DANA Inc 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)   Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in this report.   Forward-Looking Information   Statements in this report (or otherwise made by us or on our behalf) that are not entirely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often be identified by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “predicts,” “seeks,” “estimates,” “projects,” “outlook,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing” and similar expressions, variations or negatives of these words. These statements represent the present expectations of Dana Incorporated and its consolidated subsidiaries (Dana) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including those discussed below and elsewhere in this report and in our other filings with the Securities and Exchange Commission (SEC). All forward-looking statements speak only as of the date made and we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of this report.     Management Overview   Dana is headquartered in Maumee, Ohio, and was incorporated in Delaware in 2007. We are a world leader in providing power-conveyance and energy-management solutions for vehicles and machinery. The company's portfolio improves the efficiency, performance, and sustainability of light vehicles, commercial vehicles, and off-highway equipment. Our technologies include drive systems (axles, driveshafts, transmissions, and wheel and track drives); motion systems (winches, slew drives, and hub drives); electrodynamic technologies (motors, inverters, software and control systems, battery-management systems, and fuel cell plates); sealing solutions  (gaskets, seals, cam covers, and oil pan modules); thermal-management technologies (transmission and engine oil cooling, battery and electronics cooling, charge air cooling, and thermal-acoustical protective shielding); and digital solutions (active and passive system controls and descriptive and predictive analytics). We serve our global light vehicle, medium/heavy vehicle and off-highway markets through four business units – Light Vehicle Drive Systems (Light Vehicle), Commercial Vehicle Drive and Motion Systems (Commercial Vehicle), Off-Highway Drive and Motion Systems (Off-Highway) and Power Technologies, which is the center of excellence for sealing and thermal-management technologies that span all customers in our on-highway and off-highway markets. We have a diverse customer base and geographic footprint which minimizes our exposure to individual market and segment declines. At March 31, 2022, we employed approxim ately 40,600 people, operated in 32 countries and had 139 major facilities housing manufac turing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices.   External sales by operating segment for the periods ended March 31, 2022 and 2021 are as follows:       Three Months Ended March 31,       2022     2021               % of             % of       Dollars     Total     Dollars     Total   Light Vehicle   $ 985       39.7 %   $ 991       43.8 % Commercial Vehicle     463       18.7 %     349       15.4 % Off-Highway     744       30.0 %     635       28.1 % Power Technologies     288       11.6 %     288       12.7 % Total   $ 2,480             $ 2,263             See Note 19 to our consolidated financial statements in Item 1 of Part I for further financial information about our operating segments.   Our internet address is www.dana.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this report.     Operational and Strategic Initiatives   Our enterprise strategy builds on our strong technology foundation and leverages our resources across the organization while driving a customer-centric focus, expanding our global markets, and delivering innovative solutions as we evolve into the era of vehicle electrification.   Central to our strategy is  leveraging our core operations.  This foundational element enables us to infuse strong operational disciplines throughout the strategy, making it practical, actionable, and effective. It enables us to capitalize on being a major drive systems supplier across all three end mobility markets. We are achieving improved profitability by actively seeking synergies across our engineering, purchasing, and manufacturing base. We have strengthened the portfolio by acquiring critical assets, and we are utilizing our physical and intellectual capital to amplify innovation across the enterprise. Leveraging these core elements can further expand the cost efficiencies of our common technologies and deliver a sustainable competitive advantage for Dana.   25 Table of Contents   Driving customer centricity  continues to be at the heart of who we are. Putting our customers at the center of our value system is firmly embedded in our culture and is driving growth by focusing on customer relationships and providing value to our customers. These relationships are strengthened as we are physically located where we need to be in order to provide unparalleled service, and we are prioritizing our customers’ needs as we engineer solutions that differentiate their products, while making it easier to do business with Dana by digitizing their experience. Our customer-centric focus has uniquely positioned us to win more than our fair share of new business and capitalize on future customer outsourcing initiatives.   Expanding global markets  means utilizing our global capabilities and presence to further penetrate growth markets, focusing on Asia due to its position as the largest mobility market in the world with the highest market growth rate as well as its lead in the adoption of new energy vehicles. We are investing across various avenues to increase our presence in Asia Pacific by forging new partnerships, expanding inorganically, and growing organically. We continue to operate in this region through wholly owned and joint ventures with local market partners. We have recently made acquisitions that have augmented our footprint in the region, specifically in India and China. All the while, we have been making meaningful organic investments to grow with existing and new customers, primarily in Thailand, India, and China. These added capabilities have enabled us to target the domestic Asia Pacific markets and utilize the capacity for export to other global markets. We continue to enhance and expand our global footprint, optimizing it to capture growth across all of our end markets.   