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 nine months ended September 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 CVG (through its subsidiaries) is a diversified industrial company and leading supplier of seating systems, warehouse automation subsystems, wire harnesses, plastic parts, and mechanical assemblies for many markets including the following: trucking, construction, retail, military, bus, agricultural, and off-road recreational markets . We have manufacturing operations in the United States, Mexico, China, United Kingdom, Belgium, Czech Republic, Ukraine, Thailand, India and Australia. Our products are primarily sold in North America, Europe, and the Asia-Pacific region. We are primarily a manufacturer of low volume, customized products on a sequenced basis to meet the requirements of our customers. We believe our trucking products are used by a majority of the North American Commercial Truck markets, many construction vehicle original equipment manufacturers (“OEMs”), and many of the top e-commerce retailers. Business Overview For the nine months ended September 30, 2020, 34.9% of our revenue was generated from sales to North American Commercial Truck OEMs and 16.7% from sales to OEMs in the global construction equipment market. Our remaining revenue was primarily derived from warehouse automation subsystems and 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 warehouse automation market , and military end markets, primarily through business expansion enhanced by the FSE acquisition. These markets offer high growth rates and provide a balance to our traditional, cyclical end markets. Commercial Trends Demand for our products may be driven by preferences of the end-user of the vehicle, particularly with respect to heavy-duty trucks. 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 31 Table of Contents customers. Contract durations for commercial vehicle products generally extend for the entire life of the platform. Truck OEMs routinely upgrade their product platforms for aesthetics, electronic improvements, comfort improvements, energy efficiency, safety improvements, and feature enhancements. Additionally, there are new entrants to the global truck market that are focused on Electric Vehicle and low carbon emission product offerings. The Company competes to retain its existing positions on platforms that are getting refreshed, competitively win new positions on platforms on which it is not the incumbent supplier, and gain first mover positions on new Electric Vehicle platforms. The global truck market is evolving to include many offerings aimed at low emissions and less impact on the environment. The Company has a targeted growth plan that it is pursuing to grow the Company. 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 A merican heavy-duty truck production was 345,000 units in 2019. According to the October 2020 report by ACT Research, a publisher of industry market research, North American Class 8 production levels are expected to be at 206,000 units in 2020, steadily increase to 278,000 in 2021, then increase to 321,000 in 2023 and then decline to 281,000 units in 2025. ACT Research estimated that the average age of active North American Class 8 trucks was 11 and 11.2 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. According to the October 2020 report by ACT Research, North American Class 5-7 truck production is expected to decrease to 223,000 units in 2020, decrease to 218,000 in 2021, then increase to 280,000 in 2023, and decrease to 274,000 units in 2025. We primarily participate in the class 6 and 7 portion of the medium-duty truck market. Warehouse Automation Subsystems Demand for our warehouse automation subsystems is derived by expansion of supply chain infrastructures to accommodate increased customer orders in e-commerce. As the percentage of products ordered on-line increases, the delivery mechanisms must expand and increase output. CVG provides subsystems that are placed into warehouses and material handling systems. RoboticsBusinessReview.com suggests growth rates for warehouse automation greater than 20% through 2022. Construction Equipment 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. 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 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 and public health 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 most of these restrictions were eased or lifted throughout the country, COVID-19 continues to spread and the upcoming winter months and the convergence with the traditional cold and flu season may trigger additional local and regional restrictions. Business operations remain challenging, and unemployment is at historically high levels. While we continue to operate our facilities, we may 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 may experience production slowdowns and/or shutdowns, which may further impact our business, sales and results of operation. Continued impact on the Company's business, sales and results of operations from the COVID-19 pandemic may also result in additional valuation allowances being recorded against our deferred tax assets. 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. Throughout 2020, the impact of the pandemic has 32 Table of Contents been uneven across our global footprint based on local and regional outbreaks. Future waves may have a greater or lesser impact than the first wave, depending on the location of such breakouts and the response of the local government. We continue to proactively monitor, assess and minimize disruptions and delays in production and take reasonable measures to protect our workforce. 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 education or respiratory etiquette and personal hygiene protocols, the enforcement of social distancing; restrictions via physical and visual barriers; enhanced cleaning and disinfecting measures; distribution of disposable and washable face masks to employees throughout the Company; quarantining protocols, eliminating non-essential travel; replacing internal and external group meetings with video or teleconferences; temporary remote work arrangements for certain 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. In September 2020, the Company repaid the $15 million outstanding balance under the revolving credit facility. 