What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-04-28 · 238 added, 116 removed, 343 unchanged (51% of the section changed)

38 unchanged sentences

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,

At June 30, 2022, we employed approxim ately 41,300 people, operated in 32 countries and had 141 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 June 30, 2022 and 2021 are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Light Vehicle

42 unchanged sentences

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.

The share repurchase program expires on December 31, 2023, and $102 remains available for future share repurchases as of June 30, 2022.

Financing actions  — We have taken advantage of competitive debt markets, eliminating our secured debt and extending and restructuring our senior note maturity schedule.

39 unchanged sentences

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.

The outlook for the full year of 2022 reflects global light-truck production to be up 7%, with growth across all regions, exhibiting a moderate rebound as production constraints continue to ease, inventory begins to return 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.

6 unchanged sentences

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.

The outlook for 2022 is for production to be flat with 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.

The outlook for South America is for a modest 4% decrease 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 17% reduction in production from the prior year as China experiences COVID lockdowns and the Indian market recovery continues to lag. 

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;

12 unchanged sentences

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%.

With 54% of our first half 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 half 2022 non-U.S.

sales, while India and Brazil each accounted for 10% and China accounted for 9%.

Although sales in South Africa are less than 5% of our non-U.S.

1 unchanged sentence

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.

dollar in the first half of 2022, decreasing sales by $153.

A weaker euro, Thai baht and Indian rupee were partially offset by a stronger Brazilian real.

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.

Our sales in Argentina for the first half of 2022 of approximately $64 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $40, including $18 of net fixed assets, at June 30, 2022 . During the second quarter of 2018, we determined that Argentina's economy met the GAAP definition of a highly inflationary economy.

In assessing 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.

9 unchanged sentences

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.

Higher commodity prices decreased year-over-year second-quarter and first-half earnings in 2022 by $145 and $283.

Material recovery and other pricing actions increased year-over-year second-quarter and first-half earnings in 2022 by $142 and $264.

Sales, Earnings and Cash Flow Outlook

2 unchanged sentences

Net cash provided by operating activities

Discretionary pension contributions

Purchases of property, plant and equipment

5 unchanged sentences

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.

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,

We have decreased our full year 2022 adjusted EBITDA range to $700 - $740.

The $100 reduction from our April 2022 outlook reflects our expectation for continued commodity and non-material cost inflation through the balance of the year.

The midpoint of our sales range remains unchanged from our April 2022 outlook at $10,100. Adjusted EBITDA Margin is now expected to be 7.1%, 180 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 $200, or 2% of sales for 2022, reflecting lower year-over-year use of cash for working capital, partially offset by lower year-over-year adjusted EBITDA, at the midpoint of the range.

We expect capital spending will be higher than 2021, as we make investments to support awarded programs and continue to invest in electrification.

Summary Consolidated Results of Operations (Second Quarter, 2022 versus 2021)

Three Months Ended June 30,

% of Net Sales

7 unchanged sentences

Earnings before interest and income taxes

Loss on extinguishment of debt

Interest income

2 unchanged sentences

Income tax expense

Equity in earnings of affiliates

Equity in earnings (loss) of affiliates

Noncontrolling interests net income

12 unchanged sentences

Sales in 2022 were $381 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.

Weaker international currencies decreased sales by $98, principally due to a weaker euro, Thai baht and Indian rupee, partially offset by a stronger Brazilian real.

The organic sales increase of $484, or 22%, resulted from improved global construction/mining and agricultural markets, improved North America full-frame light-truck and commercial-vehicle demand and the conversion of sales backlog.

Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $180.

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.

The North America organic sales increase of 26% was driven principally by stronger light- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog, partially offset by lower medium-duty truck production volumes.

Second quarter 2022 full-frame light-truck production was up 16% while light-vehicle engine production was up 13% compared with the second quarter of 2021.

Year-over-year Class 8 truck production was up 10% while Classes 5-7 truck production was down 4%.

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.

Organic sales in this operating segment were up 25% compared with the second quarter of 2021.

