QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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 November 2, 2022 was 33,373,982 shares.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands, except for share and per share amounts and where specifically disclosed)
1. Description of Business and Basis of Presentation
At Commercial Vehicle Group, Inc. and its subsidiaries, we deliver real solutions to complex design, engineering and manufacturing problems across a range of global industries by innovating, constantly adding value, and treating our customer's bottom line as if it were our own. References herein to the "Company", "CVG", "we", "our", or "us" refer to Commercial Vehicle Group, Inc. and its subsidiaries.
We have manufacturing operations in the United States, Mexico, China, United Kingdom, Belgium, Czech Republic, Ukraine, Thailand, India and Australia. Our products are primarily sold in North America, Europe, and the Asia-Pacific region.
We primarily manufacture customized products to meet the requirements of our customer. We believe our products are used by a majority of the North American Commercial Truck markets, many construction vehicle OEMs and top e-commerce retailers.
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, 2021 (the "2021 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. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company applies the guidance to impacted transactions during the transition period. The Company does not expect the adoption of this standard to have a material impact on the Company’s Consolidated Financial Statements.
We had outstanding customer accounts receivable, net of allowances, of $178.3 million as of September 30, 2022 and $174.5 million as of December 31, 2021. 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:
On April 30, 2021, 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 proceeds of the Credit Facilities were 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.
On May 12, 2022, the Company and certain of its subsidiaries entered into a second amendment (the “Amendment”) to its Credit Agreement pursuant to which the Lenders upsized the existing term loan facility to $175 million in aggregate principal amount and increased the revolving credit facility commitments by $25 million to an aggregate of $150 million in revolving credit facility commitments. The Revolving Credit Facility includes a $10 million swing line sublimit and a $10 million letter of credit sublimit. The amended 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. Further, separate from the Company’s annual $35 million capital spending cap, a one-time $45 million capital project basket was
included in the Amendment. All other key provisions, including the $75 million accordion, acquisition holiday, and other baskets remain unchanged. The Credit Facilities mature on May 12, 2027 (the “Maturity Date”).
The Amendment resulted in a loss on extinguishment of debt of $0.9 million, including $0.6 million non-cash write off relating to deferred financing costs and unamortized discount of the Term Loan Facility and $0.3 million of other fees associated with the Amendment, recorded in our Consolidated Statements of Operations for the nine months ended September 30, 2022.
The proceeds of the Credit Facilities will be used, together with cash on hand of the Company, to (a) pay transaction costs, fees and expenses incurred in connection therewith and in connection with the Amended Credit Agreement and (b) for working capital and other lawful corporate purposes of the Company and its subsidiaries.
At September 30, 2022, we had $11.6 million of borrowings under the Revolving Credit Facility, outstanding letters of credit of $1.2 million and availability of $137.2 million. The unamortized deferred financing fees associated with the Revolving Credit Facility of $1.3 million and $1.3 million as of September 30, 2022 and December 31, 2021, respectively, are being amortized over the remaining life of the Credit Agreement. At December 31, 2021, we had $49.4 million of borrowings under the Revolving Credit Facility and we had outstanding letters of credit of $1.4 million.
Interest rates and fees
Amounts outstanding under the Credit Facilities and the commitment fee payable in connection with the Credit Facilities accrue interest at a per annum rate equal to (at the Company’s option) the base rate or the Term Secured Overnight Financing Rate ("SOFR"), including a credit spread adjustment, plus a rate which will vary according to the Consolidated Total Leverage Ratio as set forth in the most recent compliance certificate received by the Administrative Agent, as set out in the following table:
Pricing Tier
Consolidated Total Leverage Ratio
Commitment Fee
Letter of Credit Fee
Term SOFR Loans
Base Rate Loans
I
> 3.50 to 1.00
0.35%
2.75%
2.75%
1.75%
II
< 3.50 to 1.00 but
> 2.75 to 1.00
0.30%
2.50%
2.50%
1.50%
III
< 2.75 to 1.00 but
> 2.00 to 1.00
0.25%
2.25%
2.25%
1.25%
IV
< 2.00 to 1.00 but
> 1.50 to 1.00
0.20%
2.00%
2.00%
1.00%
V
< 1.50 to 1.00
0.15%
1.75%
1.75%
0.75%
Guarantee and Security
All obligations under the Credit Agreement and related documents are unconditionally guaranteed by each of the Company’s existing and future direct and indirect wholly owned material domestic subsidiaries, subject to certain exceptions (the “Guarantors”). All obligations of the Company under the Credit Agreement and the guarantees of those obligations are secured by a first priority pledge of substantially all of the assets of the Company and of the Guarantors, subject to certain exceptions. The property pledged by the Company and the Guarantors includes a first priority pledge of all of the equity interests owned by the Company and the Guarantors in their respective domestic subsidiaries and a first priority pledge of the equity interests owned by the Company and the Guarantors in certain foreign subsidiaries, in each case, subject to certain exceptions.
Covenants and other terms
The Credit Agreement contains customary restrictive covenants, including, without limitation, limitations on the ability of the Company and its subsidiaries to incur additional debt and guarantees; grant certain liens on assets; pay dividends or make certain other distributions; make certain investments or acquisitions; dispose of certain assets; make payments on certain indebtedness; merge, combine with any other person or liquidate; amend organizational documents; make material changes in accounting treatment or reporting practices; enter into certain restrictive agreements; enter into certain hedging agreements; engage in transactions with affiliates; enter into certain employee benefit plans; make acquisitions; and other matters customarily included in senior secured loan agreements.
The Credit Agreement also contains customary reporting and other affirmative covenants, as well as customary events of default, including, without limitation, nonpayment of obligations under the Credit Facilities when due; material inaccuracy of representations and warranties; violation of covenants in the Credit Agreement and certain other documents executed in connection therewith; breach or default of agreements related to material debt; revocation or attempted revocation of guarantees; denial of the validity or enforceability of the loan documents or failure of the loan documents to be in full force and effect; certain material judgments; certain events of bankruptcy or insolvency; certain Employee Retirement Income Securities Act events; and a change in control of the Company. Certain of the defaults are subject to exceptions, materiality qualifiers, grace periods and baskets customary for credit facilities of this type.
The Credit Agreement includes (a) a minimum consolidated fixed charge coverage ratio of 1.20:1.0, and (b) a maximum consolidated total leverage ratio of 3.75:1.0 (which will be subject to step-downs to 3.50:1.0 at the end of the fiscal quarter ending March 31, 2023; to 3.25:1.0 at the end of the fiscal quarter ending June 30, 2023; and to 3.00:1.0 for each fiscal quarter on and after the fiscal quarter ending September 30, 2023).
We were in compliance with these covenants as of September 30, 2022.
Repayment and prepayment
The Credit Agreement requires the Company to make quarterly amortization payments to the Term Loan Facility at an annualized rate of the loans under the Term Loan Facility for every year as follows: 5.0%, 7.5%, 10.0%, 12.5% and 15.0%. The Credit Agreement also requires all outstanding amounts under the Credit Facilities to be repaid in full on the Maturity Date.
The Credit Agreement requires mandatory prepayments from the receipt of proceeds of dispositions or debt issuance, subject to certain exceptions and the Company's ability to re-invest and use proceeds towards acquisitions permitted by the Credit Agreement.