Delivering innovative solutions  enables us to capitalize on market growth trends as we evolve our core technology capabilities. We are also focused on enhancing our physical products with digital content to provide smart systems, and we see an opportunity to become a digital systems provider by delivering software as a service to our traditional end customers. This focus on delivering solutions based on our core technology is leading to new business wins and increasing our content per vehicle. We have made significant investments - both organically and inorganically - allowing us to move to the next phase, which is to  Lead electric propulsion .   Over the last several years we continue to deliver on our goal to accelerate vehicle electrification through both core Dana technologies and targeted strategic acquisitions and are positioned today to lead the market. The nine recent investments in electrodynamic expertise and technologies combined with Dana’s longstanding mechatronics capabilities has allowed us to develop and deliver fully integrated e-Propulsion systems that are power-dense and achieve optimal efficiency through the integration of the components that we offer due to our mechatronics capabilities. With recent electric vehicle program awards, we are well on our way to achieving our growth objectives in this emerging market.   The development and implementation of our enterprise strategy is positioning Dana to grow profitably due to increased customer focus as we leverage our core capabilities, expand into new markets, develop and commercialize new technologies, including for electric vehicles.   Capital Structure Initiatives   In addition to investing in our business, we plan to prioritize a balanced allocation of capital while maintaining a strong financial position. We continue to drive toward investment grade metrics as part of our balanced allocation approach with a goal of further strengthening our balance sheet.   Shareholder return actions  — When evaluating capital structure initiatives, we balance our growth opportunities and shareholder value initiatives with maintaining a strong balance sheet and access to capital. Our strong financial position has enabled us to simplify our capital structure while providing returns to our shareholders in the form of cash dividends and a reduction in the number of shares outstanding. Through the first quarter of 2020, we had declared and paid quarterly common stock dividends for thirty-three consecutive quarters. In response to the COVID pandemic, we temporarily suspended the declaration and payment of dividends to common shareholders and the repurchase of common stock under our $200 common stock share repurchase program. With the impacts of the COVID pandemic largely behind us we resumed the declaration and payment of quarterly common stock dividends during the first quarter of 2021. In addition, we resumed the repurchase of common shares using $23 and $25 of cash to repurchase common shares under the program in 2021 and 2022, respectively. The share repurchase program expires on December 31, 2023, and $102 remains available for future share repurchases as of March 31, 2022.   Financing actions  — We have taken advantage of competitive debt markets, eliminating our secured debt and extending and restructuring our senior note maturity schedule. Our current portfolio of unsecured senior notes is structured such that no more than $400 of senior notes comes due in any calendar year, with no maturities until the second quarter of 2025. In addition, we increased our revolving credit facility in 2021 to $1,150 and extended its maturity to March 25, 2026. See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information.   Other Initiatives   Aftermarket opportunities — We have a global group dedicated to identifying and developing aftermarket growth opportunities that leverage the capabilities within our existing businesses – targeting increased future aftermarket sales. Powered by recognized brands such as Dana®, Spicer®, Spicer Electrified™, Victor Reinz®, Glaser®, GWB®, Thompson®, Tru-Cool®, SVL®, and Transejes™, Dana delivers a broad range of aftermarket solutions – including genuine, all makes, and value lines – servicing passenger, commercial, and off-highway vehicles across the globe.   Selective acquisitions — Although transformational opportunities like the GKN plc driveline business transaction that we pursued in 2018 will be considered when strategically and economically attractive, our acquisition focus is principally directed at “bolt-on” or adjacent acquisition opportunities that have a strategic fit with our existing core businesses, particularly opportunities that support our enterprise strategy and enhance the value proposition of our product offerings. Any potential acquisition will be evaluated in the same manner we currently consider customer program opportunities and other uses of capital – with a disciplined financial approach designed to ensure profitable growth and increased shareholder value.   26 Table of Contents     Acquisitions   Over the past several years we have actively grown our electric vehicle capabilities through multiple acquisitions, positioning us to deliver complete e-Propulsion systems with in-house electrodynamics. Our acquisitions of Dana TM4 Inc. (formerly TM4 Inc.), Dana TM4 Italia S.r.l. (formerly S.M.E. S.p.A.), Dana (Beijing) Electric Motor Co., Ltd. (formerly Prestolite E-Propulsion Systems (Beijing) Limited), Ashwoods Innovations Ltd., Oerlikon Drive Systems, Nordresa Motors, Inc., Rational Motion GmbH and Pi Innovo Holding Limited have enhanced our portfolio of core technologies including e-motors, power inverters, software and controls, and advance mechatronics. Our strategic partner, Hydro-Québec, owns 45% redeemable noncontrolling interests in Dana TM4 Inc., Dana TM4 Italia S.r.l., Dana (Beijing) Electric Motor Co., Ltd., and Ashwoods Innovations Ltd. See Note 7 to our consolidated financial statements in Item 1 of Part I for additional information.       Trends in Our Markets   We serve our customers in three core global end markets: light vehicle, primarily full frame trucks and SUVs; commercial vehicle, including medium-and heavy-duty trucks and busses; and off-highway, including construction, mining, and agriculture equipment.    