An 11% decrease in year-over-year medium/heavy-duty truck production levels and a 2% decrease in year-over-year light-vehicle engine production levels tempered our organic European sales increase.

Excluding currency effects, second quarter 2022 sales in South America increased 31% compared to 2021 due primarily to improved light-duty truck production and continued strengthening of medium/heavy-duty truck sales despite overall medium/heavy-duty truck production volumes moderating.

Second quarter light-duty truck production was up 13% while medium/heavy-duty truck production was down 9% compared with the second quarter of 2021. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 18% compared to 2021 due to stronger c onstruction/mining and agricultural markets and strengthening of medium/heavy-duty truck sales despite overall medium/heavy-duty truck production volumes declining.

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 for the second quarter of 2022 increased $450, or 23%, when compared to 2021.

Cost of sales as a percent of sales was 430 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.

Incremental margins provided by increased sales volumes were more than offset by higher year-over-year commodity costs of $145, non-material inflationary cost impacts of $76 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.

Gross margin of $183 for the second quarter of 2022 decreased $69 from 2021.

Gross margin as a percent of sales was 7.1% in the second quarter of 2022, 430 basis points lower than in 2021.

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.

1 unchanged sentence

SG&A expenses in 2022 were $130 (5.0% of sales) as compared to $126 (5.7% 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.

SG&A expenses were $4 higher in 2022 primarily due to higher salaried employee wages and higher travel expenses and professional fees.

Amortization of intangibles —

1 unchanged sentence

Restructuring charges, net  — 

Net restructuring charges were ($1) in the first quarter of 2022 and $1 in the first quarter of 2021.

Net restructuring charges were $1 in the second quarter of 2022.

See Note 4 for additional information.

Other income (expense), net —

4 unchanged sentences

Strategic transaction expenses

Gain on investment in Hyliion

Loss on de-designation of fixed-to-fixed cross currency swaps

Other income (expense), net

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.

We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes.

In June 2021, we redeemed all of the June 2026 Notes and de-designated the fixed-to-fixed cross currency swaps.

See Note 13 for additional information.

Interest income and interest expense 

Interest income was $2 in both 2022 and 2021.

Interest expense decreased from $34 in 2021 to $32 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 5.2% in 2021.

Income tax expense  — We reported income tax expense of $18 and $14 for the second quarter of 2022 and 2021, respectively. Our effective tax rates were 62% and 25% for the second 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, 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 (loss) of affiliates —

Net earnings (loss) from equity investments was a loss of $1 in 2022 and earnings of $10 in 2021.

Net earnings (loss) from DDAC was a loss of $3 in 2022 and earnings of $8 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.

Summary Consolidated Results of Operations (Year-to-Date, 2022 versus 2021)

Six Months Ended June 30,

% of Net Sales

Increase/ (Decrease)

Cost of sales

Selling, general and administrative expenses

Amortization of intangibles

Restructuring charges, net

Other income (expense), net

Earnings before interest and income taxes

Loss on extinguishment of debt

Interest income

Interest expense

Earnings before income taxes

Income tax expense

Equity in earnings of affiliates

Noncontrolling interests net income

Redeemable noncontrolling interests net loss

Net income attributable to the parent company

Sales —

The following table shows changes in our sales by geographic region.

Six Months Ended

Amount of Change Due To

Increase/ (Decrease)

Currency Effects

Acquisitions (Divestitures)

Organic Change

North America

South America

Sales in 2022 were $598 higher than in 2021.

Weaker international currencies decreased sales by $153, principally due to a weaker euro, Indian rupee and Thai baht, partially offset by a stronger Brazilian real.

The organic sales increase of $759, or 17%, resulted from improved global construction/mining and agricultural markets, improved North America full-frame light-truck and commercial-vehicle demand and the conversion of sales backlog.

Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $340.

The North America organic sale increase of 16% was driven principally by stronger light- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog, partially offset by lower medium-duty truck production volumes.

First half 2022 full-frame light-truck production was up 4% while light-vehicle engine production was up 6% compared with the first half of 2021.

Year-over-year Class 8 truck production was up 8% while Classes 5-7 truck production was down 7% compared with the first half of 2021.