Voluntary prepayments of amounts outstanding under the Credit Facilities are permitted at any time, without premium or penalty.
Term Loan and Security Agreement
On April 12, 2017, the Company entered into the $175.0 million 2023 Term Loan Facility, maturing on April 12, 2023, pursuant to a term loan and security agreement (the “TLS Agreement”). On April 30, 2021, the 2023 Term Loan Facility was fully repaid and terminated as described below.
ABL Revolving Credit Facility
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, which governed the Company’s ABL Revolving Credit Facility.
On March 1, 2021, the Company and certain of its subsidiaries entered into Amendment No. 3, which amended the terms of the Third ARLS Agreement, among other things, to extend the maturity date of the ABL 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 allowed the Company to increase the size of the ABL Revolving Credit Facility by up to $50.0 million with the consent of Lenders providing the increase in the ABL Revolving Credit Facility. On April 30, 2021, the ABL Revolving Credit Facility was fully repaid and terminated as described below.
Termination of TLS Agreement and Third ARLS Agreement
Effective on April 30, 2021, the Company issued a notice of redemption in respect of its 2023 Term Loan Facility and the ABL Revolving Credit Facility and deposited with the Bank of America, N.A., as Administrative Agent under the TLS Agreement and the Third ARLS Agreement proceeds from the Credit Facilities, together with cash on hand in an amount sufficient to discharge the Company’s obligations under the TLS Agreement and the Third ARLS Agreement and respective related agreements. All amounts under the 2023 Term Loan Facility and ABL Revolving Credit Facility were repaid and discharged in full on April 30, 2021 and the TLS Agreement and Third ARLS Agreement were terminated.
The discharge resulted in a loss on extinguishment of debt of $7.2 million, including $3.7 million non-cash write off relating to deferred financing costs and unamortized discount of the 2023 Term Loan Facility, a voluntary repayment premium of $3.0 million, and $0.5 million of other associated fees, recorded in our Consolidated Statements of Operations for the nine months ended September 30, 2021.
Cash Paid for Interest
For the nine months ended September 30, 2022 and 2021, cash payments for interest were $6.2 million and $7.0 million, respectively.
10
5. Intangible Assets
Our definite-lived intangible assets were comprised of the following:
September 30, 2022
December 31, 2021
Weighted- Average Amortization Period
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Trademarks/tradenames
22 years
$
11,447
$
(5,268)
$
6,179
$
11,573
$
(5,043)
$
6,530
Customer relationships
15 years
14,243
(8,918)
5,325
14,770
(8,499)
6,271
Technical know-how
5 years
9,790
(5,955)
3,835
9,790
(4,487)
5,303
Covenant not to compete
5 years
330
(201)
129
330
(151)
179
$
35,810
$
(20,342)
$
15,468
$
36,463
$
(18,180)
$
18,283
The aggregate intangible asset amortization expense was $0.9 million for the three months ended September 30, 2022 and 2021. The aggregate intangible asset amortization expense was $2.6 million for the nine months ended September 30, 2022 and 2021.
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 consist of cash, accounts receivable, accounts payable, accrued liabilities, pension assets and liabilities. 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, Czech Crown and Ukrainian Hryvnia, we have entered into forward exchange contracts which are recorded in the Condensed Consolidated Balance Sheets at fair value. The hedge contracts for transactions denominated in Mexican Pesos are designated as cash flow hedge instruments and gains and losses as a result of the changes in fair value of the hedge contract are deferred in accumulated other comprehensive loss and recognized in cost of revenues in the period the related hedge transactions are settled. As of September 30, 2022, the hedge contracts for transactions denominated in Ukrainian Hryvnia and Czech Crown were not designated as hedging instruments; therefore, they are marked-to-market and the fair value of the agreements is recorded in the Condensed Consolidated Balance Sheets with the offsetting gains and losses recognized in other (income) expense. Settlements of hedge transactions are recognized in cost of revenues in the Condensed Consolidated Statements of Operations in the period they are settled.
Interest Rate Swaps. To manage our exposure to variable interest rates, we have entered into interest rate swaps 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 swaps are intended to mitigate the impact of rising interest rates on the Company and covers 50% of outstanding debt under the Term Loan Facility. Any changes in fair value are included in earnings or deferred through Accumulated other comprehensive loss, depending on the nature and effectiveness of the offset. Any ineffectiveness in a cash flow hedging relationship is recognized immediately in earnings in the Condensed Consolidated Statements of Operations.
11
During the second quarter ended June 30, 2022, the Company entered into transactions to cash settle existing interest rate swaps and received proceeds of $3.9 million. The gain on the swap settlement has been recorded in Other comprehensive income (loss) and will be recognized over the life of the settled swaps. Following the settlement of the existing interest rate swaps, we entered into a new interest rate swap agreement to align with the SOFR rate and maturity date of the Credit Agreement.
Contingent Consideration. As a result of the acquisition of 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. As of September 30, 2022, the remaining undiscounted Contingent Consideration payment is estimated at $4.8 million and the fair value is $4.8 million, which is presented in the Condensed Consolidated Balance Sheets in accrued liabilities and other. A payment of $5.0 million was made during the second quarter of 2021 based on achievement of the second EBITDA threshold.
The fair values of our derivative assets and liabilities and Contingent Consideration measured on a recurring basis are categorized as follows:
September 30, 2022
December 31, 2021
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets:
Foreign exchange contract
$
981
$
—
$
981
$
—
$
1,375
$
—
$
1,375
$
—
Interest rate swap agreement
$
1,944
$
—
$
1,944
$
—
$
241
$
—
$
241
$
—
Liabilities:
Foreign exchange contract
$
134
$
—
$
134
$
—
$
—
$
—
$
—
$
—
Interest rate swap agreement
$
—
$
—
$
—
$
—
$
498
$
—
$
498
$
—
Contingent Consideration
$
4,750
$
—
$
—
$
4,750
$
4,409
$
—
$
—
$
4,409
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, 2021
$
4,409
Change in fair value
341
Contingent Consideration liability balance at September 30, 2022
$
4,750
The following table summarizes the notional amount of our open foreign exchange contracts:
September 30, 2022
December 31, 2021
U.S. $ Equivalent
U.S. $ Equivalent Fair Value
U.S. $ Equivalent
U.S. $ Equivalent Fair Value
Commitments to buy or sell currencies
$
12,640
$
12,863
$
49,601
$
48,712
12
The following table summarizes the fair value and presentation of derivatives in the Condensed Consolidated Balance Sheets:
Derivative Asset
Balance Sheet Location
Fair Value
September 30, 2022
December 31, 2021
Foreign exchange contracts
Other current assets
$
981
$
1,375
Interest rate swap agreement
Other current assets
$
389
$
—
Interest rate swap agreement
Other assets, net
$
1,555
$
—
Interest rate swap agreement
Accrued liabilities and other
$
—
$
241
Derivative Liability
Balance Sheet Location
Fair Value
September 30, 2022
December 31, 2021
Foreign exchange contracts
Accrued liabilities and other
$
134
$
—
Interest rate swap agreement
Accrued liabilities and other
$
—
$
498
Derivative Equity
Balance Sheet Location
Fair Value
September 30, 2022
December 31, 2021
Derivative instruments
Accumulated other comprehensive (loss) income
$
4,768
$
757
The following table summarizes the effect of derivative instruments on the Condensed Consolidated Statements of Operations:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Location of Gain (Loss) on Derivatives Recognized in Income (Loss)
Amount of Gain (Loss) on Derivatives Recognized in Income (Loss)
Amount of Gain (Loss) on Derivatives Recognized in Income (Loss)
Foreign exchange contracts
Cost of revenues
$
776
$
807
$
2,076
$
1,654
Interest rate swap agreements
Interest and other expense
$
(67)
$
(1)
$
(344)
$
(7)
Foreign exchange contracts
Other (income) expense
$
(185)
$
63
$
(219)
$
286
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:
September 30, 2022
December 31, 2021
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Term loan and security agreement 1
$
172,746
$
161,081
$
145,556
$
142,265
Revolving credit facility 1
$
11,588
$
11,588
$
49,400
$
49,400
1.Presented in the Condensed Consolidated Balance Sheets as the current portion of long-term debt of $9.8 million and long-term debt of $174.5 million as of September 30, 2022 and current portion of long-term debt of $9.4 million and long-term debt of $185.6 million as of December 31, 2021.
