Discussion and analysis of our results of operations pertaining to 2020 compared to 2019 not included in this Form 10-K can be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended
December 31, 2020. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in Item 8. Management Overview We are a global provider of high-technology products to virtually every major vehicle manufacturer in the world. We also serve the stationary industrial market. 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 Driveand Motion Systems (Commercial Vehicle), Off-Highway Driveand 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. In 2021, 47% of our sales came from North American operations and 53% from operations throughout the rest of the world. Our sales by operating segment were Light Vehicle - 42%, Commercial Vehicle - 17%, Off-Highway - 29% and Power Technologies - 12%.
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. 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 Danaby digitizing their experience. Our customer-centric focus has uniquely positioned us to win more than our fair share of new business and capitalize on future customer outsourcing initiatives. Expanding global markets means utilizing our global capabilities and presence to further penetrate growth markets, focusing on Asiadue to its position as the largest mobility market in the world with the highest market growth rate as well as its lead in the adoption of new energy vehicles. We are investing across various avenues to increase our presence in Asia Pacificby forging new partnerships, expanding inorganically, and growing organically. We continue to operate in this region through wholly owned and joint ventures with local market partners. We have recently made acquisitions that have augmented our footprint in the region, specifically in Indiaand China. All the while, we have been making meaningful organic investments to grow with existing and new customers, primarily in Thailand, India, and China. These added capabilities have enabled us to target the domestic Asia Pacificmarkets 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. 15
Over the last several years we continue to deliver on our goal to accelerate vehicle electrification through both core
Danatechnologies and targeted strategic acquisitions and are positioned today to lead the market. The nine recent investments in electrodynamic expertise and technologies combined with Dana'slongstanding 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 Danato 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. As part of our balanced allocation approach, we continue to favor investment grade metrics with the aim 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
$200common 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 $23of cash to repurchase common shares under the program in 2021. The share repurchase program expires on December 31, 2023, and $127remains available for future share repurchases as of December 31, 2021. 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 $400of 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 to $1,150and extended its maturity to March 25, 2026. See Note 14 to our consolidated financial statements in Item 8 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™, Danadelivers a broad range of aftermarket solutions - including genuine, all makes, and value lines - servicing passenger, commercial and off-highway vehicles across the globe. Selective acquisitions - Although transformational opportunities like the GKN plcdriveline 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. Acquisitions Over the past several years we have actively grown our electric vehicle capabilities through multiple acquisitions, positioning us to deliver complete e-Propulsion systems with in-house electrodynamics. Our acquisitions of TM4 Inc.(TM4), S.M.E. S.p.A. (SME), Prestolite E-Propulsion Systems (Beijing) Limited(PEPS), Ashwoods Innovations Limited(Ashwoods), Oerlikon Drive Systems, Nordresa Motors, Inc., Rational Motion GmbHand Pi Innovo Holding Limitedhave enhanced our portfolio of core technologies including e-motors, power inverters, software and controls, and advance mechatronics. Our strategic partner, Hydro- Québec, owns 45% redeemable noncontrolling interests in TM4, SME, PEPS and Ashwoods. See Note 2 and Note 9 to our consolidated financial statements in Item 8 for additional information. Segments We manage our operations globally through four operating segments. Our Light Vehicle and Power Technologies segments primarily support light vehicle original equipment manufacturers (OEMs) with products for light trucks, SUVs, CUVs, vans and passenger cars. The Commercial Vehicle segment supports the OEMs of on-highway commercial vehicles (primarily trucks and buses), while our Off-Highway segment supports OEMs of off-highway vehicles (primarily wheeled vehicles used in construction, mining and agricultural applications). 16
Table of Contents 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 10%, with growth across all regions, exhibiting a strong rebound returning to at or above 2019 levels as production constraints continue to ease, inventory returns to more normal levels, and constrained customer demand is fulfilled. Commercial vehicle markets - Our primary business is driveline systems for medium and heavy-duty trucks and busses, including the emerging market for hybrid and electric vehicles. Key regional markets are
North America, South America(primarily Brazil) and Asia Pacific. The Class-8 truck market in North Americapeaked 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 22% over the prior year driven by continued improving economic outlook and cyclical growth. Medium-duty truck production in North Americaexperienced a 20% year- over-year decline from 2019 to 2020, primarily due to COVID. During 2021, production increased a modest 3% over 2020. The outlook for 2022 is for a 13% increase in production over the prior year. Outside of North America, production of medium-and heavy-duty trucks in South Americadeclined 22% in 2020 due to COVID and deteriorating economic conditions. During 2021, production increased 76% over 2020 as the region recovered from the impact of the pandemic and the age of existing vehicles drove a replacement cycle for new trucks. The outlook for South Americais for a modest 3% reduction in production from the prior year as local economic conditions remain relatively stable. In contrast to the rest of the world, Asia Pacific, driven by China, did not experience lower truck production in 2020, but output slowed by 8% in 2021 as production matched lower demand, primarily driven by Indiawhere the recovery from the pandemic was been slower than