What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-07-30 · 200 added, 194 removed, 470 unchanged (46% of the section changed)

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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,

At September 30, 2021, we employed approxim ately 39,500 people, operated in 33 countries and had 141 major facilities housing manufac turing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices.

External sales by operating segment for the periods ended September 30, 2021 and 2020 are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Light Vehicle

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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.

We have accelerated hybridization and electrification through both core Dana technologies and targeted strategic acquisitions and are positioned today to lead the market.

The ten recent investments in electro dynamic 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.

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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 September 30, 2021 , we have used cash of $73 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.

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 and our share repurchase program in the third quarter of 2021.

Financing actions 

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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 driveline business is weighted more heavily to the truck and SUV se gments 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.

Our current outlook for the full year of 2021 reflects global full-frame light-truck production being up 6% with all regions improving over 2020, but falling short of 2019 levels due to the continued global semiconductor chip shortage.

Commercial vehicle markets —

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Our current 2021 outlook for South America is for a 64% 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 5% in 2021 as production matches lower demand, primarily driven by India where the recovery from the pandemic has been slower than in China.

Off-highway markets —

Off-highway mark ets —

Our off-highway business has a large presence outside of North America, with 64% of its 2020 sales coming from products manufactured in Europe;

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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%.

As prices have remained low, production 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.

With 55% of our year-to-date 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 51% and 10% of our year-to-date 2021 non-U.S.

sales, respectively, while India and Brazil each accounted for 9%.

Although sales in South Africa are less than 5% of our non-U.S.

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International currencies strengthened against the U.S.

dollar in the first half of 2021, increasing sales by $135.

dollar in the first nine months of 2021, increasing sales by $157.

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.

Argentina has experienced significant inflationary pressures the past few years, contributing to significant devaluation of its currency among other economic challenges.

Our Argentine operation supports our Light Vehicle operating segment.

Our sales in Argentina for 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.

Our sales in Argentina for the first nine months of 2021 of approximately $85 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $29, including $11 of net fixed assets, at September 30, 2021 . During the second quarter of 2018, we determined that Argentina's economy met the GAAP definition of a highly inflationary economy.

In asses sing 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.

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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.

Higher commodity prices decreased year-over-year third-quarter and first-nine-months earnings in 2021 by $116 and $221, while lower commodity prices increased year-over-year earnings by $13 and $35 in the same periods last year. Material cost recovery and other pricing actions increased year-over-year third-quarter and first-nine-months earnings in 2021 by $66 and $100, where as material cost recovery and other pricing actions decreased year-over-year earnings by $18 and $69 in the same periods last year.

Sales, Earnings and Cash Flow Outlook

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Adjusted EBITDA

$920 - $1,000

Net cash provided by operating activities (% of sales)

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The accompanying reconciliations of these non-GAAP measures with the most comparable GAAP measures for the historical periods presented are indicative of the reconciliations that will be prepared upon completion of the periods covered by the non-GAAP guidance.

Our 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. 

Our 2021 sales outlook range has been narrowed to $8,800 to $9,000.

We currently expect sales will be near the mid point of the range reflecting strong end-market demand, an increased currency tail wind and additional material cost recovery.

We have lowered our full year 2021 adjusted EBITDA outlook to $815 to $875.

Adjusted EBITDA Margin is expected to be 9.5%, a 120 basis-point improvement over 2020, 

reflecting higher margin net new business and the benefit of year-over-year operational efficiencies being muted by continued global-supply-chain disruptions, labor shortages at certain of our facilities, constrained customer production due to the global semiconductor chip shortage and 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 $90, or approximately 1.0% of our sales for 2021. The benefit of higher year-over-year adjusted EBITDA will be partially offset by higher working capital requirements as we carry elevated levels of inventory, helping to mitigate continued global-supply-chain disruptions as well as labor shortages at certain of our facilities, ensuring continuous supply for our customers.

We continue to forecast 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 –

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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.

At September 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,

Summary Consolidated Results of Operations (Third Quarter, 2021 versus 2020)

Three Months Ended September 30,

% of Net Sales

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Other income (expense), net

Earnings (loss) before interest and income taxes

Loss on extinguishment of debt

Earnings before interest and income taxes

Interest income

Interest expense

Earnings (loss) before income taxes

Earnings before income taxes

Income tax expense

Equity in earnings of affiliates

Net income (loss)

Noncontrolling interests net income

Redeemable noncontrolling interests net income (loss)

Net income (loss) attributable to the parent company

Redeemable noncontrolling interests net loss

Net income attributable to the parent company

Sales —

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Three Months Ended

September 30,

Amount of Change Due To

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South America

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.

