The MD&A and the analysis of the financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes therein.
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 ofDana 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 theSecurities 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 inMaumee, Ohio , and was incorporated inDelaware 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. AtSeptember 30, 2021 , we employed approximately 39,500 people, operated in 33 countries and had 141 major facilities housing manufacturing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices. External sales by operating segment for the periods endedSeptember 30, 2021 and 2020 are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 % of % of % of % of Dollars Total Dollars Total Dollars Total Dollars Total Light Vehicle$ 918 41.7 %$ 913 45.8 %$ 2,799 42.0 %$ 2,058 41.2 % Commercial Vehicle 396 18.0 % 317 15.9 % 1,132 17.0 % 852 17.0 % Off-Highway 627 28.4 % 504 25.3 % 1,931 28.9 % 1,435 28.7 % Power Technologies 263 11.9 % 260 13.0 % 810 12.1 % 653 13.1 % Total$ 2,204 $ 1,994 $ 6,672 $ 4,998
See note 19 to our consolidated financial statements in section 1 of part I for further financial information on 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 leveraging our core operations. This foundational
element enables us to infuse strong operational disciplines throughout the
strategy, making it practical, actionable, and effective. It enables us to
capitalize on being a major drive systems supplier across all three end-mobility
markets. We are achieving improved profitability by actively seeking synergies
across our engineering, purchasing, and manufacturing base. We have strengthened
the portfolio by acquiring critical assets; and we are utilizing our physical
and intellectual capital to amplify innovation across the enterprise. Leveraging
these core elements can further expand the cost efficiencies of our common
technologies and deliver a sustainable competitive advantage for Dana.
Driving customer centricity continues to be at the heart of who we are. Putting
our customers at the center of our value system is firmly embedded in our
culture and is driving growth by focusing on customer relationships and
providing value to our customers. These relationships are strengthened as we are
physically 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.
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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 onAsia 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 inAsia 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 inIndia andChina . All the while, we have been making meaningful organic investments to grow with existing and new customers, primarily inThailand ,India , andChina . These added capabilities have enabled us to target the domesticAsia 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 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 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 the discussion of trends in our markets below for more 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 reduction 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. ThroughSeptember 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 program. 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 - 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 toAugust 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 ourU.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, duringJune 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 toMarch 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 theGKN 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
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Table of Contents AcquisitionsPi Innovo Holding Limited - OnMarch 1, 2021 , we acquired the remaining 51% ownership interest inPi 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 - OnFebruary 5, 2020 , we acquiredCurtis Instruments, Inc.'s (Curtis) 35.4% ownership interest inAshwoods 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. DuringMarch 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 OnApril 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 major global end markets: light vehicles, primarily full chassis trucks and SUVs; commercial vehicle, including medium and heavy trucks and buses; and off-road, including construction, mining and agricultural 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 inNorth 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 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 - 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 areNorth America ,South America (primarilyBrazil ) andAsia Pacific . The Class-8 truck market inNorth 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 23% over the prior year driven by improving economic outlook and cyclical growth. Medium-duty truck production inNorth 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 3% increase in production over the prior year.Outside of North America , production of medium- and heavy-duty trucks inSouth 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 forSouth 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 byChina , 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 byIndia where the recovery from the pandemic has been slower than inChina . 31
