QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34365
COMMERCIAL VEHICLE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
41-1990662
(I.R.S. Employer
Identification No.)
7800 Walton Parkway
New Albany, Ohio
(Address of principal executive offices)
43054
(Zip Code)
(614) 289-5360
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.1 per share
CVGI
The NASDAQ Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the Registrant’s common stock, par value $.01 per share, at May 4, 2021 was 32,935,924 shares.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business and Basis of Presentation
Commercial Vehicle Group, Inc. and its subsidiaries 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. References herein to the "Company", "CVG", "we", "our", or "us" refer to Commercial Vehicle Group, Inc. and its subsidiaries.
The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of the Company and its subsidiaries. Except as disclosed within these condensed notes to unaudited quarterly consolidated financial statements, the adjustments made were of a normal, recurring nature. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted.
The preparation of financial statements in conformity with GAAP in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
These condensed notes to unaudited quarterly consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"), which includes a complete set of footnote disclosures, including the Company's significant accounting policies.
2. Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Also, in January 2021, the FASB issued ASU No. 2021-01 "Reference Rate Reform (Topic 848): Scope", to clarify that certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. ASU 2020-04 and ASU 2021-01 are effective beginning on March 12, 2020 and the amendments will be applied prospectively through December 31, 2022. We are evaluating the effect these ASUs will have on the Company.
Accounting Pronouncements Implemented in the three months ended March 31, 2021
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and otherwise clarifies and amends existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company implemented ASU 2019-12 as of January 1, 2021 and the ASU did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.
In October 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-10, "Codification Improvements". The ASU updates various codification topics by clarifying and improving disclosure requirements to align with the SEC's regulations. The Company implemented ASU 2020-10 as of January 1, 2021 and the ASU did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.
We had outstanding customer accounts receivable, net of allowances, of $186.0 million as of March 31, 2021 and $151.1 million as of December 31, 2020. We generally do not have other assets or liabilities associated with customer arrangements.
Revenue Disaggregation - The following is the composition, by product category, of our revenues:
Three Months Ended March 31, 2021
Electrical Systems
Global Seating
Elimination/ Other
Total
Seats
$
2,442
$
86,992
$
(7,288)
$
82,146
Electrical wire harnesses, panels and assemblies
90,852
3,880
(375)
94,357
Trim
37,386
72
(421)
37,037
Cab structures and sleeper boxes
20,657
—
—
20,657
Mirrors, wipers and controls
10,903
150
(128)
10,925
Total
$
162,240
$
91,094
$
(8,212)
$
245,122
Three Months Ended March 31, 2020
Electrical Systems
Global Seating
Elimination/ Other
Total
Seats
$
367
$
72,864
$
(62)
$
73,169
Electrical wire harnesses, panels and assemblies
54,276
408
(56)
54,628
Trim
30,509
1,919
(516)
31,912
Cab structures and sleeper boxes
14,700
—
—
14,700
Mirrors, wipers and controls
12,246
790
(340)
12,696
Total
$
112,098
$
75,981
$
(974)
$
187,105
4. Debt
Debt consisted of the following:
March 31, 2021
December 31, 2020
Term loan and security agreement due 2023
$
151,561
$
150,950
Revolving credit facility due 2026
6,800
—
Unamortized discount and issuance costs
(3,896)
(4,374)
$
154,465
$
146,576
Less: current portion, net of unamortized discount and issuance costs of $1.9 million and $1.9 million, respectively
(2,430)
(2,429)
Total long-term debt, net of current portion
$
152,035
$
144,147
On April 30, 2021, the Company refinanced its outstanding debt. See Note 18, Subsequent Event in this Form 10-Q.
Term Loan and Security Agreement
On April 12, 2017, the Company entered into a $175.0 million senior secured term loan credit facility (the "Term Loan Facility"), maturing on April 12, 2023, pursuant to a term loan and security agreement (the “TLS Agreement”), the terms of which are described in Note 3, Debt in our 2020 Form 10-K.
The TLS Agreement contains customary restrictive, financial maintenance and reporting covenants that are described in Note 3, Debt in our 2020 Form 10-K. We were in compliance with the covenants as of March 31, 2021.
On September 18, 2019, the Company entered into an amendment of the Third Amended and Restated Loan and Security Agreement (the “Third ARLS Agreement”), dated as of April 12, 2017, the terms of which are described in Note 3, Debt in our 2020 10-K and which governs the Company’s asset based revolving credit facility (the “Revolving Credit Facility”).
The Amendment amends the terms of the Revolving Credit Facility to entitle the Company and the other named borrowers thereunder (subject to the terms and conditions described therein) to request loans and other financial accommodations in an amount equal to the lesser of $90.0 million and a borrowing base composed of accounts receivable and inventory (such facility, the “Tranche A Facility”). Of the $90.0 million, $7.0 million shall be available as a first-in, last-out facility (the “Tranche B Facility”) at a 100 basis points premium, as reflected in the table below.
On May 11, 2020, the Company and certain of its subsidiaries, as guarantors or co-borrowers, as applicable, entered into an Amendment No. 2 (the “Revolving Amendment”), which amends the terms of the Third ARLS Agreement to align certain of the restrictive covenants with the restrictive covenants set forth in the TLS Agreement, as amended.
At March 31, 2021 we had $6.8 million of borrowings under the revolving credit facility, outstanding letters of credit were $1.4 million and we had availability of $81.9 million. The unamortized deferred financing fees associated with the revolving credit facility were $0.5 million and $0.4 million as of March 31, 2021 and December 31, 2020, respectively, are being amortized over the remaining life of the agreement. At December 31, 2020, we did not have borrowings under the revolving credit facility; and we had outstanding letters of credit of $1.6 million.
The Third ARLS Agreement contains customary restrictive, financial maintenance and reporting covenants that are described in Note 3, Debt in our 2020 Form 10-K and as described below. The Company was in compliance with all applicable covenants as of March 31, 2021.
Revolving Credit Amendment
On March 1, 2021, the Commercial Vehicle Group, Inc. and certain of its subsidiaries entered into Amendment No. 3 (the “Revolving Amendment”), which amends the terms of the Third ARLS Agreement, among other things, to extend the maturity date of the Revolving Credit Facility to March 1, 2026 and to remove the condition that the first $7.0 million of the $90.0 million Revolver Commitments are available as a first-in, last-out facility.
The Third ARLS Agreement, as amended, also allows the Company to increase the size of the Revolving Credit Facility by up to $50.0 million with the consent of Lenders providing the increase in the Revolving Credit Facility.