in China. The 2022 outlook for Asia Pacificis for a 6% reduction in production from the prior year as the Indian market recovery continues to lag. Off-highway markets - Our off-highway business has a large presence outside of North America, with 65% of its 2021 sales coming from products manufactured in Europe; however, a large portion of these products are utilized in vehicle production outside the region. The construction equipment segment of the off-highway market is closely related to global economic growth and infrastructure investment. This segment has experienced a 5% market contraction, which began in late 2018 and further accelerated due to COVID, with 2020 production ending down an additional 10%. The global construction market began to rebound in 2021 with production up 12% over 2020. The 2022 outlook has production demand in the global construction market showing continued strength with production increasing by 10% over the prior year. End-user investment in the mining equipment segment is driven by prices for commodity products produced by underground mining. The global mining equipment market has been mostly stable over the past several years as industry participants have maintained vehicle inventory levels to match commodity output, and this trend is expected to continue in 2022. The agriculture equipment market is the third of our key off-highway segments. Like the underground mining segment, investment in agriculture equipment is primarily driven by prices for farm commodities. Continued low farm commodity prices drove a 7% reduction in production in 2020. Farm subsidies in response to the global pandemic drove a 10% increase in production during 2021. The outlook for 2022 is for end-market demand to improve by 6% compared to the prior year, as farm subsidies are expected to continue to bolster the commodity market and drive the replacement of aging equipment. Foreign currency - With 55% of our 2021 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 and Chinaaccounted for 50% and 10% of our 2021 non- U.S.sales, respectively, while Braziland Indiaeach accounted for 9%. Although sales in South Africaare less than 5% of our non- U.S.sales, the rand has been volatile and significantly impacted sales from time to time. International currencies strengthened against the U.S.dollar in 2021, increasing 2021 sales by $138. A stronger euro, Chinese renminbi, British pound and South African rand more than offset a weaker Brazilian real. Argentinahas 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 Argentinafor 2021 of approximately $116are 1% of our consolidated sales and our net asset exposure related to Argentinawas approximately $33, including $12of net fixed assets, at December 31, 2021. During the second quarter of 2018, we determined that Argentina'seconomy met the GAAP definition of a highly inflationary economy. In assessing Argentina'seconomy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effective July 1, 2018, the U.S.dollar is the functional currency for our Argentine operations, rather than the Argentine peso. Beginning July 1, 2018, peso-denominated monetary assets and liabilities are remeasured into U.S.dollars using current Argentine peso exchange rates with resulting translation gains or losses included in results of operations. Nonmonetary assets and liabilities are remeasured into U.S.dollar using historic Argentine peso exchange rates. Reference is made to Note 1 of our consolidated financial statements in Item 8 for additional information. 17
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. Commodity prices increased significantly during 2021, reducing year-over-year earnings by approximately
$367. Material recovery and other pricing actions increased year-over-year earnings by $223in 2021.
Sales, earnings and cash flow outlook
2022 Outlook 2021 2020 2019 Sales
$9,625- $10,125 $ 8,945 $ 7,106 $ 8,620Adjusted EBITDA $900- $1,000 $ 795 $ 593 $ 1,019Net cash provided by operating activities ~7.0% of sales $ 158 $ 386 $ 637Discretionary pension contributions $- $ - $ - $ 61Purchases of property, plant and equipment ~4.0% of sales $ 369 $ 326 $ 426Adjusted Free Cash Flow ~3.0% of sales $ (211 ) $ 60 $ 272Adjusted 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 2022 sales outlook is $9,625to $10,125, reflecting improving global market demand and $400of net new business backlog. Based on our current sales and exchange rate outlook for 2022, we expect overall stability in international currencies with a modest headwind to sales. At sales levels in our current outlook for 2022, a 5% movement on the euro would impact our annual sales by approximately $140. A 5% change on the Chinese renminbi, Indian rupee or Brazilian real rates would impact our annual sales in each of those countries by approximately $25. At our current sales outlook for 2022, we expect full year 2022 adjusted EBITDA to approximate $900to $1,000. Adjusted EBITDA Margin is expected to be 9.6%, a 70 basis-point improvement over 2021, reflecting higher margin net new business and a modest benefit from material recovery and other pricing actions as commodity costs begin to abate toward the end of the year, being partially offset by increased investment to support our electrification strategy. We expect to generate adjusted free cash flow of approximately $310, or 3% of sales for 2022, reflecting the benefit of year-over-year higher adjusted EBITDA and lower year-over-year use of cash for working capital. We anticipate capital spending will be flat in comparison with 2021. Among our operational and strategic initiatives are increased focus on and investment in product technology - delivering products and technology that are key to bringing solutions to issues of paramount importance to our customers. Our success on this front is measured, in part, by our sales backlog - net new business received that will be launching in the future and adding to our base annual sales. This backlog excludes replacement business and represents incremental sales associated with new programs for which we have received formal customer awards. At December 31, 2021, our sales backlog of net new business for the 2022 through 2024 period was $800. We expect to realize $400of our sales backlog in 2022, with incremental sales backlog of $200being realized in both 2023 and 2024. Our sales backlog is evenly balanced between electric-vehicle and traditional ICE-vehicle content. 18
Table of Contents Consolidated Results of Operations
Summary of Consolidated Operating Results (2021 vs. 2020)
2021 2020 % of % of Increase/ Dollars Net Sales Dollars Net Sales (Decrease) Net sales
