Commercial Vehicle Group Inc (CVGI) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Commercial Vehicle Group Q4 Earnings Conference Call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Kirk Feiler.

You may begin.

Thank you, Lisa, and welcome to our conference call.

Joining me on the call today are Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group; and Tim Trenary, Chief Financial Officer.

They will provide a brief company update as well as commentary regarding our fourth quarter and full year 2019 financial results.

We will then open the call up for questions.

This conference call is being webcast and a supplemental earnings presentation is available on our website.

Both may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost savings initiatives and new product initiatives, among others.

Actual results may differ from anticipated results because of certain risks and uncertainties.

These risks and uncertainties may include, but are not limited to, economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies and other risks as detailed in our SEC filings.

I will now turn the call over to Pat Miller to provide a company update.

Thank you, Kirk.

Thank you, everyone, for joining the call today.

Before I get into what was already a difficult quarter, I want to take a few minutes to discuss the restatement we announced last evening.

As we disclosed last evening, we have restated our financial statements for fiscal year 2018 and those affecting the 3 quarters in 2019.

We also corrected other immaterial errors in our previously filed financial statements.

As part of our preparation of the 2019 financial statements, we discovered a potential overstatement of the prepaid tooling -- production tooling account in our vehicle cab structures manufacturing facility.

As a result, with oversight by the Audit Committee, an investigation was conducted by external counsel with the assistance of a forensic accounting firm.

This investigation concluded that the misstatements in our consolidated financial statements were due to inappropriate journal entries prepared by a former employee.

The inappropriate journal entries consisted of the former employee understating cost of revenue by improperly capitalizing certain manufacturing expenses primarily as prepaid production tooling.

During the course of, and as a result of, the investigation, the company terminated the former employee and has taken additional personnel actions.

Tim and I and our entire senior management team as well as the Board of Directors take this matter seriously.

We believe, based on our investigation, that this was isolated to one employee and one manufacturing facility.

However, we acknowledge that we had control failures that prevented us from detecting the former employee's inappropriate action, and, as a result, we have material weaknesses in our internal controls.

We have put into place a plan to strengthen our internal controls and remediate the material weaknesses, including: enhancing the design of the balance sheet account reconciliation process, enhancing the design of the manual journal entry processes and enhancing the company's risk assessment process to reduce the risk of financial misstatements.

While these measures are intended to effectively remediate the material weaknesses, it is possible that additional steps will be necessary.

Until these material weaknesses are remediated, we plan to continue to perform additional analyses and other procedures to help ensure that our consolidated financial statements are prepared in accordance with GAAP.

Now let me turn to the results for the fourth quarter and full year 2019.

As we discussed on our third quarter call, we had started to see a swift deceleration in the North American heavy- and medium-duty truck markets as well as declines in the global construction market, which weighed heavily on our fourth quarter and full year results.

North American commercial truck market has slowed considerably.

While the year-over-year comparison reflects a 7% increase in the North American medium- and heavy-duty truck revenues, the robust quarterly increases we saw in 2018 began to curtail sharply in the second half of 2019.

For 2020, we are now estimating Class 8 production declines of approximately 35% to 42% and Class 5-7 production declines of approximately 15% to 20%.

ACT is forecasting North America Class 8 truck production to be down approximately 39%, 209,000 units, in 2020 and then steadily increase back up to 308,000 units by 2023.

ACT forecasts Class 5-7 truck production to be down 15% to 240,000 units in 2020 and then steadily increase to 274,000 units in 2023.

In the global construction markets, the APAC region was soft for most of 2019, with Europe and North America showing signs of weakness in the fourth quarter.

As a reminder, demand for our construction equipment products is driven by the level of large-scale infrastructure development projects, such as highways, dams, hospitals, airports and industrial development as well as mining, forestry and commodities industries around the world.

We estimate the construction markets we serve in North America, Asia and Europe may decline 10% to 15%.

As we have stated previously, when a market contraction occurs rapidly, as we experienced in the fourth quarter of 2019, it creates challenges in flexing our workforce.

In the short term, the OEMs take out days and weeks instead of adjusting build rates, which minimizes our ability to match our costs with the volume.

As the customers actually adjust their rates, which they are attempting to do now, we are better able to align our variable costs.

Additionally, we took proactive steps to adjust the fixed costs also to lower production levels.

