Our weekly bond review this week focuses on a leading supplier of cab related products and systems for the global commercial vehicle market. Commercial Vehicle Group’s (CVGI) primary products include seating systems, trim systems and wire harnesses. CVGI’s recent quarterly results showcase a company that is increasing its margins and liquidity while decreasing costs.
Operating income margin in Q1 increased to 5.3%, from Q4 level of 3.3%.
Q1 2016 cash levels of $97.8M indicate a 6% increase from the prior year period.
Total liquidity increased in Q1 to $135.3M versus Q4 level of $129.7M.
CVGI implemented a restructuring program in late 2015 which will ultimately save the company between $8M and $12M annually.
CVGI also recently won new business contracts that will ultimately translate to an additional $10M to $12M in income each year. The company’s short-term senior notes, maturing in April 2019 are currently yielding a competitive 8%. Investors looking to add additional diversification to their portfolios should consider the addition of these B2 rated bonds. These short 33-month bonds have met our investment criteria for addition to both our FX1 and FX2 managed portfolios.
Improving Margins and New Business
CVGI has been actively working to improve its margins over the past year. In Q1, its operating income margin increased to 5.3% from its Q4 2015 level of 3.3%. Also in Q1, its gross profit margin increased from 13.5% in Q4 2015 to 14.3% in Q1 2016. These improved margins were also evident in the company’s Global Construction and Agriculture segment. In Q1, this segment registered essentially flat operating income year-over-year, notwithstanding the 15.7% decline in revenues, due to improvements in gross profit margins and reduced Sales, General and Administrative (SG&A) expense.
CVGI’s Global Construction and Agriculture segment also registered recent wins in additional business within existing customer channels. This additional business includes providing wiper systems, wire harnesses and thermoformed headliners and roof canopies. The new wiper system wins are complementary to its existing platforms, and applies not only to machines built in the US, but also to machines built in Europe and South America. Additionally, CVGI has gained incremental wire harness business with numerous construction and agriculture Original Equipment Manufacturers (OEMs) as well as its selection by a global agriculture OEM to supply thermoformed headliners and roof canopies. When fully implemented, all of the new launches represent $10 – $12M of incremental revenue annually for CVGI.
About the Issuer
Commercial Vehicle Group (CVGI) began as a private company in August 2000 and became publicly held in 2004. CVGI is a leading supplier of a full range of cab related products and systems for the global commercial vehicle market, including the medium and heavy-duty truck market, the medium and heavy-duty construction vehicle market and the bus, agriculture, military, specialty transportation, mining, industrial equipment and off-road recreational markets. The company current has manufacturing operations in the United States, Mexico, United Kingdom, Czech Republic, Ukraine, China, India and Australia. The company has two business segments; the Global Truck and Bus segment (GTB), which generated 68.4% of 2015 sales, and the Global Construction and Agriculture Segment (GCA), which generated $31.6% of 2015 sales.
In 2015, a strong majority, 78%, of the company’s sales came from North America. In terms of product mix, the three largest components in 2015 were 41% of from seat sales, 22% from Trim sales and 19% from wire harness sales. CVGI’s client companies include names such as Volvo, Daimler, Paccar, Caterpillar, Navistar and John Deere.
Restructuring for Reduced Costs
In late 2015, CVGI began a restructuring program to reduce costs and increase efficiencies. This included consolidating its seat manufacturing facilities from 3 sites to 2 sites and streamlining manufacturing processes as well as selective personnel reductions. These actions have already begun taking effect. In Q1, Commercial Vehicle Group’s SG&A expenses were down 8% over the same period in 2015. CVGI will continue to implement these restructuring initiatives throughout 2016, wrapping up toward the end of 2017. When all initiatives are implemented, CVGI estimates an annual cost savings between $8M and $12M.
