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CVGI > SEC Filings for CVGI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for COMMERCIAL VEHICLE GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COMMERCIAL VEHICLE GROUP, INC.


8-Nov-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

We are a leading supplier of a full range of cab related products and systems for the global commercial vehicle market, including the heavy-duty (Class 8) truck market, the medium- and heavy-construction vehicle markets, military, bus and agriculture markets, the specialty transportation markets and recreational (ATV/UTV) markets. Our products include static and suspension seat systems, electronic wire harness assemblies, controls and switches, cab structures and components, interior trim systems (including instrument panels, door panels, headliners, cabinetry and floor systems), interior and exterior finishes and mirrors and wiper systems specifically designed for applications in commercial vehicles.

We are differentiated from suppliers to the automotive industry by our ability to manufacture low volume, customized products on a sequenced basis to meet the requirements of our customers. We believe that we have the leading position in several of our major markets and in the North American commercial vehicle market we can offer complete cab systems, including cab body assemblies, sleeper boxes, seats, interior trim, flooring, wire harnesses, panel assemblies and other structural components. We believe our products are used by a majority of the North American heavy truck and certain leading global construction original equipment manufacturers ("OEM"), which we believe creates an opportunity to cross-sell our products and offer a full range of cab related products and systems.

Demand for our heavy truck products is generally dependent on the number of new heavy truck commercial vehicles manufactured in North America, which in turn is a function of general economic conditions, interest rates, changes in governmental regulations, consumer spending, fuel costs and our customers' inventory levels and production rates. New heavy truck commercial vehicle demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy, which generates a significant portion of the freight tonnage hauled by commercial vehicles. The North American Class 8 market showed a modest increase to 279,000 in 2012 as production levels increased approximately 9% over 2011. According to an October 2013 report by ACT Research, a publisher of industry market research, North American Class 8 production levels are expected to decline to 252,000 in 2013, increase to 281,000 in 2014, peak at 294,000 in 2015 and decline to 285,000 in 2018. For the third quarter of 2013, Class 8 build rates decreased approximately 4% compared to the second quarter of 2013. We believe the demand for new Class 8 vehicles will be driven by several factors, including growth in freight volumes and the replacement of aging vehicles. ACT forecasts that the total U.S. freight composite will increase from 13.9 trillion in 2012 to 17.7 trillion in 2018. ACT estimates that the average age of active U.S. Class 8 trucks is 6.5 years in 2013, down slightly from 6.6 years in 2012. The median age of Class 8 trucks during the past 25 years has been 5.8 years. As vehicles age, their maintenance costs typically increase. ACT forecasts that the vehicle age will decline as aging fleets are replaced. We believe the lower market conditions we experienced in the first three quarters of 2013 relate to depressed heavy truck build rates, which we expect to continue for the remainder of 2013. Some of our customers advised us of their intention to take production out of their schedules by the end of the year, which may have a negative impact on our results for the fourth quarter.

Demand for our construction products is dependent on the overall vehicle demand for new commercial vehicles in the global construction equipment market and generally follows certain economic conditions around the world. Our products are primarily used in the medium/heavy construction equipment markets (weighing over 12 metric tons). Demand in the medium/heavy construction equipment market is typically related to the level of larger scale infrastructure development projects such as highways, dams, harbors, hospitals, airports and industrial development, as well as activity in the mining, forestry and other raw material based industries. During 2009, we experienced a significant decline in global construction equipment production levels as a result of the global economic downturn and related reduction in new equipment orders. During 2010 and 2011, the global construction market showed signs of recovery, which continued into the first half of 2012 followed by an overall decline in the market after a lower than expected second half of 2012. This decline in the global construction market continued into the first three quarters of 2013. We believe the lower market conditions we experienced at the end of 2012, which carried over into the first three quarters of 2013 relate to depressed construction build rates.

Along with the United States, we have operations in Europe, Asia, Australia and Mexico. Our operating results are, therefore, impacted by exchange rate fluctuations to the extent we translate our foreign operations from their local currencies into U.S. dollars.


