Q4 2019 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on musicals. Thank you for your patience.
[music].
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed the musicals. Thank you for your patience.
[music].
After the speakers presentations there will be a question answer session to ask a question. During the session. You want me to press Star one on your telephone if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today. Her filer you may begin.
Thank you Lisa and welcome to our conference call joining me on the call today, our pet Patrick Miller, President and Chief Executive Officer, a commercial banking 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.
Open the call up for questions.
The conference call is being webcast on a supplemental earnings presentation is available on our website.
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 a certain risks and uncertainties. These risks and uncertainties may include but are not limited to economic conditions in the markets in which CBG outreach.
<unk> fluctuations in the production volumes of vehicles for which CB Jesus 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 power 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 disclose last evening, we have restated our financial statements for fiscal year 2018, and those affecting the three quarters in 2019.
We also corrected other immaterial errors in our previous 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 cap structures manufacturing facility.
The result, with oversight by the audit Committee and investigation was conducted by external counsel with your system to the forensic accounting for.
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 out the investigation the company terminated the former employee and has taken additional personnel actions.
Gemini 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 one manufacturing facility.
However, we acknowledge that we had control failures that prevented us from detecting the former employees inappropriate action.
And as a result, we have material weaknesses in our internal controls.
We have put into place a plan strengthen our internal controls and remediate the material weaknesses.
Including enhancing the design of the balance sheet account Reg 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's possible that additional steps will be necessary.
Well 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 gap.
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 eight production declines of approximately 35% to 42% and class five through seven production declines of approximately 15% to 20%.
HCT is forecasting North America class eight truck production to be down approximately 39% 209000 units in 2020, and then steadily increase back up to 308000 units by 2023.
The P. forecasts class five through seven truck production to be down 15% to 240000 units in 2020.
And then steadily increased 274000 units in 2023.
And the global construction markets. The APAC region was soft for most of 2019 with Europe, and North America, showing signs of weakness weakness in the fourth quarter.
As a reminder, demand for our construction equipment products 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've stated previously when the market contraction occurs rapidly as we experienced in the fourth quarter of 2019 decrease challenges in flexing our workforce.
In the short term the Oems takeout days and weeks instead of adjusting build rates, which minimizes our ability to match our cost with the volume.
As the customers actually adjust their rates would say are attempting to do now we're better able to align our variable costs.
Additionally, we took proactive steps to adjust the fixed costs also to the lower production levels.
These measures included cost reduction in restructuring actions that we believe should not impede the company's ability to ramp backup as demand returns.
The restructuring initiatives were primarily head count 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 two facilities.
Both of these closures are the result of improved productivity and floor space utilization, which is allowing us to combine facilities 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 you're seeing.
The majority of these investments come in the form of Allegheny allocating engage in resources in the commercial functions of the electrical business.
In order to grow with new customers, new industries, and with new capabilities, we're modifying our commercial processes to facilitate an increased funnel of new business opportunities in targeted areas.
We're 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 increase our responsiveness to customers and to help shift our culture from build to print to more value add content 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 two of our major customers now the 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 in 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 positioned the company for accelerated growth.
During 2019, we made the acquisition of FSC as part of that strategy. The addition of this business proves improved 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, we are 90% complete.
We also have been discovering opportunities to apply our lean systems to FSC flexible manufacturing model.
With shows promise for future enhancements on the bottom line.
Fscs core businesses in industrial automation in defense markets, we are seeing solid demand in both segments. Our order book has been very strong and indications are that the first half sales are inline with our expectations for growth year over year.
With positive indicators for the full year.
The markets that we supported FSC are expected to grow 8% to 10% CAGR over the next few years in the near term FSC is experiencing growth rates above those market rates, which we attribute to the type of electronic products at FSC delivers.
Another related development involves cross selling opportunities within Fscs customer base.
We have already supplied harnesses for rail application and one of business award for an industrial seat application.
We're not prepared to announce details yet, but we are excited about the growth prospects and opportunities that we're finding these new end markets.
