Item 1. Business
Item 1. Business
C OMPANY O VERVIEW
CVG is a global provider of components and assemblies into two primary end markets – the global vehicle market and the U.S. technology integrator markets. The company provides components and assemblies to global vehicle companies to build original equipment and provides aftermarket products for fleet owners. The company also provides mechanical assemblies to warehouse automation integrators and to U.S. military technology integrators.
Our Long-term Strategy
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
S EGMENTS
We manage our business in two segments: Electrical Systems and Global Seating. Each of these segments offer various products which are sold into various end markets. Certain of our facilities manufacture and sell products through both of our business segments. Each manufacturing facility that sells products through both segments is reflected in the financial results of the segment that has the greatest amount of revenues from that manufacturing facility. The products produced by each of our segments are more specifically described below.
The Electrical Systems segment designs, manufactures and sells the following products:
• Electrical systems, electrical wire harnesses, electro-mechanical assemblies for warehouses, electro-mechanical cable assemblies for the construction, agricultural, industrial, automotive, truck, mining, rail and military industries in North America, Europe and Asia-Pacific. This segment includes a portion of the company’s activities in the emerging electric vehicle market;
• Plastic components ("Trim") primarily for the North America commercial vehicle market and recreational vehicle markets;
• Warehouse automation subsystems primarily for the North American e-commerce markets and include electro-mechanical assemblies and panels;
• Commercial vehicle accessories including wipers, mirrors, floormats and sensors; and
• Cab structures for the North American medium-duty/heavy-duty ("MD/HD") truck market.
The Global Seating segment designs, manufactures and sells the following products:
• Commercial vehicle seats for the global commercial vehicle markets including heavy duty trucks, medium duty trucks, last mile trucks, construction equipment, material handling equipment and agriculture equipment in North America, Europe and Asia-Pacific. This segment includes a portion of the company’s activities in the emerging electric vehicle market;
• Office seats primarily in Europe and Asia-Pacific; and
• Aftermarket seats and components in North America, Europe and Asia-Pacific.
E LECTRICAL S YSTEMS S EGMENT O VERVIEW
Electrical Systems Segment Products
Set forth below is a description of products designed and manufactured in the Electrical Systems Segment and their applications.
Electrical Systems, Electrical Wire Harnesses, Panel Assemblies, and Electro-Mechanical Assemblies . We offer a wide range of electrical wire harnesses, electrical distribution systems, and related assemblies primarily for construction, agriculture, industrial, automotive, truck, mining, rail and military industries. Our principal products in this category include:
Electrical Wire Harnesses. We offer a broad range of electrical wire harness assemblies that function as the primary electric current carrying devices used to provide electrical interconnections for gauges, lights, control functions, power circuits, powertrain and transmission sensors, emissions systems and other electronic applications on commercial and other vehicles. Our wire harnesses are customized to fit specific end-user requirements and can be complex.
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Panel Assemblies. We offer integrated assemblies and cabinets that are installed in a vehicle or unit of equipment and may be integrated with our wire harness assemblies. These components provide the user control over multiple operational functions and features.
Electro-Mechanical Assemblies. We offer electro-mechanical assemblies, including box builds, complex automated and robotic assemblies, and large multi-cabinet control cabinets with power distribution and cabling. Our service includes mechanical assembly, wire and cable routing, automated wire preparation capabilities, complex configurations, test and custom palletizing and crating solutions.
Plastic Components and Assemblies . We design, engineer and produce plastic components and assemblies for trucks, recreational vehicles, specialty vehicle applications, and diversified markets. We offer thermoformed products, injection molded products, reaction injection molded products (RIM), and decorated / hydrographic finished products. We also assemble components and fabrics to these formed plastic parts and deliver complete subassemblies. Our principal products in this category include:
Molded Products. Our molded products include both large and small parts. Specific components include vinyl or cloth-covered appliqués ranging from a traditional cut and sew approach to a contemporary molded styling theme, armrests, map pocket compartments, and sound-reducing insulation.
Instrument Panels. We produce and assemble instrument panels that can be integrated with the rest of the interior trim. The instrument panel is a complex system of coverings and foam, plastic and metal parts designed to house various components and act as a safety device for the vehicle occupant.
Plastics Decorating and Finishing . We offer customers a wide variety of cost-effective finishes in paint, ultra violet, hard coating and customized industrial hydrographic films (simulated appearance of wood grain, carbon fiber, brushed metal, marbles, camouflage and custom patterns), and other interior and exterior finishes.
