What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-28 compared with 2023-04-28 · 235 added, 91 removed, 332 unchanged (50% 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, 2023, we employed approximately 42,800 people and operated in 31 countries.

External sales by operating segment for the periods ended March 31, 2023 and 2022 are as follows:

Three Months Ended March 31,

At June 30, 2023, we employed approximately 42,800 people and operated in 31 countries.

External sales by operating segment for the periods ended June 30, 2023 and 2022 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 $25 and $23 of cash to repurchase common shares under the program in 2022 and 2021, respectively.

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

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

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

Our current portfolio of unsecured senior notes is structured such that no more than $400 of senior notes comes due in any calendar year, with no maturities until the second quarter of 2025.

Our current portfolio of unsecured senior notes is structured such that no more than $464 of senior notes comes due in any calendar year, with no maturities until the second quarter of 2025.

We have a $1,150 revolving credit facility that matures on March 14, 2028. See Note 10 to our consolidated financial statements in Item 1 of Part I for additional information.

45 unchanged sentences

Outside of North America, production of medium- and heavy-duty trucks in South America declined 3% in 2022 as demand moderated following a significant ramp up in production in 2021 with the dissipation of the COVID pandemic in the region.

The 2023 outlook for South America is for a modest 1% increase in production from 2022 as local economic conditions remain relatively stable.

Production of medium- and heavy-duty trucks in Asia Pacific, driven by China and India, decreased 27% in 2022 compared to 2021 due to China experiencing COVID outbreaks in certain regions and India’s continued struggles to recover from the pandemic.

The 2023 outlook for South America is for a 25% decrease in production from 2022, reflecting the impact of lower year-over-year demand resulting from higher borrowing rates and 2022 pre-buy activity in advance of transition to the Euro 6 emission standard. Production of medium- and heavy-duty trucks in Asia Pacific, driven by China and India, decreased 27% in 2022 compared to 2021 due to China experiencing COVID outbreaks in certain regions and India’s continued struggles to recover from the pandemic.

The 2023 outlook for Asia Pacific is for a modest increase in production from the prior year driven by the market recovery in India gaining traction.

9 unchanged sentences

Farm commodity price increases in 2022 spurred a 6% increase in agriculture equipment production.

The outlook for 2023 is for global end-market demand to remain relatively flat with the prior year.

The outlook for 2023 is for global end-market demand to decrease slightly compared with the prior year.

Foreign currency —

With 58% of our first quarter 2023 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 52% of our first quarter 2023 non-U.S.

With 57% of our first half 2023 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 52% of our first half 2023 non-U.S.

sales, while India, Brazil and China accounted for 10%, 8% and 8%, respectively. Although sales in South Africa are less than 5% of our non-U.S.

1 unchanged sentence

International currencies including the euro, Indian rupee, Chinese renminbi and South African rand, weakened against the U.S.

dollar in the first quarter of 2023, decreasing sales by $75.

Argentina has experienced signific ant inflationary pressures the past few years, contributing to significant devaluation of its currency among other economic challenges.

dollar in the first half of 2023, decreasing sales by $96.

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 2023 of approxi mately $39 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $48, including $19 of net fixed assets, at March 31, 2023. 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 half of 2023 of approximately $83 are 2% of our consolidated sales and our net asset exposure related to Argentina was approximately $53, including $20 of net fixed assets, at June 30, 2023. 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.

1 unchanged sentence

dollar is the functional currency for our Argentine operations, rather than the Argentine peso.

Beginning July 1, 2018, peso-denominated monetary assets and liabilities are remeasured i nto U.S.

Beginning July 1, 2018, peso-denominated monetary assets and liabilities are remeasured into U.S.

dollars using current Argentine peso exchange rates with resulting translation gains or losses included in results of operations.

7 unchanged sentences

Material recovery pricing actions increased year-over-year earnings by $446 in 2022.

Lower commodity prices increased earnings during the first quarter of 2023 by $8.

Material cost recovery pricing actions increased earnings in the first quarter of 2023 by $5.

Lower commodity prices increased earnings during the second quarter and first half of 2023 by $27 and $35, respectively.

Material cost recovery pricing actions increased earnings in the second quarter and first half of 2023 by $10 and $15, respectively.

Sales, Earnings and Cash Flow Outlook

10 unchanged sentences

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.

Our 2023 sales, adjusted EBITDA and free cash flow guidance ranges remain unchanged from those provided in February 2023.

Our 2023 sales outlook is $10,350 to $10,850, reflecting a modest improvement in global market demand, continued material and inflationary cost recoveries and $300 of net new business backlog.

At our current sales outlook for 2023, we expect full year 2023 adjusted EBITDA to approximate $750 to $850.

Our 2023 sales outlook is $10,450 to $10,950, reflecting a modest improvement in global market demand, continued material and inflationary cost recoveries and $300 of net new business backlog.

At our current sales outlook for 2023, we expect full year 2023 adjusted EBITDA to approximate $800 to $900.

Adjusted EBITDA Margin is expected to be 7.9% at the midpoint of our guidance range, a 100 basis-point improvement over 2022, reflecting higher margin net new business and the benefit of material cost recoveries as commodity costs begin to abate being partially offset by continued operational inefficiencies, driven by continuing global supply chain disruptions and customer order volatility, and increased investment to support our electrification strategy.

We expect to generate free cash flow of approximately $25 at the midpoint of our guidance range reflecting the benefit of higher year-over-year adjusted EBITDA being largely offset by higher capital spending to support new business and our continued investment in our electrification strategy.

Summary Consolidated Results of Operations (First Quarter, 2023 versus 2022)

Three Months Ended March 31,

We expect to generate free cash flow of approximately $75 at the midpoint of our guidance range reflecting the benefit of higher year-over-year adjusted EBITDA being largely offset by higher capital spending to support new business and our continued investment in our electrification strategy.

Summary Consolidated Results of Operations (Second Quarter, 2023 versus 2022)

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

11 unchanged sentences

South America

Sales in 2023 were $164 higher than in 2022.

Sales in the second quarter of 2023 were $162 higher than in 2022.

Weaker international currencies decreased sales by $21, principally due to a weaker South African rand, Indian rupee and Chinese renminbi, partially offset by a stronger euro.

The organic sales increase of $183, or 7%, resulted from improved global construction/mining equipment markets, improved commercial vehicle demand primarily in North America and Europe, higher global light-truck and light-vehicle engine production and the conversion of sales backlog. Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $126.

The North America organic sales decrease of 1% was driven principally by a full-frame light-truck customer program that ended in 2022, partially offset by stronger light- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog.

Second quarter 2023 full-frame light-truck production was up 6% while light-vehicle engine production was up 18% compared to the second quarter of 2022.

Year-over-year Class 8 truck production was up 11% while Classes 5-7 truck production was down 2%.

Excluding currency effects, sales in Europe were up 20% compared with 2022.

With our significant Off-Highway presence in the region, a stronger construction/mining equipment market was a major factor.

Organic sales in this operating segment were up 10% compared with the second quarter of 2022.

Sales in Europe also benefited from higher year-over-year light-truck and medium/heavy-truck production of 17% and 14%, respectively.

Excluding currency effects, second quarter sales in South America were 10% lower than 2022 reflecting lower medium/heavy-truck production.

Year-over-year South America medium/heavy-truck production was 30% lower than the second quarter of 2022.

Excluding currency effects, sales in Asia Pacific increased 15% compared to 2022 due to a strong construction/mining equipment market and higher light-truck production volumes.

Cost of sales and gross margin —

Cost of sales for the second quarter of 2023 increased $74, or 3%, when compared to 2022.

Cost of sales as a percent of sales was 280 basis points lower than in the previous year.

Incremental margins provided by increased sales volumes, material cost savings of $32, lower commodity costs of $27, lower premium freight of $14 and lower spending on electrification initiatives of $1 were partially offset by non-material inflationary cost impacts of $84, higher warranty expense of $2, higher program launch costs of $9 and operational inefficiencies primarily attributed to continued global supply chain disruptions and frequent customer order changes made with little to no advance notification.

Commodity costs are primarily driven by certain grades of steel and aluminum.

Non-material inflation includes higher labor, energy and transportation rates.

Gross margin of $271 for the second quarter of 2023 increased $88 from 2022.

Gross margin as a percent of sales was 9.9% in the second quarter of 2023, 280 basis points higher than in 2022.

The improvement 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 second quarter of 2023, 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 the second quarter of 2023 were $144 (5.2% of sales) as compared to $130 (5.0% of sales) in the second quarter of 2022. 

SG&A expenses were $14 higher in the second quarter of 2023 primarily due to higher salaried employee wages and incentive compensation and increased software technology investments.

Amortization of intangibles —

Amortization expense was $4 in the second quarter of 2023 and $3 in the second quarter of 2022. 

See Note 2 for additional information.

Restructuring charges, net  — 

Net restructuring charges were $3 in the second quarter of 2023 and $1 in the second quarter of 2022. See Note 3 for additional information.

Other income (expense), net —

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

Three Months Ended

Non-service cost components of pension and OPEB costs

Government assistance

Foreign exchange gain (loss)

Strategic transaction expenses

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 the second quarter of 2023 and 2022 were primarily attributable to investigating potential acquisitions and business ventures and other strategic initiatives.

Loss on extinguishment of debt 

On June 9, 2023 we redeemed $200 of our April 2025 Notes.

The $1 loss on extinguishment of debt is comprised of the write-off of previously deferred financing costs associated with the April 2025 Notes.

See Note 10 for additional information.

Interest income and interest expense 

Interest income was $5 

in the second quarter of 2023 and $2 in 

the second quarter of 2022.

Interest expense increased from $32 in 

the second quarter of 2022 to $39 in 

the second quarter of 2023, due to higher average debt levels and higher interest rates on outstanding borrowings.

Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.5% in 

the second quarter of 2023 and 4.6% in 

the second quarter of 2022.

Income tax expense  — We reported income tax expense of $55 and $18 

the second quarter of 2023 and 2022, respectively.

Our effective tax rates were 62% and 62% for the second quarter of 2023 and 2022.

During the second quarter of 2023, we recorded tax expense of $19 for income tax reserves associated with prior tax years in foreign jurisdictions.

Excluding this item, the effective tax rate would have been 40% for the second quarter of 2023.

Our effective income tax rates vary from the U.S.

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

and withholding taxes related to repatriations of international earnings.

The effective income tax rate may vary significantly due to fluctuations in the amounts and sources, both foreign and domestic, of pretax income and changes in the amounts of nondeductible expenses.

Equity in earnings of affiliates —

Net earnings (loss) from equity investments was earnings of $2 in 

the second quarter of 2023 and a loss of $1 in 

the second quarter of 2022.

Net earnings (loss) from DDAC were de minimis in 

the second quarter of 2023 and a loss of $3 in 

the second quarter of 2022.

Summary Consolidated Results of Operations (Year-to-Date, 2023 versus 2022)

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 2023 were $326 higher than in 2022.

Weaker international currencies decreased sales by $96, principally due to a weaker euro, Indian rupee, South African rand and Chinese renminbi.

The organic sales increase of $239, or 10%, resulted from improved global construction/mining equipment markets, improved commercial vehicle demand primarily in North America and Europe, higher global light-vehicle engine production and the conversion of sales backlog. Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $110.

The North America organic sales increase of 2% 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, partially offset by a full-frame light-truck customer program that ended in 2022. First quarter 2023 full-frame light-truck production was up 4% while light-vehicle engine production was up 13% compared to the first quarter of 2022.

The organic sales increase of $422, or 8%, resulted from improved global construction/mining equipment markets, improved commercial vehicle demand primarily in North America and Europe, higher global light-truck and light-vehicle engine production and the conversion of sales backlog. Pricing actions and recoveries, including material commodity price and inflationary cost adjustments, increased sales by $236.

The North America organic sales increase of 1% 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, largely offset by a full-frame light-truck customer program that ended in 2022.

First half 2023 full-frame light-truck production was up 5% while light-vehicle engine production was up 16% compared to the first half of 2022.

Year-over-year Class 8 truck production was up 14% while Classes 5-7 truck production was up 7%.

Excluding currency effects, sales in Europe were up 21% compared with 2022.

With our significant Off-Highway presence in the region, a stronger construction/mining equipment market was a major factor.

Organic sales in this operating segment were up 18% compared with the first quarter of 2022.

Excluding currency effects, first quarter sales in South America were comparable to 2022 reflecting relative stability in the region.

Excluding currency effects, sales in Asia Pacific increased 17% compared to 2022 due to a stronger construction/mining market and higher light-truck sales despite overall light-truck production volumes being flat year-over-year. 

Excluding currency effects, sale in Europe were up 21% compared with 2022.

With our significant Off-Highway presence in the region, a stronger construction/mining equipment market was a major factor.

Organic sales in this operating segment were up 14% compared with the first half of 2022.

Sales in Europe also benefited from higher year-over-year light-truck and medium/heavy-truck production of 20% and 19%, respectively.

Excluding currency effects, first half sales in South America were 6% lower than 2022 reflecting lower medium/heavy-truck production.

Year-over-year South America medium/heavy-truck production was 25% lower than the first half of 2022.

Excluding currency effects, sales in Asia Pacific increased 16% compared to 2022 due to a strong construction/mining equipment market and higher light-truck production volumes.

Cost of sales and gross margin —

Cost of sales for the first quarter of 2023 increased $132, or 6%, when compared to 2022.

Cost of sales for the first six months of 2023 increased $206, or 4%, when compared to 2022.

Cost of sales as a percent of sales was 180 basis points lower than in the previous year.

Incremental margins provided by increased sales volumes, material cost savings of $29, lower commodity costs of $8, lower premium freight of $7 and lower spending on electrification initiatives of $7 were partially offset by non-material inflationary cost impacts of $96, higher warranty expense of $12, higher program launch costs of $9 and operational inefficiencies primarily attributed 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, material cost savings of $61, lower commodity costs of $35, lower premium freight of $21 and lower spending on electrification initiatives of $8 were partially offset by non-material inflationary cost impacts of $180, higher warranty expense of $14, higher program launch costs of $18 and operational inefficiencies primarily attributed to continued global supply chain disruptions and frequent customer order changes made with little to no advance notification.

Commodity cost are primarily driven by certain grades of steel and aluminum.

Non-material inflation includes higher labor, energy and transportation rates.

Gross margin of $229 for the first quarter of 2023 increased $32 from 2022.

Gross margin as a percent of sales was 8.7% in the first quarter of 2023, 80 basis points higher than in 2022.

Gross margin of $500 for the first six months of 2023 increased $120 from 2022.

Gross margin as a percent of sales was 9.3% in the first six months of 2023, 180 basis points higher than in 2022.

The improvement 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 first quarter of 2023, 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.

With commodity costs abating slightly during the first half of 2023, 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) —

2 unchanged sentences

Amortization of intangibles —

Amortization expense was $3 in 2023 and $4 in 2022. 

Amortization expense was $7 in both 2023 and 2022. 

See Note 2 for additional information.

Restructuring charges, net  — 

Net restructuring charges were $1 in the first quarter of 2023 and ($1) in the first quarter of 2022. See Note 3 for additional information.

Restruct uring charges, net  — 

Net restructuring charges were $4 in the first six months of 2023. See Note 3 for additional information.

Other income (expense), net —

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

Three Months Ended

Six Months Ended

Non-service cost components of pension and OPEB costs

5 unchanged sentences

Strategic transaction expenses in 2023 and 2022 were primarily attributable to investigating potential acquisitions and business ventures and other strategic initiatives.

Loss on extinguishment of debt  —

On June 9, 2023 we redeemed $200 of our April 2025 Notes.

The $1 loss on extinguishment of debt is comprised of the write-off of previously deferred financing costs associated with the April 2025 Notes.

See Note 10 for additional information.

Interest income and interest expense 

Interest income was $4 in 2023 and $2 in 2022.

Interest income was $9 in 2023 and $4 in 2022.

Interest expense increased from $63 in 2022 to $73 in 2023, due to higher average debt levels and higher interest rates on outstanding borrowings.

1 unchanged sentence

Income tax expense  — We reported income tax expense of $85 and $36 for 2023 and 2022, respectively.

Our effective tax rates were 50% and 49% for the first quarter of 2023 and 2022. Our effective income tax rates vary from the U.S.

Our effective tax rates were 57% and 55% for the first six months of 2023 and 2022.

During the second quarter of 2023, we recorded tax expense of $19 for income tax reserves associated with prior tax years in foreign jurisdictions.

Excluding this item, the effective tax rate would have been 44% for the 2023 six-month period.

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.

2 unchanged sentences

Equity in earnings of affiliates —

Net earnings from equity investments was $1 in both 2023 and 2022.

Net earnings from DDAC were de minimis in 2023 and $1 in 2022.

Net earnings from equity investments was $3 in 2023 and de minimis in 2022.

Net earnings (loss) from DDAC was de minimis in 2023 and was a loss of $2 in 2022.

Segment Results of Operations (2023 versus 2022)

2 unchanged sentences

Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

Currency effects

Light Vehicle sales in the first quarter of 2023, exclusive of currency effects, were comparable to 2022 with lower volumes due to a customer program ending in 2022 being partially offset by generally stronger global light-truck markets and the benefit of net customer pricing and cost recovery actions. Year-over-year North America full-frame light-truck production increased 4% while light-truck production in Europe and South America increased 16% and 15%, respectively.

Light-truck production in Asia Pacifica was comparable with the same period last year.

Net customer pricing and cost recovery actions increased year-over-year sales by $27.

Light Vehicle first-quarter segment EBITDA increased by $18 compared to the prior year.

Lower sales volumes decreased year-over-year earnings by $9 (30% decremental margin).

The year-over-year performance-related earnings increase was driven by net customer pricing and cost recovery actions of $27, commodity cost decreases of $23, operational efficiencies of $18, material cost savings of $9, lower premium freight costs of $1 and lower spending on electrification initiatives of $1.

Partially offsetting these performance-related earnings increases were inflationary cost increases of $36, higher warranty expense of $7, higher program launch costs of $4 and higher incentive compensation expense of $2. 

Light Vehicle sales in the second quarter of 2023, exclusive of currency effects, were 5% higher than 2022 reflecting stronger global markets, the conversion of sales backlog and the benefit of net customer pricing and cost recovery actions, partially offset by a customer program ending in 2022.

Year-over-year North America full-frame light-truck production increased 6% in this year’s second quarter while light-truck production in Europe, South America and Asia Pacific increased 17%, 15% and 20%, respectively.

Light Vehicle sales in the first half of 2023, exclusive of currency effects, were 2% higher than 2022 reflecting stronger global markets, the benefit of net customer pricing and cost recovery actions and the conversion of sales backlog, partially offset by a customer program ending in 2022.

Year-over-year North America full-frame light-truck production increased 5% in this year’s first half while light-truck production in Europe, South America and Asia Pacific increased 20%, 17% and 13%, respectively.

Net customer pricing and cost recovery actions increased year-over-year sales by $48 and $75 in this year’s second quarter and first half, respectively.

Light Vehicle second-quarter and first-half 2023 segment EBITDA increased $33 and $51, respectively, from the comparable periods of 2022.

Higher sales volumes provided a year-over-year earnings benefit of $2 (50% incremental margin) in the second quarter of 2023.

Lower sales volumes decreased year-over-year earnings by $7 (27% decremental margin) in the first half of 2023.

Year-over-year performance-related earnings increases in the second quarter were driven by net customer pricing and cost recovery actions of $48, commodity cost decreases of $21, material cost savings of $11 and lower premium freight costs of $5.

Partially offsetting these performance-related earnings increases were inflationary cost increases of $38, operational inefficiencies of $5, higher program launch costs of $4, higher incentive compensation of $4 and higher spending on electrification initiatives of $1.

The year-over-year performance-related earnings increases in the first half were driven by net customer pricing and cost recovery actions of $75, commodity cost decreases of $44, material cost savings of $20, operational efficiencies of $13 and lower premium freight costs of $6.

Partially offsetting these performance-related earnings increases were inflationary cost increases of $74, higher program launch costs of $8, higher warranty expense of $7 and higher incentive compensation expense of $6.

Commercial Vehicle

1 unchanged sentence

Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

Currency effects

Commercial Vehicle sales in the first quarter of 2023, exclusive of currency effects, were 14% higher than 2022 reflecting improved North America and Europe markets, conversion of sales backlog and the benefit of net customer pricing and cost recovery actions.

Year-over-year North America Class 8 production was up 17% while Classes 5-7 were up 8% in this year's first quarter.

Year-over-year medium/heavy-truck production in Europe was up 13% while production in South America and Asia Pacific were down 34% and 10%, respectively.

Net customer pricing and cost recovery actions increased year-over-year sales by $23.

Commercial Vehicle first-quarter segment EBITDA increased by $7 compared to the prior year.

Higher sales volumes increased year-over-year earnings by $7 (16% incremental margin).

The year-over-year performance-related earnings increase was driven by net customer pricing and cost recovery actions of $23, material cost savings of $9, lower spending on electrification initiatives of $9 and lower premium freight costs of $3.

Partially offsetting these performance-related earnings increases were operational inefficiencies of $28, inflationary cost increases of $8, commodity cost increases of $2, higher program launch costs of $2, higher warranty expense of $1 and higher incentive compensation expense of $1.

Commercial Vehicle sales in the second quarter of 2023, exclusive of currency effects, were 5% higher than 2022 reflecting improved North America and Europe markets, the conversion of sales backlog and the benefit of net customer pricing and cost recovery actions, partially offset by a weaker South America market.

Year-over-year North America Class 8 production was up 11% while Classes 5-7 was down 2% in this year’s second quarter.

Year-over-year medium/heavy-truck production in Europe was up 14% while medium/heavy-truck production in South America was down 30%.

Commercial Vehicle sales in the first half of 2023, exclusive of currency effects, were 9% higher than 2022 reflecting improved North America and Europe markets, the conversion of sales backlog and the benefit of net customer pricing and cost recovery actions, partially offset by a weaker South America market.

Year-over-year North America Class 8 production was up 14% while Classes 5-7 was up 7% in this year’s first half.

Year-over-year medium/heavy-truck production in Europe was up 19% while medium/heavy-truck production in South America was down 25%.

Net customer pricing and cost recovery actions increased year-over-year sales by $28 and $51 in this year’s second quarter and first half, respectively.

Commercial Vehicle second-quarter and first-half 2023 segment EBITDA increased $18 and $25 from the comparable periods of 2022.

Year-over-year second-quarter earnings improved $3 on lower sales volumes due to improved product mix.

Higher sales volumes provided a year-over-year earnings benefit of $10 (25% incremental margin) in the first half of 2023.

Year-over-year performance-related earnings increases in the second quarter were driven by net customer pricing and cost recovery actions of $28, material cost savings of $8, lower spending on electrification initiatives of $4 and lower premium freight costs of $3.

Partially offsetting these performance-related earnings increases were operational inefficiencies of $9, inflationary cost increases of $7, higher program launch costs of $4, commodity cost increases of $3, higher incentive compensation expense of $3 and higher warranty costs of $1.

Year-over-year performance-related earnings increases in the first half were driven by net customer pricing and cost recovery of $51, material cost savings of $17, lower spending on electrification initiatives $13 and lower premium freight costs of $6.

Partially offsetting these performance-related earnings increases were operational inefficiencies of $37, inflationary cost increases of $15, higher program launch costs of $6, commodity cost increases of $5, higher incentive compensation expense of $4 and higher warranty costs of $2.

Segment EBITDA

Segment EBITDA Margin

Segment EBITDA

Segment EBITDA Margin

Volume and mix

Currency effects

Off-Highway sales in the first quarter of 2023, exclusive of currency effects, were 18% higher than 2022 reflecting improved global construction/mining equipment markets, conversion of sales backlog and the benefit of net customer pricing and cost recovery actions.

Year-over-year global construction/mining equipment production increased 11% while agricultural equipment markets were relatively stable with production decreasing 2%.

Net customer pricing and cost recovery actions increased year-over-year sales by $47.

Off-Highway first-quarter segment EBITDA increased by $18 compared to the prior year.

Higher sales volumes increased year-over-year earnings by $23 (26% incremental margin).

The year-over-year performance-related earnings increase was driven by net customer pricing and cost recovery actions of $47, material cost savings of $8 and lower premium freight costs of $3.

Partially offsetting these performance-related earnings increases were inflationary cost increases of $40, commodity cost increases of $6, operational inefficiencies of $6, higher warranty expense of $4 and higher incentive compensation expense of $1.

Off-Highway sales in the second quarter and first half of 2023, exclusive of currency effects, were 10% and 14%, respectively, higher than the same periods of 2022 reflecting strong global markets, the conversion of sales backlog and the benefit of net customer pricing and cost recovery actions.

Year-over-year global construction/mining equipment markets increased 11% while global agricultural equipment markets were relatively stable with production decreasing 2% in this year’s second quarter.

Year-over-year global construction/mining equipment markets increased 11% while global agricultural equipment markets were relatively stable with production decreasing 2% in this year’s first half.

Net customer pricing and cost recovery actions increased year-over-year sales by $36 and $83 in this year’s second quarter and first half, respectively.

Off-Highway second-quarter and first-half 2023 segment EBITDA increased $31 and $49, respectively, from the comparable periods of 2022.

Higher sales volumes provided a year-over-year earnings benefit of $9 (24% incremental margin) and $32 (25% incremental margin) in the second quarter and first half of 2023, respectively.

Year-over-year performance-related earnings increases in the second quarter were driven by net customer pricing and cost recovery actions of $36, material cost savings of $10, commodity cost decreases of $6 and lower premium freight costs of $4.

Partially offsetting these performance-related earnings increases were inflationary cost increases of $24, operational inefficiencies of $4, higher incentive compensation expense of $3, higher warranty expenses of $1 and higher spending on electrification initiatives of $1.

Year-over-year performance-related earnings increases in the first half were driven by net customer pricing and cost recovery actions of $83, material cost savings of $18 and lower premium freight costs of $7.

Partially offsetting these performance-related earnings increases were inflationary cost increases of $64, operational inefficiencies of $10, higher warranty expenses of $5, higher incentive compensation expense of $4 and higher spending on electrification initiatives 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 2023, exclusive of currency effects, were 14% higher than 2022 reflecting improved global markets, conversion of sales backlog and the benefit of net customer pricing and cost recovery actions.

Year-over-year North America, Europe and South America light-vehicle engine production was up 13%, 9% and 5%, respectively.

Year-over-year Asia Pacific light-vehicle engine production was down 2%.

Net customer pricing and cost recovery actions increased year-over-year sales by $13.

Power Technologies first-quarter segment EBITDA decreased by $6 compared to the prior year.

Higher sales volumes increased year-over-year earnings by $4 (15% incremental margin).

The year-over-year performance-related earnings decrease was driven by inflationary cost increases of $10, commodity cost increases of $7, operational inefficiencies of $4, higher program launch costs of $3 and higher incentive compensation expense of $1.

Partially offsetting these performance-related earnings decreases were net customer pricing and cost recovery actions of $13 and material cost savings of $3.

Power Technologies sales in the second quarter and first half of 2023, exclusive of currency effects, were 11% and 12%, respectively, higher than the same periods of 2022 reflecting improved North America and Europe markets, the conversion of sale backlog and the benefit of net customer pricing and cost recovery actions.

Year-over-year North America light-vehicle engine production was up 18% and 16% compared to the second quarter and first half of 2022, respectively.

Year-over-year Europe light-vehicle engine production was up 8% and 12% compared to the second quarter and first half of 2022, respectively.

Net customer pricing and cost recovery actions increased year-over-year sales by $14 and $27 in this year’s second quarter and first half, respectively.

Power Technologies second-quarter and first-half 2023 segment EBITDA decreased $2 and $8, respectively, from the comparable periods of 2022.

Higher sales volumes provided a year-over-year earnings benefit of $1 (6% incremental margin) and $5 (11% incremental margin) in the second quarter and first half of 2023, respectively.

Year-over-year performance-related decreases in the second quarter were driven by inflationary cost increases of $11, operational inefficiencies of $9, higher incentive compensation expense of $2, higher spending on electrification initiatives of $2 and higher program launch costs of $1.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $14, commodity cost decreases of $3, material cost savings of $3 and lower premium freight costs of $2.

Year-over-year performance-related decreases in the second half were driven by inflationary cost increases of $21, operational inefficiencies of $13, commodity cost increases of $4, higher program launch costs of $4, higher incentive compensation expense of $3 and higher spending on electrification initiatives of $2.

Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $27, material cost savings of $6 and lower premium freight costs of $2.

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

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Interest expense, net

Loss on extinguishment of debt

Distress supplier costs

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Three Months Ended

Net cash used in operating activities

Six Months Ended

Net cash provided by operating activities

Purchases of property, plant and equipment

Free cash flow

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at March 31, 2023:

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at June 30, 2023:

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 $839 at March 31, 2023 under the Revolving Facility after deducting $295 of outstanding borrowings and $16 of outstan ding letters of credit.

The components of our March 31, 2023 consolidated cash balance were as follows:

We had availability of $1,134 at June 30, 2023 under the Revolving Facility after deducting $16 of outstan ding letters of credit.

The components of our June 30, 2023 consolidated cash balance were as follows:

Cash and cash equivalents

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On March 14, 2023, we amended our credit and guaranty agreement, extending its maturity to March 14, 2028.

At March 31, 2023, we were in compliance with the covenants of our financing agreements.

At June 30, 2023, 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 used in operating activities

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

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

Net increase in cash, cash equivalents and restricted cash

Operating activities —

Exclusive of working capital, other cash provided by operations was $258 in 2023 and $220 in 2022.

The year-over-year increase is primarily attributable to higher operating earnings.

The year-over-year increase is primarily attributable to higher operating earnings in 2023, partially offset by lower year-over-year dividends received from equity-method investments of $29.

Working capital used cash of $172 and $84 in 2023 and 2022.

Cash of $246 and $323 was used to finance receivables in 2023 and 2022, respectively.

The use of cash to finance receivables in both periods is primarily driven by normal seasonality, with first quarter sales exceeding prior year fourth quarter sales due to the impact of annual fourth quarter holidays.

The use of cash to finance receivables in both periods is primarily driven by second quarter sales exceeding first quarter sales in both years.

Cash of $107 and $85 was used to fund higher inventory levels in 2023 and 2022, respectively.

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Financing activities 

— During 2023 and 2022, we had net borrowings of $270 and $265 on our Revolving Facility. During 2023, we paid financing costs of $2 to amend our credit and guaranty agreement, extending the Revolving Facility maturity to March 14, 2028. We used cash of $15 and $14 for dividend payments to common stockholders during 2023 and 2022.

— During 2023 and 2022, we had net repayments of $25 and net borrowings of $195 on our Revolving Facility.

During 2023, we completed the issuance of €425 of our July 2031 Notes, paying financings costs of $7.

Also during 2023, we redeemed $200 of our April 2025 Notes.

During 2023, we paid financing costs of $2 to amend our credit and guaranty agreement, extending the Revolving Facility maturity to March 14, 2028. We used cash of $29 for dividend payments to common stockholders during both 2023 and 2022.

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

Distributions to noncontrolling interests totaled $1 in both 2023 and 2022.

Distributions to noncontrolling interests totaled $3 in 2023 and $2 in 2022.

Hydro-Québec made cash contributions to Dana TM4 of $17 in 2023 and $7 in 2022.

Off-Balance Sheet Arrangements

There have been no material changes at March 31, 2023 in our off-balance sheet arrangements from those reported or estimated in the disclosures in Item 7 of our 2022 Form 10-K.

There have been no material changes at June 30, 2023 in our off-balance sheet arrangements from those reported or estimated in the disclosures in Item 7 of our 2022 Form 10-K.

Contractual Obligations

 There have been no other material changes in our contractual obligations from those disclosed in Item 7 of our 2022 Form 10-K.

On May 24, 2023, Dana Financing Luxembourg S.à.r.l.

(Dana Financing), a wholly-owned subsidiary of Dana, completed the sale of €425 ($458 as of May 24, 2023) in senior unsecured notes (July 2031 Notes) at 8.500%. Interest on the notes is payable on January 15 and July 15 of each year, beginning on January 15, 2024. The July 2031 Notes will mature on July 15, 2031. On June 9, 2023 we redeemed $200 of our April 2025 Notes at a price equal to 100.00% plus accrued and unpaid interest.

See Note 10 to our consolidated financial statements in Item 1 of Part I for additional information.

Contingencies

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See Item 7 in our 2022 Form 10-K for a description of our critical accounting estimates and Note 1 to our consolidated financial statements in Item 8 of our 2022 Form 10-K for our significant accounting policies.

There were no changes to our critical accounting estimates in the three months ended March 31, 2023.

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 2023. 

There were no changes to our critical accounting estimates in the six months ended June 30, 2023.

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 2023. 

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