Meritor Acquisition and 2022 Financial Results
Table of Contents
PATENTS AND TRADEMARKS
We own or control a significant number of patents and trademarks relating to the products we manufacture. These patents and trademarks were granted and registered over a
period of years. Although these patents and trademarks are generally considered beneficial to our operations, we do not believe any patent, group of patents or trademark (other
than our leading brand house trademarks) is significant to our business.
SEASONALITY
While individual product lines may experience modest seasonal variation in production, there is no material effect on the demand for the majority of our products on a quarterly
basis with the exception that our Power Systems segment normally experiences seasonal declines in the first quarter due to general declines in construction spending during this
period.
LARGEST CUSTOMERS
We have thousands of customers around the world and have developed long-standing business relationships with many of them. PACCAR is our largest customer, accounting
for 16 percent of our consolidated net sales in 2022, 15 percent in 2021 and 15 percent in 2020. We have long-term supply agreements with PACCAR for our heavy-duty and
medium-duty engines and aftertreatment systems. While a significant number of our sales to PACCAR are under long-term supply agreements, these agreements provide for
particular engine requirements for specific vehicle models and not a specific volume of engines or aftertreatment systems. PACCAR is our only customer accounting for more
than 10 percent of our net sales in 2022. The loss of this customer or a significant decline in the production level of PACCAR vehicles that use our engines would have an
adverse effect on our results of operations and financial condition. We have supplied engines to PACCAR for 78 years. A summary of principal customers for each operating
segment is included in our segment discussion.
In addition to our agreement with PACCAR, we have long-term heavy-duty and medium-duty engine and aftertreatment system supply agreements with Traton and Daimler.
We also have an agreement with Stellantis to supply engines for its Ram trucks. Collectively, our net sales to these four customers, including PACCAR, were 36 percent of our
consolidated net sales in 2022, 33 percent in 2021 and 32 percent in 2020. Excluding PACCAR, net sales to any single customer were less than 8 percent of our consolidated net
sales in 2022, less than 8 percent in 2021 and less than 7 percent in 2020. These agreements contain standard purchase and sale agreement terms covering engine, aftertreatment
and engine parts pricing, quality and delivery commitments, as well as engineering product support obligations. The basic nature of our agreements with OEM customers is that
they are long-term price and operations agreements that help provide for the availability of our products to each customer through the duration of the respective agreements.
Agreements with most OEMs contain bilateral termination provisions giving either party the right to terminate in the event of a material breach, change of control or insolvency
or bankruptcy of the other party.
BACKLOG
As we adjust to the current global supply chain challenges, global inflationary pressures and other global macroeconomic forces, we are experiencing supply chain disruptions,
incremental costs and related challenges throughout the supply chain. The supply chain disruptions are impacting our business as well as our suppliers and customers resulting
in longer lead times in some of our businesses. We have supply agreements with some truck and off-highway equipment OEMs, however most of our business is transacted
through open purchase orders. These open orders are historically subject to month-to-month releases and are subject to cancellation on reasonable notice without cancellation
charges and therefore are not considered firm. We are working closely with our suppliers as discussed in the Supply section above as well as with customers to meet the demand
and work through backlogs as efficiently as possible.
RESEARCH AND DEVELOPMENT
In 2022, we continued to invest in future critical technologies and products. We will continue to make investments to develop new products and improve our current
technologies to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas powered engines and related
components as well as development activities around battery electric, fuel cell electric and hydrogen engine solutions.
Our research and development programs are focused on product improvements, product extensions, innovations and cost reductions for our customers. Research and
development expenditures include salaries, contractor fees, building costs, utilities, testing, technical information technology expenses, administrative expenses and allocation of
corporate costs and are expensed, net of contract reimbursements, when incurred. From time to time, we enter into agreements with customers and government agencies to fund
a portion of the research and development costs of a particular project. When not associated with a sales contract, we generally account for these reimbursements as an offset to
the related research and development expenditure. Research and development expenses, net of contract reimbursements, were $1.2 billion in 2022, $1.1 billion in 2021 and $903
million in 2020. Contract reimbursements were $110 million, $104 million and $86 million in 2022, 2021 and 2020, respectively.
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