$ 8,945 $ 7,106 $ 1,839Cost of sales 8,108 90.6 % 6,485 91.3 % 1,623 Gross margin 837 9.4 % 621 8.7 % 216 Selling, general and administrative expenses 460 5.1 % 421 5.9 % 39 Amortization of intangibles 14 13 1 Restructuring charges, net 34 (34 ) Impairment of goodwill (51 ) 51 Other income (expense), net 32 22 10 Earnings before interest and income taxes 395 124 271 Loss on extinguishment of debt (29 ) (8 ) (21 ) Interest income 9 9 - Interest expense 131 138 (7 ) Earnings (loss) before income taxes 244 (13 ) 257 Income tax expense 72 58 14 Equity in earnings of affiliates 28 20 8 Net income (loss) 200 (51 ) 251 Less: Noncontrolling interests net income 14 10 4 Less: Redeemable noncontrolling interests net loss (11 ) (30 ) 19 Net income (loss) attributable to the parent company $ 197 $ (31 ) $ 228Sales - The following table shows changes in our sales by geographic region. Amount of Change Due To Increase/ Currency Acquisitions Organic 2021 2020 (Decrease) Effects (Divestitures) Change North America $ 4,230 $ 3,602 $ 628 $ 10$ 9 $ 609Europe 2,836 2,209 627 107 2 518 South America 590 358 232 (13 ) 245 Asia Pacific 1,289 937 352 34 (39 ) 357 Total $ 8,945 $ 7,106 $ 1,839 $ 138$ (28 ) $ 1,729Sales in 2021 were $1,839higher than in 2020. Stronger international currencies increased sales by $138, principally due to a stronger euro, Chinese renminbi, British pound and South African rand, partially offset by a weaker Brazilian real. The organic sales increase of $1,729, or 24%, resulted from improved overall market demand and the conversion of sales backlog. Pricing actions, including material commodity price and inflationary cost adjustments, increased sales by $223. The North Americaorganic sales increase of 17% was driven principally by stronger light-, medium- and heavy-duty truck production volumes, higher-light vehicle engine production levels and the conversion of sale backlog. Full-frame light-truck production was up 13%, Classes 5-7 were up 3% and Class 8 was up 20% compared with 2020. Light-vehicle engine production was up 2% compared with 2020. Excluding currency effects and the impact of acquisitions, sales in Europewere up 23% compared with 2020. With our significant Off-Highway presence in the region, stronger construction/mining and agricultural markets were a major factor. Organic sales of this operating segment were up 28% compared with 2020. Excluding currency effects, sales in South Americaincreased 68% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production. Light-truck production was up 35% and medium/heavy-truck production was up 76% in 2021. Excluding currency effects and the impact of divestitures, sales in Asia Pacificincreased 38% compared to 2020 due to improved light-truck production and stronger construction/mining and agricultural markets. Light-truck production was up 4% in 2021. The global semiconductor chip shortage impacted our 2021 sales as customers of some of our more significant programs were forced to take down time during the last nine months of the year. 19
Cost of sales and gross margin - Cost of sales for 2021 increased
$1,623, or 25% when compared to 2020. Cost of sales as a percent of sales was 70 basis points lower than in the previous year. Incremental margins provided by increased sales volumes were partially offset by higher year-over-year commodity costs of $367, higher standard and premium freight costs of $61and incremental investment in electrification initiatives. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Year-over-year freight costs increases are primarily due to higher freight rates, driven by container shortages and port congestions due to pandemic-related operational disruptions, and the incurrence of premium freight to support customer demand levels. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $129. Gross margin of $837for 2021 increased $216from 2020. Gross margin as a percent of sales was 9.4% in 2021, 70 basis points higher than in 2020. The improvement in gross margin as a percent of sales was driven principally by the cost of sales factors referenced above. Gross margin during 2021 was negatively impacted by costs associated with continued global supply chains disruptions and operational inefficiencies driven by labor shortages at certain of our facilities and customer down time resulting from the global semiconductor chip shortage. In addition, gross margin during 2021 was negatively impacted by material cost recovery mechanisms with our customers lagging material cost increases charged by our suppliers by approximately 90 days. Selling, general and administrative expenses (SG&A) - SG&A expenses in 2021 were $460(5.1% of sales) as compared to $421(5.9% of sales) in 2020. SG&A expenses were $39lower in 2020 primarily due to lower salaried employee wage and benefits expenses and professional fees resulting from austerity measures taken in response to the COVID pandemic.
Amortization of intangible assets – The amortization expense was
Restructuring charges, net - Restructuring charges of
$34in 2020 were comprised of severance and benefit costs primarily related to headcount reductions across our operations in response to the COVID pandemic and exit costs related to previously announced actions. See Note 4 of our consolidated financial statements in Item 8 for additional information. Impairment of goodwill - During the first quarter of 2020, we recorded a $51goodwill impairment charge. See Note 3 of our consolidated financial statements in Item 8 for additional information.
Other income (expenses), net – The following table presents the main components of other income (expenses), net.
Non-service cost components of pension and OPEB costs
$ (10 ) $ (10 )Government grants and incentives 16
Foreign exchange gain 2
Strategic transaction expenses (13 ) (20 ) Gain (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 ) Gain on sale leaseback 66 Other, net 7 (3 ) Other income (expense), net
$ 32 $ 2220
