being the recipient of The Fabricator’s “FAB 40” #1 Largest Fabricator in the attractive U.S. markets for the past eight years in a row (2011 — 2018). While we compete with certain manufacturers across selected product lines, we believe that no single manufacturer directly competes with us across our full offering and end market applications.

Our end market diversification coupled with our extensive product breadth allows us to maintain financial stability as individual end markets fluctuate. The primary end markets we serve include heavy- and medium-duty commercial vehicles, construction, powersports, agriculture and military, among other machinery markets. As markets strengthen or weaken, our output is redirected and realigned to support ongoing change. Further, as these fluctuations affect the market, we are favorably positioned to benefit from the broader trend of our OEM customers to consolidate to fewer and more sophisticated suppliers in order to improve quality and delivery while lowering the total cost of doing business. This consolidation trend will allow us to grow and protects our cash flow as markets change and shift.

We have also experienced, and benefitted from, an OEM trend of seeking to improve their strategy execution and simplify their business through outsourcing. Based on our history, OEMs pursue a strategy that focuses on core component market differentiation, such as structural frames and complete powertrain assemblies, and prefer to outsource the remaining product components to third parties rather than manufacturing them in-house. This is done in order to maintain their strategic focus, drive cost savings and reduce their own investment in manufacturing, thereby allowing them to focus on the most important aspects of their value creation process,

 

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namely product design and development, final product assembly and testing, branding, sales, marketing and distribution. While each specific OEM differs in its strategy, we see this trend continuing as customers deal with workforce constraints and look for optimum return on investments and improving cash flow. This trend is further magnified as international labor costs continue to rise, and OEMs have an increased focus on reshoring manufacturing operations to further shorten their supply chain and lower logistics costs. Moreover, our OEM customers focus on the production of the core components of their products, which leads them to rely on outsourced providers like us for the remaining components of their finished product needs. We believe we will benefit from this continued shift in our customers’ focus and ongoing desire for OEMs to improve efficiencies, reduce costs and simplify supply chains. Our established and embedded relationships, breadth of capabilities and scalability will allow us to simplify the supply chain process for our customers by acting as a single point of contact in the supply chain. In addition, we believe OEMs are increasingly favoring platforms supported by larger, more sophisticated and financially stable suppliers with the ability to serve large national and international operations all while maintaining a local touch. Our extensive manufacturing footprint, competitive cost structure and integrated design, engineering, production planning and quality program management capabilities positions us favorably to take advantage of these opportunities and trends.

Our Competitive Strengths

We believe that customers turn to us for their manufacturing needs because we are the ultimate “ReSource”. ReSource is a dual-purpose acronym we use to describe the breadth of our capabilities and our goal to be the one-stop solution allowing customers to re-source all of their fabrication needs through us. We collaborate with our customers to generate a strategic alignment and position ourselves as an essential part of our customers’ product development and manufacturing process by drawing on our deep product and engineering knowledge to deliver best-in-class solutions. We offer a broad portfolio of end-to-end solutions comprised of advanced and innovative processes and capabilities that enhance quality and simplify supply chains. We are focused on producing the highest quality components using complex processes at the lowest cost by working with customers throughout the product design and development process to establish optimal solutions. Our engineering expertise and technical know-how allows us to add value through every product redevelopment cycle (generally every three to five years for our customers).

Value-Added Supply Chain Partner with Embedded Relationships. Our embedded relationships with our large and diverse customer base are driven by the P.R.I.D.E. (“Personal Responsibility In Daily Excellence”) approach our employees take in their work, which emphasizes the highest quality and performance in all facets of our business, including our ability to partner with our customers and deliver to them complex solutions across a wide range of products. Our unique, end-to-end offering provides solutions throughout the life cycle of a product, including upfront product manufacturability advice and prototyping, production volumes and aftermarket components. We strive to maintain operational alignment (and continuous re-alignment) with our customers’ strategy and production activities as they evolve, allowing us to remain agile in response to market changes, while enabling our customers to be successful, and to remain adaptable to changes in customer needs to retain flexibility to adjust appropriately. Together, these items comprise “The MEC Mission.” Our focus on collaboration with our customers and our breadth of capabilities also generates strategic alignment with our customers, resulting in sticky relationships, driving vendor reduction and providing other ancillary benefits such as optimization of working capital investments. Our track record of engineering expertise has resulted in our consistent inclusion in customer design and prototyping activities, enabling customers to view us as an invaluable extension of their own teams. In turn, this collaboration allows our customers to focus on the development of their core technologies and products. Our position as a deeply embedded supply chain partner of scale allows us to provide a multitude of solutions, driving strong customer relationships with high switching costs.

Leading and Defendable Market Position in Attractive North American Market. According to The Fabricator, we have been ranked as the largest fabricator in the United States for the past eight years in a row (2011 – 2018).

 

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The market is highly fragmented and characterized by high barriers to entry given the complex nature of the work, established relationships and high customer switching costs. While there are numerous competitors in the markets in which we operate, few maintain the product breadth, manufacturing capabilities, scale or engineering expertise that we do. Our depth of capabilities allows us to offer our customers:

 

   

low volume production capability;

 

   

customized and sophisticated solutions;

 

   

unique engineering and manufacturing capabilities throughout the product lifecycle;

 

   

critical scale to service large national and regional customers as well as local customers; and

 

   

the ability to act as a single point of contact and offer seamless customer service.

Our position in the market, along with our acquisition experience and reputation as the go-to consolidator, will result in continued organic and acquisitive growth in the future.

End Market and Customer Diversification. Our value-added manufacturing focus enables us to remain diversified across a variety of customer end markets, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture and military, among others. These end markets are representative of our globally recognized customers, which are comprised of large OEM manufacturers. In 2018, our top customer and top ten customers accounted for 23% and 81% of net sales, respectively, which collectively represent hundreds of platforms that we serve across a variety of end markets and customer operating segments. Our access to a multitude of end markets allows us to strategically shift focus to sell into current opportunities as end market demand evolves. In addition to customer and end market diversification, our customers themselves are also diversified across multiple end markets. For example, John Deere is one of our leading customers with fiscal 2018 net sales accounting for 23% of our total net sales, to whom we provide over 5,000 SKUs across over 60 individual John Deere platforms including the agriculture, forestry, turf care, power systems and construction markets. Our increasingly stable performance is a direct result of our intentional business design of agility and adaptability to realign manufacturing capacities to serve diversified and ever changing end markets.

End Market Diversification

(% of Net Sales)

 

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Breadth of Capabilities Appealing to a Variety of Applications. We have many manufacturing capabilities that together represent the building blocks for the complex solutions we provide to our customers. We maintain a full spectrum of capabilities across our 21 production facilities to address a wide set of customer needs, including upfront product development advice and prototyping, unique manufacturing processes and capabilities across a variety of products and back-end finishing, assembly and aftermarket components representing a unique end-to-end offering. Our range of capabilities combined with our breadth of components, including fabrications, tubes, tanks and performance structures, expands the applicable uses and end markets in which we may offer our components. Throughout our history, our capabilities have allowed us to generate growth by expanding into new verticals and by further penetrating existing verticals through cross-selling to increase wallet share, a strategy that has driven sticky relationships with our customers. Further, our unique combination of manufacturing processes allows us to opportunistically target sophisticated, higher margin business. The diversity of our offering has provided our Company with financial stability through various end market and economic cycles.

Technology-Enabled Infrastructure. We continue to invest in a technology-enabled asset base that provides significant flexible and re-deployable capacity to support our planned growth, increases profitability and efficiency and drives a long-term cost advantage over our competitors. We have leveraged our purchasing power to make significant investments in operational infrastructure throughout our history, in items such as flexible and re-deployable automation and capacity improvements to improve throughput, quality and consistency. For example, we were one of the first in our industry to adopt fiber lasers and have continued to invest in this capability. Specifically, we have implemented two 10,000-watt fiber lasers with an automation tower, which are on average three times faster, provide a cleaner, more precise cut and use one-third of the power compared to traditional CO2 lasers, generating an IRR of approximately 47% with a payback period of less than two years. Additionally, the implementation of three robotic brakes has improved quality through a continued shift towards precision automation. By reducing setup procedures, manual employee lifting requirements and downtime while offering additional capacity, the implementation of robotic brakes has generated an IRR of approximately 55% with a payback period of approximately two years. These two examples of investments in technology-enabled infrastructure allow us to alleviate up to 24 employees who can, with retraining, be redeployed into more technically skilled positions. In today’s tight labor market, the ability to redeploy labor to increase flexibility and capacity for our customers is of utmost importance and interest as part of our strategy. Our investments in continuous improvement and automation have driven operational efficiencies and improved metric tracking allowing our management team to more effectively run the business and improve the value we provide to our customers. We have, from time-to-time, made strategic, customer-driven investments that directly support new product and market expansion which result in further competitive advantages and higher switching costs for our customers.

Cost Structure and Operational Excellence. We have reduced our exposure to commodity price risk by structuring our customer contracts to pass through changes in commodity prices. As such, we have been able to effectively limit any potential impact from recent tariffs and commodity price volatility to our margins. Our scale and profitability have also allowed us the flexibility to implement continuous improvement initiatives in driving efficiencies, such as automation and additional capacity, which will result in long-term efficiency and margin improvements, and expanded capabilities.

Our Strategy

Achieve Sales Growth Through Organic Expansion. We believe there is ample opportunity to achieve deeper penetration of existing customers and to win new customers with our strong one-stop offerings. By leveraging our core product capabilities to expand into new markets, and establishing new offerings in attractive, adjacent or complementary platforms through new product introductions, there is significant opportunity to execute on our

 

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organic growth initiatives. Expanding our wallet share with our customers by capturing a wider variety of products and more platforms both increases customer switching costs and attracts potential new customers that seek to simplify supply chains, while also defending our market position from our competitors. Our expertise allows us to produce higher quality components at cost-effective rates while our volume, equipment and know-how establish competitive advantages. Further, an expanded offering increases our strategic alignment with customers and supports our “We Make Things Simple” value proposition by presenting customers with further vendor consolidation opportunities.

