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Commercial Vehicle Group Inc. (NASDAQ:CVGI)

Q2 2009 Earnings Call

August 5, 2009 10:00 am ET

Executives

Chad M. Utrup – Chief Financial Officer

Mervin Dunn – President and Chief Executive Officer

Analysts

David Leikar – Robert W. Baird

Alan Weber – Robotti & Co.

Ann Duignan – JP Morgan

[Matthew Kaplan]

[Colin Leonard]

[Brendan McMullen]

[Ralph Lehman]

[Jose Feliciano]

Operator

Welcome to the second quarter 2009 Commercial Vehicle Group Inc. earnings conference call. (Operator Instructions). I would now like to turn the presentation over to the host for today's call, Mr. Chad Utrup. You may proceed, sir.

Chad M. Utrup

As usual before we begin the formal portion of the call I will first read through the Safe Harbor language and then I'll pass the call to Merv for a brief company update. And then we'll walk through our second quarter operating results and then we'll take time to answer your questions.

With that I'd like to remind you that the conference call contains forward-looking statements. Actual results may differ from anticipated results because of certain risks and uncertainties. These may include, but are not limited to, the economic conditions in the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies and other risks detailed in our SEC filings.

And I'll turn it over to Merv.

Mervin Dunn

The national and global recessions continue to impact CVG during the second quarter. Depressed business levels in the heavy truck, global construction and other industries have continued to negatively affect each of our end markets.

Although market conditions remained weak during the quarter and our revenues were reduced by approximately 50% from the same period last year, we were able to minimize the detrimental impact to our bottom line due to the significant savings programs we implemented over the past six to nine months.

The value and effect of our cost initiatives is demonstrated by comparing our financial performance during the second quarter to that of our first quarter. In the second quarter our revenues declined by an additional $5 million, yet our operating profit improved by approximately $6.6 million, excluding our non-cash asset impairment.

With this cost structure change in place we are very excited about the potential for CVG when the recession is over and our end markets and volumes return. Going forward we will continue to take steps to align our costs with current market realities and we will also continue our efforts to develop additional business on current and prospective customers.

We will also continue to examine our manufacturing footprint and related costs by consolidating the smaller – closing smaller overlapping manufacturing assembly and sequencing facilities. These closures and consolidations will be performed strategically to insure we preserve the capacity to meet market demands when customer orders increase.

During the past quarter we were pleased to announce Nissan Diesel Motors, a subsidiary of Volvo AB, selected CVG as the development source partner for a new seat and suspension program. This joint initiative is the result of our strategic efforts to expand CVG's global presence and our ability to meet Volvo AB global sourcing objectives.

These new seats along with other interior components such as bunks are planned for use in multiple Nissan Diesel vehicles. These vehicles will be assembled in Japan for domestic use there, as well as export to other global markets including South America, Asia, Australia and the U.S.

We will produce and supply these new model seats from our Shanghai, China facility. The program is scheduled for a late 2009 launch and we expect it to be implemented over an 18 to 24-month period. We appreciate this new business and look forward to a long and continuing relationship with Nissan Diesel.

As mentioned during the quarter we continued to aggressively pursue other new business opportunities. Many of you had asked about CVG's participation in the military vehicle market and the potential impact on CVG from recent Navistar and Oshkosh announcements. Navistar defense and Oshkosh defense are only two of CVG's many military customers.

We also sell multiple product lines to most of these other customers that produce noteworthy military projects. There are at least four major tactical vehicle players who each buy more than one type of product from CVG, whether it would be wiring harnesses, wiper assembly, seats or interior systems.

Overall, we currently have engineers on site or provide a prototype and design services with several major defense contractors that supply motor vehicles to the military including Oshkosh and Navistar. To win supplier awards with these vehicle makers, CVG initially distinguished itself through both speed and services in our manufacturing technology housed in our facilities housed in Vonore, Tennessee, and Monona, Iowa.

Recently we bolstered our cost advantages by obtaining International Traffic in Arms Regulation, ITAR certification for our Agua Prieta, Mexico facility. So as you can see despite the negative markets and headlines we do have some positive news which we will continue to focus on with Chad at this point when I turn it over for the financial overview.

As you can see from the announcements that have come out recently this has been a very busy quarter. It's been a very busy six months for us. Chad, would you go through the financials for us?