Supplemental balance sheet information related to leases is as follows:
Balance Sheet Location
September 30, 2022
December 31, 2021
Operating Leases
Right-of-use assets, net
Other assets, net
$
26,807
$
26,116
Current liabilities
Accrued liabilities and other
7,172
9,048
Non-current liabilities
Other long-term liabilities
20,198
18,519
Total operating lease liabilities
$
27,370
$
27,567
Finance Leases
Right-of-use assets, net
Other assets, net
$
290
$
468
Current liabilities
Accrued liabilities and other
129
194
Non-current liabilities
Other long-term liabilities
166
272
Total finance lease liabilities
$
295
$
466
For the nine months ended September 30, 2022 and 2021, cash payments on operating leases were $7.5 million and $8.5 million, respectively.
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 2022
$
2,412
$
40
$
2,452
2023
8,554
146
8,700
2024
4,835
104
4,939
2025
5,044
65
5,109
2026
4,465
2
4,467
Thereafter
10,861
—
10,861
Total lease payments
$
36,171
$
357
$
36,528
Less: Imputed interest
(8,801)
(62)
(8,863)
Present value of lease liabilities
$
27,370
$
295
$
27,665
8. Income Taxes
For the three and nine months ended September 30, 2022, we recorded a $1.3 million, and $3.5 million tax provision, respectively, or 26% effective tax rate for each period, compared to a $2.4 million and $6.5 million tax provision for the three and nine months ended September 30, 2021, respectively, or approximately 24% effective tax rate for each period. Income tax expense is based on an estimated annual effective tax rate, which requires management to make its best estimate of annual pretax income or loss. During the year, management regularly updates forecasted annual pretax results for the various countries in which the Company operates based on changes in factors such as prices, shipments, product mix, material inflation and manufacturing operations. To the extent that actual 2022 pretax results for U.S. and foreign income or loss vary from estimates,
the actual income tax expense recognized in 2022 could be different from the forecasted amount used to estimate the income tax expense for the three and nine months ended September 30, 2022.
We have recorded valuation allowances in prior years related to certain foreign subsidiaries due to multiple year cumulative losses. Given the current earnings and anticipated future earnings of some of the Company's foreign locations, the Company believes there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow it to reach a conclusion that the valuation allowance on the deferred tax assets of certain foreign entities will no longer be needed. Releasing the valuation allowance would result in the recognition of previously unrecognized deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company is able to actually achieve.
For the nine months ended September 30, 2022 and 2021, cash paid for taxes, net of refunds received, were $4.2 million and $3.1 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 September 30,
Three Months Ended September 30,
2022
2021
2022
2021
Interest cost
$
193
$
207
$
187
$
160
Expected return on plan assets
(208)
(553)
(244)
(251)
Amortization of prior service cost 1
1,118
2
11
12
Recognized actuarial loss
82
70
142
239
Net (benefit) cost
$
1,185
$
(274)
$
96
$
160
U.S. Pension and Other Post-Retirement Benefit Plans
Non-U.S. Pension Plan
Nine months ended September 30,
Nine months ended September 30,
2022
2021
2022
2021
Interest cost
$
581
$
621
$
602
$
483
Expected return on plan assets
(623)
(1,659)
(777)
(755)
Amortization of prior service cost 1
1,122
6
37
40
Recognized actuarial loss
247
210
459
721
Net (benefit) cost
$
1,327
$
(822)
$
321
$
489
1.Includes $1.1 million non-cash settlement charge.
Net periodic (benefit) cost components, not inclusive of service costs, are recognized in other expense (income) within the Condensed Consolidated Statements of Operations.
During the year ended December 31, 2021, the Audit Committee of the Board of Directors approved amendments to the U.S. Pension Plan to terminate the plan. The plan participants were notified of the Company's intention to terminate the plan effective December 31, 2021 and settle plan liabilities through either lump sum distributions to plan participants or annuity contracts that cover vested benefits.
During the nine months ended September 30, 2022, the Company partially settled the U.S. Pension Plan liabilities. Payouts totaling $4.4 million were made out of plan assets and, as reflected in amortization of prior service cost in the table above, resulted in a non-cash settlement charge of $1.1 million, which was recorded in other expense in the Condensed Consolidated Statements of Income.
On October 3, 2022, the Company settled the remaining U.S. Pension Plan liabilities through purchase of an annuity contract. The contract totaling $25.2 million was paid out of plan assets and is expected to result in an $8.1 million non-cash settlement charge, which will be recognized in the three months ending December 31, 2022.
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 EIP.
Restricted Cash Awards – Restricted cash is a grant that is earned and payable in cash based upon the Company’s relative total shareholder return in terms of ranking as compared to the peer group and Return on Invested Capital ("ROIC") component established by the Compensation Committee of the Board of Directors.
Performance Stock Awards Settled in Cash – Performance-based stock award is a grant that is earned and payable in cash. The total amount payable as of the award's vesting date is determined based upon the number of shares allocated to a participant, the Company’s relative total shareholder return in terms of ranking which can fluctuate as compared to the peer group over the performance period, ROIC performance, and the share price of the Company's stock.
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. Performance targets are based on relative total shareholder return in terms of ranking as compared to the peer group over the performance period.
ROIC is defined as adjusted net income plus interest expense (net of tax), divided by total assets less current liabilities plus current debt. A five-point average is used to calculate the asset denominator.
These awards are 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, 2021
$
1,234
New grants
2,108
Forfeitures
(513)
Adjustments
(1,287)
Payments
(300)
Adjusted Award Value at September 30, 2022
$
1,242
Unrecognized compensation expense was $2.0 million and $2.3 million as of September 30, 2022 and 2021, respectively.
11. Share-Based Compensation
The company's outstanding share-based compensation is comprised solely of restricted stock awards and performance stock awards to be settled in stock.
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 Stock Awards Settled in Stock – Performance-based stock awards have similar restrictions as restricted stock. They 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 if the Company meets the performance targets set at the time the award was granted. Performance targets are based on relative total shareholder return in terms of ranking as compared to the peer group over the performance period and ROIC performance.