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Off-highway markets - Our off-highway business has a large presence outside ofNorth America , with 64% of its 2020 sales coming from products manufactured inEurope ; 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 our 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, 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 year-to-date 2021 sales coming from outside theU.S. , international currency movements can have a significant effect on our sales and results of operations. The euro zone countries andChina accounted for 51% and 10% of our year-to-date 2021 non-U.S. sales, respectively, whileIndia andBrazil each accounted for 9%. Although sales inSouth 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 theU.S. 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 significant devaluation of its currency among other economic challenges. Our Argentine operation supports our Light Vehicle operating segment. Our sales inArgentina for the first nine months of 2021 of approximately$85 are 1% of our consolidated sales and our net asset exposure related toArgentina was approximately$29 , including$11 of net fixed assets, atSeptember 30, 2021 . During the second quarter of 2018, we determined thatArgentina's economy met the GAAP definition of a highly inflationary economy. In assessingArgentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effectiveJuly 1, 2018 , theU.S. dollar is the functional currency for our Argentine operations, rather than the Argentine peso. BeginningJuly 1, 2018 , peso-denominated monetary assets and liabilities are remeasured intoU.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 intoU.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, respectively. 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
2021 Outlook 2020 2019
Sales $8,800 - $9,000 $ 7,106 $ 8,620
Adjusted EBITDA $815 - $875 $ 593 $ 1,019
Net cash provided by operating activities (%
of sales) ~9.5% $ 386 $ 637
Discretionary pension contributions $ - $ - $ 61
Purchases of property, plant and equipment
(% of sales) ~4.0% $ 326 $ 426
Adjusted Free Cash Flow (% of sales) ~1.0% $ 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 restructuring actions, asset impairments and certain
income tax adjustments. The accompanying reconciliations of these non-GAAP
measures with the most comparable GAAP measures for the historical periods
presented are indicative of the reconciliations that will be prepared upon
completion of the periods covered by the non-GAAP guidance.
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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 - 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. AtSeptember 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 (Third Quarter, 2021 versus 2020)
Three Months Ended September 30,
2021 2020
Increase/
Dollars % of Net Sales Dollars % of Net Sales (Decrease)
Net sales $ 2,204 $ 1,994 $ 210
Cost of sales 1,998 90.7 % 1,780 89.3 % 218
Gross margin 206 9.3 % 214 10.7 % (8 )
Selling, general and
administrative expenses 103 4.7 % 111 5.6 % (8 )
Amortization of intangibles 4 4 -
Restructuring charges, net 1 2 (1 )
Other income (expense), net (4 ) (8 ) 4
Earnings before interest and
income taxes 94 89 5
Interest income 2 3 (1 )
Interest expense 31 38 (7 )
Earnings before income taxes 65 54 11
Income tax expense 20 16 4
Equity in earnings of
affiliates 5 7 (2 )
Net income 50 45 5
Less: Noncontrolling interests
net income 4 4 -
Less: Redeemable noncontrolling
interests net loss (2 ) (4 ) 2
Net income attributable to the
parent company $ 48 $ 45 $ 3
Sales - The following table shows changes in our sales by geographic region.
Three Months Ended
September 30, Amount of Change Due To
Increase/ Acquisitions
2021 2020 (Decrease) Currency
Effects (Divestitures) Organic Change North America$ 1,050 $ 1,069 $ (19 ) $ 3 $ 4 $ (26 ) Europe 651 577 74 8 66 South America 174 96 78 4 74 Asia Pacific 329 252 77 7 (14 ) 84 Total$ 2,204 $ 1,994 $ 210 $ 22 $ (10 ) $ 198 33
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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 . TheNorth 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 inEurope 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 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 inSouth 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 inAsia 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 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$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 intangible assets – Amortization expense has been
Restructuring charges, net - Net restructuring charges of$1 and$2 in the third quarter of 2021 and 2020, respectively, were primarily comprised of exit costs related to previously announced actions. 34
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Other income (expense), net – The following table shows the main components of other income (expense), net.