Each of our end-markets has unique cyclical dynamics and market drivers. These cycles are impacted by periods of investment where end-user vehicle fleets are refreshed or expanded in reaction to demand usage patterns, regulatory changes, or when the age of vehicles in service reach their useful life. Key market drivers include regional economic growth rates; industrial output; commodity production and pricing; and residential and nonresidential construction rates. Our multi-market coverage and broad customer base help provide stability across the cycles while mitigating secular variability. In 2020, all of our end-markets were impacted to varying degrees by the COVID pandemic, which initially resulted in lower demand driven by production shutdowns related to virus mitigation efforts in the regions we serve. During 2021, we generally saw improvement across all of our end markets despite production levels being muted by continued global supply chain disruptions driven in part by transportation inefficiencies and labor, commodity and semiconductor chip shortages.   Light vehicle markets — Our driveline business is weighted more heavily to the truck and SUV segments of the light-vehicle market versus the passenger-car segment. Our vehicle content is greater on rear-wheel drive, four-wheel drive, and all-wheel drive vehicles, as well as hybrid and electric vehicles. The impact of the COVID pandemic in 2020 saw the global light-truck market contract by 13% from 2019 levels. During 2021, light-truck markets improved across all regions and were up 5% on a global basis compared to 2020. The outlook for the full year of 2022 reflects global light-truck production to be up 13%, with growth across all regions, exhibiting a strong rebound returning to at or above 2019 levels as production constraints continue to ease, inventory returns to more normal levels, and constrained customer demand is fulfilled.   Commercial vehicle markets — Our primary business is driveline systems for medium and heavy-duty trucks and busses, including the emerging market for hybrid and electric vehicles. Key regional markets are North America, South America (primarily Brazil) and Asia Pacific. The Class-8 truck market in North America peaked at 345,000 trucks produced in 2019. Production of Class-8 trucks in 2020 was 38% below the record production in 2019 due to normal cycle dynamics and the impact of COVID. During 2021, production of Class-8 trucks increased 20% over 2020 as the impacts of COVID lessened and the economy exhibited improvement. The outlook for 2022 is for stronger demand with production up 16% over the prior year driven by continued improving economic outlook and cyclical growth.   Medium-duty truck production in North America experienced a 20% year- over-year decline from 2019 to 2020, primarily due to COVID. During 2021, production increased a modest 3% over 2020. The outlook for 2022 is for a 10% increase in production over the prior year. Outside of North America, production of medium-and heavy-duty trucks in South America declined 22% in 2020 due to COVID and deteriorating economic conditions. During 2021, production increased 76% over 2020 as the region recovered from the impact of the pandemic and the age of existing vehicles drove a replacement cycle for new trucks. The outlook for South America is for a modest 3% increase in production from the prior year as local economic conditions remain relatively stable. In contrast to the rest of the world, Asia Pacific, driven by China, did not experience lower truck production in 2020, but output slowed by 8% in 2021 as production matched lower demand, primarily driven by India where the recovery from the pandemic has been slower than in China. The 2022 outlook for Asia Pacific is for a 9% reduction in production from the prior year as the Indian market recovery continues to lag.   27 Table of Contents   Off-highway markets  — Our off-highway business has a large presence outside of North America, with 65% of its 2021 sales coming from products manufactured in Europe; however, a large portion of these products are utilized in vehicle production outside the region. The construction equipment segment of the off-highway market is closely related to global economic growth and infrastructure investment. This segment has experienced a 5% market contraction, which began in late 2018 and further accelerated due to COVID, with 2020 production ending down an additional 10%. The global construction market began to rebound in 2021 with production up 12% over 2020. The 2022 outlook has production demand in the global construction market showing continued strength with production increasing by 10% over the prior year. End-user investment in the mining equipment segment is driven by prices for commodity products produced by underground mining. The global mining equipment market has been mostly stable over the past several years as industry participants have maintained vehicle inventory levels to match commodity output, and this trend is expected to continue in 2022. The agriculture equipment market is the third of our key off-highway segments.  Like the underground mining segment, investment in agriculture equipment is primarily driven by prices for farm commodities. Continued low farm commodity prices drove a 7% reduction in production in 2020. Farm subsidies in response to the global pandemic drove a 10% increase in production during 2021. The outlook for 2022 is for end-market demand to improve by 6% compared to the prior year, as farm subsidies are expected to continue to bolster the commodity market and drive the replacement of aging equipment.   Foreign currency — With 55% of our first quarter 2022 sales coming from outside the U.S., international currency movements can have a significant effect on our sales and results of operations. The euro zone countries accounted for 51% of our first quarter 2022 non-U.S. sales, while India, China and Brazil each accounted for 10%. Although sales in South Africa are less than 5% of our non-U.S. sales, the rand has been volatile and significantly impacted sales from time to time. International currencies weakened against the U.S. dollar in the first quarter of 2022, decreasing sales by $55. A weaker euro, Thai baht and Indian rupee were partially offset by a stronger Brazilian real and Chinese renminbi.   