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We are evaluating ways to improve our operating performance. These efforts include, but are not limited to, the following:

engaging a third party consultant in the third quarter of 2013 in the development of opportunities for cost savings, opportunities for improvements to our manufacturing capacity utilization and strategies to enhance our product portfolio and market penetration;

rightsizing our administrative staff and adjusting our hourly and salaried workforce to optimize costs in line with our production levels;

sourcing efforts in low-cost regions of the world and improving our manufacturing cost basis by locating production in low-cost regions of the world;

implementing lean manufacturing initiatives to improve operating efficiency and product quality as well as on-going value engineering to continuously drive cost savings;

consolidating our supply base to improve purchasing leverage;

eliminating excess production capacity through the closure and consolidation of manufacturing, warehousing or assembly facilities;

In addition, we intend to focus on expanding our business in the construction equipment segment and in the world's emerging markets.

Although OEM demand for our products is directly correlated with new vehicle production, we also have the opportunity to grow through increasing our product content per vehicle through cross selling and bundling of products. We also intend to develop and execute initiatives to enhance our product innovation and design and launch capabilities. We generally compete for new business at the beginning of the development of a new vehicle platform and upon the redesign of existing programs. New platform development generally begins at least one to three years before the marketing of such models by our customers. Contract durations for commercial vehicle products generally extend for the entire life of the platform, which is typically five to seven years.

In sourcing products for a specific platform, the customer generally develops a proposed production timetable, including current volume and option mix estimates based on their own assumptions, and then sources business with the supplier pursuant to written contracts, purchase orders or other firm commitments in terms of price, quality, technology and delivery. In general, these contracts, purchase orders and commitments provide that the customer can terminate if a supplier does not meet specified quality and delivery requirements and, in many cases, they provide that the price will decrease over the proposed production timetable. Awarded business generally covers the supply of all or a portion of a customer's production and service requirements for a particular product program rather than the supply of a specific quantity of products. Accordingly, in estimating awarded business over the life of a contract or other commitment, a supplier must make various assumptions as to the estimated number of vehicles expected to be produced, the timing of that production, mix of options on the vehicles produced and pricing of the products being supplied. The actual production volumes and option mix of vehicles produced by customers depend on a number of factors that are beyond a supplier's control.

Results of Operations

The table below sets forth certain operating data expressed as a percentage of
revenues:



                                            Three Months Ended September 30,                Nine Months Ended September 30,
                                             2013                      2012                  2013                      2012
Revenues                                        100.0  %                  100.0  %              100.0  %                  100.0  %
Cost of revenues                                  90.4                      87.1                  89.5                      85.3

Gross profit                                       9.6                      12.9                  10.5                      14.7
Selling, general and administrative
expenses                                          11.2                       8.5                  10.5                       7.9
Amortization expense                               0.2                       0.0                   0.2                       0.0

Operating (loss) income                           (1.8 )                     4.3                  (0.2 )                     6.8
Interest and other expense                         2.8                       2.6                   2.8                       2.3

(Loss) Income before benefit for
income taxes                                      (4.6 )                     1.7                  (3.0 )                     4.5
Benefit for income taxes                          (0.8 )                   (13.2 )                (0.7 )                    (3.7 )

Net (loss) income                                 (3.8 )                    14.9                  (2.3 )                     8.1
Less: Non-controlling interest in
subsidiary's loss                                  0.0                      (0.0 )                (0.0 )                    (0.0 )

Net (loss) income attributable to
CVG stockholders                                  (3.8 )%                  14.9  %                (2.3 )%                    8.1 %


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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenues. Revenues decreased approximately $16.9 million, or 8.2%, to $187.9 million in the three months ended September 30, 2013 from $204.8 million in the three months ended September 30, 2012 primarily as a result of the following:

reductions in orders in the global OEM truck market resulting in approximately $15.5 million of decreased revenues;

reductions in orders in the global construction market resulting in approximately $8.7 million of decreased revenues; and

reductions in orders for our military and agriculture end markets resulting in a decrease of approximately $4.5 million of revenues, which was offset by an increase of approximately $11.8 million of revenues in our bus, aftermarket and other end markets, as well as $5.3 million of incremental revenues from the Daltek and Vijayjyot acquisitions.