Vehicle Structures, Interior Parts, and Accessories . We design, engineer and produce complete cab structures and interior design components for commercial vehicles. Our principal products in this category include:
Cab Structures. We design, manufacture and assemble complete cab structures. Our cab structures, which are manufactured from both steel and aluminum, are delivered fully assembled and primed for paint.
Cab Interiors. We design, manufacture and provide a variety of interior design products including armrests, grab handles, storage systems, floor coverings, floor mats, sleeper bunks, headliners, wall panels, and privacy curtains that can be part of the overall cab structure or standalone assemblies depending on the customer application.
Accessories. We design, manufacture and provide a variety of mirrors, wipers and controls used in commercial, military and specialty recreational vehicles.
Electrical Systems Segment’s Customers
The Electrical Systems segment’s revenues are currently and have historically been primarily derived from commercial vehicle customers. However, during the year ended December 31, 2020, approximately 15% of total Electrical Systems segment revenue was from warehouse automation customers.
Our Electrical Systems segment revenues are primarily from North American operations, at approximately 87%, 88%, and 87% for the years ended December 31, 2020, 2019 and 2018, respectively. Our European and Asia-Pacific operations collectively contributed approximately 13%, 12% and 13% of our Electrical Systems segment revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
G LOBAL S EATING S EGMENT O VERVIEW
Global Seating Segment Products
Set forth below is a brief description of our products manufactured in the Global Seating Segment and their applications.
Seats and Seating Systems . We design, engineer and produce seats for MD/HD truck, bus, construction, agriculture and military markets. For the most part, our seats are fully-assembled and ready for installation when they are delivered to the OEM. We offer a wide range of seats that include mechanical and air suspension seats, static seats, bus seats and military seats. As a result of our product design and product technology, we believe we are a leader in designing seats with convenience and safety features. Our seats are designed to achieve a high level of operator comfort by adding a wide range of manual and power features such as lumbar support, cushion and back bolsters, and leg and thigh support. Our seats are built to meet customer
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requirements in low volumes and produced in numerous feature combinations to form a full-range product line with a wide level of price points. We also manufacture seats, parts and components for the aftermarket.
Office Seating. We design, engineer and produce office seating products. Our office seating is designed to suit different office environments including heavy usage environments, such as emergency services, call centers, reception areas, studios, general office environments and gaming applications.
Global Seating Segment Customers
The Global Seating segment’s revenues are primarily derived from commercial vehicle customers.
Our Global Seating segment revenues are split between North American operations, at approximately 51%, 57%, and 52% for the years ended December 31, 2020, 2019 and 2018, respectively. Our European and Asia-Pacific operations collectively contributed approximately 49%, 43% and 48% of the Global Seating segment’s revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
O UR C ONSOLIDATED O PERATIONS
Primary Industries Served
Commercial Vehicle Market. Commercial vehicles are used in a wide variety of end markets, including local and long-haul commercial trucking, bus, construction, mining, agricultural, military, industrial, municipal, off-road recreational and specialty vehicle markets. The commercial vehicle supply industry can generally be separated into two categories: (1) sales to OEMs, in which products are sold in relatively large quantities directly for use by OEMs in new commercial and construction vehicles; and (2) aftermarket sales, in which products are sold as replacements to a wide range of original equipment service organizations, wholesalers, retailers and installers. Additionally, we are seeing a trend toward alternate fuel and electric vehicles, middle-mile and last-mile vehicle models.
North American Commercial Truck Market. Purchasers of commercial trucks include fleet operators, owner operators, governmental agencies and industrial end users. Commercial vehicles used for local and long-haul commercial trucking are generally classified by gross vehicle weight. Class 8 vehicles are trucks with gross vehicle weight in excess of 33,000 lbs. and Classes 5 through 7 vehicles are trucks with gross vehicle weight from 16,001 lbs. to 33,000 lbs. The current market is impacted by the COVID-19 pandemic. Separately, we are seeing changes in e-commerce behaviors that are driving increased demand for middle-mile and last-mile vehicles.
The following describes the major markets within the commercial vehicle market in which the Global Seating Segment competes:
Class 8 Truck Market. The global Class 8 ("Class 8" or "heavy-duty") truck manufacturing market is concentrated in three primary regions: North America, Europe and Asia-Pacific. The global Class 8 truck market is localized in nature due to the following factors: (1) the prohibitive costs of shipping components from one region to another, (2) the high degree of customization to meet the region-specific demands of end-users, and (3) the ability to meet just-in-time delivery requirements. New Class 8 truck demand is cyclical and is particularly sensitive to economic factors that generate a significant portion of the freight tonnage hauled by commercial vehicles.