Three Months Ended
September 30,
2021 2020
Non-service cost components of pension and OPEB costs
(3 ) Government grants and incentives 5
3
Foreign exchange gain (loss) 1 (2 ) Strategic transaction expenses (3 ) (4 ) Loss on investment in Hyliion (6 ) Other, net 1 (2 ) Other income (expense), net$ (4 ) $ (8 ) Strategic transaction expenses relate primarily to costs incurred in connection with acquisition and divestiture related activities, including costs to complete the transaction and post-closing integration costs. Strategic transaction expenses in 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 theOerlikon Group (ODS) andNordresa Motors, Inc. and certain other strategic initiatives. We held convertible notes receivable from our investment inHyliion Inc. OnOctober 1, 2020 ,Hyliion Inc. completed its merger withTortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp. (Hyliion), with its common stock being listed on theNew York Stock Exchange under the ticker symbol HYLN. Effective with the completed merger, our notes receivable were converted into 2,988,229 common shares of HYLN. Our investment in Hyliion was included in 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 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. 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 theU.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 theU.S. , different statutory tax rates outside theU.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 inGermany will be released in the next twelve months. Equity in earnings of affiliates - Net earnings from equity investments was$5 in 2021 and$7 in 2020. Equity in earnings from DDAC was$3 in 2021 and$6 in 2020. Equity earnings fromBendix Spicer Foundation Brake, LLC (BSFB) was$1 in 2020. OnOctober 1, 2020 we sold our 20% ownership interest in BSFB toBendix Commercial Vehicle Systems LLC . 35
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Summary of consolidated operating results (year-to-date, 2021 vs. 2020)
Nine Months Ended September 30,
2021 2020
Increase/
Dollars % of Net Sales Dollars % of Net Sales (Decrease)
Net sales $ 6,672 $ 4,998 $ 1,674
Cost of sales 5,963 89.4 % 4,588 91.8 % 1,375
Gross margin 709 10.6 % 410 8.2 % 299
Selling, general and
administrative expenses 348 5.2 % 299 6.0 % 49
Amortization of intangibles 11 10 1
Restructuring charges, net 2 21 (19 )
Impairment of goodwill (51 ) 51
Other income (expense), net (33 ) (5 ) (28 )
Earnings before interest and
income taxes 315 24 291
Loss on extinguishment of debt (24 ) (5 ) (19 )
Interest income 6 7 (1 )
Interest expense 99 99 -
Earnings (loss) before income
taxes 198 (73 ) 271
Income tax expense 56 34 22
Equity in earnings of
affiliates 29 17 12
Net income (loss) 171 (90 ) 261
Less: Noncontrolling interests
net income 9 6 3
Less: Redeemable noncontrolling
interests net loss (10 ) (25 ) 15
Net income (loss) attributable
to the parent company $ 172 $ (71 ) $ 243
Sales – The following table shows the evolution of our sales by geographic region.
Nine Months Ended
September 30 ,
Amount of change due to
Increase/
Organic Acquisitions
2021 2020 (Decrease) Currency Effects (Divestitures) Change North America$ 3,157 $ 2,530 $ 627 $ 9 $ 7$ 611 Europe 2,136 1,588 548 125 2 421 South America 434 244 190 (12 ) 202 Asia Pacific 945 636 309 35 (26 ) 300 Total$ 6,672 $ 4,998 $ 1,674 $ 157 $ (17 )$ 1,534 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. The organic sales increase of$1,534 , or 31%, 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$100 . TheNorth 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-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 inEurope 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 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 inSouth 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 inAsia Pacific increased 47% compared to 2020 due to improved light-truck production and stronger construction/mining and agricultural markets. 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. 36
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Cost of sales and gross margin - 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$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 . Gross margin of$709 for 2021 increased$299 from 2020. Gross margin as a percent of sales was 10.6% in 2021, 240 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 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 intangible assets – Amortization expense has been
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 - 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 main components of other income (expense), net.