Cost of Revenues. Cost of revenues consists primarily of raw materials and purchased components for our products, wages and benefits for our employees and other overhead expenses such as manufacturing supplies, rent and utilities costs related to our operations. Cost of revenues decreased approximately $8.6 million, or 4.8%, to $169.9 million for the three months ended September 30, 2013 from $178.4 million for the three months ended September 30, 2012 Included in the cost of revenues for the three months ended September 30, 2013 were charges of $0.2 million related to employee separations and $1.3 million for fixed asset impairments associated with manufacturing equipment no longer in use and $1.4 million for fixed asset impairments associated with IT systems abandoned, which were offset by a decrease in raw material and purchased components costs of approximately $6.5 million, decrease in wages and benefits costs of approximately $3.4 million, and a decrease in other overhead costs of approximately $1.5 million.

Gross Profit. Gross profit was approximately $18.1 million for the three months ended September 30, 2013 compared to $26.4 million in the three months ended September 30, 2012, a decrease of approximately $8.3 million. As a percentage of revenues, gross profit was 9.6% for the three months ended September 30, 2013 compared to 12.9% for the three months ended September 30, 2012. This decrease was primarily the result of the volume decline and charges noted above.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consists primarily of wages and benefits and other overhead expenses such as marketing, travel, consulting, legal, audit, rent and utilities costs which are not directly or indirectly associated with the manufacturing of our products. Selling, general and administrative costs increased approximately $3.7 million, or 21.2%, to $21.1 million in the three months ended September 30, 2013 from $17.4 million in the three months ended September 30, 2012. This increase was primarily the result of consulting related expenses of approximately $2.8 million to assist in the development of certain short- term and long-term business strategies and cost savings initiatives and employee separation expenses of approximately $1.6 million related to organizational changes during the period, partially offset by a decrease in discretionary spending of approximately $0.7 million.

Amortization Expense. Amortization expense on our definite-lived intangible assets was approximately $0.4 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively. This increase was primarily the result of the increase of our definite lived intangible assets relating to trademarks / tradenames and customer relationships as a result of our acquisitions of Vijayjyot and Daltek, which occurred during the fourth quarter of 2012.

Interest and Other Expense. Interest, associated with our long-term debt, and other expense was approximately $5.3 million, in the three months ended September 30, 2013 and 2012, respectively.

Benefit for Income Taxes. An income tax benefit of approximately $1.5 million was recorded for the three months ended September 30, 2013 compared to a tax benefit of approximately $26.9 million for the three months ended September 30, 2012. The overall tax benefit for the current quarter was primarily driven by losses generated by our domestic and international locations, and subject to valuation allowances still in place primarily in the U.K. and Czech Republic. The change in income tax from the prior year's quarter is attributed to changes in income generated by our U.S. and non-U.S. locations, as well as the release of valuation allowances primarily associated with the U.S. companies in the three months ended September 30, 2012.


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Non-controlling Interest in Subsidiary's Loss. Included in net (loss) income is $0 and a loss of approximately $28 thousand for the three months ended September 30, 2013 and 2012, respectively, representing the non-controlling interest of our Indian joint venture.

Net (Loss) Income Attributable to CVG Stockholders. Net loss was $7.3 million in the three months ended September 30, 2013, compared to net income of $30.5 million in the three months ended September 30, 2012. The decrease in net income was primarily a result of the decreased revenues for the three months ended September 30, 2013 as well as the items noted above in Cost of Revenues and Selling, General and Administrative Expenses and the change in Benefit for Income Taxes discussed above.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenues. Revenues decreased approximately $119.9 million, or 17.5%, to $564.7 million in the nine months ended September 30, 2013 from $684.6 million in the nine months ended September 30, 2012 primarily as a result of the following:

reductions in orders in the global OEM truck market resulting in approximately $85.6 million of decreased revenues;

reductions in orders in the global construction market resulting in approximately $42.8 million of decreased revenues; and

reductions in orders for our military, aftermarket and agriculture end markets resulting in a decrease of approximately $13.9 million of revenues, which was partially offset by an increase of approximately $22.4 million of revenues in our OEM bus and other end markets, as well $16.0 million of incremental revenues from the Daltek and Vijayjyot acquisitions.