Class 5-7 Truck Market. North American Class 5-7 ("Class 5-7" or "medium-duty") includes recreational vehicles, buses and medium-duty trucks. We primarily participate in the Class 6 and 7 portion of the medium-duty truck market. The medium-duty truck market is influenced by overall economic conditions but has historically been less cyclical than the North American Class 8 truck market, with highs and lows generally not as pronounced as the Class 8 truck market.
Commercial Truck Aftermarket. Demand for aftermarket products is driven by the quality of OEM parts, the number of vehicles in operation, the average age of the vehicle fleet, the content and value per vehicle, vehicle usage and the average useful life of vehicle parts. Aftermarket sales tend to be at a higher margin. The recurring nature of aftermarket revenue can be expected to provide some insulation to the overall cyclical nature of the industry as it tends to provide a more stable stream of revenues. Brand equity and the extent of a company’s distribution network also contribute to the level of aftermarket sales. We believe CVG has a widely recognized brand portfolio and participates in most retail sales channels including original equipment dealer networks and independent distributors.
Commercial Construction Equipment Market. New vehicle demand in the global construction equipment market generally follows certain economic conditions including gross domestic product, infrastructure investment, housing starts, business investment, oil and energy investment and industrial production around the world. Within the
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construction market, there are two classes of construction equipment markets: the medium and heavy construction equipment market (weighing over 12 metric tons) and the light construction equipment market (weighing below 12 metric tons). Our construction equipment products are primarily used in the medium and heavy construction equipment markets. The platforms that we generally participate in include: cranes, pavers, planers and profilers, dozers, loaders, graders, haulers, tractors, excavators, backhoes, material handling and compactors. Demand in the medium and heavy construction equipment market is typically related to the level of larger-scale infrastructure development projects such as highways, dams, harbors, hospitals, airports and industrial development as well as activity in the mining, forestry and other commodities industries.
Purchasers of medium and heavy construction equipment include construction companies, municipalities, local governments, rental fleet owners, quarrying and mining companies and forestry related industries. Purchasers of light construction equipment include contractors, rental fleet owners, landscapers, logistics companies and farmers. In the medium and heavy construction equipment market, we primarily supply OEMs with our wire harness and seating products.
Military Equipment Market. We supply products for heavy- and medium-payload tactical vehicles and complex military communications equipment over multiple product lines that are used by various defense customers. Military equipment production is particularly sensitive to political and governmental budgetary considerations.
Warehouse Automation Market. Shifting retailer behavior and consumer expectations are creating a significant need for incremental automation within warehouses. Given consumer demands for next-day (and even same-day) delivery, there has been a surge in demand for “last mile” urban fulfillment centers, which are typically supported by very large distribution centers located in the outer ring of a city. Additionally, increased throughput volume, a greater variety of order and package types, more frequent product returns by end consumers, and COVID-19-driven social distancing protocols on warehouse floors all support the rationale for continued investment in automated solutions by warehouse operators. As a result, warehouses are experiencing a continuous increase in investment, driven by increasing levels of automation within the warehouse as well as the integration of supply chains.
Our Supply Agreements
Our supply agreements generally provide for fixed pricing but do not require us to purchase any specified quantities. Normally we do not carry inventories of raw materials or finished products in excess of what is reasonably required to meet production and shipping schedules, as well as service requirements. Steel, aluminum, petroleum-based products, copper, resin, foam, fabrics, wire and wire components comprise the most significant portion of our raw material costs. We typically purchase steel, copper and petroleum-based products at market prices that are fixed over varying periods of time. Due to the volatility in pricing, we use methods such as market index pricing and competitive bidding to assist in reducing our overall cost. The recent imposition of tariffs and the impact of the COVID-19 pandemic on steel and aluminum have impacted the prices of certain of our materials. We strive to align our customer pricing and material costs to minimize the impact of steel, copper and petrochemical price fluctuations. Certain component purchases and suppliers are directed by our customers, so we generally will pass through directly to the customer cost changes from these components. We generally are not dependent on a single supplier or limited group of suppliers for our raw materials.
Research and Development
Our research and development capabilities offer quality and technologically advanced products to our customers at competitive prices. We offer product styling, product design, specialized simulation and testing and evaluation services that are necessary in today’s global markets. Our capabilities in acoustics, thermal efficiency, benchmarking, multi-axis durability, biomechanics, comfort, prototyping and process prove-out allow us to provide complete integrated solutions.
We engage in global engineering, and research and development activities that improve the reliability, performance and cost-effectiveness of our existing products and support the design, development and testing of new products for existing and new applications. Generally, we work with our customers’ engineering and development teams at the beginning of the design process for new components and assemblies and systems, or the re-engineering process for existing components and assemblies, in order to leverage production efficiency and quality.