Argentina has experienced significant inflationary pressures the past few years, contributing to significant devaluation of its currency among other economic challenges. Our Argentine operation supports our Light Vehicle operating segment. Our sales in Argentina for the first quarter of 2022 of approximately $31 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $36, including $14 of net fixed assets, at March 31, 2022 . During the second quarter of 2018, we determined that Argentina's economy met the GAAP definition of a highly inflationary economy. In asses sing Argentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effective July 1, 2018, the U.S. dollar is the functional currency for our Argentine operations, rather than the Argentine peso. Beginning July 1, 2018, peso-denominated monetary assets and liabilities are remeasured into U.S. dollars using current Argentine peso exchange rates with resulting translation gains or losses included in results of operations. Nonmonetary assets and liabilities are remeasured into U.S. dollar using historic Argentine peso exchange rates.    Commodity costs  — The cost of our products may be significantly impacted by changes in raw material commodity prices, the most important to us being those of various grades of steel, aluminum, copper, brass and rare earth materials. The effects of changes in commodity prices are reflected directly in our purchases of commodities and indirectly through our purchases of products such as castings, forgings, bearings, batteries and component parts that include commodities. Most of our major customer agreements provide for the sharing of significant commodity price changes with those customers based on the movement in various published commodity indexes. Whe re such formal agreements are not present, we have historically been successful implementing price adjustments that largely compensate for the inflationary impact of material costs. Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes. Commodity prices increased significantly during 2021, reducing year-over-year earnings by approximately $367. Material recovery pricing actions increased year-over-year earnings by $271 in 2021. Higher commodity prices decreased earnings in the first quarter of 2022 and 2021 by $138 and $35, respectively. Material cost recovery pricing actions increased earnings in the first quarter of 2022 and 2021 by $122 and $18, respe ctively.     Sales, Earnings and Cash Flow Outlook       2022 Outlook     2021     2020   Sales   $9,850 - $10,350     $ 8,945     $ 7,106   Adjusted EBITDA   $770 - $870     $ 795     $ 593   Net cash provided by operating activities   ~6% of sales     $ 158     $ 386   Discretionary pension contributions   $ —     $ —     $ —   Purchases of property, plant and equipment   ~4% of sales     $ 369     $ 326   Adjusted Free Cash Flow   ~2% of sales     $ (211 )   $ 60     Adjusted EBITDA and adjusted free cash flow are non-GAAP financial measures. See the Non-GAAP Financial Measures discussion below for definitions of our non-GAAP financial measures and reconciliations to the most directly comparable U.S. generally accepted accounting principles (GAAP) measures. We have not provided a reconciliation of our adjusted EBITDA outlook to the most comparable GAAP measure of net income. Providing net income guidance is potentially misleading and not practical given the difficulty of projecting event driven transactional and other non-core operating items that are included in net income, including restructuring actions, asset impairments and certain income tax adjustments. The accompanying reconciliations of these non-GAAP measures with the most comparable GAAP measures for the historical periods presented are indicative of the reconciliations that will be prepared upon completion of the periods covered by the non-GAAP guidance.   28 Table of Contents   We have decreased our full year 2022 adjusted EBITDA range to $770 - $870. The $130 reduction reflects our expectation for continued commodity and non-material cost inflation through the balance of the year. Our February 2022 outlook assumed commodity cost increases would begin to dissipate late in the year. We have increased our 2022 sales range to $9,850 - $10,350. The $225 increase reflects slightly improved global market demand and additional commodity recoveries relative to our February 2022 outlook. Adjusted EBITDA Margin is now expected to be 8.1%, 80 basis-points lower than 2021, reflecting higher margin net new business and a modest benefit from material recovery and other pricing actions being more than offset by continued commodity cost increases and non-material inflation, including higher labor, energy, and transportation rates. We now expect to generate adjusted free cash flow of approximately $215, or 2% of sales for 2022, reflecting the benefit of year-over-year higher adjusted EBITDA, at the mid point of the range, and lower year-over-year use of cash for working capital. We continue to expect capital spending will be flat in comparison with 2021.     Summary Consolidated Results of Operations (First Quarter, 2022 versus 2021)       Three Months Ended March 31,               2022     2021               Dollars     % of Net Sales     Dollars     % of Net Sales     Increase/ (Decrease)   Net sales   $ 2,480             $ 2,263             $ 217   Cost of sales     2,283       92.1 %     2,012       88.9 %     271   Gross margin     197       7.9 %     251       11.1 %     (54 ) Selling, general and administrative expenses     130       5.2 %     119       5.3 %     11   Amortization of intangibles     4               4               —   Restructuring charges, net     (1 )             1               (2 ) Other income (expense), net     2               (19 )             21   Earnings before interest and income taxes     66               108               (42 ) Interest income     2               2               —   Interest expense     31               34               (3 ) Earnings before income taxes     37               76               (39 ) Income tax expense     18               22               (4 ) Equity in earnings of affiliates     1               14               (13 ) Net income     20               68               (48 ) Less: Noncontrolling interests net income     4               1               3   Less: Redeemable noncontrolling interests net loss     (1 )             (4 )             3   Net income attributable to the parent company   $ 17             $ 71             $ (54 )   Sales — The following table shows changes in our sales by geographic region.       