Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the information set forth in our consolidated financial statements and the notes thereto included in Item 8 in this Annual Report on Form 10-K. Discussion of 2022 results compared to 2021 results to the extent not included in this report can be found in Item 7 of our 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2023. The statements in this discussion regarding industry outlook, our long-term strategy, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. See “Forward-Looking Information” on page ii of this Annual Report on Form 10-K. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Item 1A - Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Business Overview
CVG is a global provider of systems, assemblies and components to the global commercial vehicle market, the electric vehicle market, and the industrial automation markets. We deliver real solutions to complex design, engineering and manufacturing problems while creating positive change for our customers, industries, and communities we serve.
We have manufacturing operations in the United States, Mexico, China, United Kingdom, Czech Republic, Ukraine, Morocco, 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.
Commercial Trends in the Vehicle Solutions and Aftermarket & Accessories Segments
Demand for our products may be driven by preferences of the end-user of the vehicle, particularly with respect to heavy-duty trucks in North America. Heavy-duty truck OEMs generally dictate the specifications of 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.
Current trends include future adoption of electric vehicles in the commercial truck segment. Commercial truck makers are developing electric models of all classes of trucks and buses in their fleets. This has created an increased number of platform opportunities relative to historical trends of platform changes. 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 fit 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.
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, supply chain constraints, interest rates, changes in government regulations, consumer spending, fuel costs, freight costs, fleet operators' financial health and access to capital, used truck prices and our customers’ inventory levels. New heavy-duty truck demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy, which generates a significant portion of the freight tonnage hauled by commercial vehicles.
North American heavy-duty truck production was 340,140 units in 2023. According to a February 2024 report by ACT Research, a publisher of industry market research, North American Class 8 production levels are expected to decrease to 285,000 units in 2024. ACT Research estimated that the average age of active North American Class 8 trucks was 5.7 years in 2023. 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 was 266,784 units in 2023. According to a February 2024 report by ACT Research, North American Class 5-7 truck production is expected to decrease to 237,000 units in 2024. We primarily participate in the class 6 and 7 portion of the medium-duty truck market.
Commercial Trends in the Electrical Systems Segment
Demand for our Electrical Systems products, such as wire harnesses, is primarily driven by construction equipment 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
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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.
Other Key Developments
During the quarter ended March 31, 2023, we established two new plant locations: one in Tangier, Morocco, and another in Aldama, Mexico. These plants are a cornerstone in our strategy of globally expanding our electrical systems business.
During the quarter ended December 31, 2023, management approved restructuring programs to align the Company’s cost structure to support margin expansion. The programs include workforce reductions and footprint optimization across segments. We incurred $1.1 million expense during the year ended December 31, 2023 related to this program and expect the cost to be between $3.0 million to $3.5 million for the entire program.
Our Long-term Strategy
The Company's long-term strategy is to increase our sales, profits and shareholder value by growing our Electrical Systems segment to be our largest business while financially optimizing its core legacy businesses, organically growing in targeted areas, strengthening our product portfolio, increasing our margins and adding to our businesses through a focused M&A program. The Company expects to diversify its revenue and profits by product, customer, platform, and end market with a goal of becoming less cyclical and less customer concentrated while strengthening / enhancing current positions, entering new markets, developing relationships with new customers, and enhancing service to our customers, leading to increased return to our stockholders. Our products include electrical wire harnesses, seating systems, plastic components, cab structures, industrial automation subsystems, mirrors, wipers and other accessories.
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 short-term and long-term strategies and may adjust actions in response to changes in our business environment and other factors including but not limited to, implementing restructuring as needed.
We are also supplementing our organic strategies by evaluating strategic acquisition and divestiture opportunities. The company has many opportunities to accomplish this type of business improvement and is being selective.
