Calculated risk Featured

7:00pm EDT December 27, 2005
The stage was set for economic disaster.

Oil prices were skyrocketing and the stock market was plunging. The nation’s terrorism alert had been elevated because of threats against specific financial targets, including the World Bank and the New York Stock Exchange. The Dow Jones Industrial Average and the S&P 500 closed at new lows for the year.

Yet in the midst of all this economic turmoil, on Aug. 5, 2004, Mervin Dunn, president and CEO of Commercial Vehicle Group Inc., was set to take his company public.

“You’re sitting there toward the end of it and you’re thinking, ‘Damn! I might have to do all this again,’” Dunn recalls of the days leading up to CVG’s initial public offering.

In fact, a dozen other companies across the nation threw in the towel at the last moment and decided against going public at that time. Five withdrew their planned IPOs that second week of August 2004. Another seven postponed their offerings due to unfavorable market conditions.

But Dunn stuck it out, and his confidence paid off.

Shares in the New Albany-based company, which supplies interior cab systems for commercial trucks, opened at $13 (less than the $16 originally predicted) but raised $120 million. It was more than enough to repay investors, who earlier had discussed a leveraged buyout of CVG — a move that CVG management opposed — to recoup their investment in the company.

“With the beating the market was taking that week ... it was just a tough time to come out, but it worked out well for us,” Dunn says. “We may have been the only one in the manufacturing sector that made it out. That says that we had a pretty strong story and a good, strong underwriting group and, hopefully, a good management group.”

In mid-December, CVG’s stock was trading in the upper-$18 range.

“And if you believe what the analysts are saying,” Dunn says, “they’re saying that we should have a $28 stock. Our stock is performing very well.”

So is the company.

Since the offering, CVG has shed itself of its remaining equity investors and acquired three high-profile, complementary businesses, sending its revenue shooting upward from $279.2 million at the close of the third quarter 2004 to $554.4 million at the close of the third quarter in 2005. Even more impressive is the company’s triple-digit earnings growth during that same timeframe.

“Since the IPO, we have grown the top line by 99 percent and the EBITDA [earnings before interest expense, income taxes, depreciation and amortization] line by 117 percent, so the earnings have gone up even higher than the revenues,” Dunn says. “We’re very proud of that.”

Here’s what it took to make that happen.

Financial calisthenics
Dunn and his management team pride themselves on adhering to stringent financial controls and measurements within their company.

“We’ve always run a very clean balance sheet, a very clean company,” Dunn says. “Our CFO and myself are very dedicated to not having to lose sleep at night over issues that are just wrong, that are not the way to run a company, public or private.”

Still, the Securities and Exchange Commission has specific hoops every company interested in going public must jump through. That meant slicing and dicing the financials the way the SEC wanted to see them. It also meant complying with all the disclosures and disclaimers required by the Sarbanes-Oxley Act, an accounting reform and investor protection law passed on the heels of the Enron debacle.

Part of the calculated risk of doing the IPO was the amount of work and money required to meet all of the regulatory requirements, taking time and effort away from running the business itself.

“The biggest thing was the paperwork,” Dunn says. “All the filings required was an immense undertaking to do the IPO. We brought in some tax people, but much of that was for Sarbanes-Oxley.”

The result of completing all that paperwork was a big hit to the corporate wallet.

“It is very expensive,” Dunn says. “It’s probably cost us over $2 million worth of profit the first two years, and that’s the tangible. The intangible — the people not focusing on cost reductions and running the companies — is probably much greater. But it’s a requirement, so that’s what we do.”

Fortunately, in CVG case, the payoff was worth it.

Showing restraint
Most top executives enjoy talking about their companies. But try doing it every day, 10 times a day, for two weeks straight, in numerous major U.S. cities to high-powered, deep-pocketed would-be investors who hang on — and often dissect — every word, and it loses its appeal pretty quickly.

“The road show was grueling,” Dunn says. “The first day, your adrenaline is pumping so much because it’s so new to you and you’re so afraid that you’re not going to come across the way you want to.”

And you have to be very careful what you say, especially in off-the-cuff responses to investor questions.

