Commercial Vehicle Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. CVG supplies seating, electrical and electro-mechanical products, and other systems to commercial vehicle, construction, industrial, military and related markets. Unless noted, amounts are U.S. dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019, restated | Six months 2020 | Six months 2019, restated |
|---|---|---|---|---|
| Revenue | $126.9 million | $243.2 million | $314.0 million | $486.4 million |
| Gross profit | $6.5 million | $32.4 million | $26.8 million | $65.5 million |
| Gross margin | 5.1% | 13.3% | 8.5% | 13.5% |
| Operating income (loss) | $(10.5) million | $15.9 million | $(37.0) million | $33.4 million |
| Net income (loss) | $(12.5) million | $6.1 million | $(37.1) million | $16.1 million |
| Diluted earnings (loss) per share | $(0.40) | $0.20 | $(1.20) | $0.52 |
- Cash flow: Six-month operating cash flow was $20.5 million, versus $8.7 million in 2019, mainly from working-capital reductions as sales fell. Investing cash outflow was $4.4 million and financing cash inflow was $10.0 million. Capital expenditures were $4.5 million; management expected full-year spending of $8–$12 million.
- Liquidity: June 30 cash was $63.4 million, with $43.2 million of revolver availability, for reported liquidity of $106.6 million. Cash included $42.1 million held by foreign subsidiaries.
- Debt: The term loan carrying amount was $154.2 million and revolver borrowings were $15.0 million. Total borrowings were therefore approximately $169.2 million before considering debt discounts and financing costs. The company remained in covenant compliance at quarter-end.
- Balance sheet: Total assets were $401.0 million, down from $435.8 million at year-end 2019; stockholders’ equity was $87.9 million, down from $128.7 million. Goodwill was fully impaired and stood at zero at June 30.
Material changes and unusual items
- Q2 revenue fell 47.8% year over year; six-month revenue fell 35.4%. The largest pressure was lower North American truck and construction OEM demand amid COVID-19 disruptions. Industrial and military sales grew, primarily due to the FSE acquisition, but did not offset declines elsewhere.
- Both reportable segments experienced steep revenue declines. Q2 Electrical Systems revenue fell 47.7% and Global Seating revenue fell 48.8%; segment operating results were a $6.2 million loss and $1.5 million income, respectively.
- Six-month impairment expense was $29.0 million: $27.1 million for the full impairment of goodwill and $1.9 million for long-lived assets. Q2 impairment expense was $0.15 million, relating to a corporate aircraft.
- Six-month results included restructuring charges, a $3.5 million charge for potential FSE milestone payments, $2.8 million of costs related to the 2019 restatement investigation, and $2.3 million of CEO transition costs. Management estimated total restructuring costs of $8–$12 million.
- The 2019 comparative financial statements are restated. The filing says prior errors included improperly capitalized manufacturing costs and a property, plant and equipment error; the Audit Committee concluded specified 2018 and 2019 statements should no longer be relied upon.
Outlook, financing and risks
- CVG did not provide 2020 guidance, citing rapidly changing markets and COVID-19 uncertainty. Management anticipated Q3 2020 revenue to increase 25%–35% from Q2. ACT Research forecasts cited in the filing projected North American Class 8 production of 169,000 units for 2020; this is an industry forecast, not company guidance.
- Management targeted more than $15 million in annualized cost reductions in mature markets and said footprint changes and growth-market investments could support $100–$150 million of new business, depending on mix. These are targets and opportunities, not assured outcomes.
- May 2020 loan amendments added a $40 million minimum-liquidity covenant through Q3 2021, temporarily suspended the leverage covenant through Q4 2020, and raised term-loan rates through September 2021. The company could elect to pay an incremental 4.5% interest in kind, adding it to principal. Amendments also restricted additional debt, liens, share repurchases, dividends and acquisitions.
- Management said available cash, operating cash flow and revolver availability were expected to fund needs for the next 12 months, but cautioned that covenant compliance and liquidity depend on forecasts and conditions. A covenant breach could accelerate debt, and cross-default provisions apply.
- COVID-19 risks include lower customer demand, plant shutdowns or slowdowns, supplier disruption and uncertain recovery. Other disclosed risks include cyclical end markets, customer concentration, foreign exchange and interest-rate exposure, and execution of restructuring and acquisition plans.
- Disclosure controls were deemed ineffective at June 30, 2020 because previously identified material weaknesses in risk assessment, balance-sheet reconciliations and manual journal-entry review had not been remediated. Remediation was underway.
Important facts for investors to verify
- Whether the Q3 revenue recovery, cost savings and new-business targets materialize, and how much depends on market recovery versus company actions.
- Liquidity headroom against the $40 million minimum covenant, revolver availability and ability to meet debt service if operating results weaken.
- Whether the material weaknesses are fully remediated, and whether any further restatements or control issues arise.
- The ultimate cost and timing of facility consolidations, restructuring actions and FSE contingent milestone payments.
- The scale of continuing COVID-19 effects on customer demand, production, suppliers and cash generation.