CONSOLIDATED RESULTS OF OPERATIONS
The table below sets forth certain operating data expressed as a percentage of revenues for the twelve months ended (dollars are in thousands):
2023 2022 2021
Revenues $ 994,679 100.0 % $ 981,553 100.0 % $ 971,578 100.0 %
Cost of revenues 860,956 86.6 895,048 91.2 852,591 87.8
Gross profit 133,723 13.4 86,505 8.8 118,987 12.2
Selling, general and administrative expenses 85,663 8.6 66,361 6.8 69,406 7.1
Operating income 48,060 4.8 20,144 2.1 49,581 5.1
Other (income) expense 1,195 0.1 10,463 1.1 (878) (0.1)
Interest expense 10,691 1.1 9,827 1.0 11,179 1.2
Loss on extinguishment of debt — — 921 0.1 7,155 0.7
Income (loss) before provision for income taxes 36,174 3.6 (1,067) (0.1) 32,125 3.3
Provision (benefit) for income taxes (13,237) (1.3) 20,904 2.1 8,393 0.9
Net income (loss) $ 49,411 5.0 % $ (21,971) (2.2) % $ 23,732 2.4 %
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Consolidated Results
The table below sets forth certain consolidated operating data for the twelve months ended indicated (dollars are in thousands):
2023 2022 Dollar Change % Change
Revenues $ 994,679 $ 981,553 $ 13,126 1.3%
Gross profit 133,723 86,505 47,218 54.6
Selling, general and administrative expenses 85,663 66,361 19,302 29.1
Other (income) expense 1,195 10,463 (9,268) (88.6)
Interest expense 10,691 9,827 864 8.8
Loss on extinguishment of debt — 921 (921) (100.0)
Provision (benefit) for income taxes (13,237) 20,904 (34,141) NM 1
Net income (loss) 49,411 (21,971) 71,382 NM 1
1. Not meaningful
Revenues. The increase in consolidated revenues resulted from:
• a $55.4 million, or 7.3%, increase in sales to OEM and other revenues;
• a $6.6 million, or 4.9%, increase in aftermarket and OES sales; and
• a $48.8 million, or 55.7%, decrease in industrial automation sales.
Twelve months ended December 31, 2023 revenues were favorably impacted by foreign currency exchange translation of $2.0 million, which is reflected in the change in revenues above. The increase in revenues was primarily driven by increased pricing and increased sales volume from the Electrical Systems business, offset by lower sales volume in the Industrial Automation and Vehicle Solutions segments.
Gross Profit. Included in gross profit is cost of revenues, which consists primarily of raw materials and purchased components for our products, wages and benefits for our employees and overhead expenses such as manufacturing supplies, facility rent and utilities costs related to our operations. The increase in gross profit is primarily attributable to price increases with customers and cost reduction initiatives. Cost of revenues decreased $34.1 million, or 3.8% as a result of a decrease in raw material and purchased component costs of $50.0 million, or 8.4%; an increase in wages and benefits of $4.6 million, or 5.9%; and an increase in overhead expenses of $11.3 million, or 5.0%. As a percentage of revenues, gross profit margin was 13.4% for the year ended December 31, 2023 compared to 8.8% for the year ended December 31, 2022.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses consist primarily of wages and benefits and other expenses such as marketing, travel, legal, audit, rent and utilities costs, which are not directly or indirectly associated with the manufacturing of our products. SG&A expenses increased $19.3 million in the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to increased employee salaries, incentive compensation, recruitment costs, travel spending and professional services. As a percentage of revenues, SG&A expense was 8.6% for the twelve months ended December 31, 2023 compared to 6.8% for the twelve months ended December 31, 2022.
Other (Income) Expense. Other expense decreased $9.3 million in the year ended December 31, 2023 as compared to the year ended December 31, 2022 due primarily to the settlement of the Company's U.S. Pension Plan liabilities of $9.2 million completed during the year ended December 31, 2022.
Interest Expense. Interest associated with our debt was $10.7 million and $9.8 million for the years ended December 31, 2023 and 2022, respectively. The increase primarily related to higher interest rates on variable rate debt, offset by lower average debt balances during the respective comparative periods.
Loss on extinguishment of debt. On May 12, 2022, the Company refinanced its long-term debt, which resulted in a loss of $0.9 million, including a $0.6 million non-cash write off relating to deferred financing costs of the Term loan facility due 2026 and $0.3 million of other associated fees.
Provision (Benefit) for Income Taxes. Income tax benefit of $13.2 million and expense of $20.9 million were recorded for the years ended December 31, 2023 and 2022, respectively. The period over period change in income tax was primarily attributable to the reversal of $22.0 million valuation allowance on our U.S. deferred tax assets during 2023 versus the 2022 establishment
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of a full valuation allowance on our U.S. deferred tax assets of $24.5 million, offset by the reversal of a $9.9 million valuation allowance on our United Kingdom (U.K.) deferred tax asset.