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. In September 2020, the Company paid an additional $5.0 million of principal on the Term Loan Facility. 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 its 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. In September 2020, the Company announced it was relaxing certain temporary measures, specifically temporary pay reductions. Long-Term Strategy The Company's long-term organic strategy is to grow revenue by product, geography and end market diversification. Our products include seating systems, warehouse automation subsystems, wire harnesses, plastic parts, mechanical assemblies, mirrors, wipers and cab structures. We intend to allocate resources to implement our strategy. Additionally, we have a long-term strategy to globally optimize our cost structure through manufacturing process enhancements, low cost footprint and global sourcing. We periodically evaluate our long-term strategy and may adjust the strategy in response to changes in our business environment and other factors. We are also supplementing our organic strategy by considering acquisitions, subject to limitations in our credit facilities, and divestitures to strengthen our comprehensive positions, open new markets and customers, enhance return to our stockholders 33 Table of Contents and service to customers. The Company completed the acquisition of FSE in September 2019. This strategic acquisition improves our ability to participate in the growth of eCommerce and manufacturing of complicated mechanical assemblies. This acquisition provides new customer relationships, and provides us with an opportunity to leverage our global footprint and to increase cross-selling opportunities. Consolidated Results of Operations Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 The table below sets forth certain consolidated operating data for the three months ended September 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 187,697 $ 225,399 $ (37,702) (16.7) % Gross Profit $ 24,159 $ 29,444 $ (5,285) (17.9) % Selling, General and Administrative Expenses $ 14,408 $ 17,531 $ (3,123) (17.8) % Interest and Other Expense $ 5,674 $ 3,800 $ 1,874 49.3 % (Benefit) Provision for Income Taxes $ (959) $ 496 $ (1,455) (293.3) % Net Income $ 4,178 $ 7,180 $ (3,002) (41.8) % Revenues . The decrease in consolidated revenues resulted from: • a $43.3 million, or 38.6%, decrease in OEM North American MD/HD Truck revenues; • a $24.9 million, or 333.5%, increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $12.4 million, or 31.2%, decrease in OEM construction equipment revenues; • a $6.8 million, or 21.2%, decrease in aftermarket and OES revenues; and • a $0.1 million, or 0.5%, 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 third quarter of 2020 were primarily a result of the COVID-19 pandemic. These sharp market declines were partially offset by increased sales in industrial and military end markets we serve through the FSE business. Third quarter 2020 revenues were favorably impacted by foreign currency exchange translation of $1.0 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 $32.4 million, or 16.5%, as a result of a decrease in raw material and purchased component costs of $20.5 million, or 16.1%; a decrease in wages and benefits of $3.8 million, or 21.4%; and a decrease in overhead expenses of $8.2 million, or 15.9%. 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 were in place through September 30, 2020, including pay reductions, furloughs, suspension of the employer 401(k) match, and reductions in discretionary spending ("Temporary Actions"). On September 22, 2020, the Company announced that certain temporary actions were being halted, specifically temporary pay reductions. Certain other temporary actions remain in effect. Third quarter 2020 cost of revenues benefited from the initiatives that began in 2019 and the Temporary Actions. The third quarter results include charges of $1.0 million associated with ongoing Restructuring Initiatives. As a percentage of revenues, gross profit margin was 12.9% for the three months ended September 30, 2020 compared to 13.1% for the three months ended September 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 $3.1 million compared to the three months ended September 30, 2019. Before giving effect to certain charges, SG&A expenses were reduced by $5.3 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $0.5 million charge for future milestone payments related to the performance of the FSE business, a $1.1 million 34 Table of Contents charge related to the abandonment of the R&D building and charges of $0.5 million associated with the 2019 restatement investigation completed in the first quarter of 2020 that resulted in the restatement of the Company's 2018 and quarterly 2019 financial statements. Interest and Other Expense . Interest associated with our debt, and other expense was $5.7 million and $3.8 million for the three months ended September 30, 2020 and 2019, respectively. The increase in interest and other expense primarily related to a $1.8 million Payment In Kind interest expense resulting from the loan amendment that occurred in the second quarter of 2020 and unfavorable change in foreign exchange translation adjustments of $0.3 million, offset by favorable change in interest rate swap adjustments of $0.2 million. (Benefit) Provision for Income Taxes. An income tax benefit of $1.0 million and an income tax provision of $0.5 million were recorded for the three months ended September 30, 2020 and 2019, respectively. The period over period change in income tax was primarily attributable to a $4.5 million decrease in pre-tax income versus the