Commercial Vehicle Group, Inc. 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below describes material changes in financial condition and results of operations as reflected in our condensed consolidated financial statements for the six months ended June 30, 2020 and 2019. This discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Form 10-K. Company Overview Commercial Vehicle Group, Inc. (through its subsidiaries) is a leading supplier of seating systems, electro-mechanical assemblies, engineered material products, and warehouse automation subsystems for many markets including the following: trucking, military, warehouse automation, bus, agriculture, specialty transportation, mining, industrial equipment and off-road recreational markets. We have manufacturing operations in the United States, Mexico, China, United Kingdom, Czech Republic, Ukraine, Thailand, India and Australia. Our products are primarily sold in North America, Europe, and the Asia-Pacific region. We are differentiated from automotive industry suppliers by our ability to manufacture low volume, customized products on a sequenced basis to meet the requirements of our customers. We believe our products are used by a majority of the North American medium- and heavy-duty truck ("MD/HD Truck") and many medium- and heavy-duty construction vehicle original equipment manufacturers (“OEMs”), and other makers of industrial equipment. Business Overview For the six months ended June 30, 2020, approximately 34% of our revenue was generated from sales to North American MD/HD Truck OEMs and approximately 18% from sales to OEMs in the global construction equipment market. Our remaining revenue was primarily derived from sales to the aftermarket, OE service organizations, industrial, military and specialty markets. We are having success with our strategy to diversify our end markets by growing in the industrial / material handling, and military end markets, primarily through the success of the FSE acquisition. These markets offer high growth rates and provide a balance to our traditional, cyclical end markets. 30 Table of Contents Demand for our products may be driven by preferences of the end-user of the vehicle, particularly with respect to heavy-duty trucks. Unlike the automotive industry, heavy-duty truck OEMs generally afford the end-user the ability to specify many of the component parts that will be used to manufacture the vehicle, including a wide variety of cab interior styles and colors, brand and type of seats, type of seat fabric and color, and interior styling. Certain of our products are only utilized in heavy-duty trucks, such as our storage systems, sleeper boxes and privacy curtains. To the extent that demand for higher content vehicles increases or decreases, our revenues and gross profit will be impacted positively or negatively. 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 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. Several of the major truck makers have upgraded their truck platforms and we believe we have maintained our share of content in these platforms. We continue to pursue opportunities to expand our content. In general, demand for our heavy-duty (or "Class 8") truck products is generally dependent on the number of new heavy-duty trucks manufactured in North America, which in turn is a function of general economic conditions, interest rates, changes in government regulations, consumer spending, fuel costs, freight costs, fleet operators' financial health and access to capital, used truck prices and our customers’ inventory levels. New heavy-duty truck 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. North American heavy-duty truck production was 345,000 units in 2019. While CVG is not providing 2020 guidance, according to the July 2020 report by ACT Research, a publisher of industry market research, North American Class 8 production levels are expected to decrease to 169,000 units in 2020, steadily increase to 336,000 units in 2023 and then decline to 267,000 units in 2025. ACT Research estimated that the average age of active North American Class 8 trucks was 6.3 and 6.6 years in 2019 and 2018, respectively. As vehicles age, maintenance costs typically increase. ACT Research forecasts that the vehicle age will decline as aging fleets are replaced. North American medium-duty (or "Class 5-7") truck production steadily increased from 249,000 units in 2017 to 281,000 units in 2019. While CVG is not providing 2020 guidance, according to the July 2020 report by ACT Research, North American Class 5-7 truck production is expected to decrease to 166,000 units in 2020, steadily increase to 274,000 units in 2025. We primarily participate in the class 6 and 7 portion of the medium-duty truck market. Demand for our construction equipment products is dependent on vehicle production. Demand for new vehicles in the global construction equipment market generally follows certain economic conditions around the world. Our products are primarily used in the medium- and heavy-duty construction equipment markets (vehicles weighing over 12 metric tons). Demand in the medium- and heavy-duty construction equipment market is typically related to the level of large scale infrastructure development projects, such as highways, dams, harbors, hospitals, airports and industrial development, as well as activity in the mining, forestry and commodities industries. The construction markets we serve in North America, Europe and Asia have declined. As more specifically described in Note 20, on September 17, 2019, the Company acquired substantially all of the assets and certain liabilities of First Source Electronics, LLC. The industrial and military markets we serve in North America have been robust and continue to show growth opportunities. Coronavirus The global spread of the novel strain of coronavirus ("COVID-19") that has been declared a pandemic by the World Health Organization and the preventative measures taken to contain or mitigate the outbreak has caused, and are continuing to cause, significant