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. Strategic transaction expenses in 2021 were primarily attributable to our pursuit of the acquisition of a portion of the thermal-management business of Modine Manufacturing Company and certain other strategic initiatives. Strategic transaction expenses in 2020 were primarily attributable to the acquisition of ODS and Nordresa 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 Exchangeunder 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 noncurrent marketable securities and carried at fair value with changes in fair value included in net income. During the third quarter of 2021, we sold all of our Hyliion shares. We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026Notes. In June 2021, we redeemed all of the June 2026Notes and de-designated the fixed-to-fixed cross currency swaps. In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We were required to divest our interest in this joint venture as it violates competitive restrictions of another of our Chinajoint 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. During December 2021, we completed a sale-leaseback transaction on three of our U.S.manufacturing facilities. We received proceeds of $77from the sale of the properties, which had carrying values totaling $11, resulting in a $66gain on the sale transaction. See Note 19 of our consolidated financial statements in Item 8 for additional information. Loss on extinguishment of debt - During May 2021, we redeemed our December 2024Notes. We incurred redemption premiums of $8in connection with these repayments and wrote off $3of previously deferred financing costs associated with the December 2024Notes. These charges were partially offset by the recognition of $3related to an unamortized fair value adjustment associated with a fixed-to-floating interest rate swap that was terminated in 2015. On June 10, 2021, in connection with the issuance of our July 2029Notes, we redeemed all of our June 2026Notes. We incurred redemption premiums of $12in connection with these repayments and wrote off $4of previously deferred financing costs associated with the June 2026Notes. On November 30, 2021, in connection with the issuance of our February 2032Notes, we fully paid down our Term B Facility. We wrote off $5of previously deferred financing costs associated with the Term B Facility. On June 19, 2020, in connection with the issuance of our June 2028Notes, we terminated our $500bridge facility and wrote off $5of deferred fees associated with the bridge facility. On December 31, 2020, we fully paid down our Term A Facility. We wrote off $3of previously deferred financing costs associated with the Term A Facility. See Note 14 of our consolidated financial statements in Item 8 for additional information. Interest income and interest expense - Interest income was $9in both 2021 and 2020. Interest expense decreased from $138in 2020 to $131in 2021 due to lower average debt levels in 2021. See Note 14 of our consolidated financial statements in Item 8 for additional information. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.1% in 2021 and 5.0% in 2020. Income tax expense - Income taxes were an expense of $72and $58in 2021 and 2020. During 2021, we recognized tax expense of $46to record valuation allowance in the US due to reduced income projections. We also recognized tax benefit of $46for the release of valuation allowances in several foreign jurisdictions based on recent history of profitability and increased income projections. The contrast of these two positions is representative of the jurisdictional mix of results and relative attributes. We also recognized tax expense of $18related to the expiration of federal tax credits. During 2020, we recognized tax expense of $60for additional valuation allowances in foreign jurisdictions due to reduced income projections. We also recognized a benefit of $26for the release of valuation allowance in a subsidiary in Australia, based on recent history of profitability and increased income projections. In conjunction with the completion of the intercompany sale of certain assets to a non- U.S.affiliate, net tax expense of $12was recorded, including the corresponding foreign derived intangible income benefit. For the year, we also recognized tax benefits of $37related to tax actions that adjusted federal tax credits. A pre-tax goodwill impairment charge of $51with an associated income tax benefit of $1was recorded. See Note 18 to our consolidated financial statements in Item 8 for additional information. Equity in earnings of affiliates - Net earnings from equity investments was $28in 2021 and $20in 2020. Equity in earnings from Dongfeng Dana Axle Co., Ltd.(DDAC) was $22in 2021 and $15in 2020. On December 16, 2020, we sold a portion of our ownership interest in ROC-Spicer, Ltd.(ROC-Spicer) to China Motor Corporation, reducing our ownership interest in ROC-Spicer to 50%. In conjunction with the decrease in our ownership interest, the ROC-Spicer shareholders agreement was amended, eliminating our controlling financial interest in ROC-Spicer. Our retained investment in ROC-Spicer is being accounted for by applying the equity method. Equity in earnings of ROC-Spicer was $3in 2021. Equity in earnings from Bendix Spicer Foundation Brake, LLC(BSFB) was $4in 2020. On October 1, 2020we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC. See Note 22 of our consolidated financial statements in Item 8 for additional information. 21
Table of Contents
Segment operating results (2021 vs. 2020)
Light Vehicle Segment Segment EBITDA Sales EBITDA Margin 2020
$ 3,038 $ 2397.9 % Volume and mix 649 134 Divestitures (24 ) (2 ) Performance 80 (99 ) Currency effects 30 2 2021 $ 3,773 $ 2747.3 % Light Vehicle sales in 2021, exclusive of currency effects and the impact of divestitures, were 24% higher than 2020 reflecting improved global markets and the conversion of sales backlog. Year-over-year North Americafull-frame light-truck production increased 13% while light-truck production in Europe, South Americaand Asia Pacificincreased 2%, 35% and 4%, respectively. Net customer pricing and cost recovery actions further increased year-over-year sales by $66. The global semiconductor chip shortage impacted our 2021 sales as customers of some of our more significant programs were forced to take down time during the last nine months of the year. Light Vehicle segment EBITDA increased by $35in 2021. Higher sales volumes provided a year-over-year benefit of $134(20.6% incremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $167, higher standard freight costs of $25, operational inefficiencies of $15, union ratification bonuses of $10, benefits of the CARES Act and austerity measures taken in response to the COVID pandemic during 2020 not repeating in 2021 of $5and $8, respectively, higher program launch costs of $7and higher warranty costs of $13. Partially offsetting these performance-related decreases were material cost savings and supplier recoveries of $73, net customer pricing and material cost recovery actions of $66, lower premium freight costs of $10and lower incentive compensation of $2. Commercial Vehicle Segment Segment EBITDA Sales EBITDA Margin 2020 $ 1,185 $ 403.4 % Volume and mix 263 68 Acquisition / Divestiture (5 ) (2 ) Performance 83 (59 ) Currency effects 6 1 2021 $ 1,532 $ 483.1 % Commercial Vehicle sales in 2021, exclusive of currency effects and the impact of acquisitions and divestitures, were 29% higher than 2020 reflecting mixed global markets and the conversion of sales backlog. Year-over-year North America Class 8 production was up 20% and Classes 5-7 production was up 3%. Year-over-year medium/heavy-truck production in Europeand South Americawere up 13% and 76%, respectively. Asia Pacificmedium/heavy-truck production was down 8% compared to 2020. Net customer pricing and cost recovery actions further increased year-over-year sales by $86. Commercial Vehicle segment EBITDA increased by $8in 2021. Higher sales volumes provided a year-over-year benefit of $68(25.9% incremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $95, operational inefficiencies of $32, higher standard and premium freight costs of $22, benefits of the CARES Act and austerity measures taken in response to the COVID pandemic during 2020 not repeating in 2021 of $2and $9, respectively, union ratification bonuses of $3, and higher warranty costs of $1. Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $86, material cost savings of $17and lower incentive compensation of $2. 22