As of September 30, 2022, there was approximately $4.2 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 September 30, 2022 and changes during the nine months ended September 30, 2022, are presented below:
2022
Shares (in thousands)
Weighted- Average Grant-Date Fair Value
Nonvested - December 31, 2021
783
$
5.68
Granted
600
7.58
Vested
(650)
3.46
Forfeited
(50)
8.45
Nonvested - September 30, 2022
683
$
6.81
As of September 30, 2022, 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, 32,551,341 and 32,034,592 shares were issued and outstanding as of September 30, 2022 and December 31, 2021, 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. No preferred shares were outstanding as of September 30, 2022 and December 31, 2021.
Earnings Per Share - Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share presented is determined by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period as determined by the treasury stock method. Potential common shares are included in the diluted earnings per share calculation when dilutive.
Diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 includes the effect of potential common shares issuable when dilutive, and is as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net income
$
3,551
$
7,511
$
10,018
$
21,096
Weighted average number of common shares outstanding (in '000s)
32,460
31,570
32,950
31,432
Dilutive effect of restricted stock grants after application of the Treasury Stock Method (in '000s)
462
1,136
695
1,306
Dilutive shares outstanding
32,922
32,706
33,645
32,738
Basic earnings per share
$
0.11
$
0.24
$
0.30
$
0.67
Diluted earnings per share
$
0.11
$
0.23
$
0.30
$
0.64
There were 8 thousand outstanding restricted shares awarded that were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2022 and no outstanding restricted shares awarded that were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2021. There were 10 thousand outstanding restricted shares awarded that were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2022 and no outstanding restricted shares awarded that were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2021.
The after-tax changes in accumulated other comprehensive income (loss), are as follows:
Foreign currency translation adjustment
Pension and post-retirement benefits plans
Derivative instruments
Accumulated other comprehensive income (loss)
Balance - December 31, 2021
$
(20,445)
$
(22,750)
$
757
$
(42,438)
Net current period change
(9,689)
—
—
(9,689)
Derivative instruments
—
—
4,011
4,011
Amortization of actuarial gain
—
1,085
—
1,085
Balance - September 30, 2022
$
(30,134)
$
(21,665)
$
4,768
$
(47,031)
Foreign currency translation adjustment
Pension and post-retirement benefit plans
Derivative instruments
Accumulated other comprehensive income (loss)
Balance - December 31, 2020
$
(19,024)
$
(27,423)
$
1,441
$
(45,006)
Net current period change
(1,809)
—
—
(1,809)
Derivative instruments
—
—
(1,052)
(1,052)
Amortization of actuarial gain
—
2,094
—
2,094
Balance - September 30, 2021
$
(20,833)
$
(25,329)
$
389
$
(45,773)
The related tax effects allocated to each component of other comprehensive loss are as follows:
Three Months Ended September 30, 2022
Nine Months Ended September 30, 2022
Before Tax Amount
Tax Expense
After Tax Amount
Before Tax Amount
Tax Expense
After Tax Amount
Cumulative translation adjustment
$
(4,493)
$
—
$
(4,493)
$
(9,689)
$
—
$
(9,689)
Amortization of actuarial gain (loss)
(396)
34
(362)
989
96
1,085
Derivative instruments
2,494
(656)
1,838
5,460
(1,449)
4,011
Total other comprehensive income (loss)
$
(2,395)
$
(622)
$
(3,017)
$
(3,240)
$
(1,353)
$
(4,593)
Three Months Ended September 30, 2021
Nine Months Ended September 30, 2021
Before Tax Amount
Tax Expense
After Tax Amount
Before Tax Amount
Tax Expense
After Tax Amount
Cumulative translation adjustment
$
(1,225)
$
—
$
(1,225)
$
(1,809)
$
—
$
(1,809)
Amortization of actuarial gain
1,308
113
1,421
1,754
340
2,094
Derivative instruments
(717)
168
(549)
(1,373)
321
(1,052)
Total other comprehensive income (loss)
$
(634)
$
281
$
(353)
$
(1,428)
$
661
$
(767)
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.
On November 1, 2021, the Company's Board of Directors approved a restructuring program to align the Company's cost structure to support margin expansion. The program includes workforce reductions and footprint optimization across segments.
The changes in accrued restructuring balances are as follows:
Vehicle Solutions
Warehouse Automation
Electrical Systems
Aftermarket and Accessories
Corporate/Other
Total
December 31, 2021
$
230
$
417
$
—
$
—
$
(161)
$
486
New charges
204
350
—
435
—
989
Payments and other adjustments
(309)
(770)
—
(435)
422
(1,092)
March 31, 2022
$
125
$
(3)
$
—
$
—
$
261
$
383
New charges
—
314
571
560
306
1,751
Payments and other adjustments
(91)
(311)
(571)
(560)
(444)
(1,977)
June 30, 2022
$
34
$
—
$
—
$
—
$
123
$
157
New charges
66
136
—
445
—
647
Payments and other adjustments
(90)
(46)
—
(445)
(123)
(704)
September 30, 2022
$
10
$
90
$
—
$
—
$
—
$
100
Vehicle Solutions
Warehouse Automation
Electrical Systems
Aftermarket and Accessories
Corporate/Other
Total
December 31, 2020
$
349
$
—
$
—
$
40
$
290
$
679
Payments and other adjustments
(186)
—
—
(40)
(36)
(262)
March 31, 2021
$
163
$
—
$
—
$
—
$
254
$
417
Payments and other adjustments
(67)
—
—
—
(171)
(238)
June 30, 2021
$
96
$
—
$
—
$
—
$
83
$
179
New charges
$
—
$
—
$
—
$
—
$
—
$
—
Payments and other adjustments
$
(96)
$
—
$
—
$
—
$
(83)
$
(179)
September 30, 2021
$
—
$
—
$
—
$
—
$
—
$
—
Of the $0.6 million costs incurred in the three months ended September 30, 2022, $0.1 million primarily related to headcount reductions and $0.5 million related to facility exit and other costs. Substantially all costs incurred were recorded in cost of revenues.
Of the $3.4 million costs incurred in the nine months ended September 30, 2022, $0.9 million primarily related to headcount reductions and $2.5 million related to facility exit and other costs. Of the $3.4 million costs incurred, $3.0 million was recorded in cost of revenues and $0.4 million was recorded in selling, general and administrative expenses.
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 September 30, 2022, 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 September 30, 2022 and 2021, 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 product liability claims, customer and supplier disputes, service provider disputes, examinations by taxing authorities, employment disputes, workers’ compensation claims, unfair labor practice charges, OSHA investigations, intellectual property disputes and environmental claims arising out of the conduct of our businesses.
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 September 30, 2022 and 2021, 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 nine months ended September 30, 2022:
Balance - December 31, 2021
$
1,490
Provision for warranty claims
491
Deduction for payments made and other adjustments
(745)
Balance - September 30, 2022
$
1,236
Debt Payments - As disclosed in Note 4, Debt, the Credit Agreement requires the Company to repay a fixed amount of principal on a quarterly basis and make 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:
Term loan facility
Revolving credit facility
Total
Remainder of 2022
$
2,187
$
—
$
2,187
2023
$
10,938
$
—
$
10,938
2024
$
15,313
$
—
$
15,313
2025
$
19,688
$
—
$
19,688
2026
$
24,063
$
—
$
24,063
Thereafter
$
100,624
$
11,588
$
112,212
16. Segment Reporting
In the quarter ended December 31, 2021, we completed a strategic reorganization of our operations into four segments, Vehicle Solutions, Warehouse Automation, Electrical Systems and Aftermarket & Accessories. The reorganization has allowed allow the Company to better focus on growth opportunities, capital allocation and enhancing shareholder value. As a result of the strategic reorganization, the prior period amounts have been reclassified to conform to the new organization structure.
