DANA Inc 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)   Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in this report.   Forward-Looking Information   Statements in this report (or otherwise made by us or on our behalf) that are not entirely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often be identified by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “predicts,” “seeks,” “estimates,” “projects,” “outlook,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing” and similar expressions, variations or negatives of these words. These statements represent the present expectations of Dana Incorporated and its consolidated subsidiaries (Dana) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including those discussed below and elsewhere in this report and in our other filings with the Securities and Exchange Commission (SEC). All forward-looking statements speak only as of the date made and we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of this report.     Management Overview   Dana is headquartered in Maumee, Ohio, and was incorporated in Delaware in 2007. We are a 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. At June 30, 2021, we employed approximatel y 38,600 people, operated in 33 countries and had 141 major facilities housin g manufacturing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices.   External sales by operating segment for the periods ended June 30, 2021 and 2020 are as follows:       Three Months Ended June 30,     Six Months Ended June 30,       2021     2020     2021     2020               % of             % of             % of             % of       Dollars     Total     Dollars     Total     Dollars     Total     Dollars     Total   Light Vehicle   $ 890       40.4 %   $ 337       31.3 %   $ 1,881       42.1 %   $ 1,145       38.1 % Commercial Vehicle     387       17.6 %     203       18.8 %     736       16.5 %     535       17.8 % Off-Highway     669       30.3 %     398       36.9 %     1,304       29.2 %     931       31.0 % Power Technologies     259       11.7 %     140       13.0 %     547       12.2 %     393       13.1 % Total   $ 2,205             $ 1,078             $ 4,468             $ 3,004             See Note 19 to our consolidated financial statements in Item 1 of Part I for further financial information about our operating segments.   Our internet address is www.dana.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this report.     Operational and Strategic Initiatives   Our enterprise strategy builds on our strong technology foundation and leverages our resources across the organization while driving a customer centric focus, expanding our global markets, and delivering innovative solutions as we evolve into the era of vehicle electrification.   Central to our strategy is l everaging 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 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.   29 Table of Contents   We continue to enhance and expand our global footprint, optimizing it to capture growth across all of our end markets.    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 and 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.   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 .   We have achieved our goal to accelerate hybridization and 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 hybrid and electric vehicles.   See Trends in Our Markets discussion below for additional information on our operational and strategic initiatives.   Capital Structure Initiatives   In addition to investing in our business, we plan to continue prioritizing the allocation of capital to reduce debt and maintain a strong financial position. We continue to drive toward investment grade metrics as part of a balanced approach to our capital allocation priorities and our 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 red uction in the number of shares outstanding. Our Board of Directors authorized a $200 share repurchase program effective in 2018 which expires at the end of 2023. Through June 30, 2021 , we have used cash of $50 to repurchase common shares under the program. Through the first quarter of 2020, we had declared and paid quarterly common stock dividends for thirty-three consecutive quarters. In response to the global COVID-19 pandemic, we temporarily suspended the declaration and payment of dividends to common shareholders and the repurchase of common stock under our existing common stock share repurchase progra m. With the impacts of the global COVID-19 pandemic largely behind us we resumed the declaration and payment of quarterly common stock dividends during the first quarter of 2021.   Financing actions  — Over the past few years we have taken advantage of the lower interest rate environment to complete refinancing transactions that resulted in lower effective interest rates while extending maturities. During 2019 we expanded our credit and guaranty agreement, entering into $675 of additional floating rate term loans to fund the ODS acquisition and increased our revolving credit facility to $1,000 and extended its maturity to August 2024. We completed a $300 2027 note offering and used the proceeds to repay $300 of higher cost 2023 notes. During 2019, we terminated one of our U.S. defined benefit pension plans, settling approximately $165 of previously unfunded pension obligations and eliminating future funding risk associated with interest rate and other market developments. In response to the global COVID-19 pandemic, during June 2020, we completed a $400 2028 note offering and a $100 add on to our 2027 notes. With the impact of the global COVID-19 pandemic on our operations dissipating, we paid down $474 of our floating rate term loans (the "Term A Facility") in the third and fourth quarters of 2020. During the first quarter of 2021, we increased our revolving credit facility to $1,150 and extended its maturity to March 2026. During the second quarter of 2021, we completed a €325 2029 note offering and used the proceeds to repay $375 of higher cost 2026 notes. In addition, we completed a $400 2030 note offering and redeemed $425 of higher cost 2024 notes. See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information.   Other Initiatives   Aftermarket opportunities — We have a global group dedicated to identifying and developing aftermarket growth opportunities that leverage the capabilities within our existing businesses – targeting increased future aftermarket sales. Powered by recognized brands such as Dana®, Spicer®, Spicer Electrified™, Victor Reinz®, Glaser®, GWB®, Thompson®, Tru-Cool®, SVL®, and Transejes™, Dana delivers a broad range of aftermarket solutions – including genuine, all makes, and value lines – servicing passenger, commercial, and off-highway vehicles across the globe.   Selective acquisitions — Although transformational opportunities like the GKN plc driveline business transaction that we pursued in 2018 will be considered when strategically and economically attractive, our acquisition focus is principally directed at “bolt-on” or adjacent acquisition opportunities that have a strategic fit with our existing core businesses, particularly opportunities that support our enterprise strategy and enhance the value proposition of our product offerings. Any potential acquisition will be evaluated in the same manner we currently consider customer program opportunities and other uses of capital – with a disciplined financial approach designed to ensure profitable growth and increased shareholder value. 30 Table of Contents     Acquisitions   Pi Innovo Holding Limited  — On March 1, 2021, we acquired the remaining 51% ownership interest in Pi Innovo Holding Limited (Pi Innovo). Pi Innovo designs, develops and manufactures electronic control units spanning a range of applications and industries. The acquisition of the remaining ownership interest provides us with a 100% ownership interest in Pi Innovo. The total purchase consideration of $35 is comprised of $18 of cash paid at closing and the $17 fair value of our previously held equity method investment in Pi Innovo. The results of operations of the business are reported within our Commercial Vehicle operating segment. Pi Innovo had an insignificant impact on our consolidated results of operations during 2021.    