DANA INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (in millions of dollars) (Form 10-Q)


Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes to 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 of
Dana 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
the Securities 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 in Maumee, Ohio, and was incorporated in Delaware 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. At March 31, 2022, we employed approximately
40,600 people, operated in 32 countries and had 139 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 ended March 31, 2022
and 2021 are as follows:



                            Three Months Ended March 31,
                            2022                    2021
                                   % of                    % of
                     Dollars      Total      Dollars      Total
Light Vehicle        $    985       39.7 %   $    991       43.8 %
Commercial Vehicle        463       18.7 %        349       15.4 %
Off-Highway               744       30.0 %        635       28.1 %
Power Technologies        288       11.6 %        288       12.7 %
Total                $  2,480                $  2,263



See Note 19 to our Consolidated Financial Statements in Item 1 of Part I for further financial information on 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.



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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 on Asia 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 in Asia 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 in India and 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 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. 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 $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 on December 31, 2023, and $102 remains
available for future share repurchases as of March 31, 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 to March
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 the GKN
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.



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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 Dana TM4
Inc. (formerly TM4 Inc.), Dana TM4 Italia S.r.l. (formerly S.M.E. S.p.A.), Dana
(Beijing) Electric Motor Co., Ltd. (formerly Prestolite E-Propulsion Systems
(Beijing) Limited), Ashwoods Innovations Ltd., Oerlikon Drive Systems, Nordresa
Motors, Inc., Rational Motion GmbH and Pi 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 in Dana TM4 Inc., Dana TM4 Italia
S.r.l., Dana (Beijing) Electric Motor Co., Ltd., and Ashwoods 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 13%, with
growth across all regions, exhibiting a strong rebound returning to at or above
2019 levels as production constraints continue to ease, inventory returns to
more normal levels, and constrained customer demand is fulfilled.



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
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 16%
over the prior year driven by continued improving economic outlook and cyclical
growth.



Medium-duty truck production in North 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 a 10% increase in
production over the prior year. Outside of North America, production of
medium-and heavy-duty trucks in South America declined 22% in 2020 due to COVID
and deteriorating economic conditions. During 2021, production increased 76%
over 2020 as the region recovered from the impact of the pandemic and the age of
existing vehicles drove a replacement cycle for new trucks. The outlook for
South America is for a modest 3% increase in production from the prior year as
local economic conditions remain relatively stable. In contrast to the rest of
the world, Asia Pacific, driven by China, did not experience lower truck
production in 2020, but output slowed by 8% in 2021 as production matched lower
demand, primarily driven by India where the recovery from the pandemic has been
slower than in China. The 2022 outlook for Asia Pacific is for a 9% reduction in
production from the prior year as the Indian market recovery continues to lag.



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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 first quarter 2022 sales coming from outside
the U.S., international currency movements can have a significant effect on our
sales and results of operations. The euro zone countries accounted for 51% of
our first quarter 2022 non-U.S. sales, while India, China and Brazil each
accounted for 10%. Although sales in South Africa are less than 5% of our
non-U.S. sales, the rand has been volatile and significantly impacted sales from
time to time. International currencies weakened against the U.S. dollar in the
first quarter of 2022, decreasing sales by $55. A weaker euro, Thai baht and
Indian rupee were partially offset by a stronger Brazilian real and Chinese
renminbi.



Argentina has experienced significant inflationary pressures the past few years,
contributing to significant devaluation of its currency among other economic
challenges. Our Argentine operation supports our Light Vehicle operating
segment. Our sales in Argentina for the first quarter of 2022 of approximately
$31 are 1% of our consolidated sales and our net asset exposure related to
Argentina was approximately $36, including $14 of net fixed assets, at March 31,
2022. During the second quarter of 2018, we determined that Argentina's economy
met the GAAP definition of a highly inflationary economy. In
assessing Argentina's economy as highly inflationary we considered its
three-year cumulative inflation rate along with other factors. As a result,
effective July 1, 2018, the U.S. 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.



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 pricing actions increased year-over-year
earnings by $271 in 2021. Higher commodity prices decreased earnings in the
first quarter of 2022 and 2021 by $138 and $35, respectively. Material cost
recovery pricing actions increased earnings in the first quarter of 2022 and
2021 by $122 and $18, respectively.





Sales, earnings and cash flow outlook


                                               2022 Outlook         2021        2020
Sales                                        $9,850 - $10,350      $ 8,945     $ 7,106
Adjusted EBITDA                                 $770 - $870        $   795     $   593
Net cash provided by operating activities      ~6% of sales        $   158     $   386
Discretionary pension contributions                 $ -            $     -     $     -
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.



