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Consumer Cyclical

Vehicles & Parts

Commercial Vehicle Group Inc.

Fourth Quarter and Full Year 2022 Operating Results
 Fourth quarter 2022 revenue was $234.9 million, up 2.6% as compared to $228.9 million from the prior year period. The year-over-year growth was primarily attributable to increased pricing to offset material cost increases. Foreign currency translation unfavorably impacted fourth quarter 2022 revenues by $6.3 million or by 2.7%. The company reported a consolidated operating loss of $4 million for the fourth quarter of 2022 compared to income of $6.5 million in the prior year period, primarily due to special items, which includes restructuring costs and an inventory write-down due to the decreased demand in the Industrial Automation segment. Additionally, foreign currency translation unfavorably impacted operating loss by $0.9 million. Adjusted EBITDA was $13.3 million for the fourth quarter, up year-over-year compared to $12.9 million in the prior year. Adjusted EBITDA margins were 5.7% as compared to adjusted EBITDA margins of 5.6% in the fourth quarter of 2021. Interest expense was $2.9 million as compared to $1.7 million in the fourth quarter of 2021 with the increase in interest expense primarily related to higher base interest rates and a higher average debt balance during the fourth quarter of 2022 compared to the fourth quarter of 2021. Net loss for the quarter was $32 million or an EPS loss of $0.98 per share as compared to net income of $2.6 million or EPS of $0.08 in the prior year period. 
 
Looking at the various operating businesses, for the Vehicle Solutions segment fourth quarter revenue increased 13% to $142.8 million compared to the year ago quarter, primarily due to material cost pass-through and higher volume. Segment operating income for the fourth quarter decreased to $3.7 million compared to operating income of $5 million in the prior year period, primarily due to a lag in price recovery process, cost inflation, and higher than planned start-up costs. Fourth quarter 2022 adjusted operating income, which excludes special costs, decreased 24% to $4.2 million.
 The Electrical Systems segment reported revenue of $47.1 million, an increase of 23% as compared to the year ago period, resulting from material cost pass-through and contributions from new business wins. Operating income was $5.4 million, an increase of $3.7 million, compared to the fourth quarter of 2021 due to the material cost pass-through and favorable volume and mix. Adjusted operating income was $5.5 million, an increase of 104% from the year ago fourth quarter.
CVG&#8217;s Aftermarket and Accessory segment revenue increased 28% to $34.1 million compared to the year ago quarter, primarily resulting from the increased sales volume and increased pricing to offset material cost. Operating income was $3.2 million, an increase compared to operating income of $1.9 million in the prior year period, with the increase primarily attributable to increased pricing. Adjusted operating income was $3.7 million, an increase of 95% compared to $1.9 million in the year ago fourth quarter.
The renamed Industrial Automation segment produced fourth quarter revenues of $11 million, a decrease of over 70% as compared to $37.5 million in the fourth quarter of 2021 due to lower demand levels. Segment operating loss was $11.9 million, a decrease compared to the operating income of $3.1 million in the year ago quarter, primarily attributable to lower sales volumes and an inventory charge of $10.4 million. Adjusted operating loss was $0.5 million compared to income of $3.6 million in the prior year period. Fourth quarter adjusted EBITDA was $13.3 million, or 5.7% of revenue, compared to $12.9 million, or a 5.6% margin, in the year ago period.
CVG reported a net loss of $32.0 million, or a loss of $0.98 per share, compared net income of $2.6 million, or $0.08 per share in the fourth quarter of 2021. Reported net loss for the fourth quarter of 2022 was impacted by some significant one-time and special item. The following table provides an EPS bridge for the quarter.&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/CVGIEPSbridge.png" style="width: 653px;height: 394px" /> 
 