Sales in 2021 were $210 higher than in 2020.

Stronger international currencies increased sales by $22, principally due to a stronger Chinese renminbi, Brazilian real, South African rand and British pound.

The organic sales increase of $198, or 10%, resulted from improved heavy-vehicle market demand and the conversion of sales backlog.

Pricing actions, including material commodity price and inflationary costs adjustments, increased sales by $66.

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.

The North America organic sales decrease of 2% was driven principally by weaker light- and medium-duty truck production volumes and lower light-vehicle engine production levels, partially offset by higher heavy-duty truck production and the conversion of sales backlog.

Third quarter full-frame light-truck production was down 16%, Classes 5-7 were down 15% and Class 8 was up 6% compared with the third quarter of 2020.

Light-vehicle engine production was down 20% compared with the third quarter of 2020.

Excluding currency effects, sales in Europe were up 11% 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. 

Organic sales in this operating segment were up 23% compared with the third quarter of 2020.

A 15% decrease in year-over-year light-duty truck production levels and a 21% decrease in year-over-year light-vehicle engine production levels tempered our organic European sales increase.

Excluding currency effects, third quarter sales in South America increased 77% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production.

Third-quarter light-truck production was up 7% and medium/heavy-truck production was up 78%.

Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 33% compared to 2020 due to a stronger construction/mining market.

The global semiconductor chip shortage impacted our third-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.

Cost of sales for the third quarter of 2021 increased $218, or 12% when compared to 2020.

Cost of sales as a percent of sales was 140 basis points higher than in the previous year.

Incremental margins provided by increased sales volumes were offset by higher year-over-year commodity costs of $116, higher standard freight costs of $18 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. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $28.

Gross margin of $206 for 2021 decreased $8 from 2020.

Gross margin as a percent of sales was 9.3% in 2021, 140 basis points lower than in 2020.

The degradation of gross margin as a percent of sales was driven principally by the cost of sales factors referenced above.

Gross margin during the third quarter of 2021 was negatively impacted by costs associated with continued 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 third 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 $103 (4.7% of sales) as compared to $111 (5.6% 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.

SG&A expenses were $8 lower in 2021 primarily due to lower incentive compensation, partially offset by higher salaried employee wages and benefits, travel expenses and professional fees.

Amortization of intangibles —

Amortization expense was $4 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.

Restructuring charges, net  — 

Net restructuring charges of $1 and $2 in the third quarter of 2021 and 2020, respectively, were primarily comprised of exit costs related to previously announced actions.

Other income (expense), net —

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Three Months Ended

September 30,

Non-service cost components of pension and OPEB costs

Government grants and incentives

Foreign exchange gain

Foreign exchange gain (loss)

Strategic transaction expenses

Gain on investment in Hyliion

Loss on de-designation of fixed-to-fixed cross currency swaps

Loss on investment in Hyliion

Other income (expense), net

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.

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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.

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.

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.

Our investment in Hyliion was included in marketable securities and carried at fair value with changes in fair value included in net income. 

During the third quarter of 2021, we sold all of our Hyliion shares.

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.

Interest income was $2 in 2021 and $3 in 2020.

Interest expense decreased from $38 in 2020 to $31 in 2021, primarily due to lower debt levels and to a lesser extent lower interest rates on outstanding borrowings.

Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.9% in 2021 and 5.1% 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.

Income tax expense  — We reported income tax expense of $20 and $16 for 2021 and 2020, respectively. Our effective tax rates were 31% and 30% for the third quarter of 2021 and 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.

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Equity in earnings from DDAC was $3 in 2021 and $6 in 2020.

Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) were de minimis in 2020.

Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) was $1 in 2020.

On October 1, 2020 we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC. 

Summary Consolidated Results of Operations (Year-to-Date, 2021 versus 2020)

Six Months Ended June 30,

Nine Months Ended September 30,

% of Net Sales

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Other income (expense), net

Earnings (loss) before interest and income taxes

Earnings before interest and income taxes

Loss on extinguishment of debt

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The following table shows changes in our sales by geographic region.

Six Months Ended

Nine Months Ended

September 30,

Amount of Change Due To

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South America

Sales in 2021 were $1,464 higher than in 2020.

Sales in 2021 were $1,674 higher than in 2020.

Stronger international currencies increased sales by $157, principally due to a stronger euro, Chinese renminbi, South African rand and British pound, partially offset by a weaker Brazilian real.

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The North America organic sales increase of 24% 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.

First-nine-months full-frame light-truck production was up 20%, Classes 5-7 were up 8% and Class 8 was up 33% compared with the first nine months of 2020.