Chad M. Utrup

As you guys saw from the release our revenues this past quarter were $103.5 million, which is a reduction of $105.7 million or about 51% from the second quarter of last year. The drop is not only the result of a estimated 57% decrease in North American Class 8 build rate from the prior year, but also reflects our global OEM construction revenues which were down more than 60% from the prior year period.

In addition to that we've got reductions in demand and our OEM bus, after market, military, service and other specialty markets were collectively down a considerable amount from the second quarter of last year as well.

With top line reductions of this magnitude we continue to focus heavily on cost reductions and cash management throughout the quarter. These cost reduction initiatives are evident in our SG&A expenditures for the quarter, which were reduced by approximately $6.4 million or 38% from this time last year, and down approximately $3 million or 22% when compared to just one quarter ago.

And on a comparative basis, excluding the one-time non-cash intangible and fixed asset impairments charged during the quarter, our operating income actually increased by approximately $6.6 million from just one quarter ago, despite a reduction in our sales of approximately $5 million. This highlights the benefits of our highly variable cost structure and the impact of our recent cost reduction efforts.

We did record approximately $10.4 million in one-time non-cash impairment charges related to certain domestic and foreign operations and in connection with our FAS 144 and FAS 142 analyses performed during the quarter. The current market environment continues to put pressure on the carrying values of certain assets, and we recorded additional impairment charges as a result of our analyses.

Depreciation was approximately $4.3 million for the quarter and amortization was $97,000. Capital spending also continues to remain a focus and was only $1.5 million for the quarter, or 1.4% of revenues.

We recorded a gain of approximately $3.5 million in other income related to the mark-to-market of our foreign exchange contracts. As you may recall this was a substantial expense for us throughout 2008 as rates continued to move unfavorably against our contracts throughout the prior year.

By the way, our effective tax rate for the quarter was negative 0.5%. As I mentioned last quarter this is driven primarily by valuation allowances required under FAS 109 due to the three-year cumulative loss created by the goodwill intangible asset impairments from last year.

Net debt, defined here as total debt less cash and cash equivalents, was approximately $147.3 million at the end of the second quarter, consisting of our $150 million 8% senior notes, a $3.4 million outstanding revolver balance and approximately $6.1 million of cash on hand at the end of the quarter.

That said, as you may have seen from our recent release on our bond exchange issuance the new second lien term loan and our ABL amendment the actual balance on our ABL as of yesterday, after giving effect to the transactions, was actually zero. This comes even after making a $6 million bond interest payment in July.

This would not be possible without the significant efforts in our working capital and cash generation efforts throughout the quarter such as inventory, which has been reduced by nearly $30 million over the past six months during a period when production levels were very depressed. The employees in our facilities have done an outstanding job in the areas of operations and materials management to make this happen.

As mentioned in the press release we are not providing guidance for the balance of the year at this time due to the volatility of our end markets. That said we currently believe we will remain in compliance with our financial covenant requirements for the full year 2009 under our revised capital structure. With our success in cash and working capital management, along with our revised capital structure announced yesterday, we are now in a better financial position moving forward toward market recovery.

As both Merv and I have mentioned we have implemented significant cost cutting and cash generating initiatives during the first six months of this year, and we continue to focus on the development of new initiatives on an ongoing basis.

The second quarter was indeed a difficult time with continuing market pressures and substantial employee related cutbacks but we remain extremely focused on the tasks at hand and optimistic about our improved cost bases and overall footprint when we see the economy and our end markets return.

With that, operator, we'd like to open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from David Leikar – Robert W. Baird.

David Leikar – Robert W. Baird

I want to walk through the revenue number here a little bit as we go forward and just get an understanding of the new business that you've announced here recently, and then what's going on with the end markets.

If you take a look at the Nissan, the Volvo, and the Daimler programs in aggregate, that's what $22 to $24 million. I think most of those are expected to be fully ramped up around this time. How much of that are you actually able to realize at the moment given where the end markets are?

Chad M. Utrup

Well I think the Nissan Diesel one you mentioned that doesn't start until towards the end of this year so I'm not sure that one is included, and the other two that you mentioned, David, sorry?

David Leikar – Robert W. Baird

The Volvo and the Daimler.

Chad M. Utrup

Oh, the Volvo and the Daimler. The Volvo piece is in the process of ramping up. It ramped up probably midway through the second quarter I believe. Merv, wasn't that the date; somewhere around the middle? So obviously volumes are down but I would say roughly we're seeing maybe half of that impact with the timing and the ramp up. And something similar with the Daimler piece as well, probably more along the lines of maybe half or towards the end of the second quarter, David.