Pursue Opportunistic Acquisitions. Our management team maintains a proven track record of successfully executing and integrating strategic acquisitions. We have completed two significant acquisitions since 2012 (Center Mfg. Co. in 2012 and DMP in December 2018) and four other complementary acquisitions since 2004, which have contributed new capabilities, end markets and technologies to our legacy business, along with significant synergy opportunities that have enhanced our financial position. Our strategy is to continue to identify, and opportunistically execute on, accretive acquisitions that will allow our Company to achieve further growth. We believe that our reputation, scale and track record of performance makes us a “consolidator of choice” among industry participants, which has led to a growing pipeline of actionable acquisition opportunities. Our investment criteria for acquisitions are U.S.-based companies with revenues between $50—$200 million, long-standing customer bases comprised of leading OEMs, and specialization in fabricated metal components and metal coating/finishing capabilities in current and adjacent markets, among other criteria. It is our view that continued execution of our acquisition strategy provides significant opportunity to generate shareholder value through further consolidation of our fragmented industry. The market environment, comprised mainly of small local and regional players, provides ample add-on acquisition opportunities to sustain our growth trajectory and bolster our one-stop shop approach to broadly serving our customers. Beyond our existing served markets, we see potential acquisition opportunities within the rail, aerospace, heavy fabrication and food end markets, among others. We believe the liquidity resulting from this offering will enable us to continue to execute on our acquisition strategy and relevant opportunities.

Continue Process-Driven Improvement Initiatives. Our process-driven improvement initiatives have resulted in significant savings throughout our history, leading to improved financial results and positive customer outcomes. Our strategy will continue to include a keen focus on continuous improvements in order to maintain a differentiated and defendable market-leading position, as well as ongoing cost and operating improvements. Improvement initiatives in 2018 were focused on strategic investments in automation technology and capacity, which are expected to drive immediate productivity and margin improvements as the integration efforts are completed. For example, we currently have process driven improvement plans that relate to:

 

   

the installation of a direct-to-metal paint line that will yield additional paint capacity and provide an improved cost position;

 

   

consolidation of our leased Wytheville, VA plant into our owned Atkins, VA facility that will result in reduced overhead and support costs, increased capacity and labor flexibility across various product lines; and

 

   

the recent and continued investment into collaborative robots that will reduce the need for direct labor employees by an estimated three to one ratio.

Maintain Alignment with Employee Base and Employee-Driven Results. Our rich history of employee ownership and personal responsibility in daily excellence has cultivated a strategic management-employee alignment and results-driven organization with each employee contributing to a common goal. Our employees will maintain a significant ownership stake following this offering, which we believe will benefit the entire organization as our strategic alignment will remain in place and continue to generate employee-driven results. As we continue to invest in our business and increasingly implement a more technology-enabled infrastructure, we will strive to redeploy our employees in other, higher-skilled areas of our business and invest in training where needed. Our employees are the foundation of our company; with experience across a diverse range of markets and capabilities,

 

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they drive innovation, believe in our process and the outcomes of their work and our success. We and our employees are also highly involved in, and actively support, the communities in which our facilities are located; our 3,100 employees take P.R.I.D.E. in creating value and support for both our customers and communities every day.

Our Capabilities. We offer a broad portfolio of end-to-end processes and solutions comprised of advanced and innovative capabilities that enhance quality and simplify supply chains for our customers. Through our collaborative approach, we maintain a complete, and growing, set of sophisticated manufacturing capabilities to meet the diverse needs of our customers, including:

 

   

Program Management—We offer our customers a complete solution from concept to launch following the APQP (Advanced Product Quality Planning) process (planning, product design and development, process design and improvement, product and process validation and continuous improvement).

 

   

Engineering—We collaborate with our customers and provide design for manufacturing, off-line programming (lasers, brake press, machining, welding), value engineering and CI (continuous improvement).

 

   

Tooling Design and Build—Our in-house tool design and tool room capability ensures quality from start to finish. We build and service all categories of tooling, including large progressive dies.

 

   

Laser Cutting—Our programmable fiber optic and CO2 laser cutting capabilities eliminate expensive hard tooling. Our equipment can cut metal up to 5/8 of an inch thick while maintaining tolerances to .002 inches at speeds up to 2,300 inches per minute.

 

   

Brake Press—We combine our operator’s expertise with the proper equipment required to offer top versatility to our clients for bending, forming, coining and air bending. Our facilities house the latest press brake press machinery including robotic part manipulation and stacking.

 

   

Stamping—We provide custom metal stamping capabilities for short, medium or long production runs. For longer runs, our production of sheet metal stamping uses 50 to 1,000-ton manual or automatic feed presses with state-of-the-art feed lines for precision metal stamping. Our small, high-speed presses are ideal for producing intricate high-volume stampings.

 

   

Machining—We provide a variety of machining capabilities to meet our customer needs by providing in-house machining assistance for parts that are part of larger fabrications and assemblies.

 

   

Tube Bending—We maintain vast tube bending capabilities, including (i) manufacturing of oval, round and square tubes from .25 inch up through six inch and (ii) leveraging our extensive inventory of equipment including the latest CNC (computer numerical control) benders; and state-of-the-art technologies such as CNC electro-servo-driven bending with multi-stack heads.

 

   

Welding—We have earned our reputation as one of the premier manufacturers of weldments. Our welding departments offer manual and robotic wire welding, including GMAW (Gas Metal Arc Welding and also known as MIG, or Metal Inert Gas), GTAW (Gas Tungsten Arc Welding and also known as TIG (Tungsten Inert Gas), Heliarc), Fluxcore, Metalcore, Aluminum, Plasma Weld, Brazing and Pulse Heliarc.

 

   

Coatings, Assembly and Logistics—We provide premier full-service coating, assembly and logistics solutions for Blue Chip OEMs. Our coating capabilities offer a full-range of high technology industrial coating capabilities, including: E-Coat, military certified CARC, commercial and industrial powder and liquid coatings. Our coating systems utilize pre-treatment including acid pickle, zinc phosphate and in-line Alodine for the conversion of aluminum.

The graphic below includes representative components that we manufacture using the capabilities listed above:

 

LOGO

Our Proven Approach. We collaborate with our customers to generate a strategic alignment and position ourselves as an essential part of our customers’ product development and manufacturing process by drawing on

 

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our deep product and engineering knowledge to deliver best-in-class solutions. Our approach is simple: we view quality as a significant business strategy with a strong return on investment. Our philosophy on quality is based on Continuous Improvement with an IATF (international automotive task force) and ISO (international organization for standardization) foundation. Our skilled and experienced staff is highly trained in areas of quality planning, metrology, geometric dimensioning and tolerancing (ASME Y14.5M 1994), ISO, QS9000, statistical techniques (SPC) and ISO 14001 certifications. Our Quality Management System is comprised of the following:

 

   

IATF 16949:2016 certification (one of the automotive industry’s most widely used international standards for quality management);

 

   

ISO 9001:2015 registration (international standard for quality management systems);

 

   

Process and assembly line audits with focus on process control;

 

   

Process capability that is proven at validation and monitored during production; and

 

   

Specialized validations for paint and weld operations.

We periodically enter into joint process improvement efforts with key customers. Such exercises have historically resulted in reduced manufacturing critical path time, cost reductions and quality improvements through effective batch sizes and more repeatable processes. Our continuous improvement initiatives have resulted in the acquisition and application of state-of-the-art technologies and plant improvements that support lean, quick response manufacturing flexibility that put us at the forefront of our market. Moreover, the agility that our quick response manufacturing methodology provides us keeps our purchasing, manufacturing, engineering and quality teams on the cutting edge of flexible manufacturing. This adaptable approach also decreases manufacturing costs, allows for faster order turnaround times, and elimination of excess waste.

We maintain an advanced machinery portfolio in our facilities that allow us to leverage our employee workforce with state of the art capabilities and functionality. We strive to maintain our assets or upgrade capabilities where deterioration has driven obsolescence or better technology is available. Most recently, we have invested in two fiber laser systems with automation aimed at reducing labor content and optimizing floor space which allows us to generate more revenue with the same workforce and footprint. We have also recently invested in a machining center with palletizers, robotic brake presses, robotic weld cells and a direct-to-metal paint line.

Our Markets. Our primary end markets include (but are not limited to) the heavy- and medium-duty commercial vehicles, construction, powersports, agriculture and military markets. While our individual end markets may be exposed to cyclical variations, the diversified nature of our end markets affords us the ability to shift production with demand as certain end markets trend lower and others trend higher. In our experience, our diversification has muted the impact of downturns on our business that we have faced in the past. For example, we experienced net sales growth during the 2008 and 2009 recession due to strong orders, particularly from our customers focused on the military end market. Moreover, as our heavy- and medium-duty commercial vehicles, construction, powersports and agriculture customers’ revenues fluctuated from 2013 to 2017, with median peak-to-trough sales declines of 23%, our peak-to-trough sales declines were less than that of those respective markets at only 10%. We were able to accomplish this by reallocating our resources to serve our heavy- and medium-duty commercial vehicles and powersports customers, leading to strong double-digit growth in those end markets.