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 multiple segments. Our segments are more specifically described below.
The Vehicle Solutions 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 delivery trucks and vans, construction and agriculture equipment in North America, Europe and Asia-Pacific. This segment includes a portion of the company’s activities in the electric vehicle market;
•Plastic components ("Trim") primarily for the North America commercial vehicle market and recreational vehicle markets; and Cab structures for the North American medium-duty/heavy-duty ("MD/HD") truck market.
The Warehouse Automation segment designs, manufactures and sells the following products:
•Warehouse automation subsystems including control panels, electro-mechanical assemblies, cable assemblies, and power and communication solutions.
•The end markets for these products primarily include e-commerce, warehouse integration, transportation, and the military/defense industry.
The Electrical Systems segment designs, manufactures and sells the following products:
•Cable and harness assemblies for both high and low voltage applications, control boxes, dashboard assemblies and design and engineering for these applications.
•The end markets for these products are construction, agricultural, industrial, automotive (both internal combustion and electric vehicles), truck, mining, rail and the military/ defense industries in North America, Europe and Asia-Pacific.
The Aftermarket & Accessories segment designs, manufactures and sells the following products:
•Seats and components sold into the commercial vehicle markets in North America, Europe and Asia-Pacific;
•Commercial vehicle accessories including wipers, mirrors, and sensors; and
•Office seats primarily in 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 tables present financial information for the Company's reportable segments for the periods indicated:
Items reported in inventories consisted of the following:
September 30, 2022
December 31, 2021
Raw materials
$
119,361
$
107,505
Work in process
16,688
21,671
Finished goods
14,298
11,869
Inventories
$
150,347
$
141,045
Items reported in property, plant, and equipment, net consisted of the following:
September 30, 2022
December 31, 2021
Land and buildings
$
32,158
$
32,012
Machinery and equipment
204,436
194,828
Construction in progress
6,217
8,822
Property, plant, and equipment, gross
242,811
235,662
Less accumulated depreciation
(178,056)
(172,536)
Property, plant and equipment, net
$
64,755
$
63,126
Items reported in accrued expenses and other liabilities consisted of the following:
September 30, 2022
December 31, 2021
Compensation and benefits
$
14,622
$
16,677
Taxes payable
5,730
6,391
Operating lease liabilities
7,172
9,048
Accrued freight
7,094
5,628
Contingent Consideration
4,750
4,409
Deferred tooling revenue
1,401
851
Other
7,677
7,836
Accrued liabilities and other
$
48,446
$
50,840
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 and nine months ended September 30, 2022 and 2021. This discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2021 Form 10-K.
Business Overview
At CVG, we deliver real solutions to complex design, engineering and manufacturing problems across a range of global industries by innovating, constantly adding value, and treating our customer's bottom line as if it were our own.
We have manufacturing operations in the United States, Mexico, China, United Kingdom, Belgium, Czech Republic, Ukraine, Thailand, India and Australia. Our products are primarily sold in North America, Europe, and the Asia-Pacific region.
We primarily manufacture customized products to meet the requirements of our customer. We believe our products are used by a majority of the North American Commercial Truck markets, many construction vehicle OEMs and top e-commerce retailers.
Key Developments
In the first quarter of 2022, Russian military forces invaded Ukraine. We have approximately 1,200 employees in the Ukraine located in our facility near L'viv. While the facility was temporarily shut-down, we have resumed operations in L'viv and also set up additional capacity in the Czech Republic. During both the nine months ended September 30, 2022 and the twelve months ended December 31, 2021, our Ukraine facility represented approximately 1% of the Company's long-lived assets.
The invasion of Ukraine by Russia and the retaliatory measures taken by the U.S., NATO and other countries have created global security concerns and economic uncertainty that could have a lasting impact on regional and global economies. We cannot be certain that international tensions will not affect our facility in the Ukraine, including due to the Russian invasion, electrical outages, cyber-attacks and periodic battles with separatists closer to our facility. In addition, certain of our employees in Ukraine may be conscripted into the military and/or sent to fight in the ongoing conflict. Furthermore, most of our products manufactured in Ukraine are shipped across the border from Ukraine to the Czech Republic for further delivery to our customers. If that border crossing were to be closed or restricted for any reason, or if our customers decide to stop ordering from us or shift orders to our competitors, we would experience a loss of the use of our Ukrainian facility, which could have an adverse effect on our results of operations and financial condition.
During the nine months ended September 30, 2022, we experienced shutdowns at our plant in Shanghai, China due to the COVID-19 pandemic. The COVID-19 pandemic has caused and continues to cause, significant volatility, uncertainty and economic disruptions to our business. While we continue to operate our facilities, we may experience production slowdowns and/or shutdowns at our manufacturing facilities in North America, Europe and Asia Pacific as a result of government orders, our inability to obtain component parts from suppliers and/or inconsistent customer demand. In addition, many of our suppliers and customers may experience production slowdowns and/or shutdowns, which may further impact our business, sales and results of operation. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on a number of factors beyond our control.
While backlog continues to be strong in the truck markets, all markets we operate in were impacted by supply chain constraints which caused volatility on our customers' production schedules and had a negative impact on our results. Overall, we continued to experience global supply chain disruptions and significant inflation, including longer lead-times to procure parts from China and due to port backups, labor inflation, chip shortages, steel and other raw material inflation, and freight cost increases. The impact of the pandemic, the related economic recovery and global inflationary pressures continue to be uneven from period to period and across our global footprint based on local and regional outbreaks. We continue to proactively monitor, assess and minimize to the extent reasonably possible disruptions and delays in production due to labor shortages or customer schedules, focus on cost control and recovery through pricing adjustments, and take reasonable measures to protect our workforce.
Consolidated Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The table below sets forth certain consolidated operating data for the three months ended September 30 (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
251,412
$
239,610
$
11,802
4.9%
Gross profit
26,842
30,144
(3,302)
(11.0)%
Selling, general and administrative expenses
17,304
18,772
(1,468)
(7.8)%
Other (income) expense
1,924
(186)
2,110
NM1
Interest expense
2,813
1,630
1,183
72.6%
Provision for income taxes
1,250
2,417
(1,167)
(48.3)%
Net income
3,551
7,511
(3,960)
(52.7)%
1.Not meaningful
Revenues. The increase in consolidated revenues resulted from:
•a $39.1 million, or 28.5%, increase in OEM;
•a $37.6 million, or 72.7%, decrease in warehouse automation revenues;
•a $1.8 million, or 3.9%, increase in aftermarket and OES revenues; and
•a $8.5 million, or 172.4% increase in other revenues.
Third quarter 2022 revenues were unfavorably impacted by foreign currency exchange translation of $6.5 million, which is reflected in the change in revenues above. The increase in revenues is primarily driven by increased pricing to offset material cost increases and volume, offset by volume decrease in Warehouse Automation.
