Commercial Vehicle Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. CVG supplies electrical systems, seating and other cab-related products to commercial vehicle and other markets. Comparisons are to Q1 2019, as restated.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $187.1 million | $243.2 million |
| Gross profit / margin | $20.3 million / 10.9% | $33.1 million / 13.6% |
| Operating income (loss) | $(26.5) million | $17.6 million |
| Net income (loss) | $(24.6) million | $10.0 million |
| Diluted earnings (loss) per share | $(0.80) | $0.33 |
| Operating cash flow | $10.3 million | $(6.0) million |
| Capital expenditures | $3.5 million | $5.6 million |
Revenue fell 23.1%, reflecting lower North American medium- and heavy-duty truck and construction-equipment demand; industrial and military sales rose, primarily following the FSE acquisition. Cost reductions and lower input costs partly offset the volume decline, but gross margin contracted. SG&A rose 12.5%, including $2.4 million of restatement-investigation costs and $2.3 million of CEO-transition costs.
Operating cash flow improved year over year, primarily due to lower working-capital investment and other operating items amid lower volumes. Cash was $58.1 million at quarter-end, including $39.0 million held by foreign subsidiaries. The company reported $114.2 million of total liquidity: cash plus $56.1 million of revolver availability.
Balance sheet and debt
At March 31, 2020, total assets were $431.2 million, total liabilities $334.3 million and stockholders’ equity $96.9 million. Debt comprised $155.6 million of term-loan carrying value and $15.0 million drawn on the revolving facility. Term-loan principal payments are scheduled through its 2023 maturity, with $146.8 million due in 2023. The company said it was compliant with applicable debt covenants at quarter-end.
Material changes, outlook and risks
- Impairments: CVG recorded $28.9 million of impairment expense, including a $27.1 million full impairment of goodwill and $1.8 million of long-lived asset impairments. Goodwill was reduced to zero.
- COVID-19: The company cited shutdowns or slowdowns, supply constraints and reduced customer demand. It provided no 2020 production guidance and expected Q2 revenue to be significantly below Q1; ACT Research estimated Q2 North American truck builds could fall 65%–75% from Q1.
- Cost and liquidity actions: Measures included pay reductions, furloughs, suspending the employer 401(k) match, reducing capital spending and additional restructuring. Management estimated total restructuring costs of $5 million–$7 million, with initiatives continuing into 2021. Expected 2020 capital spending was $8 million–$12 million.
- Subsequent debt amendments: On May 11, 2020, CVG amended its term and revolving credit agreements. The term amendment added a $40 million minimum-liquidity covenant through Q3 2021, temporarily suspended the leverage covenant through Q4 2020, and increased term-loan pricing through September 2021 to base rate plus 9.50% or LIBOR plus 10.50%, at the company’s election. The amendments also tightened certain restrictions. These changes occurred after quarter-end.
- Financial reporting controls: Management concluded internal control over financial reporting was ineffective at March 31 because previously identified material weaknesses had not been remediated. Prior-period 2018 and 2019 financial statements were restated after errors involving improperly capitalized manufacturing costs and a property, plant and equipment error; Q1 2019 net income was restated from $11.1 million to $10.0 million.
- Key uncertainties: Risks include the depth and duration of COVID-19 disruption, market cyclicality, supplier or customer financial distress, covenant compliance and access to financing. Management believed available liquidity would fund needs for the next 12 months, but gave no assurance.
Important facts for investors to verify
- Whether Q2 and subsequent demand declines, plant disruptions and working-capital needs materially reduce liquidity.
- Compliance with the amended $40 million minimum-liquidity covenant and other debt terms, including the higher interest burden.
- Progress in remediating material weaknesses and whether further restatements or control issues arise.
- Whether restructuring delivers expected savings and whether additional charges or asset impairments are required.
- FSE acquisition performance and potential contingent milestone payments; the March 31 fair value of the earnout liability was $4.8 million.