 

   

Heavy- and Medium-Duty Commercial Vehicles: Heavy-duty commercial vehicles include class 8 heavy trucks such as standard semi-trucks. Medium-duty commercial vehicles include classes 3-7 trucks such as box trucks;

 

   

Construction: Primary applications include tractors, off-highway vehicles, excavators, pipe layers and other construction equipment;

 

   

Powersports: Encompasses our all-terrain (ATV) and multi-utility (MUV) vehicles, as well as marine and motorcycle markets;

 

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Agriculture: Primary applications include tractors, combines, tillage equipment and other agriculture-related equipment;

 

   

Military: We provide a variety of components for military vehicle platforms; and

 

   

Other: We provide components and assemblies to a variety of other industrial and automotive end markets, such as power generation, mining and medical cabinetry.

Additionally, we maintain our branded MEC Outdoors business which provides shotshell re-loaders, including single stage machines, fully progressive machines and metallic single stage presses, as well as clay target machines, among other outdoor-focused products. This business comprised of less than 2% of net sales in 2018.

Our Customers. We are a critical and deeply embedded supply partner with strong strategic alignment and relationships with our customers. We have developed long-standing business relationships with our OEM customers, many of which span decades. Further, we are diversified by customers and end markets with net sales attributed to our top 20 customers accounting for $479 million of 2018 pro forma net sales, and no single end market accounting for more than 35% of pro forma net sales. For the year ended December 31, 2018, John Deere, AB Volvo, Honda Motor Co. and PACCAR Inc. accounted for 17%, 14%, 12% and 12% of pro forma net sales, respectively. We have not historically experienced customer attrition given high customer switching costs resulting from our embedded relationships driven by our broad capabilities and scale.

Our top four customers are highlighted in the graphic below:

 

LOGO

 

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Raw Materials and Manufactured Components. Our purchases primarily include steel and aluminum. We maintain a broad and diverse base of over 1,000 suppliers. Our established relationships provide efficient and flexible access to resources and redundancy to ensure support of our customers. We have no history of material supply issues or outages. In 2018, on a pro forma basis, no single supplier represented more than 18% of our total purchases and 98% of the raw materials we purchased were sourced from domestic suppliers. Our suppliers are strategically located in order to maximize efficiencies and minimize shipping costs, although switching costs are minimal and we maintain a multitude of alternative suppliers that we could transfer orders to, if needed. We have structured our customer contracts to pass through commodity price changes, which has allowed us to remain mostly unaffected by the recent raw material price volatility and tariffs. As we continue to grow, we intend to leverage our size and scale to further reduce material costs.

 

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Our Facilities. We maintain 21 strategically located U.S. facilities comprising approximately three million square feet of manufacturing space. We are headquartered in Mayville, Wisconsin.

 

Facility    Description of Use    Approximate
Square Feet
   Ownership

Mayville, WI

              
      
Manufacturing /
Corporate Headquarters

       340,000        Owned
       Manufacturing        167,000        Owned
         

 

 

      

Total

            507,000     

Defiance, OH

              
       Manufacturing        250,000        Owned
       Manufacturing        192,000        Owned
       Warehouse        90,000        Leased
         

 

 

      

Total

            532,000     

Beaver Dam, WI

              
       Manufacturing        303,000        Owned
       Manufacturing        163,000        Owned
         

 

 

      

Total

            466,000     

Greenwood, SC

       Manufacturing        234,000        Owned

Heber Springs, AR

       Manufacturing        190,000        Owned

Bedford, PA

       Manufacturing        181,000        Leased

Wautoma, WI

       Manufacturing        157,000        Owned

Atkins, VA

       Manufacturing        150,000        Owned

Byron Center, MI

       Manufacturing        138,000        Leased

Neillsville, WI

              
       Manufacturing        58,000        Owned
       Manufacturing        42,000        Owned
         

 

 

      

Total

            100,000     

Vanderbilt, MI

              
       Manufacturing        50,000        Owned
       Manufacturing        40,000        Owned
         

 

 

      

Total

            90,000     

Greenville, MS

       Manufacturing        76,000        Leased

Wayland, MI

       Manufacturing        75,000        Leased

Wytheville, VA

       Manufacturing        68,000        Leased

Piedmont, MI

       Manufacturing        34,000        Leased
         

 

 

      

Total

                  2,938,000           

We believe that our facilities are sufficient to meet our current and near-term manufacturing needs.

Sales and Marketing. We have a strong sales team comprised of over 35 experienced professionals responsible for managing and expanding client relationships, and proactively pursuing new opportunities. Sales personnel are aligned by market segment and customer, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture, military and other end markets, and employ a highly technical and collaborative sales process with deep knowledge of our customers and capabilities. Sales personnel have assigned support teams

 

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comprised of inside sales, marketing, and sales administration personnel. We are consistently involved in request for proposal processes, where our sales teams with deep process expertise collaborate with customers on optimal designs for manufacturability and manufacturing efficiency. The upfront collaboration drives formalization of product specifications, program lifecycle planning, cost estimates and risk mitigation. The sales process typically takes 3-18 months and ultimately ends in the implementation of product lifecycle timelines and purchase orders under long-term customer arrangements. The sales team utilizes systems infrastructure that effectively track and manage backlogs, quotes and bookings information, strategic projects and call reports, all of which are reviewed weekly sales team meetings.

Information Systems. We utilize standardized information technology systems across all areas of quoting and estimating, enterprise resource planning, materials resource planning, capacity planning and accounting for enhanced procurement of work, project execution and financial controls. We provide information technology oversight and support from our corporate headquarters in Mayville, WI. The operational information systems we employ throughout our company are industry specific applications that in some cases have been internally or vendor modified and improved to fit our operations. Our enterprise resource planning software is integrated with our operational information systems wherever possible to deliver relevant, real-time operational data to designated personnel. Accounting and operations personnel of acquired companies are trained not only by our information technology support staff, but by long- tenured employees in our organization with extensive experience using our systems. We believe our information systems provide our people with the tools to execute their individual job function and achieve our strategic initiatives.

Our Competition. We participate in a highly fragmented market with competitors in each of the end markets we serve ranging in size from small companies focused on a single capability or end market, to large multi-disciplinary companies. While there can be instances of intense competition from specific end markets, we believe that we have been able to effectively compete, and maintain competitive advantages on the basis of our:

 

   

scale and product offering with the ability to cross-sell and provide our customers with a one-stop solution;

 

   

broad manufacturing capability and flexibility to fulfill requests that require complex solutions;

 

   

customer service with our highly skilled and knowledgeable workforce able to provide consultative advice; and

 

   

regionalized geographic focus provides a defensible position from both foreign and domestic competitors as our customers continue to take a regionalized approach to production, which provides a shorter supply chain with greater flexibility.

Our Employees. We maintain an experienced and skilled workforce. We have been highly focused on attracting and retaining high quality personnel as they represent a critical factor in our continued success. As of December 31, 2018, we had approximately 3,100 full-time employees, none of which are unionized. Despite the recent market challenges in the hiring of trade-skilled employees, our continued investment in newer technologies and capabilities has allowed us to opportunistically re-train and redeploy certain roles that were previously human capital-intensive, and re-train and repurpose employees into other areas of the company. On average, our employees have approximately seven years of service with us. We believe we maintain strong relations with our employees and believe they are aligned with our employee-owned mindset.

Legal Proceedings. We are not currently a party to any material litigation proceedings. From time to time, however, we may be a party to litigation and subject to claims incident to the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Environmental Matters. We are subject to numerous federal, state and local laws and regulations relating to manufacturing, handling and disposal of materials into the environment. We believe that our environmental control procedures are adequate and we have no current plans for capital expenditures in the area.

 

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MANAGEMENT

Directors and Executive Officers

Set forth below is the name, age, position and a brief description of the business experience of each of our directors and executive officers at April 12, 2019.

 

Name    Age      Position

Robert D. Kamphuis

     61      Chairman, President, Chief Executive Officer and Director

Todd M. Butz

     48      Chief Financial Officer

Ryan F. Raber

     36      Executive Vice President—Sales & Marketing

Clifford O. Sanderson

     61      Vice President—Human Resources

Eric J. Welak

     43      Executive Vice President—Fabrication

Allen J. Carlson

     68      Director

Timothy L. Christen

     60      Director

Steven L. Fisher

     64      Director

Craig E. Johnson

     70      Director

Patrick D. Michels

     59      Director

Jay O. Rothman

     59      Director

John A. St. Peter

     68      Director

Robert D. Kamphuis joined our company as President and Chief Executive Officer in 2005 and has served as the Chairman, President and Chief Executive Officer since January 2007. Mr. Kamphuis also serves as a board member and past Chairman of Wisconsin Manufacturers & Commerce, a board member of Brakebush Brothers, Inc. and The Nordic Group of Companies, Ltd., and a member of the UW System Business Council, the John Deere Direct Material Supplier Council, the Harley Davidson Supplier Advisory Council and the Mebane Manor Executive Corporate Club. Prior to joining our company, Mr. Kamphuis held various roles with Giddings & Lewis, Inc. including as President and Chief Executive Officer of Gilman Engineering and Manufacturing Co., LLC, a designer and manufacturer of automated assembly systems, and began his career with Ernst & Young. Mr. Kamphuis is a graduate of the Executive International Leadership Program at Stanford University and earned a Bachelor of Business Administration & Accounting from the University of Wisconsin-Whitewater. He is also a licensed certified public accountant. We believe that Mr. Kamphuis is qualified to serve as a director of our company because he has extensive senior management experience and serves as our President and Chief Executive Officer.

Todd M. Butz joined our company in 2008 and has served as our Chief Financial Officer since January 2014. Mr. Butz also serves on the Board of Trustees for Marian University. Prior to joining our company, Mr. Butz spent time as the Finance Manager at Mercury Marine, a subsidiary of the Brunswick Corporation, and Audit Supervisor at Schenck Business Solutions. Mr. Butz earned a Bachelor of Science in Accounting and Business Management from Marian University and is a licensed certified public accountant.

