Executive Vice President and Chief Financial Officer at BorgWarner
Thank you, Fred, and good morning, everyone. Before I dive into the financial details, I'm going to provide you the key takeaways coming out of our third quarter. First, we reported strong organic growth driven by customer pricing actions and industry volumes that were at the high-end of our expectations going into the quarter. Second, our year-over-year margin performance benefited from normalized conversion on higher revenue and successful execution of our customer pricing actions. However, these benefits were partially mitigated by our planned increase in e-products R&D investment.
Let's turn to Slide 9 for a look at our year-over-year revenue walk for Q3. After adjusting for the disposition of our Water Valley facility, last year's Q3 revenue was almost $3.4 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in revenue of over 9% or approximately $320 million. Then, you can see the increase in our organic revenue about 29% year-over-year. That compares to a 22% increase in weighted average market production, which means we delivered another quarter of strong outperformance. The sum of all this was just under $4.1 billion of revenue in Q3.
Turning to Slide 10, you can see our earnings and cash flow performance for the quarter. Our third quarter adjusted operating income was $438 million or 10.8% which compares to adjusted operating income of $336 million or 9.8% from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of the Water Valley disposition, adjusted operating income increased $138 million on $990 million of higher sales. The biggest positive driver of this performance was that we converted at approximately 17% on our additional sales.
But this conversion was partially offset by two things. First, we continue to execute on our planned increase in e-products R&D. In Q3, we increased these investments by $24 million relative to last year. Second, material cost inflation, net of customer pricing recoveries was an $8 million year-over-year headwind in the quarter. Our adjusted EPS improved by $0.44 in the third quarter driven by the $138 million improvement in our adjusted operating income and a much lower effective tax rate than we've been experiencing in the last couple of years. This tax rate reduction was driven by a favorable mix of earnings across taxing jurisdictions and the impacts of ongoing tax planning initiatives. And finally free cash flow. We generated $167 million of positive free cash flow during the third quarter.
Let's now turn to Slide 11, where you can see our perspective on global light vehicle industry production for 2022. As you can see, our market assumptions still incorporate a range of potential outcomes. However, we have incorporated several adjustments to our prior assumptions, including a small decrease in the high-end at the North American market, continued production increases in China as we expect third quarter strength to continue into Q4. And a further decrease in European production due to the market uncertainty associated with the ongoing conflict in Ukraine. As a result of these assumptions, we now expect our global weighted light and commercial vehicle markets to increase in the range of 3% to 4.5% this year which is a bit narrower than the range underlying our prior guidance.
Now let's take a look at our full year outlook on Slide 12. First, it's important to note that our guidance assumes an expected full-year headwind from weaker foreign currencies of more than $1 billion. This represents an additional headwind of $230 million versus our prior guidance. While the appreciation of the U.S. dollars having a significant topline impact, remember that our strategy is generally to purchase and produce components in the same region as our customers. As a result, the impact of currencies on our guidance is predominantly translational in nature.
Next, as I previously mentioned, we expect our end-markets to be up 3% to 4.5% for the year which contributes to the organic net sales change you see on the slide. But the much bigger impact on that line item is the continued revenue growth we expect to generate above growth in end-market production. That's about $1.4 billion of our organic revenue growth suggest over 9% growth above market. That current market outlook, that current outlook for our outperformance is stronger than our prior outlook primarily due to the impact of estimated pricing recoveries from material inflation which we now estimate will contribute just under 4% of outgrowth for the full year.
Finally, as it relates to our revenue outlook, the Santroll and Rhombus acquisitions are expected to cumulatively add $45 million to $55 million to 2022 revenue. Adding these items together, we're projecting total 2022 revenue to be slightly lower than before in the range of $15.4 billion to $15.7 billion. This slightly lower revenue outlook is being driven almost entirely by the additional FX headwinds. However, our expectation for organic growth has increased to 12% to 14% compared to our previous outlook of 11% to 14%. That is helping to mitigate the FX impact we're seeing.
Switching to margin, we're updating our full year adjusted margin outlook at 10.0% to 10.2% compared to our prior outlook of 9.8% to 10.2%. The higher material cost inflation continues to negatively impact our financials, we're pleased with the progress we've made in negotiating recoveries of a portion of these costs from our customers and that's helping mitigate the impact on our P&L. For the full year, we now expect net material cost inflation to negatively impact our results by $110 million to $120 million, which is lower than our previous expectation of $145 million to $155 million.
As it relates to R&D investment, our guidance anticipates a $145 million to $150 million increase in e-products related R&D investment in 2022. Excluding the impact of net material cost inflation and the increase in e-products related R&D investment, our 2012 to margin outlook contemplates the business delivering full year incrementals in the high-teens. We're now expecting full year adjusted EPS of $4.25 to $4.45 per diluted share. This is an increase from our prior guidance reflecting two things. First, we're expecting a lower full year tax rate of 25%, down from our prior guidance of 27%, driven by our expected mix of earnings and the benefits of tax planning initiatives we've been executing the last couple of years. Second, we're benefiting a bit from the lower average share count which is a result of the stock buybacks we executed during the quarter. And finally, we continue to expect that we'll deliver free cash flow in the range of $650 million to $750 million for the full year. That's our 2022 outlook.
So let me summarize. Overall, we had a strong quarter. We delivered robust organic growth. Our margin performance is strong driven by incremental margin performance and successfully negotiated pricing recoveries with our customers. And we are increasing the midpoint of our EPS outlook for the full year driven by our strong year-to-date performance and a lower tax rate going-forward. Year-to-date, we've taken a number of actions to drive our future profitable growth and to create value for our shareholders.
We've continued our disciplined M&A and with the completed acquisitions of Santroll and Rhombus as well as the announced acquisition of SSE. We've returned more than $360 million of cash to our shareholders through our buybacks and dividends and we've secured meaningful new business awards for electric vehicles across multiple parts of our portfolio. These awards have added more than $800 million to our booked electric vehicle revenue for 2025 compared to the same point last year. As a result of our bookings and M&A, we believe that we have already achieved an important milestone, $4 billion of secured EV revenue for 2025. We view this as a huge success for the company. But we've done all of this while still delivering on our near-term commitments, once again showing the balance that is the key to our ongoing success.
With that, I'd like to turn the call back over to Pat.