Table of Contents Off-Highway Segment Segment EBITDA Sales EBITDA Margin 2020
$ 1,966 $ 23011.7 % Volume and mix 482 116 Acquisition 1 (1 ) Performance 69 - Currency effects 75 8 2021 $ 2,593 $ 35313.6 % Off-Highway sales in 2021, exclusive of currency effects and the impact of acquisitions, were 28% higher than 2020 reflecting improved global markets and the conversion of sales backlog. Year-over-year global construction/mining and agricultural equipment markets reflected marked improvement with global production increasing 12% and 10%, respectively, over 2020. Net customer pricing and cost recovery actions further increased year-over-year sales by $61. Off-Highway segment EBITDA increased by $123in 2021. Higher sales volumes provided a year-over-year benefit of $116(24.1% incremental margin). The year-over-year performance-related earnings increase driven by net customer pricing and material cost recovery actions of $61, material cost savings of $31, operational efficiencies of $16and lower incentive compensation of $3were offset by higher commodity costs of $78, higher standard and premium freight costs of $14, benefits of the CARES Act and austerity measures taken in response to the COVID pandemic during 2020 not repeating in 2021 of $1and $13, respectively, higher warranty costs of $3and union ratification bonuses of $2. Power Technologies Segment Segment EBITDA Sales EBITDA Margin 2020 $ 917 $ 9410.3 % Volume and mix 87 34 Performance 16 (8 ) Currency effects 27 3 2021 $ 1,047 $ 12311.7 % Power Technologies primarily serves the light-vehicle market but also sells product to the medium/heavy-truck and off-highway markets. Net of currency effects, sales for 2021 were 11% higher than 2020, reflecting generally improved global markets and the conversion of sales backlog. Year-over-year North America, South Americaand Asia Pacificlight-vehicle engine production was up 2%, 9% and 3%, respectively, compared to 2020. Year-over-year light-vehicle engine production in Europewas down 5% compared to 2020. Net customer pricing and cost recovery actions further increased year-over-year sales by $10. Power Technologies segment EBITDA increased by $29in 2021. Higher sales volumes provided a year-over-year benefit of $34(39.1% incremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $27, higher standard and premium freight costs of $10, benefits of the CARES Act and austerity measures taken in response to the COVID pandemic during 2020 not repeating in 2021 of $2and $9, respectively, union ratification bonuses of $3and higher incentive compensation of $1. Partially offsetting these performance-related decreases were operational efficiencies of $21, net customer pricing and material cost recovery actions of $10, material costs savings of $8and lower warranty costs of $5. 23
Table of Contents Non-GAAP Financial Measures Adjusted EBITDA We have defined adjusted EBITDA as net income (loss) 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 (loss) to adjusted EBITDA. 2021 2020 Net income (loss)
$ 200 $ (51 )Equity in earnings of affiliates 28
Income tax expense (benefit) 72
Earnings (loss) before income taxes 244 (13 ) Depreciation and amortization 389 365 Restructuring charges, net 34 Interest expense, net 122 129 Loss on extinguishment of debt 29
(Gain) loss on investment in Hyliion 20 (33 ) Loss on disposal group held for sale 7
Loss on de-designation of fixed-to-fixed currency swaps 9 Gain on sale-leaseback
(66 ) Impairment of goodwill
Pension settlement charge Acquisition related inventory adjustments Other* 41 52 Adjusted EBITDA
$ 795 $ 593
* Other includes stock-based compensation expense, non-service cost items of
pension and OPEB costs, strategic transaction expenses and other items.
See Note 21 to our Consolidated Financial Statements in Section 8 for additional information.
Free cash flow and adjusted free cash flow
We have defined free cash flow as cash provided by operating activities less purchases of property, plant and equipment. We have defined adjusted free cash flow as cash provided by 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 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 provided by operating activities to adjusted free cash flow.
Net cash flow generated by operating activities
Acquisitions of property, plant and equipment (369 ) (326 ) Free cash flow
(211 ) 60 Discretionary pension contribution - - Adjusted free cash flow
$ (211 ) $ 6024
Table of Contents Liquidity
The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, as of
Cash and cash equivalents
$ 268Less: Deposits supporting obligations (1 ) Available cash 267 Additional cash availability from Revolving Facility 1,129 Marketable securities 17 Total liquidity $ 1,413Cash 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 $1,129at December 31, 2021under our Revolving Facility after deducting $21of outstanding letters of credit. The components of our December 31, 2021consolidated cash balance were as follows: U.S. Non-U.S. Total Cash and cash equivalents $ 3 $ 168 $ 171Cash and cash equivalents held as deposits 1 1 Cash and cash equivalents held at less than wholly-owned subsidiaries 3 93 96 Consolidated cash balance $ 6 $ 262 $ 268A 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.
December 31, 2021, 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. 25
Table of Contents Cash Flow 2021 2020
Cash provided by (used for) changes in working capital
Other operating cash flows
Net cash provided by operating activities 158
Net cash used in investing activities (293 ) (327 ) Net cash provided by (used in) financing activities (127 ) (12 ) Net increase (decrease) in cash, cash equivalents and restricted cash
$ (262 ) $ 47
The table above summarizes our consolidated statement of cash flows.