The Third ARLS Agreement, provides that loans outstanding under the Revolving Credit Facility accrue interest at a per annum rate based on (at the Company’s election) the base rate or the LIBOR rate plus a margin determined by reference to availability under the Revolving Credit Facility as follows, subject to a LIBOR floor of 0.25%:
Level
Average Daily Availability
Base
Rate Loans
LIBOR Loans
III
≥ $30,000,000
0.50%
1.50%
II
> $15,000,000 but < $30,000,000
0.75%
1.75%
I
≤ $15,000,000
1.00%
2.00%
The Third ARLS Agreement, provides for an unused line fee of 0.20% on undrawn amounts under the Revolving Credit Facility if Revolver Usage is equal to or greater than 50% of the Revolver Commitment and a fee of 0.25% if Revolver Usage is less than 50% of the Revolver Commitment.
The Third ARLS Agreement, requires maintenance of a minimum fixed charge coverage ratio if availability under the Revolving Credit Facility is less than the greater of (i) $5.0 million, and (ii) 10% of the lesser of the Revolver Commitment and the Borrowing Base. The minimum fixed charge coverage ratio must be maintained until availability under the Revolving Credit Facility has been greater than or equal to the greater of (i) $5.0 million, and (ii) 10% of the lesser of the Revolver Commitment and the Borrowing Base for 60 consecutive days.
Cash Paid for Interest
For the three months ended March 31, 2021 and 2020, cash payments for interest were $3.0 million and $3.2 million, respectively.
5. Goodwill and Intangible Assets
Goodwill represents the excess of acquisition purchase price over the fair value of net assets acquired. During the first quarter of 2020, as a result of the Company’s market capitalization value being less than the carrying value of its equity for a duration
8
of time, the Company determined it had an impairment indicator. Accordingly, the Company estimated the fair value of each of the reporting units with goodwill by discounting the estimated cash flows of each reporting unit. The estimated fair values of the reporting units were then compared to their net carrying values as of March 31, 2020 and, as a result, the Company recognized $27.1 million impairment of goodwill, which represented the carrying amount of goodwill prior to the impairment charge. The impairment charge is presented in Goodwill and other impairment in the Condensed Consolidated Statements of Operations.
The changes in the carrying amounts of goodwill are as follows:
Electrical Systems
Global Seating
Total
Balance - December 31, 2019
$
22,802
$
5,014
$
27,816
Finalization of FSE Purchase Accounting
(537)
—
(537)
Goodwill impairment
(22,265)
(4,809)
(27,074)
Currency translation adjustment
—
(205)
(205)
Balance - December 31, 2020
$
—
$
—
$
—
Our definite-lived intangible assets were comprised of the following:
March 31, 2021
December 31, 2020
Weighted- Average Amortization Period
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Trademarks/tradenames
22 years
$
11,622
$
(4,773)
$
6,849
$
11,634
$
(4,681)
$
6,953
Customer relationships
15 years
14,857
(7,780)
7,077
14,881
(7,536)
7,345
Technical know-how
5 years
9,790
(3,018)
6,772
9,790
(2,529)
7,261
Covenant not to compete
5 years
330
(102)
228
330
(85)
245
$
36,599
$
(15,673)
$
20,926
$
36,635
$
(14,831)
$
21,804
The aggregate intangible asset amortization expense was $0.9 million for the three months ended March 31, 2021 and 2020 respectively.
6. Fair Value Measurement
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 - Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3 - Significant unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Our financial instruments consisted of cash, accounts receivable, accounts payable, accrued liabilities, pension assets and liabilities and our revolving credit facility. The carrying value of these instruments approximates fair value as a result of the short duration of such instruments or due to the variability of the interest cost associated with such instruments.
Recurring Measurements
Foreign Currency Forward Exchange Contracts. Our derivative assets and liabilities represent foreign exchange contracts that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk and counterparty credit risk. Based on the utilization of these inputs, the derivative assets and liabilities are classified as Level 2. To manage our risk for transactions denominated in Mexican Pesos and in Ukrainian Hryvnia, we have entered into forward exchange contracts that are designated as cash flow hedge instruments, which are recorded in the Condensed Consolidated
9
Balance Sheets at fair value. The gains and losses as a result of the changes in fair value of the hedge contract for transactions denominated in Mexican Pesos are deferred in accumulated other comprehensive loss and recognized in cost of revenues in the period the related hedge transactions are settled. As of March 31, 2021, the hedge contract for transactions denominated in Ukrainian Hryvnia was not designated as a hedging instrument; therefore, it is marked-to-market and the fair value of the agreement is recorded in the Condensed Consolidated Balance Sheets with the offsetting gains and losses recognized in other (income) expense and recognized in cost of revenues in the period the related hedge transactions are settled in the Condensed Consolidated Statements of Operations.
Interest Rate Swap Agreement. To manage our exposure to variable interest rates, we have entered into an agreement (the “Interest Rate Swap Agreement”) with Bank of America, N.A. whereby the Company has agreed to exchange, at a specified interval, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. The Interest Rate Swap Agreement is intended to mitigate the impact of rising interest rates on the Company and covers $80 million of outstanding debt under the senior secured term loan facility. As of March 31, 2021, the Interest Rate Swap Agreement was not designated as a hedging instrument; therefore, it is marked-to-market and the fair value of the agreement recorded in the Condensed Consolidated Balance Sheets with the offsetting gain or loss recorded in interest and other expense in the Condensed Consolidated Statements of Operations.
Contingent Consideration. As a result of the acquisition of the First Source Electronics, LLC (“FSE”) on September 17, 2019, the Company agreed to pay up to $10.8 million in contingent milestone payments (“Contingent consideration”). The Contingent consideration is payable based on achieving certain earnings before interest, taxes, depreciation and amortization ("EBITDA") thresholds over the periods from (a) September 18, 2019 through September 17, 2020, (b) September 18, 2019 through March 17, 2021, (c) September 18, 2019 through September 17, 2022 and (d) March 18, 2021 through September 17, 2022. The payment amount will be determined on a sliding scale for reaching between 90% and 100% of the respective EBITDA targets. The fair value for the milestone payments is based on a Monte Carlo simulation utilizing forecasted EBITDA through September 17, 2022. The estimate of $4.7 million was recorded within other long-term liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2019. The total undiscounted Contingent consideration payment is estimated at $10.8 million and the fair value is $9.0 million as of March 31, 2021, and is presented in the Condensed Consolidated Balance Sheets in accrued liabilities and other long term liabilities.
