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 six months ended June 30, 2020 and 2019. 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 2019 Form 10-K.

Company Overview

Commercial Vehicle Group, Inc. (through its subsidiaries) is a leading supplier of seating systems, electro-mechanical assemblies, engineered material products, and warehouse automation subsystems for many markets including the following: trucking, military, warehouse automation, bus, agriculture, specialty transportation, mining, industrial equipment and off-road recreational markets. We have manufacturing operations in the United States, Mexico, China, United Kingdom, Czech Republic, Ukraine, Thailand, India and Australia. Our products are primarily sold in North America, Europe, and the Asia-Pacific region. We are differentiated from automotive industry suppliers by our ability to manufacture low volume, customized products on a sequenced basis to meet the requirements of our customers. We believe our products are used by a majority of the North American medium- and heavy-duty truck ("MD/HD Truck") and many medium- and heavy-duty construction vehicle original equipment manufacturers ("OEMs"), and other makers of industrial equipment.

Business Overview

For the six months ended June 30, 2020, approximately 34% of our revenue was generated from sales to North American MD/HD Truck OEMs and approximately 18% from sales to OEMs in the global construction equipment market. Our remaining revenue was primarily derived from sales to the aftermarket, OE service organizations, industrial, military and specialty markets. We are having success with our strategy to diversify our end markets by growing in the industrial / material handling, and military end markets, primarily through the success of the FSE acquisition. These markets offer high growth rates and provide a balance to our traditional, cyclical end markets.