volatility, uncertainty and economic disruptions. The outbreak has resulted in governments around the world implementing increasingly stringent measures to contain or mitigate the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures consistent with applicable government guidelines. Specifically, in the United States, most states placed restrictions on business operations and issued stay-at-home orders for residents beginning in late March and early April. Although many of these restrictions were eased or lifted throughout the country during May and June, COVID-19 continues to spread, business operations remain challenging, and unemployment is at historically high levels. On June 8, 2020, the National Bureau of Economic Research declared that a recession began in the United States in February 2020. Based on the preliminary estimate released by the Bureau of Economic Analysis on July 30, 2020, the U.S. gross domestic product (the “GDP”) decreased at an annual rate of 32.9% in the second quarter of 2020. This sharp decline in the GDP represents the lowest quarter since the U.S. government began tracking this measure in 1947 and illustrates the difficulty of the economic environment in which we are currently operating. While we continue to operate certain of our facilities, we are experiencing, and may continue to experience, production slowdowns and/or shutdowns at our manufacturing facilities in North America, Europe and Asia Pacific as a result of government orders, our inability to obtain component parts from suppliers and/or decreased customer demand. In addition, many of our suppliers and customers are also experiencing, and may continue to experience, production slowdowns and/or shutdowns, which may further 31 Table of Contents impact our business, sales and results of operation. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on future developments, including the severity and duration of the pandemic and its overall impact on the economy. As a result of the rapid changes in our end market conditions, our OEM customer ordering patterns and general uncertainties around the impacts of COVID-19 on businesses such as government-mandated shut downs, the Company will not be providing 2020 guidance related to North American Class 5-8 truck and global construction production. Business Actions During COVID-19 In March 2020, we began implementing certain business continuity processes focused on maintaining productivity and service levels while prioritizing the health, welfare and safety of our employees and customers. These processes include employee communication on proper hand washing, social distancing and personal protective equipment; enhanced cleaning and disinfecting measures; manufacturing and distributing reusable face masks to employees throughout the Company; eliminating non-essential travel; replacing internal and external meetings with video or teleconferences; remote work arrangements for non-production personnel; flexed schedules for onsite personnel; daily self monitoring or onsite temperature scanning for personnel working on-site; health screening procedures for critical customer visitors; the installation of hands free faucets and touch free sanitizer dispensers in many facilities; enhanced hygiene and distancing protocols for all Company provided transportation and food services; and the enforcement of social distancing protocols via visual and physical plexiglass barriers, as recommended by the Centers for Disease Control and Prevention and other public health organizations within our geographic footprint. In March 2020, the Company borrowed $15 million on its revolving credit facility as a proactive measure to preserve financial flexibility in consideration of general economic and financial market uncertainty resulting from the COVID-19 pandemic. Additionally, in the three months ended June 30, 2020, we amended our Term Loan Facility and Revolving Credit Facility. The Term Loan Facility amendment temporarily suspends the leverage ratio covenant through the fiscal quarter ending December 31, 2020, and resets the leverage ratio covenant levels for quarterly periods ended March 31, 2021 through September 30, 2021, before returning to original leverage ratio covenant for the quarterly period ended on December 31, 2021. The amendment also temporarily adds a new minimum consolidated liquidity covenant of $40 million for the quarters ended June 30, 2020 through September 30, 2021, and amends certain restrictive covenants limiting the Company’s ability to incur additional debt, grant liens, repurchase the Company’s stock and to issue dividends or make investments. The amendment increases the ability of the company to restructure its operations. The maturity date remains unchanged. The Revolving Credit Facility amends the terms of the revolving loan agreement to align certain of the restrictive covenants with the restrictive covenants in the Term Loan Agreement, as amended. In late March 2020, the Company took action to right-size the business and working capital profile to protect profit margin and liquidity levels. We implemented a comprehensive program of cost reduction initiatives and manufacturing capacity rationalization initiatives. These actions are expected to continue through 2020 and into 2021. Actions included headcount reductions, reduction in recurring consulting expenses, reprioritization and decrease in capital spending and reduction in sales and marketing expenses. Additionally, the Company eliminated Corporate Business Development, Aviation, Quality, Procurement and Operating Excellence departments. The Company also implemented other temporary measures including pay reductions, plant shutdowns, furloughs, elimination of most annual incentive pay, suspension of the employer 401(k) match, and reduction in non-essential travel in an effort to mitigate the future risk of uncertainty. We believe these purposeful actions will permanently lower the Company’s cost structure and preserve core growth initiatives. According to ACT Research, third quarter 2020 North American