Finally, I would say that early indications are that the FSC 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 plan and opening up new growth path for other business units. So we're pleased with this acquisition to date.
More broadly speaking the growth and diversification opportunities within the electrical system 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 just 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 seeding side, while the market headwinds I discussed are clearly a challenge we are seeing some small wins in Europe in India and the construction railway markets. We're 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 seeding from previous static on the options.
Our focus in seating related to our strategic reorganization continues to be driving synergies to allow common flexible design and reduced validation costs.
These actions are tied to increasing our competitive cost position 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 cobot 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 to safely ramping backup 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 lost to sales at this time in the China.
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 pickup shipments in the ports were slow for awhile, 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 tariff impacts that may help us to offset some of the potential shortages that may arise in future markets the supply chains get re established.
In other regions. The situation is dynamic and we are taking preventative measures where possible and our monitoring conditions closely.
Looking forward, we're focused on Remediating. These 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.
Yes, Pat pointed out the company restated 2018 financial results and within the 2019 form 10-K filed yesterday.
The financial results for the first three quarters in 2019.
Immaterial corrections were made to the 2017 financial statements.
You talked to the restatement on the Companys statements of operations for 2018 and for the nine months ended September 32019.
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 four to 5 million from 2019.
Partly due to material supplier actions.
Partly due to the anticipated declines 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 or 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.
As material weaknesses did not allow us to prevent the misstatements nor did they allow us to detect a misstatements timely.
The company has developed a remediation plan.
So 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.
There are some overarching remarks regarding the business environment. The cost the company operated then during the year.
Consolidated sales in 2019 were roughly the same as in 2008.
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.
89000 units were produced in the first quarter production remained at about that level in the second and third quarters.
And then declined dramatically 60 thought southern thousand units in the fourth quarter, that's a 26% decline.
Exacerbating the 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 impair 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 resumed production when the Oems resume production.
This compares our ability to achieve our normal variable contribution margin.
Really what we refer to as conversion or pull through.
Setting aside the possible impact of the Corona buyers on our operations and on our customers production schedules.
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 levels 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 cost associated with difficult labor markets, including higher labor costs and costs associated with employee attrition. We're also problematic coming into 2019.
Furthermore, the cost of labor in the Ukraine was exacerbated by the relative strength of the Ukrainian currency. They are written up.
Importantly, the continued investment in and success of our lean six Sigma programs offset some of these material labor cost pressures during the year.
Labor markets stabilize somewhat during the year and certain costs like recruiting and training costs and overtime.
Starting to come down.
You are written that has begun and continues to depreciate, which may also provide some relief on 20 twond.
To exaggerate us events impacted pull through in 2019.
You may recall that in the first quarter 2019, Mexico imposed a new statutory minimum wage.
So called border minimum wage and the geographic area, along the Mexican us border and encompassing all a wire harness facility in Agua Prieta, Mexico.
The impact of the border minimum wage on 2019 was approximately 2.3 million.
A number of actions, including pricing adjustments on certain products reduced the impact of this way chart.
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 saw chapter 11 bankruptcy related began to him talk to us on the second quarter.
Cost associated with the trouble supplier in 2019 were approximately 3.1 million.
We were able to manage these costs down somewhat during the quarter exiting 2019.
The annual impacted the troubled supplier was reduced to less than 2 million.
Our long term strategy includes growing our electrical system segment to that end, we made investments in our global wire harness North American trim business during the.
Startup costs were approximately 1.8 million 2019, approximately 1 million of which is nonrecurring.
Continuing to believes this is a wise allocation of resources to support our strategy to grow this segment.
Turning now to our results for the fourth fourth quarter 2019.
Consolidated revenues were 189.5 million compared to 223.6 million in the prior year period, the decline of 15%.
Decrease reflects the decline in heavy duty truck production in North America, and then the construction equipment markets we serve.
FSC contributed 10.4 million of revenue in the fourth quarter.
Foreign currency translation adversely impacted fourth quarter revenues by point 7 million.
