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 described material changes in financial condition and results of operations as reflected in our condensed consolidated financial statements for the three months ended March 31, 2024 and 2023. 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 2023 Form 10-K. 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 Key Developments During the year 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 $1.9 million expense during the three months ended March 31, 2024 related to these programs. Consolidated Results of Operations Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The table below sets forth certain consolidated operating data for the three months ended March 31 (dollars are in thousands): 2024 2023 $ Change % Change Revenues $ 232,068 $ 262,709 $ (30,641) (11.7)% Gross profit 26,665 35,209 (8,544) (24.3) Selling, general and administrative expenses 20,093 20,565 (472) (2.3) Other expense (income) 212 (202) 414 NM 1 Interest expense 2,251 2,890 (639) (22.1) Provision for income taxes 1,170 3,256 (2,086) (64.1) Net income 2,939 8,700 (5,761) (66.2) 1. Not meaningful 18 Table of Contents Revenues . The decrease in consolidated revenues resulted from: • a $21.6 million, or 10.0%, decrease in OEM and other revenues; • a $3.6 million, or 9.5%, decrease in aftermarket and OES sales; and • a $5.4 million, or 55.9%, decrease in industrial automation sales. The decrease in revenues of 11.7% is due primarily to a softening in customer demand, the wind-down of certain programs in our Vehicle Solutions segment, and a further decline in our Industrial Automation and Aftermarket segments, partially offset by increased pricing in our Electrical Systems segment. 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 $8.5 million decrease in gross profit is primarily attributable to the impact of lower sales volumes partially offset by increased pricing. Cost of revenues decreased $22.1 million, or 9.7%, as a result of a decrease in raw material and purchased component costs of $22.9 million, or 15.5%, offset by an increase in labor and overhead expenses of $0.8 million, or 0.9%. As a percentage of revenues, gross profit margin was 11.5% for the three months ended March 31, 2024 compared to 13.4% for the three months ended March 31, 2023. 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 decreased $0.5 million compared to the three months ended March 31, 2023, primarily as a result of reduced incentive compensation expense, partially offset by an increase in salary expense during the 2024 period. As a percentage of revenues, SG&A expense was 8.7% for the three months ended March 31, 2024 compared to 7.8% for the three months ended March 31, 2023. Other Expense. Other expenses increased $0.4 million in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 due primarily to an unfavorable change in the fair value of foreign currency forward exchange contracts. Interest Expense . Interest associated with our debt was $2.3 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively. The decrease in interest expense primarily related to lower average debt balances and lower interest rates on variable rate debt during the respective comparative periods. Provision for Income Taxes. Income tax expense of $1.2 million and $3.3 million was recorded for the three months ended March 31, 2024 and 2023, respectively. The period over period change in income tax was primarily attributable to a $7.8 million decrease in pre-tax income versus the prior year period. 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. Net Income. Net income was $2.9 million for the three months ended March 31, 2024 compared to $8.7 million for the three months ended March 31, 2023. The decrease in net income is attributable to the factors noted above. 19 Table of Contents Segment Results Vehicle Solutions Segment Results Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The table below sets forth certain Vehicle Solutions Segment operating data for the three months ended March 31 (dollars are in thousands): 2024 2023 $ Change % Change Revenues $ 137,910 $ 160,584 $ (22,674) (14.1)% Gross profit 16,229 19,471 (3,242) (16.7) Selling, general & administrative expenses 5,877 6,077 (200) (3.3) Operating income 10,352 13,394 (3,042) (22.7) Revenues. The decrease in Vehicle Solutions Segment revenues of $22.7 million was primarily driven by a lower customer demand and the wind-down of certain programs. Gross Profit. The decrease in gross profit of $3.2 million was primarily attributable to lower customer demand and increased freight offset by a decrease in cost of revenues driven by a decrease in raw material and purchased component costs of $15.6 million, or 16.4%, and a decrease in labor and overhead expenses of $3.8 million, or 8.4%. As a percentage of revenues, gross profit margin was 11.8% for the three months ended March 31, 2024 compared to 12.1% for the three months ended March 31, 2023. The decrease in gross profit margin was primarily due to lower customer demand and increased freight. The three months ended March 31, 2024 results include charges of $0.5 million associated with the restructuring program. Selling, General and Administrative Expenses . SG&A expenses decreased $0.2 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Electrical Systems Segment Results Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The table below sets forth certain Electrical Systems Segment operating data for the three months ended March 31 (dollars are in thousands): 2024 2023 $ Change % Change Revenues $ 55,795 $ 54,749 $ 1,046 1.9% Gross profit 4,553 8,297 (3,744) (45.1) Selling, general & administrative expenses 2,542 2,227 315 14.1 Operating income 2,011 6,070 (4,059) (66.9) Revenues. The increase in Electrical Systems Segment revenues of $1.0 million primarily resulted from increased pricing to offset material cost pass-through and labor inflationary items. Gross Profit. The decrease in gross profit of $3.7 million is primarily attributable to restructuring activities, labor inflation and unfavorable foreign exchange impacts, partially offset by increased pricing to offset material cost through and labor inflationary items. Cost of revenues increase was driven by an increase in labor and overhead expenses of $5.1 million, or 24.5%; partially offset by a decrease in raw material and purchased component costs of $0.3 million, or 1.3%. As a percentage of revenues, gross profit margin was 8.2% for the three months ended March 31, 2024 compared to 15.2% for the three months ended March 31, 2023. The decrease in gross profit margin was primarily due to restructuring activities, labor inflation, and unfavorable foreign exchange impacts. The three months ended March 31, 2024 results include charges of $1.1 million associated with the restructuring program. Selling, General and Administrative Expenses . SG&A expenses increased $0.3 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. 