Ashwoods Innovations Limited  — On February 5, 2020, we acquired Curtis Instruments, Inc.'s (Curtis) 35.4% ownership interest in Ashwoods Innovations Limited (Ashwoods). Ashwoods designs and manufactures permanent magnet electric motors for the automotive, material handling and off-highway vehicle markets. The acquisition of Curtis' interest in Ashwoods, along with our existing ownership interest in Ashwoods, provided us with a 97.8% ownership interest and a controlling financial interest in Ashwoods. We recognized a $3 gain to other income (expense), net on the required remeasurement of our previously held equity method investment in Ashwoods to fair value. The total purchase consideration of $22 is comprised of $8 of cash paid to Curtis at closing, the $10 fair value of our previously held equity method investment in Ashwoods and $4 related to the effective settlement of a pre-existing loan payable due from Ashwoods. During March 2020, we acquired the remaining noncontrolling interests in Ashwoods held by employee shareholders. The results of operations of Ashwoods are reported within our Off-Highway operating segment. The Ashwoods acquisition had an insignificant impact on our consolidated results of operations during 2020. See Hydro-Québec relationship discussion below for details of the subsequent change in our ownership interest in Ashwoods.   Hydro-Québec Relationship   On April 14, 2020 , Hydro-Québec acquired an indirect 45% redeemable noncontrolling interest in Ashwoods. We received $9 in cash at closing, inclusive of $2 in proceeds on a loan from Hydro-Québec. Dana will continue to consolidate Ashwoods as the governing documents continue to provide Dana with a controlling financial interest in this subsidiary. See Acquisitions section above for a discussion of Dana's acquisition of Ashwoods.     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.   In 2020, all of our end-markets were impacted to varying degrees by the global COVID-19 pandemic, which initially resulted in lower demand driven by production shutdowns related to virus mitigation efforts in the regions we serve. Each of our end-markets has unique cyclical dynamics and market drivers. These cycles are impacted by periods of investment where end-user vehicle fleets are refreshed or expanded in reaction to demand usage patterns, regulatory changes, or when the age of vehicles in service reach their useful life. Key market drivers include regional economic growth rates; industrial output; commodity production and pricing; and residential and nonresidential construction rates. Our multi-market coverage and broad customer base help provide stability across the cycles while mitigating secular variability.   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. Global light-truck volumes have seen steady growth over the last three years, with the largest gains being in North America. The impact of COVID-19 saw the global market contract by 13% from 2019 levels . Our current outlook for the full year of 2021 reflects full-frame light-truck production to be up by a similar percentage, with all regions exhibiting a strong rebound and returning to 2019 levels as production constraints have eased, inventory returns to more normal levels, and constrained customer demand is fulfilled. Commercial vehicle markets — Our primary business is driveline systems for medium and heavy-duty trucks and busses, including the emerging market for hybrid and electric vehicles. Key regional markets are North America, South America (primarily Brazil) and Asia Pacific. The Class-8 truck market in North America experienced steady growth from 2017 through 2019, peaking at 345,000 trucks produced in 2019. Production of Class-8 trucks in 2020 was 38% below the record production in 2019 due to normal cycle dynamics and the impact of COVID-19. Our current outlook for 2021 is for stronger demand with production up 46% over the prior year driven by improving economic outlook and cyclical growth.   Medium-duty truck production in North America had grown steadily over the last several years before experiencing a 20% year-over-year decline from 2019 to 2020, primarily due to COVID -19. Our current outlook for 2021 is for a 11% increase in production over the prior year. Outside of North America, production of medium- and heavy-duty trucks in South America had been slowly improving prior to the COVID-19 pandemic as economic conditions had started to stabilize. Pandemic and economic conditions drove a 22% decline in production in 2020. Our current 2021 outlook for South America is for a 66% increase in production as the region recovers from the impact of the pandemic and the age of existing vehicles drives a replacement cycle for new trucks. In contrast to the rest of the world, Asia Pacific, driven by China, did not experience lower truck production in 2020, but is expected to slow output by 8% in 2021 as production matches lower demand, primarily driven by India where the recovery from the pandemic has been slower than in China.   31 Table of Contents   Off-highway markets — Our off-highway business has a large presence outside of North America, with 64% of its 2020 sales coming from products manufactured in Europe; however, a large portion of these products are utilized in vehicle production outside the region. The construction equipment segment of the off-highway market is closely related to global economic growth and infrastructure investment. This segment has experienced a 5% market contraction, which began in late 2018 and further accelerated due to COVID-19, with 2020 production ending down an additional 10%. Our current 2021 outlook has production demand in the global construction market rebounding by 12% over the prior year. End-user investment in the mining equipment segment is driven by prices for commodity products produced by underground mining. The global mining equipment market has been mostly stable over the past several years as industry participants have maintained vehicle inventory levels to match commodity output, and this trend is expected to continue in 2021. The agriculture equipment market is the third of o ur key off-highway segments. Like the underground mining segment, investment in agriculture equipment is primarily driven by prices for farm commodities. From 2018 to 2019, global demand for agriculture equipment fell by 3% due to a slump in commodity prices. As prices have remained low, pro duction in 2020 fell an additional 7%. Our current outlook for 2021 is for end-market demand to improve by 10% compared to the prior year, as farm subsidies in response to the global pandemic have bolstered the commodity market and are expected to drive the replacement of aging equipment.   Foreign currency — With 55% of our first half 2021 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 China accounted for 52% and 9% of our first half 2021 non-U.S. sales, respectively, while India and Brazil accounted for 9% and 8%, 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 strengthened against the U.S. dollar in the first half of 2021, increasing sales by $135. A stronger euro, Chinese renminbi, South African rand and British pound were partially offset by a weaker Brazilian real.   Argentina has experienced significant inflationary pressures the past few years, contributing to signifi cant devaluation of its currency among other economic challenges. Our Argentine operation supports our Light Vehicle operating segment. Our sales in Argentina for the first half of 2021 of approximately $51 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $26, including $8 of net fixed assets, at June 30, 2021. During the second quarter of 2018, we determined that Argentina's economy met the GAAP definition of a highly inflationary economy. In assessing Argentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effective July 1, 2018, the U.S. dollar is the functional currency for our Argentine operations, rather than the Argentine peso. Beginning July 1, 2018, peso-denominated monetary assets and liabilities are remeasured into U.S. dollars using current Argentine peso exchange rates with resulting translation gains or losses included in results of operations. Nonmonetary assets and liabilities are remeasured into U.S. dollar using historic Argentine peso exchange rates.    