David Leikar – Robert W. Baird

That's what fell into your second quarter number?

Chad M. Utrup

Yes, I don't have exact numbers with me but yes, those were the timing. I mean, the Volvo piece and the Daimler piece I think fell –

David Leikar – Robert W. Baird

Then the $6 million for Daimler and $8 million for Volvo I think they really set it; that was that current production volumes. Are those still accurate numbers on a run rate going forward from where we are?

Chad M. Utrup

Yes, I think at the time the current thought was we were in that 120 to130 range so maybe it's down a 10% or something like that, David.

David Leikar – Robert W. Baird

Are there any other items there plus or minus excluding the end market that would move revenue one way or the other in the second half of the year versus the second quarter?

Chad M. Utrup

Well, probably the biggest thing for us which we can't get into numbers just yet is the military piece. Merv mentioned we've got product on pretty much all those OEMs whether it's seats and interiors with one or harnesses and wipers with another. So that will be beneficial for us we expect for the last half versus the first half.

David Leikar – Robert W. Baird

The what do you have in terms of an Oshkosh on the MATV?

Mervin Dunn

We have different product lines from wire and harnesses to wipers and currently working with them on several other items. They've been a very good customer of ours. They've gone from probably fourth or fifth largest customer up until – they're probably one of our top two customers now.

David Leikar – Robert W. Baird

And where you got your overall revenue on the MATVs larger than what you recognized under the MRAP program as that went through?

Chad M. Utrup

Yes, it's a little bit difficult for us to get into numbers just yet because we're still kind of finalizing everything, David, but our hope is that it'll be comparable at a minimum.

David Leikar – Robert W. Baird

And your MRAP volume is down to zero right now. You don't have any aftermarket or anything like that at this point I assume?

Chad M. Utrup

Yes, essentially that's right.

David Leikar – Robert W. Baird

Then the other item here is if we look at in an incremental opportunities here on cutting costs, you guys have pretty much cut as deep as what you can, but is there anything here given the volumes continue to be weak, on the capacity, on the headcount, on the SG&A line. And again, you've done a fantastic job so far so it's not a critical comment so that why I say is there anything incremental left there?

Mervin Dunn

Yes. There's always incremental left. One of the things that we've been trying to do is be very conscious when we are taking out of SG&A because of new programs that we are landing and that we are implementing on launches. So what we've been able to do is talk to the people and we've taken what we call furloughs or time off without pay starting with myself down through my staff and then we just kind of led the way on doing this. Then the plants that have been more effective, they've taken more of that.

So no, that's something that we'll still continue to monitor and if need to be we'll still do the tough decisions and make the cuts like we've been doing. I think our SG&A well exceeded most people's expectations on the way we cut.

Operator

Our next question comes from Alan Weber – Robotti & Co.

Alan Weber – Robotti & Co.

Merv, when you talked about the – obviously the Class 8 market is down and the global construction is down, can you talk about the aftermarkets and some the other products. Then also by kind of products between seats, you know the electronic harnesses, cab structures, just kind of what's better and what's worse than just being down 50%?

Mervin Dunn

What we see on the aftermarket, it is down. It's down worse than what we had – most all of us had originally anticipated. One of the reasons is as long as your tonnage miles are down and your replacement of trucks are down then your replacement of components on those trucks are going to be down. Along with what we're being told that some of our fleets are – parts are being taken off of other trucks in the field.

So when this comes back, we expect the aftermarket to come probably more expedited than what it would normally be during a heavy OME sales growth, too. As far as cabs, our major production of cabs are for International and Mack.

So according to how they're doing on market share, and that's something I really don't want to get into is my customers' market shares, then we're going to be up or down on those. As far as wiring harnesses that's primarily construction and military. Seats is pretty much across the board with all customers as far as construction and heavy truck. So yes, they're pretty much down whatever the market's down.

Chad M. Utrup

Yes, and that's probably, Alan, seating is probably down more than any of the other products given what Merv just said. It's because our seating products are on construction and truck. And construction for us in the second quarter is down certainly more than we expected but it's down more than the other end markets as well, so that one is probably impacting seating.

Alan Weber – Robotti & Co.

On the previous call, I think it was maybe the third quarter call, you kind of alluded to and you alluded to it again this morning that you're kind of in a spot where you don't want to cut so much because you want to be able to participate and bid on potential new business because at some point I think we all believe the markets will rebound. So I believe that's what you stated.

