Commercial Vehicle Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. CVG supplies electrical systems, seating, and other cab-related products to commercial vehicle and other markets, with operations across the Americas, Europe, and Asia-Pacific.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $243.2 million | $233.4 million | $486.4 million | $449.1 million |
| Gross profit | $33.8 million | $35.6 million | $68.3 million | $66.4 million |
| Gross margin | 13.9% | 15.2% | 14.1% | 14.8% |
| Operating income | $17.2 million | $20.9 million | $36.3 million | $36.2 million |
| Interest and other expense | $7.5 million | $3.2 million | $11.9 million | $5.0 million |
| Net income | $7.2 million | $13.2 million | $18.3 million | $23.0 million |
| Diluted EPS | $0.23 | $0.43 | $0.60 | $0.75 |
For the first half, operating cash flow was $8.7 million, versus $0.9 million a year earlier; capital expenditures were $12.7 million, versus $5.2 million. Cash declined $10.4 million from year-end to $60.5 million. At June 30, total liquidity was $123.9 million, comprising cash and $63.4 million of revolver availability. Debt carrying value was $158.0 million; no revolver borrowings were outstanding. The term loan matures in 2023.
Changes and drivers
- Q2 revenue rose 4.2%, led by North American medium- and heavy-duty truck sales; first-half revenue increased 8.3%. Foreign exchange translation reduced revenue by $3.5 million in Q2 and $8.0 million in the first half.
- Profitability weakened despite revenue growth. Q2 gross profit fell 5.1% and net income fell 45.6%; first-half net income declined 20.6%. Higher materials, labor, and overhead costs pressured margins.
- Management cited approximately $0.7 million of Q2 cost impact from Mexico’s Border Minimum Wage, $1.2 million from a financially troubled supplier, and $1.0 million from added manufacturing capacity. First-half impacts were approximately $1.8 million, $2.0 million, and $1.3 million, respectively.
- Q2 SG&A increased 13.2%, including about $1.0 million of additional strategic-reorganization costs. First-half SG&A rose 6.4%, including about $1.8 million of such costs.
- Interest and other expense increased substantially, including a $2.5 million non-cash pension settlement charge and mark-to-market losses on the interest-rate swap. The pension lump-sum payouts totaled $7.8 million and management said they improved plan funded status to approximately 100%.
Outlook, risks, and notable items
- Management forecast 2019 capital expenditures of $19–$21 million and said cash, operating cash flow, and available revolver capacity should fund anticipated needs and debt service for the next 12 months, while noting there is no assurance.
- CVG expected North American Class 8 demand of 345,000–355,000 units in 2019 and Class 5–7 demand to be stable at 268,000. The filing cites an industry forecast for Class 8 production to fall in 2020, highlighting cyclicality.
- Management reported compliance with applicable debt covenants at June 30. A covenant breach could trigger default and acceleration; compliance depends partly on future results and conditions.
- Risks include commercial-vehicle cycle weakness, rising labor and material costs, customer or platform losses, foreign currency and interest-rate exposure, LIBOR transition uncertainty, and supply-chain disruption. A supplier’s Chapter 11 filing had already caused cost and manufacturing inefficiencies.
- Ordinary-course legal matters were not expected by management to materially affect the company, though outcomes are uncertain. Disclosure controls were concluded effective as of June 30.
Important facts for investors to verify
- Whether cost recovery, pricing actions, and added capacity mitigate inflation, border-wage, and supplier-related costs.
- Whether revenue and margins remain resilient if North American truck production declines, particularly in 2020.
- Progress on the $19–$21 million capital-spending plan, cash generation, and term-loan repayments.
- Debt-covenant headroom, interest-rate swap effects, and the impact of the LIBOR transition.
- Whether the pension settlement’s stated funded-status improvement and approximately $1.7 million expected 2019 pension contributions develop as disclosed.