Allison Transmission Holdings Inc 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q. The statements in this discussion regarding industry trends, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A “Risk Factors” below, and in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission ("SEC") on February 18, 2021. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Overview Allison Transmission Holdings, Inc. and its subsidiaries (“Allison,” the “Company,” “we,” “us” or “our”) design and manufacture vehicle propulsion solutions, including commercial-duty on-highway, off-highway and defense fully automatic transmissions and electric hybrid and fully electric systems. The business was founded in 1915 and has been headquartered in Indianapolis, Indiana since inception. Allison was an operating unit of General Motors Corporation from 1929 until 2007, when Allison once again became a stand-alone company. In March 2012, Allison began trading on the New York Stock Exchange under the symbol “ALSN”. Although approximately 79% of revenues were generated in North America in 2020, we have a global presence by serving customers in Europe, Asia, South America and Africa. We serve customers through an independent network of approximately 1,400 independent distributor and dealer locations worldwide. Trends Impacting Our Business In March 2020, the World Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic. In the first half of 2021, the COVID-19 pandemic continued to cause supply chain, labor and raw material constraints that created volatility in our business performance and impacted global markets and supply chains. As a result, we have experienced raw material and component price inflation, increased freight cost and increased overtime expense as a result of labor shortages. Our net sales are driven by commercial vehicle production, which tends to be highly correlated to macroeconomic conditions. We expect our net sales for 2021 to increase compared to 2020 principally driven by the global On-Highway, Service Parts, Support Equipment & Other and North America Off-Highway end markets as a result of the ongoing global economic recovery and price increases on certain products. We continue to monitor and proactively mitigate risks in our supply chain, including the global shortage of semiconductors and its impact on the availability of our transmission control modules. We, our suppliers and our customers are all taking actions to reduce the impact of the semiconductor shortage and other supply chain, transport and raw material constraints; however, if these constraints and inflationary costs persist, the impact on our business could be material. To limit the spread of COVID-19, governments continue to take various actions including the administration of vaccinations, travel bans and restrictions, quarantines, curfews, stay-at-home orders, social distancing guidelines and business shutdowns and closures. We are continuing to take a variety of measures to promote the safety and security of our employees and to maintain operations with as minimal impact as possible to our stakeholders, and as a result, we have been able to continue our manufacturing operations and deliver our products to customers. 24 Table of Contents Second Quarter Net Sales by End Market (dollars in millions) End Market Q2 2021 Net Sales Q2 2020 Net Sales % Variance North America On-Highway $ 302 $ 164 84 % North America Off-Highway 9 3 200 % Defense 48 42 14 % Outside North America On-Highway 98 60 63 % Outside North America Off-Highway 18 19 (5 )% Service Parts, Support Equipment and Other 128 89 44 % Total Net Sales $ 603 $ 377 60 % North America On-Highway end market net sales were up 84% for the second quarter 2021 compared to the second quarter 2020, principally driven by the continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020. North America Off-Highway end market net sales were up $6 million for the second quarter 2021 compared to the second quarter 2020, principally driven by higher demand for hydraulic fracturing applications. Defense end market net sales were up 14% for the second quarter 2021 compared to the second quarter 2020, principally driven by higher demand for Tracked vehicle applications. Outside North America On-Highway end market net sales were up 63% for the second quarter 2021 compared to the second quarter 2020, principally driven by the continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020. Outside North America Off-Highway end market net sales were down 5% for the second quarter 2021 compared to the second quarter 2020, principally driven by lower demand in the energy sector, partially offset by higher demand in the mining and construction sectors. Service Parts, Support Equipment and Other end market net sales were up 44% for the second quarter 2021 compared to the second quarter 2020, principally driven by higher demand for North America service parts, aluminum die cast components and support equipment. Key Components of our Results of