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 describe material changes in financial condition and results of operations as reflected in our condensed consolidated financial statements for the three months ended March 31, 2022 and 2021. 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 2021 Form 10-K. Business Overview At CVG, we deliver real solutions to complex design, engineering and manufacturing problems across a range of global industries by innovating, constantly adding value, and treating our customer's bottom line as if it were our own. 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 primarily manufacture customized products to meet the requirements of our customer. We believe our products are used by a majority of the North American Commercial Truck markets, many construction vehicle OEMs and top e-commerce retailers. Key Developments In the first quarter of 2022, Russian military forces invaded Ukraine. We have approximately 1,200 employees in the Ukraine located in our facility near L'viv. While the facility was temporarily shut-down, we have resumed operations in L'viv and also set up additional capacity in the Czech Republic. During both the three months ended March 31, 2022 and the twelve months ended December 31, 2021, our Ukraine facility represented approximately 1% of the Company's long-lived assets. 20 Table of Contents The invasion of Ukraine by Russia and the retaliatory measures taken by the U.S., NATO and other countries have created global security concerns and economic uncertainty that could have a lasting impact on regional and global economies. We cannot be certain that international tensions will not affect our facility in the Ukraine, including due to the Russian invasion, electrical outages, cyber-attacks and periodic battles with separatists closer to our facility. In addition, certain of our employees in Ukraine may be conscripted into the military and/or sent to fight in the ongoing conflict. Furthermore, most of our products manufactured in Ukraine are shipped across the border from Ukraine to the Czech Republic for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, or if our customers decide to stop ordering from us or shift orders to our competitors, we would experience a loss of the use of our Ukrainian facility, which could have an adverse effect on our results of operations and financial condition. During the first quarter of 2022, we experienced shutdowns at our plant in Shanghai, China due to the COVID-19 pandemic. The COVID-19 pandemic has caused and continues to cause, significant volatility, uncertainty and economic disruptions to our business. 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 inconsistent 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. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on a number of factors beyond our control. While backlog continues to be strong in the truck markets, all markets we operate in were impacted by supply chain constraints which caused volatility on our customers' production schedules and had a negative impact on our results. Overall, we continued to experience global supply chain disruptions and significant inflation, including longer lead-times to procure parts from China and due to port backups, labor inflation, chip shortages, steel and other raw material inflation, and freight cost increases. The impact of the pandemic and related economic recovery continue to be uneven from period to period and across our global footprint based on local and regional outbreaks. We continue to proactively monitor, assess and minimize to the extent reasonably possible disruptions and delays in production due to labor shortages or customer schedules, focus on cost control and recovery through pricing adjustments, and take reasonable measures to protect our workforce. On November 1, 2021, the Company's Board of Directors approved a restructuring program to align the Company’s cost structure to support margin expansion. The program includes workforce reductions and footprint optimization across segments. We incurred expenses totaling $1.0 million during the three months ended March 31, 2022 related to this program and expect the cost to be between $4.0 million to $6.0 million for the entire program. On October 25, 2021, the Company provided notice to the Volvo Group (“Volvo”) of the Company’s intention to terminate its agreement with Volvo, with such termination to become effective twelve months from the date of notice, absent the parties reaching mutually agreeable terms upon which to continue their relationship. During the first quarter, we continued negotiations with Volvo. The Company is focused on implementing customer price increases where margin on product is not meeting profitability targets. Consolidated Results of Operations Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The table below sets forth certain consolidated operating data for the three months ended March 31 (dollars are in thousands): 2022 2021 $ Change % Change Revenues $ 244,374 $ 245,122 $ (748) (0.3)% Gross profit 25,383 31,121 (5,738) (18.4) Selling, general and administrative expenses 16,999 15,718 1,281 8.1 Other (income) expense 1,041 (656) 1,697 NM 1 Interest expense 1,961 5,041 (3,080) (61.1) Provision for income taxes 1,400 2,528 (1,128) (44.6) Net income 3,982 8,490 (4,508) (53.1) 1. Not meaningful Revenues . The decrease in consolidated revenues resulted from: • a $8.3 million, or 4.7%, increase in sales to OEM; 21 Table of Contents • a $10.2 million, or 24.4%, decrease in warehouse automation sales; • a $2.2 million, or 8.3%, decrease in aftermarket and OES sales; and • a $3.4 million, or 1776.2%, increase in other revenues. First quarter 2022 revenues were favorably impacted by foreign currency exchange translation of $1.1 million, which is reflected in the change in revenues above. The decrease in revenues is due to lower shipments caused by the COVID lockdowns in China, the Ukraine conflict and lower demand in the warehouse automation business. These impacts were nearly offset by price increases in all of the business segments. Gross Profit . The $5.7 million decrease in gross profit is primarily attributable to the decrease in sales volume, partially offset by increased pricing to offset inflation. Included in gross profit is cost of revenues, which increased $5.0 million, or 2.3%, as a result of an increase in raw material and purchased component costs of $0.5 million, or 0.3%, and an increase in labor and overhead expenses of $4.5 million, or 6.5%. As a percentage of revenues, gross profit margin was 10.4% for the three months ended March 31, 2022 compared to 12.7% for the three months ended March 31, 2021. 