Commercial Vehicle Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. CVG supplies cab-related products and systems for commercial vehicles and related markets. Its reportable segments are Global Truck and Bus (GTB) and Global Construction and Agriculture (GCA).
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $233.4m | $195.1m | $449.1m | $368.5m |
| Gross profit / margin | $35.9m / 15.4% | $22.7m / 11.6% | $67.0m / 14.9% | $44.2m / 12.0% |
| Operating income / margin | $21.1m / 9.1% | $7.6m / 3.9% | $36.6m / 8.2% | $12.1m / 3.3% |
| Net income | $13.2m | $0.1m | $23.0m | $0.8m |
| Diluted EPS | $0.43 | $0.00 | $0.75 | $0.03 |
| Operating cash flow | Not separately stated | Not separately stated | $0.9m | $(3.9)m |
- Q2 revenue rose 19.6%; first-half revenue rose 21.9%. North American medium- and heavy-duty truck sales and construction equipment sales were key drivers. Foreign-exchange translation contributed $4.3m to Q2 revenue growth and $11.5m to first-half growth.
- First-half cost of revenues increased 17.8%, slower than revenue growth; gross margin improved 2.9 percentage points. Management attributed the improvement mainly to higher volume, cost-control and pricing initiatives, and the absence of prior-year labor-shortage and restructuring costs.
- Q2 interest and other expense was $3.4m versus $6.7m; first-half expense was $5.4m versus $11.3m. Management cited lower debt, favorable interest-rate-swap mark-to-market effects, and a $1.6m noncash refinancing-related charge in 2017.
Financial position and liquidity
- At June 30, 2018, cash was $44.7m, current assets $300.4m, and current liabilities $123.6m. Cash was down $7.6m from year-end 2017.
- Debt had a carrying amount of $165.4m, comprising $3.2m current and $162.1m long-term. The term loan matures in April 2023. CVG had no revolver borrowings, $63.3m of borrowing availability, and $1.7m of letters of credit.
- First-half operating cash flow was only $0.9m despite $23.0m net income, with increased receivables absorbing cash: the cash-flow statement reports a $47.3m use from accounts receivable. Capital expenditures were $5.2m.
- Management expects 2018 capital expenditures of $15m–$18m and believes cash, operating cash flow, and revolver availability will fund the next 12 months’ anticipated needs. It cautions that this is not assured and that covenant breaches could accelerate debt. Covenants were met at quarter-end.
- All $44.7m of reported cash was held by foreign subsidiaries. CVG said it did not plan to repatriate those earnings and could incur foreign withholding or income taxes if it did.
Outlook, commentary, and risks
- Management cited strong construction-equipment production in served markets and expected North American Class 8 demand of 300,000–325,000 units in 2018. The filing also cites an ACT Research forecast of 316,000 Class 8 units in 2018 and 334,000 in 2019, followed by a decline in 2020. These are market estimates, not company revenue or earnings guidance.
- Raw-material inflation and difficult labor markets continued to pressure costs; management said pricing adjustments and other cost-recovery measures partly mitigated the pressure. Results remain exposed to commercial-vehicle cyclicality, customer and platform concentration, foreign currencies, interest rates, competition, regulation, and the ability to meet debt covenants.
- CVG recorded no restructuring charges in the first half of 2018. Warranty reserves were $4.1m at June 30. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- The $4.0m tax provision for deemed repatriation recorded in 2017 remained provisional with no adjustment at June 30, 2018. CVG had not yet selected its accounting policy for future GILTI taxes. Goodwill impairment testing in Q2 found no impairment.
- CVG adopted revenue-recognition guidance effective January 1, 2018, with no transition adjustment or Q2 impact. It was assessing the future lease-accounting standard, expected to recognize lease assets and liabilities not then on the balance sheet.
- Management concluded disclosure controls were effective at June 30, 2018; it reported no material change in internal control during the quarter and no material change to the risk factors in its 2017 Form 10-K.
Most important facts for investors to verify
- Whether revenue and margin growth are sustained as truck and construction demand changes, and how much growth is attributable to volume versus foreign exchange.
- Whether working-capital absorption—especially receivables—improves and operating cash flow catches up with reported earnings.
- Whether commodity and labor inflation can be recovered through pricing without eroding margins.
- Debt amortization, covenant headroom, revolver availability, and the company’s ability to fund the planned $15m–$18m of 2018 capital spending.
- Final tax treatment and any effects from GILTI, foreign cash repatriation, and deferred-tax valuation allowances.