“In this day and age, you’re so afraid of saying the wrong thing,” says Dunn. “Before Sarbanes-Oxley, I could sit here and brag on my company. I could tell you everything. But when you’re doing the road show, with the way things have changed, you have to be so particular: ‘This is what I think it could be.’ ‘This is based upon ... ’

“I feel like I’m reading one of these warning labels for drugs or something before I get ready to talk. By the time you get through reading the warning labels, you’ve almost terrified yourself of saying anything.”

Yet the show must go on. And on. And on.

“You’re having to give the same story over and over and over, and you’re answering the same questions over and over and over,” Dunn says.

The repetition may get tiresome, but it makes giving carefully worded responses easier — most of the time.

“A lot of people don’t have expertise in your business,” Dunn says. “They are experts at what they do. We consider ourselves experts at running our company and at knowing our customers and knowing our markets, and sometimes you get some questions that you wonder if they’re trying to find the answer or if they’re just trying to incite you.”

Maintaining a tough exterior and answering every question — no matter how inane it might seem — is paramount, however. And it’s something you may as well get used to, Dunn says.

It’s not going away after you’re public. To the contrary, it often gets worse.

Answering to stockholders
Investors want results. So does Dunn. Problem is, their timeframes often differ.

“I think a lot of investors are trying to make companies live from quarter to quarter,” Dunn says.

That’s just not his style. It’s not what got the company where it is today.

“There’s very little understanding of what you’ve done with the company, what you’ve taken it from, where you’ve got it targeted,” he says. “People are getting in the middle of the boat in the middle of the stream.”

That can be aggravating.

“[For years] we’ve run our own company,” he says. “We’ve made our own decisions about what was best for the company, what was best for the customers. And you go in now, after you’re public, and everybody has questions on why did you do this or why did you do that.

“You have to realize it’s not personal when investors ask you a lot of questions. It’s their business. They put their money in here.”

He does take issue, however, with analysts who roll their eyes at his often-conservative financial projections.

“We don’t like to disappoint — ourselves or anyone else,” Dunn says. “I get in some heated discussions with analysts when we have our quarterly [teleconference] meetings. I’m going to be very frank and very honest with how I run my company. Everybody that’s on the phone — and there are usually 75 to 100 people on the phone calls — they all have an opinion. Hopefully they put their trust in me.

“They put their money in my company with me at the top to make the best decisions for the company, not for each one of them because they all have different mindsets. Some of them buy it for growth, some of them buy it for returns.

“We’re just not going to live quarter to quarter. We plan on being in the business for the long term and being a good solid company that creates wealth for investors, creates security for the employees and creates value for the customer.”

Going full throttle
Three key management decisions played a role in CVG’s recent eye-popping success.

One was orchestrating a secondary offering in July 2005, which allowed the company’s major investor, Onex Corp., to exit the company with aggregate net proceeds of roughly $165 million. Onex’s initial investment in Commercial Vehicle Group, made in 1997, was $69 million.

“Now the only ownership is what was originally in the company — the management team — and the public sector,” Dunn says. “It feels pretty good.”

The second key decision was ramping up its acquisitions-based growth strategy. Buying complementary companies, such as Mayflower Vehicle Systems, which makes truck cabs, and striking development agreements with big names such as Volvo and Freightliner helped CVG become more diverse in its offerings and less dependent on a single revenue stream.

“We’ve taken a lot of steps since going public to fulfill more of a strategy that we had, which has lessened our dependence on the Class 8 [heavy-duty truck] market,” Dunn says. “When we first started this company, we were about 90 percent Class 8 truck in North America. Today, in North America, Class 8 truck is about 44 percent of the revenue.”

The third prong of the strategy was to go global. CVG now has 39 locations in eight countries and 5,500 employees.

“We had to make the company a truly global company to be able to land the contracts we needed to land — the Volvos, the Mercedes, the Freightliners, the Internationals of the world,” says Dunn. “That was our strategy.”

It has worked beautifully. But without a successful public offering, who knows what might have happened.

“When you’re doing it, you don’t realize the full impact of what you’re doing,” Dunn says. “But when you look back after it’s all over and done and you say, ‘Damn! I took a company public!’ It’s like winning the Super Bowl and looking back and saying, ‘Wow! We did that?’ Because there are not that many people who have seen the success that we did. I’m so proud of what we’ve done.

“We want the results to speak for themselves.”

HOW TO REACH: Commercial Vehicle Group, (614) 289-5360 or