Ryan F. Raber joined our company in 2009 and has served as our Executive Vice President – Sales & Marketing since November 2018. Prior to serving in his current position, Mr. Raber served as our Vice President of Sales & Marketing beginning in August 2013. Mr. Raber earned a Masters of Business Administration from the University of Wisconsin-Madison and a Bachelor of Science in Mechanical Engineering from Purdue University.

Clifford O. Sanderson joined our company in October 2013 and has served as our Vice President – Human Resources since that time. Prior to joining our company, Mr. Sanderson served as the Director of Human

 

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Resources at Coleman Cable, Inc. from June 1998 to October 2013, the Human Resources Manager at Nypro and the Divisional Director of Human Resources at Wheeling Pittsburgh Steel Corporation. Mr. Sanderson has over 30 years of human resources management experience. Mr. Sanderson earned a Masters in Human Resources and a Masters of Business Administration, Operations and Finance, from the Keller Graduate School of Management at DeVry University and a Bachelor of Science in Business from the University of Illinois Chicago.

Eric J. Welak joined our company in 1996 and has served as our Executive Vice President – Fabrication since January 2017. Prior to serving in his current position, Mr. Welak served as our Operations Manager, Plant Manager, Director of Operations and Vice President of Operations. Mr. Welak earned an Associate of Industrial Engineering from Moraine Park Technical College and a Bachelor of Science in Business Administration, Management and Operations from Marian University.

Allen J. Carlson has been a member of our board of directors since January 2016. Mr. Carlson is currently employed by the University of Florida’s College of Engineering, serves as a director of KMCO, Inc. and on the Board of Regents of the Milwaukee School of Engineering. Mr. Carlson previously served as a director and the Chief Executive Officer of Sun Hydraulics Corporation from 2000 to 2016. From October 1977 to March 1996, Mr. Carlson held various engineering, marketing and management positions for Vickers Incorporated, a wholly owned subsidiary of Trinova Corporation. Mr. Carlson earned his Bachelor’s degree from the Milwaukee School of Engineering and is a graduate of the Advanced Management Program at the Harvard Business School. We believe that Mr. Carlson’s over 40 years of experience in the manufacturing industry and nearly 16 years as the Chief Executive Officer of a public company qualify him to serve as a member of our board of directors.

Timothy L. Christen has been a member of our board of directors since June 2016. He is currently an independent contractor providing consulting services to Baker Tilly Virchow Krause, LLP, a national public accounting firm, where he served as a partner from 1990 to 2016 and as Chairman and Chief Executive Officer from 1999 to 2016. Mr. Christen has served as the non-executive Chairman of Baker Tilly International Ltd. since 2017 and as a director of CPA.com, an accounting technology reseller, since 2018. Mr. Christen also served as director of the American Institute of CPAs from 2014 to 2017, serving as Chairman from 2015 to 2016. Mr. Christen earned his Bachelor of Science in Accounting from the University of Wisconsin-Platteville and is a licensed certified public accountant. We believe Mr. Christen’s over 36 years of accounting expertise and substantial strategy, risk and management experience over his 16 years as the Chief Executive Officer of a national public accounting firm qualify him to serve as a member of our board of directors.

Steven L. Fisher has been a member of our board of directors since November 2013. He has previously served as an executive at Caterpillar, Inc., where he was the Division Chief Financial Officer from 1991 to 1998 and Vice President from 2005 to 2014. Mr. Fisher currently serves as a member of the advisory board of Palmer Johnson Power Systems. Mr. Fisher received a Bachelor of Science in Accounting from Bradley University and is a licensed certified public accountant. We believe Mr. Fisher’s substantial experience as an executive of a public company in the manufacturing industry and accounting expertise qualify him to serve on our board of directors.

Craig E. Johnson has been a member of our board of directors since October 2006. He previously served as a risk management and insurance consultant for Corporate Insurance Solutions, Inc. from October 2004 to February 2018. Mr. Johnson also served as a director for Southern Eagle Insurance Company from January 2006 to June 2013 and Gulf State Insurance Services, Ltd. from November 2007 to June 2012. In addition, Mr. Johnson served as Chief Executive Officer and Chairman of Broker’s Surety Services, Inc. from 1992 to 1997 and Managing Member of First Partners, LLC, a risk management and actuarial consulting firm, from December 1999 to May 2012. He also served as a director and Credit Committee Chairman at FDIC Bank from 1983 to 1997. Mr. Johnson earned his Bachelor of Science from Bradley University. Mr. Johnson served in the United States Air Force as a

 

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Captain from 1970 to 1984. He served as both active duty and reserves and was Vice President of the Air Force Division of the Reserve Officers Association. We believe Mr. Johnson’s experience as an executive in the risk management industry and actuarial expertise qualify him to serve on our board of directors.

Patrick D. Michels has been a member of our board of directors since January 2010. He has served as the President, Chief Executive Officer and director of Michels Corporation, an international utility and infrastructure contractor based in Brownsville, Wisconsin, since 1998. Mr. Michels has also served as a director for the Raymond Foundation since 2012 and National Exchange Bank and Trust since 2016. He was a director of St. Norbert’s College from 2006 to 2018 and a director of American Bank from 1998 to 2016. Mr. Michels earned his Bachelor of Business Administration from St. Norbert’s College. We believe that Mr. Michels’ extensive experience as the President and Chief Executive Officer of a large construction contractor company qualifies him to serve on our board of directors.

Jay O. Rothman has been a member of our board of directors since July 2008. He has served as the Chairman and Chief Executive Officer of Foley & Lardner LLP, a national law firm, since June 2011, has been a member of the firm’s Management Committee since February 2002 and has been a partner since February 1994. He joined Foley & Lardner LLP in October 1986. Mr. Rothman serves as director of Quad/Graphics, Inc. Mr. Rothman received a Bachelor of Arts from Marquette University in 1982 and a Juris Doctor from Harvard Law School in 1985. We believe that Mr. Rothman’s career as an executive and as a business attorney qualify him to serve as a member of our board of directors.

John A. St. Peter has been a member of our board of directors since January 2014. He is currently a partner at Dempsey, Edgarton, St. Peter, Petak & Rosenfeldt, a law firm located in Fond du Lac, Wisconsin, where he has served as an attorney for 42 years. Mr. St. Peter has been one of our legal advisors since our incorporation. He has also served on the boards of directors of Hornung’s Golf Products, Inc. since 1990, Ted and Grace Bachhuber Foundation since 2018, Agnesian HealthCare Foundation, Inc. since 2012 and Moraine Park Technical College Foundation, Inc. since 1989. Mr. St. Peter earned his Bachelor of Arts from the University of Wisconsin-Madison and his Juris Doctor from the Saint Louis University School of Law. We believe that Mr. St. Peter’s career as a business attorney and his extensive familiarity with our company qualify him to serve as a member of our board of directors.

Board of Directors

Our board of directors currently consists of eight persons. Our bylaws provide that our board of directors shall be divided into three classes, with the classes to be as nearly equal in number as possible, and with the directors serving three-year terms. As a result, approximately one-third of our board of directors will be elected each year. Messrs. Michels and St. Peter are Class III directors with terms ending at our 2020 annual meeting of shareholders; Messrs. Carlson, Christen and Johnson are Class II directors with terms ending at our 2021 annual meeting of shareholders; and Messrs. Fisher, Kamphuis and Rothman are Class I directors with terms ending at our 2022 annual meeting of shareholders.

Director Independence

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has determined that each of our non-employee directors is “independent” as that term is defined under the listing standards of the NYSE. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the transactions involving them described below and in the section titled “Certain Relationships and Related Party Transactions.”

 

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In particular, for Mr. Fisher, our board of directors considered the consulting arrangement between Mr. Fisher and us, which ended in 2018. Mr. Fisher did not receive greater than $120,000 from us in any twelve-month period within the last three years pursuant to the prior consulting arrangement.

Mr. Johnson was a consultant of Corporate Insurance Solutions, Inc., a company then wholly-owned by Mr. Johnson’s wife, until 2018. We paid fees to Corporate Insurance Solutions, Inc. for risk management consulting work in 2016 and 2017, and we also paid fees directly to Mr. Johnson in 2018 for such work. In no event did Corporate Insurance Solutions, Inc. or Mr. Johnson receive greater than $120,000 from us for such consulting fees in any twelve-month period within the last three years.

Mr. St. Peter is a partner in the law firm of Edgarton, St. Peter, Petak & Rosenfeldt, which provides legal services to us. In no event did Edgarton, St. Peter, Petak & Rosenfeldt or Mr. St. Peter receive greater than $120,000 from us for such legal services in any twelve-month period within the last three years.

In each of the cases noted above and otherwise described in the section titled “Certain Relationships and Related Party Transactions,” our board of directors has determined that each of our non-employee directors is “independent” as that term is defined under the listing standards of the NYSE.

Committees of our Board of Directors

We currently have an Audit Committee and a Compensation Committee and, upon completion of this offering, will have a Nominating and Corporate Governance Committee. We may have such other committees as our board of directors shall determine from time to time. Each of our committees has the composition and responsibilities described below.

Audit Committee

Rules implemented by the NYSE and the SEC require us to have an audit committee comprised of at least three directors, each of whom meets the independence and experience standards established by the NYSE and the Exchange Act. Our Audit Committee consists of the following members: Messrs. Christen, Fisher and Michels, with Mr. Christen serving as the chair. Our board of directors has determined that                qualifies as an “audit committee financial expert” (as defined in Item 407(d)(5) of Regulation S-K) and that all of the members are independent (as defined in Rule 10A-3 of the Exchange Act and under the listing standards of the NYSE).