Three Months Ended                                       March 31,             Amount of Change Due To       2022     2021     Increase/ (Decrease)     Currency Effects     Acquisitions (Divestitures)     Organic Change   North America   $ 1,165     $ 1,095     $ 70     $ —     $ 1     $ 69   Europe     801       732       69       (52 )             121   South America     172       120       52       5               47   Asia Pacific     342       316       26       (8 )     (4 )     38   Total   $ 2,480     $ 2,263     $ 217     $ (55 )   $ (3 )   $ 275     29 Table of Contents   Sales in 2022 were $217 higher than in 2021. Weaker international currencies decreased sales by $55, principally due to a weaker euro, Thai baht and Indian rupee, partially offset by a stronger Brazilian real and Chinese renminbi. The organic sales increase of $275, or 12%, resulted from improved heavy-vehicle market demand and the conversion of sales backlog. Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $160.   The North America organic sales increase of 6% was driven principally by stronger medium- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog, partially offset by lower light-duty truck production volumes. First quarter 2022 Classes 5-7 and Class 8 truck production were up 4% and 2%, respectively, while light-vehicle engine production was up 2% compared with the first quarter of 2021. Year-over-year full-frame light-truck production was down 1% in the first quarter of 2022. Excluding currency effects, sales in Europe were up 17% compared with 2021. With our significant Off-Highway presence in the region, stronger construction/mining and agricultural markets were a major factor. Organic sales in this operating segment were up 23% compared with the first quarter of 2021. A 1% decrease in year-over-year light-duty truck production levels and a 12% decrease in year-over-year light-vehicle engine production levels tempered our organic European sales increase. Excluding currency effects, first quarter 2022 sales in South America increased 39% compared to 2021 due primarily to improved light- and medium/heavy-duty truck production. First quarter light-duty truck production was up 9% and medium/heavy-duty truck production was up 26%. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 12% compared to 2021 due to a stronger construction/mining market.   Cost of sales and gross margin — Cost of sales for the first quarter of 2022 increased $271, or 13%, when compared to 2021. Cost of sales as a percent of sales was 320 basis points higher than in the previous year. Incremental margins provided by increased sales volumes were more than offset by higher year-over-year commodity costs of $138, non-material inflationary cost impacts of $70 and operational inefficiencies primarily attributable to continued global supply chain disruptions and frequent customer order changes made with little to no advance notification. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Non-material inflation includes higher labor, energy and transportation rates. Continued material cost savings provided a partial offset, reducing costs of sales by approximately $19.   Gross margin of $197 for the first quarter of 2022 decreased $54 from 2021. Gross margin as a percent of sales was 7.9% in the first quarter of 2022, 320 basis points lower than in 2021. The degradation in gross margin as a percent of sales was driven principally by the cost of sales factors referenced above. In addition, gross margin during 2022 was negatively impacted by material cost recovery mechanisms with our customers lagging material costs increases charged by our suppliers by approximately 90 days.   Selling, general and administrative expenses (SG&A) — SG&A expenses in 2022 were $130 (5.2% of sales) as compared to $119 (5.3% of sales) in 2021.  SG&A expenses were $11 higher in 2022 primarily due to higher salaried employee wages and benefits, increased trade show and marketing activities, and higher travel expenses and professional fees.   Amortization of intangibles — Amortization expense was $4 in both 2022 and 2021.   Restructuring charges, net  —  Net restructuring charges were ($1) in the first quarter of 2022 and $1 in the first quarter of 2021.   30 Table of Contents   Other income (expense), net — The following table shows the major components of other income (expense), net.       Three Months Ended       March 31,       2022     2021   Non-service cost components of pension and OPEB costs   $ —     $ (2 ) Foreign exchange gain     3       1   Strategic transaction expenses     (4 )     (3 ) Loss on investment in Hyliion             (17 ) Loss on disposal group held for sale             (7 ) Other, net     3       9   Other income (expense), net   $ 2     $ (19 )   Strategic transaction expenses relate primarily to costs incurred in connection with acquisition and divestiture related activities, including costs to complete the transaction and post-closing integration costs, and other strategic initiatives. Strategic transaction expenses in 2022 were primarily attributable to investigating potential acquisitions and business ventures and other strategic initiatives. Strategic transaction expenses in 2021 were primarily attributable to our pursuit of the acquisition of a portion of the thermal-management business of Modine Manufacturing Company and certain other strategic initiatives.   We held convertible notes receivable from our investment in Hyliion Inc. On October 1, 2020, Hyliion Inc. completed its merger with Tortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp. (Hyliion), with its common stock being listed on the New York Stock Exchange under the ticker symbol HYLN. Effective with the completed merger, our notes receivable were converted into 2,988,229 common shares of HYLN. Our investment in Hyliion was included in marketable securities and carried at fair value with changes in fair value included in net income. During the third quarter of 2021, we sold all of our Hyliion shares. See Note 11 for additional information.   In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We were required to divest our interest in this joint venture as it violates competitive restrictions of another of our China joint venture shareholder agreements. During the first quarter of 2021, we recorded an impairment charge of $7, as we determined the carrying value of the disposal group exceeded its fair value less costs to sell. We completed the disposal of this business in April 2021.   