Gross Profit. The $3.3 million decrease in gross profit is primarily attributable to the decrease in warehouse automation revenues and the cost of revenues, which increased $15.1 million, or 7.2%, as a result of an increase in raw material and purchased component costs of $12.1 million, or 8.7%, and an increase in labor and overhead expenses of $3.0 million, or 4.3%. As a percentage of revenues, gross profit margin was 10.7% for the three months ended September 30, 2022 compared to 12.6% for the three months ended September 30, 2021. The decrease in gross profit margin is primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases. The three months ended September 30, 2022 results include charges of $0.6 million associated with the restructuring program.
Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A”) consist primarily of wages and benefits and other expenses such as Contingent Consideration, marketing, travel, legal, audit, rent and utility costs which are not directly associated with the manufacturing of our products. SG&A expenses decreased $1.5 million compared to the three months ended September 30, 2021, primarily due to lower incentive compensation and health care expense. As a percentage of revenues, SG&A expense was 6.9% for the three months ended September 30, 2022 compared to 7.8% for the three months ended September 30, 2021.
Other (Income) Expense. Other expenses increased $2.1 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 due primarily to partial settlement of the Company's U.S. Pension Plan liabilities of $1.1 million as well as an unfavorable change in foreign currency of $0.4 million.
Interest Expense. Interest associated with our debt was $2.8 million and $1.6 million for the three months ended September 30, 2022 and 2021, respectively. The increase in interest expense primarily related to higher base interest rates on our variable rate debt and a higher average debt balance during the respective comparative period.
Provision (Benefit) for Income Taxes. An income tax provision of $1.3 million and $2.4 million were recorded for the three months ended September 30, 2022 and 2021, respectively. The period over period change in income tax was primarily attributable to a $5.1 million decrease in pre-tax income versus the prior year period.
Net Income (loss). Net income was $3.6 million for the three months ended September 30, 2022 compared to $7.5 million for the three months ended September 30, 2021. The decrease in net income is attributable to the factors noted above.
Segment Results
Vehicle Solutions Segment Results
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The table below sets forth certain Vehicle Solutions Segment operating data for the three months ended September 30 (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
154,024
$
117,914
$
36,110
30.6%
Gross profit
13,839
10,143
3,696
36.4%
Selling, general & administrative expenses
4,279
7,222
(2,943)
(40.8)%
Operating income
9,560
2,921
6,639
227.3%
Revenues. The increase in Vehicle Solutions Segment revenues primarily resulted from increased pricing to offset material cost pass-through and favorable volume.
Gross Profit. The increase in gross profit was primarily attributable to volume leverage, increased pricing and lower health care expense. Included in gross profit is cost of revenues, which increased $32.4 million, or 30.1%, as a result of an increase in raw material and purchased component costs of $28.7 million, or 40.5%, and an increase in labor and overhead expenses of $3.7 million, or 10.1%.
As a percentage of revenues, gross profit margin was 9.0% for the three months ended September 30, 2022 compared to 8.6% for the three months ended September 30, 2021.
Selling, General and Administrative Expenses. SG&A expenses decreased $2.9 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to lower incentive compensation and health care expense.
Warehouse Automation Segment Results
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The table below sets forth certain Warehouse Automation Segment operating data for the three months ended September 30 (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
14,116
$
51,681
$
(37,565)
(72.7)%
Gross profit
404
9,486
(9,082)
(95.7)%
Selling, general & administrative expenses
1,371
1,461
(90)
(6.2)%
Operating income (loss)
(967)
8,025
(8,992)
(112.0)%
Revenues. The decrease in Warehouse Automation Segment revenues primarily resulted from lower sales volume due to decreased customer demand.
Gross Profit. The decrease in gross profit is primarily attributable to lower sales volume. Included in gross profit is cost of revenues, which decreased $28.5 million, or 67.5%, as a result of a decrease in raw material and purchased component costs of $23.9 million, or 70.5%, and a decrease in labor and overhead expenses of $4.6 million, or 55.2%.
As a percentage of revenues, gross profit margin was 2.9% for the three months ended September 30, 2022 compared to 18.4% for the three months ended September 30, 2021. The decrease is due to loss of volume leverage.
Selling, General and Administrative Expenses. SG&A expenses decreased $0.1 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
Electrical Systems Segment Results
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The table below sets forth certain Electric Systems Segment operating data for the three months ended September 30 (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
46,129
$
40,085
$
6,044
15.1%
Gross profit
6,210
6,633
(423)
(6.4)
Selling, general & administrative expenses
1,055
1,718
(663)
(38.6)
Operating income
5,155
4,915
240
4.9
Revenues. The increase in Electric Systems Segment revenues primarily resulted from increased pricing to offset material cost pass-through and new business wins.
Gross Profit. The decrease in gross profit is primarily attributable to cost of revenues, which increased $6.5 million, or 19.3%, as a result of an increase in raw material and purchased component costs of $5.3 million, or 29.7%, and an increase in labor and overhead expenses of $1.2 million, or 7.4%.
As a percentage of revenues, gross profit margin was 13.5% for the three months ended September 30, 2022 compared to 16.5% for the three months ended September 30, 2021. The decrease in gross profit margin is primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases.
Selling, General and Administrative Expenses. SG&A expenses decreased $0.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The table below sets forth certain Aftermarket & Accessories Segment operating data for the three months ended September 30 (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
37,143
$
29,930
$
7,213
24.1%
Gross profit
6,389
3,885
2,504
64.5
Selling, general & administrative expenses
1,436
1,536
(100)
(6.5)
Operating income
4,953
2,349
2,604
110.9
Revenues. The increase in Aftermarket & Accessories Segment revenues resulted from increased sales volume and pricing to offset material cost pass-through.
Gross Profit. The increase in gross profit is primarily attributable to the increase in sales volume and pricing. Included in gross profit is cost of revenues, which increased $4.7 million, or 18.1%, as a result of an increase in raw material and purchased component costs of $2.0 million, or 11.7%, and an increase in labor and overhead expenses of $2.7 million, or 29.7%.
As a percentage of revenues, gross profit margin was 17.2% for the three months ended September 30, 2022 compared to 13.0% for the three months ended September 30, 2021. The increase in gross profit margin is primarily due to increased pricing to offset material cost pass-through. The three months ended September 30, 2022 results include charges of $0.4 million associated with the restructuring program.
Selling, General and Administrative Expenses. SG&A expenses decreased $0.1 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
Consolidated Results of Operations
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The table below sets forth certain consolidated operating data for the nine months ended September 30, (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
746,635
$
742,673
$
3,962
0.5%
Gross profit
74,104
95,633
(21,529)
(22.5)%
Selling, general and administrative expenses
49,955
52,529
(2,574)
(4.9)%
Other (income) expense
2,798
(1,127)
3,925
NM 1
Interest expense
6,892
9,489
(2,597)
(27.4)%
Loss on extinguishment of debt
921
7,155
(6,234)
(87.1)%
Provision for income taxes
3,520
6,491
(2,971)
(45.8)%
Net income
10,018
21,096
(11,078)
(52.5)%
1.Not meaningful
Revenues. The increase in consolidated revenues resulted from:
•a $43.1 million, or 9.6%, increase in OEM;
•a $73.6 million, or 48.9%, decrease in warehouse automation revenues;
•a $14.1 million, or 10.4%, increase in aftermarket and OES revenues; and
•a $20.3 million, or 288.2% increase in other revenues.