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 24% compared with the first half of 2021.

A 4% decrease in year-over-year light-duty truck production levels and a 10% decrease in year-over-year light-vehicle engine production levels tempered our organic European sale increase.

Excluding currency effects, first half 2022 sales in South America increased 35% compared to 2021 due primarily to improved light-duty truck production and continued strengthening of medium/heavy-duty truck sales despite overall medium/heavy- duty truck production volumes moderating.

First half light-duty truck production was up 5% while medium/heavy-duty truck production was down 3% compared with the first half of 2021.

Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 15% compared to 2021 due to strengthening of medium/heavy-duty truck sales despite lower overall medium/heavy-duty production volumes compared with the first half of 2021.

Cost of sales and gross margin —

Cost of sales for the first half of 2022 increased $721, or 18%, when compared to 2021.

Cost of sales as a percent of sales was 380 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 $283, non-material inflationary cost impacts of $146 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 and supplier recoveries provided a partial offset, reducing costs of sales by approximately $16.

Gross margin of $380 for the first half of 2022 decreased $123 from 2021.

Gross margin as a percent of sales was 7.5% in the first half of 2022, 380 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 along with recovery of non-material inflation typically not being specifically provided for in our current contracts with customers resulting in prolonged negotiations and indeterminate recoveries. 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 $260 (5.1% of sales) as compared to $245 (5.5% of sales) in 2021. 

SG&A expenses were $15 higher in 2022 primarily due to higher salaried employee wages and higher travel expenses and professional fees.

Amortization of intangibles —

Amortization expense was $7 in both 2022 and 2021.

Restructuring charges, net  —

N et restructuring charges were $1 in the first half of 2021.

See Note 4 for additional information.

Other income (expense), net —

The following table shows the major components of other income (expense), net.

Six Months Ended

Non-service cost components of pension and OPEB costs

Foreign exchange gain

Strategic transaction expenses

Loss on investment in Hyliion

Loss on disposal group held for sale

Loss on de-designation of fixed-to-fixed cross currency swaps

Other income (expense), net

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.

Strategic transaction expenses in 2022 were primarily attributable to investigating potential acquisitions and business ventures and 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.

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.

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.

In conjunction with our acquisition of Oerlikon Drive Systems, 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.

We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes.

In June 2021, we redeemed all of the June 2026 Notes and de-designated the fixed-to-fixed cross currency swaps.

See Note 13 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 

2 unchanged sentences

Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.6% in 2022 and 5.3% 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.

Income tax expense  — We reported income tax expense of $36 and $36 for the first half of 2022 and 2021, respectively. Our effective tax rates were 55% and 27% for the first half 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.

federal statutory rate of 21% due to establishment, release and adjustment of valuation allowances in several countries, different statutory tax rates outside the U.S.

and withholding taxes related to repatriations of international earnings.

1 unchanged sentence

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.

Net earnings from equity investments was de minimis in 2022 and $24 in 2021.

Equity in earnings from DDAC was a loss of $2 in 2022 and earnings of $21 in 2021.

3 unchanged sentences

Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

1 unchanged sentence

Currency effects

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.  

Light Vehicle sales in the second quarter 2022, exclusive of currency effects, the impact of divestitures and the product line transfer to Commercial Vehicle, were 20% higher than 2021 reflecting generally stronger global markets, cost recovery actions and the conversion of sales backlog.

Year-over-year North America full-frame light-truck production increased 16% in this year’s second quarter while light-truck production in Europe and South America increased 7% and 13%, respectively.

Year-over-year Asia Pacific light-truck production decreased 7% in this year’s second quarter.

Light Vehicle sales in the first half of 2022, exclusive of currency effects, the impact of divestitures and the product line transfer to Commercial Vehicle, were 11% higher than 2021 reflecting stronger North America and South America markets, cost recovery actions and the conversion of sales backlog.

Year-over-year North America full-frame light-truck and South America light-truck production increased 4% and 5%, respectively, while Europe and Asia Pacific light-truck production decreased 4% and 3%, respectively.