Operations Net sales We generate our net sales primarily from the sale of vehicle propulsion solutions, service and component parts, support equipment, defense kits, engineering services, royalties and extended transmission coverage to a wide array of original equipment manufacturers, distributors and the U.S. government. Sales are recorded net of provisions for customer allowances and other rebates. Engineering services are recorded as net sales in accordance with the terms of the contract. The associated costs are recorded in cost of sales. We also have royalty agreements with third parties that provide net sales as a result of joint efforts in developing marketable products. Cost of sales Our primary components of cost of sales are purchased parts, overhead expense related to our manufacturing operations and direct labor associated with the manufacture and assembly of transmissions and parts. For the six months ended June 30, 2021, direct material costs were approximately 67%, overhead costs were approximately 25%, and direct labor costs were approximately 8% of total cost of sales. We are subject to changes in our cost of sales caused by movements in underlying commodity prices. We seek to hedge against this risk by using long-term agreements, as appropriate. See Part I, Item 3 “Quantitative and Qualitative Disclosures about Market Risk —Commodity Price Risk” included below. 25 Table of Contents Selling, general and administrative The principal components of our selling, general and administrative expenses are salaries and benefits for our office personnel, advertising and promotional expenses, product warranty expense, expenses relating to certain information technology systems and amortization of our intangibles. Engineering — research and development We incur costs in connection with research and development programs that are expected to contribute to future earnings. Such costs are expensed as incurred. 26 Table of Contents Non-GAAP Financial Measures We use Adjusted Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA as a percent of net sales to measure our operating profitability. We believe that Adjusted EBITDA and Adjusted EBITDA as a percent of net sales provide management, investors and creditors with useful measures of the operational results of our business and increase the period-to-period comparability of our operating profitability and comparability with other companies. Adjusted EBITDA as a percent of net sales is also used in the calculation of management’s incentive compensation program. The most directly comparable U.S. generally accepted accounting principles (“GAAP”) measure to Adjusted EBITDA and Adjusted EBITDA as a percent of net sales is Net income and Net income as a percent of net sales, respectively. Adjusted EBITDA is calculated as earnings before interest expense, income tax expense, amortization of intangible assets, depreciation of property, plant and equipment and other adjustments as defined by the Second Amended and Restated Credit Agreement dated as of March 29, 2019, as amended (the “Credit Agreement”) governing Allison Transmission, Inc.’s (“ATI”), our wholly-owned subsidiary, term loan facility in the amount of $635 million due March 2026 (“Term Loan”). Adjusted EBITDA as a percent of net sales is calculated as Adjusted EBITDA divided by net sales. We use Adjusted free cash flow to evaluate the amount of cash generated by our business that, after the capital investment needed to maintain and grow our business and certain mandatory debt service requirements, can be used for repayment of debt, stockholder distributions and strategic opportunities, including investing in our business. We believe that Adjusted free cash flow enhances the understanding of the cash flows of our business for management, investors and creditors. Adjusted free cash flow is also used in the calculation of management’s incentive compensation program. The most directly comparable GAAP measure to Adjusted free cash flow is Net cash provided by operating activities. Adjusted free cash flow is calculated as Net cash provided by operating activities, excluding non-recurring restructuring charges, after additions of long-lived assets. The following is a reconciliation of Net income and Net income as a percent of net sales to Adjusted EBITDA and Adjusted EBITDA as a percent of net sales and a reconciliation of Net cash provided by operating activities to Adjusted free cash flow: Three Months Ended June 30, Six Months Ended June 30, (unaudited, dollars in millions) 2021 2020 2021 2020 Net income (GAAP) $ 110 $ 23 $ 230 $ 162 plus: Income tax expense 30 7 64 49 Interest expense, net 30 33 59 66 Depreciation of property, plant and equipment 26 24 51 46 Amortization of intangible assets 11 13 23 29 Stock-based compensation expense (a) 5 2 8 5 Unrealized loss on foreign exchange (b) 1 — — 2 Restructuring charges (c) — 12 — 12 Acquisition-related earnouts (d) — 1 — 1 Adjusted EBITDA (Non-GAAP) $ 213 $ 115 $ 435 $ 372 Net sales (GAAP) $ 603 $ 377 $ 1,191 $ 1,014 Net income as a percent of net sales (GAAP) 18.2 % 6.1 % 19.3 % 16.0 % Adjusted EBITDA as a percent of net sales (Non-GAAP) 35.3 % 30.5 % 36.5 % 36.7 % Net cash provided by operating activities (GAAP) $ 143 $ 92 $ 271 $ 240 Deductions to reconcile to Adjusted free cash flow: Additions of long-lived assets (48 ) (28 ) (69 ) (49 ) Restructuring charges (c) — 3 — 3 Adjusted free cash flow (Non-GAAP) $ 95 $ 67 $ 202 $ 194 (a) Represents stock-based compensation expense (recorded in Cost of sales, Selling, general and administrative, and Engineering - research and development). 