The Audit Committee is governed by a charter adopted by our board of directors, a copy of which will be available on our website.

Our Audit Committee assists the board of directors in fulfilling the oversight responsibilities the board of directors has with respect to (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the qualifications and independence of our independent registered public accounting firm and (iv) the performance of our internal audit function and our independent registered public accounting firm. The Audit Committee has responsibility for the appointment, compensation, retention and oversight of our independent registered public accounting firm, which reports directly to the Audit Committee. The Audit Committee is also responsible for preparing an audit committee report to be included in our annual proxy statement, and reviews, approves and oversees on an on-going basis any related party transactions. The Audit Committee has authority to preapprove all auditing and permitted non-audit services to be performed by our independent registered public accounting firm, subject to the de minimis exceptions provided under the Exchange Act. The Audit Committee will establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting and auditing matters.

 

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Compensation Committee

Our Compensation Committee consists of the following members: Messrs. Carlson, Fisher and Johnson, with Mr. Fisher serving as the chair. The purposes of our Compensation Committee are to (i) assist the board of directors in discharging its responsibilities relating to the compensation of our executive officers, (ii) administer our incentive and equity compensation plans and (iii) provide oversight of the policies and practices relating to employee relations and human resource activities. Our board of directors adopted a charter defining our Compensation Committee’s primary duties, a copy of which will be available on our website.

Our Compensation Committee approves the compensation of our executive officers, including the Chief Executive Officer. Our Compensation Committee also provides oversight of the design of all our retirement and health and welfare plan programs and human resource management practices and policies, including hiring and retention, performance management programs, diversity policies and practices, leadership development and manager succession planning. It has authority to retain or obtain the advice of compensation consultants to assist with regard to any of its activities.

Our Compensation Committee administers our incentive and equity compensation plans. Our Compensation Committee will also be responsible for overseeing the preparation of the compensation discussion and analysis section to be included in our annual proxy statement when the Company becomes subject to, or otherwise determines to comply with, SEC requirements for such section.

Nominating and Corporate Governance Committee

Upon completion of this offering, our Nominating and Corporate Governance Committee will consist of the following members: Messrs. Carlson, Christen, Rothman and St. Peter, with Mr. Rothman serving as the chair. The purpose of our Nominating and Corporate Governance Committee will be to (i) carry out the responsibilities delegated to it by our board of directors relating to our director nomination process and procedures, (ii) identify individuals qualified to become members of the board (consistent with criteria approved by the board), (iii) select and recommend to the board qualified potential director nominees for election at each of the annual meeting of shareholders, (iv) develop, maintain and recommend to the board of directors a set of corporate governance guidelines applicable to us, (v) oversee the evaluation of the board, its committees and management and (vi) oversee, in concert with the Audit Committee, compliance with the rules, regulations and ethical standards for our directors, officers and employees, including corporate governance matters and practices. Our board of directors adopted, effective immediately preceding the completion of this offering, a charter defining our Nominating and Corporate Governance Committee’s primary duties, a copy of which will be available on our website.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is, or has ever been, an officer or employee of us.

Code of Business Conduct and Ethics

Prior to the completion of this offering, our board of directors will adopt a code of business conduct and ethics applicable to our employees, directors and officers, in accordance with applicable federal securities laws and the corporate governance rules of the NYSE. Our code of business conduct and ethics will be available on our

 

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website. Any amendments to, or waivers from, this code of business conduct and ethics may be made only by our board of directors and will be promptly disclosed by posting such information on our website.

Corporate Governance Guidelines

Prior to the completion of this offering, our board of directors will adopt corporate governance guidelines, a copy of which will be available on our website.

 

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EXECUTIVE COMPENSATION

This section discusses the material components of the executive compensation program for our executive officers who are named in the “Summary Compensation Table for 2018” below. Our named executive officers for 2018 were:

 

Name(1)    Principal Position

  Robert D. Kamphuis

   Chairman, President and Chief Executive Officer

  Todd M. Butz

   Chief Financial Officer

  Ryan F. Raber

   Executive Vice President – Sales & Marketing

 

(1)

As an “emerging growth company,” our “named executive officers” consist of the individuals who served as our principal executive officer and our two other most highly compensated officers who served as executive officers during our last completed fiscal year.

This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion.

Summary Compensation Table for 2018

The following table provides information regarding the compensation of our named executive officers during 2018.

 

Name and Principal Position   Year   Salary
($)
  Bonus
($)(1)
  Stock
awards
($)
  Option
awards
($)
  Non-equity
incentive plan
compensation
($)(2)
  Non-qualified
deferred
compensation
earnings ($)(3)
  All other
compensation
($)(4)
  Total ($)

Robert D. Kamphuis

      2018       510,000       892,680                   1,607,418             13,366       3,023,464

Chairman, President
and Chief Executive Officer

                                   

Todd M. Butz

      2018       310,000       257,560                   390,823             13,366       971,749

Chief Financial Officer

                                   

Ryan F. Raber

      2018       265,000       190,220                   247,404             13,582       716,206

Executive Vice President – Sales & Marketing

                                                                                         

 

(1)

The amounts in this column represent discretionary cash bonuses in the amount of $100,000 for Mr. Kamphuis and $50,000 for Mr. Butz, as well as incentive awards paid under the Mayville Engineering Company, Inc. Long-Term Incentive Plan with respect to the three-year performance period covering 2016 to 2018 even though the performance goals were not achieved. The amounts paid under the Mayville Engineering Company, Inc. Long-Term Incentive Plan with respect to 2016 to 2018 were as follows: Mr. Kamphuis—$792,680; Mr. Butz—$207,560; and Mr. Raber—$190,220. The terms and conditions of the Mayville Engineering Company, Inc. Long-Term Incentive Plan are described in narrative disclosure below.

 

(2)

The amounts in this column represent performance-based annual cash bonuses earned in 2018.

 

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(3)

Our named executive officers did not receive any above-market interest on nonqualified deferred compensation in 2018.

 

(4)

The amount in this column represents amounts credited by us to the named executive officer’s account under the ESOP ($13,366 for each named executive officer) and, for Mr. Raber, to his account under the Mayville Engineering Company Deferred Compensation Plan.

Employment, Severance or Change in Control Agreements

During the first four months of 2018, we maintained change in control severance agreements with our named executive officers. Each of these agreements expired on April 30, 2018.

Following this offering, Messrs. Kamphuis and Butz will be covered under executive severance agreements providing a lump sum severance benefit equal to one and one-half times and one times, respectively, of his then current annual base salary and target annual cash bonus, in the event that his employment is involuntarily terminated without cause or he terminates for good reason. As a condition of receiving such severance Messrs. Kamphuis and Butz are required to execute a release and waiver of claims. Other than the foregoing, our named executive officers have no employment, severance or change in control agreements.

Incentive Compensation Plans

2018 Annual Cash Bonus

During 2018, our named executive officers were eligible to receive annual cash bonuses based on the achievement of certain performance conditions established by our Compensation Committee. The performance goals had both (1) company performance measures, which were Return on Net Capital Employed, or RONCE, Earnings Before Interest, Taxes, Depreciation, Amortization and ESOP Expense, or EBITDAE, and, for Mr. Raber, Manufacturing Return on Assets, or MFG ROA, and Manufacturing Margin, or MFG Margin, and (2) individual performance measures. The performance goals for each element were pre-established at threshold, target and maximum performance levels.

The performance measures that applied to each named executive officer, and the impact of the performance measures on the amount of the annual cash bonus earned, was as follows. For Messrs. Kamphuis and Butz, the applicable measures were weighted as follows: 40% RONCE, 40% EBITDAE and 20% individual performance. Mr. Raber’s measures were weighted as follows: 10% RONCE, 10% EBITDAE, 30% MFG ROA, 30% MFG Margin and 20% individual performance. For 2018, the percentages achieved were as follows:

 

2018 Actual Achievement
      Percentage Achieved

RONCE

       123.9 %

EBITDAE

       88.8 %

MFG ROA

       66.7 %

MFG Margin

       78.7 %

Our Compensation Committee also established specific target bonus payouts for each named executive officer, which are expressed as a percentage of each named executive officer’s base salary. For 2018, the named executive officer target payouts as a percentage of base salary were: Mr. Kamphuis 300%; Mr. Butz 120% and Mr. Raber 100%. The actual annual cash bonus paid is calculated by multiplying the applicable weightings by the percentages of achievement to derive the percentages shown in the table below, and multiplying the sum of those

 

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percentages by the bonus target payouts for each named executive officer and each named executive officer’s base salary. In 2018, the actual annual cash bonus calculations were as follows:

 

     RONCE
(%)
  EBITDAE
(%)
  MFG
ROA
(%)
  MFG
Margin
(%)
  Individual
(%)
  Total Bonus
Percentage
Achieved
(%)
  Bonus
Target
(%)
  Base
Salary
($)
  Annual
Cash
Bonus ($)

Robert D. Kamphuis

      49.6       35.5       N/A       N/A       20       105.1       300       510,000       1,607,418

Todd M. Butz

      49.6       35.5       N/A       N/A       20       105.1       120       310,000       390,823

Ryan F. Raber

      12.4       8.9       27.6       24.5       20       93.4       100       265,000       247,404

Mayville Engineering Company, Inc. Long-Term Incentive Plan

Our named executive officers participate in the Mayville Engineering Company, Inc. Long-Term Incentive Plan, which we sometimes refer to as the Long-Term Plan, which provides for the grant of long-term cash incentive, which we sometimes refer to as LTIP, awards that may be earned if the specified performance goals are achieved.