In 2021, as part of the Organization for Economic Co-operation and Development's ("OECD") Inclusive Framework, 140 member countries agreed to the implementation of the Pillar Two Global Minimum Tax ("Pillar Two") of 15%. The OECD continues to release additional guidance, including administrative guidance on how Pillar Two rules should be interpreted and applied by jurisdictions as they adopt Pillar Two. These changes, when enacted by various countries in which we do business, may increase our taxes in these countries. Changes to these and other areas in relation to international tax reform, including future actions taken by foreign governments in response to Pillar Two, could increase uncertainty and may adversely affect our tax rate and cash flow in future years. We continue to evaluate the potential impact on future periods of Pillar Two, pending legislative adoption by individual countries.
SEGMENT RESULTS OF OPERATIONS
Vehicle Solutions Segment Results
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The table below sets forth certain Vehicle Solutions Segment operating data for the twelve months ended, (dollars are in thousands):
2023 2022 Dollar Change % Change
Revenues $ 587,119 $ 579,731 $ 7,388 1.3%
Gross profit 68,129 45,979 22,150 48.2
Selling, general & administrative expenses 26,109 24,930 1,179 4.7
Operating income (loss) 42,020 21,049 20,971 99.6
Revenues. The increase in 2023 revenues of $7.4 million from 2022 primarily resulted from increased pricing which more than offset lower sales volume.
Gross Profit. The increase in 2023 gross profit of $22.2 million from 2022 was primarily due to price increases with customers, cost reduction initiatives, and a decrease in cost of revenues driven by a decrease in raw material and purchased component costs of $25.8 million, or 7.1%; offset by an increase in overhead expenses of $7.9 million, or 5.8%; and an increase in wages and benefits of $3.1 million, or 9.1%.
As a percentage of revenues, gross profit for the years ended December 31, 2023 and 2022, was 11.6% and 7.9%, respectively. The increase in gross profit in 2023 from 2022 was primarily due to price increases with customers and cost reduction initiatives including lower freight costs, lower startup costs, and improved manufacturing efficiencies.
Selling, General and Administrative Expenses. The increase in 2023 SG&A expenses of $1.2 million from 2022 was primarily due to an increase in system implementation costs and employee benefit costs including salaries and incentive compensation expenses.
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Electrical Systems Segment Results
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The table below sets forth certain Electrical Systems Segment operating data for the twelve months ended, (dollars are in thousands):
2023 2022 Dollar Change % Change
Revenues $ 228,424 $ 180,404 $ 48,020 26.6%
Gross profit 35,397 23,993 11,404 47.5
Selling, general & administrative expenses 9,107 5,775 3,332 57.7
Operating income 26,290 18,218 8,072 44.3
Revenues. The increase in 2023 revenues of $48.0 million from 2022 is primarily attributable to sales volume and increased pricing to offset material cost pass-through and other inflationary items.
Gross Profit. The increase in 2023 gross profit of $11.4 million from 2022 was primarily attributable to volume leverage and increased pricing to offset material cost pass-through and other inflationary items. Cost of revenues increased in line with the sales increase of 26.6%, driven by an increase in raw material and purchased component costs of $19.1 million, or 21.8%; an increase in overhead expenses of $11.8 million, or 28.6%; and an increase in wages and benefits of $5.7 million, or 20.8%.
As a percentage of revenues, gross profit for the years ended December 31, 2023 and 2022, was 15.5% and 13.3%, respectively. The increase in 2023 gross profit margin was primarily due to volume leverage and increased pricing, more than offsetting inflationary items.
Selling, General and Administrative Expenses. 2023 SG&A expenses increased $3.3 million from 2022, primarily driven by increased headcount and incentive adjustments based on performance.
Aftermarket & Accessories Segment Results
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The table below sets forth certain Aftermarket & Accessories Segment operating data for the twelve months ended, (dollars are in thousands):
2023 2022 Dollar Change % Change
Revenues $ 140,236 $ 133,671 $6,565 4.9%
Gross profit 27,187 18,836 8,351 44.3
Selling, general & administrative expenses 8,144 6,925 1,219 17.6
Operating income 19,043 11,911 7,132 59.9
Revenues. The increase in 2023 revenues of $6.6 million from 2022 resulted from increased pricing to offset material cost pass-through and other inflationary items.
