Dana Incorporated — Q1 2021 Form 10-Q
Business context and reporting period. Dana supplies driveline, motion, sealing, thermal-management and electrification products to vehicle manufacturers and industrial customers. This unaudited filing covers the three months ended March 31, 2021, compared with Q1 2020. Unless noted otherwise, amounts are in millions of dollars. Dana acquired the remaining 51% of Pi Innovo on March 1, giving it full ownership.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $2,263 | $1,926 |
| Gross margin | $251; 11.1% of sales | $206; 10.7% of sales |
| Earnings before interest and taxes | $108 | $47 |
| Net income | $68 | $38 |
| Net income attributable to parent | $71 | $58, as revised |
| Diluted earnings per share | $0.48 | $0.40, as revised |
| Adjusted EBITDA | $234 | $205 |
| Operating cash flow | $27 | $(51) |
| Capital expenditures | $53 | $63 |
| Adjusted free cash flow | $(26) | $(114) |
Sales increased $337, or about 17%. Management attributed the gain to stronger end-market demand and backlog conversion, $48 of favorable currency effects and $3 from acquisitions. Reported Q1 2021 earnings included a $17 loss on Dana’s Hyliion investment and a $7 impairment loss on a disposal group. Q1 2020 included a $51 goodwill impairment charge.
Liquidity, debt and financial position
- At March 31, cash and cash equivalents were $483; cash, cash equivalents and restricted cash totaled $493. Marketable securities included $26 of current securities.
- Total liquidity, a company-defined measure, was $1,636, including $481 of available cash, $26 of marketable securities and $1,129 available under the revolving facility.
- Debt carrying amounts included $26 short-term debt, $8 current long-term debt and $2,420 long-term debt, net of issuance costs. Dana reported no revolving-facility borrowings and $21 of letters of credit outstanding.
- Current assets were $3,573 and current liabilities $2,170. Cash declined from $559 at year-end 2020; working capital used $133 of cash during the quarter, including $257 for receivables and $137 for inventory, partly offset by increases in payables and other net liabilities.
- Dana amended its credit agreement, increasing the revolving facility to $1,150 and extending maturity to March 25, 2026. It reported compliance with financing covenants at quarter-end.
Material changes and segment performance
- Organic sales increased $286, or 15%; foreign currency added $48. Sales rose in each segment: Light Vehicle to $991 from $808; Commercial Vehicle to $352 from $333; Off-Highway to $632 from $532; and Power Technologies to $288 from $253.
- Segment EBITDA was $235 versus $206. Light Vehicle EBITDA rose to $100 from $83; Commercial Vehicle fell to $14 from $21; Off-Highway increased to $80 from $72; and Power Technologies increased to $41 from $30.
- Gross margin improved 40 basis points to 11.1%, but higher commodity costs reduced earnings by $35 and higher standard and premium freight costs by $23. Customer cost recovery lagged material cost inflation by about 90 days.
- Interest expense rose to $34 from $29, with the reported average effective rate increasing to 5.5% from 4.8%. Equity-method earnings increased to $14 from $2.
- The filing revises Q1 2020 parent-attributable income and EPS: a prior-period error in allocating goodwill impairment to redeemable noncontrolling interests increased the comparative parent-attributable income to $58 and EPS to $0.40. Dana said the error was not material and did not require amendment of its prior filing.
Outlook, commentary and risks
- Dana raised its 2021 sales outlook to $8,500–$9,000 and adjusted EBITDA outlook to $920–$1,000. Adjusted EBITDA margin was expected to be 11.0%. Adjusted free cash flow was forecast at approximately $280, or about 3.2% of sales; capital spending was expected to be about 4.5% of sales.
- Management cited stronger demand, favorable currency and additional material-cost recovery for the outlook increase. Higher commodity costs were expected to be largely offset by recovery and pricing actions; elevated capital spending for customer programs and electrification was expected to temper cash flow.
- Net new-business backlog was $700 for 2021–2022; Dana expected to realize $500 in 2021 and $200 in 2022. The backlog was described as evenly balanced between electric-vehicle and traditional-engine content.
- Management described market recovery across vehicle and off-highway markets, while noting that the 2021 outlook depends on production rebounds. The filing cited commodity inflation, elevated freight costs, foreign-exchange movements, pandemic-related disruption and customer demand as relevant factors. The semiconductor shortage had a negligible sales impact in Q1.
- Hydro-Québec may put all of its redeemable interests in Dana TM4 to Dana at fair value any time after June 22, 2021. Dana estimates redemption value using discounted cash flows and significant assumptions.
- Dana said pending and threatened legal matters were not expected to materially adversely affect its financial condition, liquidity or results. It reported no material changes to previously disclosed risk factors, market-risk exposures, contractual obligations or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales growth and the raised outlook translate into sustained margins, particularly as commodity and freight costs and customer recovery timing evolve.
- Whether working-capital use, capital spending and other cash requirements permit Dana to achieve its 2021 adjusted free-cash-flow outlook.
- The assumptions, fair value and potential timing of Hydro-Québec’s put right, and the resulting cash or financing implications.
- The valuation sensitivity of the Hyliion investment and the completion and proceeds of the China joint-venture disposal, completed in April 2021.
- The revised Q1 2020 comparison and the company-defined, non-GAAP adjusted EBITDA, adjusted free cash flow and liquidity measures, including their reconciliations and assumptions.