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We have decreased our full year 2022 adjusted EBITDA range to $770 - $870. The
$130 reduction reflects our expectation for continued commodity and non-material
cost inflation through the balance of the year. Our February 2022 outlook
assumed commodity cost increases would begin to dissipate late in the year. We
have increased our 2022 sales range to $9,850 - $10,350. The $225 increase
reflects slightly improved global market demand and additional commodity
recoveries relative to our February 2022 outlook. Adjusted EBITDA Margin is now
expected to be 8.1%, 80 basis-points lower than 2021, reflecting higher margin
net new business and a modest benefit from material recovery and other pricing
actions being more than offset by continued commodity cost increases and
non-material inflation, including higher labor, energy, and transportation
rates. We now expect to generate adjusted free cash flow of approximately $215,
or 2% of sales for 2022, reflecting the benefit of year-over-year higher
adjusted EBITDA, at the mid point of the range, and lower year-over-year use of
cash for working capital. We continue to expect capital spending will be flat in
comparison with 2021.





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



                                                     Three Months Ended March 31,
                                               2022                                2021
                                                                                                            Increase/
                                   Dollars        % of Net Sales       Dollars        % of Net Sales        (Decrease)
Net sales                         $    2,480                          $    2,263                          $          217
Cost of sales                          2,283                 92.1 %        2,012                 88.9 %              271
Gross margin                             197                  7.9 %          251                 11.1 %              (54 )
Selling, general and
administrative expenses                  130                  5.2 %          119                  5.3 %               11
Amortization of intangibles                4                                   4                                       -
Restructuring charges, net                (1 )                                 1                                      (2 )
Other income (expense), net                2                                 (19 )                                    21
Earnings before interest and
income taxes                              66                                 108                                     (42 )
Interest income                            2                                   2                                       -
Interest expense                          31                                  34                                      (3 )
Earnings before income taxes              37                                  76                                     (39 )
Income tax expense                        18                                  22                                      (4 )
Equity in earnings of
affiliates                                 1                                  14                                     (13 )
Net income                                20                                  68                                     (48 )
Less: Noncontrolling interests
net income                                 4                                   1                                       3
Less: Redeemable noncontrolling
interests net loss                        (1 )                                (4 )                                     3
Net income attributable to the
parent company                    $       17                          $       71                          $          (54 )




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



             Three Months Ended
                  March 31,                                                     Amount of Change Due To
                                          Increase/                                     Acquisitions
             2022           2021          (Decrease)        Currency
Effects           (Divestitures)         Organic Change
North
America   $    1,165      $   1,095     $           70     $                -       $                  1     $             69
Europe           801            732                 69                    (52 )                                           121
South
America          172            120                 52                      5                                              47
Asia
Pacific          342            316                 26                     (8 )                       (4 )                 38
Total     $    2,480      $   2,263     $          217     $              (55 )     $                 (3 )   $            275




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Sales in 2022 were $217 higher than in 2021. Weaker international currencies
decreased sales by $55, principally due to a weaker euro, Thai baht and Indian
rupee, partially offset by a stronger Brazilian real and Chinese renminbi. The
organic sales increase of $275, or 12%, resulted from improved
heavy-vehicle market demand and the conversion of sales backlog. Pricing actions
and recoveries, including material commodity price and inflationary
cost adjustments, increased sales by $160.



The North America organic sales increase of 6% was driven principally by
stronger medium- and heavy-duty truck production volumes, higher light-vehicle
engine production levels and the conversion of sales backlog, partially offset
by lower light-duty truck production volumes. First quarter 2022 Classes 5-7 and
Class 8 truck production were up 4% and 2%, respectively, while light-vehicle
engine production was up 2% compared with the first quarter of 2021.
Year-over-year full-frame light-truck production was down 1% in the first
quarter of 2022. Excluding currency effects, sales in Europe were up 17%
compared with 2021. With our significant Off-Highway presence in the region,
stronger construction/mining and agricultural markets were a major factor.
Organic sales in this operating segment were up 23% compared with the first
quarter of 2021. A 1% decrease in year-over-year light-duty truck production
levels and a 12% decrease in year-over-year light-vehicle engine production
levels tempered our organic European sales increase. Excluding currency effects,
first quarter 2022 sales in South America increased 39% compared to 2021 due
primarily to improved light- and medium/heavy-duty truck production. First
quarter light-duty truck production was up 9% and medium/heavy-duty truck
production was up 26%. Excluding currency effects and the impact of
divestitures, sales in Asia Pacific increased 12% compared to 2021 due to a
stronger construction/mining market.