These measures included cost reduction and restructuring actions that we believe should not impede the company's ability to ramp back up as demand returns.

The restructuring initiatives were primarily headcount reductions at a corporate level as well as within each segment.

In addition, we identified areas of further cost containment associated with transferring and consolidating production, allowing the subsequent closure of 2 facilities.

Both of these closures are the result of improved productivity and floor space utilization, which is allowing us to combine facilities and achieve comparable levels of production.

Lastly, we are reinvesting part of the cost savings from the restructuring into the electrical segment to build upon the growth opportunities we're seeing.

The majority of these investments come in the form of allocating and engaging resources in the commercial functions of the electrical business.

In order to grow with new customers, new industries and with new capabilities, we are modifying our commercial processes to facilitate an increased funnel of new business opportunities in targeted areas.

We are also dedicating resources to focus on organic growth actions while allowing a different team to manage and maintain our core business.

These changes include reconstructing our sales and engineering teams to better align with our long-term goals.

We have brought in some new sales leadership and technical talent to increase our responsiveness to customers and to help shift our culture from build-to-print to more value-add content and service support.

Secondly, we are developing the processes and knowledge to expand our capability into high-voltage cables and high-speed data applications that opens new markets for CVG.

We are working with 2 of our major customers now to validate our high-speed data products.

Our intent is to prove our capability in North America and then duplicate these processes in other regions.

As the electric and electronic applications expand within vehicle architecture and industrial products, the need for high-speed data and high-voltage components is also expanding.

One year ago, we announced the reorganization of our business to align with our products versus industry markets, better position the company for accelerated growth.

During 2019, we made the acquisition of FSE as part of that strategy.

The addition of this business proves -- improves diversification, helps insulate us in a downturn and opens up new markets.

To date, the integration is progressing according to plan.

Our 100-day plan was achieved on schedule, and we expect to complete remaining integration actions in Q2.

Our integration focused primarily on back office areas, and we're 90% complete.

We also have been discovering opportunities to apply our Lean systems to FSE's flexible manufacturing model, which shows promise for future enhancements on the bottom line.

FSE's core business is in industrial automation and defense markets, and we are seeing solid demand in both segments.

Our order book has been very strong, and indications are that the first half sales are in line with our expectations for growth year-over-year with positive indicators for the full year.

The markets that we support at FSE are expected to grow 8% to 10% CAGR over the next few years.

In the near term, FSE is experiencing growth rates above those market rates, which we attribute to the type of electronic products that FSE delivers.

Another related development involves cross-selling opportunities within FSE's customer base.

We have already supplied harnesses for a rail application and won a business award for an industrial seat application.

We are not prepared to announce details yet, but we are excited about the growth prospects and opportunities that we are finding in these new end markets.

Finally, I would say that early indications are that the FSE acquisition is meeting the growth targets we anticipated without experiencing the cyclical downturns we see in our core markets.

Additionally, we are achieving the synergies we planned and opening up new growth paths for our other business units.

So we are pleased with this acquisition to date.

More broadly speaking, the growth and diversification opportunities within the Electrical Systems segment have also been very exciting.

We are in development on multiple new electric vehicle applications across our product portfolio and recently received a PO for prototype development work on the electric powertrain slated to support several different electric vehicles for a major new customer.

We are staffing these opportunities in order to participate in the pending new launches targeted in 2021 and 2022.

On the Global Seating side, while the market headwinds I discussed are clearly a challenge, we are seeing some small wins in Europe and India in the construction and railway markets.

We are also working with current customers on new products and applications that include content growth, especially in our Asian regions where we see more applications evolving to suspension seating from previous static-only options.

Our focus in seating related to our strategic reorganization continues to be driving synergies to allow common flexible designs and reduce validation costs.

These actions are tied to increasing our competitive cost position in the markets we participate.

This approach has recently been validated as we were awarded the follow-on business with one of our largest current customers for the replacement of a large existing seating application that will be utilizing our new flexible common product architecture launching in 2023.

We are currently in development with other global customers that are equally interested in our new product design.

Switching gears, I'd like to discuss COVID-19 impacts.

Our operations in China were affected by the health event with production shutdowns following the Chinese New Year holiday and much of the month of February.

However, our team has done an outstanding job managing through the rapidly changing situation and has begun safely ramping back up in early March.

The inventory that had been increased prior to the holiday has helped to sustain the supply chain with customers.