Nine Months Ended
September 30,
2021 2020
Non-service cost components of pension and OPEB costs $ (7 ) $ (8 )
Government grants and incentives 13 9
Foreign exchange gain 2 5
Strategic transaction expenses (11 ) (15 )
Loss on investment in Hyliion (20 )
Loss on disposal group held for sale (7 )
Loss on de-designation of fixed-to-fixed cross currency swaps (9 )
Other, net 6 4
Other income (expense), net $ (33 ) $ (5 )
Strategic transaction expenses relate primarily to costs incurred in connection
with acquisition and divestiture related activities, including costs to complete
the transaction and post-closing integration costs. Strategic transaction
expenses in 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 combined company being renamed
Hyliion Holdings Corp. (Hyliion), with its common stock being listed on the New
York Stock Exchange under the ticker symbol HYLN. Effective with the completed
merger, our notes receivable were converted into 2,988,229 common shares of
HYLN. Our investment in Hyliion was included in 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.
37
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We had previously entered into fixed-to-fixed cross currency swaps as a hedge against ourJune 2026 Notes. InJune 2021 , we redeemed all of theJune 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 inChina . We were required to divest of our interest in this joint venture as it violates competitive restrictions of another of ourChina 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 inApril 2021 . See Note 17 of the consolidated financial statement in Item I of Part I for additional information. Loss on extinguishment of debt - OnMay 13, 2021 andMay 17, 2021 , we redeemed$254 and$171 of ourDecember 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 ourDecember 2024 Notes. In addition, we recognized a previously deferred$3 gain on a terminated fixed-to-floating interest rate swap associated with theDecember 2024 Notes. OnJune 10, 2021 , we redeemed all of ourJune 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 ourJune 2026 Notes. OnJune 19, 2020 , in connection with the issuance of ourJune 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$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. 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$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 theU.S. based on reduced income projections, and tax expense of$4 to record valuation allowances in foreign jurisdictions due to reduced income projections. 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 theU.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 theU.S. , different statutory tax rates outside theU.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 inGermany will be released in the next twelve months. 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 inChina's Hubei province, the center of the initial COVID-19 outbreak, were shut down the entire month ofFebruary 2020 . Production was permitted to resume inMarch 2020 . Equity earnings fromBendix Spicer Foundation Brake, LLC (BSFB) was$4 in 2020. OnOctober 1, 2020 we sold our 20% ownership interest in BSFB toBendix Commercial Vehicle Systems LLC . 38
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Table of Contents
Segment operating results (2021 vs. 2020)
Light Vehicle
Three Months Nine Months
Segment EBITDA Segment EBITDA
Sales Segment EBITDA Margin Sales Segment EBITDA Margin
2020 $ 913 $ 89 9.7 % $ 2,058 $ 140 6.8 %
Volume and mix (12 ) (6 ) 691 151
Divestitures (9 ) (1 ) (16 ) (1 )
Performance 22 (28 ) 32 (52 )
Currency effects 4 34 3
2021 $ 918 $ 54 5.9 % $ 2,799 $ 241 8.6 %
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
Three Months Nine Months
Segment EBITDA Segment EBITDA
Sales Segment EBITDA Margin Sales Segment EBITDA Margin
2020 $ 317 $ 17 5.4 % $ 852 $ 32 3.8 %
Volume and mix 51 13 229 62
Acquisitions/Divestitures (1 ) 1 (2 ) 1
Performance 23 (11 ) 44 (43 )
Currency effects 6 9 1
2021 $ 396 $ 20 5.1 % $ 1,132 $ 53 4.7 %
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 .
39
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Table of Contents
Off-Highway
Three Months Nine Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2020 $ 504 $ 64 12.7 % $ 1,435 $ 172 12.0 %
Volume and mix 91 20 380 94
Acquisitions 1 (1 )
Performance 24 15 29 2
Currency effects 8 1 86 9
2021 $ 627 $ 100 15.9 % $ 1,931 $ 276 14.3 %
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 $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
Three Months Nine Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2020 $ 260 $ 34 13.1 % $ 653 $ 63 9.6 %
Volume and mix (10 ) (3 ) 119 43
Performance 9 6 10 2
Currency effects 4 1 28 3
2021 $ 263 $ 38 14.4 % $ 810 $ 111 13.7 %
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 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 .
