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 month periods ended
Business Overview CVG is a global provider of components, assemblies and systems to the traditional commercial vehicle market, the electric vehicle market, and the warehouse automation market.
22 -------------------------------------------------------------------------------- Table of Contents Commercial Trends in the North America Commercial Truck Markets Demand for our products may be driven by preferences of the end-user of the vehicle, particularly with respect to heavy-duty trucks. Heavy-duty truck OEMs generally dictate the specifications of component parts that will be used to manufacture the vehicle, including a wide variety of cab interior styles and colors, brand and type of seats, type of seat fabric and color, and interior styling. Certain of our products are only utilized in heavy-duty trucks, such as our storage systems, sleeper boxes and privacy curtains. To the extent that demand for higher content vehicles increases or decreases, our revenues and gross profit will be impacted positively or negatively. Current trends include future adoption of electric vehicles in the commercial truck segment. Commercial truck makers are developing electric models of all classes of trucks and buses in their fleets. This has created an increased number of platform opportunities relative to historical trends of platform changes. The Company competes to retain its existing positions on platforms that are getting refreshed, competitively win new positions on platforms on which it is not the incumbent supplier, and gain first fit positions on new Electric Vehicle platforms. The global truck market is evolving to include many offerings aimed at low emissions and less impact on the environment. In general, demand for our heavy-duty (or "Class 8") truck products is generally dependent on the number of new heavy-duty trucks manufactured inNorth America , which in turn is a function of general economic conditions, supply chain constraints, interest rates, changes in government regulations, consumer spending, fuel costs, freight costs, fleet operators' financial health and access to capital, used truck prices and our customers' inventory levels. New heavy-duty truck demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy, which generates a significant portion of the freight tonnage hauled by commercial vehicles. With respect to the North American medium-duty (or "Class 5-7") market, we primarily participate in the Class 6 and 7 portion of the market. The medium-duty truck market is influenced by overall economic conditions but has historically been less cyclical than the North American Class 8 truck market, with highs and lows generally not as pronounced as the Class 8 truck market. The Company is a new entrant into making components, sub-assemblies and systems for the last-mile delivery vehicle market. This is a focus of business development activities and the Company has secured business for 2021 and beyond. Commercial Trends in Warehouse Automation Subsystems Demand for our warehouse automation subsystems is derived by expansion of supply chain infrastructures to accommodate increased customer orders in e-commerce. As the percentage of products ordered on-line increases, the delivery mechanisms must expand to increase output. Additionally, desire for cost reduction, increased throughput volume and SKU proliferation, a greater variety of order and package types, more frequent product returns by end consumers, and COVID-19-driven social distancing protocols on warehouse floors, all have driven increased investment in automated solutions by warehouse operators. The Company assembles the material handling subsystems incorporated into automated warehouses. Commercial Trends in Construction Equipment Demand for our construction equipment products is dependent on vehicle production. Demand for new vehicles in the global construction equipment market generally follows certain economic conditions around the world. Our products are primarily used in the medium- and heavy-duty construction equipment markets (vehicles weighing over 12 metric tons). Demand in the medium- and heavy-duty construction equipment market is typically related to the level of large scale infrastructure development projects, such as highways, dams, harbors, hospitals, airports and industrial development, as well as activity in the mining, forestry and commodities industries. Other Key Developments OnApril 30, 2021 , the Company closed on$275 million in senior secured credit facilities, consisting of a$150 million Term Loan Facility and a$125 million Revolving Credit Facility. During the nine months endedSeptember 30, 2021 , the Company recognized a loss on extinguishment of debt of approximately$7.2 million , including a non-cash write off relating to deferred financing costs and unamortized discount of the 2023 Term Loan Facility, a voluntary repayment premium, and certain fees related to the new Credit Facilities. The Company deferred$1.8 million of fees related to the new Credit Facilities. All amounts under the 2023 Term Loan Facility and ABL Revolving Credit Facility were repaid and discharged in full onApril 30, 2021 and the TLS Agreement and Third ARLS Agreement were terminated. OnOctober 25, 2021 , the Company entered into an amendment (the "Amendment") to the Credit Agreement. The Amendment permits the Company to engage in supply chain financing arrangements with financial institutions to cover up to$20.0 million in accounts receivable from customers per month. Additionally, the Amendment increases the Company's capital expenditure 23 -------------------------------------------------------------------------------- Table of Contents investment threshold from$25.0 million to$32.0 million . OnOctober 25, 2021 , the Company provided notice to theVolvo Group ("Volvo") of the Company's intention to terminate its agreement with Volvo, with such termination to become effective twelve months from the date of notice, absent the parties reaching mutually agreeable terms upon which to continue their relationship. The Company is focused on implementing customer price increases where margin on product is not meeting profitability targets. 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 inNorth America ,Europe andAsia Pacific as a result of government orders, our inability to obtain component parts from suppliers and/or decreased customer demand. In addition, many of our suppliers and customers may experience production slowdowns and/or shutdowns, which may further impact our business, sales and results of operation. Continued impact on the Company's business, sales and results of operations from the COVID-19 pandemic may also result in additional valuation allowances being recorded against our deferred tax assets. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on future developments, including the severity and duration of the pandemic and its overall impact on the economy. While backlog was strong in the truck markets during the quarter endedSeptember 30, 2021 , 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 in the third quarter, including longer lead-times to procure parts fromChina and due to port backups, labor inflation, chip shortages, steel and other raw material inflation, and freight cost increases. The impact of the pandemic and related economic recovery continue to be uneven from period to period and across our global footprint based on local and regional outbreaks. We continue to proactively monitor, assess and minimize to the extent 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. As we begin the fourth quarter, supply chains for our products continue to be negatively impacted by the global shortage of semiconductor chips. We are proactively managing to the extent possible labor shortages due to local dynamics around our primary manufacturing facilities, material inflation, freight costs increases, and global supply constraints. OnNovember 1, 2021 , the Company's Board of Directors approved a restructuring program to align the Company's cost structure to support margin expansion. The program includes workforce reductions and footprint optimization across segments. We expect the restructuring cost to be between$4.0 million to$6.0 million for the entire program. In lateMarch 2020 , the Company took action to right-size the business and working capital profile to protect profit margin and liquidity levels. We implemented a comprehensive program of cost reduction initiatives and manufacturing capacity rationalization initiatives. These actions continued through the end of 2020. Actions included headcount reductions, reduction in recurring consulting expenses, re-prioritization and decrease in capital spending and reduction in sales and marketing expenses. Additionally, the Company eliminated the Corporate Business Development, Aviation, Quality, Procurement and Operating Excellence departments. The Company also implemented other temporary measures including pay reductions, plant shutdowns, furloughs, elimination of most annual incentive pay, suspension of the employer 401(k) match, and reduction in non-essential travel in an effort to mitigate the uncertainty.
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