And so if we look at this quarter, having said that, if the markets did stayed flat and your revenues stayed at the current level, can you get the company positioned so that it can actually be profitable at a run rate of $400 million of revenues?

Mervin Dunn

I think so.

Alan Weber – Robotti & Co.

While you could also be looking to bid on potential or increase your market share?

Mervin Dunn

Absolutely. The difference when we talk about bidding versus launching is two major concerns. The people that bid on the product are not necessarily tied much to launching of the product. The quoting, we're still quoting a lot of business. The thing that we're not seeing as many people take a lot of moves because right now a lot of the customers' times are spent just trying to keep the suppliers they've got afloat.

And that's one reason I'm very proud of the way that this company has been able to perform with cost reductions, with new agreements on financials where we've got the company very well positioned to last longer in a very difficult market where most people – let me rephrase that, where a lot of people are continuing to struggle and still being as proactive as we have been.

Alan Weber – Robotti & Co

So is there – I mean or do you have, and whether you tell us or not, is there some timeline where if the markets continue to be worse than anybody expects and you have $400 million of revenue where you really will be profitable? And you've done a great job of cutting costs and it's just a question of how much money –

Chad M. Utrup

Yes, that's the ultimate question, though, isn't it? I mean if we knew to add a crystal ball today that said we were going to need $400 million and the markets were going to be where they're at, for infinity, I think you would see a lot different positioning than trying to ensure that we're still landing new business and going to be in better shape than we were in prior positive markets.

Mervin Dunn

You will see us address some of this as the time goes on this year, and that's when we have customers that their volumes have gotten so low that we can not substantiate the support that it takes for them. You'll see us move and exit some of those business lines because what we really have done a lot of concentrating on is going back into our markets and saying okay, let's suppose that we're going to have 125,000 unit run rate or X percent on the construction market, what does this company need to look like and what customers does it need to have?

So where you see us going in with a Nissan Diesel, it's a huge growth opportunity for us, plus it's also adding to a current customer which is Volvo, which is very important to us. So you'll see growth with a strong customer where you may hear that we released a certain amount of business because even during, when, in 2006 when there's a lot of units being built, it was a minimal player maybe.

And now with 2009 run rates they just can't support the level of business at the sales price that they've got and sometimes they can't afford to pay the higher price so they have to figure out some other way they're going to get their product made.

Alan Weber – Robotti & Co

Okay, my final – I didn't mean to interrupt. Thank you. The exchange offer you did in the new $16 million raise, all of that the $44 million or $42 million that was exchanged of new notes or whatever, that's all senior to the 8% notes that you had outstanding previously, is that correct?

Chad M. Utrup

Yes.

Operator

Our next question comes from Ann Duignan – JP Morgan.

Ann Duignan – JP Morgan

Couple of just nit-picky questions, and I can take them off line if you like, but what was the tax rate on the impairments and the restructuring?

Chad M. Utrup

Our effective tax rate Ann if you exclude the valuation allowances that we need to apply is in that 34%, 35% range and if you kind of normalized it and take that up, took that away.

Ann Duignan – JP Morgan

Okay, and that's what I should – that's what we can use when we look for [tax] when we look for the rest of the year?

Chad M. Utrup

Yes, it's very cumbersome but with that FAS 109, that three-year look back and that impairment from '08 it just basically that's all I can point to is use that rate to the extent we have positive pre-tax it may change the percentage a little bit. But yes, that's about the best I can give you.

Ann Duignan – JP Morgan

And then can you talk a little bit about your cash flow from operations. You did a good job on reducing inventories and the working capital looked okay but just trying to back into cash from operations for the quarter, can you help us with that?

Chad M. Utrup

Yes, I think –

Mervin Dunn

Cash flow to us does look better than okay. Cash flow does look so damn good to be honest with you. So I mean the cash flow in this company that's something we're very proud of how we've been able to develop cash and going from during the first quarter I think somewhere about $25 million borrowed on our revolver to as we talked today zero borrowed on it.

Chad M. Utrup

Yes, that's right. You know for the quarter, Ann, we had $1.5 million of CapEx and so if you take the net debt change, I mean the balance of that is going to be in your operating level so we did pretty darn good. We're effectively at zero today with the new announcement we've got out there. We've got – I think it was in the press release.

We can borrow up to about $21 million before we hit any covenant threshold, so it's not like we have $21 million of availability and if we get to $15 we have covenants, no that's not true, we have $21 million. We can borrow up to about $21 million today and still not have any covenants effectively, so that's what the – I think the number was $20.8 million in the release.