The fair values of our derivative assets and liabilities and contingent consideration measured on a recurring basis are categorized as follows:
March 31, 2021
December 31, 2020
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets:
Foreign exchange contract
$
1,510
$
—
$
1,510
$
—
$
1,882
$
—
$
1,882
$
—
Interest rate swap agreement
$
756
$
—
$
756
$
—
$
936
$
—
$
936
$
—
Liabilities:
Interest rate swap agreement
$
1,687
$
—
$
1,687
$
—
$
2,080
$
—
$
2,080
$
—
Contingent consideration
$
9,048
$
—
$
—
$
9,048
$
8,800
$
—
$
—
$
8,800
Details of the changes in value for the Contingent consideration that is measured using significant unobservable inputs (Level 3) are as follows:
Amount
Contingent consideration liability balance at December 31, 2020
$
8,800
Change in fair value
248
Contingent consideration liability balance at March 31, 2021
$
9,048
The following table summarizes the notional amount of our open foreign exchange contracts:
March 31, 2021
December 31, 2020
U.S. $ Equivalent
U.S. Equivalent Fair Value
U.S. $ Equivalent
U.S. Equivalent Fair Value
Commitments to buy or sell currencies
$
18,698
$
18,955
$
14,675
$
16,558
10
The following table summarizes the fair value and presentation of derivatives in the Condensed Consolidated Balance Sheets:
Derivative Asset
Balance Sheet Location
Fair Value
March 31, 2021
December 31, 2020
Foreign exchange contracts
Other current assets
$
1,510
$
1,882
Interest rate swap agreement
Accrued liabilities and other
$
756
$
936
Derivative Liability
Balance Sheet Location
Fair Value
March 31, 2021
December 31, 2020
Interest rate swap agreement
Accrued liabilities and other
$
1,687
$
2,080
Derivative Equity
Balance Sheet Location
Fair Value
March 31, 2021
December 31, 2020
Foreign exchange contracts
Accumulated other comprehensive loss
$
1,015
$
1,441
The following table summarizes the effect of derivative instruments on the Condensed Consolidated Statements of Operations:
Three Months Ended March 31,
2021
2020
Location of Gain (Loss) on Derivatives Recognized in Income
Amount of Gain (Loss) on Derivatives Recognized in Income
Foreign exchange contracts
Cost of revenues
$
(307)
$
—
Interest rate swap agreement
Interest and other expense
$
2
$
(996)
Foreign exchange contracts
Other (income) expense
$
(182)
$
—
We consider the impact of our credit risk on the fair value of the contracts, as well as our ability to honor obligations under the contract.
Other Fair Value Measurements
The fair value of long-term debt obligations is based on a fair value model utilizing observable inputs. Based on these inputs, our long-term debt fair value as disclosed is classified as Level 2. The carrying amounts and fair values of our long-term debt obligations are as follows:
March 31, 2021
December 31, 2020
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Term loan and security agreement 1
$
147,665
$
145,960
$
146,576
$
144,878
Revolving credit facility
$
6,800
$
6,800
$
—
$
—
1.Presented in the Condensed Consolidated Balance Sheets as the current portion of long-term debt of $2.4 million and long-term debt of $145.2 million as of March 31, 2021, and current portion of long-term debt of $2.4 million and long-term debt of $144.1 million as of December 31, 2020.
Supplemental balance sheet information related to leases is as follows:
Balance Sheet Location
March 31, 2021
December 31, 2020
Operating Leases
Right-of-use assets, net
Other assets, net
$
28,218
$
30,047
Current liabilities
Accrued liabilities and other
8,639
9,236
Non-current liabilities
Other long-term liabilities
22,002
23,932
Total operating lease liabilities
$
30,641
$
33,168
Finance Leases
Right-of-use assets
$
1,314
$
1,410
Accumulated depreciation
(651)
(643)
Right-of-use assets, net
Other assets, net
663
767
Current liabilities
Accrued liabilities and other
267
293
Non-current liabilities
Other long-term liabilities
367
434
Total finance lease liabilities
$
634
$
727
For the three months ended March 31, 2021 and 2020, cash payments on operating leases were $2.2 million and $2.6 million, respectively.
Right-of-use Assets Impairment. The impairment of an operating lease right-of-use asset of $0.4 million was recorded for the first quarter ended March 31, 2020. The impairment charge is presented in Goodwill and other impairment in the Condensed Consolidated Statements of Operations.
Anticipated future lease costs, which are based in part on certain assumptions to approximate minimum annual rental commitments under non-cancelable leases, are as follows:
Operating
Financing
Total
Remainder of 2021
$
8,002
$
224
$
8,226
2022
9,640
197
9,837
2023
5,831
128
5,959
2024
4,594
79
4,673
2025
3,983
42
4,025
Thereafter
3,949
—
3,949
Total lease payments
$
35,999
$
670
$
36,669
Less: Imputed interest
(5,358)
(36)
(5,394)
Present value of lease liabilities
$
30,641
$
634
$
31,275
8. Income Taxes
For the three months ended March 31, 2021 we recorded a $2.5 million tax provision, or 23% effective tax rate for the period, compared to a $7.3 million tax benefit for the three months ended March 31, 2020. The effective tax rate in the current three month period is higher than the U.S. federal income tax rate primarily as a result of U.S. state and non-U.S. income taxes. The Company’s prior year tax benefit was primarily a result of pre-tax net loss for the three months ended March 31, 2020.
For the three months ended March 31, 2021 and 2020, cash paid for taxes, net of refunds received were $1.0 million and $0.8 million, respectively.
9. Pension and Other Post-Retirement Benefit Plans
The components of net periodic (benefit) cost related to pension and other post-retirement benefit plans is as follows:
U.S. Pension and Other Post-Retirement Benefit Plans
Non-U.S. Pension Plan
Three Months Ended March 31,
Three Months Ended March 31,
2021
2020
2021
2020
Interest cost
208
281
161
204
Expected return on plan assets
(553)
(519)
(250)
(263)
Amortization of prior service cost
2
74
14
11
Recognized actuarial loss
74
2
239
143
Net (benefit) cost
$
(269)
$
(162)
$
164
$
95
Net periodic (benefit) cost components, not inclusive of service costs, are recognized in other expense (income) within the Condensed Consolidated Statements of Operations.
10. Performance Awards
In 2020, the Company made awards, defined as cash, shares or other awards, to employees under the Commercial Vehicle Group, Inc. 2014 Equity Incentive Plan (the “2014 EIP”) and the Commercial Vehicle Group, Inc. 2020 Equity Incentive Plan (the “2020 EIP”). Effective June 15, 2020, as part of the Company’s stockholders’ approval of the 2020 EIP, the Company agreed that no more awards will be made under the 2014 Plan. The cash award is earned and payable based upon the Company’s relative total shareholder return in terms of ranking as compared to the peer group over a three-year period (the “Performance Period”). Total shareholder return is determined by the percentage change in value (positive or negative) over the applicable measurement period as measured by dividing (A) the sum of the cumulative value of dividends and other distributions paid on the Common Stock for the applicable measurement period and the difference (positive or negative) between each such company’s starting stock price and ending stock price, by (B) the starting stock price. The award is payable at the end of the Performance Period in cash if the employee is employed through the end of the Performance Period. If the employee is not employed during the entire Performance Period, the award is forfeited. These grants are accounted for as cash settlement awards for which the fair value of the award fluctuates based on the change in total shareholder return in relation to the peer group.
The following table summarizes performance awards granted in the form of cash awards under the equity incentive plans:
Amount
Adjusted Award Value at December 31, 2020
$
976
Adjustments
179
Payments
(300)
Adjusted Award Value at March 31, 2021
$
855
Unrecognized compensation expense was $3.0 million and $0.6 million as of March 31, 2021 and 2020, respectively.
