Commercial Vehicle Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company supplies cab-related products and systems to global truck, bus, construction, agriculture, and other vehicle markets through its Global Truck and Bus (GTB) and Global Construction and Agriculture (GCA) segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $225.0m | $198.3m | $674.1m | $566.9m |
| Gross profit / margin | $32.5m / 14.4% | $25.2m / 12.7% | $99.5m / 14.8% | $69.4m / 12.2% |
| Operating income / margin | $16.5m / 7.3% | $10.7m / 5.4% | $53.1m / 7.9% | $22.8m / 4.0% |
| Net income | $12.6m | $4.8m | $35.6m | $5.5m |
| Diluted EPS | $0.41 | $0.16 | $1.17 | $0.18 |
Q3 revenue rose 13.5%; nine-month revenue rose 18.9%. Management attributed growth primarily to North American medium- and heavy-duty truck OEM sales, with additional contribution from construction equipment and other markets. Nine-month revenue also benefited by $10.4m from foreign-currency translation; Q3 revenue was reduced by $1.0m from translation.
For the first nine months, operating cash flow was $20.0m, compared with cash used of $2.3m in 2017. Increased earnings were partly offset by working-capital investment, including a $51.1m increase in accounts receivable cash use. Capital expenditures were $9.8m. Cash at September 30 was $57.5m, including $50.3m held by foreign subsidiaries.
Debt carrying value was $164.6m, comprising $3.2m current and $161.3m long-term; cash less debt was approximately $107.0m net debt. The company had no revolver borrowings and $63.3m of availability, with $1.7m of letters of credit outstanding. It reported compliance with applicable debt covenants.
Changes and segment results
- Profitability improved: Nine-month gross margin increased to 14.8% from 12.2%. The comparison benefited from higher volume, cost controls and recovery initiatives, completion of prior restructuring, and the absence of approximately $10.0m of 2017 wire-harness labor-shortage costs and $2.3m of restructuring-related costs.
- GTB: Nine-month revenue increased 23.1% to $423.4m; operating income rose to $45.3m from $30.7m. Q3 revenue increased 20.0% to $146.4m, while gross margin was broadly stable at 14.0% versus 14.1%.
- GCA: Nine-month revenue increased 13.6% to $262.6m; operating income rose to $24.9m from $9.4m. Gross margin increased to 14.4% from 9.6%, reflecting volume and the prior-year labor and restructuring costs. Q3 gross margin increased to 14.7% from 10.5%.
- Interest and other expense declined to $9.0m for nine months from $14.8m, reflecting lower debt, favorable interest-rate-swap mark-to-market effects, and a prior-year $1.6m refinancing-related write-off.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of $13m–$16m and believed cash, operating cash flow, and available revolver capacity would fund anticipated needs and debt service over the next 12 months; it cautioned that this was not assured.
- Management cited ACT Research estimates of North American Class 8 production of 317,000 units in 2018 and 335,000 in 2019, followed by 244,000 in 2020; CVG itself believed 2018 demand would be 315,000–325,000 units. These are market estimates, not company revenue or earnings guidance.
- A $2.9m tax benefit was recorded in Q3 to revise the prior-year provisional tax on deemed repatriation of foreign earnings. Further adjustment remained possible by year-end. The company had not finalized its accounting policy for GILTI taxes.
- Key risks include cyclical commercial-vehicle demand, customer or platform losses, labor constraints, material inflation and steel/aluminum tariffs, foreign-exchange exposure, Brexit uncertainty, interest rates, and the ability to maintain debt-covenant compliance. Approximately 47% of nine-month revenue came from North American MD/HD truck OEMs.
- Ordinary-course legal claims were not expected by management to have a material adverse effect, though outcomes were uncertain. The company reported effective disclosure controls and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether revenue growth and margin gains persist after the favorable prior-year cost comparisons, and whether labor and material inflation can be recovered through pricing.
- Accounts-receivable growth, cash conversion, and the use and location of cash, including the $50.3m held by foreign subsidiaries.
- Debt amortization, interest-rate exposure, revolver availability, and ongoing compliance with financial and other covenants.
- Final tax accounting for the provisional repatriation-tax adjustment and GILTI, including any further year-end changes.
- Actual 2018 capital spending and end-market production trends versus the market forecasts cited by management.