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 increased $1.3 million compared to the three months ended March 31, 2021, primarily as a result of wages, benefits and travel returning to or increasing beyond pre-pandemic levels and legal cost increases. As a percentage of revenues, SG&A expense was 7.0% for the three months ended March 31, 2022 compared to 6.4% for the three months ended March 31, 2021. Other Expense. Other expenses increased $1.7 million in the quarter ended March 31, 2022 as compared to the quarter ended March 31, 2021 due primarily to an unfavorable change in the fair value of foreign currency forward exchange contracts in 2022 versus a favorable change in the fair value of foreign currency forward exchange contracts in 2021. Interest Expense . Interest associated with our debt, and other expense was $2.0 million and $5.0 million for the three months ended March 31, 2022 and 2021, respectively. The decrease in interest expense primarily related to refinancing of the Company's long term debt in April 2021, including elimination of PIK interest. Provision (Benefit) for Income Taxes. An income tax provision of $1.4 million and $2.5 million were recorded for the three months ended March 31, 2022 and 2021, respectively. The period over period change in income tax was primarily attributable to a $5.6 million decrease in pre-tax income versus the prior year period. Net Income (loss). Net income was $4.0 million for the three months ended March 31, 2022 compared to $8.5 million for the three months ended March 31, 2021. The decrease in net income is attributable to the factors noted above. Segment Results Vehicle Solutions Segment Results Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The table below sets forth certain Vehicle Solutions Segment operating data for the three months ended March 31 (dollars are in thousands): 2022 2021 $ Change % Change Revenues $ 140,157 $ 124,342 $ 15,815 12.7% Gross profit 12,907 13,808 (901) (6.5) Selling, general & administrative expenses 6,588 6,325 263 4.2 Operating income 6,319 7,483 (1,164) (15.6) Revenues. The increase in Vehicle Solutions Segment revenues primarily resulted from increased pricing to offset material cost pass-through and new business wins offset by lower shipments caused by the COVID shutdown in China. Gross Profit. The decrease in gross profit was primarily attributable to cost of revenues, which increased $16.7 million, or 15.1%, as a result of an increase in raw material and purchased component costs of $11.5 million, or 15.5%, and an increase in labor and overhead expenses of $5.2 million, or 14.3%. 22 Table of Contents As a percentage of revenues, gross profit margin was 9.2% for the three months ended March 31, 2022 compared to 11.1% for the three months ended March 31, 2021. Selling, General and Administrative Expenses . SG&A expenses increased $0.3 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, consistent with the prior year amount on a percent of sales basis. Warehouse Automation Segment Results Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The table below sets forth certain Warehouse Automation Segment operating data for the three months ended March 31 (dollars are in thousands): 2022 2021 $ Change % Change Revenues $ 34,126 $ 44,372 $ (10,246) (23.1)% Gross profit 4,991 5,440 (449) (8.3) Selling, general & administrative expenses 1,324 1,531 (207) (13.5) Operating income 3,667 3,909 (242) (6.2) Revenues. The decrease in Warehouse Automation Segment revenues primarily resulted from lower sales volume. 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 $9.8 million, or 25.2%, as a result of a decrease in raw material and purchased component costs of $8.5 million, or 27.3%, and a decrease in labor and overhead expenses of $1.3 million, or 16.8%. As a percentage of revenues, gross profit margin was 14.6% for the three months ended March 31, 2022 compared to 12.3% for the three months ended March 31, 2021. Selling, General and Administrative Expenses . SG&A expenses decreased $0.2 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, consistent with the prior year amount on a percent of sales basis. Electrical Systems Segment Results Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The table below sets forth certain Electric Systems Segment operating data for the three months ended March 31 (dollars are in thousands): 2022 2021 $ Change % Change Revenues $ 39,876 $ 46,462 $ (6,586) (14.2)% Gross profit 3,401 6,324 (2,923) (46.2) Selling, general & administrative expenses 1,640 1,468 172 11.7 Operating income 1,761 4,856 (3,095) (63.7) Revenues. The decrease in Electric Systems Segment revenues primarily resulted from lower sales volumes due to supply chain and semi-conductor chip shortages at our customer plants, and the disruption caused by the war in the Ukraine. 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 $3.7 million, or 9.1%, as a result of a decrease in raw material and purchased component costs of $3.3 million, or 14.1%, and a decrease in labor and overhead expenses of $0.3 million, or 2.0%. As a percentage of revenues, gross profit margin was 8.5% for the three months ended March 31, 2022 compared to 13.6% for the three months ended March 31, 2021. 