Consolidated operating loss for the fourth quarter was 4.3 million or 2.3% of sales.
Appeared 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.
Legendary pressure on material and labor costs, and operating inefficiencies associated with the steep decline in heavy duty truck production in the quarter.
Order minimum wage cost associated with the trouble 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 five to 7 million annually once fully implemented.
These savings the five to 7 million are after giving effect to re purpose spend for growth investments.
These actions were initiated in the fourth quarter of 2019 in anticipation of weaken in end markets.
Benefits of these actions began in January 2020.
We estimate that about a third of the savings will be in place by the middle of the year about two thirds by year end and the remainder early in 2021.
Pre tax costs associated with these actions are expected to be six to 8 million.
Majority of which our employer related separation costs and other costs associated with the transfer production and subsequent closure of facilities.
Approximately 3 million of the costs related to these actions were incurred in the fourth quarter 2019 remain three to 5 million expected to be incurred 20 twond. It.
Net loss for the fourth quarter, 2019 was 7.5 million or 24 cents per diluted share compared to net income of 8.1 million or 26 cents 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.
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.
Thats assay contributed 12.8 million revenues in 2019.
Foreign currency translation negatively impacted revenues by 10.4 million or 1.2%.
Validated 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 and heavy duty truck production in the fourth quarter.
Pre tax 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 FSC.
9 million and the restructuring initiatives point 8 million impacted SGN a during the year.
Interest and other expense was 19.1 million and 13.4 million for the years ended 2019 and 2018, respectively.
The 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.
Point 8 million gain in the prior year period.
Additionally, 2019 results included 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 us Pat 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 51 cents per diluted share compared to 41.5 million or $1.36 per diluted share in 2018.
The effective tax rate in 2019 was 27%.
Yes, affective tax rate and 2020 is highly uncertain for a number of reasons, having said that for the moment, we're 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.
$10.4 million about B C revenues.
Foreign currency translation adversely impacted fourth quarter revenues by point 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.
Decrease was due primarily to lower volumes inflationary pressure on material labor and operating inefficiencies are result of the sharp decline in North American heavy duty truck production.
Cost associated with 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 FSC 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.
0.1% of sales compared to 55 million or 10.7% of sales in the prior year.
Decrease period over period is primary are primarily attributable to inflationary pressure, our material and labor costs and.
Apart the operating inefficiencies.
Cost associated with the restructuring initiatives 2.2 million the border minimum wage and the trouble supplier 5.4 million impacted the electrical systems segment in 2019.
Manufacturing investment in our global awareness business is 1.8 million for the year.
Turning now to global seen fourth quarter 2019 revenues were 76.5 million compared to 9.3 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 city revenue by point 4 million or <unk>, 0.4%.
Fourth quarter global seating operating loss was point 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 labor.
An operating inefficiencies as a result of the sharp decline in end market volumes during the quarter fourth quarter Global City results include point $5 million restructuring costs.
Full year 2019 revenues for the global sit incitement were 381.5 million compared to $397.5 million in the prior year.
<unk> decreased 4%, primarily resulting from declines in the global construction markets Reserve.
Partially by modest increases in heavy duty truck production in North America.
Foreign currency translation adversely impacted 2019 revenue of 6.7 million a 1.7%.
Global seating segment operating income was in 2019 was 24.2 million or 6.4% of sales.
Compared to 31.2 million.
Were 7.9% of sales in the prior year.
The decrease year over year is primarily attributable to lower volumes.
Inflationary pressure on material and labor costs and operating inefficiencies.
As a result in the sharp declines in end market volumes during the quarter.
The 2019 results.
Include charges, a point 5 million associated with 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 up from $12 million to $14 million in 20 Twond.
Although the coal that 19 virus as effective production in our China facility somewhat this had very little impact to date on the company's consolidated financial results and the future impact of the virus on the Companys financial results is highly uncertain.
The company is 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 some 31 2019.
That concludes our prepared remarks, and Lisa I will now turn it over to you.
Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound or hash key please standby when we compile acuity roster.
And our first question comes from the line of Chris How from Barrington Research. Your line is open.
Good morning, everyone.
Hi, Chris.
Hi.
First off.
Paul.
Just.
It 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 thats in place.
As you look to expand your capabilities into high speed data.
Also high voltage cave tabling applications.
Okay. So I.
I think I understood. The question this is Pat.
Good morning by the way Chris.
As far as retain workforce I think it's 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 show.
It has reduced our expenses from attrition and recruiting.
For the most part across the company and I think to help stabilize those costs and frankly improved productivity. We've been we've been seeing improved productivity.
Across most of our operations. So that's a 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 with all of our employees. It through a lot of government required actions.
As well is the wellbeing of our team there they've been able to helping facilitate people and getting back where they need to go.
Travel and whatnot was restricted for some period of time and and as we mentioned things are starting to return to 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 electronic 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 across that segment that included analyzing revamping how we how we go about reacting to do custom.
Over time as you have six or seven 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 and 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 processes that we have.
What we found is that that is a different skill set so you've heard that analogy about hunters and gatherers ad.
When you have very large core customers that you've had for many years do tend to migrate towards 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 change the structure. We brought in new talent. Some of it has some of those folks come out of industries that are more electronic like.
Chronically proficient and have a deeper understanding of the direction of some of this evolution. It's we're currently experiencing and so.
We're pretty excited about the changes we've made some people are new they come and they've come onboard 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.
Being much more flexible to customer needs and some of this we're learning from the FSC acquisition there their businesses modeled in a more discrete order and project based fashion, our intent to be faster and so that's how we've been structuring our business I'm encouraged by some of the results were seen as far as the amount of.
Opportunities and the way that we analyze those opportunities.
Quickly deciding where they fit into the strategic front or not so.
Thanks for asking the question that's something that I think we're we're very eager to announce results and.
Those actions are taken because we feel we feel like we're going to see some positive results that will be able to talk about shortly.
That's interesting and following up on some of your comments in regard to FSC.
As I have slide seven 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 things 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 district 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 six months of 2020 in the.
Form of 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 weve votes that publicly but I will say the businesses that were helping to support in industrial automation includes all of these new logistic automated warehouses that are expanding across tied directly to on loans online sale.
Last mile deliveries.
And not just in North America, but that that businesses as blossoming globally.
Our customers our international customers they have that capability today, we are predominately supporting them in North America, but thats 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 were down in the chain so were like a tier two.
Supplier into that chain, making electromechanical assemblies as well as electronic control units.
For those electromechanical systems, so that business has been.
Blossoming.
Second major industry segments for them is defense the defense side and in particular, the electronics in the communication.
Modules for the defense side and you can you can see that.
From what we can tell for the next few years that businesses. It looks robust so thats our visibility on Fscs direct business.
On the comment about.
Cross selling opportunities.
Some of those same customer dynamics I, just described our opening up opportunities for our tier for our customers.
Who are tier ones into that industry, who who have capacity issues. So they are 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 covert 19 don't.
On the inhibit any of that activity show.
We see near term opportunities and we also see some longer term opportunities for us inside inside that cross selling action I don't we're not prepared to put any timing or magnitude to it yet because it is 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.
Sure 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 Mark global markets does that impact that all your assessment.
Again as opportunities this next fiscal year in electrical systems.
[music].
Thank you.
Here if the court this is.
This is Tim Chris.
If the question is in regards to the Companys ability to continue to invest in growth.
Organically more specifically in the electrical systems segment.
We had at the end of the year total liquidity of approaching a $100 million.
And.
Cash flow has been pretty static so far this year.
Well there hasn't been an issue at all of course.
Look I mean, it snows theirs.
Tremendous uncertainty now in the near term with respect to.
On 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.
In the company's business in arc Inorganically I'm sorry.
Okay, I'm going to get to that okay [laughter].
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 FSC was I think a wise investment in a successful investment we're very very happy with.