Commodity costs — The cost of our products may be significantly impacted by changes in raw material commodity prices, the most important to us being those of various grades of steel, aluminum, copper, brass and rare earth materials. The effects of changes in commodity prices are reflected directly in our purchases of commodities and indirectly through our purchases of products such as castings, forgings, bearings, batteries and component parts that include commodities. Most of our major customer agreements provide for the sharing of significant commodity price changes with those customers based on the movement in various published commodity indexes. Where such formal agreements are not present, we have historically been successful implementing price adjustments that largely compensate for the inflationary impact of material costs. Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes. Lower commodity prices increased year-over-year earnings in 2020 by approximately $37, as compared to year-over-year earnings reductions of $30 from higher commodity prices in 2019. Material recovery and other pricing actions decreased year-over-year earnings by $80 and $10 in 2020 and 2019, respective ly. Higher commodity prices decreased year-over-year second-quarter and first-half earnings in 2021 by $70 and $105, while lower commodity prices increased year-over-year earnings by $4 and $22 in the same periods last year. Material cost recovery and other pricing actions increased year-over-year second-quarter and first-half earnings in 2021 by $30 and $34, where as material cost recovery and other pricing actions decreased year-over-year earnings by $24 and $51 in the same periods last year.     Sales, Earnings and Cash Flow Outlook       2021 Outlook     2020     2019   Sales   $8,500 - $9,000     $ 7,106     $ 8,620   Adjusted EBITDA   $920 - $1,000     $ 593     $ 1,019   Net cash provided by operating activities (% of sales)   ~10.7%     $ 386     $ 637   Discretionary pension contributions   $ —     $ —     $ 61   Purchases of property, plant and equipment (% of sales)   ~4.0%     $ 326     $ 426   Adjusted Free Cash Flow (% of sales)   ~3.0%     $ 60     $ 272     Adjusted EBITDA and adjusted free cash flow are non-GAAP financial measures. See the Non-GAAP Financial Measures discussion below for definitions of our non-GAAP financial measures and reconciliations to the most directly comparable U.S. generally accepted accounting principles (GAAP) measures. We have not provided a reconciliation of our adjusted EBITDA outlook to the most comparable GAAP measure of net income. Providing net income guidance is potentially misleading and not practical given the difficulty of projecting event driven transactional and other non-core operating items that are included in net income, including re structuring 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.   32 Table of Contents   Our 2021 sales outlook of $8,500 to $9,000 is unchanged from our April 2021 outlook. We currently expect sales will be closer to the high end of the range primarily due to strong end-market demand, an increased currency tail wind and additional material cost recovery. Our full year 2021 adjusted EBITDA outlook of $920 to $1,000 is unchanged from our April 2021 outlook. Adjusted EBITDA Margin is expected to be 10.7%, a 240 basis-point improvement over 2020, reflecting higher margin net new business and the benefit of operational inefficiencies associated with the global COVID-19 pandemic not repeating in 2021, being partially offset by increased investment to support our electrification strategy. In addition, we anticipate higher commodity costs to be largely offset by material recovery and other pricing actions. We now expect to generate adjusted free cash flow of approximately $280, or approximately 3.0% of our sales for 2021. The benefit of higher year-over-year adjusted EBITDA will be partially offset by an elevated level of capital spending supporting new customer programs, as spending on certain projects was deferred during 2020 in response the global COVID-19 pandemic.    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 received that will be launching in the future and 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 June 30, 2021 , our sales backlog of net new business for the 2021 through 2022 period was $700. We expect to realize $500 of our sales backlog in 2021, with incremental sales backlog of $200 being realized in 2022. Our sales backlog is evenly balanced between electric-vehicle and traditional ICE-vehicle content.        Summary Consolidated Results of Operations (Second Quarter, 2021 versus 2020)       Three Months Ended June 30,               2021     2020               Dollars     % of Net Sales     Dollars     % of Net Sales     Increase/ (Decrease)   Net sales   $ 2,205             $ 1,078             $ 1,127   Cost of sales     1,953       88.6 %     1,088       100.9 %     865   Gross margin     252       11.4 %     (10 )     -0.9 %     262   Selling, general and administrative expenses     126       5.7 %     82       7.6 %     44   Amortization of intangibles     3               3               -   Restructuring charges, net                     16               (16 ) Other income (expense), net     (10 )             (1 )             (9 ) Earnings (loss) before interest and income taxes     113               (112 )             225   Loss on extinguishment of debt     (24 )             (5 )             (19 ) Interest income     2               2               —   Interest expense     34               32               2   Earnings (loss) before income taxes     57               (147 )             204   Income tax expense     14               34               (20 ) Equity in earnings of affiliates     10               8               2   Net income (loss)     53               (173 )             226   Less: Noncontrolling interests net income     4                               4   Less: Redeemable noncontrolling interests net income (loss)     (4 )             1               (5 ) Net income (loss) attributable to the parent company   $ 53             $ (174 )           $ 227     Sales — The following table shows changes in our sales by geographic region.       Three Months Ended                                       June 30,             Amount of Change Due To       2021     2020     Increase/ (Decrease)     Currency Effects     Acquisitions (Divestitures)     Organic Change   North America   $ 1,012     $ 479     $ 533     $ 5     $ 2     $ 526   Europe     753       397       356       63               293   South America     140       43       97       2               95   Asia Pacific     300       159       141       17       (12 )     136   Total   $ 2,205     $ 1,078     $ 1,127     $ 87     $ (10 )   $ 1,050     33 Table of Contents   Sales in 2021 were $1,127 higher than in 2020. Stronger international currencies increased sales by $87, principally due to a stronger euro, Chinese renminbi, South African rand and British pound. The organic sales increase of $1,050, or 97%, resulted from improved overall market demand and the conversion of sales backlog. Pricing actions, including material commodity price and inflationary costs adjustments, increased sales by $30.   The North America organic sales increase of 110% 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. Second quarter full-frame light-truck production was up 150%, Classes 5-7 were up 52% and Class 8 was up 161% compared with the second quarter of 2020. Light-vehicle engine production was up 131% compared with the second quarter of 2020. Excluding currency effects, sales in Europe were up 74% compared with 2020. 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 58% compared with the first quarter of 2020. A 109% increase in year-over-year light-vehicle engine production levels also contributed to our organic European sales increase. Excluding currency effects, second quarter sales in South America increased 221% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production. Second-quarter light-truck production was up 315% and medium/heavy-truck production was up 316%. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 86% compared to 2020 due to improved light-truck production and a stronger construction/mining market. Second-quarter 2021 light-truck production was up 25%. The global semiconductor chip shortage impacted our second-quarter 2021 sales as customers of some of our more significant programs were forced to take down time during the quarter.  Cost of sales and gross margin — Cost of sales for the second quarter of 2021 increased $865, or 80% when compared to 2020. Cost of sales as a percent of sales was 1,230 basis points lower than in the previous year. Incremental margins provided by increased sales volumes were partially offset by higher year-over-year commodity costs of $70, higher standard and premium freight costs of $20 and incremental investment in electrification initiatives. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Year-over-year freight cost increases are primarily due to higher freight rates, driven by container shortages and port congestions due to pandemic-related operational disruptions, and the incurrence of premium freight to support customer demand levels. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $49. Gross margin of $252 for 2021  increased $262 from 2020. Gross margin as a percent of sales was 11.4% in 2021, 1,230 basis points higher than in 2020. The improvement in gross margin as a percent of sales was driven principally by the cost of sales factors referenced above. Gross margin during the second quarter of 2021 was negatively impacted by costs associated with continued, while dissipating, global supply chain disruptions and operational inefficiencies driven by labor shortages at certain of our facilities and customer down time resulting from the global semiconductor chip shortage. In addition, gross margin during the second quarter of 2021 was negatively impacted by material cost recovery mechanisms with our customers lagging material cost increases charged by our suppliers by approximately 90 days.   Selling, general and administrative expenses (SG&A) — SG&A expenses in 2021 were $126 (5.7% of sales) as compared to $82 (7.6% of sales) in 2020.  SG&A expenses were $44 lower in 2020 primarily due to lower incentive compensation and lower salaried employee wages and benefits, travel expenses and professional fees resulting from austerity measures taken in response to the global COVID-19 pandemic.   Amortization of intangibles — Amortization expense was $3 in both 2021 and in 2020.   Restructuring charges, net  — Net restructuring charges of $16 in the first quarter of 2020 were comprised of severance and benefit costs primarily related to headcount reductions across our operations in response to the global COVID-19 pandemic and exit costs related to previously announced actions.   34 Table of Contents   Other income (expense), net — The following table shows the major components of other income (expense), net.       Three Months Ended       June 30,       2021     2020   Non-service cost components of pension and OPEB costs   $ (3 )   $ (3 ) Government grants and incentives     5       2   Foreign exchange gain             2   Strategic transaction expenses     (5 )     (5 ) Gain on investment in Hyliion     3           Loss on de-designation of fixed-to-fixed cross currency swaps     (9 )         Other, net     (1 )     3   Other income (expense), net   $ (10 )   $ (1 )   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 inte gration costs. 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. Strategic transaction expenses in 2020 were primarily attributable to the acquisitions of the Oerlikon Drive Systems segment of the Oerlikon Group (ODS) and Nordresa Motors, Inc. 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 combi ned 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 is included in marketable securities and carried at fair value with changes in fair value included in net income.   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. See Note 13 of the consolidated financial statements in Item I of Part I for additional information.   Loss on extinguishment of debt  — On May 13, 2021 and May 17, 2021, we redeemed $254 and $171 of our December 2024 Notes, respectively. The $11 loss on extinguishment of debt includes the redemption premiums and the write-off of $3 of previously deferred financings costs associated with our December 2024 Notes. In addition, we recognized a previously deferred $3 gain on a terminated fixed-to-floating interest rate swap associated with the December 2024 Notes. On June 10, 2021, we redeemed all of our June 2026 Notes. The $16 loss on extinguishment of debt includes the $12 redemption premium and the write-off of $4 of previously deferred financing costs associated with our June 2026 Notes. On June 19, 2020, in connection with the issuance of our June 2028 Notes, we terminated our $500 bridge facility and wrote off $5 of deferred fees associated with the bridge facility. See Note 12 of the consolidated financial statements in Item 1 of Part I for additional information.   Interest income and interest expense  — Interest income was $2 in both 2021 and 2020. Interest expense increased from $32 in 2020 to $34 in 2021, primarily due to higher interest rates on outstanding borrowings. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.2% in 2021 and 4.7%  in 2020. The year-over-year increase in our average effective interest rate is primarily attributable to the issuance of $400 of our 5.625% June 2028 Notes and an additional $100 of our 5.375% November 2027 Notes during the second quarter of 2020 and the pay down our Term A Facility, which bore interest at an average of 2.03% durin g the second quarter of 2020, in the fourth quarter of 2020.   Income tax expense  — We reported income tax expense of $14 and $34 for 2021 and 2020 , respectively. Our effective tax rates were 25% and (23)% for the second quarter of 2021 and 2020. In the second quarter of 2020 we recorded an income tax expense of $56 for valuation allowances in foreign jurisdictions due to reduced income projections. Excluding this item, the effective tax rate would have been 15% for the second quarter of 2020. Our effective income tax rates vary from the U.S. federal statutory rate of 21% due to establishment, release and adjustment of valuation allowances in several countries, nondeductible expenses and deemed income, local tax incentives in several countries outside the U.S., different statutory tax rates outside the U.S. and withholding taxes related to repatriations of international earnings. The effective income tax rate may vary significantly due to fluctuations in the amounts and sources, both foreign and domestic, of pretax income and changes in the amounts of nondeductible expenses.   In countries where our history of operating losses does not allow us to satisfy the “more likely than not” criterion for recognition of deferred tax assets, we have generally recognized no income tax on the pre-tax income or losses as valuation allowance adjustments offset the associated tax effects. Consequently, there is no income tax expense or benefit recognized on the pre-tax income or losses in these jurisdictions as valuation allowances are adjusted to offset the associated tax expense or benefit. We believe it is reasonably possible that valuation allowances of up to approximately $50 related to subsidiaries in Germany will be released in the next twelve months.    Equity in earnings of affiliates — Net earnings from equity investments was $10 in 2021 and $8 in 2020. Equity in earnings from DDAC was $8 in 2021 and $9 in 2020. Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) were de minimis in 2020. On October 1, 2020 we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC.      35 Table of Contents   Summary Consolidated Results of Operations (Year-to-Date, 2021 versus 2020)       Six Months Ended June 30,               2021     2020               Dollars     % of Net Sales     Dollars     % of Net Sales     Increase/ (Decrease)   Net sales   $ 4,468             $ 3,004             $ 1,464   Cost of sales     3,965       88.7 %     2,808       93.5 %     1,157   Gross margin     503       11.3 %     196       6.5 %     307   Selling, general and administrative expenses     245       5.5 %     188       6.3 %     57   Amortization of intangibles     7               6               1   Restructuring charges, net     1               19               (18 ) Impairment of goodwill                     (51 )             51   Other income (expense), net     (29 )             3               (32 ) Earnings (loss) before interest and income taxes     221               (65 )             286   Loss on extinguishment of debt     (24 )             (5 )             (19 ) Interest income     4               4               —   Interest expense     68               61               7   Earnings (loss) before income taxes     133               (127 )             260   Income tax expense     36               18               18   Equity in earnings of affiliates     24               10               14   Net income (loss)     121               (135 )             256   Less: Noncontrolling interests net income     5               2               3   Less: Redeemable noncontrolling interests net loss     (8 )             (21 )             13   Net income (loss) attributable to the parent company   $ 124             $ (116 )           $ 240     Sales — The following table shows changes in our sales by geographic region.       