What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-08-03 · 176 added, 143 removed, 438 unchanged (42% 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 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,

At September 30, 2022, we employed approxim ately 42,300 people, operated in 32 countries and had 140 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 September 30, 2022 and 2021 are as follows:

Three Months Ended September 30,

Nine Months Ended September 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 June 30, 2022.

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

50 unchanged sentences

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 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 outlook for South America is for a modest 1% 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 26% reduction in production from the prior year as China experiences COVID lockdowns and the Indian market recovery continues to lag. 

13 unchanged sentences

Foreign currency —

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.

With 54% of our year-to-date 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 49% of our year-to-date 2022 non-U.S.

sales, while Brazil, India and China accounted for 11%, 10% and 9%, respectively. 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 half of 2022, decreasing sales by $153.

dollar in the first nine months of 2022, decreasing sales by $292.

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

1 unchanged sentence

Our Argentine operation supports our Light Vehicle operating segment.

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.

Our sales in Argentina for the first nine months of 2022 of approximately $109 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $42, including $18 of net fixed assets, at September 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.

10 unchanged sentences

Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes.

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.

Higher commodity prices decreased year-over-year third-quarter and first-nine-months earnings in 2022 by $113 and $396.

Material recovery pricing actions increased year-over-year third-quarter and first-nine-months earnings in 2022 by $134 and $398.

Sales, Earnings and Cash Flow Outlook

9 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 $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.

Our full year 2022 adjusted EBITDA range of $700 - $740 remains unchanged from our July 2022 outlook and 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 July 2022 outlook at $10,100. Adjusted EBITDA Margin is 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 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,

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

Three Months Ended September 30,

% of Net Sales

5 unchanged sentences

Restructuring charges, net

Impairment of goodwill

Other income (expense), net

Earnings before interest and income taxes

Loss on extinguishment of debt

Earnings (loss) before interest and income taxes

Interest income

Interest expense

Earnings before income taxes

Earnings (loss) before income taxes

Income tax expense

Equity in earnings (loss) of affiliates

Net income (loss)

Noncontrolling interests net income

Redeemable noncontrolling interests net loss

Net income attributable to the parent company

Net income (loss) attributable to the parent company

Sales —

1 unchanged sentence

Three Months Ended

September 30,

Amount of Change Due To

6 unchanged sentences

Sales in 2022 were $331 higher than in 2021.

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.

Weaker international currencies decreased sales by $139, principally due to a weaker euro, Indian rupee, Thai baht, Chinese renminbi and South African rand. The organic sales increase of $470, or 21%, resulted from improved global construction/mining and agricultural markets, improved North America full-frame light-truck and commercial-vehicle demand, improved South America commercial-vehicle demand and the conversion of sales backlog.

Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $229.

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%.

The North America organic sales increase of 19% was driven principally by stronger light-, medium- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog.

Third quarter 2022 full-frame light-truck production was up 20% while light-vehicle engine production was up 30% compared with the third quarter of 2021.

Year-over-year Class 8 truck production was up 35% while Classes 5-7 truck production was up 6%.

Excluding currency effects, sales in Europe were up 24% 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 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.

Organic sales in this operating segment were up 23% compared with the third quarter of 2021.

Excluding currency effects, third quarter 2022 sales in South America increased 28% compared to 2021 due primarily to improved light- and medium/heavy-duty truck production.

Third quarter light-duty truck production was up 36% and medium/heavy-duty truck production was up 5% compared with the third quarter of 2021. Excluding currency effects, sales in Asia Pacific increased 20% compared to 2021 due to stronger construction/mining and agricultural markets and higher medium/heavy-duty truck related sales despite overall medium/heavy-duty truck production volumes declining 9% compared to 2021.

Cost of sales and gross margin —

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

Cost of sales for the third quarter of 2022 increased $334, or 17%, when compared to 2021.

Cost of sales as a percent of sales was 130 basis points higher than in the previous year.

1 unchanged sentence

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.

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.

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 $21.

Gross margin of $203 for the third quarter of 2022 decreased $3 from 2021.

Gross margin as a percent of sales was 8.0% in the third quarter of 2022, 130 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.

Material cost recovery mechanisms with our customers lag material cost changes by our suppliers by approximately 90 days.

With commodity costs abating slightly during the third quarter of 2022, gross margin was positively impacted by net material cost recoveries on both a dollar and percentage basis. The recovery of non-material inflation is not specifically provided for in our current contracts with customers resulting in prolonged negotiations and indeterminate recoveries.

Selling, general and administrative expenses (SG&A) —

SG&A expenses in 2022 were $114 (4.5% of sales) as compared to $103 (4.7% of sales) in 2021. 

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

SG&A expenses were $11 higher in 2022 primarily due to higher incentive compensation, travel expenses and professional fees.

Amortization of intangibles —

Amortization expense was $3 in both 2022 and 2021.

Amortization expense was $3 in 2022 and $4 in 2021.

Restructuring charges, net  — 

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

See Note 4 for additional information.

Net restructuring charges were ($1) in the third quarter of 2022 and $1 in the third quarter of 2021. See Note 4 for additional information.

Impairment of g oodwill  —

During the third quarter of 2022, we recorded a $191 goodwill impairment charge.

See Note 3 of our consolidated financial statements in Item 1 of Part I for additional information.

Other income (expense), net —

1 unchanged sentence

Three Months Ended

September 30,

Non-service cost components of pension and OPEB costs

1 unchanged sentence

Strategic transaction expenses

Gain on investment in Hyliion

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

Loss on investment in Hyliion

Other income (expense), net

10 unchanged sentences

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.

Interest expense increased from $31 in 2021 to $32 in 2022, primarily due to higher debt levels, partially offset by lower interest rates on outstanding borrowings.

Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.8% in 2022 and 4.9% 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.

Income tax expense  — 

We reported income tax expense of $31 and $20 for 2022 and 2021, respectively.

Our effective tax rates were (24)% and 31% for the third quarter of 2022 and 2021.

During the third quarter of 2022, we recorded a pre-tax goodwill impairment charge of $191 with an associated income tax benefit of $2.

In addition, we recorded a tax benefit of $32 for U.S.

tax credits generated.

Also, during the third quarter of 2022, we recorded tax expense of $31 for valuation allowances related to U.S.

states driven by differences between our federal and state tax profile.

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.

federal statutory rate of 21% due to establishment, release, and adjustment of valuation allowances in several countries, nondeductible expenses and deemed income, local tax incentives 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.

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 non-deductible expenses.

Equity in earnings (loss) of affiliates —

3 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

% of Net Sales

5 unchanged sentences

Restructuring charges, net

Impairment of goodwill

Other income (expense), net

3 unchanged sentences

Interest expense

Earnings before income taxes

Earnings (loss) before income taxes

Income tax expense

Equity in earnings of affiliates

Equity in earnings (loss) of affiliates

Net income (loss)

Noncontrolling interests net income

Redeemable noncontrolling interests net loss

Net income attributable to the parent company

Net income (loss) attributable to the parent company

Sales —

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

Six Months Ended

Nine Months Ended

September 30,

Amount of Change Due To

7 unchanged sentences

Weaker international currencies decreased sales by $292, 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.

The organic sales increase of $1,229, or 18%, resulted from improved global construction/mining and agricultural markets, improved North America full-frame light-truck and commercial-vehicle demand, improved South America commercial-vehicle demand and the conversion of sales backlog.

Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $569.

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.

The North America organic sale increase of 17% was driven principally by stronger light- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog.

First nine months 2022 full-frame light-truck production was up 9% while light-vehicle engine production was up 13% compared with the first nine months of 2021.

Year-over-year Class 8 truck production was up 19% while Classes 5-7 truck production was up 1% compared with the first nine months of 2021.

Excluding currency effects, sales in Europe were up 19% 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.

Organic sales in this operating segment were up 23% compared with the first nine months of 2021.

Excluding currency effects, first nine months 2022 sales in South America increased 32% compared to 2021 due primarily to improved light-duty truck production and continued strengthening of medium/heavy-duty truck related sales despite overall medium/heavy- duty truck production volumes moderating.

First nine months light-duty truck production was up 15% while medium/heavy-duty truck production was up 1% compared with the first nine months of 2021.

Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 17% compared to 2021 due to stronger construction/mining and agricultural markets and higher medium/heavy-duty truck related sales despite overall medium/heavy-duty production volumes declining 34% compared to the first nine months 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 for the first nine months of 2022 increased $1,055, or 18%, when compared to 2021.

Cost of sales as a percent of sales was 290 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.

Incremental margins provided by increased sales volumes were more than offset by higher year-over-year commodity costs of $396, non-material inflationary cost impacts of $250 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.

1 unchanged sentence

Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $37.

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.

Gross margin of $583 for the first nine months of 2022 decreased $126 from 2021.

Gross margin as a percent of sales was 7.7% in the first nine months of 2022, 290 basis points lower than in 2021.

Material cost recovery mechanisms with our customers lag material cost changes by our suppliers by approximately 90 days.

With commodity costs abating slightly during the third quarter of 2022, gross margin experienced a modest benefit from net material recoveries on a dollar basis.

Selling, general and administrative expenses (SG&A) —

SG&A expenses in 2022 were $374 (4.9% of sales) as compared to $348 (5.2% 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.

SG&A expenses were $26 higher in 2022 primarily due to higher salaried employee wages and incentive compensation, travel expenses and professional fees.

Amortization of intangibles —

Amortization expense was $7 in both 2022 and 2021.

Amortization expense was $10 in 2022 and $11 in 2021.

Restructuring charges, net  —

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

N et restructuring charges were ($1) in the first nine months of 2022 and $2 in the first nine months of 2021.

See Note 4 for additional information.

Impairment of go odwill  —

During the third quarter of 2022, we recorded a $191 goodwill impairment charge.

See Note 3 of our consolidated financial statements in Item 1 of Part I for additional information.

Other income (expense), net —

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

Six Months Ended

Nine Months Ended

September 30,

Non-service cost components of pension and OPEB costs

26 unchanged sentences

Interest expense decreased from $99 in 2021 to $95 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 5.3% in 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.

Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.7% in 2022 and 5.3% in 2021.

Income tax expense  — We reported income tax expense of $67 and $56 for the first nine months of 2022 and 2021, respectively. 

Our effective tax rates were (103)% and 28% for the first nine months of 2022 and 2021.

During the third quarter of 2022, we recorded a pre-tax goodwill impairment charge of $191 with an associated income tax benefit of $2.

In addition, we recorded a tax benefit of $32 for U.S.

tax credits generated.

Also, during the third quarter of 2022, we recorded tax expense of $31 for valuation allowances related to U.S.

states driven by differences between our federal and state tax profile.

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 of affiliates —

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

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 non-deductible expenses.

Equity in earnings (loss) of affiliates —

Net earnings (loss) from equity investments was a loss of $1 in 2022 and earnings of $29 in 2021.

Equity in earnings from DDAC was a loss of $5 in 2022 and earnings of $24 in 2021.

9 unchanged sentences

Currency effects

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.

Light Vehicle sales in the third quarter 2022, exclusive of currency effects and the product line transfer to Commercial Vehicle, were 19% 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 20% in this year’s third quarter while light-truck production in Europe, South America and Asia Pacific increased 23%, 36% and 24%, respectively. Light Vehicle sales in the first nine months of 2022, exclusive of currency effects, the impact of divestitures and the product line transfer to Commercial Vehicle, were 14% higher than 2021 reflecting stronger markets in all regions, cost recovery actions and the conversion of sales backlog.

Year-over-year North America full-frame light-truck increased 9% while light-truck production in Europe, South America and Asia Pacific increased 2%, 15% and 7%, respectively.

Net customer pricing and cost recovery actions increased year-over-year sales by $88 and $185 in this year’s third quarter and first nine months, respectively.

Light Vehicle third-quarter 2022 segment EBITDA increased by $6 from last year, with first-nine-months earnings lower by $117.

Higher sales volumes provided a year-over-year benefit of $20 (22% incremental margin) and $34 (17% incremental margin) in the third quarter and first nine months of 2022.

Year-over-year performance-related earnings decreases in the third quarter were driven by inflationary cost increases of $41, operational inefficiencies of $27, commodity cost increases of $27, higher program launch costs of $5, higher incentive compensation of $3 and higher warranty costs of $2.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $88, higher material cost savings and supplier recoveries of $7 and lower premium freight costs of $1.

The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $135, operational inefficiencies of $88, inflationary cost increases of $89, higher program launch costs of $9, higher incentive compensation of $3, lower material cost savings and supplier recoveries of $3 and higher premium freight costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $185 and lower warranty costs of $2.

Commercial Vehicle

6 unchanged sentences

Currency effects

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.

Commercial Vehicles sales in the third quarter and first nine months of 2022, exclusive of currency effects and the production line transfer from Light Vehicle, were 26% higher than the same periods of 2021 reflecting continued strengthening of medium/heavy-duty truck production volumes, cost recovery actions and the conversion of sales backlog.

Year-over-year North America Class 8 production was up 35% while Classes 5-7 were up 6% in this year’s third quarter.

Year-over-year medium/heavy-truck production in Europe and South America were up 30% and 5%, respectively, while production in Asia Pacific was down 9% in this year’s third quarter.

Year-over-year North America Class 8 production was up 19% while Classes 5-7 were flat in this year’s first nine months.

Year-over-year medium/heavy-truck production in Europe and South America were up 4% and 1%, respectively, while production in Asia Pacific was down 34% in this year's first nine months.

Net customer pricing and cost recovery actions increased year-over-year sales by $46 and $138 in this year’s third quarter and first nine months, respectively.

Commercial Vehicle third-quarter 2022 segment EBITDA decreased by $2 from last year, with first-nine-months earnings lower by $15.

Higher sales volumes provided a year-over-year benefit of $8 (14% incremental margin) and $28 (17% incremental margin) in the third quarter and first nine months of 2022.

Year-over-year performance-related earnings decreases in the third quarter were driven by commodity cost increases of $32, inflationary cost increases of $19, operational inefficiencies of $6, higher premium freight costs of $3, higher incentive compensation of $2 and higher program launch costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $46 and material cost savings of $6.

The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $97, inflationary cost increases of $51, operational inefficiencies of $51, higher incentive compensation of $3 and higher program launch costs of $1. Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $138, material cost savings of $15 and lower premium freight costs of $2.

Segment EBITDA

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Currency effects

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.

Off-Highway sales in the third quarter and first nine months of 2022, exclusive of currency effects, were 23% higher than the same periods 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.

Net customer pricing and cost recovery actions further increased year-over-year sales by $78 and $200 in this year’s third quarter and first nine months, respectively.

Off-Highway third-quarter 2022 segment EBITDA decreased by $9 from last year, with first-nine-months earnings higher by $15.

Higher sales volumes provided a year-over-year benefit of $12 (18% incremental margin) and $59 (23% incremental margin) in the third quarter and first nine months of 2022.

Year-over-year performance-related earnings decreases in the third quarter were driven by commodity cost increases of $37, inflationary cost increases of $36, operational inefficiencies of $18, higher incentive compensation of $3 and higher warranty costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $78 and material cost savings of $6.

The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $109, inflationary cost increases of $90, operational inefficiencies of $33, higher premium freight costs of $6 and higher incentive compensation of $3.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $200 and material cost savings of $20.

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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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 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.

Power Technologies sales in the third quarter and first nine months of 2022, exclusive of currency effects, were 17% and 11% 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 30% and 13% compared to the third quarter and first nine months of 2021, respectively.

Year-over-year Europe light-vehicle engine production was up 24% and down 1% compared to the third quarter and first nine months of 2021, respectively.

Net customer pricing and cost recovery actions further increased year-over-year sales by $17 and $46 in this year’s third quarter and first nine months, respectively.

Power Technologies third-quarter 2022 segment EBITDA decreased by $17 from last year, with first-nine-months earnings lower by $40.

Higher sales volumes provided a year-over-year benefit of $5 (18% incremental margin) and $9 (20% incremental margin) in the third quarter and first nine months of 2022.

Year-over-year performance-related earnings decreases in the third quarter were driven by commodity cost increases of $17, operational inefficiencies of $9, inflationary cost increases of $8, higher program launch costs of $2, higher incentive compensation of $2 and higher warranty costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $17 and material cost savings of $2.

The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $55, inflationary cost increases of $20, operational inefficiencies of $12, higher program launch costs of $4, higher warranty costs of $2, higher incentive compensation of $2 and higher premium freight costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $46 and material cost savings of $5.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

Equity in earnings (loss) of affiliates

Income tax expense

Earnings before income taxes

Earnings (loss) before income taxes

Depreciation and amortization

2 unchanged sentences

Loss on extinguishment of debt

(Gain) loss on investment in Hyliion

Loss on investment in Hyliion

Loss on disposal group held for sale

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

Impairment of goodwill

Adjusted EBITDA

9 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net cash provided by operating activities

3 unchanged sentences

Adjusted free cash flow

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

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at September 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 $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:

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

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

Cash and cash equivalents

6 unchanged sentences

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 June 30, 2022, we were in compliance with the covenants of our financing agreements.

At September 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:

Six Months Ended

Nine Months Ended

September 30,

Cash used for changes in working capital

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Cash of $345 and $253 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 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.

The higher level of cash used to finance receivables in 2022 is due to higher year-over-year third quarter sales driven by improved global construction/mining and agricultural markets, improved North America full-frame light-truck and commercial-vehicle demand and improved South America commercial-vehicle demand. Cash of $152 and $441 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 $476 and $193 in 2022 and 2021, respectively.

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 half of 2022 and 2021, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities.

Investing activities — Expenditures for property, plant and equipment were $300 and $228 during 2022 and 2021.

The increase in capital spending during 2022 is in support of awarded next generation programs and new business.

During 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 2021, we acquired a 1% ownership interest in Switch Mobility Limited for $18.

During 2022, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities.

During 2021, we sold all of our Hyliion shares for $29.

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 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.

— During 2022 and 2021, we had net borrowings of $195 and $52 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 $43 and $44 for dividend payments to common stockholders during 2022 and 2021.

We used cash of $25 and $23 to repurchase common shares under our share repurchase program during 2022 and 2021.

Distributions to noncontrolling interests totaled $8 and 2022 and $10 in 2021.

H ydro-Québec 

made cash contributions to Dana TM4 of $30 in 2022 and $6 in 2021.

During 2021, we sold a portion of our ownership interest in Tai Ya Investment (HK) Co., Limited (Tai Ya) to China Motor Corporation, reducing our ownership interest in Tai Ya to 50%.

In conjunction with the decrease in our ownership interest, the Tai Ya shareholders agreement was amended, eliminating our controlling financial interest in Tai Ya.

Upon our loss of control, we deconsolidated Tai Ya, including $6 of cash and cash equivalents.

Off-Balance Sheet Arrangements

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.

There have been no material changes at September 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

6 unchanged sentences

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 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. 

There were no changes to our critical accounting estimates in the nine months ended September 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 nine months of 2022. 

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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