Cost of sales and gross margin - Cost of sales for the first quarter of 2022
increased $271, or 13%, when compared to 2021. Cost of sales as a percent of
sales was 320 basis points higher than in the previous year. Incremental margins
provided by increased sales volumes were more than offset by higher
year-over-year commodity costs of $138, non-material inflationary cost impacts
of $70 and operational inefficiencies primarily attributable to continued global
supply chain disruptions and frequent customer order changes made with little to
no advance notification. Commodity cost increases are being driven by higher
prices for certain grades of steel and aluminum. Non-material inflation includes
higher labor, energy and transportation rates. Continued material cost savings
provided a partial offset, reducing costs of sales by approximately $19.



Gross margin of $197 for the first quarter of 2022 decreased $54 from 2021.
Gross margin as a percent of sales was 7.9% in the first quarter of 2022,
320 basis points lower than in 2021. The degradation in gross margin as a
percent of sales was driven principally by the cost of sales factors referenced
above. In addition, gross margin during 2022 was negatively impacted by material
cost recovery mechanisms with our customers lagging material costs increases
charged by our suppliers by approximately 90 days.



Selling, general and administrative expenses (SG&A) - SG&A expenses in 2022 were
$130 (5.2% of sales) as compared to $119 (5.3% of sales) in 2021. SG&A expenses
were $11 higher in 2022 primarily due to higher salaried employee wages and
benefits, increased trade show and marketing activities, and higher travel
expenses and professional fees.



Amortization of intangible assets – The amortization expense was $4 in 2022 and 2021.

Restructuring charges, net – Restructuring charges, net were ($1) in the first quarter of 2022 and $1 in the first quarter of 2021.

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Other income (expenses), net – The following table presents the main components of other income (expenses), net.


                                                          Three Months Ended
                                                               March 31,
                                                         2022           2021

Components of non-service costs of pension plans and other additional expenses $ – $

  (2 )
Foreign exchange gain                                         3             

1

Strategic transaction expenses                               (4 )            (3 )
Loss on investment in Hyliion                                               (17 )
Loss on disposal group held for sale                                         (7 )
Other, net                                                    3               9
Other income (expense), net                             $     2       $     (19 )




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. See Note 11 for
additional information.



In conjunction with our acquisition of ODS, we acquired a controlling financial
interest in a joint venture in China. We were required to divest our interest in
this joint venture as it violates competitive restrictions of another of our
China joint venture shareholder agreements. During the first quarter of 2021, we
recorded an impairment charge of $7, as we determined the carrying value of the
disposal group exceeded its fair value less costs to sell. We completed the
disposal of this business in April 2021.



Interest income and interest expense - Interest income was $2 in both 2022 and
2021. Interest expense decreased from $34 in 2021 to $31 in 2022, primarily due
to lower interest rates on outstanding borrowings, partially offset by higher
debt levels. Average effective interest rates, inclusive of amortization of debt
issuance costs, approximated 4.6% in 2022 and 5.5% in 2021.



Income tax expense - We reported income tax expense of $18 and $22 for the first
quarter of 2022 and 2021, respectively. Our effective tax rates were 49% and 29%
for the first quarter of 2022 and 2021. Our effective income tax rates vary from
the U.S. federal statutory rate of 21% due to establishment, release and
adjustment of valuation allowances in several countries outside the U.S.,
different statutory tax rates outside the U.S. and withholding taxes related to
repatriations of international earnings. The effective income tax rate may vary
significantly due to fluctuations in the amounts and sources, both foreign and
domestic, of pretax income and changes in the amounts of nondeductible expenses.



Equity in earnings of affiliates - Net earnings from equity investments was
$1 in 2022 and $14 in 2021. Equity in earnings from DDAC was $1 in 2022 and
$13 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.



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Segment operating results (2022 vs. 2021)


Light Vehicle



                                             Three Months
                        Sales       Segment EBITDA       Segment EBITDA Margin
2021                    $  991     $            100                        10.1 %
Volume and mix             (26 )                 (9 )
Divestitures                (3 )
Product line transfer      (23 )                 (2 )
Performance                 56                  (58 )
Currency effects           (10 )
2022                    $  985     $             31                         3.1 %




Light Vehicle sales in the first quarter of 2022, exclusive of currency effects,
the impact of divestitures and the product line transfer to Commercial Vehicle,
were 3% higher than 2021 reflecting generally weaker global markets being
partially offset by the conversion of sales backlog. Year-over-year North
America full-frame light-truck production decreased 1% while light-truck
production in Europe and Asia Pacific decreased 1% and 2%, respectively, and
light-truck production in South America increased 9%. Net customer pricing and
cost recovery actions increased year-over-year sales by $56.