Nine months ended 2022 revenues were unfavorably impacted by foreign currency exchange translation of $12.4 million, which is reflected in the change in revenues above. The increase in revenues is primarily driven by increased pricing to offset material cost increases and volume, offset by volume decreases in Warehouse Automation.
Gross Profit. The $21.5 million decrease in gross profit is primarily attributable to the decrease in warehouse automation revenues and the cost of revenues, which increased $25.5 million, or 3.9%, as a result of an increase in raw material and purchased component costs of $13.9 million, or 3.2%, and an increase in labor and overhead expenses of $11.6 million, or 5.4%. As a percentage of revenues, gross profit margin was 9.9% for the nine months ended September 30, 2022 compared to 12.9% for the nine months ended September 30, 2021. The nine months ended September 30, 2022 results include charges of $3.0 million associated with the restructuring program.
Selling, General and Administrative Expenses. SG&A expenses decreased $2.6 million compared to the nine months ended September 30, 2021, primarily due to lower incentive compensation and health care expense. As a percentage of revenues, SG&A expense was 6.7% for the nine months ended September 30, 2022 compared to 7.1% for the nine months ended September 30, 2021.
Other (Income) Expense. Other expenses increased $3.9 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 due primarily to partial settlement of the Company's U.S. Pension Plan liabilities of $1.1 million as well as an unfavorable change in foreign currency of $1.3 million.
Interest Expense. Interest associated with our debt was $6.9 million and $9.5 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease in interest expense primarily related to lower rates, partially offset by a higher average debt balance during the respective comparative periods.
Loss on extinguishment of debt. On May 12, 2022, the Company refinanced its long-term debt, which resulted in a loss of $0.9 million, including a $0.6 million non-cash write off relating to deferred financing costs of the Term loan facility due 2026 and $0.3 million of other associated fees. During the nine months ended September 30, 2021 the Company refinanced its long-term debt, which resulted in a loss of $7.2 million, including a $3.7 million non-cash write off relating to deferred financing costs and unamortized discount of the 2023 Term Loan Facility, a voluntary repayment premium of $3.0 million and $0.5 million of other associated fees.
Provision (Benefit) for Income Taxes. An income tax provision of $3.5 million and $6.5 million were recorded for the nine months ended September 30, 2022 and 2021, respectively. The period over period change in income tax was primarily attributable to the $14.0 million decrease in pre-tax income versus the prior year period.
Net Income (loss). Net income was $10.0 million for the nine months ended September 30, 2022 compared to $21.1 million for the nine months ended September 30, 2021. The decrease in net income is attributable to the factors noted above.
Segment Results
Vehicle Solutions Segment Results
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The table below sets forth certain Vehicle Solutions Segment operating data for the nine months ended September 30, (dollars are in thousands):
Revenues. The increase in Vehicle Solutions Segment revenues primarily resulted from increased pricing to offset material cost pass-through and new business wins offset by lower shipments caused by the COVID shutdown in China.
Gross Profit. The decrease in gross profit was primarily attributable to cost of revenues, which increased $67.7 million, or 20.3%, as a result of an increase in raw material and purchased component costs of $55.4 million, or 25.1%, and an increase in labor and overhead expenses of $12.3 million, or 10.9%.
As a percentage of revenues, gross profit margin was 8.2% for the nine months ended September 30, 2022 compared to 10.4% for the nine months ended September 30, 2021. The decrease in gross profit margin is primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases. The nine months ended September 30, 2022 results include charges of $0.2 million associated with the restructuring program.
Selling, General and Administrative Expenses. SG&A expenses decreased $2.0 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to lower incentive compensation and healthcare expense.
Warehouse Automation Segment Results
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The table below sets forth certain Warehouse Automation Segment operating data for the nine months ended September 30, (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
76,789
$
150,378
$
(73,589)
(48.9)%
Gross profit
8,249
24,612
(16,363)
(66.5)%
Selling, general & administrative expenses
4,242
4,199
43
1.0%
Operating income
4,007
20,413
(16,406)
(80.4)%
Revenues. The decrease in Warehouse Automation Segment revenues resulted from lower sales volume due to decreased customer demand.
Gross Profit. The decrease in gross profit is primarily attributable to the decrease in sales volume. Included in gross profit is cost of revenues, which decreased $57.2 million, or 45.5%, as a result of a decrease in raw material and purchased component costs of $47.9 million, or 47.4%, and a decrease in labor and overhead expenses of $9.3 million, or 37.6%.
As a percentage of revenues, gross profit margin was 10.7% for the nine months ended September 30, 2022 compared to 16.4% for the nine months ended September 30, 2021. The nine months ended September 30, 2022 results include charges of $0.8 million associated with the restructuring program.
Selling, General and Administrative Expenses. SG&A expenses were flat year over year.
Electrical Systems Segment Results
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The table below sets forth certain Electric Systems Segment operating data for the nine months ended September 30, (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
133,350
$
130,742
$
2,608
2.0%
Gross profit
16,857
17,545
(688)
(3.9)%
Selling, general & administrative expenses
3,998
4,646
(648)
(13.9)%
Operating income
12,859
12,899
(40)
(0.3)%
Revenues. The increase in Electrical Systems Segment revenues resulted from increased pricing to offset material cost pass-through, and new business wins.
Gross Profit. The decrease in gross profit is primarily attributable to the cost of revenues, which increased $3.3 million, or 2.9%, as a result of an increase in raw material and purchased component costs of $0.9 million, or 1.4%, and an increase in labor and overhead expenses of $2.4 million, or 4.8%.
As a percentage of revenues, gross profit margin was 12.6% for the nine months ended September 30, 2022 compared to 13.4% for the nine months ended September 30, 2021. The decrease is primarily due to supply chain and semi-conductor chip shortages at our customer plants, and the disruption caused by the war in the Ukraine. The nine months ended September 30, 2022 results include charges of $0.6 million associated with the restructuring program.
Selling, General and Administrative Expenses. SG&A expenses decreased $0.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, consistent with the prior year amount on a percent of sales basis.
Aftermarket & Accessories Segment Results
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The table below sets forth certain Aftermarket & Accessories Segment operating data for the nine months ended September 30, (dollars are in thousands):
2022
2021
$ Change
% Change
Revenues
$
99,530
$
89,066
$
10,464
11.7%
Gross profit
13,341
14,605
(1,264)
(8.7)%
Selling, general & administrative expenses
4,636
4,407
229
5.2%
Operating income (loss)
8,705
10,198
(1,493)
(14.6)%
Revenues. The increase in Aftermarket & Accessories Segment revenues resulted from increased sales volume and pricing to offset material cost pass-through.
Gross Profit. The decrease in gross profit is primarily attributable to cost of revenues, which increased $11.7 million, or 15.8%, as a result of an increase in raw material and purchased component costs of $5.5 million, or 11.5%, and an increase in labor and overhead expenses of $6.2 million, or 23.4%.
As a percentage of revenues, gross profit margin was 13.4% for the nine months ended September 30, 2022 compared to 16.4% for the nine months ended September 30, 2021. The decrease in gross profit margin is primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases. The nine months ended September 30, 2022 results include charges of $1.4 million associated with the restructuring program.