prior year period. The period over period change was also impacted by a $2.0 million income tax benefit recorded in the current period for the impact of the below discussed high-tax exception to Global Intangible Low-Taxed Income ("GILTI"), offset by a smaller income tax benefit for period-specific tax adjustments recorded in the current versus prior year period. On July 20, 2020, the U.S. Treasury Department issued final regulations ("T.D. 9902") addressing the treatment of income earned by certain foreign corporations that are subject to a high rate of foreign income tax for purposes of the GILTI provisions of I.R.C. section 951A. Specifically, these regulations allow taxpayers to exclude certain high-taxed income of a controlled foreign corporation from their computation of GILTI on an elective basis ("High-Tax Exception"). Although the High-Tax Exception was effective July 23, 2020, taxpayers are allowed to apply the rule to the taxable years of their controlled foreign corporations beginning after December 31, 2017. During the three months ended September 30, 2020, the Company recorded a $2.0 million U.S. federal income tax benefit for the impact of the High-Tax Exception which consisted of a $0.7 million tax benefit related to the current year-to-date period, a $0.5 million tax benefit related to the year ended December 31, 2019, and a $0.8 million tax benefit related to the year ended December 31, 2018. Net Income. Net income was $4.2 million for the three months ended September 30, 2020 compared to $7.2 million for the three months ended September 30, 2019. The decrease in net income is attributable to the factors noted above. Segment Results Electrical System Segment Results Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 The table below sets forth certain Electrical Systems Segment operating data for the three months ended September 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 121,067 $ 131,442 $ (10,375) (7.9) % Gross Profit $ 16,118 $ 17,134 $ (1,016) (5.9) % Selling, General & Administrative Expenses $ 3,166 $ 4,030 $ (864) (21.4) % Operating Income $ 12,223 $ 12,801 $ (578) (4.5) % Revenues. The decrease in Electrical System Segment revenues resulted from: • a $22.6 million, or 33.1%, decrease in OEM North American MD/HD Truck revenues; • a $23.3 million, or 312.6% increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $7.9 million, or 36.5%, decrease in OEM construction equipment revenues; • a $2.6 million, or 21.2% decrease in aftermarket and OES revenue; and • a $0.5 million, or 2.2%, decrease in other revenues. The acquisition of FSE and growth of warehouse automation subsystems revenue were driven by e-commerce demand and expansion of parcel handling facilities. This growth was more than offset by sharp declines in sales in North American construction equipment markets. 35 Table of Contents While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the third 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 favorably impacted by foreign currency exchange translation of $0.4 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 $9.4 million, or 8.2%, as a result of a decrease in raw material and purchased component costs of $3.6 million, or 4.9%; a decrease in wages and benefits of $1.8 million, or 15.9%; and a decrease in overhead expenses of $4.0 million, or 13.2%. Third quarter 2020 cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The third quarter results include charges of $0.7 million associated with ongoing Restructuring Initiatives. As a percentage of revenues, gross profit margin was 13.3% for the three months ended September 30, 2020 compared to 13.0% for the three months ended September 30, 2019. Selling, General and Administrative Expenses . SG&A expenses decreased $0.9 million for the three months ended September 30, 2020 compared to the three months ended September 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 $1.4 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $0.5 million charge for milestone payments related to the performance of the FSE business. Global Seating Segment Results Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 The table below sets forth certain Global Seating Segment operating data for the three months ended September 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 68,902 $ 95,719 $ (26,817) (28.0) % Gross Profit $ 8,418 $ 12,331 $ (3,913) (31.7) % Selling, General & Administrative Expenses $ 3,517 $ 5,044 $ (1,527) (30.3) % Operating Income $ 4,772 $ 7,153 $ (2,381) (33.3) % Revenues. The decrease in Global Seating Segment revenues resulted from: • a $20.7 million, or 47.2%, decrease in OEM North American MD/HD Truck revenues; • a $4.5 million, or 24.8%, decrease in OEM construction equipment revenues; • a $4.2 million, or 21.1%, decrease in aftermarket and OES sales; and • a $2.6 million, or 17.4%, increase 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 third quarter of 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. Global Seating Segment revenues were favorably 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 is primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $22.9 million, or 27.5%, as a result of a decrease in raw material and purchased component costs of $16.4 million, or 29.3%; a decrease in wages and benefits of $2.0 million, or 30.6%; and a decrease in overhead expenses of $4.4 million, or 21.4%. Third quarter 2020 cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The third quarter results include charges of $0.3 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 12.2% for the three months ended September 30, 2020 compared to 12.9% for the three months ended September 30, 2019. Selling, General and Administrative Expenses . SG&A expenses decreased $1.5 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Before giving effect to certain charges, SG&A expenses 36 Table of Contents reduced by $1.4 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. Consolidated Results of