heavy-duty truck build is expected to increase by approximately 50% as compared to the second quarter of 2020, as the North American Truck OEMs rebound from the second quarter which was negatively impacted by COVID-19. Third quarter medium-duty truck build is expected to increase by approximately 30% as compared to the second quarter, per ACT Research. Although the COVID-19 pandemic creates forecasting uncertainties, we currently anticipate revenues to increase 25% to 35% for the three months ending September 30, 2020, as compared to the three months ended June 30, 2020. Our Long-Term Strategy Our long-term strategy is to grow revenue by product, geography and end market. Our products include electrical wire harnesses and electro-mechanical and cable assemblies, Trim, molded plastics, mirrors, wipers and controls, cab structures and sleeper boxes, and Seats. We intend to allocate resources consistent with our strategy; more specifically, consistent with our product portfolio, geographic region and end market diversification objectives. We periodically evaluate our long-term strategy and may adjust the strategy in response to changes in our business environment and other factors. 32 Table of Contents As part of our long-term strategy, we have considered and will consider acquisitions and divestitures to enhance return to our stockholders and service to customers. The Company completed the acquisition of FSE in September 2019. This strategic acquisition improves our ability to participate in the progression of digitalization, connectivity and associated power and data applications. The acquisition also complements our wire harness business, provides an entry into new markets, and provides us with an opportunity to leverage our global footprint and to increase cross-selling opportunities. Strategic Footprint Repositioning The Company is strategically repositioning its operations to grow faster, innovate rapidly, and lower its costs. This repositioning involves twelve facilities. The Company’s business in the warehouse automation and military markets continues to grow with solid long-term outlook. We have taken strategic actions to significantly expand our footprint, capacity, and product complexity to serve these diverse markets. These actions are expected to support between $100.0 million to $150.0 million of new business, depending on the mix. Anchor customer business has already been established for this multi-plant expansion with key actions underway as follows: 1. Expanding our Elkridge, MD plant by securing new space at an adjacent property. This plant is the main plant for our manufacturing warehouse automation subsystems and military subsystems. 2. Repurposing floor space and creating new manufacturing capability in our Vonore, TN plant. 3. Repurposing floor space and creating new manufacturing capability in our Chillicothe, OH plant. 4. Repurposing floor space and creating new manufacturing capability in our Monona, IA plant. 5. Moving certain production from Monona, IA plant to our low cost facility in Agua Prieta, Mexico. 6. Design and installation of a new medium-duty seat production line in our Saltillo, Mexico plant. The Company is also permanently consolidating a portion of our cost structure dedicated to mature markets through several deliberate actions including the redistribution of our centralized R&D capabilities to speed the time to market for new products and expand our ability to innovate in the Asian market. The key actions underway in this area are as follows: 1. Consolidation of our Piedmont, AL plant into our Vonore, TN plant. 2. Consolidation of one-half of our existing manufacturing footprint at our Concord, NC plant with our low cost facility in Saltillo, Mexico. 3. Consolidation of our corporate R&D center and activities into two existing U.S. plants and improving our R&D capabilities at our Shanghai, China site, with the goal of increased innovation in each market. 4. Closure of our facility in Morelos, Mexico, and consolidation of equipment into our Agua Prieta, Mexico plant. We expect our strategic footprint realignment to help us expand in growth areas, reduce costs in mature areas, and increase our ability to innovate. We believe we are on track to permanently reduce our annualized costs by over $15.0 million in mature markets through a combination of staff reductions, facility consolidations, and operational improvements. We believe these actions will make us stronger, increase our competitiveness, accelerate the speed of our innovation, and increase our opportunities to win. We are leveraging our know-how to serve top tier OEMs with high quality, on-time delivery of complex subsystems into new areas. We believe these actions will enable new value and new growth. 33 Table of Contents Consolidated Results of Operations Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 The table below sets forth certain consolidated operating data for the three months ended June 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 126,896 $ 243,190 $ (116,294) (47.8) % Gross Profit $ 6,475 $ 32,436 $ (25,961) (80.0) % Selling, General and Administrative Expenses $ 15,984 $ 16,248 $ (264) (1.6) % Impairment Expense $ 150 $ — $ 150 100.0 % Interest and Other Expense $ 5,104 $ 7,490 $ (2,386) (31.9) % (Benefit) Provision for Income Taxes $ (3,122) $ 2,230 $ (5,352) (240.0) % Net (Loss) Income $ (12,497) $ 6,146 $ (18,643) (303.3) % Revenues . The decrease in consolidated revenues resulted from: • a $92.1 million, or 74.5%, decrease in OEM North American MD/HD Truck revenues; • a $18.3 million, or 42.8%, decrease in OEM construction equipment revenues; • a $21.4 million, or 453.3%, increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $12.9 million, or 37.9%, decrease in aftermarket and OES revenues; and • a $14.4 million, or 37.9%, decrease in other revenues. While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the second quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. These sharp market declines were partially offset by increased sales in industrial and military