27 Table of Contents (b) Represents losses ( recorded in Other income , net) on intercompany financing transactions related to investments in plant assets for our India facility. (c) Represents restructuring charges (recorded in Cost of sales, Selling, general and administrative, and Engineering - research and development) related to voluntary and involuntary separation programs for both hourly and salaried employees in the second quarter of 2020. (d) Represents expenses (recorded in Selling, general and administrative and Engineering – research and development) for earnouts related to our acquisition of Vantage Power Limited. 28 Table of Contents Results of Operations Comparison of three months ended June 30, 2021 and 2020 The following table sets forth certain financial information for the three months ended June 30, 2021 and 2020. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Three Months Ended June 30, (unaudited, dollars in millions) 2021 % of net sales 2020 % of net sales Net sales $ 603 100 % $ 377 100 % Cost of sales 315 52 212 56 Gross profit 288 48 165 44 Operating expenses: Selling, general and administrative 80 13 69 19 Engineering — research and development 41 7 38 10 Total operating expenses 121 20 107 29 Operating income 167 28 58 15 Interest expense, net (30 ) (5 ) (33 ) (8 ) Other income, net 3 — 5 1 Income before income taxes 140 23 30 8 Income tax expense (30 ) (5 ) (7 ) (2 ) Net income $ 110 18 % $ 23 6 % Net sales Net sales for the quarter ended June 30, 2021 were $603 million compared to $377 million for the quarter ended June 30, 2020, an increase of 60%. The increase was principally driven by a $138 million, or 84%, increase in net sales in the North America On-Highway end market principally driven by the continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020, a $39 million, or 44%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for North America service parts, aluminum die cast components and support equipment, a $38 million, or 63%, increase in net sales in the Outside North America On-Highway end market principally driven by the continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020, a $6 million, or 200%, increase in net sales in the North America Off-Highway end market principally driven by higher demand for hydraulic fracturing applications and a $6 million, or 14%, increase in net sales in the Defense end market principally driven by higher demand for Tracked vehicle applications, partially offset by a $1 million, or 5%, decrease in net sales in the Outside North America Off-Highway end market principally driven by lower demand in the energy sector, partially offset by higher demand in the mining and construction sectors. Cost of sales Cost of sales for the quarter ended June 30, 2021 was $315 million compared to $212 million for the quarter ended June 30, 2020, an increase of 49%. The increase was principally driven by increased direct material and manufacturing expense commensurate with increased net sales, unfavorable material costs and higher incentive compensation expense, partially offset by restructuring charges in the second quarter of 2020 that did not recur in 2021. Gross profit Gross profit for the quarter ended June 30, 2021 was $288 million compared to $165 million for the quarter ended June 30, 2020, an increase of 75%. The increase was principally driven by $156 million related to increased net sales, $5 million of restructuring charges in the second quarter of 2020 that did not recur in 2021 and price increases on certain products, partially offset by $24 million of higher manufacturing expense commensurate with increased net sales, $11 million of unfavorable material costs and higher incentive compensation expense. Gross 29 Table of Contents profit as a percent of net sales for the three months ended June 30, 2021 increased 400 basis points compared to the same period in 2020 principally driven by increased net sales , restructuring charges in the second quarter of 2020 that did not recur in 2021 and price increases on certain products , partially offset by unfavorable material costs and higher incentive compensation expense . Selling, general and administrative Selling, general and administrative expenses for the quarter ended June 30, 2021 were $80 million compared to $69 million for the quarter ended June 30, 2020, an increase of 16%. The increase was principally driven by higher incentive compensation expense, $3 million of higher commercial activities spending and higher stock compensation expense, partially offset by $3 million of restructuring charges in the second quarter of 2020 that did not recur in 2021 and lower intangible amortization expense. Engineering — research and development Engineering expenses for the quarter ended June 30, 2021 were $41 million compared to $38 million for the quarter ended June 30, 2020, an increase of 8%. The increase was principally driven by increased product initiatives spending, partially offset by $4 million of restructuring charges in the second quarter of 2020 that did not recur in 2021. Interest expense, net Interest expense, net for the quarter ended June 30, 2021 was $30 million compared to $33 million for the quarter ended June 30, 2020, a decrease of 9%. The decrease was principally driven by $3 million of decreased interest expense due to lower interest rates as a result of our long-term debt refinancing in the fourth quarter of 2020 that extended maturities at lower fixed interest rates . Other income, net Other income, net for the quarter ended June 30, 2021 was $3 million compared to $5 million for the quarter ended June 30, 2020. The change was principally driven by $1 million of unfavorable foreign exchange and $1 million of unfavorable change associated with assets held in a rabbi trust. Income tax expense Income tax expense for the three months ended June 30, 2021 was $30 million, resulting in an effective tax rate of 21%, compared to $7 million of income tax expense and an effective tax rate of 23% for the three months ended June 30, 2020. The increase in income tax expense was principally driven by increased taxable income. The decrease in the effective tax rate was principally driven by increased estimated U.S. federal income tax deductions. 30 Table of Contents Comparison of six months ended June 30, 2021 and 2020 The following table sets forth certain financial information for the six months ended June 30, 2021 and 2020. The following table and discussion should be read in conjunction with the information contained in our condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Six Months Ended June 30, (unaudited, dollars in millions) 2021 % of net sales 2020 % of net sales Net sales $ 1,191 100 % $ 1,014 100 % Cost of sales 612 51 523 52 Gross profit 579 49 491 48 Operating expenses: Selling, general and administrative 153 13 144 14 Engineering — research and development 79 7 74 7 Total operating expenses 232 20 218 21 Operating income 347 29 273 27 Interest expense, net (59 ) (5 ) (66 ) (6 ) Other income, net 6 1 4 — Income before income taxes 294 25 211 21 Income tax expense (64 ) (6 ) (49 ) (5 ) Net income $ 230 19 % $ 162 16 % Net sales Net sales for the six months ended June 30, 2021 were $1,191 million compared to $1,014 million for the six months ended June 30, 2020, an increase of 17%. The increase was principally driven by a $105 million, or 20%, increase in net sales in the North America On-Highway end market and a $50 million, or 38%, increase in net sales in the Outside North America On-Highway end market both of which were principally driven by the continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020, a $23 million, or 10%, increase in net sales in the Service Parts, Support Equipment and Other end market principally driven by higher demand for aluminum die cast components, support equipment and service parts and an $11 million, or 13%, increase in net sales in the Defense end market principally driven by higher demand for Tracked vehicle applications, partially offset by a $12 million, or 26%, decrease in net sales in the Outside North America Off-Highway end market principally driven by lower demand in the energy sector. Cost of sales Cost of sales for the six months ended June 30, 2021 was $612 million compared to $523 million for the six months ended June 30, 2020, an increase of 17%. The increase was principally driven by increased direct material and manufacturing expense commensurate with increased net sales, unfavorable material costs and higher incentive compensation expense, partially offset by restructuring charges in the second quarter of 2020 that did not recur in 2021. Gross profit Gross profit for the six months ended June 30, 2021 was $579 million compared to $491 million for the six months ended June 30, 2020, an increase of 18%. The increase was principally driven by $122 million related to increased net sales, $13 million of price increases on certain products and $5 million of restructuring charges in the second quarter of 2020 that did not recur 2021, partially offset by $23 million of higher manufacturing expense commensurate with increased net sales, $18 million of unfavorable material costs, and $11 million of higher incentive compensation expense. Gross profit as a percent of net sales for the six months ended June 30, 2021 increased 20 basis points compared to the same period in 2020 principally driven by increased net sales, price increases on certain products and restructuring charges in the second quarter of 2020 that did not recur in 2021, partially offset by unfavorable material costs and higher incentive compensation expense. 31 Table of Contents Selling, general and administrative Selling, general and administrative expenses for the six months ended June 30, 2021 were $153 million compared to $144 million for six months ended June 30, 2020, an increase of 6%. The increase was principally driven by higher incentive compensation expense and higher stock compensation expense, partially offset by $6 million of lower intangible amortization expense, $3 million of restructuring charges in the second quarter of 2020 that did not recur in 2021 and lower commercial activities spending. Engineering — research and development Engineering expenses for the six months ended June 30, 2021 were $79 million compared to $74 million for the six months ended June 30, 2020, an increase of 7%. The increase was principally driven by higher incentive compensation expense and increased product initiatives spending, partially offset by $4 million of restructuring charges in the second quarter of 2020 that did not recur 2021. Interest expense, net Interest expense, net for the six months ended June 30, 2021 was $59 million compared to $66 million for the six months ended June 30, 2020, a decrease of 11%. The decrease was principally driven by $6 million of decreased interest expense due to lower interest rates as a result of our long-term debt refinancing in the fourth quarter of 2020 that extended maturities at lower fixed interest rates . Other income, net Other income, net for the six months ended June 30, 2021 was $6 million compared to $4 million for the six months ended June 30, 2020. The change was principally driven by $2 million of favorable foreign exchange on intercompany financing and $1 million of favorable change associated with assets held in a rabbi trust. Income tax expense Income tax expense for the six months ended June 30, 2021 was $64 million, resulting in an effective tax rate of 22%, compared to $49 million of income tax expense and an effective tax rate of 23% for the six months ended June 30, 2020. The increase in income tax expense was principally driven by increased taxable income. The decrease in the effective tax rate was principally driven by increased estimated U.S. federal income tax deductions. 32 Table of Contents Liquidity and Capital Resources We generate cash primarily from our operations to fund our operating, investing and financing activities. Our principal uses of cash are operating expenses, capital expenditures, working capital needs, debt service, dividends on common stock, stock repurchases and strategic growth initiatives, including acquisitions. Our ability to generate cash in the future and our future uses of cash are subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control. We had total available cash and cash equivalents of $238 million and $310 million as of June 30, 2021 and December 31, 2020, respectively. Of the available cash and cash equivalents, $128 million and $150 million were deposited in operating accounts as of June 30, 2021 and December 31, 2020, respectively, while $110 million and $160 million were invested in U.S. government backed securities as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, the total of cash and cash equivalents held by foreign subsidiaries was $95 million, the majority of which was at our subsidiaries located in China and the Netherlands. We manage our worldwide cash requirements considering available funds among the subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not currently anticipate any local liquidity restrictions will preclude us from funding our targeted initiatives or operating needs with local resources. We have not recognized any deferred tax liabilities associated with earnings in foreign subsidiaries, except for our subsidiary located in China, as they are intended to be permanently reinvested and used to support foreign operations or have no associated tax requirements. We have recorded a deferred tax liability of $3 million for the tax liability associated with the remittance of previously taxed income and unremitted earnings for our subsidiary located in China. The remaining deferred tax liabilities, if recorded, related to unremitted earnings that are indefinitely reinvested are not material. Our liquidity requirements are significant, primarily due to our debt service requirements. As of June 30, 2021, we had $635 million of indebtedness associated with ATI’s Term Loan, $400 million of indebtedness associated with ATI’s 4.75% Senior Notes due October 2027 (“4.75% Senior Notes”), $500 million of indebtedness associated with ATI’s 5.875% Senior Notes due June 2029 (“5.875% Senior Notes”) and $1,000 million of indebtedness associated with ATI’s 3.75% Senior Notes due January 2031 (“3.75% Senior Notes” and, together with the 4.75% Senior Notes and 5.875% Senior Notes, the “Senior Notes”). Short-term and long-term debt service liquidity requirements consist of $2 million of minimum required quarterly principal payments on ATI’s Term Loan through its maturity date of March 2026 and periodic interest payments on ATI’s Term Loan and the Senior Notes. There are no required quarterly principal payments on ATI’s Senior Notes. Long-term debt service liquidity requirements also consist of the payment in full of any remaining principal balance of ATI’s Term Loan and the Senior Notes upon their respective maturity dates. We made $3 million of principal payments on the Term Loan during each of the six months ended June 30, 2021 and 2020. Our ability to make payments on and refinance our indebtedness and to fund planned capital expenditures and growth initiatives will depend on our ability to generate cash in the future. 33 Table of Contents The Senior Secured Cr edit Facility provides for a $ 650 million Revolving Credit Facility, net of an allowance for up to $75 million in outstanding letter of credit commitments. As of June 30, 2021 , we had $645 million available under the Revolving Credit Facility, net of $5 million in letters of credit. If we have commitments outstanding on the Revolving Credit Facility at the end of a fiscal quarter, the Senior Secured Credit Facility requires us to maintain a specified maximum first lien net leverage ratio of 5.50x. Additionally, within the terms of the Senior Secured Credit Facility, a first lien net leverage ratio at or below 4.00x results in the elimination of excess cash flow payments on the Senior Secured Credit Facility for the applicable year. As of June 30, 2021 , our first lien net leverage ratio was 0.50x . The Senior Secured Credit Facility also provides certain financial incentives based on our first lien net leverage ratio. A first lien net leverage ratio at or below 4.00x and above 3.50x results in a 25 basis point reduction to the applicable margin on the Revolving Credit Facility. A first lien net leverage ratio at or below 3.50x results in an additional 25 basis point reduction to the applicable margin on the Revolving Credit Facility. These reductions remain in effect as long as we achieve a first lien net leverage ratio at or below the related threshold. In addition, the Credit Agreement includes, among other things, customary restrictions (subject to certain exceptions) on our ability to incur certain indebtedness, grant certain liens, make certain investments, engage in acquisitions, consolidations and mergers, declare or pay certain dividends, and repurchase shares of our common stock. The indentures governing the Senior Notes contain negative covenants restricting or limiting our ability to, among other things, incur or guarantee additional indebtedness, incur liens, pay dividends on, redeem or repurchase our capital stock, make certain investments, permit payment or dividend restrictions on certain of our subsidiaries, sell assets, engage in certain transactions with affiliates, and consolidate or merge or sell all or substantially all of our assets. As of June 30, 2021, we are in compliance with all covenants under the Senior Secured Credit Facility and indentures governing the Senior Notes. Our credit ratings are reviewed by Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”). Moody’s rates our corporate credit at ‘Ba2’, the Term Loan at ‘Baa3’, the 4.75% Senior Notes at ‘Ba3’, the 5.875% Senior Notes at 'Ba3' and the 3.75% Senior Notes at ‘Ba3’. Fitch rates our corporate credit at ‘BB’, the Term Loan at ‘BB+’, the 4.75% Senior Notes at ‘BB’, the 5.875% Senior Notes at 'BB' and the 3.75% Senior Notes at ‘BB’. Our Board of Directors has authorized us to repurchase up to a certain amount of our common stock pursuant to a stock repurchase program (the "Repurchase Program"). During the six months ended June 30, 2021, we repurchased $226 million of our common stock under the Repurchase Program. All of the repurchase transactions during the six months ended June 30, 2021 were settled in cash during the same period. As of June 30, 2021, we had $601 million available under the Repurchase Program. 34 Table of Contents The following table shows our sources and uses of funds for the six months ended June 30, 2021 and 2020 (in millions): Six Months Ended June 30, Statements of Cash Flows Data 2021 2020 Cash flows provided by operating activities $ 271 $ 240 Cash flows used for investing activities $ (69 ) $ (45 ) Cash flows (used for) provided by financing activities $ (274 ) $ 49 Generally, cash provided by operating activities has been adequate to fund our operations. We have significant liquidity, including $238 million of cash and cash equivalents and $645 million available under the Revolving Credit Facility, net of $5 million of letters of credit, as of June 30, 2021. At this time, we believe cash provided by operating activities, cash and cash equivalents and borrowing capacity under the Senior Secured Credit Facility will be sufficient to meet our cash requirements for the next twelve months. Cash provided by operating activities Operating activities for the six months ended June 30, 2021 generated $271 million of cash compared to $240 million for the six months ended June 30, 2020. The increase was principally driven by higher gross profit, lower cash incentive compensation expense and lower cash interest expense, partially offset by higher operating working capital requirements and higher cash income taxes. Cash used for investing activities Investing activities for the six months ended June 30, 2021 used $69 million of cash compared to $45 million for the six months ended June 30, 2020. The increase was principally driven by an $20 million increase in capital expenditures, partially offset by a $4 million net working capital settlement related to the acquisition of Walker Die Casting in 2020 that did not recur in 2021. Cash (used for) provided by financing activities Financing activities for the six months ended June 30, 2021 used $274 million of cash compared to providing $49 million for the six months ended June 30, 2020. The change was principally driven by $275 of net borrowings on the revolving credit facility in 2020 that did not recur in 2021 and $46 million of increased stock repurchases. Contingencies We are a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, personal injury and workers’ compensation, safety, health, taxes, environmental and other matters. For more information, see NOTE P, “Commitments and Contingencies” of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 35 Table of Contents Critical Accounting Policies and Significant Accounting Estimates A discussion of our critical accounting policies and significant accounting estimates is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission on February 18, 2021. The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ materially from these estimates. Changes in estimates are recorded in results of operations in the period that the events or circumstances giving rise to such changes occur. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported for the three and six months ended June 30, 2021. Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements. Recently Issued Accounting Pronouncements See NOTE B, “Summary of Significant Accounting Policies” in Part I, Item 1, of this Quarterly Report on Form 10-Q. 36 Table of Contents Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflect management’s good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to: the duration and spread of the COVID-19 pandemic, including new variants of the virus and the pace and availability of vaccines, mitigating efforts deployed by government agencies and the public at large, and the overall impact from such outbreak on economic conditions, financial market volatility and our business, including but not limited to the operations of our manufacturing and other facilities, our supply chain, our distribution processes and demand for our products and the corresponding impacts to our net sales and cash flow; increases in cost, disruption of supply or shortage of labor, freight, raw materials or components used to manufacture or transport our products, including as a result of the COVID-19 pandemic; risks related to our substantial indebtedness; our participation in markets that are competitive; the highly cyclical industries in which certain of our end users operate; uncertainty in the global regulatory and business environments in which we operate; our ability to prepare for, respond to and successfully achieve our objectives relating to technological and market developments, competitive threats and changing customer needs; the concentration of our net sales in our top five customers and the loss of any one of these; the failure of markets outside North America to increase adoption of fully automatic transmissions; the success of our research and development efforts, the outcome of which is uncertain; U.S. and foreign defense spending; risks associated with our international operations, including increased trade protectionism; general economic and industry conditions; the discovery of defects in our products, resulting in delays in new model launches, recall campaigns and/or increased warranty costs and reduction in future sales or damage to our brand and reputation; our ability to identify, consummate and effectively integrate acquisitions; labor stoppages, labor strikes, work stoppages or similar labor disputes, which could significantly disrupt our operations or those of our principal customers or suppliers; and our intention to pay dividends and repurchase shares of our common stock. Important factors that could cause actual results to differ materially from our expectations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on February 18, 2021. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings or public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties. 37 Table of Contents