Administration

Our Compensation Committee has the full power and authority to construe, interpret, and administer the Long-Term Plan, which includes making each determination provided for in the Long-Term Plan and adopting rules, regulations, and procedures for the Long-Term Plan. The Compensation Committee may delegate part or all of its duties to any person who is our employee or affiliate.

LTIP Awards

LTIP awards granted under the Long-Term Plan are interests in a long-term cash incentive award for a three-calendar-year performance period. Payment of the LTIP awards is entirely discretionary. The performance goal applicable to the LTIP awards granted for the performance period 2016 to 2018 was for our value at the end of the performance period, as determined under the ESOP, to have increased by a minimum of 12% from the value immediately prior to the start of the period. As a condition to receiving payment under the LTIP awards, a participating employee must either (1) be our employee or our affiliate’s employee on the date of the applicable cash payment after the performance period or (2) have retired after reaching age 65, died or become disabled during the performance period.

At the end of the performance period, the Compensation Committee reviews the performance of our Chief Executive Officer, and our Chief Executive Officer reviews the performance of all other participating employees who have satisfied the continuing employment conditions, and determines a discretionary cash amount earned by the participating employee, from a minimum of $0 to a maximum amount that is specified in each participating employee’s award agreement, or a fraction thereof for employees terminated during the performance period due to retirement at age 65, death or disability. Following the end of the 2016 to 2018 performance period, it was determined that the performance goal described above had not been fully achieved, but the Compensation Committee exercised its discretion to approve payment of the LTIP awards to acknowledge the contributions of the participants to our financial performance and to continue to provide competitive compensation. The amounts received by our named executive officers for the 2016 to 2018 performance period are shown in the “Bonus” column of the Summary Compensation Table.

Following this offering, we expect that our named executive officers will participate in the Omnibus Incentive Plan. As a result, the Long-Term Plan will be terminated upon the consummation of this offering.

 

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As of the date of this offering, the 2017 to 2019 and the 2018 to 2020 performance periods will have been partially completed. We refer to these performance periods as the open performance periods. In contemplation of this offering, no awards were granted with respect to the 2019 to 2021 performance period. The open performance periods will be truncated as of the date of this offering, and as soon as practicable following this offering, the Compensation Committee will review the performance of all participants (including those participants whose performance previously was reviewed by our Chief Executive Officer). The Compensation Committee will determine a discretionary cash amount earned by each participating employee with respect to the open performance periods, from a minimum of $0 to a maximum amount that is a fraction of the maximum amount that is specified in each participating employee’s award agreement, based on the portion of the performance period completed through the date of this offering.

Following the determination of and final payment of any amounts awarded by our Compensation Committee with respect to the open performance periods, the Long-Term Plan will terminate. No further awards will be granted under the Long-Term Plan.

Incentive Compensation Decisions Relating to Our Initial Public Offering

One-Time IPO Long-Term Incentive Award Grants. On March 14, 2019, our Compensation Committee approved one-time equity-based award grants to our executive officers, including our named executive officers, which are contingent upon the completion of this offering. Such grants are in recognition of the contributions of our executive officers to this offering. The equity-based awards will be granted under our Omnibus Incentive Plan, will have the target grant date fair values listed below and will be granted in the form of stock options, restricted stock or restricted stock units, as determined by our Compensation Committee, based on the initial public offering price:

 

Executive Officer    Target Grant Date Fair Value

Robert D. Kamphuis

     $ 700,000

Todd M. Butz

     $ 350,000

Ryan F. Raber

     $ 350,000

Clifford O. Sanderson

     $ 250,000

Eric J. Welak

     $ 250,000

Vesting or other terms and conditions for these awards have not yet been determined.

Other Incentive Compensation Decisions.    Our Compensation Committee also approved a reduction in Mr. Kamphuis’ target annual cash bonus opportunity for 2019 from 300% of base salary to 150% of base salary, contingent on the closing of this offering and the adoption and approval by our shareholders of our Omnibus Incentive Plan. Our Compensation Committee approved this reduction to place greater emphasis on long-term incentive compensation following the initial public offering. To compensate Mr. Kamphuis for this change, our Compensation Committee approved a one-time equity-based award with a target grant date fair value of $1,000,000, to be made in the form of stock options, restricted stock or restricted stock units, as determined by our Compensation Committee, based on the initial public offering price. The award is contingent on the closing of this offering and the adoption and approval by our shareholders of our Omnibus Incentive Plan. Vesting or other terms and conditions for these awards have not yet been determined.

Outstanding Equity Awards as of December 31, 2018

Our named executive officers had no outstanding equity-based awards as of December 31, 2018.

Pension Benefits and Nonqualified Deferred Compensation; 401(k) Plan; ESOP

Mayville Engineering Company, Inc. 401(k) Plan

Our named executive officers are eligible to participate in the Mayville Engineering Company, Inc. 401(k) Plan, which we sometimes refer to as the 401(k) Plan, on the same basis as other employees who satisfy the 401(k)

 

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Plan’s eligibility requirements. Accordingly, our named executive officers, along with other 401(k) Plan participants, are eligible for “safe harbor” non-elective contributions of 3% per year of an employee’s annual salary, which historically has been contributed to the ESOP in order for the 401(k) Plan to maintain “safe harbor” status. Following this offering the contribution will either be made to the 401(k) Plan or to the 401(k) ESOP.

Our named executive officers are eligible to participate in the ESOP on the same basis as other employees who satisfy the ESOP’s eligibility requirements. Under the ESOP, named executive officers, along with other eligible employees, are eligible for the 401(k) safe harbor contributions described above and for discretionary contributions into an account under the ESOP in the employee’s name. See “ESOP—Distributions, Diversification and Transfers” for further details on the ESOP.

We do not provide any defined-benefit pension benefits.

Mayville Engineering Company Deferred Compensation Plan

Our named executive officers are eligible to participate in the Mayville Engineering Company Deferred Compensation Plan, which we sometimes refer to as the Deferred Compensation Plan, which permits eligible participants to make elective deferrals of up to 50% of the participant’s annual base salary and up to 100% of the participant’s annual short-term cash incentive compensation. Each year, we credit to the account of each participant an amount reflecting the amount, if any, of any reduced allocations, due solely to the participant’s elective deferrals under the Deferred Compensation Plan of our “safe harbor” contributions and discretionary employer contributions to the ESOP and employer non-elective contributions to the 401(k) Plan for the year.

Amounts deferred under the Deferred Compensation Plan are deemed invested in shares of our common stock and are credited with dividend equivalents while deferred. Deferred amounts credited to a participant’s account are generally distributed following the participant’s separation from service, in a lump sum or up to five annual installments, as elected by the participant. Upon a change in control (which does not include this offering), the Deferred Compensation Plan will terminate and all amounts deferred under the plan will be distributed, generally in a lump sum.

In connection with this offering, and since future equity incentive opportunities will be provided through the Omnibus Incentive Plan, the Deferred Compensation Plan will be amended to eliminate the deemed investment of Deferred Compensation Plan account balances in our common stock. Instead, a participant’s Deferred Compensation Plan account will be deemed to be invested in one or more alternate investment options, such as a mutual fund, for purposes of tracking the deemed investment gain or loss on the participant’s account. The conversion of a participant’s account from a deemed investment in our common stock to a cash-based investment will be effectuated at the price established by the underwriters for our sale of stock in this offering. With these modifications, the Deferred Compensation Plan will continue to operate following this offering.

Other Elements of Compensation

Health/Welfare Plans. All of our full-time employees, including our named executive officers, are eligible to participate in our health and welfare plans, including:

 

   

medical, dental and vision benefits;

 

   

medical and dependent care flexible spending accounts;

 

   

short-term and long-term disability insurance; and

 

   

life insurance.

 

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We believe the benefits described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.

Cost Guarantee. We maintain a cost guarantee arrangement with Mr. Kamphuis under which, in exchange for Mr. Kamphuis’ relocation to the Mayville area, we agreed to guarantee the return of the initial cost of his home in the event of his death, disability or termination of employment. In addition, if the value of the guarantee is in excess of the current fair market value at the time of the termination, then we will provide a make-whole payment to Mr. Kamphuis for any personal income tax liability he incurs as a result of the guarantee and any taxes due as a result of the make-whole payment. We entered into this arrangement with Mr. Kamphuis to encourage him to relocate to the Mayville area because we believe that it is valuable to us to have our President and Chief Executive Officer in close proximity to our headquarters.

Omnibus Incentive Plan

We did not maintain any equity incentive plan during 2018.

On                     , 2019, our board of directors and on                    , 2019, the ESOP, as our sole shareholder, adopted the Mayville Engineering Company, Inc. 2019 Omnibus Incentive Plan. The following description of the material terms and conditions of the Omnibus Incentive Plan is qualified by reference to the full text of the Omnibus Incentive Plan.

Administration

The Omnibus Incentive Plan will be administered by our board of directors or our compensation committee, or any other committee or subcommittee or one or more of our officers to whom authority has been delegated, which we sometimes refer to collectively as the Administrator. The Administrator will have the authority to interpret the Omnibus Incentive Plan or award agreements entered into with respect to the plan; make, change, and rescind rules and regulations relating to the Omnibus Incentive Plan; make changes to, or reconcile any inconsistency in, the Omnibus Incentive Plan or any award or agreement covering an award; and take any other actions needed to administer the Omnibus Incentive Plan.

Eligibility; Participant Award Limits

The Administrator may designate any of the following as a participant under the Omnibus Incentive Plan: any officer or employee, or individuals engaged to become an officer or employee, of our Company or our affiliates; and consultants of our Company or our affiliates, and our directors, including our non-employee directors.