end markets we serve through the FSE business. Second quarter 2020 revenues were adversely impacted by foreign currency exchange translation of $1.8 million, which is reflected in the change in revenues above. Gross Profit . The decrease in gross profit is primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $90.3 million, or 42.9%, as a result of a decrease in raw material and purchased component costs of $63.5 million, or 46.6%; a decrease in wages and benefits of $9.1 million, or 46.8%; and a decrease in overhead expenses of $17.7 million, or 32.3%. Commodity and other material costs, as well as difficult labor markets, have stabilized, but management cannot predict whether the COVID-19 pandemic will adversely impact these costs in future periods. Cost control and cost recovery initiatives, including pricing adjustments, reduced the impact of these cost pressures on gross profit. During 2019, the Company began implementing cost reduction and manufacturing capacity rationalization initiatives (the "Restructuring Initiatives") in response to declines in end market volumes. The Restructuring Initiatives consist primarily of headcount reductions in each segment and at corporate. In addition, the Company implemented a series of temporary reductions that will remain in place until conditions improve, including pay reductions, furloughs, suspension of the employer 401(k) match, and reductions in discretionary spending ("Temporary Actions"). Second quarter 2020 cost of revenues benefited from the initiatives that began in 2019 and the Temporary Actions. The second quarter results include charges of $2.0 million associated with ongoing Restructuring Initiatives. As a percentage of revenues, gross profit margin was 5.1% for the three months ended June 30, 2020 compared to 13.3% for the three months ended June 30, 2019. Selling, General and Administrative Expenses . Selling, general and administrative expenses ("SG&A”) consist primarily of wages and benefits and other expenses such as marketing, travel, legal, audit, rent and utility costs which are not directly associated with the manufacturing of our products. SG&A expenses decreased $0.3 million compared to the three months ended June 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $4.7 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $3.5 million charge for future milestone payments related to the performance of the FSE business, charges of $1.0 million associated with ongoing Restructuring Initiatives and charges of $0.4 million associated with the 2019 restatement investigation completed in the first quarter of 2020 that resulted in the restatement of the Company's 2019 financial statements. Interest and Other Expense . Interest, associated with our debt, and other expense was $5.1 million and $7.5 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in interest and other expense resulted primarily from a $2.5 million non-cash charge taken in prior year associated with the early payout of benefits to term vested participants in the U.S. pension plan ("U.S. Pension Plan"), which reduced future financial risk associated with the U.S. Pension Plan and contributed to an improvement in funded status to approximately 100%. Additionally in the second quarter of 2020, the 34 Table of Contents Company incurred Payment In Kind interest expense of $1.7 million resulting from the loan amendment that occurred in the first quarter of 2020, offset by lower interest expense of $0.4 million due to lower interest rates and favorable interest rate swap adjustments of $1.0 million, (Benefit) Provision for Income Taxes. An income tax benefit of $3.1 million and an income tax provision of $2.2 million were recorded for the three months ended June 30, 2020 and 2019, respectively. The period over period change in income tax was primarily attributable to the pre-tax loss sustained in the current period versus the pre-tax income generated in the prior year period. The income tax benefit for the three months ended June 30, 2020, was calculated based the Company's actual effective tax rate for the current year-to-date period due to the uncertainty of the impact of the COVID-19 pandemic on our full year income (loss). See Note 15 of the "Notes to Condensed Consolidated Financial Statements" for additional details. Net (Loss) Income. Net loss was $12.5 million for the three months ended June 30, 2020 compared to $6.1 million net income for the three months ended June 30, 2019. The decrease in net income is attributable to the factors noted above. SEGMENT RESULTS Electrical System Segment Results Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 The table below sets forth certain Electrical Systems Segment operating data for the three months ended June 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 74,210 $ 141,947 $ (67,737) (47.7) % Gross Profit $ 1,144 $ 17,761 $ (16,617) (93.6) % Selling, General & Administrative Expenses $ 6,580 $ 3,676 $ 2,904 79.0 % Operating (Loss) Income $ (6,165) $ 13,899 $ (20,064) (144.4) % Revenues. The decrease in Electrical System Segment revenues resulted from: • a $59.0 million, or 76.9%, decrease in OEM North American MD/HD Truck revenues; • a $11.4 million, or 52.1%, decrease in OEM construction equipment revenues; • a $21.4 million, or 458.4% increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $6.2 million, or 46.6% decrease in aftermarket and OES revenue; and • a $12.5 million, or 49.4%, decrease in other revenues. While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the second quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. These sharp market declines were partially offset by increased sales in industrial and military end markets we serve through the FSE business. Electrical System Segment revenues were adversely impacted by foreign currency exchange translation of $0.6 million, which is reflected in the change in revenues above. Gross Profit. The decrease in gross profit was primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $51.1 million, or 41.2%, as a result of a decrease in raw material and purchased component costs of $35.4 million, or 45.1%; a decrease in wages and benefits of $5.2 million, or 42.1%; and a decrease in overhead expenses of $10.5 million, or 31.5%. Second quarter 2020 cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions, The second quarter results include charges of $1.6 million associated with ongoing Restructuring Initiatives. As a percentage of revenues, gross profit margin was 1.5% for the three months ended June 30, 2020 compared to 12.5% for the three months ended June 30, 2019. Selling, General and Administrative Expenses . SG&A expenses increased $2.