We are currently at approximately 70% production levels in our China operation and trending to be back up to full capacity in the second quarter.

Our customers, for the most part, have been very cooperative and have helped us prioritize production to align with their efforts.

Some orders have been pushed out, and so far, the customers are asking us to make up the backlog.

Consequently, we estimate an immaterial loss to sales at this time in the China operation.

From a supplier standpoint, most suppliers in the region are back up and running at varying levels, and freight is starting to move.

We had trouble getting logistic companies to pick up shipments and the ports were slow for a while, but now it is returning to normal levels.

We are encouraged by what we've seen in recent weeks in China.

Additionally, we have made localization moves initially related to tariff impacts that may help us to offset some of the potential shortages that may arise in future months as the supply chains get reestablished.

In other regions, the situation is dynamic, and we are taking preventative measures where possible and are monitoring conditions closely.

Looking forward, we are focused on remediating the internal control weaknesses, completing planned restructuring actions, reducing variable costs to better align the business with lower production levels while at the same time strategically investing in areas we believe will enhance our growth profile as markets improve.

With that, I'll turn the call over to Tim, who will go through the financials in more detail.

Thank you, Pat, and good morning.

As Pat pointed out, the company restated 2018 financial results, and, within the 2019 Form 10-K filed yesterday, the financial results for the first 3 quarters of 2019.

Immaterial corrections were made to the 2017 financial statements.

The impact of the restatement on the company's statements of operations for 2018 and for the 9 months ended September 30, 2019, is an understatement of cost of revenues, more specifically material costs, by $3.9 million and $4.6 million, respectively.

As regards the manufacturing facility associated with the restatement, looking forward to 2020, we estimate that material costs in the facility will decline by $4 million to $5 million from 2019 partly due to material supplier actions and partly due to the anticipated decline in production levels in the facility.

As part of the independent investigation, the cost of which will be incurred in the first quarter, was $3 million and which is now complete, we determined that assets were not misappropriated from the company.

Furthermore, we determined that the company's cash flow was not impacted.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.

As a consequence of the misstatements, we have identified material weaknesses in the design of certain of our internal controls.

These material weaknesses did not allow us to prevent the misstatements nor did they us allow to detect the misstatements timely.

The company has developed a remediation plan.

Until these material weaknesses are remediated, we intend to perform additional analyses and other procedures to help ensure that our consolidated financial statements are prepared in accordance with generally accepted accounting principles.

Before I speak to the company's fourth quarter and full year 2019 financial results, here are some overarching remarks regarding the business environment the company operated in during the year.

Consolidated sales in 2019 were roughly the same as in 2018.

However, this is not representative of the business environment during the year.

More specifically, heavy-duty truck production in North America was high coming into 2019.

89,000 units were produced in the first quarter, production remained at about that level in the second and third quarters and then declined dramatically to 67,000 units in the fourth quarter.

That's a 26% decline.

Exacerbating this step change in fourth quarter production was the instability of some OEM production schedules during the quarter, which sometimes changed suddenly.

Production fluctuations of this magnitude and suddenness impaired the ability of our operators to flex their near-term cost structure, especially manpower levels, which, in the case of OEM shutdowns, must be maintained so that we can resume production when the OEMs resume production.

This impairs our ability to achieve our normal variable contribution margin, what we refer to as conversion or pull-through.

Setting aside the possible impact of the coronavirus on our operations and on our customers' production schedules and assuming our customers' production schedules and volumes normalize in the near term, we believe our operators will manage costs to a more normal variable contribution margin in 2020.

Further impacting pull-through in 2019 were material and labor costs.

Coming into 2019, certain material suppliers enjoyed pricing leverage in large part due to high production levels, which adversely affected pull-through.

Although our materials costs largely reflect this pricing leverage currently, it seems that supplier pricing leverage has moderated.

Furthermore, actions are underway that may improve the effectiveness of our supply chain.

As regards labor, costs associated with difficult labor markets, including higher labor costs, and costs associated with employee attrition were also problematic coming into 2019.

Furthermore, the cost of labor in the Ukraine was exacerbated by the relative strength of the Ukrainian currency, the hryvnia.

Importantly, the continued investment in and success of our Lean Six Sigma programs offset some of these material and labor cost pressures during the year.