Six Months Ended                                       June 30,             Amount of Change Due To       2021     2020     Increase/ (Decrease)     Currency Effects     Acquisitions (Divestitures)     Organic Change   North America   $ 2,107     $ 1,461     $ 646     $ 6     $ 3     $ 637   Europe     1,485       1,011       474       117       2       355   South America     260       148       112       (16 )             128   Asia Pacific     616       384       232       28       (12 )     216   Total   $ 4,468     $ 3,004     $ 1,464     $ 135     $ (7 )   $ 1,336     Sales in 2021 were $1,464 higher than in 2020. Stronger international currencies increased sales by $135, principally due to a stronger euro, Chinese renminbi, South African rand and British pound, partially offset by a weaker Brazilian real. The organic sales increase of $1,336, or 44%, resulted from improved overall market demand and the conversion of sales backlog. Pricing actions, including material commodity price and inflationary costs adjustments, increase sales by $34.   The North America organic sales increase of 44% was driven principally by stronger light-, medium- and heavy-duty truck production volumes, higher-light vehicle engine production levels and the conversion of sale backlog. First half full-frame light-truck production was up 49%, Classes 5-7 were up 18% and Class 8 was up 58% compared with the first half of 2020. Light-vehicle engine production was up 35% compared with the first half of 2020. Excluding currency effects and the impact of acquisitions, sales in Europe were up 35% compared with 2020. With our significant Off-Highway presence in the region, stronger construction/mining and agricultural markets were a major factor. Organic sales of this operating segment were up 32% compared with the first half of 2020. A 35% increase in year-over-year light-vehicle engine production levels also contributed to our organic European sales increase. Excluding currency effects, first-half sales in South America increased 86% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production. First-half 2021 light-truck production was up 104% and medium/heavy-truck production was up 116%. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 56% compared to 2020 due to improved light-truck production and stronger construction/mining and agricultural markets. First-half 2021 light-truck production was up 29%. The global semiconductor chip shortage impacted our first-half 2021 sales as customers of some of our more significant programs were forced to take down time during the second quarter.   36 Table of Contents   Cost of sales and gross margin — Cost of sales for the first half of 2021 increased $1,157, or 41% when compared to 2020. Cost of sales as a percent of sales was 480 basis points lower than in the previous year. Incremental margins provided by increased sales volumes were partially offset by higher year-over-year commodity costs of $105, higher standard and premium freight costs of $43 and incremental investment in electrification initiatives. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Year-over-year freight cost increases are primarily due to higher freight rates, driven by container shortages and port congestions due to pandemic-related operational disruptions, and the incurrence of premium freight to support customer demand levels. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $76.   Gross margin of $503 for 2021 increased $307 from 2020. Gross margin as a percent of sales was 11.3% in 2021, 480 basis points higher than in 2020. The improvement in gross margin as a percent of sales was driven principally by the cost of sales factors referenced above. Gross margin during the first half of 2021 was negatively impacted by costs associated with continued, while dissipating, global supply chains disruptions and operational inefficiencies driven by labor shortages at certain of our facilities and customer down time resulting from the global semiconductor chip shortage. In addition, gross margin during the first half of 2021 was negatively impacted by material cost recovery mechanisms with our customers lagging material cost increases charged by our suppliers by approximately 90 days.   Selling, general and administrative expenses (SG&A) — SG&A expenses in 2021 were $245 (5.5% of sales) as compared to $188 (6.3% of sales) in 2020. SG&A expenses were $57 lower in 2020 primarily due to lower  incentive compensation and lower salaried employee wages and benefits, travel expenses and professional fees resulting from austerity measures taken in response to the global COVID-19 pandemic.   Amortization of intangibles — Amortization expense was $7 in 2021 and $6 in 2020. The increase in amortization expense is primarily due to higher levels of intangible assets as the result of acquisition activity.   Restructuring charges, net — Net restructuring charges were $1 in 2021 and $19 in 2020. Restructuring charges in 2020 were comprised of severance and benefit costs primarily related to headcount reductions across our operations in response to the global COVID-19 pandemic and exit costs related to previously announced actions.   Impairment of goodwill  — During the first quarter of 2020, we recorded a $51 goodwill impairment charge. See Note 3 of our consolidated financial statements in Item 1 of Part I for additional information.    Other income (expense), net — The following table shows the major components of other income (expense), net.       Six Months Ended       June 30,       2021     2020   Non-service cost components of pension and OPEB costs   $ (5 )   $ (5 ) Government grants and incentives     8       6   Foreign exchange gain     1       7   Strategic transaction expenses     (8 )     (11 ) Loss on investment in Hyliion     (14 )         Loss on disposal group held for sale     (7 )         Loss on de-designation of fixed-to-fixed cross currency swaps     (9 )         Other, net     5       6   Other income (expense), net   $ (29 )   $ 3     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 cost s. 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. Strategic transaction expenses in 2020 were primarily attributable to the acquisitions of the Oerlikon Drive Systems seg ment of the Oerlikon Group (ODS) and Nordresa Motors, Inc. and certain other strategic initiatives.   37 Table of Contents   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 is included in marketable securities and carried at fair value with changes in fair value included in net income.   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. See Note 13 of the consolidated financial statements in Item I of Part I for additional information.   In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We were required to divest of 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 divestiture of this business in April 2021. See Note 17 of the consolidated financial statement in Item I of Part I for additional information.   Loss on extinguishment of debt  — On May 13, 2021 and May 17, 2021, we redeemed $254 and $171 of our December 2024 Notes, respectively. The $11 loss on extinguishment of debt includes the redemption premiums and the write-off of $3 of previously deferred financings costs associated with our December 2024 Notes. In addition, we recognized a previously deferred $3 gain on a terminated fixed-to-floating interest rate swap associated with the December 2024 Notes. On June 10, 2021, we redeemed all of our June 2026 Notes. The $16 loss on extinguishment of debt includes the $12 redemption premium and the write-off of $4 of previously deferred financing costs associated with our June 2026 Notes. On June 19, 2020, in connection with the issuance of our June 2028 Notes, we terminated our $500 bridge facility and wrote off $5 of deferred fees associated with the bridge facility. See Note 12 of the consolidated financial statements in Item 1 of Part I for additional information.   