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily as a result of the decrease in revenues and cost reductions as a result of the Restructuring Initiatives and other reductions in costs. Before giving effect to certain charges, SG&A expenses reduced by $0.4 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $3.5 million charge for future milestone payments related to the performance of the FSE business and charges of $0.4 million associated with ongoing restructuring initiatives. 35 Table of Contents Global Seating Segment Results Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 The table below sets forth certain Global Seating Segment operating data for the three months ended June 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 53,862 $ 105,276 $ (51,414) (48.8) % Gross Profit $ 5,345 $ 14,686 $ (9,341) (63.6) % Selling, General & Administrative Expenses $ 3,683 $ 5,177 $ (1,494) (28.9) % Operating (Loss) Income $ 1,535 $ 9,373 $ (7,838) (83.6) % Revenues. The decrease in Global Seating Segment revenues resulted from: • a $33.1 million, or 70.4%, decrease in OEM North American MD/HD Truck revenues; • a $6.9 million, or 32.9%, decrease in OEM construction equipment revenues; • a $6.7 million, or 32.3%, decrease in aftermarket and OES sales; and • a $4.7 million, or 28.4%, decrease in other revenues. While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the second quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. Global Seating Segment revenues were adversely impacted by foreign currency exchange translation of $1.2 million, which is reflected in the change in revenues above. Gross Profit. The decrease in gross profit is primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $42.1 million, or 46.4%, as a result of a decrease in raw material and purchased component costs of $31.0 million, or 50.0%; a decrease in wages and benefits of $3.9 million, or 54.7%; and a decrease in overhead expenses of $7.2 million, or 33.4%. Second quarter 2020 cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The second quarter results include charges of $0.4 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 9.9% for the three months ended June 30, 2020 compared to 13.9% for the three months ended June 30, 2019. Selling, General and Administrative Expenses . SG&A expenses decreased $1.5 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $1.7 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were partially offset by charges of $0.2 million associated with ongoing restructuring initiatives. 36 Table of Contents Consolidated Results of Operations Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 The table below sets forth certain consolidated operating data for the six months ended June 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 314,001 $ 486,354 $ (172,353) (35.4) % Gross Profit $ 26,778 $ 65,525 $ (38,747) (59.1) % Selling, General and Administrative Expenses $ 33,083 $ 31,447 $ 1,636 5.2 % Impairment Expense $ 29,017 $ — $ 29,017 100.0 % Interest and Other Expense $ 10,469 $ 11,886 $ (1,417) (11.9) % (Benefit) Provision for Income Taxes $ (10,416) $ 5,417 $ (15,833) (292.3) % Net (Loss) Income $ (37,091) $ 16,132 $ (53,223) (329.9) % Revenues . The decrease in consolidated revenues resulted from: • a $139.4 million, or 56.8%, decrease in OEM North American MD/HD Truck revenues; • a $32.7 million, or 36.3%, decrease in OEM construction equipment revenues; • a $33.8 million, or 344.9%, increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $17.6 million, or 25.7%, decrease in aftermarket and OES revenues; and • a $16.4 million, or 22.6%, decrease in other revenues. While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the second quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. These sharp market declines were partially offset by increased sales in industrial and military end markets we serve through the FSE business. Revenues were adversely impacted by foreign currency exchange translation of $3.0 million, which is reflected in the change in revenues above. Gross Profit . The decrease in gross profit is primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $133.6 million, or 31.7%, as a result of an decrease in raw material and purchased component costs of $95.4 million, or (35.0)%; a decrease in wages and benefits of $12.5 million, or (32.5)%; and a decrease in overhead expenses of $25.7 million, or (23.5)%. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The year to date results include charges of $2.1 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 8.5% for the six months ended June 30, 2020 compared to 13.5% for the six months ended June 30, 2019. Selling, General and Administrative Expenses . SG&A expenses increased $1.6 million compared to the six months ended June 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $6.9 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $3.5 million charge for future milestone payments related to the performance of the FSE business, charges of $1.0 million associated with ongoing restructuring initiatives, charges of $2.8 million associated with the 2019 restatement investigation that resulted in the restatement of the Company’s financial statements and $2.3 million in costs associated with the CEO transition. Impairment Expense . As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity, the Company determined it had an impairment indicator. Accordingly, we recognized a $27.1 million