Moving into markerless motion capture
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Move.ai is an interesting new markerless motion capture technology that is being released next month. Here’s a short preview, alongside a quick glimpse into how it’s being used at Corridor Digital.
Motion capture has come a very long way in the decades since it was first invented, and the next step on its way to being able to run on consumer level equipment is exemplified by move.ai which uses arrays of iPhones or GoPros for markerless motion capture. Not just brand new, top of the range models either, but anything down to an iPhone 8 or a GoPro HERO8. Stick them on some tripods, point them at your subject, boot up the app, and off you go.
The company reckons that using an array of six phones will give you optical-grade motion capture of a 6m x 6m volume with up to three people in the scene. The data can then be output into Unreal, Unity, Omniverse….pretty much anywhere you want to send it actually. It’s not a realtime process, the data is processed in the cloud before you can view it, but it is a cost-effective one; the company reckons you can have a set-up rigged in under seven minutes and when the service launches next month it’s going to be priced at $365 for 12 month’s access.
This is the sort of thing it can do.
Beta feedback
Behind all this is a patented combination of AI, computer vision and machine learning software, which is just what you need to capture high fidelity motion without any suits or markers. And feedback from the beta tests so far is positive.
Corridor Digital is a case in point. The company is a leading independent virtual production studio probably best known for viral, action-filled short-form online videos series such as Rush and Lifeline. Having used markerless capture originally in the days of the Kinect, it started to examine the market to see what other technology was available.
Niko Pueringer, Corridor Digital Co-founder, says: “We discovered Move.ai on Discord, and from its YouTube community. Its ability to produce high quality motion capture data using markerless tech, simply using iPhones or GoPros, immediately captured our attention.
“From our initial research, we decided this was an avenue to explore. The clinching factor was its simplistic workflow, enabling us to achieve our goal of speeding up our creative process. Being able to discuss an idea and instantly try it out using only a few team members, to see if it’s worth progressing, is invaluable.”
To date, Corridor Digital has used Move.ai’s tech in beta testing, and is using a variety of equipment to explore its full range of capabilities. The test setups have been wide ranging, from multiple pieces of equipment such as a green screen painted white, iPhones, and an iPad, to a multiple-camera setup, and a simple two-phone test, specifically concentrating on capturing hand movement.
Corridor Digital also tested the tech using different numbers of team members, and was able to capture footage with only two people. The team also discovered that while Move.ai’s tech isn’t real-time, after the initial calibration period was done being able to process shots in parallel kept the pace of output on par with a normal day of production using motion capture suits. Another critical feature is the real-world placement and interaction with the ground and surroundings as having accurate world-space placement for mocap unlocks a lot of interesting movement possibilities.
Apart from the lower costs involved due to its use of iPhones and GoPros, Corridor reports two other winning attributes: flexibility around shooting location and the amount of physical space captured, and its ability to ‘pick up and shoot’.
“In time, once we’ve fully realised the potential of markerless motion capture on our smaller productions and the tech itself has become more robust, we can begin designing full narratives around this workflow,” says Pueringer. “Move.ai’s tech is not only fast, low budget, and fun, but it also perfectly demonstrates the future of motion capture. We’re excited to see how it advances and improves as we use it!”
Corridor Digital collaborates with Joel Haver and Movella to create viral video
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Movella, a leading full-stack provider of sensors, software, and analytics, has partnered with internet sensation Corridor Digital to deliver Hollywood-scale 3D characters. Corridor Digital’s recent viral video project featuring comedian, Joel Haver, has pushed the boundaries of what Movella’s Xsens motion capture technology for digitizing movement can do, treating assets rendered in Unreal Engine as real-time footage.
Founded in 2000 by VFX artists Sam Gorski and Niko Pueringer, Corridor Digital provides an entertainment and education platform to its 15M subscribers. Movella’s Xsens motion capture system enabled Corridor Digital to remove the high barrier to the creation of 3D character animation.
“When we first got our hands on the Xsens suit we knew it was the solution to our character animation challenges,” says Gorski. “Now, we have the ability to create animations driven by human actors instead of laboriously making them in different software packages. The greatest asset the Xsens technology has given us is the incredibly clean data capture, which has completely changed our workflow.”
Working with Haver to produce long takes of improvised comedy, Corridor Digital recognized the Xsens Link system’s ability to push data directly into Unreal Engine. This enabled fast rendering of VFX proxies that allowed the team to work with extended clips in the same way that editors would in a live-action project.
“Our partnership with Corridor Digital has enabled some of the most imaginative and exciting content on the internet right now,” says CJ Hoogsteen, VP Sales & Marketing at Movella. “It’s a testament to the ingenuity of their team that they’ve managed to create such cutting-edge content, free from traditional optical camera studio systems. This is a great example of Movella’s Xsens technology driving the democratization of animation. We can’t wait to see what they’ll do next.”
Video link: Hollywood Stuntman Meets the Guy who Stole His job
Making of: Exposing Hollywood’s Most Thankless Job ft. Joel Haver
Corridor Digital’s videos can be found on their YouTube channels:
https://www.youtube.com/@CorridorCrew
https://www.youtube.com/@Corridor
About Movella
Movella is a leading full-stack provider of sensors, software, and analytics that enable the digitization of movement. Movella serves the entertainment, health & sports, and automation & mobility markets. Our innovations enable our customers to capitalize on the value of movement by transforming data into meaningful and actionable insights. Partnering with leading global brands such as Electronic Arts, EPIC Games, 20th Century Studios, Netflix, Toyota, Siemens, and over 500 sports organizations, Movella is creating extraordinary outcomes that move humanity forward. To learn more, visit http://www.movella.com.
What’s the Truth About That One Shot From ‘Avatar: The Way of Water’
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Fans and filmmakers alike simply can’t tell if the shot was created using a real or camera VFX.
In the James Cameron sequel, Avatar: The Way of Water, there is a simple pickup shot of a digital character wrapping a leather strap around a blue arm, much like a bronco rider would in real life. The image is ordinary, but it’s also compelling due to the nature of this film’s production, so much so that it’s got fans and digital artists alike arguing about whether it’s real, CGI, or both. For many, you just can’t tell.