Gross Profit. The increase in 2023 gross profit of $8.4 million from 2022 is primarily due to increased pricing to offset material cost inflation and other inflationary items, cost reduction initiatives, and a decrease in cost of revenue driven by a decrease in wages and benefits of $2.5 million, or 23.4%; offset by an increase in raw material and purchased component costs of $0.6 million, or 0.9%; and an increase in overhead expenses of $0.2 million, or 0.5%.
As a percentage of revenues, gross profit for the years ended December 31, 2023 and 2022, was 19.4% and 14.1%, respectively. The increase in 2023 gross profit margin is primarily due to increased pricing offsetting moderating cost inflation and cost reduction initiatives including lower freight costs. The twelve months ended December 31, 2022 results include charges of $1.9 million associated with the restructuring program.
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Selling, General and Administrative Expenses. The increase in 2023 SG&A expenses of $1.2 million from 2022, is primarily driven by commissions expense increase and is consistent with the prior year on a percent of sales basis.
Industrial Automation Segment Results
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The table below sets forth certain Industrial Automation Segment operating data for the twelve months ended, (dollars are in thousands):
2023 2022 Dollar Change % Change
Revenues $ 38,900 $ 87,747 $ (48,847) (55.7)%
Gross profit 3,010 (2,303) 5,313 NM 1
Selling, general & administrative expenses 4,392 5,564 (1,172) (21.1)
Operating income (loss) (1,382) (7,867) 6,485 (82.4)
1. Not meaningful
Revenues. The decrease in 2023 revenues of $48.8 million from 2022 primarily resulted from lower sales volume due to decreased customer demand.
Gross Profit. The increase in 2023 gross profit of $5.3 million from 2022 was primarily attributable to the inclusion of a $10.4 million inventory charge in the 2022 results which did not recur in 2023, and $1.2 million less restructuring costs in 2023 versus 2022. Cost of revenues decreased in line with the sales decrease of 55.7%, driven by a decrease in raw material and purchased component costs of $43.7 million, or 61.8%; a decrease in overhead expenses of $8.7 million, or 55.8%; and a decrease in wages and benefits of $1.7 million, or 46.9%.
As a percentage of revenues, gross profit for the years ended December 31, 2023 and 2022, was 7.7% and (2.6)%, respectively. The increase in gross profit as a percentage of revenues in 2023 from 2022 was due to nonrecurring costs recognized in 2022, including a $10.4 million inventory charge.
Selling, General and Administrative Expenses. SG&A expenses decreased $1.2 million in 2023 compared to 2022, primarily driven by overhead reduction.
Liquidity and Capital Resources
At December 31, 2023, the Company had no borrowings under its revolving credit facility. At December 31, 2023, the Company had liquidity of $197.9 million, including $37.8 million of cash and $160.1 million availability from its U.S. and China credit facilities.
We intend to allocate resources consistent with the following priorities: (1) invest in growth; (2) invest in operational improvements; (3) manage working capital; (4) to reduce debt; and (5) other actions deemed appropriate by management to improve operational performance.
Our primary sources of liquidity during the year ended December 31, 2023 were operating income, cash and availability under our 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. We also rely on the timely collection of receivables as a source of liquidity. As of December 31, 2023, we had outstanding letters of credit of $1.2 million and borrowing availability of $160.1 million from our U.S. and China credit facilities.
As of December 31, 2023, cash of $37.8 million was held by foreign subsidiaries. The Company had a $0.5 million deferred tax liability as of December 31, 2023 for the expected future income tax implications of repatriating cash from the foreign subsidiaries for which indefinite reinvestment is not expected.
Covenants and Liquidity
On May 12, 2022, the Company entered into an amendment to increase its existing senior secured credit facilities to $325 million from $275 million consisting of a $175 million Term Loan A and a $150 million Revolving Credit Facility. The
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amendment provides the Company with additional capital flexibility to execute upon its transformation and growth initiatives. As part of the amended terms of the agreement, the maturity date of the Senior Secured Credit Facilities has been extended by twelve months to May 12, 2027, the interest rate decreased by 50 bps at various leverage ratios based on SOFR, and the maximum consolidated total leverage ratio increased from 3.25x to 3.75x until December 31, 2022 with a quarterly step down of 25 bps to 3.00x leverage by September 30, 2023 and the maximum consolidated total leverage ratio will remain at this level thereafter. Further, separate from the Company’s annual $35 million capital spending cap, a one-time $45 million capital project basket was included in the amendment. All other key provisions, including the $75 million accordion, acquisition holiday, and other baskets remain unchanged.