11. Share-Based Compensation
The company's outstanding share-based compensation is comprised solely of restricted stock awards.
Restricted Stock Awards – Restricted stock is a grant of shares of common stock that may not be sold, encumbered or disposed of and that may be forfeited in the event of certain terminations of employment or in the case of the board of directors, a separation for cause, prior to the end of a restricted period set by the compensation committee of the board of directors. Forfeitures are recorded as they occur. A participant granted restricted stock generally has all of the rights of a stockholder, unless the compensation committee determines otherwise. Time-based restricted stock awards generally vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock at the end of the vesting period. Performance-based stock awards vest over the specified period following the date of grant, unless forfeited, and will be paid out in the form of stock at the end of the vesting period at the Company’s discretion if the Company meets the performance targets set at the time of the award was granted.
As of March 31, 2021, there was approximately $6.2 million of unrecognized compensation expense related to non-vested share-based compensation arrangements granted under our equity incentive plans. This expense is subject to future adjustments and forfeitures and will be recognized on a straight-line basis over the remaining period listed above for each grant.
A summary of the status of our restricted stock awards as of March 31, and changes during the Three Months Ended March 31, are presented below:
2021
Shares (in thousands)
Weighted- Average Grant-Date Fair Value
Nonvested - December 31, 2020
1,263
$
3.48
Granted
371
6.58
Vested
(139)
3.24
Forfeited
(4)
6.35
Nonvested - March 31, 2021
1,491
$
4.46
As of March 31, 2021, a total of 2.9 million shares were available for future grants from the shares authorized for award under our 2020 EIP, including cumulative forfeitures.
12. Stockholders’ Equity
Common Stock — Our authorized capital stock consists of 60,000,000 shares of common stock with a par value of $0.01 per share; of which, 31,381,845 and 31,249,811 shares were issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.
Preferred Stock — Our authorized capital stock also consists of 5,000,000 shares of preferred stock with a par value of $0.01 per share, with no preferred shares were outstanding as of March 31, 2021 and December 31, 2020.
Diluted earnings per share for the three and three months ended March 31, 2021 and 2020 includes the effect of potential common shares issuable when dilutive, and is as follows:
Three Months Ended March 31,
2021
2020
Net income (loss)
$
8,490
$
(24,594)
Weighted average number of common shares outstanding (in '000s)
31,264
30,806
Dilutive effect of restricted stock grants after application of the Treasury Stock Method (in '000s)
1,043
—
Dilutive shares outstanding
32,307
30,806
Basic earnings (loss) per share
$
0.27
$
(0.80)
Diluted earnings (loss) per share
$
0.26
$
(0.80)
There were no outstanding restricted shares awarded that were excluded from the calculation of diluted earnings per shares for the three months ended March 31, 2021 and 2020.
Shareholder Rights Plan
On June 23, 2020, the Company’s Board of Directors adopted a limited duration rights plan and declared a dividend distribution of one right (each, a “Right” and together with all other such rights distributed or issued pursuant thereto, the “Rights”) for each outstanding share of common stock, par value $0.01, of the Company, as of July 5, 2020, the record date for such dividend. Each holder of common stock as of the record date will receive a dividend of one Right per share of common stock. The Rights will become exercisable only if a person or persons acquires beneficial ownership of 10% or more of the Company's outstanding common stock, or 15% in the case of certain passive investors. In the event that the Rights become exercisable, each holder of Rights (other than the person or group triggering the rights plan) will be entitled to purchase, at the Right’s exercise price, a number of shares of our common stock having a market value of twice the Right’s exercise price.
On April 15, 2021, the Company, and Computershare Trust Company, N.A., a federally chartered trust company, as rights agent (“Rights Agent”), entered into an amendment (the “Amendment”) to the Rights Agreement, dated as of June 25, 2020, by and between the Company and Rights Agent (the “Rights Agreement”). Pursuant to the Amendment, the Final Expiration Date of the Rights (each as defined in the Rights Agreement) was advanced from June 24, 2021 to April 15, 2021. As a result of the Amendment, the Rights are no longer outstanding.
13. Other Comprehensive Loss
The after-tax changes in accumulated other comprehensive loss are as follows:
The related tax effects allocated to each component of other comprehensive loss are as follows:
Three Months Ended March 31, 2021
Before Tax Amount
Tax Expense
After Tax Amount
Amortization of actuarial gains
$
399
$
(113)
$
286
Derivative instruments
(556)
130
(426)
Cumulative translation adjustment
(2,072)
—
(2,072)
Total other comprehensive loss
$
(2,229)
$
17
$
(2,212)
Three Months Ended March 31, 2020
Before Tax Amount
Tax Expense
After Tax Amount
Amortization of actuarial losses
$
(554)
$
107
$
(447)
Derivative instruments
(3,488)
710
(2,778)
Cumulative translation adjustment
(4,805)
—
(4,805)
Total other comprehensive loss
$
(8,847)
$
817
$
(8,030)
14. Cost Reduction and Manufacturing Capacity Rationalization
During 2019, the Company began implementing cost reduction and manufacturing capacity rationalization initiatives (the "Restructuring Initiatives") in response to declines in end market volumes. Furthermore, in 2020 the Company began implementing additional cost reduction initiatives and further manufacturing capacity rationalization initiatives in response to the COVID-19 pandemic ("the 2020 Initiatives"). The Restructuring Initiatives and 2020 Initiatives consist primarily of headcount reductions in each segment and at corporate, as well as other costs associated with transfer of production and subsequent closure of facilities, and expansion of production footprint to manufacture warehouse automation subsystems.
The changes in accrued restructuring balances are as follows:
Electrical Systems
Global Seating
Corporate/ Other
Total
December 31, 2020
$
463
$
40
$
176
$
679
Payments and other adjustments
(186)
(40)
(36)
(262)
March 31, 2021
$
277
$
—
$
140
$
417
Electrical Systems
Global Seating
Corporate/ Other
Total
December 31, 2019
$
1,276
$
102
$
947
$
2,325
New charges
—
131
40
171
Payments and other adjustments
(848)
(196)
(248)
(1,292)
March 31, 2020
$
428
$
37
$
739
$
1,204
Approximately $0.1 million in employee costs were incurred in the three months ended March 31, 2020 in the Global Seating Segment and is included in cost of revenues.
15. Commitments and Contingencies
Leases - As disclosed in Note 7, Leases, we lease office, warehouse and manufacturing space and equipment under non-cancelable operating lease agreements that generally require us to pay maintenance, insurance, taxes and other expenses in addition to annual rental fees. As of March 31, 2021, our equipment leases did not provide for any material guarantee of a specified portion of residual values.
Guarantees - Costs associated with guarantees are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of available facts; where no
amount within a range of estimates is more likely, the minimum is accrued. As of March 31, 2021 and 2020, we had no such guarantees.