Light-vehicle engine production was up 10% compared with the first nine months of 2020.

Excluding currency effects and the impact of acquisitions, sales in Europe were up 27% 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%.

Organic sales of this operating segment were up 29% compared with the first nine months of 2020. A 10% increase in year-over-year light-vehicle engine production levels also contributed to our organic European sales increase.

Excluding currency effects, first-nine-months sales in South America increased 83% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production.

First-nine-months 2021 light-truck production was up 58% and medium/heavy-truck production was up 95%.

Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 47% 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.

First-nine-months 2021 light-truck production was up 12%.

The global semiconductor chip shortage impacted our first-nine-months 2021 sales as customers of some of our more significant programs were forced to take down time during the second and third quarters.

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 for the first nine months of 2021 increased $1,375, or 30% when compared to 2020.

Cost of sales as a percent of sales was 240 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.

Incremental margins provided by increased sales volumes were partially offset by higher year-over-year commodity costs of $221, higher standard and premium freight costs of $61 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 $104.

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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 —

Gross margin during the nine months of 2021 was negatively impacted by costs associated with continued 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 nine months 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 $348 (5.2% of sales) as compared to $299 (6.0% of sales) in 2020.

SG&A expenses were $49 lower in 2020 primarily due to lower 

incentive compensation and lower salaried employee wages and benefits expenses and professional fees resulting from austerity measures taken in response to the global COVID-19 pandemic.

Amortization of intangibles

Amortization expense was $11 in 2021 and $10 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, net

Net restructuring charges were $2 in 2021 and $21 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  —

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 —

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

Nine Months Ended

September 30,

Non-service cost components of pension and OPEB costs

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Other income (expense), net

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.

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.

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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.

Our investment in Hyliion was included in marketable securities and carried at fair value with changes in fair value included in net income. During the third quarter of 2021, we sold all of our Hyliion shares.

We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes.

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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.

Interest income and interest expense — Interest income was $6 in 2021 and $7 in 2020.

Interest expense was $99 in both 2021 and 2020, with lower debt levels in 2021 offset by higher interest rates.

Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.3% in 2021 and 4.9% in 2020.

61% du ring the first half of 2020, in the fourth quarter of 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 2.65% during the first nine months 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.

 — We reported income tax expense of $56 and $34 for the first nine months of 2021 and 2020, respectively. Our effective tax rates were 28% and (46)% for the first nine months of 2021 and 2020.

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.

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 these items, the effective tax rate would have been (45)% for the first nine months of 2020. Our effective income tax rates vary from the U.S.

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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.

Equity in earnings of affiliates

— Net earnings from equity investments was $29 in 2021 and $17 in 2020.

Equity in earnings from DDAC was $24 in 2021 and $14 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.

Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) was $4 in 2020.

On October 1, 2020 we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC. 

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Currency effects

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.

Light Vehicle sales in the third quarter and first nine months of 2021, exclusive of currency effects and the impact of divestitures, were 1% and 35% higher than the same period of 2020 reflecting weaker global markets in the third quarter of 2021, improved global markets in the first nine months of 2021, and the conversion of sales backlog in both periods.

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 decreased 16% in this year’s third quarter while light-truck production in Europe and Asia Pacific decreased 15% and 14%, respectively, while light-truck production in South America increased 7%.

Year-over-year North America full-frame light-truck production increased 20% in this year’s first nine months while light-truck production in Europe, South America and Asia Pacific increased 19%, 58% and 12%, respectively.

Net customer pricing and cost recovery actions further increased year-over-year sales by $14 and $16 in this year’s third quarter and first nine months, respectively.

The global semiconductor chip shortage impacted our third-quarter and first-nine months 2021 sales as customers of some of our more significant programs were forced to take down time during the second and third quarters.

Light Vehicle third-quarter 2021 segment EBITDA decreased by $35 from last year, with first-nine-months earnings higher by $101.

Lower sales volumes decreased year-over-year earnings by $6 (50.0% decremental margin) in the third quarter of 2021.

Higher sales volumes provided a year-over-year benefit of $151 (21.9% incremental margin) in the first nine months of 2021. Year-over-year performance-related earnings decreases in the third quarter were driven by commodity cost increases of $53, higher standard freight costs of $5, operational inefficiencies of $4, higher program launch costs of $3 and benefits of austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $2.

Offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $14, material cost savings and supplier recoveries of $13, lower incentive compensation of $6, lower premium freight costs of $4 and lower warranty costs of $2. The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $101, higher standard freight costs of $21, higher program launch costs of $6, 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 $8, respectively and higher warranty costs of $3.