Interest income and interest expense  — Interest income was $2 in both 2022 and 2021. Interest expense decreased from $34 in 2021 to $31 in 2022, primarily due to lower interest rates on outstanding borrowings, partially offset by higher debt levels. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.6% in 2022 and 5.5% in 2021.   Income tax expense  — We reported income tax expense of $18 and $22 for the first quarter of 2022 and 2021, respectively. Our effective tax rates were 49% and 29% for the first quarter of 2022 and 2021. Our effective income tax rates vary from the U.S. federal statutory rate of 21% due to establishment, release and adjustment of valuation allowances in several countries outside the U.S., different statutory tax rates outside the U.S. and withholding taxes related to repatriations of international earnings. The effective income tax rate may vary significantly due to fluctuations in the amounts and sources, both foreign and domestic, of pretax income and changes in the amounts of nondeductible expenses.   Equity in earnings of affiliates — Net earnings from equity investments was $1 in 2022 and $14 in 2021. Equity in earnings from DDAC was $1 in 2022 and $13 in 2021. The decrease in DDAC's earnings is due to lower year-over-year sales driven by significant 2021 medium- and heavy-duty vehicle pre-buy activity in advance of new emission standards going into effect in China and Chinese government incentives driving new construction and infrastructure projects in 2021, increasing the demand for medium- and heavy-duty vehicles.   31 Table of Contents     Segment Results of Operations (2022 versus 2021)   Light Vehicle       Three Months       Sales     Segment EBITDA     Segment EBITDA Margin   2021   $ 991     $ 100       10.1 % Volume and mix     (26 )     (9 )         Divestitures     (3 )                 Product line transfer     (23 )     (2 )         Performance     56       (58 )         Currency effects     (10 )                 2022   $ 985     $ 31       3.1 %   Light Vehicle sales in the first quarter of 2022, exclusive of currency effects, the impact of divestitures and the product line transfer to Commercial Vehicle, were 3% higher than 2021 reflecting generally weaker global markets being partially offset by the conversion of sales backlog. Year-over-year North America full-frame light-truck production decreased 1% while light-truck production in Europe and Asia Pacific decreased 1% and 2%, respectively, and light-truck production in South America increased 9%. Net customer pricing and cost recovery actions increased year-over-year sales by $56.   Light Vehicle first-quarter segment EBITDA decreased by $69 in 2022. Lower sales volumes decreased year-over-year earnings by $9 (35% decremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $61, inflationary cost increases of $20, higher program launch costs of $2, higher premium freight costs of $2 and operational inefficiencies of $37. Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $56, material cost savings of $7 and lower warranty costs of $1.     Commercial Vehicle       Three Months       Sales     Segment EBITDA     Segment EBITDA Margin   2021   $ 349     $ 15       4.3 % Volume and mix     51       10           Product line transfer     23       2           Performance     41       (17 )         Currency effects     (1 )                 2022   $ 463     $ 10       2.2 %   Commercial Vehicle sales in the first quarter of 2022, exclusive of currency effects and the product line transfer from Light Vehicle, were 26% higher than 2021 reflecting mixed global markets. Year-over-year North America Class 8 production was up 2% and Classes 5-7 production was up 4%. Year-over-year medium/heavy-truck production in South America was up 26%. Year-over-year medium/heavy-truck production in Europe and Asia Pacific were down 8% and 40%, respectively. Net customer pricing and cost recovery actions further increased year-over-year sales by $41.   Commercial Vehicle first-quarter segment EBITDA decreased by $5 in 2022. Higher sales volumes increased year-over-year earnings by $10 (20% incremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $33, inflationary cost increases of $20, higher incentive compensation of $1 and operational inefficiencies of $15. Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $41, lower premium freight costs of $7 and material cost savings of $4.   32 Table of Contents   Off-Highway       Three Months       Sales     Segment EBITDA     Segment EBITDA Margin   2021   $ 635     $ 79       12.4 % Volume and mix     91       24           Performance     53       2           Currency effects     (35 )     (5 )         2022   $ 744     $ 100       13.4 %   Off-Highway sales in the first quarter of 2022, exclusive of currency effects, were 23% higher than 2021 reflecting improved global markets and the conversion of sales backlog. Year-over-year global construction/mining and agricultural equipment markets reflected marked improvement with global production increasing 10% and 6%, respectively. Net customer pricing and cost recovery actions further increased year-over-year sales by $53.   Off-Highway first-quarter segment EBITDA increased by $21 in 2022. Higher sales volumes increased year-over-year earnings by $24 (26% incremental margin). The year-over-year performance-related earning increase was driven by net customer pricing and cost recovery actions of $53, material cost savings of $7 and lower warranty costs of $2. Partially offsetting these performance-related increases were commodity cost increases of $30, inflationary cost increases of $25, higher premium freight costs of $4 and operational inefficiencies of $1.   Power Technologies       Three Months       Sales     Segment EBITDA     Segment EBITDA Margin   2021   $ 288     $ 41       14.2 % Volume and mix     (1 )                 Performance     10       (11 )         Currency effects     (9 )     (1 )         2022   $ 288     $ 29       10.1 %   Power Technologies primarily serves the light-vehicle market but also sells product to the medium/heavy-truck and off-highway markets. Power Technologies sales in the first quarter of 2022, exclusive of currency effects, were 3% higher than 2021 reflecting generally weaker global markets partially offset by the conversion of sales backlog. Year-over-year Europe, South America and Asia Pacific light-vehicle engine production was down 12%, 11% and 3% compared to 2021. Year-over-year North America light-vehicle engine production was up 2% compared to 2021. Net customer pricing and cost recovery actions increased year-over-year sales by $10.   