Litigation - We are subject to various legal proceedings and claims arising in the ordinary course of business, including but not limited to workers' compensation claims, OSHA investigations, employment disputes, unfair labor practice charges, customer and supplier disputes, service provider disputes, product liability claims, intellectual property disputes, environmental claims arising out of the conduct of our businesses and examinations by the Internal Revenue Service.
Management believes that the Company maintains adequate insurance and that we have established reserves for issues that are probable and estimable in amounts that are adequate to cover reasonable adverse judgments not covered by insurance. Based upon the information available to management and discussions with legal counsel, it is the opinion of management that the ultimate outcome of the various legal actions and claims that are incidental to our business are not expected to have a material adverse impact on the consolidated financial position, results of operations, equity or cash flows; however, such matters are subject to many uncertainties and the outcomes of individual matters are not predictable with any degree of assurance.
Warranty - We are subject to warranty claims for products that fail to perform as expected due to design or manufacturing deficiencies. Depending on the terms under which we supply products to our customers, a customer may hold us responsible for some or all of the repair or replacement costs of defective products when the product supplied did not perform as represented. Our policy is to record provisions for estimated future customer warranty costs based on historical trends and for specific claims. These amounts, as they relate to the periods ended March 31, 2021 and 2020, are included within accrued liabilities and other in the accompanying Condensed Consolidated Balance Sheets.
The following presents a summary of the warranty provision for the three months ended March 31, 2021:
Balance - December 31, 2020
$
2,041
Provision for warranty claims
108
Deduction for payments made and other adjustments
(354)
Balance - March 31, 2021
$
1,795
Debt Payments - As disclosed in Note 4, Debt, the TLS Agreement requires the Company to repay a fixed amount of principal on a quarterly basis, make mandatory prepayments of excess cash flows and voluntary prepayments that coincide with certain events.
The following table provides future minimum principal payments due on long-term debt for the next five years (see also Note 18, Subsequent Event):
Term Loan
Revolving credit facility
Total
Remainder of 2021
$
3,281
$
—
$
3,281
2022
$
4,375
$
—
$
4,375
2023
$
143,905
$
—
$
143,905
2024
$
—
$
—
$
—
2025
$
—
$
—
$
—
Thereafter
$
—
$
6,800
$
6,800
16. Segment Reporting
Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker (“CODM”), which is our President and Chief Executive Officer. Each of these segments consists of a number of manufacturing facilities. Certain of our facilities manufacture and sell products through both of our 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. 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 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.
Corporate expenses consist of certain overhead and shared costs that are not directly attributable to the operations of a segment. For purposes of business segment performance measurement, some of these costs that are for the benefit of the operations are allocated based on a combination of methodologies. The costs that are not allocated to a segment are considered stewardship costs and remain at corporate in our segment reporting.
The following table presents segment revenues, gross profit, selling, general and administrative expenses, amortization expense, operating income, capital expenditures, depreciation expense and other items for the three months ended March 31, 2021 and 2020. The table does not include assets as the CODM does not review assets by segment.
Items reported in inventories consisted of the following:
March 31, 2021
December 31, 2020
Raw materials
$
80,990
$
65,334
Work in process
14,711
13,373
Finished goods
13,307
12,540
$
109,008
$
91,247
Items reported in property, plant, and equipment, net consisted of the following:
March 31, 2021
December 31, 2020
Land and buildings
$
30,335
$
30,305
Machinery and equipment
189,364
189,939
Construction in progress
2,107
1,558
Property, plant, and equipment, gross
221,806
221,802
Less accumulated depreciation
(161,924)
(159,026)
Property, plant and equipment, net
$
59,882
$
62,776
Items reported in accrued expenses and other liabilities consisted of the following:
March 31, 2021
December 31, 2020
Compensation and benefits
$
15,745
$
13,172
Operating lease liabilities
8,639
9,236
Contingent consideration
5,000
4,870
Taxes payable
4,274
4,057
Accrued freight
3,996
2,556
Insurance
2,408
2,705
Other
11,619
13,460
$
51,681
$
50,056
18. Subsequent Event
On April 30, 2021, Commercial Vehicle Group, Inc. (the “Company”) and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) between, among others, Bank of America, N.A. as administrative agent (the “Administrative Agent”) and other lenders party thereto (the “Lenders”) pursuant to which the Lenders made available a $150 million Term Loan Facility (the “Term Loan Facility”) and a $125 million Revolving Credit Facility (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). Subject to the terms of the Credit Agreement, the Revolving Credit Facility includes a $10 million swing line sublimit and a $10 million letter of credit sublimit. The Credit Agreement provides for an incremental term facility agreement and/or an increase of the Revolving Credit Facility (together, the “Incremental Facilities”), in a maximum aggregate amount of (a) up to the date of receipt of financial statements for the fiscal quarter ending June 30, 2022, $75 million, and (b) thereafter, (i) $75 million less the aggregate principal amount of Incremental Facilities incurred before such date, plus (ii) an unlimited amount if the pro forma consolidated total leverage ratio (assuming the Incremental Facilities are fully drawn) is less than 2.50:1.0. The Credit Facilities mature on April 30, 2026 (the “Maturity Date”).
The proceeds of the Credit Facilities will be used, together with cash on hand of the Company, to (a) fund the redemption, satisfaction and discharge of all of the Company’s outstanding secured credit facility due 2023 (the “2023 Term Loan Facility”) issued pursuant to a term facility agreement (the “Term Facility Agreement”) between, among others, Bank of America, N.A. as administrative agent and other lender parties thereto, (b) fund the redemption, satisfaction and discharge of all of the Company’s asset-based revolving credit facility (the “ABL Revolving Credit Facility”) issued pursuant to a facility agreement (the “ABL Facility Agreement”) between, among others, Bank of America, N.A. as agent and certain financial institutions as lenders, (c) pay transaction costs, fees and expenses incurred in connection therewith and in connection with the Credit Agreement, and (d) for working capital and other lawful corporate purposes of the Company and its subsidiaries. The Company expects to recognize a loss on extinguishment of debt of approximately $7.2 million, including non-cash write off relating to
deferred financing costs and unamortized discount of the 2023 Term Loan Facility and a voluntary repayment premium during the financial quarter ending June 30, 2021.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below describes material changes in financial condition and results of operations as reflected in our condensed consolidated financial statements for the three months ended March 31, 2021 and 2020. 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 2020 Form 10-K.
Business Overview
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.
Commercial Trends in the North America Commercial Truck Markets
Demand for our products may be driven by preferences of the end-user of the vehicle, particularly with respect to heavy-duty trucks. Heavy-duty truck OEMs generally afford the end-user the ability to specify many of the component parts that will be used to manufacture the vehicle, including a wide variety of cab interior styles and colors, brand and type of seats, type of seat fabric and color, and interior styling. Certain of our products are only utilized in heavy-duty trucks, such as our storage systems, sleeper boxes and privacy curtains. To the extent that demand for higher content vehicles increases or decreases, our revenues and gross profit will be impacted positively or negatively.