The labor market stabilized somewhat during the year, and certain costs like recruiting and training costs and overtime have started to come down.

The hryvnia has begun and continues to depreciate, which may also provide some relief in 2020.

Two exogenous events impacted pull-through in 2019.

You may recall that in the first quarter of 2019, Mexico imposed a new statutory minimum wage, the so-called border minimum wage, in a geographic area along the Mexican-U.

S. border and encompassing our wire harness facility in Agua Prieta, Mexico.

The impact of the border minimum wage in 2019 was approximately $2.3 million.

A number of actions, including pricing adjustments on certain products, reduced the impact of this wage hike.

Exiting 2019, the annual impact of the border minimum wage was reduced to approximately $1.2 million annually.

Furthermore, costs associated with a troubled supplier of fabricated metals that sought Chapter 11 bankruptcy relief began to impact us in the second quarter.

Costs associated with the troubled supplier in 2019 were approximately $3.1 million.

We were able to manage these costs down somewhat during the quarter.

Exiting 2019, the annual impact of the troubled supplier was reduced to less than $2 million.

Our long-term strategy includes growing our Electrical Systems Segment.

To that end, we made investments in our global wire harness and North American trim business during the year.

Start-up costs were approximately $1.8 million in 2019, approximately $1 million of which is nonrecurring.

We continue to believe this is a wise allocation of resources to support our strategy to grow this segment.

Turning now to our results for the fourth quarter of 2019.

Consolidated revenues were $189.5 million compared to $223.6 million in the prior year period, a decline of 15%.

This decrease reflects the decline in heavy-duty truck production in North America and in the construction equipment markets we serve.

FSE contributed $10.4 million of revenue in the fourth quarter.

Foreign currency translation adversely impacted fourth quarter revenues by $0.7 million.

Consolidated operating loss for the fourth quarter was $4.3 million or 2.3% of sales compared to consolidated operating income of $13.4 million or 6% of sales in the prior year period.

The decrease in operating income is largely attributable to lower revenue, inflationary pressure on material and labor costs and operating inefficiencies associated with the steep decline in heavy-duty truck production in the quarter.

Border minimum wage, costs associated with the troubled supplier and the manufacturing investments impacted fourth quarter results by approximately $1 million.

We are taking restructuring and other cost reduction actions that are expected to reduce operating costs by $5 million to $7 million annually once fully implemented.

These savings, the $5 million to $7 million, are after giving effect to repurposed spend for growth investments.

These actions were initiated in the fourth quarter of 2019 in anticipation of weakening end markets.

The benefits of these actions began in January 2020.

We estimate that about 1/3 of the savings will be in place by the middle of the year, about 2/3 by year-end and the remainder early in 2021.

Pretax costs associated with these actions are expected to be $6 million to $8 million, the majority of which are employee-related separation costs and other costs associated with the transfer of production and subsequent closure of facilities.

Approximately $3 million of the costs related to these actions were incurred in the fourth quarter of 2019, with the remaining $3 million to $5 million expected to be incurred in 2020.

Net loss for the fourth quarter 2019 was $7.5 million or $0.24 per diluted share compared to net income of $8.1 million or $0.26 per diluted share in the prior year period.

As for the full year 2019 consolidated results, revenues of $901.2 million were about the same as 2018 or $897.7 million.

Heavy-duty truck production in North America was high during the year but declined significantly in the fourth quarter.

Global construction equipment volumes for medium- and heavy-duty equipment declined in 2019 compared to 2018.

FSE contributed $12.8 million in revenues in 2019.

Foreign currency translation negatively impacted revenues by $10.4 million or 1.2%.

Consolidated operating income in 2019 was $40.6 million or 4.5% of sales compared to $62.9 million or 7% of sales in the prior year.

Decrease in operating income was largely attributable to inflationary pressure on material and labor costs and operating inefficiencies in part associated with the steep decline in heavy-duty truck production in the fourth quarter.

Pretax costs of $3 million associated with the restructuring initiatives are included in the 2019 results.

The border minimum wage, $2.3 million; troubled supplier, $3.1 million; and costs associated with manufacturing investments, $1.8 million, also impacted 2019 results.

Selling, general and administrative costs were $62.5 million in 2019, an increase of $1.7 million compared to $60.7 million in the prior year period.

Costs associated with the acquisition of FSE, $0.9 million; and the restructuring initiatives, $0.8 million, impacted SG&A during the year.