Our ability to comply with the covenants in the Credit Agreement, as discussed in Note 3, 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 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.
Cash Flows
2023 2022 2021
(In thousands)
Net cash provided (used) by operating activities $ 38,276 $ 68,947 $ (29,832)
Net cash used in investing activities (19,696) (19,710) (17,566)
Net cash (used) provided in financing activities (12,729) (50,091) 31,011
Effect of currency exchange rate changes on cash 172 (2,279) 842
Net increase (decrease) in cash
$ 6,023 $ (3,133) $ (15,545)
Operating activities . For the year ended December 31, 2023, net cash provided by operations was $38.3 million compared to $68.9 million for the year ended December 31, 2022. Net cash provided by operating activities is primarily attributable to an increase in working capital offset by the improved financial results during the year ended December 31, 2023 as compared to the prior year period.
Investing activities . Net cash used in investing activities was $19.7 million for the year ended December 31, 2023 and 2022. In 2024, we expect capital expenditures to be in the range of $25 million to $30 million.
Financing activities . For the year ended December 31, 2023, net cash used in financing activities was $12.7 million compared to $50.1 million for the year ended December 31, 2022. Net cash used in financing activities for the year ended December 31, 2023 is primarily attributable to $10.9 million of net repayments under our credit facilities compared to net repayments of $43.2 million in the prior year.
Debt and Credit Facilities
The debt and credit facility summaries described in Note 3, Debt, to our consolidated financial statements in Item 8 in this Annual Report on Form 10-K are incorporated in this section by reference.
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Contractual Obligations and Commercial Commitments
The following table reflects our contractual obligations as of December 31, 2023 (in thousands):
Payments Due by Period
Total
1 Year 2-3 Years 4-5 Years More than
5 Years
(In thousands)
Debt obligations $ 141,563 $ 15,313 $ 43,750 $ 82,500 $ —
Estimated interest payments 28,939 10,332 16,426 2,181 —
Leasing obligations 48,271 10,517 16,394 6,761 14,599
Non-U.S. pension funding 13,913 1,199 2,511 2,777 7,426
Total $ 232,686 $ 37,361 $ 79,081 $ 94,219 $ 22,025
We estimated future interest payments based on the effective interest rate as of December 31, 2023. Since December 31, 2023, there have been no material changes outside the ordinary course of business to our contractual obligations as set forth above.
Generally, we enter into agreements with our customers at the beginning of a given vehicle platform’s life to supply products for the entire life of that vehicle platform. These agreements generally provide for the supply of a customer’s production requirements for a particular platform rather than for the purchase of a specific quantity of products. The obligations under these agreements and regulations are not reflected in the contractual obligations table above.
As of December 31, 2023, we were not a party to significant purchase obligations for goods or services.
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 this Annual Report on Form 10-K.
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis, particularly relating to accounts receivable reserves, inventory reserves, goodwill, intangible and long-lived assets, income taxes, warranty reserves, litigation reserves and pension and other post-retirement benefit plans. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ materially from these estimates and assumptions. See Item 1A - Risk Factors in this Annual Report on Form 10-K for additional information regarding risk factors that may impact our estimates.
Revenue Recognition — We recognize revenue when our performance obligation has been satisfied and control of products has been transferred to a customer, which typically occurs upon shipment. Revenue is measured based on the amount of consideration we expect to receive in exchange for the transfer of goods or services. We enter into agreements with certain customers in the Vehicle Solutions segment at the beginning of a vehicle platform’s life to supply products for that vehicle platform. Once we enter into such agreements, fulfillment of our requirements is our obligation for the entire production life of the platform. Such contracts typically contain restrictive provisions related to termination. Management judgments and estimates must be made in estimating sales returns and allowances relating to revenue recognized in a given period.
Inventory — Inventories are valued at the lower of first-in, first-out cost or net realizable value. Cost includes applicable material, labor and overhead. We value our finished goods inventory at a standard cost that is periodically adjusted to approximate actual cost. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based primarily on our estimated production requirements driven by expected market volumes.
Income Taxes — We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax laws and rates expected to be in place when the deferred tax items are realized. We recognize tax positions initially in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. We provide a valuation allowance for deferred tax assets when it is more likely than not that a portion of such deferred tax assets will not be realized.
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