Net customer pricing and cost recovery actions increased year-over-year sales by $41 and $97 in this year’s second quarter and first half, respectively.

Light Vehicle second-quarter 2022 segment EBITDA decreased by $54 from last year, with first-half earnings lower by $123.

Higher sales volumes provided a year-over-year benefit of $23 (17% incremental margin) and $14 (13% incremental margin) in the second quarter and first half of 2022.

Year-over-year performance-related earnings decreases in the second quarter were driven by commodity cost increases of $47, inflationary cost increases of $28, lower material cost savings and supplier recoveries of $17, operational inefficiencies of $24 and higher program launch costs of $2.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $41 and lower warranty costs of $3.

The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $108, operational inefficiencies of $61, inflationary cost increases of $48, lower material cost savings and supplier recoveries of $10, higher program launch costs of $4 and higher premium freight costs of $2.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $97 and lower warranty costs of $4.

Commercial Vehicle

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Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

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Currency effects

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.

Commercial Vehicles sales in the second quarter and first half of 2022, exclusive of currency effects and the production line transfer from Light Vehicle, were 27% higher than the same periods of 2021 reflecting continued strengthening of medium/heavy-duty truck sales despite global medium/heavy-duty truck production volumes moderating, cost recovery actions and the conversion of sales backlog.

Year-over-year North America Class 8 production was up 10% while Classes 5-7 were down 4% in this year’s second quarter.

Year-over-year medium/heavy-truck production in Europe, South America and Asia Pacific were down 11%, 9% and 47%, respectively, in this year’s second quarter.

Year-over-year North America Class 8 production was up 8% while Classes 5-7 were down 7% in this year’s first half.

Year-over-year medium/heavy-truck production in Europe, South America and Asia Pacific were down 9%, 3% and 42%, respectively, in this year’s first half.

Net customer pricing and cost recovery actions increased year-over-year sales by $51 and $92 in this year’s second quarter and first half, respectively.

Commercial Vehicle second-quarter 2022 segment EBITDA decreased by $8 from last year, with first-half earnings lower by $13.

Higher sales volumes provided a year-over-year benefit of $10 (18% incremental margin) and $20 (19% incremental margin) in the second quarter and first half of 2022.

Year-over-year performance-related earnings decreases in the second quarter were driven by commodity cost increases of $32, operational inefficiencies of $30, inflationary cost increases of $12 and higher premium freight of $2.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $51 and material cost savings of $5.

The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $65, operational inefficiencies of $45, inflationary cost increases of $32 and higher incentive compensation of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $92, material cost savings of $9 and lower premium freight of $5.

Segment EBITDA

Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

Currency effects

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.

Off-Highway sales in the second quarter and first half of 2022, exclusive of currency effects, were 25% and 24% higher than the same period of 2021 reflecting improved global markets, cost recovery actions and the conversion of sales backlog.

Year-over-year global construction/mining and agricultural equipment markets reflected marked improvement.

Net customer pricing and cost recovery actions further increased year-over-year sales by $69 and $122 in this year’s second quarter and first half, respectively.

Off-Highway second-quarter 2022 segment EBITDA increased by $3 from last year, with first-half earnings higher by $24.

Higher sales volumes provided a year-over-year benefit of $23 (24% incremental margin) and $47 (25% incremental margin) in the second quarter and first half of 2022.

Year-over-year performance-related earnings decreases in the second quarter were driven by commodity cost increases of $42, inflationary cost increases of $29, operational inefficiencies of $14, higher premium freight costs of $2 and higher warranty costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $69 and material cost savings of $7.

The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $72, inflationary cost increases of $54, operational inefficiencies of $15 and higher premium freight costs of $6.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $122, material cost savings of $14 and lower warranty costs of $1.

Power Technologies

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Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

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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.

Power Technologies sales in the second quarter and first half of 2022, exclusive of currency effects, were 15% and 9% higher than the same period of 2021 reflecting an improved North American market, cost recovery actions and the conversion of sale backlog.

Year-over-year North American light-vehicle engine production was up 13% and 6% compared to the second quarter and first half of 2021, respectively.

