Commercial Vehicle Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statement amounts are in millions of dollars, except per-share data. CVG supplies cab-related products and systems to commercial truck, construction, military, bus, agriculture, specialty transportation and recreational vehicle markets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $198.9 | $242.7 | $376.7 | $479.7 |
| Gross profit / margin | $22.9 / 11.5% | $37.5 / 15.4% | $41.0 / 10.9% | $74.2 / 15.5% |
| Operating income | $2.1 | $19.0 | $1.9 | $37.5 |
| Net income (loss) | $(1.7) | $13.2 | $(6.3) | $25.1 |
| Diluted EPS | $(0.06) | $0.46 | $(0.22) | $0.89 |
| Operating cash flow | Not presented separately for the quarter | $4.5 | $8.7 |
- Q2 revenue fell 18.1%; first-half revenue fell 21.5%. Lower global OEM truck and construction orders were the main drivers. Bus, aftermarket and other markets partially offset declines.
- Gross margin contracted as costs did not fall in proportion to revenue. Q2 SG&A rose 10.8% to $20.3 million, including approximately $2.5 million of severance, recruitment and relocation costs related to an executive leadership change.
- Interest and other expense was $5.2 million in Q2 and $10.6 million for the first half. Income tax benefits were $1.4 million and $2.5 million, respectively.
- At June 30, cash was $64.9 million, down from $68.4 million at year-end 2012. First-half investing cash use was $7.8 million, primarily capital expenditures and life-insurance premiums; capital expenditure purchases were $7.2 million.
- Debt was $250.0 million of 7.875% senior secured notes due 2019. No revolver borrowings were outstanding; reported availability was $37.2 million, with $2.8 million of letters of credit. The revolver matures April 2014. Cash held by foreign subsidiaries was $18.7 million; management said it did not intend to repatriate those funds.
- Total current assets were $296.8 million and current liabilities $110.0 million. Total liabilities were $392.1 million and stockholders’ equity $59.2 million.
Changes and management commentary
Revenue declines reflected approximately $30.2 million less Q2 revenue from global OEM truck markets and $18.0 million less from global construction markets. For the first half, those declines were approximately $71.9 million and $34.1 million. North American Class 8 build rates rose about 22% in Q2 versus Q1, following weak conditions at the end of 2012 and in Q1 2013.
Management cited ACT Research’s July 2013 forecast for North American Class 8 production: 262,000 in 2013, 301,000 in 2014, 235,000 in 2016 and 295,000 in 2018. These are industry forecasts, not company guidance. Management said cash on hand, operating cash flow and revolver availability should fund anticipated working capital, planned capital spending, strategic initiatives and debt service for the next 12 months, while cautioning that this is not assured.
Risks, contingencies and unusual items
- Liquidity and covenant compliance depend on market and operating conditions. The fixed-charge coverage covenant applies if revolver availability falls below $10 million; CVG reported availability above that threshold and compliance with debt covenants at quarter-end.
- Key risks include cyclical truck and construction demand, customer production and inventory levels, foreign exchange, competition, customer or platform losses, regulation, financing access and covenant compliance.
- Foreign currency translation loss was $3.8 million in Q2. Foreign-exchange contracts were not designated as hedges; the company recorded a $0.6 million Q2 loss on them in cost of revenue.
- Goodwill was $8.4 million. The second-quarter qualitative assessment concluded impairment was not more likely than not; no quantitative impairment test was required.
- Warranty liability was $3.0 million at June 30. Management considered ordinary-course litigation reserves adequate and said it did not expect a material adverse impact, while noting outcomes are uncertain. No material litigation or guarantees were reported.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Whether lower OEM truck and construction volumes persist, and whether industry production forecasts translate into CVG orders and revenue.
- Whether margins recover as production changes, given the sharp decline in gross margin and the company’s inability to reduce costs in line with falling sales.
- Cash generation, working-capital needs, capital spending and the availability and maturity terms of the revolver, particularly if availability approaches the $10 million covenant threshold.
- Progress on executive-transition costs and the effect of acquisition-related amortization on future results.
- Foreign-currency exposure, tax valuation allowances and the adequacy of warranty and other contingency estimates.