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 as well as the aftermarket opportunities. The Company competes to retain its existing positions on platforms that are getting refreshed, competitively win new positions on platforms on which it is not the incumbent supplier, and gain first mover positions on new Electric Vehicle platforms. The global truck market is evolving to include many offerings aimed at low emissions and less impact on the environment. The Company has a targeted growth plan that it is pursuing to grow the Company.
In general, demand for our heavy-duty (or "Class 8") truck products is generally dependent on the number of new heavy-duty trucks manufactured in North America, which in turn is a function of general economic conditions, interest rates, changes in government regulations, consumer spending, fuel costs, freight costs, fleet operators' financial health and access to capital, used truck prices and our customers’ inventory levels. New heavy-duty truck demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy, which generates a significant portion of the freight tonnage hauled by commercial vehicles.
With respect to the North American medium-duty (or "Class 5-7") market, we primarily participate in the Class 6 and 7 portion of the 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 Trends in Warehouse Automation Subsystems
Demand for our warehouse automation subsystems is derived by expansion of supply chain infrastructures to accommodate increased customer orders in e-commerce. As the percentage of products ordered on-line increases, the delivery mechanisms must expand and increase output. Additionally, desire for cost reduction, increased throughput volume and SKU proliferation, 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 have driven increased investment in automated solutions by warehouse operators. CVG assembles the material handling subsystems incorporated into automated warehouses.
Commercial Trends in Construction Equipment
Demand for our construction equipment products is dependent on vehicle production. Demand for new vehicles in the global construction equipment market generally follows certain economic conditions around the world. Our products are primarily
used in the medium- and heavy-duty construction equipment markets (vehicles weighing over 12 metric tons). Demand in the medium- and heavy-duty construction equipment market is typically related to the level of large scale infrastructure development projects, such as highways, dams, harbors, hospitals, airports and industrial development, as well as activity in the mining, forestry and commodities industries.
Other Key Developments
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 decreased customer demand. In addition, many of our suppliers and customers may experience production slowdowns and/or shutdowns, which may further impact our business, sales and results of operation. Continued impact on the Company's business, sales and results of operations from the COVID-19 pandemic may also result in additional valuation allowances being recorded against our deferred tax assets. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on future developments, including the severity and duration of the pandemic and its overall impact on the economy.
During the quarter ended March 31, 2021, we experienced supply constraints and material 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 disruptions and delays in production, focus on cost control and recovery through pricing adjustments, and take reasonable measures to protect our workforce.
As we begin the second quarter, demand for our products is being negatively impacted by the global shortage of semiconductor chips. We are proactively managing labor shortages due to local dynamics around our primary manufacturing facilities, material inflation, and global supply constraints including, foam supply shortages tied to recent storms in Texas and Mexico.
On April 30, 2021, the Company closed on $275 million in senior secured credit facilities, consisting of a $150 million Term Loan A and a $125 million Revolving Credit Facility. The Company expects to recognize a loss on extinguishment of debt of approximately $7.2 million, including non-cash write off relating to deferred financing costs and unamortized discount of the 2023 Term Loan Facility and a voluntary repayment premium during the financial quarter ending June 30, 2021. See Note 18, Subsequent Event in this Form 10-Q.
Consolidated Results of Operations
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
The table below sets forth certain consolidated operating data for the three months ended March 31 (dollars are in thousands):
2021
2020
$ Change
% Change
Revenues
$
245,122
$
187,105
$
58,017
31.0%
Gross profit
$
31,121
$
20,303
$
10,818
53.3
Selling, general and administrative expenses
$
15,718
$
17,959
$
(2,241)
(12.5)
Goodwill and other impairment
$
—
$
28,867
$
(28,867)
(100.0)
Other (income) expense
$
(656)
$
741
$
(1,397)
NM 1
Interest expense
$
5,041
$
4,624
$
417
9.0
Provision (benefit) for income taxes
$
2,528
$
(7,294)
$
9,822
NM 1
Net income (loss)
$
8,490
$
(24,594)
$
33,084
NM 1
1.Not meaningful
Revenues. The increase in consolidated revenues resulted from:
•a $13.9 million, or 18.6%, increase in OEM North American MD/HD Truck revenues;
•a $33.9 million, or 423.8%, increase in warehouse automation revenues;
•a $11.1 million, or 34.4%, increase in OEM construction equipment revenues; and
•a $0.9 million, or 3.0%, decrease in aftermarket and OES revenues.
First quarter 2021 revenues were favorably impacted by foreign currency exchange translation of $4.3 million, which is reflected in the change in revenues above.
Gross Profit. The $10.8 million increase in gross profit is primarily attributable to the increase in sales volume and improved cost structure, partially offset by material price increases and sales mix. Included in gross profit is cost of revenues, which increased $47.2 million, or 28.3%, as a result of an increase in raw material and purchased component costs of $39.9 million, or 38.2%, and an increase in labor and overhead expenses of $7.3 million, or 11.7%. As a percentage of revenues, gross profit margin was 12.7% for the three months ended March 31, 2021 compared to 10.9% for the three months ended March 31, 2020.
Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A”) consist primarily of wages and benefits and other expenses such as marketing, travel, legal, audit, rent and utility costs which are not directly associated with the manufacturing of our products. SG&A expenses decreased $2.2 million compared to the three months ended March 31, 2020, primarily due to the decrease in non-recurring payments relating to CEO transition and investigation expenses incurred during the prior year quarter of $4.7 million. As a percentage of revenues, SG&A expense was 6.4% for the three months ended March 31, 2021 compared to 9.6% for the three months ended March 31, 2020.
Impairment Expense. As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity for a period of time, the Company determined it had an impairment indicator during the first quarter of 2020. Accordingly, we recognized a $27.1 million impairment of goodwill and impairment of long-lived assets of $1.8 million for the quarter ended March 31, 2020.
Other Expense. Other expenses decreased $1.4 million in the quarter ended March 31, 2021 as compared to the quarter ended March 31, 2020 due primarily to a favorable change in foreign currency of $1.1 million.
Interest Expense. Interest associated with our debt, and other expense was $5.0 million and $4.6 million for the three months ended March 31, 2021 and 2020, respectively. The increase in interest expense primarily related to a $1.7 million Payment In Kind interest expense resulting from the loan amendment that occurred in the second quarter of 2020, offset by favorable change in interest rate swap adjustments of $1.0 million and a lower interest expense of $0.5 million due to declining interest rates.
Provision (Benefit) for Income Taxes. An income tax provision of $2.5 million and an income tax benefit of $7.3 million were recorded for the three months ended March 31, 2021 and 2020, respectively. The period over period change in income tax was primarily attributable to a $42.9 million increase in pre-tax income versus the prior year period.
Net Income (loss). Net income was $8.5 million for the three months ended March 31, 2021 compared to $24.6 million net loss for the three months ended March 31, 2020. The increase in net income is attributable to the factors noted above.
