Dana Incorporated — Q2 2022 Form 10-Q
Business context and period. The quarter and six months ended June 30, 2022. Dana supplies driveline, motion, sealing, thermal-management and electrification products to light-vehicle, commercial-vehicle and off-highway markets through four operating segments. Unless noted, financial figures are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $2,586 | $2,205 | $5,066 | $4,468 |
| Gross margin | $183 (7.1%) | $252 (11.4%) | $380 (7.5%) | $503 (11.3%) |
| Net income attributable to parent | $8 | $53 | $25 | $124 |
| Diluted EPS | $0.06 | $0.36 | $0.17 | $0.85 |
| Adjusted EBITDA (non-GAAP) | $162 | $233 | $332 | $467 |
| Operating cash flow | $257 | $67 | $136 | $94 |
| Capital expenditures | $90 | $80 | $206 | $133 |
| Free cash flow (non-GAAP) | $167 | $(13) | $(70) | $(39) |
- Q2 sales rose 17% year over year; organic sales increased $484 (22%), more than offsetting $98 of unfavorable currency effects and $5 from divestitures/acquisitions.
- Six-month sales increased 13%; organic growth was $759 (17%), while currency reduced sales by $153 and acquisitions/divestitures by $8.
- Q2 cost of sales rose $450, faster than revenue. Commodity inflation added $145 to costs, non-material inflation $76, and operational inefficiencies also weighed on results. Customer pricing and material cost recoveries increased Q2 sales by $180, but recovery timing lagged supplier cost increases by about 90 days.
- Q2 segment EBITDA was $33 Light Vehicle, $10 Commercial Vehicle, $100 Off-Highway and $21 Power Technologies, versus $87, $18, $97 and $32, respectively, a year earlier. Off-Highway was the only segment with higher Q2 EBITDA.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $321, current assets $3,953 and current liabilities $2,605.
- Short-term debt was $235; current portion of long-term debt was $8; long-term debt, net of issuance costs, was $2,352.
- Total liquidity was reported as $1,273, including $320 available cash, $934 undrawn Revolving Facility capacity and $19 marketable securities. The $1,150 revolving facility had $195 drawn and $21 committed to letters of credit.
- Dana reported compliance with financing covenants, including its revolving-credit first-lien net leverage maintenance covenant. Management stated liquidity and operating cash flow should meet anticipated requirements over the next 12 months.
- Six-month working capital used $84 of cash. Capital spending rose to $206, and net revolving-facility borrowings were $195. Dana paid $29 in common dividends and repurchased $25 of shares in Q1; approximately $102 remained under its repurchase authorization.
Changes, outlook and key risks
- Despite higher sales, parent-attributable earnings and adjusted EBITDA fell substantially, and gross margin contracted 430 basis points in Q2. Management cited commodities, labor, energy and transportation inflation, supply-chain disruption, customer order changes, launch costs and delayed customer recoveries.
- For full-year 2022, Dana forecast sales of $10.0–$10.2 billion, adjusted EBITDA of $700–$740 million, operating cash flow of about 6% of sales, capital spending of about 4% and adjusted free cash flow of about 2% of sales (approximately $200 million). The company lowered its EBITDA range by $100 million from its April outlook because of expected continued cost inflation; the sales midpoint remained $10.1 billion. It expected an adjusted EBITDA margin of 7.1%, below 2021.
- Market outlooks in the filing were mixed: expected 2022 growth in global light-truck, North American Class 8, construction and agricultural demand, but declines in Asia-Pacific truck production and some other vehicle categories.
- Material risks include persistent inflation and supply-chain disruption; currency movements (54% of first-half sales were outside the U.S.); Russia’s invasion of Ukraine and related sanctions or disruption; market cyclicality; and uncertainty around customer price recovery. Dana said 2021 revenue from Russia, Ukraine and Belarus was approximately $75 million.
- Contingencies included product-liability accruals of $1, environmental accruals of $8, and a lease guarantee with approximately $6 in annual payments through June 2025. Management said pending legal matters were not expected to materially adversely affect results or liquidity.
- An $8 cost-of-sales adjustment related to intercompany inventory transfers was recorded in Q1 2022; management concluded it was not material to Q1 or prior periods. Dana also disclosed a possible U.S. valuation-allowance increase of up to approximately $40 over the next 12 months.
Investor verification priorities
- Track whether price recoveries catch up with commodity and other inflation, and whether gross margin stabilizes.
- Compare realized full-year sales, adjusted EBITDA and free cash flow with guidance; review the non-GAAP definitions and reconciliations.
- Monitor working-capital needs, capital expenditure, revolver borrowings, debt maturities and covenant headroom.
- Assess segment-level profitability, especially continued weakness in Light Vehicle, Commercial Vehicle and Power Technologies EBITDA.
- Review currency exposure, supply-chain conditions and the financial effects of geopolitical developments, including the Russia-Ukraine conflict.
- Verify the assumptions behind warranty, environmental, legal, tax-valuation-allowance and redeemable noncontrolling-interest estimates.