So we've created substantial more amount of flexibility for ourselves with the cash flow generation. The inventory reduction that our folks in the field have done has been absolutely astonishing and they're not done yet, so we're still pushing there. So that's a very long-winded explanation but hopefully I circled back around to your answer.

Ann Duignan – JP Morgan

You didn't really you know. I'm still looking for the number.

Chad M. Utrup

Well the operating piece Ann, I mean we had $1.5 million of CapEx, so the change of at the end of the first quarter we had about $15 million borrowed, and I guess if you're using June numbers we had $3.4 million borrowed so there's a $12 million, $13 million delta there.

Ann Duignan – JP Morgan

Yes, but I was getting about $1.5 million of cash from operations and then $1.5 million of CapEx, so kind of zero free cash flow?

Chad M. Utrup

At what starting point and ending point are you using?

Ann Duignan – JP Morgan

Well, I can take it offline if you like, but I'm starting with a net income loss of $22.5 million then depreciation, amortization $5.3 million, change in working capital of a positive $18.7 million so that was getting me to net cash from operations of about $1.5 million.

Chad M. Utrup

Yes, let's take it offline rather than sit here and try to sketch it out. That might be more helpful.

Ann Duignan – JP Morgan

Yes, because I would like to start with that for my forecast for the rest of the year and for next year. Just changing tacks a little bit, I know you're not giving guidance but you know we're already in August here, what are your forecasts internally for Class A build schedules for this quarter?

Mervin Dunn

Yes, I mean we pretty much have seen ourselves kind of aligned. We're ACT plus or minus 5%. We've kind of been within their range.

Ann Duignan – JP Morgan

So you're – I think you said you were down 57% in Q2, so that was roughly 25,000 build, is that what you were looking at for Q2?

Chad M. Utrup

Yes, that's right and I think if you went out for Q3 and Q4 I think it's around – I think it's pretty close to that and goes up another I don't know, 4,000 or 5,000 units in Q4 I think is the latest.

Ann Duignan – JP Morgan

Yes, it looks like orders were up a little bit yesterday, might be seeing a little bit of pre-buying in there, but –

Chad M. Utrup

Yes, we're seeing a little bit of that as well. That's why we kind of generally think maybe Q4 will be up just a bit.

Ann Duignan – JP Morgan

Okay, and then just one final question, your restructuring costs were down significantly sequentially, are you kind of – I know there's been a couple of questions on how many more levers could you pull but is your restructuring kind of done and over for now and you're just kind of backing away and seeing if markets recover?

Chad M. Utrup

Well I think the biggest thing is we've got this line item on our P&L called restructure. Those are the costs that we can run through there from a GAAP's perspective. The facilities that we announced that we closed down, the leases may not be run out just quite yet. Those are still running through cost of sales, so there are some things that will fall off as opposed to what you're seeing.

Most of what you see on the restructure line item is, especially in Q1, $1.7 million, that's mostly related to wage and those types of things that we technically can call restructure. Everything else that may run out from our facility closures and whatnot is still registered as cost of sales.

Ann Duignan – JP Morgan

Okay. So we should see some improvement.

Mervin Dunn

We also watch all of those costs closely associated with the cash impact it would have, too.

Operator

Your next question comes from the line of [Matthew Kaplan].

[Matthew Kaplan]

Hi guys. I was wondering if the holders of the remaining 8% notes will have the opportunity to exchange into the new third liens?

Chad M. Utrup

No. It was a private exchange.

[Matthew Kaplan]

Okay. So that's kind of over? There's no chance for the eights to move up?

Chad M. Utrup

Not under the current structure, no.

Operator

Your next question comes from the line of [Colin Leonard].

[Colin Leonard]

Hey Chad, could you walk through the pro forma cash balance post the exchange?

Chad M. Utrup

The cash balance?

[Colin Leonard]

Yes. I know it was about $6 million at the end of the quarter. Just wondering what it is pro forma for the exchange?

Chad M. Utrup

It's going to be probably, if you use the $5 million or $6 million that we typically have in transit. Well, we had $3.5 million at the end of June. We obviously made our $6 million bond interest payment in July, which brought us around to the $10 million or so. And I think yesterday we were just shy of that, around $8 million or something like that. So it would have added a couple million in addition to that with the use of the $10 million pay down.

[Colin Leonard]

Positive?

Chad M. Utrup

Positive, yes.

Operator

(Operator Instructions). Your next question comes from David Leikar – Robert W. Baird.