The original Avatar, made in 2009, introduced the Na’vi, a blue-skinned race of extraterrestrial giants who are battling humans for control of their planet, Pandora. Fifteen years later, the sequel shows us what has happened to this tribe. While some fans are saying there’s nothing new about the effects-laden sequel, others are looking at even the most mundane of shots and wondering how they were really done.
Diving Into The Deep Blue
The more powerful computer systems get, the more complicated visual effects can be. In Avatar: The Way of Water, those effects had to be constructed around a mostly underwater environment, most likely borrowing from James Cameron’s obsession with our own ocean. The post-production team at Wētā FX created a host of new visual effects techniques, including underwater motion capture, which has changed the way filmmakers will be looking at complicated CGI moving forward.
Credit: 20th Century Studios
“This is coming from Jim’s desire to treat the digital world and the real world the same,” Wētā FX director Joe Letteri said in an interview appearing in a special section of the Below-the-Line issue of TheWrap’s awards magazine.
“He wanted to use the camera like a real camera, see his actors, see the lighting, art-direct the shots, move sets, and dressing around,” Letteri added. “This was the core of building all of that together. And it paid off because it carried over into the live-action shoot.”
Letteri said that traditionally, visual effects adopt a layer approach, mainly a holdover from the days of compositing on film using bluescreen. Think Adobe’s Photoshop and After Effects workflows.
With Avatar: The Way of Water, they had to reimagine how VFX could be accomplished in more complex situations. The team developed a technique that uses (you guessed it) artificial intelligence to interact more naturally with the environment.
“But if you imagine a character walking around a tree within one shot, at one point they’re in front of it and another they’re behind it,” Letteri said. “We created a neural network to train for what we were shooting.”
With that kind of focus, it was inevitable that audiences would see visual effects shots that they weren’t altogether certain were made with a computer.
That One Shot
But there is one shot that has people arguing on Reddit, YouTube, and even Twitter about how it was created.
It is the one of Jake Sully (Sam Worthington), who is now a full-fledged Na’vi. In this shot, he is cinching up a leather strap to a saddle on top of an iLu, a dolphin-like creature, so he can keep a better grip to stay on the animal.
The shot lasts about a second, maybe two, but it has fans and visual effects artists alike arguing about digital water bubbles, skin illumination, and surface tension, while others are convinced it was a simple live shot of an actor. It turns out it was a little bit of both.
Credit: 20th Century Studios
The team at Wētā FX crafted a real-world saddle for the iLu, and used it for the main live-action plate. “We actually shot that in a kid’s pool,” added visual effects supervisor Eric Saindon. “And what we ended up using out of it was in between where everyone was guessing. We replaced the arm and the body, and we had to get an iLu in there. The reality falls between the Reddit conversation and the recent articles that said it was all live-action.”
For all the amazing technology that the Avatar films have created, this one shot that everyone has been talking about was the most traditional of the bunch. A simple plate with some elements replaced with CGI.
Don’t Reinvent The Wheel
Wētā’s ever-growing list of new effects patents shows that the VFX company has developed the tools needed to make the shot look as realistic as possible. Now, it’s even got other professional visual effects artists debating how they did it, and that ends up being the ultimate compliment.
Like any magic trick, it makes one want to know how they did that. The fact that it is one very simple shot that makes people want to know even more reminds us that the fundamentals of filmmaking and basic VFX can make something great. Sometimes, you don’t really need to reinvent the wheel. You just have to make excellent use of the wheel.
Let us know what you think of the shot in the comments below!
Avatar 2: How much has CGI really improved since 2009?
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A technologically unprecedented spectacle. That seemed to be the consensus opinion from audiences and critics alike when Avatar premiered in 2009. Nevermind the critiques about the blockbuster’s run-of-the-mill story — Avatar decidedly brought a new level of photorealism to sci-fi epics through computer-generated imagery (CGI), stereoscopic filming techniques, and state-of-the-art motion-capture technology.
That was 13 years ago. How has CGI improved since?
It depends whom you ask. One answer, or at least a 109-second glimpse of one, comes in the recently released trailer for Avatar: The Way of Water, which is set to release December 2022 and will be followed by three other entries in the series.
Commenting on the CGI featured in the trailer, reactions ranged from “stunning” to “looks like a crappy cartoon.”
On the more objective side, the $250-million sequel does seem like it will up the ante on CGI through its use of new motion-capture technology, where actors wear suits outfitted with markers so computers can record their movements and overlay digital animation on top of them.
The motion-capture tech in the Avatar sequel was specifically designed to cleanly capture actors’ movements underwater. Director James Cameron told Collider that it took more than a year for the new system to overcome the optical problems that cameras face when trying to film underwater; he said that the interaction between air and water creates a “moving mirror [that] reflects all the dots and markers” that actors wear as part of motion-capture suits.
But why go through the hassle of filming underwater — not to mention, training actors to hold their breath for minutes at a time — when visual effects artists could have simulated the underwater scenes through CGI?
Fusing the real with the fake: When CGI is convincing, it’s usually because the scenes include some elements from the real world to keep the fake imagery grounded, such as real people or real environments.
Compare the new Avatar trailer to scenes from the 2018 movie Aquaman, for example. Unlike Avatar, the Aquaman filmmakers shot the “underwater” scenes using a technique called “dry for wet,” in which actors were suspended from wires and filmed against a blue screen in a studio. Lost in this technique are the more realistic physics and lighting effects gained from filming in actual water.
The same rule applies above ground. In 2021’s Dune, much of the film’s outdoor scenes were shot in the natural sunlight of the deserts of Jordan and the United Arab Emirates, imbuing the shots with realistic lighting. To further boost realism, the filmmakers used actual helicopters to depict the ornithopters in order to capture how the aircraft kick up sand in real life.
CGI was obviously used to render the ornithopters, giant sandworms, and other impossible shots. But the filmmakers inserted these visual effects after filming in real environments against a “sandscreen” — a greenscreen modified to better match the colors of the desert.
In contrast, the visuals of completely computer-generated environments tend to look unrealistic. A character’s face might maintain the same lighting even though they just stepped into a dark corridor, or bombs are exploding around them.