Subject to adjustment as described below, participants may not be granted awards that could result in such participant receiving more than:

 

   

             stock options and stock appreciation rights (or             stock options and stock appreciation rights for a non-employee director) during any of our fiscal years;

 

   

             shares of restricted stock and restricted stock units (or            shares of restricted stock and restricted stock units for a non-employee director) during any of our fiscal years;

 

   

             shares under performance awards measured in relation to our shares for any two-year performance periods (or             shares for a non-employee director) and             shares under such awards for any three-year performance periods (or            shares for a non-employee director);

 

   

$             for cash-based incentive awards ($             for a non-employee director) during any of our fiscal years;

 

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$             for performance awards not measured in relation to a share with two-year performance periods (or $             for a non-employee director) and $             for similar awards for with three-year performance periods (or $             for a non-employee director); and

 

   

            shares of other stock-based awards or dividend equivalent units (or            shares for a non-employee director).

Types of Awards

The Omnibus Incentive Plan permits the Administrator to grant stock options, stock appreciation rights, performance shares, performance units, shares of common stock, restricted stock, restricted stock units, cash incentive awards, dividend equivalent units, or any other type of award permitted under the Omnibus Incentive Plan. If the Omnibus Incentive Plan is approved, then the Administrator may grant any type of award to any participant it selects, but only our employees or our subsidiaries’ employees may receive grants of incentive stock options within the meaning of Section 422 of the Code. Awards may be granted alone or in addition to, in tandem with, or (subject to the repricing prohibition described below) in substitution for any other award (or any other award granted under another plan of our Company or any affiliate, including the plan of an acquired entity).

Shares Reserved under the Omnibus Incentive Plan

The Omnibus Incentive Plan provides that                shares of our common stock are reserved for issuance under the Omnibus Incentive Plan, all of which may be issued pursuant to the exercise of incentive stock options. The number of shares reserved for issuance under the Omnibus Incentive Plan will be reduced on the date of the grant of any award by the maximum number of shares, if any, with respect to which such award is granted. However, an award that may be settled solely in cash will not deplete the Omnibus Incentive Plan’s share reserve at the time the award is granted. If (a) an award expires, is canceled, or terminates without issuance of shares or is settled in cash, (b) the Administrator determines that the shares granted under an award will not be issuable because the conditions for issuance will not be satisfied, (c) shares are forfeited under an award, (d) shares are issued under any award and we reacquire them pursuant to our reserved rights upon the issuance of the shares, (e) shares are tendered or withheld in payment of the exercise price of an option or as a result of the net settlement of outstanding stock appreciation rights or (f) shares are tendered or withheld to satisfy federal, state or local tax withholding obligations, then those shares are added back to the reserve and may again be used for new awards under the Omnibus Incentive Plan; provided, however, shares added back to the reserve pursuant to clauses (d), (e) or (f) may not be issued pursuant to incentive stock options.

Options

The Administrator may grant stock options and determine all terms and conditions of each stock option, which include the number of stock options granted, whether a stock option is to be an incentive stock option or non-qualified stock option, and the grant date for the stock option. However, the exercise price per share of common stock may never be less than the fair market value of a share of common stock on the date of grant and the expiration date may not be later than 10 years after the date of grant. Stock options will be exercisable and vest at such times and be subject to such restrictions and conditions as are determined by the Administrator, including with respect to the manner of payment of the exercise price of such stock options.

Stock Appreciation Rights

The Administrator may grant stock appreciation rights, which we sometimes refer to as SARs. A SAR is the right of a participant to receive cash in an amount, or common stock with a fair market value, equal to the appreciation of the fair market value of a share of common stock during a specified period of time. The Omnibus Incentive Plan provides that the Administrator will determine all terms and conditions of each SAR, including, among other things:

 

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(a) whether the SAR is granted independently of a stock option or relates to a stock option, (b) the grant price, which may never be less than the fair market value of our common stock as determined on the date of grant, (c) a term that must be no later than 10 years after the date of grant, and (d) whether the SAR will settle in cash, common stock or a combination of the two.

Performance and Stock Awards

The Administrator may grant awards of shares of common stock, restricted stock, restricted stock units, which we sometimes refer to as RSUs, performance shares, or performance units. Restricted stock means shares of common stock that are subject to a risk of forfeiture or restrictions on transfer, which may lapse upon the achievement or partial achievement of performance goals (as described below) or upon the completion of a period of service. An RSU grants the participant the right to receive cash or shares of common stock the value of which is equal to the fair market value of one share of common stock, to the extent performance goals are achieved or upon the completion of a period of service. Performance shares give the participant the right to receive shares of common stock to the extent performance goals are achieved. Performance units give the participant the right to receive cash or shares of common stock valued in relation to a unit that has a designated dollar value or the value of which is equal to the fair market value of one or more shares of common stock, to the extent performance goals are achieved.

The Administrator will determine all terms and conditions of the awards including (a) whether performance goals must be achieved for the participant to realize any portion of the benefit provided under the award, (b) the length of the vesting or performance period, subject to the minimum vesting period requirement (described below), and, if different, the date that payment of the benefit will be made, (c) with respect to performance units, whether to measure the value of each unit in relation to a designated dollar value or the fair market value of one or more shares of common stock, and (d) with respect to performance shares, performance units, and RSUs, whether the awards will settle in cash, in shares of common stock (including restricted stock), or in a combination of the two.

Cash Incentive Awards

The Administrator may grant cash incentive awards. An incentive award is the right to receive a cash payment to the extent one or more performance goals are achieved. The Administrator will determine all terms and conditions of a cash incentive award, including, but not limited to, the performance goals (as described above), the performance period, the potential amount payable, and the timing of payment. While the Omnibus Incentive Plan permits cash incentive awards to be granted under the Omnibus Incentive Plan, we may also make cash incentive awards outside of the Omnibus Incentive Plan.

Performance Goals

For purposes of the Omnibus Incentive Plan, the Administrator may establish objective or subjective performance goals which may apply to any performance award. Such performance goals may include, but are not limited to, one or more of the following measures with respect to our Company or any one or more of our subsidiaries, affiliates, or other business units: net sales; cost of sales; gross income; gross revenue; revenue; operating income; earnings before taxes; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings before interest, taxes, depreciation, amortization and exception items; income from continuing operations; net income; earnings per share; diluted earnings per share; total shareholder return; fair market value of a share of common stock; cash flow; net cash provided by operating activities; net cash provided by operating activities less net cash used in investing activities; ratio of debt to debt plus equity; return on stockholder equity; return on invested capital; return on average total capital employed; return on net capital employed; return on assets; return on net assets employed before interest and taxes; operating working capital;

 

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average accounts receivable (calculated by taking the average of accounts receivable at the end of each month); average inventories (calculated by taking the average of inventories at the end of each month); economic value added; succession planning; manufacturing return on assets; manufacturing margin; and customer satisfaction. Performance goals may also relate to a participant’s individual performance. The Administrator reserves the right to adjust any performance goals or modify the manner of measuring or evaluating a performance goal.

Dividend Equivalent Units

The Administrator may grant dividend equivalent units. A dividend equivalent unit gives the participant the right to receive a payment, in cash or shares of common stock, equal to the cash dividends or other distributions that we pay with respect to a share of common stock. We determine all terms and conditions of a dividend equivalent unit award, except that dividend equivalent units may not be granted in connection with a stock option or SAR, and dividend equivalent unit awards that relate to performance shares or performance units may not provide for payment prior to vesting of such shares or units.

Other Stock-Based Awards

The Administrator may grant to any participant shares of unrestricted stock as a replacement for other compensation to which such participant is entitled, such as in payment of director fees, in lieu of cash compensation, in exchange for cancellation of a compensation right, or as a bonus.

Transferability

Awards are not transferable, including to any financial institution, other than by will or the laws of descent and distribution, unless the Administrator allows a participant to (a) designate in writing a beneficiary to exercise the award or receive payment under the award after the participant’s death, (b) transfer an award to a former spouse as required by a domestic relations order incident to a divorce, or (c) transfer an award without receiving any consideration.

Adjustments

If (a) we are involved in a merger or other transaction in which our shares of common stock are changed or exchanged; (b) we subdivide or combine shares of common stock or declare a dividend payable in shares of common stock, other securities, or other property (other than stock purchase rights issued pursuant to a shareholder rights agreement); (c) we effect a cash dividend that exceeds 10% of the fair market value of a share of common stock or any other dividend or distribution in the form of cash or a repurchase of shares of common stock that our board of directors determines is special or extraordinary, or that is in connection with a recapitalization or reorganization; or (d) any other event occurs that in the Administrator’s judgment requires an adjustment to prevent dilution or enlargement of the benefits intended to be made available under the Omnibus Incentive Plan, then the Administrator will, in a manner it deems equitable, adjust any or all of (1) the number and type of shares subject to the Omnibus Incentive Plan and which may, after the event, be made the subject of awards; (2) the number and type of shares of common stock subject to outstanding awards; (3) the grant, purchase, or exercise price with respect to any award; and (4) the performance goals of an award.

In any such case, the Administrator may also provide for a cash payment to the holder of an outstanding award in exchange for the cancellation of all or a portion of the award, subject to the terms of the Omnibus Incentive Plan.

The Administrator may, in connection with any merger, consolidation, acquisition of property or stock, or reorganization, authorize the issuance or assumption of awards upon terms and conditions we deem appropriate without affecting the number of shares of common stock otherwise reserved or available under the Omnibus Incentive Plan.

 

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Change of Control

Upon a change of control (as defined in the Omnibus Incentive Plan), the successor or surviving corporation may agree to assume some or all outstanding awards or replace them with the same type of award with similar terms and conditions, without the consent of any participant, subject to the following requirements:

 

   

Each award that is assumed must be appropriately adjusted, immediately after such change of control, to apply to the number and class of securities that would have been issuable to a participant upon the consummation of such change of control had the award been exercised, vested, or earned immediately prior to such change of control, and other appropriate adjustment to the terms and conditions of the award may be made.

 

   

If the securities to which the awards relate after the change of control are not listed and traded on a national securities exchange, then (a) each participant must be provided the option to elect to receive, in lieu of the issuance of such securities, cash in an amount equal to the fair value of the securities that would have otherwise been issued, and (b) no reduction may be taken to reflect a discount for lack of marketability, minority, or any similar consideration, for purposes of determining the fair value of such securities.

 

   

If a participant is terminated from employment without cause, or due to death or disability, or the participant resigns employment for good reason (as defined in any award or other agreement between the participant and our Company or an affiliate) within two years following the change of control, then upon such termination, all of the participant’s awards in effect on the date of such termination will vest in full or be deemed earned in full.

If the purchaser, successor, or surviving entity does not assume the awards or issue replacement awards, then immediately prior to the change of control date, unless the Administrator otherwise determines:

 

   

Each stock option or SAR then held by a participant will become immediately and fully vested, and all stock options and SARs will be cancelled on the change of control date in exchange for a cash payment equal to the excess of the change of control price of the shares of common stock over the purchase or grant price of such shares under the award.

 

   

Unvested restricted stock and RSUs (that are not performance awards) will vest in full.

 

   

All performance shares, performance units, and cash incentive awards for which the performance period has expired will be paid based on actual performance, and all such awards for which the performance period has not expired will be cancelled in exchange for a cash payment equal to the amount that would have been due under such awards, valued assuming achievement of target performance goals at the time of the change of control, prorated based on the number of full months elapsed in the performance period.

 

   

All unvested dividend equivalent units will vest (to the same extent as the award granted in tandem with such units) and be paid.

 

   

All other unvested awards will vest and any amounts payable will be paid in cash.

Term of Plan

Unless earlier terminated by our board of directors, the Omnibus Incentive Plan will remain in effect until the date all shares reserved for issuance have been issued, except that no incentive stock options may be issued if the term of the Omnibus Incentive Plan extends beyond 10 years from the effective date without shareholder approval of such extension.

Termination and Amendment

Our board of directors or the Administrator may amend, alter, suspend, discontinue or terminate the Omnibus Incentive Plan at any time, subject to the following limitations:

 

   

Our board of directors must approve any amendment to the Omnibus Incentive Plan if we determine such approval is required by prior action of our board of directors, applicable corporate law, or any other applicable law;

 

   

Shareholders must approve any amendment to the Omnibus Incentive Plan, which may include an amendment to materially increase the number of shares reserved under the Omnibus Incentive Plan, if we determine that such approval is required by Section 16 of the Exchange Act, the Code, the listing requirements of any principal securities exchange or market on which the shares are then traded, or any other applicable law; and

 

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Shareholders must approve any amendment to the Omnibus Incentive Plan that would diminish the protections afforded by the participant award limits or repricing and backdating prohibition.

Subject to the requirements of the Omnibus Incentive Plan, the Administrator may modify or amend any award or waive any restrictions or conditions applicable to any award or the exercise of the award, or amend, modify, or cancel any terms and conditions applicable to any award, in each case, by mutual agreement of the Administrator and the participant or any other person(s) that may have an interest in the award, so long as any such action does not increase the number of shares of common stock issuable under the Omnibus Incentive Plan. We need not obtain participant (or other interested party) consent for any such action (a) that is permitted pursuant to the adjustment provisions of the Omnibus Incentive Plan; (b) to the extent we deem the action necessary to comply with any applicable law or the listing requirements of any principal securities exchange or market on which our common stock is then traded; (c) to the extent we deem the action is necessary to preserve favorable accounting or tax treatment of any award for us; or (d) to the extent we determine that such action does not materially and adversely affect the value of an award or that such action is in the best interest of the affected participant or any other person(s) as may then have an interest in the award.

Repricing Prohibited

Except for the adjustments provided for in the Omnibus Incentive Plan, neither the Administrator nor any other person may amend the terms of outstanding stock options or SARs to reduce their exercise or grant price, cancel outstanding stock options or SARs in exchange for stock options or SARs with an exercise or grant price that is less than the exercise or grant price of the awards being cancelled, or cancel outstanding stock options or SARs with an exercise or grant price above the current fair market value of a share in exchange for cash or other securities. In addition, the Administrator may not grant a stock option or SAR with a grant date that is effective prior to the date the Administrator takes action to approve such award.

Director Compensation for 2018

The following table provides information regarding the compensation of our non-employee directors during 2018.

 

Name    Fees Earned or Paid in
Cash ($)
   Total
($)

Allen J. Carlson

       27,750        27,750

Timothy L. Christen

       35,750        35,750

Steven L. Fisher

       60,250        60,250

Craig E. Johnson

       60,000        60,000

Patrick D. Michels

       27,250        27,250

Jay O. Rothman

       37,250        37,250

John A. St. Peter

       43,250        43,250

During 2018, we compensated our non-employee directors as follows: $6,000 for each meeting of our board of directors attended, $1,000 for each meeting of our board committees attended and $750 for each telephonic meeting of our board committees joined. In 2019, our non-employee directors will receive $8,000 for each meeting of our board of directors attended, $2,000 for each meeting of our board committees attended and $1,000 for each telephonic meeting of our board committees joined. Following completion of this offering, our non-employee directors will also receive an annual equity grant with a target grant date value of $100,000. Our employee directors received no additional compensation for their service on our board of directors. Following the completion of this offering, we expect to pay our non-employee directors as follows:                    . We also reimburse all ordinary and necessary expenses incurred in the conduct of our business.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a description of transactions within the past three years to which we have been a party, in which the amount involved exceeds or will exceed $120,000 and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest.

Jay O. Rothman, one of our directors, is a partner in the law firm of Foley & Lardner LLP, which provides legal services to us. For this legal work, we paid Foley & Lardner LLP approximately $135,000, $375,000 and $600,000 during the fiscal years ended December 31, 2016, 2017 and 2018, respectively.

Certain participants in the ESOP are entitled to diversification and distribution rights pursuant to the ESOP and applicable law. In order to fund the diversification and distribution elections of the eligible participants under the ESOP prior to the completion of this offering, we have repurchased shares of our common stock from the ESOP in the amounts of $13.6 million, $12.7 million and $11.8 million in 2016, 2017 and 2018, respectively. See “Principal Shareholders—ESOP.”

Review and Approval of Related Party Transactions

Prior to the completion of this offering, our board of directors will adopt a written policy regarding the review and approval of related party transactions. Our audit committee charter provides that the audit committee shall review and approve or disapprove any related party transactions, which are transactions between us and related persons in which the aggregate amount involved exceeds or may be expected to exceed $120,000 and in which a related person has or will have a direct or indirect material interest. Upon the completion of this offering, our policy regarding transactions between us and related persons will provide that a related person is defined as a director, executive officer, nominee for director or greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed year, and any of their immediate family members.

Historically, our management and board of directors have reviewed and approved related party transactions. Our management and board of directors will continue to review and approve related party transactions until the adoption, prior to the completion of this offering, of the policy described above.

 

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PRINCIPAL SHAREHOLDERS

The following table sets forth information at                , 2019 with respect to the beneficial ownership of our common stock (i) immediately prior to this offering and (ii) as adjusted to reflect the sale of                shares of our common stock in this offering, in each case by:

 

   

each of our named executive officers;

 

   

each of our directors;

 

   

all of our current directors and executive officers as a group; and

 

   

each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock.

We have determined beneficial ownership in accordance with the rules of the SEC, and thus it represents sole or shared voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially owned, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose, including for purposes of Sections 13(d) and 13(g) of the Securities Act.

In the table below, the applicable percentage ownership relating to shares beneficially owned prior to this offering is based on            shares of our common stock outstanding at                    , 2019. The applicable percentage ownership relating to shares beneficially owned after this offering is based on            shares of our common stock outstanding at                    , 2019 (or            shares of our common stock if the underwriters’ option to purchase additional shares is exercised in full). Beneficial ownership as reported in the table below has been determined in accordance with Rule 13d-3 under the Exchange Act. In computing the number of shares beneficially owned by a person or entity and the percentage ownership of that person or entity, we deemed to be outstanding all shares of our common stock subject to options held by that person or entity that are currently exercisable or that will become exercisable within 60 days of                    , 2019. Unless otherwise indicated in the footnotes below, the address of each beneficial owner listed in the table below is c/o Mayville Engineering Company, Inc., 715 South Street, Mayville, Wisconsin 53050.

 

 

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      Shares of Common Stock Beneficially Owned
     Shares of Common
Stock Beneficially
Owned before this
offering
  Shares of Common
Stock Beneficially
Owned after this
offering assuming
underwriters’ option
is not exercised
  Shares of Common
Stock Beneficially
Owned after this
offering assuming
underwriters’ option
is exercised in full(1)
Name of beneficial owner    Number
of Shares
   Percentage   Number
of Shares
   Percentage   Number
of Shares
   Percentage

Directors and Executive Officers

                           

Robert D. Kamphuis(2)

                              %                     %

Todd M. Butz(2)

                              %                     %

Ryan F. Raber(2)

                              %                     %

Allen J. Carlson

       0        *       0        *       0        *

Timothy L. Christen

       0        *       0        *       0        *

Steven L. Fisher

       0        *       0        *       0        *

Craig E. Johnson

       0        *       0        *       0        *

Patrick D. Michels

       0        *       0        *       0        *

Jay O. Rothman

       0        *       0        *       0        *

John A. St. Peter

       0        *       0        *       0        *

All Directors and Executive Officers as a group (12 persons)(2)

                              %                     %

Other Holders

                           

ESOP(3)

                  100 %                           %                           %