Operating activities - Exclusive of working capital, other cash provided by operations was
$613during 2021 compared to $339during 2020. The year-over-year increase is primarily attributable to higher operating earnings and lower year-over-year cash paid for interest and strategic transaction expenses of $20and $7, respectively. The decrease in cash paid for interest resulted from refinancing transactions in 2021 changing the timing of interest payments on our senior notes. Working capital used cash of $455in 2021 and provided cash of $47in 2020. Cash of $189and $66was used to finance receivables in 2021 and 2020, respectively. The higher level of cash used to finance receivables in 2021 is due to higher year-over-year fourth quarter sales driven by strong heavy-vehicles markets. Cash of $471was used to fund higher inventory levels during 2021, while cash of $69was generated by lower inventory levels in 2020. We are carrying higher levels of inventory in 2021 to mitigate continued global-supply-chain disruptions as well as labor shortages at certain of our facilities, ensuring continuous supply for our customers. The cash generated by lower inventory levels in 2020 was due primarily to actions taken to reduce inventory levels, preserving working capital, in response to the COVID pandemic. Increases in accounts payable and other net liabilities provided cash of $205and $44in 2021 and 2020, respectively. The increase in accounts payable and other net liabilities in 2021 was principally driven by higher raw material purchases in the third and fourth quarters. Investing activities - Expenditures for property plant and equipment were $369and $326in 2021 and 2020. During 2020, capital spending was delayed where and when appropriate in response to the COVID pandemic. During December 2021, we completed a sale-leaseback transaction on three of our U.S.manufacturing facilities receiving proceeds of $77from the sale of the properties. During 2020, we paid $17to acquire a 49% noncontrolling financial interest in Pi Innovo. 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 provides us with a 100% ownership interest in Pi Innovo. During 2020, we paid $8to acquire Curtis' 35.4% ownership interest in Ashwoods. The acquisition of Curtis' interest in Ashwoods, along with our existing ownership interest in Ashwoods, provided us with a controlling financial interest in Ashwoods. During 2021, we acquired a 1% ownership interest in Switch Mobility Limitedfor $18. During 2020, we sold our 20% ownership interest in Bendix Spicer Foundation Brake, LLC(BSFB) for $50, consisting of $21in cash, a note receivable of $25and deferred proceeds of $4. During 2021, we received $29in settlement of the note receivable and deferred proceeds from the BSFB transaction. During 2021, we sold all of our Hyliion shares for $29. During 2020, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities. During 2021, we dedesignated the fixed-to-fixed cross currency swaps associated with our June 2026Notes and settled certain of the fixed-to-fixed cross currency swaps resulting in a net cash outflow of $22. Financing activities - During 2021, we completed the issuance of €325 of our July 2029Notes, $400of our September 2030Notes and $350of our February 2032Notes, paying financing costs of $16. Also during 2021, we redeemed all $375of our June 2026Notes and all $425of our December 2024Notes, paying redemption premiums of $21. During 2021, we fully paid down our Term B Facility, making principal payments of $349. During 2021, we paid financing costs of $2to amend our credit and guaranty agreement, increasing the Revolving Facility to $1,150and extending its maturity to March 25, 2026. During 2020, we completed the issuance of $400of our June 2028Notes and the issuance of an additional $100of our November 2027Notes, paying financing costs of $8. During 2020, we entered into a $500bridge facility, paying financing costs of $5. We subsequently terminated the bridge facility. During 2020 we fully paid down our Term A Facility, making principal payments of $474. We used $58and $15for dividend payments to common stockholders during 2021 and 2020. We used cash of $23to repurchase common shares under our share repurchase program in 2021. During the second quarter of 2020, we temporarily suspended the declaration and payment of dividends to common stockholders and temporarily suspended the repurchase of common stock under our existing common stock repurchase program in response to the global COVID pandemic. Distributions to noncontrolling interests totaled $15and $11in 2021 and 2020. During 2020, Hydro- Québecpaid us $7to acquire an indirect 45% redeemable noncontrolling interest in Ashwoods. Hydro- Québeccontributed $14and $4to the strategic joint venture in 2021 and 2020. During 2021, we sold a portion of our ownership interest in Tai Ya Investment (HK) Co., Limited(Tai Ya) to China Motor Corporation, reducing our ownership interest in Tai Ya to 50%. In conjunction with the decrease in our ownership interest, the Tai Ya shareholders agreement was amended, eliminating our controlling financial interest in Tai Ya. Upon our loss of control, we deconsolidated Tai Ya, including $6of cash and cash equivalents. During 2020, we sold a portion of our ownership interest in ROC-Spicer, Ltd.(ROC-Spicer) to China Motor Corporation, reducing our ownership interest in ROC-Spicer to 50%. In conjunction with the decrease in our ownership interest, the ROC-Spicer shareholders agreement was amended, eliminating our controlling financial interest in ROC-Spicer. Upon our loss of control, we deconsolidated ROC-Spicer, including $14of cash and cash equivalents. 26
Table of Contents
Off-balance sheet arrangements
In connection with the divestiture of our Structural Products business in 2010, leases covering three
U.S.facilities were assigned to a U.S.affiliate of the new owner, Metalsa S.A. de C.V.(Metalsa). Under the terms of the sale agreement, we guarantee the affiliate's performance under the leases, which run through June 2025, including approximately $6of annual payments. In the event of a required payment by Danaas guarantor, we are entitled to pursue full recovery from Metalsa of the amounts paid under the guarantee and to take possession of the leased property. Contractual Obligations
We are obligated to make future cash payments in fixed amounts under various agreements. The following table summarizes our main contractual obligations as of
Payments Due by Period Contractual Cash Obligations Total 2022 2023 - 2024 2025 - 2026 After 2026 Long-term debt(1)
$ 2,365 $ 1$ 35 $ 409 $ 1,920Interest payments(2) 801 112 229 213 247 Operating leases(3) 356 52 75 59 170 Financing leases(4) 77 10 16 11 40 Unconditional purchase obligations(5) 239 226 13 - - Pension contribution(6) 17 17 Retiree health care benefits(7) 43 5 9 8 21 Uncertain income tax positions(8) - Total contractual cash obligations $ 3,898 $ 423$ 377 $ 700 $ 2,398
(1) Principal payments on long-term debt.
(2) Interest payments are based on the long-term debt in place at
and the interest rates applicable to these bonds.
(3) Operating lease obligations, including interest, relating to real estate,
manufacturing and material handling equipment, vehicles and other assets.
(4) Finance lease obligations, including interest, related to real estate and
manufacturing and handling equipment.
(5) Unconditional purchase obligations consist of commitments
the procurement of fixed assets, the purchase of raw materials and the
the performance of other contractual obligations.
(6) This amount represents the estimated minimum required contributions for 2022 to our
global defined benefit pension plans. We did not estimate the pension
contributions beyond 2022 due to the significant impact that the return of the plan
assets and changes in discount rates could have on these amounts.