Physics also helps to keep CGI grounded. With motion-capture technology, for example, digital graphics are overlaid atop the facial and body movements of real people, as was used in films like Avatar, War for the Planet of the Apes, and Avengers: Infinity War.
But when characters are rendered completely through CGI, as was the case in one scene from the final battle in Black Panther, the results can look cartoonish. That’s because it essentially is a high-budget cartoon.
After all, no cameras are used in scenes that are completely computer-generated. That can make for a jarring viewing experience, where the audience’s point of view is moving around in ways that would be impossible for a conventional camera rig.
So, is CGI getting worse? Technologically, the answer is definitely no. Compared to 2009, visual effects artists have access to better and more affordable software and motion-capture techniques. But that doesn’t mean CGI is always used to good effect.
CGI overuse: One common criticism of Hollywood’s use of CGI is that it was once a complimentary dish but now it’s the main course.
In 1993’s Jurassic Park, for example, Steven Spielberg decided to use CGI instead of stop-motion animation (the more conventional method at the time) to render about half of the dinosaurs seen in the movie. It was among the first movies to convincingly depict animals through CGI.
And, surprisingly, the CGI still holds up. Compare the 1993 movie to 2015’s Jurassic World: which feels more immersive? Jurassic World might have slicker CGI, but Jurassic Park is arguably more immersive — a feat achieved through balancing some pretty impressive CGI with controlled animatronics, puppets, and clever photography.
To put it more objectively: Jurassic Park featured about six minutes of CGI, while Jurassic World included about 40 times as many CGI shots.
That’s not to say that more CGI necessarily equals a worse movie. It’s more about how it’s used. After all, most modern films, even romantic comedies and dramas, use CGI in ways you might not even notice, such as to edit props out of the background, populate an empty stadium with roaring crowds, or depict a car accident.
Even today’s best practical-effects movies use CGI. For example, 2015’s Mad Max: Fury Road was lauded specifically for not leaning on CGI and instead opting for good old-fashioned stunts, pyrotechnics, and practical effects, even though about 2,000 of the movie’s 2,700 shots contained CGI in some form.
Why did it go over so well with critics, many of whom seemed exhausted with CGI around 2015? It could be that the CGI was used to complement (mostly) real shots, not to make reality itself.
Here’s how Tenet director Christopher Nolan put this concept to the Directors Guild of America in 2012: “There are usually two different goals in a visual effects movie. One is to fool the audience into seeing something seamless, and that’s how I try to use it. The other is to impress the audience with the amount of money spent on the spectacle of the visual effect, and that, I have no interest in.”
Money and coordination problems: Granted, movies like Fury Road and Avatar were backed by visionary directors and mega budgets. That’s a rarity. For lower-budget movies, or movies for which studios want to spend as little as possible, CGI often winds up looking clunky and unrealistic.
It’s typically not the fault of visual effects artists. The problem lies in the business model. At the beginning of a movie’s production, a studio might contract a visual effects company to generate 500 shots for $10 million as part of a “fixed bid.”
But the studio will often demand that changes be made to those 500 shots, for which visual effects artists might spend 100 hours per week working on. Why? It could be creative decisions, misunderstandings, production setbacks, or the fact that some modern movies begin production without a definitive third act in mind.
Whatever the reason, the studio does not pay additional money for those changes to be made; from their perspective, they paid for 500 shots, changes or no changes. Ultimately, the visual effects company gets stuck paying the extra expenses and doing extra labor.
To visual effects artist Jack Fulmer, this uncoordinated and overly demanding workflow often makes movies worse.
“If you’re not a visionary, or if you don’t have a visionary involved in a project, and it relies heavily on visual effects, it’s not going to succeed,” Fulmer said in Life After Pi, a 2014 documentary that overviewed the visual effects company Rhythm & Hues Studios, which won an Academy Award for its work on 2012’s Life of Pi just weeks after declaring bankruptcy.
There could be a very simple reason why CGI might seem as if it’s getting worse: we’re no longer impressed by it. After enough action blockbusters and entries in the Marvel Cinematic Universe, we might not notice incremental improvements in CGI, or maybe we only notice CGI when it’s glaringly bad.
Bad CGI is the antithesis of immersion. When the physics of a person’s movements seem unnatural, or when it’s clear that people or objects are not really in the environment depicted on the screen, you sense it, consciously or subconsciously.
What remains to be seen is whether CGI will become so polished that these optical stumbling blocks are no longer an issue. To Christopher Nolan, that’ll never happen.
“However sophisticated your computer-generated imagery is, if it’s been created from no physical elements and you haven’t shot anything, it’s going to feel like animation,” Nolan told the Directors Guild of America.
Then again, nobody ever complained about the lack of hyperrealistic physics in Toy Story.
We’d love to hear from you! If you have a comment about this article or if you have a tip for a future Freethink story, please email us at [email protected]
DANA INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) (form 10-K)
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Discussion and analysis of our results of operations pertaining to 2021 compared to 2020 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, 2021 . 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 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. In 2022, 48% of our sales came from North American operations and 52% from operations throughout the rest of the world. Our sales by operating segment were Light Vehicle - 40%, Commercial Vehicle - 20%, Off-Highway - 29% and Power Technologies - 11%.
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 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. 14
Table of Contents
Over the last several years we continue to deliver on our goal to accelerate vehicle electrification through both core Dana technologies and targeted strategic acquisitions and are positioned today to lead the market. The nine recent investments in electrodynamic expertise and technologies combined with Dana’s longstanding mechatronics capabilities has allowed us to develop and deliver fully integrated e-Propulsion systems that are power-dense and achieve optimal efficiency through the integration of the components that we offer due to our mechatronics capabilities. With recent electric vehicle program awards, we are well on our way to achieving our growth objectives in this emerging market. The development and implementation of our enterprise strategy is positioning Dana to grow profitably due to increased customer focus as we leverage our core capabilities, expand into new markets, develop and commercialize new technologies, including for electric vehicles. Capital Structure Initiatives
In addition to investing in our business, we plan to prioritize a balanced allocation of capital while maintaining a strong financial position. We continue to drive toward investment grade metrics as part of our balanced allocation approach with a goal of further strengthening our balance sheet.