Power Technologies first-quarter segment EBITDA decreased by $12 in 2022. Lower sales volumes had a negligible impact on earnings. The year-over-year performance-related decrease was driven by commodity cost increases of $14, inflationary cost increases of $5, higher warranty costs of $1, higher program launch costs of $1 and operational inefficiencies of $2. Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $10, material cost savings of $1 and lower premium freight costs of $1.   33 Table of Contents     Non-GAAP Financial Measures   Adjusted EBITDA   We have defined adjusted EBITDA as net income before interest, income taxes, depreciation, amortization, equity grant expense, restructuring expense, non-service cost components of pension and other postretirement benefits (OPEB) costs and other adjustments not related to our core operations (gain/loss on debt extinguishment, pension settlements, divestitures, impairment, etc.). Adjusted EBITDA is a measure of our ability to maintain and continue to invest in our operations and provide shareholder returns. We use adjusted EBITDA in assessing the effectiveness of our business strategies, evaluating and pricing potential acquisitions and as a factor in making incentive compensation decisions. In addition to its use by management, we also believe adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate financial performance of our company relative to other Tier 1 automotive suppliers. Adjusted EBITDA should not be considered a substitute for earnings before income taxes, net income or other results reported in accordance with GAAP. Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.   The following table provides a reconciliation of net income to adjusted EBITDA.       Three Months Ended       March 31,       2022     2021   Net income   $ 20     $ 68   Equity in earnings of affiliates     1       14   Income tax expense     18       22   Earnings before income taxes     37       76   Depreciation and amortization     97       95   Restructuring charges, net     (1 )     1   Interest expense, net     29       32   Loss on investment in Hyliion             17   Loss on disposal group held for sale             7   Other*     8       6   Adjusted EBITDA   $ 170     $ 234   * Other includes stock compensation expense, non-service cost components of pension and OPEB costs, strategic transaction expenses and other items. See Note 19 to our consolidated financial statements in Item 1 of Part I for additional details.   Free Cash Flow and Adjusted Free Cash Flow   We have defined free cash flow as cash provided by (used in) operating activities less purchases of property, plant and equipment. We have defined adjusted free cash flow as cash provided by (used in) operating activities excluding discretionary pension contributions less purchases of property, plant and equipment. We believe these measures are useful to investors in evaluating the operational cash flow of the company inclusive of the spending required to maintain the operations. Free cash flow and adjusted free cash flow are not intended to represent nor be an alternative to the measure of net cash provided by (used in) operating activities reported in accordance with GAAP. Free cash flow and adjusted free cash flow may not be comparable to similarly titled measures reported by other companies.   The following table reconciles net cash flows provided by (used in) operating activities to adjusted free cash flow.       Three Months Ended       March 31,       2022     2021   Net cash provided by (used in) operating activities   $ (121 )   $ 27   Purchases of property, plant and equipment     (116 )     (53 ) Free cash flow     (237 )     (26 ) Discretionary pension contribution     —       —   Adjusted free cash flow   $ (237 )   $ (26 )   34 Table of Contents     Liquidity   The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at March 31, 2022:   Cash and cash equivalents   $ 259   Less: Deposits supporting obligations     (1 ) Available cash     258   Additional cash availability from Revolving Facility     864   Marketable securities     19   Total liquidity   $ 1,141     Cash deposits are maintained to provide credit enhancement for certain agreements and are reported as part of cash and cash equiv alents. For most of these deposits, the cash may be withdrawn if a comparable security is provided in the form of letters of credit. Accordingly, these deposits are not considered to be restricted. Marketable securities are included as a component of liquidity as these investments can be readily liquidated at our discretion. We had availability of $864 at March 31, 2022  under the Revolving Facility after deducting $265 of outstanding borrowings and $21 of outstanding letters of credit.   The components of our March 31, 2022 consolidated cash balance were as follows:       U.S.     Non-U.S.     Total   Cash and cash equivalents   $ 73     $ 99     $ 172   Cash and cash equivalents held as deposits             1       1   Cash and cash equivalents held at less than wholly-owned subsidiaries     3       83       86   Consolidated cash balance   $ 76     $ 183     $ 259     A portion of the non-U.S. cash and cash equivalents is utilized for working capital and other operating purposes. Several countries have local regulatory requirements that restrict the ability of our operations to repatriate this cash. Beyond these restrictions, there are practical limitations on repatriation of cash from certain subsidiaries because of the resulting tax withholdings and subsidiary by-law restrictions which could limit our ability to access cash and other assets.   At March 31, 2022, we were in compliance with the covenants of our financing agreements. Under the Revolving Facility and our senior notes, we are required to comply with certain incurrence-based covenants customary for facilities of these types. The incurrence-based covenants in the Revolving Facility permit us to, among other things, (i) issue foreign subsidiary indebtedness, (ii) incur general secured indebtedness subject to a pro forma first lien net leverage ratio not to exceed 1.50:1.00 in the case of first lien debt and a pro forma secured net leverage ratio of 2.50:1.00 in the case of other secured debt and (iii) incur additional unsecured debt subject to a pro forma total net leverage ratio not to exceed 3.50:1.00, tested at the time of incurrence. We may also make dividend payments in respect of our common stock as well as certain investments and acquisitions subject to a pro forma total net leverage ratio of 2.75:1.00. In addition, the Revolving Facility is subject to a financial covenant requiring us to maintain a first lien net leverage ratio not to exceed 2.00:1.00. The indentures governing the senior notes include other incurrence-based covenants that may subject us to additional specified limitations.   