impairment of goodwill for the six months ended June 30, 2020. Additionally, the Company determined it had and impairment indicator of long-lived assets due to market conditions resulting in an impairment of $1.9 million for the six months ended June 30, 2020. Interest and Other Expense . Interest, associated with our debt, and other expense was $10.5 million and $11.9 million for the six months ended June 30, 2020 and 2019, respectively. The decrease is primarily attributable to the prior year $2.5 million non-cash charge associated with the early payout of benefits to term vested participants in the U.S. pension plan, which reduced future financial risk associated with the U.S. Pension Plan and contributed to an improvement in funded status to approximately 100%. Partially offsetting this decrease were unfavorable foreign exchange translation adjustments of $0.7 million in the six months ended June 30, 2020 compared to a favorable foreign exchange translation adjustment gain in the prior year of $0.1 million. 37 Table of Contents (Benefit) Provision for Income Taxes. An income tax benefit of $10.4 million and an income tax provision of $5.4 million were recorded for the six months ended June 30, 2020 and 2019, respectively. The period over period change in income tax was primarily attributable to the pre-tax loss sustained in the current period versus the pre-tax income generated in the prior year period. The income tax benefit for the six months ended June 30, 2020, was calculated based the Company's actual effective tax rate for the current year-to-date period due to significant market uncertainty. See Note 15 of the "Notes to Condensed Consolidated Financial Statements" for additional details. Net (Loss) Income. Net loss was $37.1 million for the six months ended June 30, 2020 compared to $16.1 million net income for the six months ended June 30, 2019. The decrease in net income is attributable to the factors noted above. SEGMENT RESULTS Electrical System Segment Results Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 The table below sets forth certain Electrical Systems Segment operating data for the six months ended June 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 186,308 $ 285,558 $ (99,250) (34.8) % Gross Profit $ 12,090 $ 37,093 $ (25,003) (67.4) % Selling, General & Administrative Expenses $ 10,531 $ 7,825 $ 2,706 34.6 % Impairment Expense $ 23,415 $ — $ 23,415 100.0 % Operating (Loss) Income $ (23,314) $ 28,895 $ (52,209) (180.7) % Revenues. The decrease in Electrical System Segment revenues resulted from: • a $89.8 million, or 59.2%, decrease in OEM North American MD/HD Truck revenues; • a $17.5 million, or 38.5%, decrease in OEM construction equipment revenues; • a $33.8 million, or 348.0% increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $8.9 million, or 32%, decrease in aftermarket and OES revenues; and • a $16.9 million, or 33.2%, decrease in other revenues. While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the second quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. These sharp market declines were partially offset by increased sales in industrial and military end markets we serve through the FSE business Electrical System Segment revenues were adversely impacted by foreign currency exchange translation of $0.9 million, which is reflected in the change in revenues above. Gross Profit. The decrease in gross profit was primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $74.2 million, or 29.9%, as a result of a decrease in raw material and purchased component costs of $53.1 million, or 33.5%; a decrease in wages and benefits of $6.7 million, or 27.9%; and a decrease in overhead expenses of $14.4 million, or 21.8%. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The year to date results include charges of $1.6 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 6.5% for the six months ended June 30, 2020 compared to 13.0% for the six months ended June 30, 2019. Selling, General and Administrative Expenses . SG&A expenses increased $2.7 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $1.2 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $3.5 million charge for future milestone payments related to the performance of the FSE business and charges of $0.4 million associated with ongoing restructuring initiatives, 38 Table of Contents Impairment Expense . As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity, the Company determined it had an impairment indicator. Accordingly, we recognized a $22.3 million impairment of goodwill and an impairment of long-lived assets of $1.1 million for the six months ended June 30, 2020. Global Seating Segment Results Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 The table below sets forth certain Global Seating Segment operating data for the six months ended June 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 129,842 $ 209,337 $ (79,495) (38.0) % Gross Profit $ 14,714 $ 28,466 $ (13,752) (48.3) % Selling, General & Administrative Expenses $ 8,475 $ 10,514 $ (2,039) (19.4) % Impairment Expense $ 4,809 $ — $ 4,809 100.0 % Operating (Loss) Income $ 1,172 $ 17,682 $ (16,510) (93.4) % Revenues. The decrease in Global Seating Segment revenues resulted from: • a $49.6 million, or 52.9%, decrease in OEM North American MD/HD Truck revenues; • a $15.2 million, or 34.1%, decrease in OEM construction equipment revenues; • a $8.8 million, or 21.5%, decrease in aftermarket and OES revenue; and • a $5.9 million, or 19.7%, decrease in other revenues. While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the second quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. Global Seating Segment revenues were adversely impacted by foreign currency exchange translation of $2.0 million, which is reflected in the change in revenues above. Gross Profit. The decrease in gross profit is primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $65.7 million, or 36.3%, as a result of an decrease in raw material and purchased component costs of $48.7 million, or 39.6%; a decrease in wages and benefits of $5.8 million, or 40.2%; and a decrease in overhead expenses of $11.3 million, or 25.9%. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The year to date results include charges of $0.5 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 11.3% for the six months ended June 30, 2020 compared to 13.6% for the six months ended June 30, 2019. Selling, General and Administrative Expenses . SG&A expenses decreased $2.0 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $2.2 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were partially offset by charges of $0.2 million associated with ongoing restructuring initiatives. Impairment Expense . As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity, the Company determined it had an impairment indicator. Accordingly, we recognized a $4.8 million impairment of goodwill for the six months ended June 30, 2020. Critical Accounting Policies and Estimates We prepare our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, which requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues, and expenses recorded in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the first quarter of 2020 we determined we had an impairment indicator specific to goodwill. As a result, we impaired the full value of our goodwill, $27.1 million. We also recorded impairments of long-lived assets of $1.9 million based on certain other 39 Table of Contents impairment indicators for the six months ended June 30, 2020. We are not aware of other specific events or circumstances that would require updates to our estimates or judgments or require us to revise the carrying value of our long-lived assets, including property, plant and equipment and definite-lived intangible assets as of June 30, 2020 or August 10, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions and conditions. There were no other significant changes in our critical accounting estimates during the six months ended June 30, 2020 compared to those previously disclosed in “Critical Accounting Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2019 Form 10-K and Q1 2020 Form 10-Q. Liquidity and Capital Resources The Company borrowed $15.0 million under its revolving credit facility during the six months ended June 30, 2020. At June 30, 2020, the Company had liquidity of $106.6 million; $63.4 million of cash and $43.2 million of availability from the revolving credit facility. We intend to allocate resources consistent with the following priorities: (1) to provide liquidity; (2) to invest in growth; (3) to reduce debt; and (4) to return capital to our shareholders. Cash Flows Our primary sources of liquidity during the six months ended June 30, 2020 were cash reserves and availability under our revolving credit facility. We believe that these sources of liquidity will provide adequate funds for our working capital needs, capital expenditures and debt service throughout the next twelve months. However, no assurance can be given that this will be the case. As of June 30, 2020, we had $15.0 million borrowings under our revolving credit facility and had borrowing availability of $43.2 million. For the six months ended June 30, 2020, net cash provided by operating activities was $20.5 million compared to $8.7 million for the six months ended June 30, 2019. The improvement in net cash provided by operating activities is primarily attributable to the reduction in working capital associated with the sales declines in the six months ended June 30, 2020 as compared to the to the prior year period. The cash generated by the working capital reduction was partially offset by the net loss in the current period compared to net income in the prior year period. For the six months ended June 30, 2020, net cash used in investing activities was $4.4 million compared to $12.8 million for the six months ended June 30, 2019. In 2020, we expect capital expenditures to be in the range of $8 to $12 million. For the six months ended June 30, 2020, net cash provided by financing activities was $10.0 million compared to net cash used in financing activities of $6.6 million for the six months ended June 30, 2019. Net cash provided by financing activities for the six months ended June 30, 2020 is attributable to $15.0 million of borrowings under the revolving credit facility offset by repayments of the senior secured term loan credit facility. Net cash used in financing activities for the six months ended June 30, 2019 is attributable to repayments of the senior secured term loan credit facility, including an excess cash flow payment on the facility. As of June 30, 2020, cash of $42.1 million was held by foreign subsidiaries. The Company currently maintains a $0.8 million deferred tax liability for the future income tax implications of repatriating earnings from the foreign subsidiaries for which it is not making the indefinite reinvestment assertion. Debt and Credit Facilities The debt and credit facilities descriptions in Note 14 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this section by reference. On May 11, 2020, the Company entered into Amendment No. 1 of the TLS Agreement and Amendment No. 2 to the Revolving Credit Facility, the terms of which are discussed in Note 14. Covenants and Liquidity Our ability to comply with the covenants in the TLS Agreement and the Third ARLS Agreement, as discussed in Note 14, may be affected by economic or business conditions beyond our control. Based on our current forecast, we believe that we will be able to maintain compliance with the financial maintenance covenants and the fixed charge coverage ratio covenant, if applicable, and other covenants in the TLS Agreement and the Third ARLS Agreement for the next twelve months as amended in accordance with Note 14; however, no assurances can be given that we will be able to comply. We base our forecasts on 40 Table of Contents historical experience, industry forecasts and other assumptions that we believe are reasonable under the circumstances. If actual results are substantially different than our current forecast we may not