Interest income and interest expense — Interest income was $4 in both 2021 and 2020. Interest expense increased from $61 in 2020 to $68 in 2021, primarily due to higher interest rates on outstanding borrowings. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.3% in 2021 and 4.7% in 2020. The year-over-year increase in our average effective interest rate is primarily attributable to the issuance of $400 of our 5.625% June 2028 Notes and an additional $100 of our 5.375% November 2027 Notes during the second quarter of 2020 and the pay down our Term A Facility, which bore interest at an average of 2. 61% du ring the first half of 2020, in the fourth quarter of 2020.   Income tax expense  — We reported income tax expense of $36 and $18 for the first half of June 30, 2021 and 2020 , respectively. Our effective tax rates were 27% and (14)% for the first half of 2021 and 2020. In the second quarter of 2020 we recorded an income tax expense of $56 for valuation allowances in foreign jurisdictions due to reduced income projections. During the first quarter of 2020, a pre-tax goodwill impairment charge of $51 with an associated income tax benefit of $1 was recorded. Also, during the first quarter of 2020, we recorded tax benefits of $37 related to tax actions that adjusted federal tax credits, tax expense of $2 to record additional valuation allowance in the U.S. based on reduced income projections, and tax expense of $4 to record valuation allowances in foreign jurisdictions due to reduced income projections. Excluding these items, the effective tax rate would have been 8% for the first half of 2020. Our effective income tax rates vary from the U.S. federal statutory rate of 21% due to establishment, release and adjustment of valuation allowances in several countries, nondeductible expenses and deemed income, local tax incentives in several countries outside the U.S., different statutory tax rates outside the U.S. and withholding taxes related to repatriations of international earnings. The effective income tax rate may vary significantly due to fluctuations in the amounts and sources, both foreign and domestic, of pretax income and changes in the amounts of nondeductible expenses.   In countries where our history of operating losses does not allow us to satisfy the “more likely than not” criterion for recognition of deferred tax assets, we have generally recognized no income tax on the pre-tax income or losses as valuation allowance adjustments offset the associated tax effects. Consequently, there is no income tax expense or benefit recognized on the pre-tax income or losses in these jurisdictions as valuation allowances are adjusted to offset the associated tax expense or benefit. We believe it is reasonably possible that valuation allowances of up to approximately $50 related to subsidiaries in Germany will be released in the next twelve months.    Equ ity in earnings of affiliates — Net earnings from equity investments was $24 in 2021 and $10 in 2020. Equity in earnings from DDAC was $21 in 2021 and $8 in 2020. DDAC's operations located in China's Hubei province, the center of the initial COVID-19 outbreak, were shut down the entire month of February 2020. Production was permitted to resume in March 2020. Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) was $3 in 2020. On October 1, 2020 we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC.      38 Table of Contents   Segment Results of Operations (2021 versus 2020)   Light Vehicle       Three Months     Six Months       Sales     Segment EBITDA     Segment EBITDA Margin     Sales     Segment EBITDA     Segment EBITDA Margin   2020   $ 337     $ (32 )     -9.5 %   $ 1,145     $ 51       4.5 % Volume and mix     525       117               703       157           Divestitures     (7 )                     (7 )                 Performance     15                       10       (24 )         Currency effects     20       2               30       3           2021   $ 890     $ 87       9.8 %   $ 1,881     $ 187       9.9 %   Light Vehicle sales in the second quarter and first half of 2021, exclusive of currency effects and the impact of divestitures, were 160% and 62% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. Second-quarter and first-half 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Year-over-year North America full-frame light-truck production increased 150% in this year’s second quarter while light-truck production in Europe, South America and Asia Pacific increased 109%, 315% and 25%, respectively. Year-over-year North America full-frame light-truck production increased 49% in this year’s first half while light-truck production in Europe, South America and Asia Pacific increased 41%, 104% and 29%, respectively. Net customer pricing and cost recovery actions further increased year-over-year sales by $6 and $2 in this year’s second quarter and first half, respectively. The global semiconductor chip shortage impacted our second-quarter and first-half 2021 sales as customers of some of our more significant programs were forced to take down time during the second quarter.   Light Vehicle second-quarter 2021 segment EBITDA increased by $119 from last year, with first-half earnings higher by $136. Higher sales volumes provided a year-over-year benefit of $117 (22.3% incremental margin) and $157 (22.3% incremental margin) in the second quarter and first half of 2021. Year-over-year performance-related earnings decreases in the second quarter were driven by commodity cost increases of $32, higher standard and premium freight costs of $10, higher incentive compensation of $3, higher warranty costs of $5, higher program launch costs of $3 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $5 and $6, respectively. Offsetting these performance-related decreases were material cost savings and supplier recoveries of $35, net customer pricing and material cost recovery actions of $6 and operational efficiencies of $23. The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $48, higher standard and premium freight costs of $19, higher incentive compensation of $6, higher warranty costs of $5, higher program launch costs of $3 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $5 and $6, respectively. Partially offsetting these performance-related decreases were material cost savings and supplier recoveries of $48, net customer pricing and material cost recovery actions of $2 and operational efficiencies of $18.   Commercial Vehicle       Three Months     Six Months       Sales     Segment EBITDA     Segment EBITDA Margin     Sales     Segment EBITDA     Segment EBITDA Margin   2020   $ 203     $ (6 )     -3.0 %   $ 535     $ 15       2.8 % Volume and mix     157       44               178       49           Acquisitions/Divestitures     (3 )                     (1 )                 Performance     18       (21 )             21       (32 )         Currency effects     12       1               3       1           2021   $ 387     $ 18       4.7 %   $ 736     $ 33       4.5 %   Commercial Vehicle sales in the second quarter and first half of 2021, exclusive of currency effects and the impact of acquisitions and divestitures, were 86% and 37% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. Second-quarter and first-half 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Year-over-year North America Class 8 production was up 161% and Classes 5-7 were up 52% in this year’s second quarter. Year-over-year North America Class 8 production was up 58% and Classes 5-7 were up 18% in the first half of this year. Year-over-year medium/heavy-truck production in Europe and South America were up 78% and 316%, respectively, while production in Asia Pacific was down 6% in this year’s second quarter. Year-over-year medium/heavy-truck production in Europe, South America and Asia Pacific were up 20%, 116% and 14%, respectively, in the first half of this year. Net customer pricing and cost recovery actions further increased year-over-year sales by $16 and $24 in this year’s second quarter and first half, respectively. The global semiconductor chip shortage impacted our second-quarter and first-half 2021 sales as customers of some of our more significant programs were forced to take down time during the second quarter.   Commercial Vehicle second-quarter 2021 segment EBITDA increased by $24 from last year, with first-half earnings higher by $18. Higher sales volumes provided a year-over-year benefit of $44 (28.0% incremental margin) and $49 (27.5% incremental margin) in the second quarter and first half of 2021. The year-over-year performance-related earnings decrease in the second quarter was driven by commodity cost increases of $20, higher standard and premium freight costs of $6, higher incentive compensation of $2, higher warranty costs of $1, operational inefficiencies of $2 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $2 and $8, respectively. Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $16 and material cost savings of $4. The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $29, higher standard and premium freight costs of $16, higher incentive compensation of $4, operational inefficiencies of $5 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $2 and $8, respectively. Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $24 and material cost savings of $8.   39 Table of Contents   Off-Highway       Three Months     Six Months       Sales     Segment EBITDA     Segment EBITDA Margin     Sales     Segment EBITDA     Segment EBITDA Margin   2020   $ 398     $ 36       9.0 %   $ 931     $ 108       11.6 % Volume and mix     224       59               289       74           Acquisitions                             1       (1 )         Performance     5       (3 )             5       (13 )         Currency effects     42       5               78       8           2021   $ 669     $ 97       14.5 %   $ 1,304     $ 176       13.5 %   Off-Highway sales in the second quarter and first half of 2021, exclusive of currency effects and the impact of acquisitions, were 58% and 32% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. Year-over-year global construction/mining and agricultural equipment markets reflected marked improvement. Net customer pricing and cost recovery actions further increased year-over-year sales by $6 and $7 in this year’s second quarter and first half, respectively.   Off-Highway second-quarter 2021 segment EBITDA increased by $61 from last year, with first-half earnings higher by $68. Higher sales volumes provided a year-over-year benefit of $59 (26.3% incremental margin) and $74 (25.6% incremental margin) in the second quarter and first half of 2021. The year-over-year performance-related earnings decrease in the second quarter was driven by commodity cost increases of $14, higher standard and premium freight costs of $2, higher incentive compensation of $2 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1 and $9, respectively. Partially offsetting these performance-related decreases were material cost savings of $8, net customer pricing and material cost recovery actions of $6, operational efficiencies of $10 and lower warranty costs of $1. The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $21, higher standard and premium freight costs of $3, higher incentive compensation of $4 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1 and $11, respectively. Partially offsetting these performance-related decreases were material cost savings of $15, net customer pricing and material cost recovery actions of $7 and operational efficiencies of $5.   Power Technologies       Three Months     Six Months       Sales     Segment EBITDA     Segment EBITDA Margin     Sales     Segment EBITDA     Segment EBITDA Margin   2020   $ 140     $ (1 )     -0.7 %   $ 393     $ 29       7.4 % Volume and mix     104       38               129       46           Performance     2       (6 )             1       (4 )         Currency effects     13       1               24       2           2021   $ 259     $ 32       12.4 %   $ 547     $ 73       13.3 %   Power Technologies primarily serves the light-vehicle market but also sells product to the medium/heavy-truck and off-highway markets. Power Technologies sales in the second quarter and first half of 2021, exclusive of currency effects, were 76% and 33% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. Second-quarter and first-half 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Year-over-year North America, Europe, South America and Asia Pacific light-vehicle engine production was up 131%, 109%, 291% and 20%, respectively, in this year’s second quarter. Year-over-year North America, Europe, South America and Asia Pacific light-vehicle engine production was up 35%, 35%, 48% and 26%, respectively, in the first half of this year. Net customer pricing and cost recovery actions further increased year-over-year sales by $2 and $1 in this year’s second quarter and first half, respectively. The global semiconductor chip shortage impacted our second-quarter and first-half 2021 sales as customers were forced to take down time during the second quarter.   Power Technologies second-quarter 2021 segment EBITDA increased by $33 from last year, with first-half earnings higher by $44. Higher sales volumes provided a year-over-year benefit of $38 (36.5% incremental margin) and $46 (35.7% incremental margin) in the second quarter and first half of 2021. The year-over-year performance-related earnings decrease in the second quarter was driven by commodity cost increases of $4, higher standard and premium freight costs of $2, higher incentive compensation of $3 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1 and $7, respectively. Partially offsetting these performance-related decreases were material cost savings of $2, net customer pricing and material cost recovery actions of $2, operational efficiencies of $6 and lower warranty costs of $1. The year-over-year performance-related earnings decrease in the first half was driven by commodity cost increases of $7, higher standard and premium freight costs of $5, higher incentive compensation of $5 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1 and $7, respectively. Partially offsetting these performance-related decreases were material cost savings of $5, net customer pricing and material cost recovery actions of $1, operational efficiencies of $13 and lower warranty costs of $2.      40 Table of Contents       Non-GAAP Financial Measures   Adjusted EBITDA   We have defined adjusted EBITDA as net income before interest, income taxes, depreciation, amortization, equity grant expense, restructuring expense, non-service cost components of pension and other postretirement benefits (OPEB) costs and other adjustments not related to our core operations (gain/loss on debt extinguishment, pension settlements, divestitures, impairment, etc.). Adjusted EBITDA is a measure of our ability to maintain and continue to invest in our operations and provide shareholder returns. We use adjusted EBITDA in assessing the effectiveness of our business strategies, evaluating and pricing potential acquisitions and as a factor in making incentive compensation decisions. In addition to its use by management, we also believe adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate financial performance of our company relative to other Tier 1 automotive suppliers. Adjusted EBITDA should not be considered a substitute for earnings before income taxes, net income or other results reported in accordance with GAAP. Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.   The following table provides a reconciliation of net income to adjusted EBITDA.       Three Months Ended     Six Months Ended       June 30,     June 30,       2021     2020     2021     2020   Net income (loss)   $ 53     $ (173 )   $ 121     $ (135 ) Equity in earnings of affiliates     10       8       24       10   Income tax expense     14       34       36       18   Earnings (loss) before income taxes     57       (147 )     133       (127 ) Depreciation and amortization     97       89       192       178   Restructuring charges, net             16       1       19   Interest expense, net     32       30       64       57   Loss on extinguishment of debt     24       5       24       5   Impairment of goodwill                             51   (Gain) loss on investment in Hyliion     (3 )             14           Loss on disposal group held for sale                     7           Loss on de-designation of fixed-to-fixed cross currency swaps     9               9           Other*     17       2       23       17   Adjusted EBITDA   $ 233     $ (5 )   $ 467     $ 200   * Other includes stock compensation expense, non-service cost components of pension and OPEB costs, strategic transaction expenses and other items. See Note 19 to our consolidated financial statements in Item 1 of Part I for additional details.   Free Cash Flow and Adjusted Free Cash Flow   We have defined free cash flow as cash provided by (used in) operating activities less purchases of property, plant and equipment. We have defined adjusted free cash flow as cash provided by (used in) operating activities excluding discretionary pension contributions less purchases of property, plant and equipment. We believe these measures are useful to investors in evaluating the operational cash flow of the company inclusive of the spending required to maintain the operations. Free cash flow and adjusted free cash flow are not intended to represent nor be an alternative to the measure of net cash provided by (used in) operating activities reported in accordance with GAAP. Free cash flow and adjusted free cash flow may not be comparable to similarly titled measures reported by other companies.   The following table reconciles net cash flows provided by (used in) operating activities to adjusted free cash flow.       Three Months Ended     Six Months Ended       June 30,     June 30,       2021     2020     2021     2020   Net cash provided by (used in) operating activities   $ 67     $ (75 )   $ 94     $ (126 ) Purchases of property, plant and equipment     (80 )     (58 )     (133 )     (121 ) Free cash flow     (13 )     (133 )     (39 )     (247 ) Discretionary pension contribution     —       —       —       —   Adjusted free cash flow   $ (13 )   $ (133 )   $ (39 )   $ (247 )     41 Table of Contents     Liquidity   The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at June 30, 2021:   Cash and cash equivalents   $ 384   Less: Deposits supporting obligations     —   Available cash     384   Additional cash availability from Revolving Facility     1,129   Marketable securities     59   Total liquidity   $ 1,572     Cash deposits are maintained to provide credit enhancement for certain agreements and are reported as part of cash and cash equivalents. For most of these deposits, the cash may be withdrawn if a comparable security is provided in the form of letters of credit. Accordingly, these deposits are not considered to be restricted. Marketable securities are included as a component of liquidity as these investments can be readily liquidated at our discretion. We h ad avail ability of $1,129 at June 30, 2021 under the Revolving Facility after deducting $21 of outstanding letters of credit.   The components of our June 30, 2021 consolidated cash balance were as follows:       U.S.     Non-U.S.     Total   Cash and cash equivalents   $ —     $ 294     $ 294   Cash and cash equivalents held as deposits                     —   Cash and cash equivalents held at less than wholly-owned subsidiaries     2       88       90   Consolidated cash balance   $ 2     $ 382     $ 384     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.   On March 25, 2021, we amended our credit and guaranty agreement, increasing the Revolving Facility to $1,150 and extending its maturity to March 25, 2026.   At June 30, 2021, we were in compliance with the covenants of our financing agreements. Under the Term B Facility, 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 Term B  Facility and 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. 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.   42 Table of Contents   Cash Flow   The following table summarizes our consolidated statement of cash flows:       Six Months Ended       June 30,       2021     2020   Cash used for changes in working capital   $ (239 )   $ (228 ) Other cash provided by operations     333       102   Net cash provided by (used in) operating activities     94       (126 ) Net cash used in investing activities     (180 )     (141 ) Net cash provided by (used in) financing activities     (71 )     476   Net increase (decrease) in cash, cash equivalents and restricted cash   $ (157 )   $ 209     Operating activities — Exclusive of working capital, other cash provided by operations was $333 in 2021 and $102 in 2020. The year-over-year increase is primarily attributable to higher operating earnings.   Working capital used cash of $239 and $228 in 2021 and 2020. Cash of $204 was used to finance receivables in 2021, while cash of $201 was provided by lower levels of receivables in 2020. The cash generated by lower receivables in 2020 was due primarily to the rapid dissipation of customer demand beginning in March 2020 as a result of the global COVID-19 pandemic. Cash of $305 was used to fund higher inventory levels during 2021, while cash of $53 was provided by lower inventory levels in 2020. The cash generated by lower inventory levels in 2020 was due primarily to actions taken to reduce inventory levels, preserving working capital, in response to the global COVID-19 pandemic. Increases in accounts payable and other net liabilities provided cash of $270 in 2021, while decreases in accounts payable and other net liabilities used cash of $482 in 2020. The reduction in accounts payable and other net liabilities in 2020 was principally driven by lower raw material purchases beginning in March 2020 due to the rapid dissipation of customer demand resulting from the global COVID-19 pandemic.   Investing activities — Expenditures for property, plant and equipment were $133 and $121 during 2021 and 2020. 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 provides us with a 100% ownership interest in Pi Innovo. During the first quarter of 2020, we paid $8 to acquire Curtis' 35.4% ownership interest in Ashwoods. The acquisition of Curtis's interest in Ashwoods, along with our existing ownership interest in Ashwoods, provided us with a controlling financing interest in Ashwoods. During 2021 and 2020, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities. In 2021 we de-designated 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 2021, we completed the issuance of €325 of our July 2029 Notes and $400 of our September 2030 Notes, paying financing costs of $11. 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 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. During 2020, we completed the issuance of $400 of our June 2028 Notes and the issuance of an additional $100 of our November 2027 Notes, paying financing costs of $6. During 2020, we entered a $500 bridge facility, paying financing costs of $5. We subsequently terminated the bridge facility. We used $29 and $15 for dividend payments to common stockholders during 2021 and 2020. During the second quarter of 2020, we temporarily suspended the declaration and payment of dividends to common stockholders and temporarily suspended the repurchase of c ommon stock under our existing common stock repurchase program in response to the global COVID-19 pandemic. During 2020, Hydro-Québec paid us $7 to acquire an indirect 45% ownership interest in Ashwoods.   43 Table of Contents     Off-Balance Sheet Arrangements   There have been no material changes at June 30, 2021 in our off-balance sheet arrangements from those reported or estimated in the disclosures in Item 7 of our 2020 Form 10-K.   Contractual Obligations   There have been no material changes in our contractual obligations from those disclosed in Item 7 of our 2020 Form 10-K.   Contingencies   For a summary of litigation and other contingencies, see Note 14 to our consolidated financial statements in Item 1 of Part I. Based on information available to us at the present time, we do not believe that any liabilities beyond the amounts already accrued that may result from these contingencies will have a material adverse effect on our liquidity, financial condition or results of operations.   Critical Accounting Estimates   The preparation of our consolidated financial statements in accordance with GAAP requires us to use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. See Item 7 in our 2020 Form 10-K for a description of our critical accounting estimates and Note 1 to our consolidated financial statements in Item 8 of our 2020 Form 10-K for our significant accounting policies. There were no changes to our critical accounting estimates in the six months ended June 30, 2021. See Note 1 to our consolidated financial statements in this Form 10-Q for a discussion of new accounting guidance adopted during the first six months of 2021.      Item 3. Quantitative and Qualitative Disclosures About Market Risk   There have been no material changes to market risk exposures related to changes in currency exchange rates, interest rates or commodity costs from those discussed in Item 7A of our 2020 Form 10-K.