 Source: Company presentation
For full year 2022, CVG reported record revenue of $981.6 million, up from $971.6 million in 2021. Adjusted EBITDA totaled $53.5 million, or a 5.4% margin, down from $72.5 million, or a 7.5% margin in 2021. GAAP net loss was $22 million, or a loss of $0.68 per share compared to GAAP net income of $23.7 million, or $0.72 per diluted share for 2021. CVG reported adjusted net income for 2022 of $16.4 million, or $0.51 per share, in 2022, compared to $31.8 million, or $0.97 per share last year.&nbsp;
Steps Taken to Improve Short-term Results&nbsp;
Management highlighted a number of steps taken to improve short-term operating performance and we believe it is worth illustrating them here as we believe these actions will help drive operating performance going forward:
<ul>
<li>Strong performance in the Vehicle businesses offset weakness in the Industrial Automation (formerly Warehouse Automation) segment. The Vehicle businesses were up 17% in sales and 32% in adjusted operating income in the fourth quarter, offsetting a 71% revenue decline and 117% adjusted operating income drop in the Industrial Automation business. For the full year, Vehicle segment revenues were up $110.1 million, or 14.1%, and adjusted operating income was up 5.2%, compared to a $100.2 million, or 53.3%, decline in revenue for Industrial Automation and a $4.2 million drop in adjusted operating income. 
 </li>
</ul>
<ul>
<li>Improving the business mix. The weakness in industrial automation is expected to continue, and the Company has taken additional actions to show higher short-term profit improvement at the same time as CVG goes about changing the revenue and business mix away from Class 8 and customer concentration towards the wider spectrum of commercial vehicles, electrification and automation, especially in the electric vehicle industry.</li>
</ul>
<ul>
<li>Upsized Cost-Out Program. CVG is targeting $30 million of cost reductions during 2023 within 350 projects globally, and expects to accomplish $90 million of cost-outs over the next three years. This program is underway already, and the Company began it in Q4 with targeted headcount cuts in both SG&amp;A and COGS. The Company expects to show results beginning in the first quarter of 2023. CVG has a multifaceted program that includes plant consolidations, headcount cuts, process automation and procurement savings. </li>
</ul>
<ul>
<li>Limiting exposure to high start-up cost programs. CVG is curtailing exposure to high start-up costs in the Vehicle businesses, especially the Seating business.</li>
</ul>
Operating Environment 
 
CVG secured an additional set of new growth programs during the full year valued at approximately $150 million of new revenue when vehicle production is in full ramp. The Company has&nbsp;won business on 300 new programs across 115 new and existing customers and vehicle platforms. The 5-year goal is to secure approximately $100 million per year in new wins going forward.
Significantly, 2023 has gotten off to a strong start in the Vehicle business, with multiple new wins this year already. The year started out with&nbsp; a truck&nbsp;build rate at 350,000, which is above external forecast and CVG&#8217;s annual run rate expectations along with being additive to the performance of the Vehicle businesses. Currently, the Company is benefitting from higher than expected vehicle production, corrected prices, a larger cost-out program that&#8217;s already underway, and a new business wins program focused on lower cost start-up programs tied to vehicle electrification and automation.
For the full year, demand outlook is very promising, according to independent forecasts across key end vehicle markets and commentary from large public customers. For North America, Class 8 truck builds, both research services, ACT and FTR, are predicting a slight increase year-over-year and ACT Research is projecting slight year-over-year improvements for North American medium-duty trucks. The commercial vehicle aftermarket is continuing to grow at a modest 4% in 2023 and beyond. The electric wire harness business and the global commercial and automotive wire harness business is growing at around 4.5% CAGR through 2030. With regard to specific selected segments within that, the global electric truck market is expected to grow at approximately 30% CAGR from 2023 to 2030. Finally, the earthmoving and agricultural vehicle market is also expected to grow around 4% from 2023 and beyond.
The one area that remains soft is Industrial Automation. Management believes this business has bottomed out but there does not appear to be a driving force for significantly improved results here. The focus is on expanding relationships with existing customers in this area, outside of the former key customer, and searching adjacencies from which to derive incremental growth.
Capital Structure
 CVG ended the year with $31.8 million of cash, $10.9 million of short-term debt, and $141.5 million of long-term debt. During the year, CVG&nbsp;paid down $43 million of debt, which exceeded the projected $25 million to $40 million range. Management has a goal of repaying an additional&nbsp;$20 million to $25 million of debt in 2023. At year-end, the Company had total liquidity of $180.6 million.
Updated Projections 
 
On the positive side for 2023, CVG will benefit from the meaningful additional price corrections achieved during fourth quarter, which have begun already on January 1, 2023. Price realization is now ahead of inflation driven costs, according to management. The expanded cost-out program will also benefit results, although it is too early to quantify by how much. We expect to see additional growth in higher margin programs during the year, which will help margins. On the negative side, the Industrial Automation business will remain a headwind on a comp basis likely though the first three quarters of the year. Although not included in our model, management did note that the U.S. tax provision that impacted the fourth quarter of 2022 could reverse itself at year-end 2023, and the Company is in active inventory recovery negotiations that could impact the inventory provision that was taken in the just completed quarter.
For the first quarter, we are projecting revenue of $245 million,&nbsp;adjusted EBITDA of $14 million, and EPS of $0.15. For the full year, we are at revenue of $999 million, adjusted EBITDA of $57.8 million, and EPS of $0.62.

Commercial Vehicle Group Inc. (CVGI)

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