Research and development costs for the years ended December 31, 2020, 2019 and 2018 totaled $6.4 million, $9.9 million and $9.5 million, respectively.
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Intellectual Property
Our major brands include CVG ™ , Sprague Devices ® , Moto Mirror ® , RoadWatch ® , KAB Seating ™ , National Seating ™ , Bostrom Seating ® , Stratos ™ , and FinishTEK ™ . We believe that our brands are valuable but that our business is not dependent on any one brand. We own U.S. federal trademark registrations for several of our products.
Manufacturing Processes
We utilize a wide range of manufacturing processes to produce our products. The end markets for our products can be highly specialized and our customers frequently request modified products in low volumes within an expedited delivery timeframe. As a result, we primarily utilize flexible manufacturing cells at our production facilities. Manufacturing cells are clusters of individual manufacturing operations and work stations. This provides flexibility by allowing efficient changes to the number of operations each operator performs. When compared to the more traditional, less flexible assembly line process, cell manufacturing allows us to better maintain our product output consistent with our OEM customers’ requirements and minimize the level of inventory.
We have systems in place that allow us to provide complete customized interior kits in boxes that are delivered in sequence. Sequencing reduces our cost of production because it eliminates warehousing costs and reduces waste and obsolescence, thereby offsetting increased labor costs. Several of our manufacturing facilities are strategically located near our customers’ assembly facilities, which facilitates this process and minimizes shipping costs.
We employ just-in-time manufacturing and sourcing in our operations to meet customer requirements for faster deliveries and to minimize our need to carry significant inventory levels. We utilize material systems to manage inventory levels and, in certain locations, we have inventory delivered as often as two times per day from a nearby facility based on the previous day’s order, which reduces the need to carry excess inventory at our facilities.
Within our cyclical industries, we strive to maintain a certain portion of temporary labor to improve our ability to flex our costs and throughput as required by fluctuating customer demand. We engage our core employees to assist in making our processes efficient.
Our Customer Contracts, and Sales and Marketing
Our OEM customers generally source business to us pursuant to written contracts, purchase orders or other commitments (“Commercial Arrangements”) with terms of price, quality, technology and delivery. Awarded business generally covers the supply of all or a portion of a customer’s production and service requirements for a particular product program rather than the supply of a specific quantity of products. In general, these Commercial Arrangements provide that the customer can terminate them if we do not meet specified quality, delivery and cost requirements. Although these Commercial Arrangements may be terminated at any time by our customers (but generally not by us), such terminations have historically been minimal and have not had a material impact on our results of operations. Because we produce products for a broad cross section of vehicle models, we are not overly reliant on any one vehicle model.
Our Commercial Arrangements with our OEM customers may provide for an annual prospective productivity price reduction. These productivity price reductions are generally calculated on an annual basis as a percentage of the previous year’s purchases by each customer. Historically, most of these price reductions have been offset by internal cost reductions and through the assistance of our supply base, although no assurances can be given that we will be able to achieve such reductions in the future. The cost reduction is achieved through engineering changes, material cost reductions, logistics savings, reductions in packaging cost, labor efficiencies and other productivity actions.
Our sales and marketing efforts are designed to create customer awareness of our engineering, design and manufacturing capabilities. Our sales and marketing staff work closely with our design and engineering personnel to prepare the materials used for bidding on new business, as well as to provide an interface between us and our key customers. We have sales and marketing personnel located in every major region in which we operate. From time to time, we participate in industry trade shows and advertise in industry publications.
Our principal customers for our aftermarket sales include OEM dealers and independent wholesale or retail distributors. Our sales and marketing efforts are focused on supporting these two distribution channels, as well as participation in industry trade shows and direct contact with major fleets.
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Competition
Within each of our principal product categories we compete with a variety of independent suppliers and with OEMs’ in-house operations, primarily on the basis of price, breadth of product offerings, product quality, technical expertise, development capability, product delivery and product service.
Environmental
The Company is subject to changing federal, state, and local laws and regulations governing the protection of the environment and occupational health and safety, including laws regulating air emissions, wastewater discharges, generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the soil, ground or air; and the health and safety of our colleagues. Stringent fines and penalties may be imposed for noncompliance with these laws. In addition, environmental laws could impose liability for costs associated with investigating and remediating contamination at the Company’s facilities or at third-party facilities at which the Company may arrange for the disposal treatment of hazardous materials.