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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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income (loss) $ 50 $ 45 $ 171 $ (90 )
Equity in earnings of affiliates 5 7 29 17
Income tax expense 20 16 56 34
Earnings (loss) before income taxes 65 54 198 (73 )
Depreciation and amortization 98 94 290 272
Restructuring charges, net 1 2 2 21
Interest expense, net 29 35 93 92
Loss on extinguishment of debt 24 5
Impairment of goodwill 51
Loss on investment in Hyliion 6
20
Loss on disposal group held for sale
7
Loss on de-designation of fixed-to-fixed cross currency swaps 9 Other* 11 16 34 33 Adjusted EBITDA$ 210 $ 201 $ 677 $ 401
* Other includes stock-based compensation expense, non-service cost items 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 the net cash flow provided by (used in) operating activities with the adjusted free cash flow.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net cash provided by (used in) operating
activities $ (75 ) $ 321 $ 19 $ 195
Purchases of property, plant and
equipment (95 ) (60 ) (228 ) (181 )
Free cash flow (170 ) 261 (209 ) 14
Discretionary pension contribution - - - -
Adjusted free cash flow $ (170 ) $ 261 $ (209 ) $ 14
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Table of Contents Liquidity
The following table presents a reconciliation of cash and cash equivalents to cash, a non-GAAP measure, as of
Cash and cash equivalents$ 220 Less: Deposits supporting obligations - Available cash 220 Additional cash availability from Revolving Facility 1,077 Marketable securities 18 Total liquidity$ 1,315 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 had availability of$1,077 atSeptember 30, 2021 under the Revolving Facility after deducting$52 of outstanding borrowings and$21 of outstanding letters of credit. The components of ourSeptember 30, 2021 consolidated cash balance were as follows: U.S. Non-U.S. Total Cash and cash equivalents $ 39$ 111 $ 150 Cash and cash equivalents held at less than wholly-owned subsidiaries 3 67 70 Consolidated cash balance $ 42$ 178 $ 220 A portion of the non-U.S. cash and cash equivalents is utilized for working capital and other operating purposes. Several countries have local regulatory requirements that restrict the ability of our operations to repatriate this cash. Beyond these restrictions, there are practical limitations on repatriation of cash from certain subsidiaries because of the resulting tax withholdings and subsidiary by-law restrictions which could limit our ability to access cash and other assets.
At
AtSeptember 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. 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. 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
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Table of Contents Cash Flow
The following table summarizes our consolidated statement of cash flows:
Nine Months Ended
September 30,
2021 2020
Cash used for changes in working capital $ (501 ) $ (50 )
Other cash provided by operations 520
245
Net cash provided by operating activities 19
195
Net cash used in investing activities (260 ) (193 ) Net cash provided by (used in) financing activities (71 )
466
Net increase (decrease) in cash, cash equivalents and restricted cash$ (312 ) $ 468
Operating activities – Excluding working capital, other operating cash flows were
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$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, we acquired a 1% ownership interest inSwitch 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 ourJune 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 ourJuly 2029 Notes and$400 of ourSeptember 2030 Notes, paying financing costs of$11 . Also during 2021, we redeemed all$375 of ourJune 2026 Notes and all$425 of ourDecember 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 toMarch 25, 2026 . During 2020, we completed the issuance of$400 of ourJune 2028 Notes and the issuance of an additional$100 of ourNovember 2027 Notes, paying financing costs of$8 . During 2020, we entered a$500 bridge facility, paying financing costs of$5 . We subsequently terminated the bridge facility. We used$44 and$15 for dividend payments to common stockholders during 2021 and 2020. 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 inTai 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. 43
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Off-balance sheet provisions
There have been no material changes atSeptember 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 During the second quarter of 2021, we completed the sale of$400 of ourSeptember 2030 Notes and €325 of ourJuly 2029 Notes and redeemed all$425 of ourDecember 2024 Notes and all$375 of ourJune 2026 Notes. See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information. 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 nine months endedSeptember 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.
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