be able to comply with our financial covenants. If we do not comply with the financial and other covenants in the TLS Agreement and the Third ARLS Agreement, the lenders could declare an event of default under the TLS Agreement and the Third ARLS Agreement and our indebtedness thereunder could be declared immediately due and payable. The TLS Agreement and the Third ARLS Agreement contain cross default provisions. If we are unable to borrow under the Third ARLS Agreement, we will need to meet our capital requirements using alternative sources of liquidity which may not be available on acceptable terms. Any of these events would have a material adverse effect on our business, financial condition and liquidity. We believe that cash on hand, cash flow from operating activities together with available borrowings under the Third ARLS Agreement will be sufficient to fund anticipated working capital, capital spending, certain strategic initiatives, and debt service requirements for the next 12 months. No assurance can be given, however, that this will be the case. The Company is monitoring these conditions, and will continue to take the necessary steps to maintain its liquidity during this uncertain period. These steps include, but are not limited to, further restructuring actions, engaging external advisors, further drawdowns on existing credit lines, and the consideration of other strategic alternatives. Forward-Looking Statements All statements, other than statements of historical fact included in this Form 10-Q, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are, or may be deemed to be, forward-looking statements which speak only as of the date the statements were made. When used in this Form 10-Q, the words “believe”, “anticipate”, “plan”, “expect”, “intend”, “will”, “should”, “could”, “would”, “project”, “continue”, “likely”, and similar expressions, as they relate to us, are intended to identify forward-looking statements. The important factors discussed in “Part II, Item 1A - Risk Factors”, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management’s current expectations and are inherently uncertain. Investors are warned that actual results may differ from management’s expectations. In particular, this Form 10-Q may contain forward-looking statements about Company expectations for future periods with respect to its plans to improve financial results and enhance the Company, the future of the Company’s end markets, including the short-term and potential longer-term impact of the COVID-19 pandemic on Class 8 and Class 5-7 North America truck build rates and performance of the global construction equipment business, expected cost savings, the Company’s initiatives to address customer needs, organic growth, the Company’s plans to focus on certain segments and markets and the Company’s financial position or other financial information. These statements are based on certain assumptions that the Company has made in light of its experience as well as its perspective on historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. Actual results may differ materially from the anticipated results because of certain risks and uncertainties, including but not limited to: (i) a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements; (ii) future financial restatements affecting the company; (iii) general economic or business conditions affecting the markets in which the Company serves; (iv) the Company's ability to develop or successfully introduce new products; (v) risks associated with conducting business in foreign countries and currencies; (vi) increased competition in the medium- and heavy-duty truck markets, construction, agriculture, aftermarket, military, bus and other markets; (vii) the Company’s failure to complete or successfully integrate strategic acquisitions and the impact of such acquisitions on business relationships; (viii) the Company’s ability to recognize synergies from the reorganization of the segments; (ix) the Company’s failure to successfully manage any divestitures; (x) the impact of changes in governmental regulations on the Company's customers or on its business; (xi) the loss of business from a major customer, a collection of smaller customers or the discontinuation of particular commercial vehicle platforms; (xii) the Company’s ability to obtain future financing due to changes in the lending markets or its financial position; (xiii) the Company’s ability to comply with the financial covenants in its debt facilities; (xiv) fluctuation in interest rates or change in the reference interest rate relating to the Company’s debt facilities; (xv) the Company’s ability to realize the benefits of its cost reduction and strategic initiatives and address rising labor and material costs; (xvi) volatility and cyclicality in the commercial vehicle market adversely affecting us, including the impact of the current COVID-19 pandemic; (xvii) the geographic profile of our taxable income and changes in valuation of our deferred tax assets and liabilities impacting our effective tax rate; (xviii) changes to domestic manufacturing initiatives; (xix) implementation of tax or other changes, by the United States or other international jurisdictions, related to products manufactured in one or more jurisdictions where the Company does business (xx) security breaches and other disruptions that could compromise our information systems; (xxi) the impact of disruptions in our supply chain or delivery chains; (xxii) litigation against us; (xxiii) the impact of health epidemics or widespread outbreak of contagious disease; and (xxiv) various other risks as outlined under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for fiscal year ending December 31, 2019 and the Company's fillings with the SEC. There can be no assurance that statements made in this Form 10-Q relating to future events will be achieved. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future 41 Table of Contents operating results over time. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such cautionary statements.