The Company believes it is in compliance in all material respects, with all applicable environmental laws and the Company is not aware of any noncompliance or obligation to investigate or remediate contamination that could reasonably be expected to result in a material liability. Several of our facilities are either certified as, or are in the process of being certified as ISO 9001, 14000, 14001 or TS16949 (the international environmental management standard) compliant or are developing similar environmental management systems. We have made, and will continue to make, capital and other expenditures to implement such environmental programs and comply with environmental requirements.
The environmental laws continue to be amended and revised to impose stricter obligations, and compliance with future additional environmental requirements could necessitate capital outlays. However, the Company does not believe that these expenditures will ultimately result in a material adverse effect on its financial position or results of operations. The Company cannot predict the precise effect such future requirements, if enacted, would have on the Company. The Company believes that such regulations would be enacted over time and would affect the industry as a whole.
Human Capital, Environmental, Social and Governance
As of December 31, 2020, we had approximately 7,740 employees of which 7,200 were permanent employees and 540 (7%) were temporary employees. 6,240 (81%) of the Company's employees are international and 1,500 (19%) of the Company's employees are in the United States. It is customary for the company to employ temporary employees to both flex up / down to demand rates as well as an onboarding approach for new employees. Of our permanent workforce, 940 (13%) were salaried and the remainder were hourly. As of December 31, 2020, all of the Company's U.S. employees were non-union and a majority of the Company's personnel in Mexico were unionized. Approximately 63% of our European, Asian and Australian operations were represented by some form of shop steward committees.
The Company is committed to establishing and developing a workforce to support our long term diversification and growth strategy through targeted external recruiting, and internal development and succession planning. We have developed cohorts of plant leaders and emerging leaders for targeted training opportunities and have leveraged online learning platforms to make training more accessible for our workforce.
Compensation and Benefits - Our compensation programs reinforce a pay for performance philosophy with market-based compensation and benefits that are competitive for the manufacturing sector. Specific programs vary worldwide based on regional practices and benchmarks.
Diversity and Inclusion - The Company is intentional in its commitment to diversity and inclusion including a diverse Board of Directors and executive leadership team. One third of our current Board is diverse by race or gender and one fourth of our current executive team is diverse by race or gender with others bringing diversity of experience, thought and perspective to their leadership roles. Among our global workforce, 48% is female, and among our domestic workforce, 27% is racially diverse. The Company established an Executive Diversity & Inclusion Steering Committee in 2020 to champion diversity, inclusion and awareness through our recruiting, retention and communication programs.
Safety - The safety of our workforce has always been a top priority and the Company is proud of our safety record, which includes three consecutive years of declining recordable incidents and five consecutive years of declining incident rates. Our 2020 full year incident rate of 0.51 is below the industry benchmarks and six of our global facilities were incident free in calendar year 2020.
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The impact of the COVID-19 pandemic on our global organization was significant. A key focus for 2020 was the adaptation of our operations to protect our employees and continue our work as an essential manufacturing employer. We implemented a number of prevention and mitigation strategies over the past year including a non-essential travel ban, and visitor restrictions and screening protocols. We installed plexiglass barriers and touchless faucets and dispensers in high traffic facilities, and we adopted temporary alternating remote work schedules for non-production employees to encourage social distancing and reduce density for critical onsite personnel. We introduced pilot programs in our largest facilities for rapid onsite antibody testing and high capacity thermal scanners; and we implemented a shared drive to track facility level statistical reporting and share best practice prevention and response plans. We also expanded our distribution of PPE and industrial hygiene products in all facilities, including the manufacturing of disposable face masks in our Saltillo facility for distribution to our global employees and their families.
CVG is committed to operating in an ethical and sustainable manner that benefits all our stakeholders including customers, employees and the communities we serve. We have established company-wide environmental, human rights and labor rights policies that outline the Company’s standards for all business operations. More information on these policies can be found on our website under the caption “About Us - CVG Policies,” including highlights of our ongoing Environmental, Social and Governance (“ESG”) efforts related to safety, quality, environmental, community engagement and corporate governance.
A VAILABLE I NFORMATION
We maintain a website on the Internet at www.cvgrp.com. We make available free of charge through our website, by way of a hyperlink to a third-party Securities Exchange Commission ("SEC") filing website, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports electronically filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934. Such information is available as soon as such reports are filed with the SEC. Additionally, our Code of Ethics may be accessed within the Investor Relations section of our website. Information found on our website is not part of this Annual Report on Form 10-K or any other report filed with the SEC.
E XECUTIVE O FFICERS OF R EGISTRANT
See Item 10. Directors, Executive Officers and Corporate Governance" in Part III.