David Leikar – Robert W. Baird

Hey, Chad, can you just remind me – I don't think it's very restrictive, but what's the covenant on the 8% notes?

Chad M. Utrup

The maximum of the indenture is like a lien test of about $140 million.

David Leikar – Robert W. Baird

In total borrowings or –

Chad M. Utrup

Yes. Yes.

David Leikar – Robert W. Baird

So are you – would that mean that you're in compliance with that right now?

Chad M. Utrup

Yes.

David Leikar – Robert W. Baird

Okay. And then –

Mervin Dunn

And then $140 million in front of it.

Chad M. Utrup

Yes, $140 million in front of it.

David Leikar – Robert W. Baird

And then on the – as volumes pick up here at some point, you've had huge working capital swings here on a positive side that conceivably flips around on the other side. What flexibility capacity do you have to kind of replenish that working capital as volumes build again?

Chad M. Utrup

Well, we're still working on some inventory things. But probably the biggest thing that we still see as favorable for us is we're still working on some terms negotiations with both customers and suppliers, which we've been very successful with. So that's the positive side.

But you're absolutely right. When the markets come back up, we will have that use of working capital. And with the reductions we've done in programs and inventory, that's probably one big one and the changes in DSO and DPO. Yes, it'll be a use but the new structure that we announced yesterday gives us quite a bit of flexibility on the upside. And I don't have a magic number for you, David, in terms of what it gets to. But we feel we've got a lot of flexibility here.

David Leikar – Robert W. Baird

Don't you, as of today right now if I heard you correctly, have about $10 million available?

Chad M. Utrup

No. No. No. We have – let me walk through that. We have a $37.5 million line, okay, with the change from yesterday. We've got $1.7 million of letters of credit.

David Leikar – Robert W. Baird

Right.

Chad M. Utrup

And if you take away $15 million of availability, which is what we need to have before we can have covenants –

David Leikar – Robert W. Baird

Right.

Chad M. Utrup

Before we have covenants? That leaves us with the ability to borrow $20.8 million and still have no covenant test.

David Leikar – Robert W. Baird

But you have $20 million – $10 million of that $20 million borrowed right now, right?

Chad M. Utrup

No. No, we have nothing borrowed today. We have a cash surplus today with – we used $10 million – we got $10 million yesterday from the transaction of new second lien coming in. That effectively completely paid off our ABL, we have nothing borrowed today.

David Leikar – Robert W. Baird

And then as we look at, I think the understanding is on that credit agreement the old covenants are in place which is the cumulative $23 million in EBITDA, is that correct?

Chad M. Utrup

No. No. There's new covenants with the second amendment, David. They don't start until July. Actually they don't start until September. It's not tested until then. But there's EBITDA tests for the rest of '09, if we've reached that $15 million mark, which I don't see that we will. And then it just moves to a fixed charge test after that. And still no test if we stay under the $15 million.

Mervin Dunn

So in other words, there's no covenants until we borrow more than $15 million.

Chad M. Utrup

No. Availability, until we borrow more than, you know, under the scenario I just gave you, at $20.8 million.

David Leikar – Robert W. Baird

So as your volumes come back up and your working capital increases and you need to dip into that $15 million set aside, presumably the EBITDA gets up quickly enough that you have access to that.

Chad M. Utrup

That's exactly right, David. You got it. So to the extent working capital is needed, really the only way that it should be needed is when volumes come up and then you're fine under the covenants to be able to borrow more.

David Leikar – Robert W. Baird

Okay. Great. And then these last two questions. Where do you think capital spending finishes for the year in depreciation and amortization?

Chad M. Utrup

Depreciation's probably going to stay at the same run rate that you've seen in the first couple of quarters, David. And CapEx we're going to do our darndest to keep it the same, too, about $1.5 million a quarter. But we do have some kickoff on some of the programs like Nissan Diesel that may push it up. But I don't expect it to be a significant amount more.

David Leikar – Robert W. Baird

And then lastly, I don't – and you might have said it and I missed it, but currency impact here in the quarter on the revenue?

Chad M. Utrup

Yes. It was – oh, the exchange?

David Leikar – Robert W. Baird

Yes. FX. Yes.

Chad M. Utrup

Yes. The numbers are about the same. The non-cash mark-to-market recorded as other income, it is FX related. It's $3.5 million, again, non-cash. And the currency translation on our revenues for the quarter was I think about $4 million, reduced revenues about $4 million.