With the first source electronics.
We.
Notwithstanding.
No the downturn here in the markets and the contraction in the company's business somewhat we intend to turn to continuing to make this investment in corporate development to explore.
[music].
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 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 the right opportunity the right fit for our company the right. So the cash flows and that the capital markets are open.
I think that we have a fair shot at getting getting that financed and so we're going to continue to pursue corporate development opportunities.
Thanks, Tim and Pat I appreciate all the color I'll hop back into queue for now thank you.
So.
Question comes from the line of Mike Shlisky from Dougherty and company. Your line is open.
Good morning guns.
They're not.
Hey, there.
I was wondering if you can give us a sense of the seasonality you think of the truck build schedules and 2020.
Perhaps maybe just in general it also have you seen any changes.
In the last few weeks or so in the order patterns or the build schedule based on the cobot 90 situation.
You know 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 our expectation and they were communicating clearly were to reduce build rates down too.
To 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 expect the year to proceed.
Unclear about the second half of 2020, but thats, how we expected the first half and you know.
There haven't been any.
Large impacts related to the cobot virus from 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.
And the anything other than correcting for the market dynamics.
So I think that is.
That is to be seen I mean, obviously to have have been changing daily here over the last week or two 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.
To 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 in few weeks.
It's uncertain.
Okay.
Wanted to just switch over quickly to some things you sit on Tvs.
You mentioned that there was some units coming on 2021 2022, hopefully you're working closely with those Oems.
Those heavy vehicles or medium and do you have any sense as to whether the.
The content per vehicle phone CVG will be higher compared to a diesel.
Okay, sorry, so electric vehicle, yes, I mean, I think the exciting interesting thing about.
That emerging market space for us.
Is related to the fact theres some new entrants.
Right. So there are new entrants, who need support they need help they need.
I need suppliers, who have wherewithal across a multitude of product portfolios because they are trying to launch companies and 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 in the activity level, we have across our product portfolio.
It varies Mike to answer your question on on content. Obviously, if we can put multitude of products on a vehicle do we get that's that's a good content per vehicle for US if were strictly trying to look at apples to apples in particularly related to the electrical content I'd say, it's equivalent because what we see.
Going away and let me, let me characterize that a little differently. If it's equivalent if the vehicle in the power trains and everything are.
Just swapping electric for diesel, but what we're seeing is there is an evolution of increased electronic 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 two new products that I mentioned high voltage and high speed data is each of these sub systems have to talk to each other they have to be powered and they have to have.
High speed data coming to and from them.
Got cameras.
Places, where you didnt have cameras and its multiply and what that his duties that is dramatically increasing the amount of content opportunity for our electrical group. Okay. So that's that's really where we see the content change is the type of.
Systems that they're putting in so where they have today hydraulic or electro mechanical.
System, they're converting that to either an electric system, which needs power in data or it's at least Electra electronically monitored with sensors and data generation and communication, So thats where were seeing the content growth.
Got it and maybe last one for me.
Our two major truck Oems that are.
Cost of possibly merging right now.
One I know is your customer the other one I'm not sure about uses as to whether there's an opportunity that they've already been trying to work together on on there on their supply agreements, but any kind of opportunity for CBG cashless and more business going forward from that from the tire.
I assume you're referring to VW and NAV and yes, you know we have a long history and relationship and they are major customer for us and Navistar in North America.
We work with.
Volkswagen.
Predominantly through Skoda in the Czech Republic on the passenger car side, a little bit on.
A little bit on the truck side, but not a lot. So the opportunity for us would be able to would be to have access into that European.
Side of things that would be that 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.
But we've been interacting with the I think navistar with support from Volkswagen since they took a bigger stake about a year ago.
Okay got it.
I will pass along thanks guys.
I would now like to turn the call back to Pat Miller for closing remarks.
Okay. Thank you Lisa listen I want to appreciate 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're 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 your patience as we work through those dynamic issues and I wish you the best as stay safe it well and we look forward to talk into next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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