Interest and other expense was $19.1 million and $13.4 million for the years ended 2019 and 2018, respectively.

Increase is primarily a result of the mark-to-market impact of the interest rate swap agreement, which resulted in a $1.8 million noncash charge in 2019 and a $0.8 million gain in the prior year period.

Additionally, 2019 results include a $2.5 million noncash charge associated with the voluntary lump sum settlement of $7.8 million in pension liabilities for a portion of our term vested participants.

This lump sum settlement reduces financial risk associated with this pension plan.

Our U.S. pension plan is now essentially fully funded, and we have weighted the asset allocation away from equities to fixed-income securities.

Net income was $15.8 million in 2019 or $0.51 per diluted share compared to $41.5 million or $1.36 per diluted share in 2018.

The effective tax rate in 2019 was 27%.

The effective tax rate in 2020 is highly uncertain for a number of reasons.

Having said that, for the moment, we are modeling 35%.

Turning now to our segments.

Q4 2019 revenues for the Electrical Systems Segment were $113.9 million compared to $127 million in the prior year period, a decrease of 10.3%.

Sharp decline in North American heavy-duty truck production in the quarter and a decline in the construction markets we serve were partially offset by $10.4 million of FSE revenues.

Foreign currency translation adversely impacted fourth quarter revenues by $0.3 million or 0.3%.

Electrical Systems operating income for the fourth quarter 2019 was $1.1 million, compared to $12.3 million in the prior year period.

The decrease was due primarily to the lower volumes, inflationary pressure on material and labor and operating inefficiencies as a result of the sharp decline in North American heavy-duty truck production.

Costs associated with the restructuring actions, $2.2 million, were incurred in the fourth quarter.

Full year 2019 revenues for the Electrical Systems segment were $530.9 million compared to $512.8 million in the prior year, an increase of 3.5%, reflecting modest increases in North American heavy-duty truck production for the full year and the FSE acquisition.

These increases were partially offset by declines in the global construction equipment markets we serve.

Foreign currency translation adversely impacted 2019 revenue by $3.7 million or 0.7%.

Electrical Systems segment operating income in 2019 was $42.8 million or 8.1% of sales compared to $55 million or 10.7% of sales in the prior year.

Decrease period-over-period is primarily attributable to inflationary pressure on material and labor costs and in part to the operating inefficiencies.

Costs associated with the restructuring initiatives, $2.2 million; the border minimum wage and the troubled supplier, $5.4 million, impacted the Electrical Systems Segment in 2019.

Manufacturing investment in our global wire harness business is $1.8 million for the year.

Turning now to Global Seating.

Fourth quarter 2019 revenues were $76.5 million compared to $99.3 million in the prior year period.

This 22.9% decrease was primarily the result of a decrease in heavy-duty truck production in North America in the quarter and the decline in the construction markets we serve.

Foreign currency translation negatively impacted fourth quarter Global Seating revenue by $0.4 million or 0.4%.

Fourth quarter Global Seating operating loss was $0.6 million compared to operating income of $7 million in the prior year.

The decrease is primarily attributable to lower volumes, inflationary pressures on material and labor and operating inefficiencies as a result of the sharp decline in end market volumes during the quarter.

Fourth quarter Global Seating results include $0.5 million of restructuring costs.

Full year 2019 revenues for the Global Seating Segment were $381.5 million compared to $397.5 million in the prior year, a decrease of 4% primarily resulting from declines in the global construction markets we serve, offset partially by modest increases in heavy-duty truck production in North America.

Foreign currency translation adversely impacted 2019 revenue by $6.7 million or 1.7%.

Global Seating segment operating income was -- in 2019 was $24.2 million or 6.4% of sales compared to $31.2 million or 7.9% of sales in the prior year.

The decrease year-over-year is primarily attributable to the lower volumes, inflationary pressure on material and labor costs and operating inefficiencies in part as a result of the sharp declines in end market volumes during the quarter.

The 2019 results include charges of $0.5 million associated with the restructuring initiatives.

For the year 2019, capital expenditures were $24.1 million higher than recent historical spend primarily as a result of the investments we made during the year in the Electrical segment.

We expect to return to historical capital expenditure levels of from $12 million to $14 million in 2020.

Although the COVID-19 virus has affected production in our China facility somewhat, this had very little impact to date on the company's consolidated financial results.