In 2015, CVGI’s primary end markets were OEMs in the Truck (49%), Construction (18%) and Bus (16%) markets. Its product mix in 2015, was primarily seats (41%), trim (22%) and wire harnesses (19%). Demand for its heavy-duty truck products is dependent of the number of new heavy duty truck (Class 8) commercial vehicles built in North America, which is affected by the general health of the economy, incorporating items such as fuel costs, production rates and current inventory levels amongst others. Historically, this demand has been cyclical, particularly focused on the industrial sector. ACT Research, a publisher of industry market research estimates North American heavy duty commercial truck production levels to decline to 237,000 (from 323,000 in 2015) in 2016 and gradually increase to 327,000 in 2020. ACT also estimates medium duty truck production to be relatively flat for 2016 at 236,000 units, gradually increasing to 274,000 by 2020. CVGI believes it has approximately 5% market share of the global truck, bus, construction and agriculture end markets. Therefore, there is significant opportunity to grow organically in its end markets.
In addition to improving its margins and reducing its costs, CVGI has also been working to deleverage its balance sheet and increase its liquidity. In October 2015, CVGI redeemed $15M of these Senior 2019 Notes, reducing the outstanding balance from $250M to $235M. This move also reduced the company’s annual interest expense by $1.2M. The company’s cash and liquidity has also been improving. From Q1 2015 to Q1 2016, CVGI increased its cash level by 6%, from $92.2M to $97.8M. And its total liquidity also increased between Q4 2015 and Q1 2016, from $129.7M to $135.3M.
In 2015, CVGI had operating income of $38.03M and interest expense of $21.21M, for an interest coverage ratio of 1.79x. This ratio remained virtually unchanged in Q1, with operating income of $8.58M and interest expense of $4.86M for an interest coverage of 1.76x. Although this coverage level is lower than some of the other issues profiled on this blog, CVGI continues to boast healthy cash and liquidity levels. In addition, the company is profitable, registering net income in 2015 of just over $7M, and net income of $2.6M in Q1.
The default risk is CVGI’s ability to perform. The company has been making excellent progress on improving its margins and reducing operating costs. CVGI is also taking advantage of opportunities to deleverage and improve its balance sheet. It has been increasing its cash and liquidity levels to not only ensure adequate capital for operations, but also to take advantage of opportunities for capital growth or additional deleveraging. While the yields on this bond may not be as high as some of the other issues recently reviewed on this blog, these bonds still have an excellent yield when compared to a comparable three year U.S. Treasury, currently yielding less than 1%.
Summary and Conclusion
Commercial Vehicle Group has been working to steadily increase its operating and profit margins. This has helped the company to maintain operating income levels in its Global Construction and Agriculture segment, even as revenues declined. It used excess cash to pay down $15M of these 2019 notes late last year and continues to build its cash and liquidity levels. Its restructuring initiative is driving down operating costs, ultimately saving CVGI between $8-$12M per year. Coupled with the recent new business wins, which are estimated to bring an additional $10-$12M in income each year, CVGI could be looking at a bump of up to $24 M in income within the next few years. Operating income for 2015 was just over $38M. The addition of $24M in income would greatly increase CVGI’s profitability and possibly open up opportunities to expand its product offerings through mergers or acquisitions. CVGI’s 2019 bonds, couponed at 7.875%, and currently yielding 8%, provide additional diversification for income seeking investors, and meet our investment criteria for addition to both the Fixed-Income1.com and Fixed-Income2.com global high yield income portfolio strategies.
Issuer: Commercial Vehicle Group, Inc.
Yield to Maturity: ~8.08%
About Durig Capital
At Durig Capital, we provide investors with a specialized, transparent fiduciary service at a very low cost. To obtain higher yields and keep costs as low as possible, we typically bundle smaller retail orders into larger institutional sized orders with many global trading firms and bond platforms. Our professional service enables access to a greater spectrum of bonds, higher yields, and lower price points. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured.
We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful. Our main priority is to provide the best opportunities for our clients. Our bond reviews are published on the Internet and distributed through our free email newsletter to thousands of prospective clients and competitive firms only after we have first served the needs of our clients. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients.
When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.
To know more about this Commercial Vehicle Group bond call our fixed income specialist at 971-327-8847
Tell us what your looking for, or if you have questions about US bond.
Disclosure: Durig Capital and certain clients may have positions in Alta Mesa Holdings 2018 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you