Segment Results
Electrical System Segment Results
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
The table below sets forth certain Electrical Systems Segment operating data for the three months ended March 31 (dollars are in thousands):
2021
2020
$ Change
% Change
Revenues
$
162,240
$
112,098
$
50,142
44.7%
Gross profit
$
20,270
$
10,946
$
9,324
85.2
Selling, general & administrative expenses
$
5,403
$
4,679
$
724
15.5
Goodwill and other impairment
$
—
$
23,415
$
(23,415)
(100.0)
Operating income (loss)
$
14,867
$
(17,148)
$
32,015
NM 1
1.Not meaningful
Revenues. The increase in Electrical System Segment revenues resulted from:
•a $15.1 million, or 34.2%, increase in OEM North American MD/HD Truck revenues;
•a $30.9 million, or 386.3% increase in warehouse automation revenues;
•a $3.3 million, or 19.5%, increase in OEM construction equipment revenues;
•a $1.0 million, or 8.6% increase in aftermarket and OES revenue; and
•a $0.2 million, or 0.6%, decrease in other revenues.
Electrical System Segment revenues were favorably impacted by foreign currency exchange translation of $1.3 million, which is reflected in the change in revenues above.
Gross Profit. The increase in gross profit was primarily attributable to the increase in sales volume. Included in gross profit is cost of revenues, which increased $40.8 million, or 40.4%, as a result of an increase in raw material and purchased component costs of $34.6 million, or 55.7%, and an increase in labor and overhead expenses of $6.2 million, or 15.9%. As a percentage of revenues, gross profit margin was 12.5% for the three months ended March 31, 2021 compared to 9.8% for the three months ended March 31, 2020.
Selling, General and Administrative Expenses. SG&A expenses increased $0.7 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, related to a $0.2 million charge for milestone payments related to the performance of the FSE business.
Impairment Expense. As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity for a period of time, the Company determined it had an impairment indicator during the first quarter of 2020. Accordingly, we recognized a $22.3 million impairment of goodwill and an impairment of long-lived assets of $1.1 million for the three months ended March 31, 2020.
Global Seating Segment Results
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
The table below sets forth certain Global Seating Segment operating data for the three months ended March 31 (dollars are in thousands):
2021
2020
$ Change
% Change
Revenues
$
91,094
$
75,981
$
15,113
19.9%
Gross profit
$
10,888
$
9,371
$
1,517
16.2
Selling, general & administrative expenses
$
5,344
$
4,923
$
421
8.6
Goodwill and other impairment
$
—
$
4,809
$
(4,809)
(100.0)
Operating income (loss)
$
5,544
$
(361)
$
5,905
NM 1
1.Not meaningful
Revenues. The increase in Global Seating Segment revenues resulted from:
•a $1.2 million, or 4.0%, decrease in OEM North American MD/HD Truck revenues;
•a $7.8 million, or 50.6%, increase in OEM construction equipment revenues;
•a $1.9 million, or 10.6%, decrease in aftermarket and OES sales; and
•a $10.4 million, or 84.6%, increase in other revenues.
Global Seating Segment revenues were favorably impacted by foreign currency exchange translation of $3.0 million, which is reflected in the change in revenues above.
Gross Profit. The increase in gross profit is primarily attributable to the increase in sales volume. Included in gross profit is cost of revenues, which increased $13.6 million, or 20.4%, as a result of an increase in raw material and purchased component costs of $12.5 million, or 28.9%, and an increase in labor and overhead expenses of $1.1 million, or 4.6%. As a percentage of revenues, gross profit margin was 12.0% for the three months ended March 31, 2021 compared to 12.3% for the three months ended March 31, 2020.
Selling, General and Administrative Expenses. SG&A expenses increased $0.4 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, consistent with the prior year amount on a percent of sales basis.
Impairment Expense. As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity, the Company determined it had an impairment indicator during the first quarter of 2020. Accordingly, we recognized a $4.8 million impairment of goodwill for the three months ended March 31, 2020.
Liquidity and Capital Resources
During the three months ended March 31, 2021, the Company borrowed $6.8 million under its revolving credit facility. At March 31, 2021, the Company had liquidity of $120.0 million; $38.1 million of cash and $81.9 million of availability from the revolving credit facility.
Our primary sources of liquidity during the three months ended March 31, 2021 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, 2021, cash of $38.1 million was held by foreign subsidiaries. The Company had a $0.3 million deferred tax liability as of March 31, 2021 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 TLS Agreement and the Third ARLS 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 TLS Agreement and the Third ARLS Agreement for the next twelve months as amended in accordance with Note 4, Debt; however, no assurances can be given that we will be able to comply. We base our forecasts on historical experience, industry forecasts and other assumptions that we believe are reasonable under the circumstances. If actual results are substantially different than our current forecast we may not be able to comply with our financial covenants. If we do not comply with the financial and other covenants in the TLS Agreement and the Third ARLS Agreement, the lenders could declare an event of default under the TLS Agreement and the Third ARLS Agreement and our indebtedness thereunder could be declared immediately due and payable. The TLS Agreement and the Third ARLS Agreement contain cross default provisions. If we are unable to borrow under the Third ARLS Agreement, we will need to meet our capital requirements using alternative sources of liquidity which may not be available on acceptable terms. Any of these events would have a material adverse effect on our business, financial condition and liquidity.
Sources and Uses of Cash
March 31, 2021
March 31, 2020
(In thousands)
Net cash provided by (used in) operating activities
$
(15,371)
$
10,345
Net cash used in investing activities
(1,709)
(3,468)
Net cash provided by financing activities
5,474
13,844
Effect of currency exchange rate changes on cash
(761)
(2,177)
Net increase (decrease) in cash
$
(12,367)
$
18,544
Operating activities. For the three months ended March 31, 2021, net cash used in operating activities was $15.4 million compared to net cash provided by operating activities of $10.3 million for the three months ended March 31, 2020. Net cash used in operating activities is primarily attributable to the increase in working capital for the three months ended March 31, 2021 as compared to the prior year period.
Investing activities. For the three months ended March 31, 2021, net cash used in investing activities was $1.7 million compared to $3.5 million for the three months ended March 31, 2020. In 2021, we expect capital expenditures to be in the range of $20 million to $25 million.
Financing activities. For the three months ended March 31, 2021, net cash provided by financing activities was $5.5 million compared to $13.8 million for the three months ended March 31, 2020. Net cash provided by financing activities for the three
months ended March 31, 2021 is attributable to $6.8 million of borrowings under the revolving credit facility offset by a repayment of the senior secured term loan credit facility. Net cash used in financing activities for the three months ended March 31, 2020 is attributable to $15.0 million of borrowings under the revolving credit facility offset by a repayment of the senior secured term loan credit facility.
Debt and Credit Facilities
The debt and credit facilities descriptions in Note 4, Debt are incorporated in this section by reference. On April 30, 2021, the Company refinanced its outstanding debt. See Note 18, Subsequent Event in this Form 10-Q.