Any future impact of the virus on the company's financial results is highly uncertain.

The company has drawn down $15 million of the previously undrawn revolving credit facility just in case.

At December 31, 2019, the company had liquidity of $94.6 million, $39.5 million of cash and $55.1 million of availability from our revolving credit facility.

There were no borrowings under the facility at December 31, 2019.

That concludes our prepared remarks.

And Lisa, I will now turn it over to you.

(Operator Instructions) And our first question comes from the line of Chris Howe from Barrington Research.

First off, just want to start off with what you're seeing in the current macroeconomic environment as it relates to your workforce, in retaining that workforce through the weakness you saw in the fourth quarter in this fiscal year.

And more specifically, in regard to the restructuring of your sales and engineering teams, how do you feel about the current staff that's in place as you look to expand your capabilities into high-speed data and also high-voltage cabling applications?

Okay.

So I think I understood the question.

This is Pat.

As far as retaining workforce, I think as Tim mentioned in his prepared remarks, we have seen a steady improvement in that condition, especially as production has leveled through the year in most of the places in which we operate.

So it has reduced our expenses from attrition and recruiting, for the most part, across the company, and I think helped stabilize those costs.

And frankly, improved productivity -- we've been seeing improved productivity across most of our operations.

So that's a general statement as far as workforce.

Now there have been some special considerations certainly in China during February and March.

But even then, we've worked very closely with all of our employees through a lot of government-required actions as well as the well-being of our team there.

They've been able to help and facilitate people in getting back where they need to go.

Travel and whatnot was restricted for some period of time.

And as we mentioned, things are starting to return to a normal operating, at least up to where we're at today and what we see for the foreseeable future.

From a sales and engineering standpoint, we have made pretty dramatic changes in particular in the electrical arena.

And that's in both parts of that business, on the electrical -- electronics side as well as in the interior trim and injection molding, chemical-based process side of things.

And for the most part, we implemented a new organic growth process across that segment.

That included analyzing and revamping how we go about reacting to new customers.

Over time, as you have 6 or 7 large customers with similar characteristics and needs and requirements, our systems have adapted to their systems.

And as we try to bring in new customers and approach new segments, we have to be more flexible in how our front-end systems work.

And so we have been moving through the process since -- really since the fall to modify those processes to be more open, more flexible and faster responding to be able to quote new business and take on things that don't fit neatly into the processes that we have.

What we found is that, that is a different skill set.

So you've heard the analogy about hunters and gatherers, that when you have very large core customers that you've had for many years, you tend to migrate toward the type of individual that is more of a maintenance and core customer dependent.

So that necessitated changes for us in some personnel and the type of personnel and also additions because we did not want to decrease our focus on the core customers.

And so we have split organizations and changed the structure.

We brought in new talent.

Some of it has -- some of those folks come out of industries that are more electronically proficient and have a deeper understanding of the direction of some of this evolution that we're currently experiencing.

And so we're pretty excited about the changes we've made.

Some people are new.

They've come on board in the fourth quarter.

We are probably still evolving those actions.

We've implemented new quoting systems and methodologies that allow us much faster response time, be much more flexible to customer needs.

And some of this we're learning from the FSE acquisition.

Their business is modeled in a more discrete order- and project-based fashion requiring them to be faster.

And so that's how we've been structuring our business.

I'm encouraged by some of the results we're seeing as far as the amount of opportunities and the way that we analyze those opportunities, quickly deciding whether they fit into the strategic funnel or not.

So thanks for asking the question.

That's something that I think we're very eager to announce results.

And those actions are taken because we feel like we're going to see some positive results that we'll be able to talk about shortly.

That's interesting.

And following up on some of your comments in regard to FSE as I have Slide 7 of the deck in front of me, can you talk about the level of visibility you have this next fiscal year as it relates to cross-selling opportunities, potential new businesses coming online as well as the synergistic opportunities here?

And assuming the noise in the global markets continues, kind of a worst-case scenario, does this change at all your capital allocation or preservation activities?

I know you mentioned the $94 million of liquidity on hand in case of emergency.

But how should we think about that as it relates to your potential for accretive, inorganic opportunities or investments in the current Electrical Systems business?

Okay.

Let me talk about the first one, which is how much visibility do we have.

We -- that business is different than our other businesses.