23 Table of Contents Selling, General and Administrative Expenses . SG&A expenses increased $0.2 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Aftermarket & Accessories Segment Results Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The table below sets forth certain Aftermarket & Accessories Segment operating data for the three months ended March 31 (dollars are in thousands): 2022 2021 $ Change % Change Revenues $ 30,215 $ 29,946 $ 269 0.9% Gross profit 4,086 5,585 (1,499) (26.8) Selling, general & administrative expenses 1,465 1,422 43 3.0 Operating income 2,621 4,163 (1,542) (37.0) Revenues. The modest increase in Aftermarket & Accessories Segment revenues primarily resulted from sales volume and pricing to offset material cost pass-through. Gross Profit. The decrease in gross profit is primarily attributable to cost of revenues, which increased $1.8 million, or 7.3%, as a result of an increase in raw material and purchased component costs of $0.9 million, or 5.4%, and an increase in labor and overhead expenses of $0.9 million, or 10.7%. As a percentage of revenues, gross profit margin was 13.5% for the three months ended March 31, 2022 compared to 18.7% for the three months ended March 31, 2021 due to lagging price-cost offsets. Selling, General and Administrative Expenses . SG&A expenses were flat year over year and consistent with the prior year amount on a percent of sales basis. Liquidity and Capital Resources As of March 31, 2022, the Company had $80.2 million of outstanding borrowings on its revolving credit facility, $38.2 million of cash and $43.6 million of availability from the revolving credit facility, resulting in total liquidity of $81.8 million. Our primary sources of liquidity as of March 31, 2022 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 March 31, 2022, cash o f $38.1 million was held by foreign subsidiaries. The Company had a $0.3 million deferred tax liability as of March 31, 2022 for the expected future income tax implications of repatriating cash from the foreign subsidiaries for which no indefinite reinvestment assertion has been made. Covenants and Liquidity Our ability to comply with the covenants in the Credit Agreement, as discussed in Note 4, Debt, 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 Credit Agreement for the next twelve months; 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 Credit Agreement, the lenders could declare an event of default under the Credit Agreement and our indebtedness thereunder could be declared immediately due and payable. The Credit Agreement contain cross default provisions. If we are unable to borrow under the Credit 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. 24 Table of Contents Sources and Uses of Cash March 31, 2022 March 31, 2021 (In thousands) Net cash provided by (used in) operating activities $ (21,398) $ (15,371) Net cash used in investing activities (3,590) (1,709) Net cash provided by financing activities 28,406 5,474 Effect of currency exchange rate changes on cash (168) (761) Net increase (decrease) in cash $ 3,250 $ (12,367) Operating activities. For the three months ended March 31, 2022, net cash used in operating activities was $21.4 million compared to $15.4 million for the three months ended March 31, 2021. Net cash used in operating activities is primarily attributable to the increase in working capital for the three months ended March 31, 2022. Investing activities. For the three months ended March 31, 2022, net cash used in investing activities was mainly due to capital expenditures and was $3.6 million compared to $1.7 million for the three months ended March 31, 2021. In 2022, we expect capital expenditures to be in the range of $20 million to $25 million. Financing activities. For the three months ended March 31, 2022, net cash provided by financing activities was $28.4 million compared to $5.5 million for the three months ended March 31, 2021. Net cash provided by financing activities for the three months ended March 31, 2022 is attributable to borrowings under the revolving credit facility to fund the working capital increase. Debt and Credit Facilities The debt and credit facilities descriptions in Note 4, Debt are incorporated in this section by reference. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For a comprehensive discussion of our significant accounting policies, see "Note 1. Significant Accounting Policies", to our consolidated financial statements in Item 8 in our 2021 Form 10-K. Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Com mittee of our board of directors. For information about critical accounting estimates, see Critical Accounting Estimates in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K. At March 31, 2022, there have been no material changes to our critical accounting estimates from those disclosed in our 2021 Form 10-K. Forward-Looking Statements This Quarter Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements under “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry outlook, the Company’s expectations for future periods with respect to its plans to improve financial results, the future of the Company’s end markets, including the short-term and long-term impact of the COVID-19 pandemic on our business and the global supply chain, changes in the Class 8 and Class 5-7 North America truck build rates, performance of the global construction equipment business, the Company’s prospects in the wire harness, warehouse automation and electric vehicle markets, the Company’s initiatives to address customer needs, organic growth, the Company’s strategic plans and plans to focus on certain segments, competition faced by the Company, volatility in and disruption to the global economic environment, including inflation and labor shortages, financial covenant compliance, anticipated effects of acquisitions, production of new products, plans for capital expenditures and our results of operations or financial position and liquidity, may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believe”, “anticipate”, “plan”, “expect”, “intend”, “will”, “should”, “could”, “would”, “project”, “continue”, “likely”, and similar expressions, as they relate to 25 Table of Contents us, are intended to identify forward-looking statements. The important factors discussed in “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. Additionally, various economic and competitive factors could cause actual results to differ materially from those discussed in such forward-looking statements, including, but not limited to, factors which are outside our control. Any forward-looking statement that we make in this report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.