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Demand for our products may be driven by preferences of the end-user of the
vehicle, particularly with respect to heavy-duty trucks. Unlike the automotive
industry, heavy-duty truck OEMs generally afford the end-user the ability to
specify many of the component parts that will be used to manufacture the
vehicle, including a wide variety of cab interior styles and colors, brand and
type of seats, type of seat fabric and color, and interior styling. Certain of
our products are only utilized in heavy-duty trucks, such as our storage
systems, sleeper boxes and privacy curtains. To the extent that demand for
higher content vehicles increases or decreases, our revenues and gross profit
will be impacted positively or negatively.
We generally compete for new business at the beginning of the development of a
new vehicle platform and upon the redesign of existing programs. New platform
development generally begins one to three years before the marketing of such
models by our customers. Contract durations for commercial vehicle products
generally extend for the entire life of the platform. Several of the major truck
makers have upgraded their truck platforms and we believe we have maintained our
share of content in these platforms. We continue to pursue opportunities to
expand our content.
In general, demand for our heavy-duty (or "Class 8") truck products is generally
dependent on the number of new heavy-duty trucks manufactured in North America,
which in turn is a function of general economic conditions, interest rates,
changes in government regulations, consumer spending, fuel costs, freight costs,
fleet operators' financial health and access to capital, used truck prices and
our customers' inventory levels. New heavy-duty truck demand has historically
been cyclical and is particularly sensitive to the industrial sector of the
economy, which generates a significant portion of the freight tonnage hauled by
commercial vehicles. North American heavy-duty truck production was 345,000
units in 2019. While CVG is not providing 2020 guidance, according to the July
2020 report by ACT Research, a publisher of industry market research, North
American Class 8 production levels are expected to decrease to 169,000 units in
2020, steadily increase to 336,000 units in 2023 and then decline to 267,000
units in 2025. ACT Research estimated that the average age of active North
American Class 8 trucks was 6.3 and 6.6 years in 2019 and 2018, respectively. As
vehicles age, maintenance costs typically increase. ACT Research forecasts that
the vehicle age will decline as aging fleets are replaced.
North American medium-duty (or "Class 5-7") truck production steadily increased
from 249,000 units in 2017 to 281,000 units in 2019. While CVG is not providing
2020 guidance, according to the July 2020 report by ACT Research, North American
Class 5-7 truck production is expected to decrease to 166,000 units in 2020,
steadily increase to 274,000 units in 2025. We primarily participate in the
class 6 and 7 portion of the medium-duty truck market.
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. The construction markets we serve in North America,
Europe and Asia have declined.
As more specifically described in Note 20, on September 17, 2019, the Company
acquired substantially all of the assets and certain liabilities of First Source
Electronics, LLC. The industrial and military markets we serve in North America
have been robust and continue to show growth opportunities.
Coronavirus
The global spread of the novel strain of coronavirus ("COVID-19") that has been
declared a pandemic by the World Health Organization and the preventative
measures taken to contain or mitigate the outbreak has caused, and are
continuing to cause, significant volatility, uncertainty and economic
disruptions. The outbreak has resulted in governments around the world
implementing increasingly stringent measures to contain or mitigate the spread
of the virus, including quarantines, "shelter in place" and "stay at home"
orders, travel restrictions, business curtailments and other measures consistent
with applicable government guidelines. Specifically, in the United States, most
states placed restrictions on business operations and issued stay-at-home orders
for residents beginning in late March and early April. Although many of these
restrictions were eased or lifted throughout the country during May and June,
COVID-19 continues to spread, business operations remain challenging, and
unemployment is at historically high levels. On June 8, 2020, the National
Bureau of Economic Research declared that a recession began in the United States
in February 2020. Based on the preliminary estimate released by the Bureau of
Economic Analysis on July 30, 2020, the U.S. gross domestic product (the "GDP")
decreased at an annual rate of 32.9% in the second quarter of 2020. This sharp
decline in the GDP represents the lowest quarter since the U.S. government began
tracking this measure in 1947 and illustrates the difficulty of the economic
environment in which we are currently operating. While we continue to operate
certain of our facilities, we are experiencing, and may continue to 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 are also experiencing, and may
continue to experience, production slowdowns and/or shutdowns, which may further
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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 future
developments, including the severity and duration of the pandemic and its
overall impact on the economy.
As a result of the rapid changes in our end market conditions, our OEM customer
ordering patterns and general uncertainties around the impacts of COVID-19 on
businesses such as government-mandated shut downs, the Company will not be
providing 2020 guidance related to North American Class 5-8 truck and global
construction production.
Business Actions During COVID-19
In March 2020, we began implementing certain business continuity processes
focused on maintaining  productivity and service levels while prioritizing the
health, welfare and safety of our employees and customers. These processes
include employee communication on proper hand washing, social distancing and
personal protective equipment; enhanced cleaning and disinfecting measures;
manufacturing and distributing reusable face masks to employees throughout the
Company; eliminating non-essential travel; replacing internal and external
meetings with video or teleconferences; remote work arrangements for
non-production personnel; flexed schedules for onsite personnel; daily self
monitoring or onsite temperature scanning for personnel working on-site; health
screening procedures for critical customer visitors; the installation of hands
free faucets and touch free sanitizer dispensers in many facilities; enhanced
hygiene and distancing protocols for all Company provided transportation and
food services; and the enforcement of social distancing protocols via visual and
physical plexiglass barriers, as recommended by the Centers for Disease Control
and Prevention and other public health organizations within our geographic
footprint.
In March 2020, the Company borrowed $15 million on its revolving credit facility
as a proactive measure to preserve financial flexibility in consideration of
general economic and financial market uncertainty resulting from the COVID-19
pandemic. Additionally, in the three months ended June 30, 2020, we amended our
Term Loan Facility and Revolving Credit Facility. The Term Loan Facility
amendment temporarily suspends the leverage ratio covenant through the fiscal
quarter ending December 31, 2020, and resets the leverage ratio covenant levels
for quarterly periods ended March 31, 2021 through September 30, 2021, before
returning to original leverage ratio covenant for the quarterly period ended on
December 31, 2021. The amendment also temporarily adds a new minimum
consolidated liquidity covenant of $40 million for the quarters ended June 30,
2020 through September 30, 2021, and amends certain restrictive covenants
limiting the Company's ability to incur additional debt, grant liens, repurchase
the Company's stock and to issue dividends or make investments. The amendment
increases the ability of the company to restructure its operations. The maturity
date remains unchanged.
The Revolving Credit Facility amends the terms of the revolving loan agreement
to align certain of the restrictive covenants with the restrictive covenants in
the Term Loan Agreement, as amended.
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 are expected
to continue through 2020 and into 2021. Actions included headcount reductions,
reduction in recurring consulting expenses, reprioritization and decrease in
capital spending and reduction in sales and marketing expenses. Additionally,
the Company eliminated 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 future
risk of uncertainty. We believe these purposeful actions will permanently lower
the Company's cost structure and preserve core growth initiatives.
According to ACT Research, third quarter 2020 North American heavy-duty truck
build is expected to increase by approximately 50% as compared to the second
quarter of 2020, as the North American Truck OEMs rebound from the second
quarter which was negatively impacted by COVID-19. Third quarter medium-duty
truck build is expected to increase by approximately 30% as compared to the
second quarter, per ACT Research. Although the COVID-19 pandemic creates
forecasting uncertainties, we currently anticipate revenues to increase 25% to
35% for the three months ending September 30, 2020, as compared to the three
months ended June 30, 2020.