Cost of Revenues. Cost of revenues consists primarily of raw materials and purchased components for our products, wages and benefits for our employees and other overhead expenses such as manufacturing supplies, rent and utilities costs related to our operations. Cost of revenues decreased approximately $78.3 million, or 13.4%, to $505.6 million for the nine months ended September 30, 2013 from $583.9 million for the nine months ended September 30, 2012. Included in the cost of revenues for the nine months ended September 30, 2013 were charges of $0.2 million related to employee separations and $1.3 million for fixed asset impairments associated with manufacturing equipment no longer in use and $1.4 million for fixed asset impairments associated with IT systems abandoned, which were offset by a decrease in raw material and purchased components costs of approximately $62.4 million, decrease in wages and benefits costs of approximately $19.0 million, partially offset by an increase in other overhead costs of approximately $0.2 million.

Gross Profit. Gross profit was approximately $59.0 million for the nine months ended September 30, 2013 compared to $100.6 million in the nine months ended September 30, 2012, a decrease of approximately $41.6 million. As a percentage of revenues, gross profit was 10.5% for the nine months ended September 30, 2013 compared to 14.7% for the nine months ended September 30, 2012. This decrease was primarily the result of the volume decline and charges noted above.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consists primarily of wages and benefits and other overhead expenses such as marketing, travel, consulting, legal, audit, rent and utilities costs which are not directly or indirectly associated with the manufacturing of our products. Selling, general and administrative costs increased approximately $5.4 million, or 10.1%, to $59.4 million in the nine months ended September 30, 2013 from $54.0 million in the nine months ended September 30, 2012. This increase was primarily the result of an increase in severance, recruitment and relocation expenses of approximately $2.5 million relating to the change in our executive leadership, an increase of approximately $2.8 million of consulting related expenses primarily to assist in the development of certain short- and long-term business strategies and cost savings initiatives, and employee separation expenses of approximately $1.6 million related to organizational changes during the period, partially offset by a decrease in discretionary spending of approximately $1.5 million.

Amortization Expense. Amortization expense on our definite-lived intangible assets was approximately $1.2 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively. This increase was primarily the result of the increase of our definite lived intangible assets relating to trademarks / tradenames and customer relationships as a result of our acquisitions of Vijayjyot and Daltek in the year ended December 31, 2012.


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Interest and Other Expense. Interest, associated with our long-term debt, and other expense was approximately $15.9 million in the nine months ended September 30, 2013 and 2012, respectively.

Benefit for Income Taxes. An income tax benefit of approximately $3.9 million was recorded for the nine months ended September 30, 2013 compared to an income tax benefit of approximately $25.1 million for the nine months ended September 30, 2012. The overall tax benefit year-to-date was primarily driven by losses generated by our domestic and international locations, and subject to valuation allowances still in place primarily in the U.K. and Czech Republic. The change in income tax from the prior year's first nine months is attributed to changes in income generated by our U.S. and non-U.S. locations, as well as the release of valuation allowances primarily associated with the U.S. companies.

Non-controlling Interest in Subsidiary's Loss. Included in net loss is a loss of approximately $3 thousand and $43 thousand for the nine months ended September 30, 2013 and 2012, respectively, representing the non-controlling interest of our Indian joint venture.

Net (Loss) Income Attributable to CVG Stockholders. Net loss was $13.5 million in the nine months ended September 30, 2013, compared to net income of $55.7 million in the nine months ended September 30, 2012. The decrease in net income was primarily a result of the decreased revenues for the nine months ended September 30, 2013 as well as the items noted above in Cost of Revenues and Selling, General and Administrative Expenses and the change in Benefit for Income Taxes discussed above.

Liquidity and Capital Resources

Cash Flows

For the nine months ended September 30, 2013, net cash provided by operations was approximately $16.3 million compared to approximately $24.3 million for the nine months ended September 30, 2012. The change in net cash provided by operations for the nine months ended September 30, 2013 compared to the prior year period was primarily a result of our net loss and reduced working capital. Net cash provided for the nine months ended September 30, 2012 was primarily a result of increased operating income, which was partially offset by higher inventory as production volumes increased.