Operations Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The table below sets forth certain consolidated operating data for the nine months ended September 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 501,698 $ 711,753 $ (210,055) (29.5) % Gross Profit $ 50,937 $ 94,969 $ (44,032) (46.4) % Selling, General and Administrative Expenses $ 47,491 $ 48,978 $ (1,487) (3.0) % Impairment Expense $ 29,017 $ — $ 29,017 100.0 % Interest and Other Expense $ 16,142 $ 15,686 $ 456 2.9 % (Benefit) Provision for Income Taxes $ (11,375) $ 5,913 $ (17,288) (292.4) % Net (Loss) Income $ (32,913) $ 23,312 $ (56,225) (241.2) % Revenues . The decrease in consolidated revenues resulted from: • a $182.7 million, or 51.1%, decrease in OEM North American MD/HD Truck revenues; • a $58.7 million, or 340.0%, increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $45.7 million, or 35.3%, decrease in OEM construction equipment revenues; • a $24.4 million, or 24.2%, decrease in aftermarket and OES revenues; and • a $16.0 million, or 15.0%, 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 nine months ended September 30, 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 $2.1 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 $166.0 million, or 26.9%, as a result of an decrease in raw material and purchased component costs of $115.9 million, or 29.0%; a decrease in wages and benefits of $16.3 million, or 29.0%; and a decrease in overhead expenses of $33.9 million, or 21.0%. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The nine months ended September 30, 2020 results include charges of $3.2 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 10.2% for the nine months ended September 30, 2020 compared to 13.3% for the nine months ended September 30, 2019. Selling, General and Administrative Expenses . SG&A expenses increased $1.5 million compared to the nine months ended September 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $13.4 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $4.1 million charge for future milestone payments related to the performance of the FSE business, a $1.1 million charge related to the abandonment of the R&D building, charges of $1.0 million associated with ongoing restructuring initiatives, charges of $3.3 million associated with the 2018 and quarterly 2019 financial statements restatement investigation that resulted in the restatement of the Company’s financial statements and $2.3 million in costs a ssociated 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 nine months ended September 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 nine months ended September 30, 2020. 37 Table of Contents Interest and Other Expense . Interest associated with our debt, and other expense was $16.1 million and $15.7 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in interest and other expense primarily related to a $3.6 million Payment In Kind interest expense resulting from the loan amendment that occurred in the second quarter of 2020 and unfavorable change in foreign exchange translation adjustments and amortization of deferred financing fees of $1.6 million. The offset to this increase 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%. Additionally in the third quarter of 2020, the Company incurred lower interest expense of $1.2 million due to lower interest rates and had a favorable interest rate swap adjustments of $0.9 million. (Benefit) Provision for Income Taxes. An income tax benefit of $11.4 million and an income tax provision of $5.9 million were recorded for the nine months ended September 30, 2020 and 2019, respectively. The period over period change in income tax was primarily attributable to the $44.3 million pre-tax loss sustained in the current period versus the $29.2 million pre-tax income generated in the prior year period. The period over period change was also favorably impacted by a $2.0 million income tax benefit recorded in the current period for the impact of GILTI, offset by a smaller income tax benefit for period-specific tax adjustments recorded in the current versus prior year period. During the nine months ended September 30, 2020, the Company recorded a $2.0 million U.S. federal income tax benefit for the impact of the High-Tax Exception which consisted of a $0.7 million tax benefit related to the current year-to-date period, a $0.5 million tax benefit related to the year ended December 31, 2019, and a $0.8 million tax benefit related to the year ended December 31, 2018. Net (Loss) Income. Net loss was $32.9 million for the nine months ended September 30, 2020 compared to $23.3 million net income for the nine months ended September 30, 2019. The decrease in net income is attributable to the factors noted above. Segment Results Electrical System Segment Results Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The table below sets forth certain Electrical Systems Segment operating data for the nine months ended September 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 307,376 $ 417,000 $ (109,624) (26.3) % Gross Profit $ 28,208 $ 54,227 $ (26,019) (48.0) % Selling, General & Administrative Expenses $ 13,696 $ 11,855 $ 1,841 15.5 % Impairment Expense $ 23,415 $ — $ 23,415 100.0 % Operating (Loss) Income $ (11,091) $ 41,696 $ (52,787) (126.6) % Revenues. The decrease in Electrical System Segment revenues resulted from: • a $112.4 million, or 51.1%, decrease in OEM North American MD/HD Truck revenues; • a $57.1 million, or 340.0% increase in industrial and military revenues primarily attributable to the FSE acquisition; • a $26.0 million, or 35.3%, decrease in OEM construction equipment revenues; • a $11.5 million, or 24.2%, decrease in aftermarket and OES revenues; and • a $16.8 million, or 15.0%, 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 nine months ended September 30, 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 $0.7 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 $83.6 million, or 23.0%, as a result of a decrease in raw material and purchased component 38 Table of Contents costs of $56.7 million, or 24.5%; a decrease in wages and benefits of $8.5 million, or 24.1%; and a decrease in overhead expenses of $18.4 million, or 19.1%. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The nine months ended September 30, 2020 results include charges of $2.3 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 9.2% for the nine months ended September 30, 2020 compared to 13.0% for the nine months ended September 30, 2019. Selling, General and Administrative Expenses . SG&A expenses increased $1.8 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $2.6 million due the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic. These reductions were offset by a $4.1 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, 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 nine months ended September 30, 2020. Global Seating Segment Results Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The table below sets forth certain Global Seating Segment operating data for the nine months ended September 30 (dollars are in thousands): 2020 2019 (as restated) $ Change % Change Revenues $ 198,744 $ 305,056 $ (106,312) (34.8) % Gross Profit $ 23,133 $ 40,797 $ (17,664) (43.3) % Selling, General & Administrative Expenses $ 11,992 $ 15,558 $ (3,566) (22.9) % Impairment Expense $ 4,809 $ — $ 4,809 100.0 % Operating Income $ 5,945 $ 24,835 $ (18,890) (76.1) % Revenues. The decrease in Global Seating Segment revenues resulted from: • a $70.3 million, or 51.0%, decrease in OEM North American MD/HD Truck revenues; • a $19.6 million, or 31.4%, decrease in OEM construction equipment revenues; • a $12.9 million, or 21.3%, decrease in aftermarket and OES revenue; and • a $3.6 million, or 8.0%, 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 nine months ended September 30, 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 $1.4 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 $88.6 million, or 33.5%, as a result of an decrease in raw material and purchased component costs of $65.1 million, or 36.4%; a decrease in wages and benefits of $7.8 million, or 37.2%; and a decrease in overhead expenses of $15.7 million, or 24.5%. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The nine months ended September 30, 2020 results include charges of $0.8 million associated with ongoing restructuring initiatives. As a percentage of revenues, gross profit margin was 11.6% for the nine months ended September 30, 2020 compared to 13.4% for the nine months ended September 30, 2019. Selling, General and Administrative Expenses . SG&A expenses decreased $3.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Before giving effect to certain charges, SG&A expenses reduced by $3.8 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 nine months ended September 30, 2020. 39 Table of Contents 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 impairment indicators for the nine months ended September 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 September 30, 2020 or November 9, 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 nine months ended September 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 Q2 2020 Form 10-Q. Liquidity and Capital Resources The Company borrowed and repaid $15.0 million under its revolving credit facility during the nine months ended September 30, 2020. In September 2020, the Company paid an additional $5.0 million of principal on the Term Loan Facility. At September 30, 2020, the Company had liquidity of $126.2 million; $53.6 million of cash and $72.6 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; and (3) to reduce debt. Cash Flows Our primary sources of liquidity during the nine months ended September 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 September 30, 2020, we had no outstanding borrowings under our revolving credit facility and had borrowing availability of $72.6 million. For the nine months ended September 30, 2020, net cash provided by operating activities was $30.8 million compared to $28.5 million for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2020, net cash used in investing activities was $5.5 million compared to $52.7 million for the nine months ended September 30, 2019. The decrease in investing activity is primarily due to the FSE Acquisition for $34.0 million completed within three months ended September 30, 2019. In 2020, we expect capital expenditures to be in the range of $8 to $12 million. For the nine months ended September 30, 2020, net cash provided by financing activities was $11.2 million compared to net cash used in financing activities of $6.7 million for the nine months ended September 30, 2019. Net cash provided by financing activities for the nine months ended September 30, 2020 is attributable to additional repayment of $5.0 million of the senior secured term loan credit facility. Net cash used in financing activities for the nine months ended September 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 September 30, 2020, cash of $45.7 million was held by foreign subsidiaries. The Company plans to repatriate between $7.0 million and $9.0 million from its foreign subsidiaries and a deferred tax liability of $0.8 million has been accrued for the expected future income tax implications . 40 Table of Contents Debt and Credit Facilities The debt and credit facilities descriptions in Note 14, Debt and Credit Facilities 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, Debt and Credit Facilities, 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, Debt and Credit Facilities; however, no assurances can be given that we will be able to comply. We base our forecasts on 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 long-term impact of the COVID-19 pandemic on our business, including the impact 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 41 Table of Contents 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 filings 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 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.