Light Vehicle first-quarter segment EBITDA decreased by $69 in 2022. Lower sales
volumes decreased year-over-year earnings by $9 (35% decremental margin). The
year-over-year performance-related earnings decrease was driven by commodity
cost increases of $61, inflationary cost increases of $20, higher program launch
costs of $2, higher premium freight costs of $2 and operational inefficiencies
of $37. Partially offsetting these performance-related decreases were net
customer pricing and cost recovery actions of $56, material cost savings of $7
and lower warranty costs of $1.



Commercial Vehicle



                                             Three Months
                        Sales       Segment EBITDA       Segment EBITDA Margin
2021                    $  349     $             15                         4.3 %
Volume and mix              51                   10
Product line transfer       23                    2
Performance                 41                  (17 )
Currency effects            (1 )
2022                    $  463     $             10                         2.2 %




Commercial Vehicle sales in the first quarter of 2022, exclusive of currency
effects and the product line transfer from Light Vehicle, were 26% higher than
2021 reflecting mixed global markets. Year-over-year North America Class 8
production was up 2% and Classes 5-7 production was up 4%. Year-over-year
medium/heavy-truck production in South America was up 26%. Year-over-year
medium/heavy-truck production in Europe and Asia Pacific were down 8% and 40%,
respectively. Net customer pricing and cost recovery actions further increased
year-over-year sales by $41.



Commercial Vehicle first-quarter segment EBITDA decreased by $5 in 2022. Higher
sales volumes increased year-over-year earnings by $10 (20% incremental margin).
The year-over-year performance-related earnings decrease was driven by commodity
cost increases of $33, inflationary cost increases of $20, higher incentive
compensation of $1 and operational inefficiencies of $15. Partially offsetting
these performance-related decreases were net customer pricing and cost recovery
actions of $41, lower premium freight costs of $7 and material cost savings of
$4.



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Off-Highway



                                        Three Months
                   Sales       Segment EBITDA       Segment EBITDA Margin
2021               $  635     $             79                        12.4 %
Volume and mix         91                   24
Performance            53                    2
Currency effects      (35 )                 (5 )
2022               $  744     $            100                        13.4 %




Off-Highway sales in the first quarter of 2022, exclusive of currency effects,
were 23% higher than 2021 reflecting improved global markets and the conversion
of sales backlog. Year-over-year global construction/mining and agricultural
equipment markets reflected marked improvement with global production increasing
10% and 6%, respectively. Net customer pricing and cost recovery actions further
increased year-over-year sales by $53.



Off-Highway first-quarter segment EBITDA increased by $21 in 2022. Higher sales
volumes increased year-over-year earnings by $24 (26% incremental margin). The
year-over-year performance-related earning increase was driven by net customer
pricing and cost recovery actions of $53, material cost savings of $7 and lower
warranty costs of $2. Partially offsetting these performance-related increases
were commodity cost increases of $30, inflationary cost increases of $25, higher
premium freight costs of $4 and operational inefficiencies of $1.



Power Technologies



                                        Three Months
                   Sales       Segment EBITDA       Segment EBITDA Margin
2021               $  288     $             41                        14.2 %
Volume and mix         (1 )
Performance            10                  (11 )
Currency effects       (9 )                 (1 )
2022               $  288     $             29                        10.1 %




Power Technologies primarily serves the light-vehicle market but also sells
product to the medium/heavy-truck and off-highway markets. Power Technologies
sales in the first quarter of 2022, exclusive of currency effects, were 3%
higher than 2021 reflecting generally weaker global markets partially offset by
the conversion of sales backlog. Year-over-year Europe, South America and Asia
Pacific light-vehicle engine production was down 12%, 11% and 3% compared to
2021. Year-over-year North America light-vehicle engine production was up 2%
compared to 2021. Net customer pricing and cost recovery actions increased
year-over-year sales by $10.



Power Technologies first-quarter segment EBITDA decreased by $12 in 2022. Lower
sales volumes had a negligible impact on earnings. The year-over-year
performance-related decrease was driven by commodity cost increases of $14,
inflationary cost increases of $5, higher warranty costs of $1, higher program
launch costs of $1 and operational inefficiencies of $2. Partially offsetting
these performance-related decreases were net customer pricing and cost recovery
actions of $10, material cost savings of $1 and lower premium freight costs of
$1.



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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
                                               March 31,
                                         2022            2021
Net income                             $      20       $      68
Equity in earnings of affiliates               1              14
Income tax expense                            18              22
Earnings before income taxes                  37              76
Depreciation and amortization                 97              95
Restructuring charges, net                    (1 )             1
Interest expense, net                         29              32
Loss on investment in Hyliion                                 17
Loss on disposal group held for sale                           7
Other*                                         8               6
Adjusted EBITDA                        $     170       $     234


* Other includes stock-based compensation expense, non-service cost items of

pension and OPEB costs, strategic transaction expenses and other items. To 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 free cash flow generated by (used in) operating activities with adjusted free cash flow.


                                                        Three Months Ended
                                                             March 31,
                                                         2022           2021

Net cash provided by (used in) operating activities $ (121 ) $27
Purchases of property, plant and equipment

                  (116 )        (53 )
Free cash flow                                              (237 )        (26 )
Discretionary pension contribution                             -            -
Adjusted free cash flow                               $     (237 )     $  (26 )




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Liquidity


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



Cash and cash equivalents                              $   259
Less: Deposits supporting obligations                       (1 )
Available cash                                             258
Additional cash availability from Revolving Facility       864
Marketable securities                                       19
Total liquidity                                        $ 1,141




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 $864 at March 31, 2022 under the Revolving Facility after
deducting $265 of outstanding borrowings and $21 of outstanding letters of
credit.



The components of our March 31, 2022 consolidated cash balance were as follows:



                                                U.S.           Non-U.S.          Total
Cash and cash equivalents                   $         73     $         99     $        172
Cash and cash equivalents held as
deposits                                                                1                1
Cash and cash equivalents held at less
than wholly-owned subsidiaries                         3               83               86
Consolidated cash balance                   $         76     $        183     $        259




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.



At March 31, 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.



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Cash Flow


The following table summarizes our consolidated statement of cash flows:


                                                               Three Months Ended
                                                                    March 31,
                                                               2022           2021
Cash used for changes in working capital                     $    (211 )     $  (133 )
Other cash provided by operations                                   90      

160

Net cash provided by (used in) operating activities               (121 )    

27

Net cash used in investing activities                             (117 )         (73 )
Net cash provided by (used in) financing activities                229           (16 )
Net decrease in cash, cash equivalents and restricted cash   $      (9 )     $   (62 )



Operating activities – Excluding working capital, other operating cash flows were $90 in 2022 and $160 in 2021. The year-over-year decrease is primarily due to lower operating income.



Working capital used cash of $211 and $133 in 2022 and 2021. Cash of $325 and
$257 was used to finance receivables in 2022 and 2021, respectively. The higher
level of cash used to finance receivables in 2022 is due to higher
year-over-year first quarter sales driven by strong heavy-vehicles markets. Cash
of $63 and $137 was used to fund higher inventory levels in 2022 and 2021,
respectively. 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
$177 and $261 in 2022 and 2021, respectively. The increase in accounts payable
and other net liabilities in 2022 was principally driven by higher raw material
purchases in the first quarter of 2022.



Investing activities - Expenditures for property, plant and equipment were
$116 and $53 during first quarter of 2022 and 2021. The increase in capital
spending during the first quarter of 2022 is in support of awarded next
generation programs and new business. During the first quarter of 2021, we paid
$17, net of cash acquired, to acquire an additional 51% interest in Pi Innovo.
The acquisition of the additional ownership interest provided us with a 100%
ownership interest in Pi Innovo. During the first quarter of 2022 and 2021,
purchases of marketable securities were largely funded by proceeds from sales
and maturities of marketable securities.



Financing activities - During the first quarter of 2022, we had net borrowings
of $265 on our Revolving Facility. During the first quarter of 2021 we paid
financing costs of $2 to amend our credit and guaranty agreement, increasing our
Revolving Facility to $1,150 and extending its maturity to March 25, 2026. We
used cash of $14 for dividend payments to common stockholders during both the
first quarter of 2022 and 2021. We used cash of $25 to repurchase common shares
under our share repurchase program during the first quarter of 2022.



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Off-balance sheet arrangements



There have been no material changes at March 31, 2022 in our off-balance sheet
arrangements from those reported or estimated in the disclosures in Item 7 of
our 2021 Form 10-K.



Contractual Obligations


There have been no 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 three months ended March 31, 2022. See Note 1 to our consolidated
financial statements in this Form 10-Q for a discussion of new accounting
guidance adopted during the first three months of 2022.

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