Operator

Your next question comes from the line of [Brendan McMullen].

[Brendan McMullen]

Just a couple questions, could you just go over what the total debt outstanding is now including the second lien notes? Could you just tabulate what the components are?

Chad M. Utrup

Sure. I'm going to give you the face value because there's some pick aspects and accretion aspects but it's 90 – let me get my number right here. We had $150 million of 8% notes. We exchanged $52 million. So we have $98 million of the 8% remaining. I'm rounding here, okay?

[Brendan McMullen]

Yes.

Chad M. Utrup

The net $52 million that we exchanged is now $42 million. It was exchanged at a discount. And we issued $16.8 million second lien. And that's where the new money came from. And we have nothing borrowed on our ABL, so that's pretty much the components right there at today.

[Brendan McMullen]

Okay. And the catalyst for renegotiating the – or exchanging the 8% notes was to basically get more flexibility in terms of getting a second lien note package from those same borrowers? Is that basically the catalyst for it?

Chad M. Utrup

Yes. I mean that's just that's how the transaction ended up. That's right. I mean one wasn't – I don't know how the right way to say it. But that's where the transaction ended up, yes.

[Brendan McMullen]

Okay. And the last thing is just around military. Could you just help me think about military sizing in terms of either what it's been as a percentage of revenues in the past? Or maybe actually even better would just be sort of some kind of rough dollar content per vehicle for wire and harnesses with Oshkosh in the past or on similar type vehicles to MATV?

Chad M. Utrup

Yes. Unfortunately, we can't get into the dollar values per vehicle. We just can't do that. 2008 military was about 7.7% close to 8% of our total revenues, 2008. It ticked up a little bit for 2009 as a percentage of our sales but I think a lot of that is driven from the decline in the other markets. Unfortunately, we can't get into too much detail on the military stuff in terms of content and whatnot, only to talk about our revenues in total.

[Brendan McMullen]

I guess, do you, along the line of the previous caller's question or a few callers ago, in terms of expectations for MATV do you think that your total dollar content will more or less run in line with MRAP?

Mervin Dunn

That's our objective.

Operator

Our next question comes from [Ralph Lehman].

[Ralph Lehman]

I'm sorry, just to confirm this again, your total liquidity currently is $28.8 million, right. You have $8 million in cash and $20.8 on the revolver. Is that right?

Chad M. Utrup

No, no, no, after the transaction yesterday we have nothing. We have zero, nothing borrowed on our revolver.

[Ralph Lehman]

No, I understand that. I'm talking about your total liquidity available to you.

Mervin Dunn

We have available $20.8 million to borrow on the revolver which we chose to do. And our cash position –

Chad M. Utrup

Our cash position, it improved maybe a couple of million yesterday after we paid down the revolver.

[Ralph Lehman]

I thought you said it was $8 million, is that wrong?

Chad M. Utrup

Yes, if you add a couple million to our typical $5 million or $6 million of cash in transit, yes, you're right.

[Ralph Lehman]

And then in terms of the cash burn for the rest of the year, are you able to continue to source cash out of working capital or did that kind of come to an end and then you end up burning a little bit between here and the rest of the year?

Chad M. Utrup

Well I think obviously that depends on where markets are. We've taken a huge giant leap through the first six months with improving, getting cash out of working capital. It won't continue at that rate, but we do have some plans for inventory and some plans for DSO and DPO like I mentioned. If markets stay exactly the same, yes, we'll probably see some cash burn maybe to the extent of what our CapEx is. So we don't see it as substantial, but again we are working on some things to negate that.

[Ralph Lehman]

So it's kind of again at current demand level, that's sort of your run rate burn until things start to turn?

Mervin Dunn

Yes, that's give or take, that's right.

[Ralph Lehman]

So based on that you've given yourself, it looks like quite a bit of runway here until the markets turn.

Mervin Dunn

Yes, absolutely we couldn't be happier about getting the transaction in place yesterday. So it's a big relief for us and we're pleased.

[Ralph Lehman]

Just on the mechanics of the exchange, so those private individuals that exchanged, I mean, so is there like a lock-up period when they're privy to the details of the exchange they're not allowed to trade their securities and now they are free to trade securities?

Mervin Dunn

Yes, they are free to trade because we completed that, completed everything through yesterday.

[Ralph Lehman]

But were not free leading up to the transaction?

Mervin Dunn

Correct, that is correct; they were not.

Operator

Your next question comes from [Jose Feliciano].