For the nine months ended September 30, 2013, we used approximately $10.4 million of cash for investing activities compared to approximately $14.0 million for the nine months ended September 30, 2012. The amounts used for investing activities for the nine months ended September 30, 2013 and 2012 primarily reflect capital expenditures and life insurance premium payments made during that period.

For the nine months ended September 30, 2013, cash from financing activities remained relatively flat.

As of September 30, 2013, cash held by foreign subsidiaries was approximately $18.5 million. If we were to repatriate any portion of these funds back to the U.S., we would accrue and pay the appropriate withholding and income taxes on amounts repatriated. We do not intend to repatriate funds held by our foreign affiliates, but intend to use the cash to fund the growth of our foreign operations.

Debt and Credit Facilities

As of September 30, 2013, our outstanding indebtedness consisted of an aggregate of $250.0 million of 7.875% notes due 2019 (the "7.875% notes"). We did not have any borrowings under our loan and security agreement as of September 30, 2013, and we had outstanding letters of credit of approximately $2.8 million and borrowing availability of $27.2 million under the loan and security agreement, which is subject to an availability block under certain circumstances.

Revolving Credit Facility

On January 7, 2009, we and certain of our direct and indirect U.S. subsidiaries, as borrowers (the "borrowers"), entered into a loan and security agreement with Bank of America, N.A., as agent and lender, which provided for a three-year asset-based revolving credit facility (as amended, the "revolving credit facility") with an aggregate principal amount of up to $37.5 million (after giving effect to a second amendment to our loan and security agreement entered into on August 4, 2009), which was subject to an availability block. On April 26, 2011, we entered into an amendment and restatement to the loan and security agreement governing the revolving credit facility (as so amended and restated, the "Loan and Security Agreement") which, among other things, extended the maturity of the revolving credit facility to April 26, 2014,


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increased the revolving commitment to $40.0 million and revised the availability block to equal the amount of debt Bank of America, N.A. or its affiliates makes available to the Company's foreign subsidiaries. As of September 30, 2013, there was no availability block. Up to an aggregate of $10.0 million is available to the borrowers for the issuance of letters of credit, which reduces availability under the revolving credit facility.

In connection with the amendment and restatement of the Loan and Security Agreement on April 26, 2011, we issued $250.0 million aggregate principal amount of 7.875% notes pursuant to a new indenture (as discussed below). We used the net proceeds from the offering of the 7.875% notes to repay all outstanding indebtedness under our loan and security agreement, to fund the repurchase of approximately $94.9 million of our 8% Senior Notes due 2013 (the "8% notes") and approximately $48.0 million of our 11%/ 13% Third Lien Senior Secured Notes due 2013 (the "third lien notes") and to pay related fees and expenses.

As of September 30, 2013, approximately $4.9 million in deferred fees relating to the revolving credit facility and our 7.875% notes were being amortized over the life of the agreements.

Under the revolving credit facility, borrowings bear interest at various rates plus a margin based on certain financial ratios. The borrowers' obligations under the revolving credit facility are secured by a first-priority lien (subject to certain permitted liens) on substantially all of the tangible and intangible assets of the borrowers, as well as 100% of the capital stock of the direct domestic subsidiaries of each borrower and 65% of the capital stock of each foreign subsidiary directly owned by a borrower. Each of CVG and each other borrower is jointly and severally liable for the obligations under the revolving credit facility and unconditionally guarantees the prompt payment and performance thereof.

The applicable margin for borrowings under the revolving credit facility is based upon the fixed charge coverage ratio for the most recently ended fiscal quarter, as follows:

                                                  Domestic Base       LIBOR
      Level                 Ratio                  Rate Loans     Revolver Loans
       III             < 1.25 to 1.00                 1.50%           2.50%
       II      1.25 to 1.00 but < 1.75 to 1.00       1.25%           2.25%
        I               1.75 to 1.00                 1.00%           2.00%

The applicable margin shall be subject to increase or decrease following receipt by the agent of the financial statements and corresponding compliance certificate for each fiscal quarter. If the financial statements or corresponding compliance certificate are not timely delivered, then the highest rate shall be applicable until the first day of the calendar month following actual receipt. Until receipt by the agent of the financial statements and corresponding compliance certificate for the fiscal quarter ending September 30, . . .

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