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11/02/2021 | 04:09pm EST

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 September 30, 2021 and 2020. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2020 Form 10-K.

Business Overview CVG is a global provider of components, assemblies and systems to the traditional commercial vehicle market, the electric vehicle market, and the warehouse automation market.

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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 in North America,
which in turn is a function of general economic conditions, supply chain
constraints, interest rates, changes in government regulations, consumer
spending, fuel costs, freight costs, fleet operators' financial health and
access to capital, used truck prices and our customers' inventory levels. New
heavy-duty truck demand has historically been cyclical and is particularly
sensitive to the industrial sector of the economy, which generates a significant
portion of the freight tonnage hauled by commercial vehicles.
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
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
On April 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 ended September 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 on April 30, 2021 and the TLS Agreement and Third
ARLS Agreement were terminated.
On October 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
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investment threshold from $25.0 million to $32.0 million.
On October 25, 2021, the Company provided notice to the Volvo 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 in North America, Europe and Asia Pacific as a
result of government orders, our inability to obtain component parts from
suppliers and/or decreased customer demand. In addition, many of our suppliers
and customers may experience production slowdowns and/or shutdowns, which may
further impact our business, sales and results of operation. Continued impact on
the Company's business, sales and results of operations from the COVID-19
pandemic may also result in additional valuation allowances being recorded
against our deferred tax assets. The extent of the adverse effect of the
COVID-19 pandemic on our business results depends on future developments,
including the severity and duration of the pandemic and its overall impact on
the economy.
While backlog was strong in the truck markets during the quarter ended
September 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 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 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.
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. We expect the restructuring cost to be between $4.0 million to
$6.0 million for the entire program.
In late March 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

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