Partially offsetting these performance-related decreases were material cost savings and supplier recoveries of $61, net customer pricing and material cost recovery actions of $16, operational efficiencies of $14 and lower premium freight costs of $1.

Commercial Vehicle

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Currency effects

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.

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.

Commercial Vehicle sales in the third quarter and first nine months of 2021, exclusive of currency effects and the impact of acquisitions and divestitures, were 23% and 32% higher than the same period of 2020 reflecting mixed global markets in the third quarter of 2021, improved global markets in the first nine months of 2021, and the conversion of sales backlog in both periods.

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 6% and Classes 5-7 were down 15% in this year’s third quarter.

Year-over-year North America Class 8 production was up 33% and Classes 5-7 were up 8% in the first nine months of this year.

Year-over-year medium/heavy-truck production in Europe and South America were up 3% and 78%, respectively, while production in Asia Pacific was down 39% in this year’s third quarter.

Year-over-year medium/heavy-truck production in Europe, South America and Asia Pacific were up 16%, 95% and 5%, respectively, in the first nine months of this year.

Net customer pricing and cost recovery actions further increased year-over-year sales by $28 and $52 in this year’s third quarter and first nine months, respectively.

The global semiconductor chip shortage impacted our third-quarter and first-nine months 2021 sales as customers of some of our more significant programs were forced to take down time during the second and third quarters.

Commercial Vehicle third-quarter 2021 segment EBITDA increased by $3 from last year, with first-nine-months earnings higher by $21.

Higher sales volumes provided a year-over-year benefit of $13 (25.5% incremental margin) and $62 (27.1% incremental margin) in the third quarter and first nine months of 2021.

The year-over-year performance-related earnings decrease in the third quarter was driven by commodity cost increases of $31, operational inefficiencies of $9, higher standard and premium freight costs of $8 and benefits of austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1.

Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $28, material cost savings of $5, lower incentive compensation of $4 and lower warranty costs of $1.

The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $60, higher standard and premium freight costs of $24, operational inefficiencies of $14 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 $9, respectively.

Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $52, material cost savings of $13 and lower warranty costs of $1.

Segment EBITDA

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Currency effects

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.

Off-Highway sales in the third quarter and first nine months of 2021, exclusive of currency effects and the impact of acquisitions, were 23% and 29% 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.

Net customer pricing and cost recovery actions further increased year-over-year sales by $21 and $28 in this year’s third quarter and first nine months, respectively.

Off-Highway third-quarter 2021 segment EBITDA increased by $36 from last year, with first-nine-months earnings higher by $104.

Higher sales volumes provided a year-over-year benefit of $20 (22.0% incremental margin) and $94 (24.7% incremental margin) in the third quarter and first nine months of 2021.

The year-over-year performance-related earnings increase in the third quarter was driven by net customer and material cost recovery actions of $21, operational efficiencies of $17, material cost savings of $8 and lower incentive compensation of $4.

Partially offsetting these performance-related increases were commodity cost increases of $23, higher standard and premium freight costs of $6, higher warranty costs of $5 and benefits of austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1.

The year-over-year performance-related earnings increase in the first nine months was driven by net customer and material cost recovery actions of $28, material cost savings of $23 and operational efficiencies of $22.

Partially offsetting these performance-related increases were commodity cost increases of $44, higher standard and premium freight costs of $9, 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 $12, respectively, and higher warranty costs of $5.

Power Technologies

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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. 

Power Technologies sales in the third quarter of 2021, exclusive of currency effects, were flat compared to the same period last year.

Sales in the first nine months of 2021, exclusive of currency effects, were 20% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog.

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 down 20%, 21%, 20% and 15%, respectively, in this year’s third quarter.

Year-over-year North America, Europe, South America and Asia Pacific light-vehicle engine production was up 10%, 10%, 23% and 10%, respectively, in the first nine months of this year.

Net customer pricing and cost recovery actions further increased year-over-year sales by $3 and $4 in this year’s third quarter and first nine months, respectively.

The global semiconductor chip shortage impacted our third-quarter and first-nine months 2021 sales as customers were forced to take down time during the second and third quarters.

Power Technologies third-quarter 2021 segment EBITDA increased by $4 from last year, with first-nine-months earnings higher by $48.

Lower sales volumes decreased year-over-year earnings by $3 (30.0% decremental margin) in the third quarter of 2021.

Higher sales volumes provided a year-over-year benefit of $43 (36.1% incremental margin) in the first nine months of 2021. The year-over-year performance-related earnings increase in the third quarter was driven by operational efficiencies of $8, net customer pricing and material recovery actions of $3, lower incentive compensation of $3, material cost savings of $2 and lower warranty costs of $2.