Selling, General and Administrative Expenses. SG&A expenses increased $0.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, consistent with the prior year amount on a percent of sales basis.
Liquidity and Capital Resources
As of September 30, 2022, the Company had $11.6 million of outstanding borrowings under its revolving credit facility, $38.7 million of cash and $137.2 million of availability under the revolving credit facility, resulting in total liquidity of $175.9 million.
Our primary sources of liquidity as of September 30, 2022 were cash reserves and availability under our revolving credit facility. We believe that these sources of liquidity will provide adequate funds for our working capital needs, capital expenditures and debt service throughout the next twelve months. However, no assurance can be given that this will be the case.
As of September 30, 2022, cash of $35.0 million was held by foreign subsidiaries. The Company had a $0.5 million deferred tax liability as of September 30, 2022 for the expected future income tax implications of repatriating cash from the foreign subsidiaries for which no indefinite reinvestment assertion has been made.
On May 12, 2022, the Company entered into an amendment to increase its existing senior secured credit facilities to $325 million from $275 million consisting of a $175 million Term Loan A and a $150 million Revolving Credit Facility. The amendment provides the Company with additional capital flexibility to execute upon its transformation and growth initiatives. As part of the amended terms of the agreement, the maturity date of the Senior Secured Credit Facilities has been extended by twelve months to May 12, 2027, the interest rate decreased by 50 bps at various leverage ratios based on SOFR, and the maximum consolidated total leverage ratio increased from 3.25x to 3.75x until December 31, 2022 with a quarterly step down of 25 bps to 3.00x leverage by September 30, 2023 and remain at this level thereafter. Further, separate from the Company’s annual $35 million capital spending cap, a one-time $45 million capital project basket was included in the amendment. All other key provisions, including the $75 million accordion, acquisition holiday, and other baskets remain unchanged.
Our ability to comply with the covenants in the Credit Agreement, as discussed in Note 4, Debt, of our Condensed Consolidated Financial Statements 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
September 30, 2022
September 30, 2021
(In thousands)
Net cash provided by (used in) operating activities
$
33,794
$
(20,889)
Net cash used in investing activities
(12,525)
(11,399)
Net cash provided by (used in) financing activities
(13,031)
16,073
Effect of currency exchange rate changes on cash
(4,483)
(685)
Net increase (decrease) in cash
$
3,755
$
(16,900)
Operating activities. For the nine months ended September 30, 2022, net cash provided by operating activities was $33.8 million compared to net cash used in operating activities of $20.9 million for the nine months ended September 30, 2021. Net cash provided by operating activities is primarily attributable to a decrease in working capital for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Investing activities. For the nine months ended September 30, 2022, net cash used in investing activities was $12.5 million compared to $11.4 million for the nine months ended September 30, 2021. In 2022, we expect capital expenditures to be approximately $22 million.
Financing activities. For the nine months ended September 30, 2022, net cash used in financing activities was $13.0 million compared to net cash provided by financing activities of $16.1 million for the nine months ended September 30, 2021. Net cash used in financing activities for the nine months ended September 30, 2022 is primarily attributable to $11.3 million of net repayments under our credit facilities. Net cash provided by financing activities for the nine months ended September 30, 2021 is attributable to $26.8 million of borrowings, offset by $5.4 million of costs attributed to debt amendment and extinguishment completed during the nine months ended September 30, 2021 and a $5.0 million Contingent Consideration payment.
Debt and Credit Facilities
The debt and credit facilities descriptions in Note 4, Debt of our Condensed Consolidated Financial Statements are incorporated in this section by reference.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For a comprehensive discussion of our significant accounting policies, see "Note 1. Significant Accounting Policies", to our consolidated financial statements in Item 8 in our 2021 Form 10-K.
Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. We review the development, selection, and disclosure of our critical accounting estimates with the Audit 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 2021 Form 10-K. At September 30, 2022, there have been no material changes to our critical accounting estimates from those disclosed in our 2021 Form 10-K.
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 2021 Form 10-K. As of September 30, 2022, there have been no material changes in our exposure to market risk from those disclosed in our 2021 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 September 30, 2022. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022 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 September 30, 2022 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.
We are subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, product liability claims, customer and supplier disputes, service provider disputes, examinations by taxing authorities, employment disputes, workers’ compensation claims, unfair labor practice charges, OSHA investigations, intellectual property disputes and environmental claims arising out of the conduct of our businesses. 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 2021 Form 10-K and our filings with the SEC since December 31, 2021. 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.
We face risks related to heightened inflation, recession, financial and credit market disruptions and other economic conditions
Our financial results, operations and prospects depend significantly on worldwide economic and geopolitical conditions, the demand for our products, and the financial condition of our customers and suppliers. Economic weakness and geopolitical uncertainty have in the past resulted, and may result in the future, in reduced demand for products resulting in decreased sales, margins and earnings. In 2022, the countries in which we operate experienced significantly heightened inflationary pressures which we expect to continue into 2023. We may not be able to fully mitigate the impact of inflation through price increases, productivity initiatives and cost savings, which could have an adverse effect on our results of operations. In addition, if the U.S. economy enters a recession, we may experience sales declines which could have an adverse effect on our business, operating results and financial condition.
Similarly, disruptions in financial and/or credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. Further, in the event of a recession or threat of a recession, our customers and suppliers may suffer their own financial and economic challenges and as a result they may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet our customer demands or collect revenue or otherwise could harm our business. An economic or credit crisis could occur and impair credit availability and our ability to raise capital when needed. A disruption in the financial markets could impair our banking or other business partners, on whom we rely for access to capital. In addition, changes in tax or interest rates in the U.S. or other nations, whether due to recession, economic disruptions or other reasons, could have an adverse effect on our operating results.
Economic weakness and geopolitical uncertainty may also lead us to impair assets, take restructuring actions or adjust our operating strategy and reduce expenses in response to decreased sales or margins. We may not be able to adequately adjust our cost structure in a timely fashion, which could have an adverse effect on our operating results and financial condition. Uncertainty about economic conditions may increase foreign currency volatility in markets in which we transact business, which could have an adverse effect on our operating results.
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any equity securities during the nine months ended September 30, 2022 that were not registered under the Securities Act of 1933, as amended.
Forward-Looking Statements
This Quarter Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements under “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry outlook, the Company’s expectations for future periods with respect to its plans to improve financial results, the future of the Company’s end markets, including the short-term and long-term impact of the COVID-19 pandemic on
our business and the global supply chain, changes in the Class 8 and Class 5-7 North America truck build rates, performance of the global construction equipment business, the Company’s prospects in the wire harness, warehouse automation and electric vehicle markets, the Company’s initiatives to address customer needs, organic growth, the Company’s strategic plans and plans to focus on certain segments, competition faced by the Company, volatility in and disruption to the global economic environment, including inflation and labor shortages, financial covenant compliance, anticipated effects of acquisitions, production of new products, plans for capital expenditures and our results of operations or financial position and liquidity, may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believe”, “anticipate”, “plan”, “expect”, “intend”, “will”, “should”, “could”, “would”, “project”, “continue”, “likely”, and similar expressions, as they relate to 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.
Andy Cheung Offer Letter dated September 8, 2022 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 14, 2022)
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.