(7) This amount represents estimated payments under our retiree healthcare program
programs. Obligations under retiree health care programs are not fixed
commitments and will vary depending on various factors, including the level
participant utilization and inflation. Our estimates of payments to
made in the future, consider recent payment trends and some of our
(8) We are unable to reasonably estimate the timing of payments related to
uncertain tax positions because the timing of settlement is uncertain. the
the table above does not reflect unrecognized tax benefits
for additional discussion.
Contingencies For a summary of litigation and other contingencies, see Note 16 of our consolidated financial statements in Item 8. 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. 27
Table of Contents 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, expenses and the related disclosures. Considerable judgment is often involved in making these determinations. Critical estimates are those that require the most difficult, subjective or complex judgments in the preparation of the financial statements and the accompanying notes. We evaluate these estimates and judgments on a regular basis. We believe our assumptions and estimates are reasonable and appropriate. However, the use of different assumptions could result in significantly different results and actual results could differ from those estimates. The following discussion of accounting estimates is intended to supplement the Summary of Significant Accounting Policies presented as Note 1 of our consolidated financial statements in Item 8. Income taxes - Accounting for income taxes is complex, in part because we conduct business globally and therefore file income tax returns in numerous tax jurisdictions. Significant judgment is required in determining the income tax provision, uncertain tax positions, deferred tax assets and liabilities and the valuation allowances recorded against our net deferred tax assets. A valuation allowance is provided when, in our judgment based upon available information, it is more likely than not that a portion of such deferred tax assets will not be realized. To make this assessment, we consider the historical and projected future taxable income or loss by tax jurisdiction. We consider all components of comprehensive income and weigh the positive and negative evidence, putting greater reliance on objectively verifiable historical evidence than on projections of future profitability that are dependent on actions that have not taken place as of the assessment date. We also consider changes to historical profitability of actions that occurred through the date of assessment and objectively verifiable effects of material forecasted events that would have a sustained effect on future profitability, as well as the effect on historical profits of nonrecurring events. We also incorporate the changes to historical and prospective income from tax planning strategies that are prudent and feasible. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is less than certain. We are regularly under audit by the various applicable tax authorities. Although the outcome of tax audits is always uncertain, we believe that we have appropriate support for the positions taken on our tax returns and that our annual tax provisions include amounts sufficient to pay assessments, if any, upon final determination by the taxing authorities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. See additional discussion of our deferred tax assets and liabilities in Note 18 of our consolidated financial statements in Item 8. Retiree benefits - Accounting for pension benefits and other postretirement benefits (OPEB) involves estimating the cost of benefits to be provided well into the future and attributing that cost to the time period each employee works. These plan expenses and obligations are dependent on assumptions developed by us in consultation with our outside advisers such as actuaries and other consultants and are generally calculated independently of funding requirements. The assumptions used, including inflation, discount rates, investment returns, life expectancies, turnover rates, retirement rates, future compensation levels and health care cost trend rates, have a significant impact on plan expenses and obligations. These assumptions are regularly reviewed and modified when appropriate based on historical experience, current trends and future outlook. Changes in one or more of the underlying assumptions could result in a material impact to our consolidated financial statements in any given period. If actual experience differs from expectations, our financial position and results of operations in future periods could be affected. Mortality rates are based in part on the company's plan experience and actuarial estimates. The inflation assumption is based on an evaluation of external market indicators, while retirement and turnover rates are based primarily on actual plan experience. Health care cost trend rates are developed based on our actual historical claims experience, the near-term outlook and an assessment of likely long-term trends. For our largest plans, discount rates are based upon the construction of a yield curve which is developed based on a subset of high-quality fixed-income investments (those with yields between the 40th and 90th percentiles). The projected cash flows are matched to this yield curve and a present value developed which is then calibrated to develop a single equivalent discount rate. Pension benefits are funded through deposits with trustees that satisfy, at a minimum, the applicable funding regulations. For our largest defined benefit pension plans, expected investment rates of return are based on input from the plans' investment advisers regarding our expected investment portfolio mix, historical rates of return on those assets, projected future asset class returns, the impact of active management and long-term market conditions and inflation expectations. We believe that the long-term asset allocation on average will approximate the targeted allocation and we regularly review the actual asset allocation to periodically re-balance the investments to the targeted allocation when appropriate. OPEB and the majority of our non-
U.S.pension benefits are funded as they become due. Actuarial gains or losses may result from changes in assumptions or when actual experience is different from that which was expected. Under the applicable standards, those gains and losses are not required to be immediately recognized in our results of operations as income or expense, but instead are deferred as part of AOCI and amortized into our results of operations over future periods. U.S.retirement plans - Our U.S.defined benefit pension plans comprise 66% of our consolidated defined benefit pension obligations at December 31, 2021. These plans are frozen and no service-related costs are being incurred. Changes in our net obligations are principally attributable to changing discount rates and the performance of plan assets. In October 2017, upon authorization by the DanaBoard of Directors, we commenced the process of terminating one of our U.S.defined benefit pension plans. During the second quarter of 2019, payments were made from plan assets to those plan participants that elected to take the lump-sum payout option. In June 2019, we entered into (a) a definitive commitment agreement by and among Dana, Athene Annuity and Life Company(Athene) and State Street Global Advisors, as independent fiduciary to the plan, and (b) a definitive commitment agreement by and among Dana, Companion Life Insurance Company(Companion) and State Street Global Advisors, as independent fiduciary to the plan. Pursuant to the definitive commitment agreements, the plan purchased group annuity contracts that irrevocably transferred to the insurance companies the remaining future pension benefit obligations of the plan. Plan participant's benefits are unchanged as a result of the termination. We contributed $59to the plan prior to the purchase of the group annuity contracts. The purchase of group annuity contracts was then funded directly by the assets of the plan in June 2019. By irrevocably transferring the obligations to Athene and Companion, we reduced our unfunded pension obligation by approximately $165and recognized a pre-tax pension settlement charge of $256in 2019. 28
Rising discount rates decrease the present value of future pension obligations - a 25 basis point increase in the discount rate would decrease our
U.S.pension liability by about $18. As indicated above, when establishing the expected long-term rate of return on our U.S.pension plan assets, we consider historical performance and forward looking return estimates reflective of our portfolio mix and investment strategy. Based on the most recent analysis of projected portfolio returns, we concluded that the use of a 4.0% expected return in 2022 is appropriate for our U.S.pension plans. See Note 12 to our consolidated financial statements in Item 8 for information about the investing and allocation objectives related to our U.S.pension plan assets. We use a full yield curve approach to estimate the service (where applicable) and interest components of the annual cost of our pension and other postretirement benefit plans. This method estimates interest and service expense using the specific spot rates, from the yield curve, that relate to projected cash flows. We believe this method is a more precise measurement of interest and service costs by improving the correlation between the projected cash flows and the corresponding interest rates. The determination of the projected benefit obligation at year end is unchanged. At December 31, 2021, we have $129of unrecognized losses relating to our U.S.pension plans. Actuarial gains and losses, which are primarily the result of changes in the discount rate and other assumptions and differences between actual and expected asset returns, are deferred in AOCI and amortized to expense following the corridor approach. We use the average remaining service period of active participants unless almost all of the plan's participants are inactive, in which case we use the average remaining life expectancy of inactive participants.
Based on the current funding status of our
See Note 12 to our Consolidated Financial Statements in Section 8 for additional discussion of our pension plan and OPEB obligations.
Acquisitions - From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired, liabilities assumed and any redeemable noncontrolling interests or noncontrolling interests based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage independent third-party valuation specialists when necessary. Estimating fair values can be complex and subject to significant business judgment. We believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to, future expected cash flows from product sales, customer contracts and acquired technologies, and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results. Generally, we have, if necessary, up to one year from the acquisition date to finalize our estimates of acquisition date fair values. Redeemable noncontrolling interests - Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the redeemable noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values. Redeemable noncontrolling interest adjustments of redemption value are recorded in retained earnings. We estimate the fair value of the redemption value using an income based approach based on discounted cash flow projections. In determining fair value using discounted cash flow projections, we make significant assumptions and estimates about the extent and timing of future cash flows, including revenue growth rates, projected EBITDA, discount rates, and terminal growth rates. See additional discussion of redeemable noncontrolling interests in Note 9 of our consolidated financial statements in Item 8.
Goodwilland other indefinite-lived intangible assets - Our goodwill and other indefinite-lived intangible assets are tested for impairment annually as of October 31for all of our reporting units, and more frequently if events or circumstances warrant such a review. We make significant assumptions and estimates about the extent and timing of future cash flows, including revenue growth rates, projected gross margins, discount rates, and exit earnings multiples. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to a high degree of uncertainty. Our utilization of market valuation models requires us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. We use our internal forecasts, which we update quarterly, to make our cash flow projections. These forecasts are based on our knowledge of our customers' production forecasts, our assessment of market growth rates, net new business, material and labor cost estimates, cost recovery agreements with customers and our estimate of savings expected from our restructuring activities. The most likely factors that would significantly impact our forecasts are changes in customer production levels and loss of significant portions of our business. We believe that the assumptions and estimates used in the assessment of the goodwill and other indefinite-lived intangible assets as of October 31, 2021were reasonable. Long-lived assets with definite lives - We perform impairment assessments on our property, plant and equipment and our definite-lived intangible assets whenever events and circumstances indicate that the carrying amounts of the assets may not be recoverable. When indications are present, we compare the estimated future undiscounted net cash flows of the operations to which the assets relate to the carrying amounts of such assets. We utilize the cash flow projections discussed above for property, plant and equipment and amortizable intangibles. We group the assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the undiscounted future cash flows using the life of the primary assets. If the carrying amounts of the long-lived assets are not recoverable from future cash flows and exceed their fair value, an impairment loss is recognized to reduce the carrying amounts of the long-lived assets to their fair value. Fair value is determined based on discounted cash flows, third-party appraisals or other methods that provide appropriate estimates of value. Determining whether a triggering event has occurred, performing the impairment analysis and estimating the fair value of the assets require numerous assumptions and a considerable amount of management judgment. 29
Investments in affiliates - We had aggregate investments in affiliates of
$174at December 31, 2021and $152at December 31, 2020. We monitor our investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If we determine that an other-than-temporary decline in value has occurred, we recognize an impairment loss, which is measured as the difference between the recorded carrying value and the fair value of the investment. Fair value is generally determined using the discounted cash flows (an income approach) or guideline public company (a market approach) methods. Warranty - Costs related to product warranty obligations are estimated and accrued at the time of sale with a charge against cost of sales. Warranty accruals are evaluated and adjusted as appropriate based on occurrences giving rise to potential warranty exposure and associated experience. Warranty accruals and adjustments require significant judgment, including a determination of our involvement in the matter giving rise to the potential warranty issue or claim, our contractual requirements, estimates of units requiring repair and estimates of repair costs. If actual experience differs from expectations, our financial position and results of operations in future periods could be affected. Contingency reserves - We have numerous other loss exposures, such as product liability and warranty claims and matters involving litigation. Establishing loss reserves for these matters requires the use of estimates and judgment regarding risk of exposure and ultimate liability. Product liability and warranty claims are generally estimated based on historical experience and the estimated costs associated with specific events giving rise to potential field campaigns or recalls. In the case of legal contingencies, estimates are made of the likely outcome of legal proceedings and potential exposure where reasonably determinable based on the information presently known to us. New information and other developments in these matters could materially affect our recorded liabilities.
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