From time to time, depending upon market, pricing and other conditions, as well as our cash balances and liquidity, we may seek to acquire our senior notes or other indebtedness or our common stock through open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as we may determine (or as may be provided for in the indentures governing the notes), for cash, securities or other consideration. In addition, we may enter into sale-leaseback transactions related to certain of our real estate holdings and factor receivables. There can be no assurance that we will pursue any such transactions in the future, as the pursuit of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our financing and governance documents.   The principal sources of liquidity available for our future cash requirements are expected to be (i) cash flows from operations, (ii) cash and cash equivalents on hand and (iii) borrowings from our Revolving Facility. We believe that our overall liquidity and operating cash flow will be sufficient to meet our anticipated cash requirements for capital expenditures, working capital, debt obligations and other commitments during the next twelve months. While uncertainty surrounding the current economic environment could adversely impact our business, based on our current financial position, we believe it is unlikely that any such effects would preclude us from maintaining sufficient liquidity.   35 Table of Contents   Cash Flow   The following table summarizes our consolidated statement of cash flows:       Three Months Ended       March 31,       2022     2021   Cash used for changes in working capital   $ (211 )   $ (133 ) Other cash provided by operations     90       160   Net cash provided by (used in) operating activities     (121 )     27   Net cash used in investing activities     (117 )     (73 ) Net cash provided by (used in) financing activities     229       (16 ) Net decrease in cash, cash equivalents and restricted cash   $ (9 )   $ (62 )   Operating activities — Exclusive of working capital, other cash provided by operations was $90 in 2022 and $160 in 2021. The year-over-year decrease is primarily attributable to lower operating earnings.   Working capital used cash of $211 and $133 in 2022 and 2021. Cash of $325 and $257 was used to finance receivables in 2022 and 2021, respectively. The higher level of cash used to finance receivables in 2022 is due to higher year-over-year first quarter sales driven by strong heavy-vehicles markets. Cash of $63 and $137 was used to fund higher inventory levels in 2022 and 2021, respectively. We are carrying higher levels of inventory to mitigate continued global-supply-chain disruptions, ensuring continuous supply for our customers. Increases in accounts payable and other net liabilities provided cash of $177 and $261 in 2022 and 2021, respectively. The increase in accounts payable and other net liabilities in 2022 was principally driven by higher raw material purchases in the first quarter of 2022.   Investing activities — Expenditures for property, plant and equipment were $116 and $53 during first quarter of 2022 and 2021. The increase in capital spending during the first quarter of 2022 is in support of awarded next generation programs and new business. During the first quarter of 2021, we paid $17, net of cash acquired, to acquire an additional 51% interest in Pi Innovo. The acquisition of the additional ownership interest provided us with a 100% ownership interest in Pi Innovo. During the first quarter of 2022 and 2021, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities.   Financing activities  — During the first quarter of 2022, we had net borrowings of $265 on our Revolving Facility. During the first quarter of 2021 we paid financing costs of $2 to amend our credit and guaranty agreement, increasing our Revolving Facility to $1,150 and extending its maturity to March 25, 2026. We used cash of $14 for dividend payments to common stockholders during both the first quarter of 2022 and 2021. We used cash of $25 to repurchase common shares under our share repurchase program during the first quarter of 2022.   36 Table of Contents     Off-Balance Sheet Arrangements   There have been no material changes at March 31, 2022 in our off-balance sheet arrangements from those reported or estimated in the disclosures in Item 7 of our 2021 Form 10-K.   Contractual Obligations   There have been no material changes in our contractual obligations from those disclosed in Item 7 of our 2021 Form 10-K.   Contingencies   For a summary of litigation and other contingencies, see Note 14 to our consolidated financial statements in Item 1 of Part I. Based on information available to us at the present time, we do not believe that any liabilities beyond the amounts already accrued that may result from these contingencies will have a material adverse effect on our liquidity, financial condition or results of operations.   Critical Accounting Estimates   The preparation of our consolidated financial statements in accordance with GAAP requires us to use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. See Item 7 in our 2021 Form 10-K for a description of our critical accounting estimates and Note 1 to our consolidated financial statements in Item 8 of our 2021 Form 10-K for our significant accounting policies. There were no changes to our critical accounting estimates in the three months ended March 31, 2022. See Note 1 to our consolidated financial statements in this Form 10-Q for a discussion of new accounting guidance adopted during the first three months of 2022.      Item 3. Quantitative and Qualitative Disclosures About Market Risk   There have been no material changes to market risk exposures related to changes in currency exchange rates, interest rates or commodity costs from those discussed in Item 7A of our 2021 Form 10-K.