Partially offsetting these performance-related increases were commodity cost increases of $9 and higher standard and premium freight costs of $3.

The year-over-year performance-related earnings increase in the first nine months was driven by operational efficiencies of $21, material cost savings of $7, net customer pricing and material cost recovery actions of $4 and lower warranty costs of $4.

Partially offsetting these performance-related increases were commodity cost increases of $16, higher standard and premium freight costs of $8, 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, and higher incentive compensation of $2.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

7 unchanged sentences

Impairment of goodwill

(Gain) loss on investment in Hyliion

Loss on investment in Hyliion

Loss on disposal group held for sale

11 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net cash provided by (used in) operating activities

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Adjusted free cash flow

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at June 30, 2021:

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at September 30, 2021:

Cash and cash equivalents

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Total liquidity

Cash deposits are maintained to provide credit enhancement for certain agreements and are reported as part of cash and cash equivalents.

Cash deposits are maintained to provide credit enhancement for certain agreements and are reported as part of cash and cash equiv alents.

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:

We had availability of $1,077 at September 30, 2021  under the Revolving Facility after deducting $52 of outstanding borrowings and $21 of outstanding letters of credit.

The components of our September 30, 2021 consolidated cash balance were as follows:

Cash and cash equivalents

Cash and cash equivalents held as deposits

Cash and cash equivalents held at less than wholly-owned subsidiaries

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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.

At September 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.

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The indentures governing the senior notes include other incurrence-based covenants that may subject us to additional specified limitations.

From time to time, depending upon market, pricing and other conditions, as well as our cash balances and liquidity, we may seek to acquire our senior notes or other indebtedness or our common stock through open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as we may determine (or as may be provided for in the indentures governing the notes), for cash, securities or other consideration.

In addition, we may enter into sale-leaseback transactions related to certain of our real estate holdings.

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.

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The following table summarizes our consolidated statement of cash flows:

Six Months Ended

Nine Months Ended

September 30,

Cash used for changes in working capital

Other cash provided by operations

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Net cash used in investing activities

4 unchanged sentences

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.

Working capital used cash of $501 and $50 in 2021 and 2020.

Cash of $253 and $120 was used to finance receivables in 2021 and 2020, respectively.

The higher level of cash used to finance receivables in 2021 is due to higher year-over-year third quarter sales driven by strong heavy-vehicles markets.

Cash of $441 was used to fund higher inventory levels during 2021, while cash of $105 was provided by lower inventory levels in 2020.

We are carrying higher levels of inventory in 2021 to mitigate continued global-supply-chain disruptions as well as labor shortages at certain of our facilities, ensuring continuous supply for our customers.

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.

Increases in accounts payable and other net liabilities provided cash of $193 in 2021, while decreases in accounts payable and other net liabilities used cash of $35 in 2020.

The increase in accounts payable and other net liabilities in 2021 was principally driven by higher raw material purchases in the second and third quarters.

Investing activities — 

Expenditures for property, plant and equipment were $228 and $181 during 2021 and 2020.

During 2020, capital spending was delayed where and when appropriate in response to the global COVID-19 pandemic.

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.

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, we acquired a 1% ownership interest in Switch Mobility Limited for $18.

During 2021, we sold all of our Hyliion shares for $29.

During 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 had net borrowings of $52 on our Revolving Facility.

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.

5 unchanged sentences

We used $44 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.

We used cash of $23 to repurchase common shares under our share repurchase program in 2021.

During the second quarter of 2020, we temporarily suspended the declaration and payment of dividends to common stockholders and temporarily suspended the repurchase of common stock under our existing common stock repurchase program in response to the global COVID-19 pandemic.

Distributions to noncontrolling interests totaled $10 in both 2021 and 2020.

During 2020, Hydro-Québec paid us $7 to acquire an indirect 45% ownership interest in Ashwoods.

During 2021, we sold a portion of our ownership interest in Tai Ya Investment (HK) Co., Limited (Tai Ya) to China Motor Corporation, reducing our ownership interest in Tai Ya to 50%.

In conjunction with the decrease in our ownership interest, the Tai Ya shareholders agreement was amended, eliminating our controlling financial interest in Tai Ya.

Upon our loss of control, we deconsolidated Tai Ya, including $6 of cash and cash equivalents.

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.

There have been no material changes at September 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.

During the second quarter of 2021, we completed the sale of $400 of our September 2030 Notes and €325 of our July 2029 Notes and redeemed all $425 of our December 2024 Notes and all $375 of our June 2026 Notes. See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information.

Contingencies

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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. 

There were no changes to our critical accounting estimates in the nine months ended September 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 nine months of 2021. 

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis