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
Company Overview
Business Overview
For the six months ended
30 -------------------------------------------------------------------------------- Table of Contents 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 inNorth 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 theJuly 2020 report byACT 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 theJuly 2020 report byACT 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 inNorth America ,Europe andAsia have declined. As more specifically described in Note 20, onSeptember 17, 2019 , the Company acquired substantially all of the assets and certain liabilities ofFirst Source Electronics, LLC . The industrial and military markets we serve inNorth 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 theWorld 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, inthe 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. OnJune 8, 2020 , theNational Bureau of Economic Research declared that a recession began inthe United States inFebruary 2020 . Based on the preliminary estimate released by theBureau of Economic Analysis onJuly 30, 2020 , theU.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 theU.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 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 are also experiencing, and may continue to experience, production slowdowns and/or shutdowns, which may further 31 -------------------------------------------------------------------------------- Table of Contents 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 InMarch 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 theCenters for Disease Control and Prevention and other public health organizations within our geographic footprint. InMarch 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 endedJune 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 endingDecember 31, 2020 , and resets the leverage ratio covenant levels for quarterly periods endedMarch 31, 2021 throughSeptember 30, 2021 , before returning to original leverage ratio covenant for the quarterly period ended onDecember 31, 2021 . The amendment also temporarily adds a new minimum consolidated liquidity covenant of$40 million for the quarters endedJune 30, 2020 throughSeptember 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 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 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 toACT 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, perACT Research . Although the COVID-19 pandemic creates forecasting uncertainties, we currently anticipate revenues to increase 25% to 35% for the three months endingSeptember 30, 2020 , as compared to the three months endedJune 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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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
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
1.Expanding ourElkridge, 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 ourVonore, TN plant. 3. Repurposing floor space and creating new manufacturing capability in ourChillicothe, OH plant. 4. Repurposing floor space and creating new manufacturing capability in ourMonona, IA plant. 5. Moving certain production fromMonona, IA plant to our low cost facility inAgua Prieta, Mexico . 6. Design and installation of a new medium-duty seat production line in ourSaltillo, 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
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
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