It tends to be discrete, project-oriented orders but from some of the same repetitive customers and similar type products.

And so we have a pretty good visibility to the pipeline through the first 6 months of 2020 in the form of hard orders.

In the back half of 2020, what we're seeing is very positive indicators from many of the same customers on pending orders that they are seeing in their business, which would result in orders in our business.

That's kind of how it works.

Let me give you a flavor of the types of customers.

I can't -- I'm not prepared to talk specific customers because I don't know that we've divulged that publicly, but I will say the businesses that we're helping to support in industrial automation includes all of these new logistic, automated warehouses that are expanding across -- tied directly to online sales, last-mile deliveries and not just in North America, but that business is blossoming globally.

Our customers are international customers.

They have that capability.

Today, we're predominantly supporting them in North America, but that's another longer-term opportunity for us.

But my point is that particular business is continuing to grow, and speed is critical for them.

And so the faster that we can help produce those programs for our customers.

So we're down in the chain.

So we're like a Tier 2 supplier into that chain, making electromechanical assemblies as well as the electronic control units for those electromechanical systems.

So that business has been blossoming.

Second major industry segment for them is defense, the defense side and, in particular, the electronics and the communication modules for the defense side.

And you can see that what we can tell for the next few years, that business is -- it looks robust.

So that's our visibility on FSE's direct business.

On the comment about cross-selling opportunities, some of those same customer dynamics I just described are opening up opportunities for our tier -- for our customers who are Tier 1s into that industry who have capacity issues.

So they are struggling with capacity issues, and they're looking for opportunities for us to be able to support them, and we are evaluating those now.

We have had to get different certifications in some of our facilities.

In the case of one facility, we've recently gotten UL certified officially, and we've got customer audits and things planned over the next 30 to 45 days, assuming that some of these restrictions related to COVID-19 don't inhibit any of that activity.

So we see near-term opportunities, and we also see some longer-term opportunities for us inside that cross-selling action.

I don't -- we're not prepared to put any timing or magnitude to it yet because it's early, but we're pretty excited about the speed at which they move.

It's a much faster-selling process than what we see in most of our businesses.

Great.

That's very helpful.

And can you perhaps comment on the other part of my question as far as -- given the noise that you're seeing in the global markets, does that impact at all your assessment of inorganic opportunities this next fiscal year in Electrical Systems?

I think it's...

Well, I -- if your -- if the -- this is Tim, Chris.

If the question is in regards to the company's ability to continue to invest in growth organically more specifically in the Electrical Systems Segment, we had at the end of the year a total liquidity approaching $100 million, and cash flow has been pretty static so far this year.

So that hasn't been an issue at all.

Of course, look, I mean, it's no -- there's a tremendous uncertainty now in the near term with respect to the global economy but especially our economy here in the United States because of this virus, so I can't pretend or begin to anticipate what that might mean for us.

But setting that aside, I believe that we have today adequate capital to continue to invest organically in the company's business...

Inorganic.

Inorganically, I'm sorry.

He wants to (inaudible)

Okay.

I'm going to get to that, okay?

Continue to invest organically in the business.

As for inorganic.

About 15 months ago now, we made a conscious decision to develop a corporate development function which, as evidenced by the acquisition of FSE, was, I think, a wise investment and a successful investment.

We're very happy with First Source Electronics.

We -- notwithstanding the downturn here in the markets and the contraction in the company's business somewhat, we intend to continue to make this investment in corporate development to explore inorganic activities.

If we are so fortunate as to find the right opportunity with the right set of products, the right customers, the right cash flow profile, we will consider how best to finance that opportunity at that point in time.

Of course, it will depend on the capital markets, the construct of the cash flows, et cetera, et cetera.

But I believe that if we find the right opportunity, the right fit for our company, the right set of cash flows and if the capital markets are open, I think that we have a fair shot at getting it financed, and so we're going to continue to pursue corporate development opportunities.

Our next question comes from the line of Mike Shlisky from Dougherty & Company.

I was wondering if you can give us a sense of the seasonality you think of the truck build schedules in 2020 perhaps maybe just in general.

And also, have you seen any changes in the last few weeks or so in the order patterns or the build schedule based on the COVID-19 situation?

As far as -- our expectation initially going into the year in 2020 for truck builds were that there was going to need to be some correction in the builds, which unfortunately started in earnest in the fourth quarter and continued in -- early in first quarter.

And we -- our expectation, and they were communicating clearly, were to reduce build rates down to some lower daily build rates and allow us to align our daily build rates with theirs.

That has -- it was -- the intent was to correct the inventory levels and whatnot resulting from lower order rates.

And so that is really how we expected the year to proceed.

Unclear about the second half of 2020, but that's how we expected the first half.

And there haven't been any large impacts related to the COVID virus from the North American truck build at this stage that we've seen related to order patterns.

So the orders have been a little bit erratic in the first quarter but not related to anything other than correcting for the market dynamics.

So I think that is to be seen.

I mean, obviously, [things] have been changing daily here over the last week or 2 in North America, and we will adapt as required to what their needs are.

Globally, interestingly, we have continued to see orders along the ways that we have planned in our other operations, which are support a couple of different other industries in addition to some of the commercial trucking but as well as construction and others.

So, so far, we've not seen any knee-jerk reactions.

Now what's going to happen over the next few months and few weeks, it's uncertain.

Okay.

I wanted to just switch over quickly to some of the things you said on EVs.

You mentioned that there were some units coming out in 2021 and 2022.

Hopefully, you're working closely with those OEMs.

Are those heavy vehicles or medium?

And do you have any sense as to whether the content per vehicle from CVG will be higher compared to a diesel?

Okay.

Oh, sorry.

So electric vehicle, yes.

I mean I think the exciting and interesting thing about that emerging market space for us is related to the fact there are some new entrants, right?

So there are new entrants who need support, they need help, they need suppliers who have wherewithal across the multitude of product portfolios because they're trying to launch companies.

And we have found that there's opportunities for us to support them in that process.

And while things are still new and emerging in that arena, we are encouraged by the activities and the activity level we have across our product portfolio.

It varies, Mike, to answer your question on content.

Obviously, if we can put a multitude of products on a vehicle, then we get -- that's a good content per vehicle for us.

If we're strictly trying to look at apples-to-apples in particular related to the electrical content, I'd say it's equivalent because what we see going away -- and let me characterize that a little differently.

It's equivalent if the vehicle and the powertrains and everything are just swapping electric for diesel.

But what we're seeing is there is an evolution of increased electronic and electric -- electrically controlled subsystems in these vehicles.

And so that is driving an inflation, what we're calling technical inflation, all right?

And so what we're seeing is -- in particular in the 2 new products that I mentioned, high-voltage and high-speed data, is each of these subsystems have to talk to each other.

They have to be powered and they have to have high-speed data coming to and from them.

You've got cameras in places where you didn't have cameras, and it's multiplied.

And what that's doing is that is dramatically increasing the amount of content opportunity for our electrical group, okay?

So that's really where we see the content change, is the type of systems that they're putting in.

So where they have today a hydraulic or a mechanical system, they're converting that to either an electric system, which needs power and data, or it's at least electronically monitored with sensors and data generation and communication.

So that's where we're seeing the content growth.

Got it.

And maybe the last one for me.

There are 2 major truck OEMs that are in the process of possibly merging right now.

One, I know, is your customer.

The other one I'm not sure about.

Can you give us a sense as to whether there's an opportunity there?

They've already been trying to work together on their supply agreements.

But is there any kind of opportunity for CVG to capture some more business going forward from that tie-up?

I assume you're referring to VW and NAV.

And...

Yes.

We have a long history and relationship, and they are a major customer for us, Navistar, in North America.

We work with Volkswagen predominantly through Skoda in the Czech Republic on the passenger car side and a little bit on the truck side but not a lot.

So the opportunity for us would be able -- would be to have access into that European side of things.

That would be the major opportunity for us.

It's an inflection point, and -- but they've been actually working together, at least on the procurement side, pretty closely for, I think, the last 12 months.

So we've been interacting with, I think, Navistar with support from Volkswagen for -- since they took a bigger stake about a year ago.

I would now like to turn the call back to Pat Miller for closing remarks.

Okay.

Thank you, Lisa.

Listen, I want to tell everyone I appreciate them joining the call.

We have -- I want to reassure you that we have managed through other market cycles in the past, and we are taking the necessary steps now to align our business as well as preparing for other potential scenarios as they unfold.

And we appreciate your support and your patience as we work through those dynamic issues, and I wish you the best.

Stay safe and well.

And we look forward to talking to you next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.