Shareholder return actions - When evaluating capital structure initiatives, we balance our growth opportunities and shareholder value initiatives with maintaining a strong balance sheet and access to capital. Our strong financial position has enabled us to simplify our capital structure while providing returns to our shareholders in the form of cash dividends and a reduction in the number of shares outstanding. Through the first quarter of 2020, we had declared and paid quarterly common stock dividends for thirty-three consecutive quarters. In response to the COVID pandemic, we temporarily suspended the declaration and payment of dividends to common shareholders and the repurchase of common stock under our $200 common stock share repurchase program. With the impacts of the COVID pandemic largely behind us we resumed the declaration and payment of quarterly common stock dividends during the first quarter of 2021. In addition, we resumed the repurchase of common shares using $25 and $23 of cash to repurchase common shares under the program in 2022 and 2021, respectively. The share repurchase program expires on December 31, 2023 , and $102 remains available for future share repurchases as of December 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, during 2021 we increased our revolving credit facility to $1,150 and extended its maturity to March 25, 2026 . See Note 13 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™, 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 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 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 the Dana TM4 joint venture entities. See 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). 15
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; cost and availability of end customer financing; 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. During 2022, we continued to see incremental improvements across our end markets despite continuing, but lessening, global supply chain disruptions. 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. During 2022, light-truck markets improved across all regions and were up 6% on a global basis compared to 2021. The outlook for the full year of 2023 reflects global light-truck production being relatively stable across all regions, as production constraints continue to ease, vehicle inventories return to more normal levels, and constrained customer demand is fulfilled. Commercial vehicle markets - Our primary business is driveline systems for medium and heavy-duty trucks and busses, including the emerging market for hybrid and electric vehicles. Key regional markets are North America , South America (primarily Brazil ) and Asia Pacific . During 2022, production of Class-8 trucks in North America increased 24% over 2021 reflecting increased demand driven by strong transport and construction activity resulting from higher freight volumes and rates and increased fleet utilization levels. The strong demand was muted by continued global supply chain disruptions. The outlook for 2023 is for continued strong demand with production slightly above 2022 levels driven by solid order backlogs. Medium-duty truck production in North America experienced a modest 3% year-over-year increase from 2021 to 2022. The outlook for 2023 is for a slight increase in production over the prior year. Outside of North America , production of medium- and heavy-duty trucks in South America declined 3% in 2022 as demand moderated following a significant ramp up in production in 2021 with the dissipation of the COVID pandemic in the region. The 2023 outlook for South America is for a modest 1% increase in production from 2022 as local economic conditions remain relatively stable. Production of medium- and heavy-duty trucks in Asia Pacific , driven by China and India , decreased 27% in 2022 compared to 2021 due to China experiencing COVID outbreaks in certain regions and India’s continued struggles to recover from the pandemic. The 2023 outlook for Asia Pacific is for a modest increase in production from the prior year driven by the market recovery in India gaining traction. Off-highway markets - Our off-highway business has a large presence outside of North America , with 66% of its 2022 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. The global construction equipment market continued to rebound in 2022 with production up 10% over the prior year. The outlook for 2023 is for continued modest growth. 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 2023. 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. Farm commodity price increases in 2022 spurred a 6% increase in agriculture equipment production. The outlook for 2023 is for global end-market demand to remain relatively flat with the prior year. Foreign currency - With 54% of our 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 and Brazil accounted for 49% and 11% of our 2022 non- U.S. sales, respectively, while India and China accounted for 10% and 9%, respectively. 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 2022, decreasing 2022 sales by $420 . A weaker euro, Indian rupee, Thai baht, Chinese renminbi and South African rand were partially offset by a stronger Brazilian real. Argentina has experienced significant inflationary pressures the past several 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 2022 of approximately $151 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $44 , including $18 of net fixed assets, at December 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. Reference is made to Note 1 of our consolidated financial statements in Item 8 for additional information. 16
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Commodity costs - The cost of our products may be significantly impacted by changes in raw material commodity prices, the most important to us being those of various grades of steel, aluminum, copper, brass and rare earth materials. The effects of changes in commodity prices are reflected directly in our purchases of commodities and indirectly through our purchases of products such as castings, forgings, bearings, batteries and component parts that include commodities. Most of our major customer agreements provide for the sharing of significant commodity price changes with those customers based on the movement in various published commodity indexes. Where such formal agreements are not present, we have historically been successful implementing price adjustments that largely compensate for the inflationary impact of material costs. Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes. Higher commodity prices decreased year-over-year earnings by $447 in 2022. Material recovery pricing actions increased year-over-year earnings by $446 in 2022.