Our Long-Term Strategy

Our long-term strategy is to grow revenue by product, geography and end market. Our products include electrical wire harnesses and electro-mechanical and cable assemblies, Trim, molded plastics, mirrors, wipers and controls, cab structures and sleeper boxes, and Seats. We intend to allocate resources consistent with our strategy; more specifically, consistent with our product portfolio, geographic region and end market diversification objectives. We periodically evaluate our long-term strategy and may adjust the strategy in response to changes in our business environment and other factors.


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Table of Contents As part of our long-term strategy, we have considered and will consider acquisitions and divestitures to enhance return to our stockholders and service to customers. The Company completed the acquisition of FSE in September 2019. This strategic acquisition improves our ability to participate in the progression of digitalization, connectivity and associated power and data applications. The acquisition also complements our wire harness business, provides an entry into new markets, and provides us with an opportunity to leverage our global footprint and to increase cross-selling opportunities.

Strategic Footprint Repositioning

The Company is strategically repositioning its operations to grow faster, innovate rapidly, and lower its costs. This repositioning involves twelve facilities.

The Company's business in the warehouse automation and military markets continues to grow with solid long-term outlook. We have taken strategic actions to significantly expand our footprint, capacity, and product complexity to serve these diverse markets. These actions are expected to support between $100.0 million to $150.0 million of new business, depending on the mix. Anchor customer business has already been established for this multi-plant expansion with key actions underway as follows:



1.Expanding our Elkridge, MD plant by securing new space at an adjacent
property. This plant is the main plant for
our manufacturing warehouse automation subsystems and military subsystems.
2. Repurposing floor space and creating new manufacturing capability in our
Vonore, TN plant.
3. Repurposing floor space and creating new manufacturing capability in our
Chillicothe, OH plant.
4. Repurposing floor space and creating new manufacturing capability in our
Monona, IA plant.
5. Moving certain production from Monona, IA plant to our low cost facility in
Agua Prieta, Mexico.
6. Design and installation of a new medium-duty seat production line in our
Saltillo, Mexico plant.

The Company is also permanently consolidating a portion of our cost structure dedicated to mature markets through several deliberate actions including the redistribution of our centralized R&D capabilities to speed the time to market for new products and expand our ability to innovate in the Asian market. The key actions underway in this area are as follows:

1.Consolidation of our Piedmont, AL plant into our Vonore, TN plant. 2.Consolidation of one-half of our existing manufacturing footprint at our Concord, NC plant with our low cost facility in Saltillo, Mexico. 3.Consolidation of our corporate R&D center and activities into two existing U.S. plants and improving our R&D capabilities at our Shanghai, China site, with the goal of increased innovation in each market. 4.Closure of our facility in Morelos, Mexico, and consolidation of equipment into our Agua Prieta, Mexico plant.

We expect our strategic footprint realignment to help us expand in growth areas, reduce costs in mature areas, and increase our ability to innovate. We believe we are on track to permanently reduce our annualized costs by over $15.0 million in mature markets through a combination of staff reductions, facility consolidations, and operational improvements. We believe these actions will make us stronger, increase our competitiveness, accelerate the speed of our innovation, and increase our opportunities to win. We are leveraging our know-how to serve top tier OEMs with high quality, on-time delivery of complex subsystems into new areas. We believe these actions will enable new value and new growth.


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