[Jose Feliciano]

Quick question, you mentioned that you had significant restructuring charges that are kind of running out but are not included in the restructuring line item, could you kind of estimate, give us an estimate of those?

Chad M. Utrup

Yes, in total maybe it's $1 million or something like that, but spread out. I mean most of that is going to be facility costs and lease run-outs and some may expire next quarter, some may not expire for a year. So when all is said and done, it's probably somewhere in that range.

[Jose Feliciano]

I'm sorry, a million aggregate or a million –

Chad M. Utrup

Aggregate.

[Jose Feliciano]

And you can comment specifically on the change and restructuring transaction on the second lien? It looks, when you factor in the discount, a fairly high because of capital something like 25%, 30%. Is that kind of what you think, what it took I guess to get that type of money in this environment?

Chad M. Utrup

Well I don't think you can look at it individually. I think you have to look at the transaction collectively. We were able to get pick on the third lien so that helps us out in the current timeframe from a cash perspective which was certainly our objective.

And with the discount from 52% to 42%, we got a 20% discount on that, plus the pick, plus the new money. Expense-wise interest may go up a little bit, but for what our objective was from a cash perspective here hopefully in the trough of these markets, not necessarily looking at it from that's what it took to get second lien, but I think you have to look at it collectively if that makes sense.

Operator

Our last question comes from Alan Weber – Robotti & Co.

Alan Weber – Robotti & Co.

It seems to me that you've done over the last six or nine months really a great job on the operations. Your debt prior to the exchange is down and you seem to be picking up market share, winning new business and cutting costs, which is all I think you really can do given the end market. But I must say that it seems to me on the financing side, it's terrible. Chad, you just made a comment about interest expense might be up. How is it possible that interest expense isn't going to be up?

Chad M. Utrup

No, I said it might be up but you have to look at it from a cash perspective. So I agree that it's up from an expense perspective, but the cash side of things is down when you look at it for the next, call it 18 months, if you look at that pick period.

Alan Weber – Robotti & Co.

Right, because it's a pick, now why didn't you offer or can you explain who you use as an advisor to do this?

Chad M. Utrup

Unfortunately I can't. We've got a confidentiality agreement that I was advised not to do that just on today's call. That may come out later. I just can't do it today, Alan.

Alan Weber – Robotti & Co.

Did any part of anybody in management – do the board participate in this exchange offer in any way?

Chad M. Utrup

Participate in terms of –

Mervin Dunn

Did we sell some of the bonds?

Alan Weber – Robotti & Co.

Yes, did they participate whether they bought the new paper, participate in the exchange or anything like that?

Chad M. Utrup

No, no.

Mervin Dunn

Absolutely not.

Alan Weber – Robotti & Co.

And I guess I don't just quite understand why, I mean, because somebody asked the same question, why you didn't try to solicit from all of your holders?

Chad M. Utrup

Well I mean the structure, the transaction was structured in a way that we thought best to A, not run the risk of getting a deal done and a timing standpoint and from a cost standpoint. So that's –

Alan Weber – Robotti & Co.

I guess I just disagree with all that. Well anyway the operations you do seem to be doing an excellent job there even if I think the financing is terrible.

Operator

I show you have no more questions at this time, sir, so I turn it back to you for any closing remarks.

Mervin Dunn

Well we'd like to thank all of you again for calling in. I do appreciate your comments. We always take them to heart. We always look at them – look at them for alternatives to make the company run better. As you can imagine with Alan's comments, those aren't completely in agreement here. Any time you're dealing with the different entities and trying to get a deal done it's sometimes like pushing a rope just if you're dealing with a couple.

So this has been a major time consuming effort and we have been working on it for some time. And we will continue to look at moves that we think will make this company stronger and better and be able to withstand the pressures of the marketplace until they do improve.

We intend on being one of the last soldiers fighting. And we feel very good about the position we've got the company in right now and we feel very opportunistic with the market as it does start to return. You'll see us realign some of our customer base. You'll see us as, we've been continuing to do, realign some of our manufacturing operations.

So again, thank you. Chad, do you have anything?

Chad M. Utrup

Just to add onto that, we're pretty pleased despite differing opinions, that the liquidity and the cash position is much stronger than it was last week today in our opinion, so we're positioned to move forward. And thanks, everybody for the call.

Operator

Ladies and gentlemen this concludes the presentation. Thank you for your participation in today's conference. You may now disconnect.

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Source: Commercial Vehicle Group Inc. Q2 2009 Earnings Call Transcript
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