Sales, Earnings and Cash Flow Outlook
2023 Outlook 2022 2021 2020 Sales $10,350 - $10,850 $ 10,156 $ 8,945 $ 7,106 Adjusted EBITDA $750 - $850 $ 700 $ 795 $ 593 Net cash provided by operating activities $510 - $560 $ 649 $ 158 $ 386 Purchases of property, plant and equipment ~5% of sales $ 440 $ 369 $ 326 Free Cash Flow $0 - $50 $ 209 $ (211 ) $ 60 Adjusted EBITDA and 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 2023 sales outlook is $10,350 to $10,850 , reflecting a modest improvement in global market demand, continued material and inflationary cost recoveries and $300 of net new business backlog. Based on our current sales and exchange rate outlook for 2023, we expect overall stability in international currencies with a modest headwind to sales. At sales levels in our current outlook for 2023, 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 $30 . At our current sales outlook for 2023, we expect full year 2023 adjusted EBITDA to approximate $750 to $850 . Adjusted EBITDA Margin is expected to be 7.5% at the midpoint of our guidance range, a 60 basis-point improvement over 2022, reflecting higher margin net new business and the benefit of material cost recoveries as commodity costs begin to abate being partially offset by continued operational inefficiencies, driven by continuing global supply chain disruptions and customer order volatility, and increased investment to support our electrification strategy. We expect to generate free cash flow of approximately $25 at the midpoint of our guidance range reflecting the benefit of higher year-over-year adjusted EBITDA being largely offset by higher capital spending to support new business and our continued investment in our electrification strategy. 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 awarded that will be launching over the next three years, 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, 2023 , our sales backlog of net new business for the 2023 through 2025 period was $900 . We expect to realize $300 of our sales backlog in 2023, with incremental sales backlog of $350 and $250 being realized in 2024 and 2025, respectively. Our sales backlog is approximately 65% attributable to electric-vehicle content with the balance attributable to traditional ICE-vehicle content. Our sales backlog is balanced across all of our end markets. 17
Table of Contents Consolidated Results of Operations
Summary Consolidated Results of Operations (2022 versus 2021)
2022 2021 % of % of Increase/ Dollars Net Sales Dollars Net Sales (Decrease) Net sales $ 10,156 $ 8,945 $ 1,211 Cost of sales 9,393 92.5 % 8,108 90.6 % 1,285 Gross margin 763 7.5 % 837 9.4 % (74 ) Selling, general and administrative expenses 495 4.9 % 460 5.1 % 35 Amortization of intangibles 14 14 - Restructuring charges, net (1 ) (1 ) Impairment of goodwill (191 ) (191 ) Other income (expense), net 22 32 (10 ) Earnings before interest and income taxes 86 395 (309 ) Loss on extinguishment of debt (29 ) 29 Interest income 11 9 2 Interest expense 128 131 (3 ) Earnings (loss) before income taxes (31 ) 244 (275 ) Income tax expense 284 72 212 Equity in earnings of affiliates 4 28 (24 ) Net income (loss) (311 ) 200 (511 ) Less: Noncontrolling interests net income 15 14 1 Less: Redeemable noncontrolling interests net loss (84 ) (11 ) (73 ) Net income (loss) attributable to the parent company $ (242 ) $ 197 $ (439 ) Sales - The following table shows changes in our sales by geographic region. Amount of Change Due To Increase/ Currency Acquisitions Organic 2022 2021 (Decrease) Effects (Divestitures) Change North America $ 4,923 $ 4,230 $ 693 $ (4 ) $ 1 $ 696 Europe 3,059 2,836 223 (347 ) 570 South America 788 590 198 16 182 Asia Pacific 1,386 1,289 97 (85 ) (9 ) 191 Total $ 10,156 $ 8,945 $ 1,211 $ (420 ) $ (8 ) $ 1,639 Sales in 2022 were $1,211 higher than in 2021. Weaker international currencies reduced sales by $420 , principally due to a weaker euro, Indian rupee, Thai baht and Chinese renminbi, partially offset by a stronger Brazilian real. The organic sales increase of $1,639 , or 18%, 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 $772 . The North America organic sales increase of 16% was driven principally by stronger light-, medium- and heavy-duty truck production volumes, higher light-vehicle engine production levels and the conversion of sales backlog. Full-frame light-truck production was up 7% while light-vehicle engine production was up 13% compared with 2021. Year-over-year Class 8 truck production was up 24% while Classes 5-7 truck production was up 3%. Excluding currency effects, sales in Europe were up 20% 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 to 2021. Excluding currency effects, sales in South America increased 31% compared to 2021 due primarily to improved light-duty truck production and continued strengthening of medium/heavy-duty truck related sales despite overall medium/heavy-duty truck production volumes moderating. Light-duty truck production was up 13% while medium/heavy-duty truck production was down 3% compared to 2021. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 15% compared to 2021 due to stronger construction/mining and agricultural equipment markets and higher medium/heavy-duty truck related sales despite overall medium/heavy-duty truck production volumes declining 27% compared to 2021. Cost of sales and gross margin - Cost of sales for 2022 increased $1,285 , or 16%, when compared to 2021. Cost of sales as a percent of sales was 190 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 $447 , non-material inflationary cost impacts of $357 , higher spending on electrification initiatives of $50 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 certain grades of steel and aluminum. Non-material inflation includes higher labor, energy and transportation rates. Continued material cost savings and supplier recoveries provided a partial offset, reducing cost of sales by approximately $66 . Gross margin of $763 for 2022 decreased $74 from 2021. Gross margin as a percent of sales was 7.5% in 2022, 190 basis points lower than in 2021. The degradation in gross margin as a percent of sales was driven principally by the cost of sales factors referenced above along with recovery of non-material inflation typically not being specifically provided for in our current contracts with customers resulting in prolonged negotiations and indeterminate recoveries. In addition, gross margin during 2022 was negatively impacted by material cost recovery mechanisms with our customers lagging material cost increases charged by our suppliers by approximately 90 days. 18
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Selling, general and administrative expenses (SG&A) - SG&A expenses in 2022 were $495 (4.9% of sales) as compared to $460 (5.1% of sales) in 2021. SG&A expenses were $35 higher in 2022 primarily due to higher salaried employee wages and incentive compensation, increased software technology investments, travel expenses and professional fees.
Amortization of intangibles - Amortization expense was $14 in both 2021 and 2021.
Restructuring charges, net - Net restructuring charges were ( $1 ) in 2022. See Note 4 of our consolidated financial statements in Item 8 for additional information.
Impairment of goodwill - During the third quarter of 2022, we recorded a $191 goodwill impairment charge. See Note 3 of our consolidated financial statements in Item 8 for additional information.
Other income (expense), net - The following table shows the major components of other income (expense), net.
2022
2021
Non-service cost components of pension and OPEB costs $ (7 ) $ (10 ) Government assistance 8 Foreign exchange gain 4
2
Strategic transaction expenses (8 ) (13 ) 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 25 23 Other income (expense), net $ 22 $ 32 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 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 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. 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 . We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes. In June 2021 , we redeemed all of the June 2026 Notes and de-designated the fixed-to-fixed cross currency swaps. During December 2021 , we completed a sale-leaseback transaction on three of our U.S. manufacturing facilities. We received proceeds of $77 from the sale of the properties, which had carrying values totaling $11 , resulting in a $66 gain on the sale transaction. See Note 18 of our consolidated financial statements in Item 8 for additional information. Loss on extinguishment of debt - During May 2021 , we redeemed our December 2024 Notes. We incurred redemption premiums of $8 in connection with these repayments and wrote off $3 of previously deferred financing costs associated with the December 2024 Notes. These charges were partially offset by the recognition of $3 related 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 2029 Notes, we redeemed all of our June 2026 Notes. We incurred redemption premiums of $12 in connection with these repayments and wrote off $4 of previously deferred financing costs associated with the June 2026 Notes. On November 30, 2021 , in connection with the issuance of our February 2032 Notes, we fully paid down our Term B Facility. We wrote off $5 of previously deferred financing costs associated with the Term B Facility. See Note 13 of our consolidated financial statements in Item 8 for additional information. Interest income and interest expense - Interest income was $11 in 2022 and $9 in 2021. Interest expense decreased from $131 in 2021 to $128 in 2022, with higher average debt levels being more than offset by lower interest rates on outstanding borrowings. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.7% in 2022 and 5.1% in 2021. Income tax expense - Income tax expense was $284 in 2022 and $72 in 2021. During 2022, we recognized tax expense of $240 to record valuation allowance in the U.S. , which includes $189 on U.S. federal credits and attributes and $51 related to U.S. state attributes. In addition, we recorded a tax benefit of $32 for U.S. tax credits generated. During 2022, we recorded a pre-tax goodwill impairment charge of $191 with an associated income tax benefit of $2 . During 2021, we recognized tax expense of $46 to record valuation allowance in the U.S. due to reduced income projections. We also recognized tax benefit of $46 for 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 $18 related to the expiration of federal tax credits. See Note 17 to our consolidated financial statements in Item 8 for additional information. Equity in earnings of affiliates - Net earnings from equity investments was $4 in 2022 and $28 in 2021. Equity in earnings from Dongfeng Dana Axle Co., Ltd. (DDAC) was a loss of $1 in 2022 and earnings of $22 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 constructions and infrastructure projects in 2021, increasing demand for medium- and heavy-duty vehicles. 19
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Segment Results of Operations (2022 versus 2021)
Light Vehicle Segment Segment EBITDA Sales EBITDA Margin 2021 $ 3,773 $ 274 7.3 % Volume and mix 250 37 Divestitures (8 ) Product line transfer (80 ) (10 ) Performance 238 (137 ) Currency effects (83 ) (6 ) 2022 $ 4,090 $ 158 3.9 % Light Vehicle sales in 2022, exclusive of currency effects, the impact of divestitures and the product line transfer to Commercial Vehicle, were 13% higher than 2021 reflecting stronger markets in all regions, cost recovery actions and the conversion of sales backlog. Year-over-year North America full-frame light-truck production increased 7% while light-truck production in Europe , South America and Asia Pacific increased 5%, 13% and 6%, respectively. Net customer pricing and cost recovery actions increased year-over-year sales by $238 . Light Vehicle segment EBITDA decreased by $116 in 2022. Higher sales volumes provided a year-over-year benefit of $37 (14.8% incremental margin). The year-over-year performance-related earnings decrease was driven by inflationary cost increases of $134 , commodity cost increases of $130 , operational inefficiencies of $93 , higher program launch costs of $18 , higher spending on electrification initiatives of $8 , higher incentive compensation of $5 and higher warranty costs of $1 . Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $238 , higher material cost savings and supplier recoveries of $10 and lower premium freight costs of $4 . Commercial Vehicle Segment Segment EBITDA Sales EBITDA Margin 2021 $ 1,532 $ 48 3.1 % Volume and mix 215 34 Product line transfer 80 10 Performance 178 (48 ) Currency effects (26 ) (1 ) 2022 $ 1,979 $ 43 2.2 % Commercial Vehicles sales in 2022, exclusive of currency effects and the product line transfer from Light Vehicle, were 26% higher than 2021 reflecting continued strengthening of medium/heavy-duty truck production volumes in North America and Europe and cost recovery actions. Year-over-year North America Class 8 production was up 24% and Classes 5-7 production was up 3%. Year-over-year medium/heavy-truck production in Europe was up 14% while medium/heavy-truck production in South America and Asia Pacific were down 3% and 27%, respectively. Net customer pricing and cost recovery actions increased year-over-year sales by $178 . Commercial Vehicle segment EBITDA decreased by $5 in 2022. Higher sales volumes provided a year-over-year benefit of $34 (15.8% incremental margin). The year-over-year performance-related decrease was driven by commodity cost increases of $114 , inflationary cost increases of $66 , operational inefficiencies of $52 , higher spending on electrification initiatives of $16 , higher incentive compensation of $4 and higher program launch costs of $3 . Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $178 , higher material cost savings of $23 , lower warranty costs of $4 and lower premium freight costs of $2 . 20
Table of Contents Off-Highway Segment Segment EBITDA Sales EBITDA Margin 2021 $ 2,593 $ 353 13.6 % Volume and mix 326 76 Performance 277 9 Currency effects (250 ) (34 ) 2022 $ 2,946 $ 404 13.7 % Off-Highway sales in 2022, exclusive of currency effects, were 23% higher than 2021 reflecting improved global markets, cost recovery actions and the conversion of sales backlog. Year-over-year global construction/mining and agricultural equipment markets reflected marked improvement with global production increasing 10% and 6%, respectively, over 2021. Net customer pricing and cost recovery actions increased year-over-year sales by $277 . Off-Highway segment EBITDA increased by $51 in 2022. Higher sales volumes provided a year-over-year benefit of $76 (23.3% incremental margin). The year-over-year performance-related earnings increase was driven by net customer pricing and cost recovery actions of $277 and higher material cost savings of $26 . Partially offsetting these performance-related increases were commodity cost increases of $134 , inflationary cost increases of $130 , operational inefficiencies of $11 , higher spending on electrification initiatives of $9 , higher incentive compensation of $4 , higher premium freight costs of $4 and higher warranty costs of $2 . Power Technologies Segment Segment EBITDA Sales EBITDA Margin 2021 $ 1,047 $ 123 11.7 % Volume and mix 76 13 Performance 79 (37 ) Currency effects (61 ) (5 ) 2022 $ 1,141 $ 94 8.2 % 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 2022, exclusive of currency effects, were $155 higher than in 2022 reflecting improved global markets, cost recovery actions and conversion of sales backlog. Year-over-year light-vehicle engine production in North America , South America and Asia Pacific increased 13%, 13% and 6%, respectively, while year-over-year light-vehicle engine production in Europe decreased 1%. Net customer pricing and cost recovery actions increased year-over-year sales by $79 . Power Technologies segment EBITDA decreased by $29 in 2022. Higher sales volumes provided a year-over-year benefit of $13 (17.1% incremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $69 , inflationary cost increases of $27 , operational inefficiencies of $11 , higher program launch costs of $6 , higher spending on electrification initiatives of $4 , higher incentive compensation of $3 and higher warranty costs of $3 . Partially offsetting these performance-related decreases were net customer pricing and cost recovery actions of $79 and higher material cost savings of $7 . 21
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 (loss) 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. 2022 2021 Net income (loss) $ (311 ) $ 200 Equity in earnings of affiliates 4
28
Income tax expense (benefit) 284
72
Earnings (loss) before income taxes (31 )
244
Depreciation and amortization 388
389
Restructuring charges, net (1 ) Interest expense, net 117
122
Loss on extinguishment of debt
29
(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 ) Impairment of goodwill 191 Other* 36 41 Adjusted EBITDA $ 700 $ 795
- Other includes stock compensation expense, non-service cost components of
pension and OPEB costs, strategic transaction expenses and other items.
See Note 20 of our consolidated financial statements in Item 8 for additional
details. Free Cash Flow We have defined free cash flow as cash provided by operating activities less purchases of property, plant and equipment. We believe free cash flow is useful to investors in evaluating the operational cash flow of the company inclusive of the spending required to maintain the operations. Free cash flow is 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 may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net cash flows provided by operating activities to free cash flow.
2022 2021
Net cash provided by operating activities $ 649 $ 158 Purchases of property, plant and equipment (440 ) (369 ) Free cash flow
$ 209 $ (211 ) 22
Table of Contents Liquidity
The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at December 31, 2022 :
Cash and cash equivalents $ 425 Less: Deposits supporting obligations (1 ) Available cash 424
Additional cash availability from Revolving Facility 1,109 Total liquidity
$ 1,533 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. We had availability of $1,109 at December 31, 2022 under our Revolving Facility after deducting $25 of outstanding borrowings and $16 of outstanding letters of credit. The components of our December 31, 2022 consolidated cash balance were as follows: U.S. Non-U.S. Total Cash and cash equivalents $ - $ 322 $ 322 Cash and cash equivalents held as deposits 1 1 Cash and cash equivalents held at less than wholly-owned subsidiaries 6 96 102 Consolidated cash balance $ 6 $ 419 $ 425 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 December 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. 23
Table of Contents Cash Flow 2022 2021
Cash provided by (used for) changes in working capital $ 199 $ (455 ) Other cash provided by operations
450
613
Net cash provided by operating activities 649
158
Net cash used in investing activities (426 ) (293 ) Net cash used in financing activities (42 ) (127 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 181 $ (262 )
The table above summarizes our consolidated statement of cash flows.
Operating activities - Exclusive of working capital, other cash provided by operations was $450 in 2022 and $613 in 2021. The year-over-year decrease is primarily attributable to lower operating earnings and higher cash paid for income taxes.
Working capital provided cash of $199 in 2022 and used cash of $455 in 2021. Cash of $81 and $189 was used to finance receivables in 2022 and 2021, respectively. The lower level of cash used to finance receivables in 2022 is being driven by shorter customer payment terms having been negotiated with certain customers. Cash of $99 and $471 was used to fund higher inventory levels during 2022 and 2021, respectively. While we continue to carry higher levels of inventory to mitigate on-going global-supply-chain disruptions, ensuring continuous supply for our customers, we have actively managed down our inventory days on hand during 2022. Increases in accounts payable and other net liabilities provided cash of $379 and $205 in 2022 and 2021, respectively. Investing activities - Expenditures for property plant and equipment were $440 and $369 in 2022 and 2021. The increase in capital spend during 2022 is in support of awarded next generation programs and new business. During December 2021 , we completed a sale-leaseback transaction on three of our U.S. manufacturing facilities receiving proceeds of $77 from the sale of the properties. During 2021, we paid $17 , net of cash acquired, to acquire an additional 51% interest in Pi Innovo. The acquisition of the additional ownership interest provided us with a 100% ownership interest in Pi Innovo. During 2021, we acquired a 1% ownership interest in Switch Mobility Limited for $18 . During 2020, we sold our 20% ownership interest in Bendix Spicer Foundation Brake, LLC (BSFB) for $50 , consisting of $21 in cash, a note receivable of $25 and deferred proceeds of $4 . During 2021, we received $29 in settlement of the note receivable and deferred proceeds from the BSFB transaction. During 2022, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities. During 2021, we sold all of our Hyliion shares for $29 . During 2021, we dedesignated the fixed-to-fixed cross currency swaps associated with our June 2026 Notes and settled certain of the fixed-to-fixed cross currency swaps resulting in a net cash outflow of $22 . Financing activities - During 2022, we had net borrowings of $25 on our Revolving Facility. During 2021, we completed the issuance of €325 of our July 2029 Notes, $400 of our September 2030 Notes and $350 of our February 2032 Notes, paying financing costs of $16 . Also during 2021, we redeemed all $375 of our June 2026 Notes and all $425 of our December 2024 Notes, 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 $2 to amend our credit and guaranty agreement, increasing the Revolving Facility to $1,150 and extending its maturity to March 25, 2026 . We used $58 for dividend payments to common stockholders during both 2022 and 2021. We used cash of $25 and $23 to repurchase common shares under our share repurchase program during 2022 and 2021. Distributions to noncontrolling interests totaled $9 and $15 in 2022 and 2021. Hydro- Québec made cash contribution to Dana TM4 of $51 in 2022 and $14 in 2021. 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 $6 of cash and cash equivalents. 24
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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 $6 of annual payments. In the event of a required payment by Dana as 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 significant contractual obligations as of December 31, 2022 .
Payments Due by Period Contractual Cash Obligations Total 2023 2024 - 2025 2026 - 2027 After 2027 Long-term debt(1) $ 2,326 $ 427 $ 400 $ 1,499 Interest payments(2) 657 110 212 177 158 Operating leases(3) 453 54 98 79 222 Financing leases(4) 71 9 15 12 35 Unconditional purchase obligations(5) 446 313 66 28 39 Pension contribution(6) 16 16 Retiree health care benefits(7) 38 4 8 8 18 Uncertain income tax positions(8) - Total contractual cash obligations $ 4,007 $ 506 $ 826 $ 704 $ 1,971
Notes:
(1) Principal payments on long-term debt. (2) Interest payments are based on long-term debt in place at December 31, 2022
and the interest rates applicable to such obligations. (3) Operating lease obligations, including interest, related 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 material handling equipment. (5) Unconditional purchase obligations are comprised of commitments for the
procurement of fixed assets, the purchase of raw materials and the
fulfillment of other contractual obligations. (6) This amount represents estimated 2023 minimum required contributions to our
global defined benefit pension plans. We have not estimated pension
contributions beyond 2023 due to the significant impact that return on plan
assets and changes in discount rates might have on such amounts. (7) This amount represents estimated payments under our retiree health care
programs. Obligations under the retiree health care programs are not fixed
commitments and will vary depending on various factors, including the level
of participant utilization and inflation. Our estimates of the payments to be
made in the future consider recent payment trends and certain of our
actuarial assumptions. (8) We are not able to reasonably estimate the timing of payments related to
uncertain tax positions because the timing of settlement is uncertain. The
above table does not reflect unrecognized tax benefits at December 31 ,
2022 of $102 . See Note 17 of our consolidated financial statements in Item 8
for additional discussion.
At December 31, 2022 , we maintained cash balances of $1 on deposit with financial institutions primarily to support property insurance policy deductibles, certain employee retirement obligations and specific government approved environmental remediation efforts.
Contingencies For a summary of litigation and other contingencies, see Note 15 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.
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. 25
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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 17 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 65% of our consolidated defined benefit pension obligations at December 31, 2022 . 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. 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 $11 . 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 6.0% expected return in 2023 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, 2022 , we have $141 of 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 funded status of our U.S. plans, we do not expect to make any contributions during 2023.
See Note 12 of our consolidated financial statements in Item 8 for additional discussion of our pension and OPEB obligations.
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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. Goodwill and other indefinite-lived intangible assets - Our goodwill and other indefinite-lived intangible assets are tested for impairment annually as of October 31 for 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, 2021 were 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. Investments in affiliates - We had aggregate investments in affiliates of $138 at December 31, 2022 and $174 at December 31, 2021 . 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. 27
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Avatar: The Way of Water’s CGI is a huge leap forward for film effects
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When James Cameron’s Avatar came out back in 2009, it was one of the most visually ambitious movies that audiences had ever seen. The legendary director has always pushed boundaries with his storytelling, but with Avatar‘s detailed 3D presentation, numerous motion-capture animated characters, and breathtaking alien vistas and creatures, it was one of the most innovate films of the 2000s.
Fast forward to 2022, and we’re finally getting the first of Cameron’s long-awaited Avatar sequels. The first trailer for Avatar: The Way of Water released earlier this year, teasing a return to Pandora with Jake Sully (Sam Worthington), Neytiri (Zoe Saldaña), and their Na’vi and human children. This movie has been more than a decade in the making, and from the sweeping visuals of the trailer, it seems like the wait will have been worth it.
Avatar: The Way of Water has a ton of newly developed visual technology
However, the Internet being what it is, there are contingents that have taken to griping that the visual effects don’t look that impressive compared to all the other stunning movies we’ve seen since Avatar. In a recent episode of “VFX Artists React” on the Corridor Crew YouTube channel (via Screen Rant), a group of special effects artists went into detail about how revolutionary some of Avatar: The Way of Water’s special effects are, even just in the trailer. And it all comes down to the water.
The specific moment they picked out is this one, where we see a close-up of a Na’vi cinching the straps of their aquatic mount’s saddle as water laps at their hand. According to the artists, this entire shot was made with CGI effects, which is crazy considering how realistic it looks.
Here’s what the Corridor Crew had to say about it:
Ian Hubert: “The bit that I think is nuts is the surface tension in the bottom left, the way it goes into that woven bit. I don’t remember ever seeing surface tension on that complex and dynamic of a scale. As the water goes away it’s still trapped there in the little bits [of woven fabric].” Sam Gorski: “On top of that, from a visual and rendering standpoint, I don’t even know how many patents they’ve been making. But I’ve seen little blurbs pop that’s like, ‘Oh, cool, Weta’s got like 4 or 5 new water simulations patents,’ for really unique cases like this shot.” Wren Weichman: “I think there’s a two-stage water simulation happening here. Normally, when you do a water sim it’s very particle-based and they’re doing that first particle sim for the water. But then, when it actually interfaces with something I think what [the new patent’s] saying is it’s actually generating new particles at those actual surfaces and that’s kind of creating the illusion of that water tension that you’re talking about.[…] Weta is famous for literally inventing tools from scratch to make their movies.”
Weichman is absolutely right about Wētā FX (formerly called Weta Digital) having a reputation for innovating new tools for its films, from the extensive technology used to create Gollum and the replicated CGI armies in The Lord of the Rings to the even more detailed performance capture tech used to bring Caesar to life in the Planet of the Apes trilogy. Wētā FX is one of the most well known companies in the special effects business for a reason, and Avatar: The Way of Water is just going to drive that home even further.
All of this also lines up well with something Zoe Saldaña said a while back: part of the reason it’s taken Cameron so long to finish Avatar 2 is that his team has needed to literally create the technology that would make the physics of the film’s extensive underwater sequences work. We’re just getting the barest hint of that in the trailer, but it’s already enough to show that the effects on this thing are going to be revolutionary.
Avatar: The Way of Water splashes into theaters on December 16.
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