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 2020 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 Committee 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 2020 Form 10-K. At March 31, 2021, there have been no material changes to our critical accounting estimates from those disclosed in our 2020 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, 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, such as risks relating to (i) our financial condition and results of operations will be materially adversely affected by the coronavirus pandemic; (ii) volatility in and disruption to the global economic environment and changes in the regulatory and business environments in which we operate may have a material adverse effect on our business, results of operations and financial condition; (iii) material weaknesses in our internal control over financial reporting could have a significant adverse effect on our business and the price of our common stock; (iv) our results of operations could be materially and adversely affected by downturns in the U.S. and global economy which are naturally accompanied by related declines in freight tonnage hauled and in infrastructure development and other construction projects; (v) volatility and cyclicality in the commercial vehicle market could adversely affect us; (vi) we may be unable to successfully implement our business strategy and, as a result, our businesses and financial position and results of operations could be materially and adversely affected; (vii) we may be unable to complete strategic acquisitions or we may encounter unforeseen difficulties in integrating acquisitions; (viii) circumstances associated with our acquisition and divestiture strategy could adversely affect our results of operations and financial condition; (ix) our customer base is concentrated and the loss of business from a major customer or the discontinuation of particular commercial vehicle platforms could reduce our revenues; (x) our profitability could be adversely affected if the actual production volumes for our customers’ vehicles are significantly lower than expected; (xi) our major OEM customers may exert significant influence over us; (xii) we are subject to certain risks associated with our foreign operations; (xiii) the U.K.’s exit from the European Union (EU) could materially and adversely impact our results of operations, financial condition and cash flows; (xiv) we are subject to certain risks associated with our Mexican operations; (xv) decreased availability or increased costs of materials could increase our costs of producing our products; (xvi) we have invested substantial resources in markets where we expect growth and we may be unable to timely alter our strategies should such expectations not be realized; (xvii) our inability to compete effectively in the highly competitive
commercial vehicle component supply industry could result in lower prices for our products, loss of market share and reduced gross margins, which could have an adverse effect on our revenues and operating results; (xviii) we may be unable to successfully introduce new products and, as a result, our business, and financial condition and results of operations could be materially and adversely affected (xix) we could experience disruption in our supply or delivery chain, which could cause one or more of our customers to halt or delay production;(xx) if we are unable to recruit or retain senior management and other skilled personnel, our business, operating results and financial condition could be materially and adversely affected; (xxi) we may be adversely impacted by labor strikes, work stoppages and other matters; (xxii) our earnings may be adversely affected by changes to the carrying values of our tangible and intangible assets as a result of recording any impairment charges deemed necessary; (xxiii) our inability to successfully achieve operational efficiencies could result in the incurrence of additional costs and expenses that could adversely affect our reported earnings; (xxiv) the geographic profile of our taxable income could adversely impact our tax provision and therefore our results of operations; (xxv) exposure to currency exchange rate fluctuations on cross border transactions and translation of local currency results into United States dollars could materially impact our results of operations; (xxvi) we have only limited protection for our proprietary rights in our intellectual property, which makes it difficult to prevent third parties from infringing upon our rights and our operations could be limited by the rights of others; (xxvii) our products may be susceptible to claims by third parties that our products infringe upon their proprietary rights; (xxviii) we may be subject to product liability claims, recalls or warranty claims, which could be expensive, damage our reputation and result in a diversion of management resources; (xxix) our businesses are subject to statutory environmental and safety regulations in multiple jurisdictions, and the impact of any changes in regulation and/or the violation of any applicable laws and regulations by our businesses could result in a material adverse effect on our financial condition and results of operations; (xxx) the agreement governing our senior secured revolving credit facility and the agreement governing our senior secured term loan credit facility contain covenants that may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions. If we are unable to comply with these covenants, our business, results of operations and liquidity could be materially and adversely affected; (xxxi) our indebtedness may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness; (xxxii) the transition away from LIBOR may adversely affect our cost to obtain financing and may negatively impact our interest rate swap agreements; (xxxiii) our operating results, revenues and expenses may fluctuate significantly from quarter-to-quarter or year-to-year, which could have an adverse effect on the market price of our common stock; (xxxiv) our common stock has historically had a low trading volume with limited analyst coverage and, as a result, any sale of a significant number of shares may depress the trading price of our stock; stockholders may be unable to sell their shares above the purchase price; (xxxv) provisions in our charter documents and Delaware law could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our stock; (xxxvi) security breaches and other disruptions could compromise our information systems and expose us to liability, which could cause our business and reputation to suffer; and (xxxvii) we face risks related to health epidemics that could impact our sales and operating results as outlined under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for fiscal year ending December 31, 2020 and the Company's fillings with the SEC. There can be no assurance that statements made in this Form 10-Q relating to future events will be achieved. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such cautionary statements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information relating to quantitative and qualitative disclosures about market risk, see the discussion under "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our 2020 Form 10-K. As of March 31, 2021, there have been no material changes in our exposure to market risk from those disclosed in our 2020 Form 10-K.
ITEM 4 – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
We evaluated, the effectiveness of our disclosure controls and procedures as of March 31, 2021. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2021 to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There were no changes during the quarter ended March 31, 2021 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings
We are subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, workers’ compensation claims, OSHA investigations, employment disputes, unfair labor practice charges, customer and supplier disputes, service provider disputes, product liability claims, intellectual property disputes, environmental claims arising out of the conduct of our businesses and examinations by taxing authorities. Based upon the information available to management and discussions with legal counsel, it is the opinion of management that the ultimate outcome of the various legal actions and claims that are incidental to our business are not expected to have a material adverse impact on the consolidated financial position, results of operations, stockholders' equity or cash flows; however, such matters are subject to many uncertainties and the outcomes of individual matters are not predictable with any degree of assurance.
ITEM 1A Risk Factors
You should carefully consider the information in this Form 10-Q, the risk factors discussed in "Risk Factors" and other risks discussed in our 2020 Form 10-K and our filings with the SEC since December 31, 2020. These risks could materially and adversely affect our results of operations, financial condition, liquidity and cash flows. Our business also could be affected by risks that we are not presently aware of or that we currently consider immaterial to our operations.
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any equity securities during the three months ended March 31, 2021 that were not registered under the Securities Act of 1933, as amended.
Amendment No. 3 to the Third Amended and Restated Loan and Security Agreement originally dated as of April 12, 2017, among Commercial Vehicle Group, Inc. and certain of its subsidiaries and Bank of America, N.A., as agent, and certain financial institutions as lenders dated as of March 1, 2021.
Change in Control & Non-Competition Agreement dated March 8, 2021 with Christopher Bohnert (incorporated by reference to Exhibit 10.28 to the Company’s annual report on Form 10-K (File No. 001-34365), filed on March 9, 2021).
Change in Control & Non-Competition Agreement dated March 8, 2021 with Angela O’Leary (incorporated by reference to Exhibit 10.29 to the Company’s annual report on Form 10-K (File No. 001-34365), filed on March 9, 2021).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