20 Table of Contents Aftermarket & Accessories Segment Results Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The table below sets forth certain Aftermarket & Accessories Segment operating data for the three months ended March 31 (dollars are in thousands): 2024 2023 $ Change % Change Revenues $ 34,061 $ 37,629 $ (3,568) (9.5)% Gross profit 6,439 7,227 (788) (10.9) Selling, general & administrative expenses 1,907 1,650 257 15.6 Operating income 4,532 5,577 (1,045) (18.7) Revenues. The decrease in Aftermarket & Accessories Segment revenues of $3.6 million primarily resulted from lower sales volume due to decreased customer demand and the reduction of backlog in the prior period. Gross Profit. The decrease in gross profit is primarily attributable to lower sales volume. Cost of revenues decreased in line with the sales decrease of 9.5%, driven by a decrease in raw material and purchased component costs of $2.7 million, or 13.6%; and a decrease in labor and overhead expenses of $0.1 million, or 1.1%. As a percentage of revenues, gross profit margin was 18.9% for the three months ended March 31, 2024 compared to 19.2% for the three months ended March 31, 2023. The decrease in gross profit margin was primarily due to lower sales volume and product mix. Selling, General and Administrative Expenses . SG&A expenses increased $0.3 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Industrial Automation Segment Results Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The table below sets forth certain Industrial Automation Segment operating data for the three months ended March 31 (dollars are in thousands): 2024 2023 $ Change % Change Revenues $ 4,302 $ 9,747 $ (5,445) (55.9)% Gross profit (556) 214 (770) NM 1 Selling, general & administrative expenses 1,439 1,076 363 33.7 Operating loss (1,995) (862) (1,133) 131.4 1. Not meaningful Revenues. The decrease in Industrial Automation Segment revenues of $5.4 million primarily resulted from lower sales volume due to decreased customer demand. Gross Profit. The decrease in gross profit of $0.8 million was primarily attributable to lower sales volume. Cost of revenues decreased in line with the sales decrease of 55.9%, driven by a decrease in raw material and purchased component costs of $4.2 million, or 62.2%; and a decrease in labor and overhead expenses of $0.4 million, or 15.8%. As a percentage of revenues, gross profit margin was (12.9)% for the three months ended March 31, 2024 compared to 2.2% for the three months ended March 31, 2023. The decrease in gross profit margin is primarily due to the previously noted lower sales volume. The three months ended March 31, 2024 results include charges of $0.1 million associated with the restructuring program. Selling, General and Administrative Expenses . SG&A expenses increased $0.4 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily attributable to investment in new product development. 21 Table of Contents Liquidity and Capital Resources As of March 31, 2024, the Company had total liquidity of $189.3 million, including $46.8 million of cash and $142.5 million of availability from its U.S. and China credit facilities. Our primary sources of liquidity as of March 31, 2024 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 March 31, 2024 , we had outstanding letters of credit of $1.1 million and borrowing availability of $142.5 million from our U.S. and China credit facilities. As of March 31, 2024, cash of $46.8 million was held by foreign subsidiaries. The Company had a $0.5 million deferred tax liability as of March 31, 2024 for the expected future income tax implications of repatriating cash from the foreign subsidiaries for which indefinite reinvestment is not expected. 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 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. Sources and Uses of Cash Three Months Ended March 31, 2024 2023 (In thousands) Net cash (used in) provided by operating activities $ (2,356) $ 58 Net cash used in investing activities (1,859) (3,321) Net cash provided by financing activities 14,176 12,377 Effect of currency exchange rate changes on cash (993) 545 Net increase in cash $ 8,968 $ 9,659 Operating activities. For the three months ended March 31, 2024, net cash used in operating activities was $2.4 million compared to net cash provided by operating activities of $0.1 million for the three months ended March 31, 2023. Net cash used in operating activities is primarily attributable to a smaller increase in working capital offset by the decrease in net income from the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. Investing activities. For the three months ended March 31, 2024, net cash used in investing activities of $1.9 million compared to $3.3 million for the three months ended March 31, 2023 was mainly due to an increase in capital expenditures, offset by $3.2 million proceeds from sale of the Company's FinishTEK business during the quarter. In 2024, we expect capital expenditures to be in the range of $25 million to $30 million. Financing activities. For the three months ended March 31, 2024, net cash provided by financing activities was $14.2 million compared to $12.4 million for the three months ended March 31, 2023. Net cash provided by financing activities for the three months ended March 31, 2024 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. 22 Table of Contents 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 2023 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 2023 Form 10-K. At March 31, 2024, there have been no material changes to our critical accounting estimates from those disclosed in our 2023 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, 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 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.