Year-over-year Europe light-vehicle engine production was down 2% and 10% compared to the second quarter and first half of 2021, respectively.

Net customer pricing and cost recovery actions further increased year-over-year sales by $19 and $29 in this year’s second quarter and first half, respectively.

Power Technologies second-quarter 2022 segment EBITDA decreased by $11 from last year, with first-half earnings lower by $23.

Higher sales volumes provided a year-over-year benefit of $4 (21% incremental margin) and $4 (22% incremental margin) in the second quarter and first half of 2022.

Year-over-year performance-related earnings decreases in the second quarter were driven by commodity cost increases of $24, inflationary cost increases of $7, higher premium freight costs of $2, operational inefficiencies of $1 and higher program launch costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $19 and material cost savings of $2.

The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $38, inflationary cost increases of $12, operational inefficiencies of $3, higher program launch costs of $2, higher warranty costs of $1 and higher premium freight costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $29 and material cost savings of $3.

Non-GAAP Financial Measures

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Three Months Ended

Equity in earnings of affiliates

Six Months Ended

Equity in earnings (loss) of affiliates

Income tax expense

3 unchanged sentences

Interest expense, net

Loss on investment in Hyliion

Loss on extinguishment of debt

(Gain) loss on investment in Hyliion

Loss on disposal group held for sale

Loss on de-designation of fixed-to-fixed cross currency swaps

Adjusted EBITDA

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Three Months Ended

Net cash provided by (used in) operating activities

Six Months Ended

Net cash provided by operating activities

Purchases of property, plant and equipment

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Adjusted free cash flow

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at March 31, 2022:

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at June 30, 2022:

Cash and cash equivalents

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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:

We had availability of $934 at June 30, 2022  under the Revolving Facility after deducting $195 of outstanding borrowings and $21 of outstanding letters of credit.

The components of our June 30, 2022 consolidated cash balance were as follows:

Cash and cash equivalents

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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.

At June 30, 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.

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The following table summarizes our consolidated statement of cash flows:

Three Months Ended

Six Months Ended

Cash used for changes in working capital

Other cash provided by operations

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Operating activities —

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Cash of $323 and $204 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.

The higher level of cash used to finance receivables in 2022 is due to higher year-over-year second quarter sales driven by improved global construction/mining and agricultural markets and a stronger North America full-frame light-truck market. Cash of $85 and $305 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 $324 and $270 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.

Investing activities — Expenditures for property, plant and equipment were $206 and $133 during first half of 2022 and 2021.

The increase in capital spending during the first half 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.

The acquisition of the additional ownership interest provided us with a 100% ownership interest in Pi Innovo. During the first half of 2022 and 2021, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities.

In 2021 we de-designated the fixed-to-fixed cross currency swaps associated with our June 2026 Notes and settled certain of the fixed-to-fixed cross currency swaps resulting in a net cash outflow of $22.

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.

— During the first half of 2022, we had net borrowings of $195 on our Revolving Facility. During 2021, we completed the issuance of €325 of our July 2029 Notes and $400 of our September 2030 Notes, paying financing costs of $11. Also during 2021, we redeemed all $375 of our June 2026 Notes and all $425 of our December 2024 Notes, paying redemption premiums of $21.

During 2021, we paid financing costs of $2 to amend our credit and guaranty agreement, increasing the Revolving Facility to $1,150 and extending its maturity to March 25, 2026. We used cash of $29 for dividend payments to common stockholders during both the first half of 2022 and 2021.

We used cash of $25 to repurchase common shares under our share repurchase program during the first quarter of 2022.

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.

There have been no material changes at June 30, 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.

During the second quarter of 2022, we commenced two operating leases with minimum lease payments totaling $56 over their respective noncancelable lease terms which expire in September 2035 and January 2037. There have been no other material changes in our contractual obligations from those disclosed in Item 7 of our 2021 Form 10-K.

Contingencies

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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. 

There were no changes to our critical accounting estimates in the six months ended June 30, 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 six months of 2022. 

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis