DANA INCORPORATED Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in this report.
Forward-Looking Information Statements in this report (or otherwise made by us or on our behalf) that are not entirely historical constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often be identified by words such as "anticipates," "expects," "believes," "intends," "plans," "predicts," "seeks," "estimates," "projects," "outlook," "may," "will," "should," "would," "could," "potential," "continue," "ongoing" and similar expressions, variations or negatives of these words. These statements represent the present expectations ofDana Incorporated and its consolidated subsidiaries (Dana) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including those discussed below and elsewhere in this report and in our other filings with theSecurities and Exchange Commission (SEC). All forward-looking statements speak only as of the date made and we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of this report. Management Overview Dana is headquartered inMaumee, Ohio , and was incorporated inDelaware in 2007. We are a world leader in providing power-conveyance and energy-management solutions for vehicles and machinery. The company's portfolio improves the efficiency, performance, and sustainability of light vehicles, commercial vehicles, and off-highway equipment. Our technologies include drive systems (axles, driveshafts, transmissions, and wheel and track drives); motion systems (winches, slew drives, and hub drives); electrodynamic technologies (motors, inverters, software and control systems, battery-management systems, and fuel cell plates); sealing solutions (gaskets, seals, cam covers, and oil pan modules); thermal-management technologies (transmission and engine oil cooling, battery and electronics cooling, charge air cooling, and thermal-acoustical protective shielding); and digital solutions (active and passive system controls and descriptive and predictive analytics). We serve our global light vehicle, medium/heavy vehicle and off-highway markets through four business units - Light Vehicle Drive Systems (Light Vehicle),Commercial Vehicle Drive and Motion Systems (Commercial Vehicle),Off-Highway Drive and Motion Systems (Off-Highway) and Power Technologies, which is the center of excellence for sealing and thermal-management technologies that span all customers in our on-highway and off-highway markets. We have a diverse customer base and geographic footprint which minimizes our exposure to individual market and segment declines. AtSeptember 30, 2022 , we employed approximately 42,300 people, operated in 32 countries and had 140 major facilities housing manufacturing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices. External sales by operating segment for the periods endedSeptember 30, 2022 and 2021 are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 % of % of % of % of Dollars Total Dollars Total
Dollars Total Dollars Total Light Vehicle$ 1,047 41.3 %$ 918 41.7 %$ 3,060 40.3 %$ 2,799 42.0 % Commercial Vehicle 505 19.9 % 396 18.0 % 1,475 19.4 % 1,132 17.0 % Off-Highway 694 27.4 % 627 28.4 % 2,206 29.0 % 1,931 28.9 % Power Technologies 289 11.4 % 263 11.9 % 860 11.3 % 810 12.1 % Total$ 2,535 $ 2,204 $ 7,601 $ 6,672
See Note 19 to our consolidated financial statements in Item 1 of Part I for further financial information about our operating segments.
Our internet address is www.dana.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this report.
Operational and Strategic Initiatives
Our enterprise strategy builds on our strong technology foundation and leverages
our resources across the organization while driving a customer-centric focus,
expanding our global markets, and delivering innovative solutions as we evolve
into the era of vehicle electrification.
Central to our strategy is leveraging our core operations. This foundational
element enables us to infuse strong operational disciplines throughout the
strategy, making it practical, actionable, and effective. It enables us to
capitalize on being a major drive systems supplier across all three end mobility
markets. We are achieving improved profitability by actively seeking synergies
across our engineering, purchasing, and manufacturing base. We have strengthened
the portfolio by acquiring critical assets, and we are utilizing our physical
and intellectual capital to amplify innovation across the enterprise. Leveraging
these core elements can further expand the cost efficiencies of our common
technologies and deliver a sustainable competitive advantage for Dana.
25--------------------------------------------------------------------------------
Table of Contents
Driving customer centricity continues to be at the heart of who we are. Putting our customers at the center of our value system is firmly embedded in our culture and is driving growth by focusing on customer relationships and providing value to our customers. These relationships are strengthened as we are physically located where we need to be in order to provide unparalleled service, and we are prioritizing our customers' needs as we engineer solutions that differentiate their products, while making it easier to do business with Dana by digitizing their experience. Our customer-centric focus has uniquely positioned us to win more than our fair share of new business and capitalize on future customer outsourcing initiatives. Expanding global markets means utilizing our global capabilities and presence to further penetrate growth markets, focusing onAsia due to its position as the largest mobility market in the world with the highest market growth rate as well as its lead in the adoption of new energy vehicles. We are investing across various avenues to increase our presence inAsia Pacific by forging new partnerships, expanding inorganically, and growing organically. We continue to operate in this region through wholly owned and joint ventures with local market partners. We have recently made acquisitions that have augmented our footprint in the region, specifically inIndia andChina . All the while, we have been making meaningful organic investments to grow with existing and new customers, primarily inThailand ,India , andChina . These added capabilities have enabled us to target the domesticAsia Pacific markets and utilize the capacity for export to other global markets. We continue to enhance and expand our global footprint, optimizing it to capture growth across all of our end markets. Delivering innovative solutions enables us to capitalize on market growth trends as we evolve our core technology capabilities. We are also focused on enhancing our physical products with digital content to provide smart systems, and we see an opportunity to become a digital systems provider by delivering software as a service to our traditional end customers. This focus on delivering solutions based on our core technology is leading to new business wins and increasing our content per vehicle. We have made significant investments - both organically and inorganically - allowing us to move to the next phase, which is to Lead electric propulsion. Over the last several years we continue to deliver on our goal to accelerate vehicle electrification through both core Dana technologies and targeted strategic acquisitions and are positioned today to lead the market. The nine recent investments in electrodynamic expertise and technologies combined with Dana's longstanding mechatronics capabilities has allowed us to develop and deliver fully integrated e-Propulsion systems that are power-dense and achieve optimal efficiency through the integration of the components that we offer due to our mechatronics capabilities. With recent electric vehicle program awards, we are well on our way to achieving our growth objectives in this emerging market. The development and implementation of our enterprise strategy is positioning Dana to grow profitably due to increased customer focus as we leverage our core capabilities, expand into new markets, develop and commercialize new technologies, including for electric vehicles. Capital Structure Initiatives
In addition to investing in our business, we plan to prioritize a balanced allocation of capital while maintaining a strong financial position. We continue to drive toward investment grade metrics as part of our balanced allocation approach with a goal of further strengthening our balance sheet.
Shareholder return actions - When evaluating capital structure initiatives, we balance our growth opportunities and shareholder value initiatives with maintaining a strong balance sheet and access to capital. Our strong financial position has enabled us to simplify our capital structure while providing returns to our shareholders in the form of cash dividends and a reduction in the number of shares outstanding. Through the first quarter of 2020, we had declared and paid quarterly common stock dividends for thirty-three consecutive quarters. In response to the COVID pandemic, we temporarily suspended the declaration and payment of dividends to common shareholders and the repurchase of common stock under our$200 common stock share repurchase program. With the impacts of the COVID pandemic largely behind us we resumed the declaration and payment of quarterly common stock dividends during the first quarter of 2021. In addition, we resumed the repurchase of common shares using$23 and$25 of cash to repurchase common shares under the program in 2021 and 2022, respectively. The share repurchase program expires onDecember 31, 2023 , and$102 remains available for future share repurchases as ofSeptember 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. Our current portfolio of unsecured senior notes is structured such that no more than$400 of senior notes comes due in any calendar year, with no maturities until the second quarter of 2025. In addition, we increased our revolving credit facility in 2021 to$1,150 and extended its maturity toMarch 25, 2026 . See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information. Other Initiatives Aftermarket opportunities - We have a global group dedicated to identifying and developing aftermarket growth opportunities that leverage the capabilities within our existing businesses - targeting increased future aftermarket sales. Powered by recognized brands such as Dana®, Spicer®, Spicer Electrified™, Victor Reinz®, Glaser®, GWB®, Thompson®, Tru-Cool®, SVL®, and Transejes™, Dana delivers a broad range of aftermarket solutions - including genuine, all makes, and value lines - servicing passenger, commercial, and off-highway vehicles across the globe. Selective acquisitions - Although transformational opportunities like theGKN plc driveline business transaction that we pursued in 2018 will be considered when strategically and economically attractive, our acquisition focus is principally directed at "bolt-on" or adjacent acquisition opportunities that have a strategic fit with our existing core businesses, particularly opportunities that support our enterprise strategy and enhance the value proposition of our product offerings. Any potential acquisition will be evaluated in the same manner we currently consider customer program opportunities and other uses of capital - with a disciplined financial approach designed to ensure profitable growth and increased shareholder value. 26
--------------------------------------------------------------------------------
Table of Contents Acquisitions Over the past several years we have actively grown our electric vehicle capabilities through multiple acquisitions, positioning us to deliver complete e-Propulsion systems with in-house electrodynamics. Our acquisitions ofDana TM4 Inc. (formerlyTM4 Inc. ), Dana TM4 Italia S.r.l. (formerlyS.M.E . S.p.A.),Dana (Beijing) Electric Motor Co., Ltd. (formerlyPrestolite E-Propulsion Systems (Beijing ) Limited),Ashwoods Innovations Ltd. , Oerlikon Drive Systems,Nordresa Motors, Inc. ,Rational Motion GmbH andPi Innovo Holding Limited have enhanced our portfolio of core technologies including e-motors, power inverters, software and controls, and advance mechatronics. Our strategic partner, Hydro-Québec , owns 45% redeemable noncontrolling interests inDana TM4 Inc. , Dana TM4 Italia S.r.l.,Dana (Beijing) Electric Motor Co., Ltd. , andAshwoods Innovations Ltd. See Note 7 to our consolidated financial statements in Item 1 of Part I for additional information. Trends in Our Markets We serve our customers in three core global end markets: light vehicle, primarily full frame trucks and SUVs; commercial vehicle, including medium-and heavy-duty trucks and busses; and off-highway, including construction, mining, and agriculture equipment. Each of our end-markets has unique cyclical dynamics and market drivers. These cycles are impacted by periods of investment where end-user vehicle fleets are refreshed or expanded in reaction to demand usage patterns, regulatory changes, or when the age of vehicles in service reach their useful life. Key market drivers include regional economic growth rates; industrial output; commodity production and pricing; and residential and nonresidential construction rates. Our multi-market coverage and broad customer base help provide stability across the cycles while mitigating secular variability. In 2020, all of our end-markets were impacted to varying degrees by the COVID pandemic, which initially resulted in lower demand driven by production shutdowns related to virus mitigation efforts in the regions we serve. During 2021, we generally saw improvement across all of our end markets despite production levels being muted by continued global supply chain disruptions driven in part by transportation inefficiencies and labor, commodity and semiconductor chip shortages. Light vehicle markets - Our driveline business is weighted more heavily to the truck and SUV segments of the light-vehicle market versus the passenger-car segment. Our vehicle content is greater on rear-wheel drive, four-wheel drive, and all-wheel drive vehicles, as well as hybrid and electric vehicles. The impact of the COVID pandemic in 2020 saw the global light-truck market contract by 13% from 2019 levels. During 2021, light-truck markets improved across all regions and were up 5% on a global basis compared to 2020. The outlook for the full year of 2022 reflects global light-truck production to be up 8%, with growth across all regions, exhibiting a moderate rebound as production constraints continue to ease, inventory begins to return to more normal levels, and constrained customer demand is fulfilled. Commercial vehicle markets - Our primary business is driveline systems for medium and heavy-duty trucks and busses, including the emerging market for hybrid and electric vehicles. Key regional markets areNorth America ,South America (primarilyBrazil ) andAsia Pacific . The Class-8 truck market inNorth America peaked at 345,000 trucks produced in 2019. Production of Class-8 trucks in 2020 was 38% below the record production in 2019 due to normal cycle dynamics and the impact of COVID. During 2021, production of Class-8 trucks increased 20% over 2020 as the impacts of COVID lessened and the economy exhibited improvement. The outlook for 2022 is for stronger demand with production up 21% over the prior year driven by continued improving economic outlook and cyclical growth. Medium-duty truck production inNorth America experienced a 20% year- over-year decline from 2019 to 2020, primarily due to COVID. During 2021, production increased a modest 3% over 2020. The outlook for 2022 is for production to be flat with the prior year.Outside of North America , production of medium-and heavy-duty trucks inSouth America declined 22% in 2020 due to COVID and deteriorating economic conditions. During 2021, production increased 76% over 2020 as the region recovered from the impact of the pandemic and the age of existing vehicles drove a replacement cycle for new trucks. The outlook forSouth 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 byChina , did not experience lower truck production in 2020, but output slowed by 8% in 2021 as production matched lower demand, primarily driven byIndia where the recovery from the pandemic has been slower than inChina . The 2022 outlook forAsia Pacific is for a 26% reduction in production from the prior year asChina experiences COVID lockdowns and the Indian market recovery continues to lag. Off-highway markets - Our off-highway business has a large presence outside ofNorth America , with 65% of its 2021 sales coming from products manufactured inEurope ; however, a large portion of these products are utilized in vehicle production outside the region. The construction equipment segment of the off-highway market is closely related to global economic growth and infrastructure investment. This segment has experienced a 5% market contraction, which began in late 2018 and further accelerated due to COVID, with 2020 production ending down an additional 10%. The global construction market began to rebound in 2021 with production up 12% over 2020. The 2022 outlook has production demand in the global construction market showing continued strength with production increasing by 10% over the prior year. End-user investment in the mining equipment segment is driven by prices for commodity products produced by underground mining. The global mining equipment market has been mostly stable over the past several years as industry participants have maintained vehicle inventory levels to match commodity output, and this trend is expected to continue in 2022. The agriculture equipment market is the third of our key off-highway segments. Like the underground mining segment, investment in agriculture equipment is primarily driven by prices for farm commodities. Continued low farm commodity prices drove a 7% reduction in production in 2020. Farm subsidies in response to the global pandemic drove a 10% increase in production during 2021. The outlook for 2022 is for end-market demand to improve by 6% compared to the prior year, as farm subsidies are expected to continue to bolster the commodity market and drive the replacement of aging equipment. 27
--------------------------------------------------------------------------------
Table of Contents
Foreign currency - With 54% of our year-to-date 2022 sales coming from outside theU.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, whileBrazil ,India andChina accounted for 11%, 10% and 9%, respectively. Although sales inSouth 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 theU.S. 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.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 inArgentina for the first nine months of 2022 of approximately$109 are 1% of our consolidated sales and our net asset exposure related toArgentina was approximately$42 , including$18 of net fixed assets, atSeptember 30, 2022 . During the second quarter of 2018, we determined thatArgentina's economy met the GAAP definition of a highly inflationary economy. In assessingArgentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effectiveJuly 1, 2018 , theU.S. dollar is the functional currency for our Argentine operations, rather than the Argentine peso. BeginningJuly 1, 2018 , peso-denominated monetary assets and liabilities are remeasured intoU.S. dollars using current Argentine peso exchange rates with resulting translation gains or losses included in results of operations. Nonmonetary assets and liabilities are remeasured intoU.S. dollar using historic Argentine peso exchange rates. Commodity costs - The cost of our products may be significantly impacted by changes in raw material commodity prices, the most important to us being those of various grades of steel, aluminum, copper, brass and rare earth materials. The effects of changes in commodity prices are reflected directly in our purchases of commodities and indirectly through our purchases of products such as castings, forgings, bearings, batteries and component parts that include commodities. Most of our major customer agreements provide for the sharing of significant commodity price changes with those customers based on the movement in various published commodity indexes. Where such formal agreements are not present, we have historically been successful implementing price adjustments that largely compensate for the inflationary impact of material costs. Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes. 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
2022 Outlook 2021 2020
Sales $10,000 - $10,200 $ 8,945 $ 7,106
Adjusted EBITDA $700 - $740 $ 795 $ 593
Net cash provided by operating activities ~6% of sales $ 158 $ 386
Purchases of property, plant and equipment ~4% of sales $ 369 $ 326
Adjusted Free Cash Flow ~2% of sales $ (211 ) $ 60
Adjusted EBITDA and adjusted free cash flow are non-GAAP financial measures. See
the Non-GAAP Financial Measures discussion below for definitions of our non-GAAP
financial measures and reconciliations to the most directly comparable U.S.
generally accepted accounting principles (GAAP) measures. We have not provided a
reconciliation of our adjusted EBITDA outlook to the most comparable GAAP
measure of net income. Providing net income guidance is potentially misleading
and not practical given the difficulty of projecting event driven transactional
and other non-core operating items that are included in net income, including
restructuring actions, asset impairments and certain income tax adjustments. The
accompanying reconciliations of these non-GAAP measures with the most comparable
GAAP measures for the historical periods presented are indicative of the
reconciliations that will be prepared upon completion of the periods covered by
the non-GAAP guidance.
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.
28--------------------------------------------------------------------------------
Table of Contents
Summary Consolidated Results of Operations (Third Quarter, 2022 versus 2021)
Three Months Ended September 30,
2022 2021
Increase/
Dollars % of Net Sales Dollars % of Net Sales (Decrease)
Net sales $ 2,535 $ 2,204 $ 331
Cost of sales 2,332 92.0 % 1,998 90.7 % 334
Gross margin 203 8.0 % 206 9.3 % (3 )
Selling, general and
administrative expenses 114 4.5 % 103 4.7 % 11
Amortization of intangibles 3 4 (1 )
Restructuring charges, net (1 ) 1 (2 )
Impairment of goodwill (191 ) (191 )
Other income (expense), net 3 (4 ) 7
Earnings (loss) before interest
and income taxes (101 ) 94 (195 )
Interest income 2 2 -
Interest expense 32 31 1
Earnings (loss) before income
taxes (131 ) 65 (196 )
Income tax expense 31 20 11
Equity in earnings (loss) of
affiliates (1 ) 5 (6 )
Net income (loss) (163 ) 50 (213 )
Less: Noncontrolling interests
net income 4 4 -
Less: Redeemable noncontrolling
interests net loss (79 ) (2 ) (77 )
Net income (loss) attributable
to the parent company $ (88 ) $ 48 $ (136 ) Sales - The following table shows changes in our sales by geographic region.
Three Months Ended
September 30 , Amount of Change Due To
Increase/ Currency Acquisitions
2022 2021 (Decrease) Effects (Divestitures) Organic Change
North
America $ 1,250 $ 1,050 $ 200 $ (1 ) $ - $ 201
Europe 698 651 47 (107 ) 154
South
America 219 174 45 (3 ) 48
Asia
Pacific 368 329 39 (28 ) 67
Total $ 2,535 $ 2,204 $ 331 $ (139 ) $ - $ 470
Sales in 2022 were $331 higher than in 2021. 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 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 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.
29--------------------------------------------------------------------------------
Table of Contents
Cost of sales and gross margin - 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. Incremental margins provided by increased sales volumes were more than offset by higher year-over-year commodity costs of$113 , non-material inflationary cost impacts of$104 and operational inefficiencies primarily attributable to continued global supply chain disruptions and frequent customer order changes made with little to no advance notification. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Non-material inflation includes higher labor, energy and transportation rates. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately$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$11 higher in 2022 primarily due to higher incentive compensation, travel expenses and professional fees.
Amortization of intangibles - Amortization expense was
Restructuring charges, net - Net restructuring charges were (
Impairment of goodwill - 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.
Three Months Ended
September 30,
2022 2021Non-service cost components of pension and OPEB costs $ - $
(2 ) Foreign exchange gain
1
Strategic transaction expenses (1 ) (3 ) Loss on investment in Hyliion (6 ) Other, net 4 6 Other income (expense), net$ 3 $ (4 ) Strategic transaction expenses relate primarily to costs incurred in connection with acquisition and divestiture related activities, including costs to complete the transaction and post-closing integration costs, and other strategic initiatives. Strategic transaction expenses in 2022 were primarily attributable to investigating potential acquisitions and business ventures and other strategic initiatives. Strategic transaction expenses in 2021 were primarily attributable to our pursuit of the acquisition of a portion of the thermal-management business of Modine Manufacturing Company and certain other strategic initiatives. We held convertible notes receivable from our investment inHyliion Inc. OnOctober 1, 2020 ,Hyliion Inc. completed its merger withTortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp. (Hyliion), with its common stock being listed on theNew York Stock Exchange under the ticker symbol HYLN. Effective with the completed merger, our notes receivable were converted into 2,988,229 common shares of HYLN. Our investment in Hyliion was included in marketable securities and carried at fair value with changes in fair value included in net income. During the third quarter of 2021, we sold all of our Hyliion shares. Interest income and interest expense - Interest income was$2 in both 2022 and 2021. 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$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 forU.S. tax credits generated. Also, during the third quarter of 2022, we recorded tax expense of$31 for valuation allowances related toU.S. states driven by differences between our federal and state tax profile. Our effective income tax rates vary from theU.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 theU.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 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$5 in 2021. Net earnings (loss) from DDAC was a loss of$3 in 2022 and earnings of$3 in 2021. The decrease in DDAC's earnings is due to lower year-over-year sales driven by significant 2021 medium- and heavy-duty vehicle pre-buy activity in advance of new emission standards going into effect inChina and Chinese government incentives driving new construction and infrastructure projects in 2021, increasing the demand for medium- and heavy-duty vehicles. 30
--------------------------------------------------------------------------------
Table of Contents
Summary Consolidated Results of Operations (Year-to-Date, 2022 versus 2021)
Nine Months Ended September 30,
2022 2021
Increase/
Dollars % of Net Sales Dollars % of Net Sales (Decrease)
Net sales $ 7,601 $ 6,672 $ 929
Cost of sales 7,018 92.3 % 5,963 89.4 % 1,055
Gross margin 583 7.7 % 709 10.6 % (126 )
Selling, general and
administrative expenses 374 4.9 % 348 5.2 % 26
Amortization of intangibles 10 11 (1 )
Restructuring charges, net (1 ) 2 (3 )
Impairment of goodwill (191 ) (191 )
Other income (expense), net 15 (33 ) 48
Earnings before interest and
income taxes 24 315 (291 )
Loss on extinguishment of debt (24 ) 24
Interest income 6 6 -
Interest expense 95 99 (4 )
Earnings (loss) before income
taxes (65 ) 198 (263 )
Income tax expense 67 56 11
Equity in earnings (loss) of
affiliates (1 ) 29 (30 )
Net income (loss) (133 ) 171 (304 )
Less: Noncontrolling interests
net income 11 9 2
Less: Redeemable noncontrolling
interests net loss (81 ) (10 ) (71 )
Net income (loss) attributable
to the parent company $ (63 ) $ 172 $ (235 )
Sales - The following table shows changes in our sales by geographic region.
Nine Months Ended
September 30, Amount of Change Due To
Increase/ Acquisitions
2022 2021 (Decrease) Currency Effects (Divestitures) Organic Change
North America $ 3,689 $ 3,157 $ 532 $ (2 ) $ 1 $ 533
Europe 2,286 2,136 150 (250 ) 400
South America 584 434 150 12 138
Asia Pacific 1,042 945 97 (52 ) (9 ) 158
Total $ 7,601 $ 6,672 $ 929 $ (292 ) $ (8 ) $ 1,229
Sales in 2022 were $929 higher than in 2021. 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 $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 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 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 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 $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. 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 $37 .
31--------------------------------------------------------------------------------
Table of Contents
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. 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. 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$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
Restructuring charges, net - Net restructuring charges were (
Impairment of goodwill - 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.
Nine Months Ended
September 30,
2022 2021
Non-service cost components of pension and OPEB costs $ (3 ) $ (7 )
Foreign exchange gain 4 2
Strategic transaction expenses (6 ) (11 )
Loss on investment in Hyliion (20 )
Loss on disposal group held for sale (7 )
Loss on de-designation of fixed-to-fixed cross currency swaps (9 )
Other, net 20 19
Other income (expense), net $ 15 $ (33 )
Strategic transaction expenses relate primarily to costs incurred in connection
with acquisition and divestiture related activities, including costs to complete
the transaction and post-closing integration costs, and other strategic
initiatives. Strategic transaction expenses in 2022 were primarily attributable
to investigating potential acquisitions and business ventures and other
strategic initiatives. Strategic transaction expenses in 2021 were primarily
attributable to our pursuit of the acquisition of a portion of the
thermal-management business of Modine Manufacturing Company and certain other
strategic initiatives.
We held convertible notes receivable from our investment in Hyliion Inc. On
October 1, 2020 , Hyliion Inc. completed its merger with Tortoise Acquisition
Corp. The business combination resulted in the combined company being renamed
Hyliion Holdings Corp. (Hyliion), with its common stock being listed on the New
York Stock Exchange under the ticker symbol HYLN. Effective with the completed
merger, our notes receivable were converted into 2,988,229 common shares of
HYLN. Our investment in Hyliion was included in marketable securities and
carried at fair value with changes in fair value included in net income. During
the third quarter of 2021, we sold all of our Hyliion shares.
In conjunction with our acquisition of Oerlikon Drive Systems, we acquired a
controlling financial interest in a joint venture in China . We were required to
divest our interest in this joint venture as it violates competitive
restrictions of another of our China joint venture shareholder agreements.
During the first quarter of 2021, we recorded an impairment charge of $7 , as we
determined the carrying value of the disposal group exceeded its fair value less
costs to sell. We completed the disposal of this business in April 2021 .
We had previously entered into fixed-to-fixed cross currency swaps as a hedge
against our June 2026 Notes. In June 2021 , we redeemed all of the June 2026
Notes and de-designated the fixed-to-fixed cross currency swaps. See Note 13 for
additional information.
Interest income and interest expense - Interest income was $6 in both 2022 and
2021. 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 4.7% 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, 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 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. The
decrease in DDAC's earnings is due to lower year-over-year sales driven by
significant 2021 medium- and heavy-duty vehicle pre-buy activity in advance of
new emission standards going into effect in China and Chinese government
incentives driving new construction and infrastructure projects in 2021,
increasing the demand for medium- and heavy-duty vehicles.
32--------------------------------------------------------------------------------
Table of Contents
Segment Results of Operations (2022 versus 2021)
Light Vehicle
Three Months Nine Months
Segment EBITDA Segment EBITDA
Sales Segment EBITDA Margin Sales Segment EBITDA Margin
2021 $ 918 $ 54 5.9 % $ 2,799 $ 241 8.6 %
Volume and
mix 90 20 199 34
Divestitures (8 )
Product line
transfer (20 ) (2 ) (59 ) (6 )
Performance 88 (9 ) 185 (141 )
Currency
effects (29 ) (3 ) (56 ) (4 )
2022 $ 1,047 $ 60 5.7 % $ 3,060 $ 124 4.1 %
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
Three Months Nine Months
Segment EBITDA Segment EBITDA
Sales Segment EBITDA Margin Sales Segment EBITDA Margin
2021 $ 396 $ 20 5.1 % $ 1,132 $ 53 4.7 %
Volume and
mix 57 8 163 28
Product
line
transfer 20 2 59 6
Performance 46 (11 ) 138 (48 )
Currency
effects (14 ) (1 ) (17 ) (1 )
2022 $ 505 $ 18 3.6 % $ 1,475 $ 38 2.6 %
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 .
33--------------------------------------------------------------------------------
Table of Contents
Off-Highway
Three Months Nine Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2021 $ 627 $ 100 15.9 % $ 1,931 $ 276 14.3 %
Volume and mix 66 12 252 59
Performance 78 (11 ) 200 (21 )
Currency effects (77 ) (10 ) (177 ) (23 )
2022 $ 694 $ 91 13.1 % $ 2,206 $ 291 13.2 %
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 $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 .
Power Technologies
Three Months Nine Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2021 $ 263 $ 38 14.4 % $ 810 $ 111 13.7 %
Volume and mix 28 5 46 9
Performance 17 (20 ) 46 (45 )
Currency effects (19 ) (2 ) (42 ) (4 )
2022 $ 289 $ 21 7.3 % $ 860 $ 71 8.3 %
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 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 .
34--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Financial Measures
Adjusted EBITDA
We have defined adjusted EBITDA as net income before interest, income taxes,
depreciation, amortization, equity grant expense, restructuring expense,
non-service cost components of pension and other postretirement benefits (OPEB)
costs and other adjustments not related to our core operations (gain/loss on
debt extinguishment, pension settlements, divestitures, impairment, etc.).
Adjusted EBITDA is a measure of our ability to maintain and continue to invest
in our operations and provide shareholder returns. We use adjusted EBITDA in
assessing the effectiveness of our business strategies, evaluating and pricing
potential acquisitions and as a factor in making incentive compensation
decisions. In addition to its use by management, we also believe adjusted EBITDA
is a measure widely used by securities analysts, investors and others to
evaluate financial performance of our company relative to other Tier 1
automotive suppliers. Adjusted EBITDA should not be considered a substitute for
earnings before income taxes, net income or other results reported in accordance
with GAAP. Adjusted EBITDA may not be comparable to similarly titled measures
reported by other companies.
The following table provides a reconciliation of net income to adjusted EBITDA.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income (loss) $ (163 ) $ 50 $ (133 ) $ 171
Equity in earnings (loss) of affiliates (1 ) 5 (1 ) 29
Income tax expense 31 20 67 56
Earnings (loss) before income taxes (131 ) 65 (65 ) 198
Depreciation and amortization 94 98 287 290
Restructuring charges, net (1 ) 1 (1 ) 2
Interest expense, net 30 29 89 93
Loss on extinguishment of debt 24
Loss on investment in Hyliion 6 20
Loss on disposal group held for sale 7
Loss on de-designation of fixed-to-fixed
cross currency swaps 9
Impairment of goodwill 191 191
Other* 9 11 23 34
Adjusted EBITDA $ 192 $ 210 $ 524 $ 677 * Other includes stock compensation expense, non-service cost components of
pension and OPEB costs, strategic transaction expenses and other items. See
Note 19 to our consolidated financial statements in Item 1 of Part I for additional details.
Free Cash Flow and Adjusted Free Cash Flow
We have defined free cash flow as cash provided by (used in) operating activities less purchases of property, plant and equipment. We have defined adjusted free cash flow as cash provided by (used in) operating activities excluding discretionary pension contributions less purchases of property, plant and equipment. We believe these measures are useful to investors in evaluating the operational cash flow of the company inclusive of the spending required to maintain the operations. Free cash flow and adjusted free cash flow are not intended to represent nor be an alternative to the measure of net cash provided by (used in) operating activities reported in accordance with GAAP. Free cash flow and adjusted free cash flow may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net cash flows provided by (used in) operating activities to adjusted free cash flow.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net cash provided by operating activities
$ 307 $ 19 Purchases of property, plant and equipment (94 ) (95 ) (300 ) (228 ) Free cash flow 77 (170 ) 7 (209 ) Discretionary pension contribution - - - - Adjusted free cash flow$ 77 $ (170 ) $ 7 $ (209 ) 35
--------------------------------------------------------------------------------
Table of Contents Liquidity
The following table provides a reconciliation of cash and cash equivalents to
liquidity, a non-GAAP measure, at
Cash and cash equivalents$ 371 Less: Deposits supporting obligations (1 ) Available cash 370 Additional cash availability from Revolving Facility 934 Marketable securities 13 Total liquidity$ 1,317 Cash deposits are maintained to provide credit enhancement for certain agreements and are reported as part of cash and cash equivalents. For most of these deposits, the cash may be withdrawn if a comparable security is provided in the form of letters of credit. Accordingly, these deposits are not considered to be restricted. Marketable securities are included as a component of liquidity as these investments can be readily liquidated at our discretion. We had availability of$934 atSeptember 30, 2022 under the Revolving Facility after deducting$195 of outstanding borrowings and$21 of outstanding letters of credit. The components of ourSeptember 30, 2022 consolidated cash balance were as follows: U.S. Non-U.S. Total Cash and cash equivalents $ -$ 297 $ 297 Cash and cash equivalents held as deposits 1 1 Cash and cash equivalents held at less than wholly-owned subsidiaries 2 71 73 Consolidated cash balance $ 2$ 369 $ 371 A portion of the non-U.S. cash and cash equivalents is utilized for working capital and other operating purposes. Several countries have local regulatory requirements that restrict the ability of our operations to repatriate this cash. Beyond these restrictions, there are practical limitations on repatriation of cash from certain subsidiaries because of the resulting tax withholdings and subsidiary by-law restrictions which could limit our ability to access cash and other assets. AtSeptember 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. The incurrence-based covenants in the Revolving Facility permit us to, among other things, (i) issue foreign subsidiary indebtedness, (ii) incur general secured indebtedness subject to a pro forma first lien net leverage ratio not to exceed 1.50:1.00 in the case of first lien debt and a pro forma secured net leverage ratio of 2.50:1.00 in the case of other secured debt and (iii) incur additional unsecured debt subject to a pro forma total net leverage ratio not to exceed 3.50:1.00, tested at the time of incurrence. We may also make dividend payments in respect of our common stock as well as certain investments and acquisitions subject to a pro forma total net leverage ratio of 2.75:1.00. In addition, the Revolving Facility is subject to a financial covenant requiring us to maintain a first lien net leverage ratio not to exceed 2.00:1.00. The indentures governing the senior notes include other incurrence-based covenants that may subject us to additional specified limitations. From time to time, depending upon market, pricing and other conditions, as well as our cash balances and liquidity, we may seek to acquire our senior notes or other indebtedness or our common stock through open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as we may determine (or as may be provided for in the indentures governing the notes), for cash, securities or other consideration. In addition, we may enter into sale-leaseback transactions related to certain of our real estate holdings and factor receivables. There can be no assurance that we will pursue any such transactions in the future, as the pursuit of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our financing and governance documents. The principal sources of liquidity available for our future cash requirements are expected to be (i) cash flows from operations, (ii) cash and cash equivalents on hand and (iii) borrowings from our Revolving Facility. We believe that our overall liquidity and operating cash flow will be sufficient to meet our anticipated cash requirements for capital expenditures, working capital, debt obligations and other commitments during the next twelve months. While uncertainty surrounding the current economic environment could adversely impact our business, based on our current financial position, we believe it is unlikely that any such effects would preclude us from maintaining sufficient liquidity. 36
--------------------------------------------------------------------------------
Table of Contents Cash Flow
The following table summarizes our consolidated statement of cash flows:
Nine Months Ended
September 30,
2022 2021
Cash used for changes in working capital $ (21 ) $ (501 )
Other cash provided by operations 328 520
Net cash provided by operating activities 307 19 Net cash used in investing activities (297 ) (260 ) Net cash provided by (used in) financing activities 138 (71 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ 148 $ (312 )
Operating activities - Exclusive of working capital, other cash provided by
operations was
Working capital used cash of$21 and$501 in 2022 and 2021. 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 third quarter sales driven by improved global construction/mining and agricultural markets, improvedNorth America full-frame light-truck and commercial-vehicle demand and improvedSouth 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$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 inSwitch 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 ourJune 2026 Notes and settled certain of the fixed-to-fixed cross currency swaps resulting in a net cash outflow of$22 . Financing activities - 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 ourJuly 2029 Notes and$400 of ourSeptember 2030 Notes, paying financing costs of$11 . Also during 2021, we redeemed all$375 of ourJune 2026 Notes and all$425 of ourDecember 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 toMarch 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. Hydro-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 inTai 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. 37
--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
There have been no material changes atSeptember 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 During the second quarter of 2022, we commenced two operating leases with minimum lease payments totaling$56 over their respective noncancelable lease terms which expire inSeptember 2035 andJanuary 2037 . There have been no other material changes in our contractual obligations from those disclosed in Item 7 of our 2021 Form 10-K. Contingencies For a summary of litigation and other contingencies, see Note 14 to our consolidated financial statements in Item 1 of Part I. Based on information available to us at the present time, we do not believe that any liabilities beyond the amounts already accrued that may result from these contingencies will have a material adverse effect on our liquidity, financial condition or results of operations.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. See Item 7 in our 2021 Form 10-K for a description of our critical accounting estimates and Note 1 to our consolidated financial statements in Item 8 of our 2021 Form 10-K for our significant accounting policies. There were no changes to our critical accounting estimates in the nine months endedSeptember 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.
© Edgar Online, source
