Commercial Vehicle Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results. CVG supplies cab-related products and systems to truck, bus, construction, agriculture, and other vehicle markets. Unless stated otherwise, figures below are in millions of dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $153.6 | $202.7 | $512.1 | $640.6 |
| Gross profit / margin | $18.9 / 12.3% | $27.9 / 13.8% | $69.0 / 13.5% | $86.5 / 13.5% |
| Operating income / margin | $4.5 / 2.9% | $9.9 / 4.9% | $21.5 / 4.2% | $32.7 / 5.1% |
| Net income attributable to CVG stockholders | $1.1 | $2.6 | $6.4 | $9.4 |
| EPS, basic and diluted | $0.04 | $0.09 | $0.22 | $0.32 |
| Operating cash flow | Not separately stated | Not separately stated | $50.2 | $52.4 |
Q3 pretax loss was $0.3 million, offset by a $1.5 million income tax benefit, resulting in net income of $1.1 million. For the first nine months, pretax income was $6.9 million and income tax expense was $0.5 million. Interest and other expense was $4.8 million for Q3 and $14.6 million year to date.
At September 30, cash was $137.1 million, total current assets $318.7 million and current liabilities $110.2 million. Long-term debt carrying value was $233.0 million; the notes’ stated principal was $235.0 million. The company had no revolver borrowings, $2.5 million of letters of credit and $37.5 million of stated borrowing availability. Cash held by foreign subsidiaries was $35.9 million. Nine-month capital expenditures were $7.5 million; net cash used in investing was $5.0 million.
Material changes versus comparable periods
- Q3 revenue fell 24.2%; nine-month revenue fell 20.1%. The principal driver was lower North American OEM medium- and heavy-duty truck sales, down 39.4% in Q3 and 32.2% year to date. Currency translation reduced nine-month revenue by $5.6 million.
- Q3 gross margin declined to 12.3%, primarily due to lower volume and higher restructuring charges. Year-to-date gross margin was flat at 13.5%, as cost reductions helped offset lower sales.
- Global Truck and Bus Q3 revenue declined 32.8% and operating income fell to $5.1 million from $16.4 million. Global Construction and Agriculture revenue declined 5.0%, but operating income rose to $3.9 million from $0.8 million, reflecting cost reductions and restructuring actions.
- Nine-month operating cash flow was $50.2 million versus $52.4 million. CVG attributed cash generation partly to lower working-capital use as sales declined. Cash increased from $92.2 million at year-end 2015 to $137.1 million.
Outlook, risks and unusual items
- Management expects 2016 capital expenditures of $11–$13 million and believes available cash, operating cash flow and revolver availability should fund anticipated needs and debt service for at least 12 months, while cautioning there is no assurance.
- Management expects the restructuring plan to reduce annual operating costs by $8–$12 million when fully implemented by the end of 2017. Total pre-tax costs, including capital expenditures, were revised to $10–$14 million, including $2–$3 million of capital investment. About $2 million of restructuring expenditures had been incurred in the first nine months of 2016; $4–$5 million was expected for full-year 2016 and $3–$5 million in 2017.
- Actions include closing or consolidating facilities and transferring production, including the Piedmont seat operation, Monona wire-harness production and Shadyside assembly and stamping. Management expects global construction and agriculture markets to remain soft into 2017 and overall 2017 conditions to be relatively flat.
- Management cited ACT Research expectations for North American Class 8 production to decline to 203,000 in 2017 before rising gradually to 324,000 in 2020; CVG estimated 2016 demand at 215,000–225,000. These are third-party forecasts and company estimates, not company revenue guidance.
- CVG has $235 million principal amount of 7.875% senior secured notes due April 2019. The company reported compliance with debt covenants and no defaults at September 30. Revolver covenant testing is triggered if availability falls below $7.5 million; management warned that weaker-than-forecast results, unrealized savings or reduced liquidity could threaten future compliance and borrowing access.
- Restructuring charges included $2.3 million year to date. A $0.6 million asset-held-for-sale impairment was also recorded. The company reported a $0.7 million fair-value liability on foreign-exchange contracts and a $0.9 million loss on those contracts in Q3.
- In a lawsuit filed by Bouchet & Co., a court on October 24, 2016 found CVG liable for breach of contract but left damages for a jury; it denied summary judgment on the separate promissory-fraud claim. Plaintiff seeks $2.5 million in contract damages plus other relief. CVG had accrued $0.95 million at September 30 and said it did not expect a material adverse effect.
- Other risks include cyclical vehicle demand, customer or platform losses, foreign currency exposure, execution of cost savings, financing and covenant access, competition, and legal and warranty claims. Management said disclosure controls were effective as of September 30, 2016.
Key facts for investors to verify
- Whether the steep decline in truck OEM demand persists and how it affects revenue, margins and working capital.
- Whether restructuring actions deliver the targeted $8–$12 million in annual savings within the revised cost and timing estimates.
- Whether cash generation and revolver availability remain adequate to service the 2019 notes and maintain covenant compliance.
- The eventual jury determination of damages and outcome of the remaining claims in the Bouchet litigation.
- Whether the improved GCA segment profitability can continue and offset weakness in Global Truck and Bus.