Dana Incorporated — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Dana supplies driveline, motion, electrification, sealing and thermal-management products to vehicle manufacturers and industrial customers.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,926 | $2,163 |
| Gross margin | $206; 10.7% | $300; 13.9% |
| EBIT | $47 | $140 |
| Net income attributable to parent | $38 | $98 |
| Diluted EPS | $0.26 | $0.68 |
| Net cash used in operating activities | $(51) | $(16) |
| Capital expenditures | $63 | $98 |
| Free cash flow | $(114) | $(114) |
Sales declined 11%; organic sales fell 15%, partly offset by $116 of acquisition-related sales, while currency reduced sales by $34. The $51 goodwill impairment was recorded in Q1 2020. Dana reported adjusted EBITDA of $205 versus $257 a year earlier; this is a non-GAAP measure.
Gross margin fell 320 basis points. Management attributed the pressure mainly to customer demand falling faster than Dana could flex costs, leaving fixed costs, including depreciation and rent, less absorbed. Lower commodity costs and material savings provided partial offsets. Working capital used $183 of cash, principally for receivables, inventory and lower accounts payable and other liabilities.
At March 31, cash and cash equivalents were $628 and marketable securities were $23. Total liquidity was $1,325, including $679 available under the revolving facility. Short-term debt was $312, current long-term debt $28, and long-term debt $2,335. Dana drew $300 on its revolver during the quarter as a COVID-19 contingency measure. It was in compliance with financing covenants at quarter-end.
Material changes and segment performance
Net income attributable to the parent fell $60 year over year, alongside lower sales and segment EBITDA and the goodwill impairment. The income tax benefit of $16, compared with tax expense of $20 in Q1 2019, partly cushioned the decline; it included a $37 benefit from tax actions, partly offset by valuation allowance expenses. Excluding specified unusual tax items, the effective tax rates were 23% and 31%, respectively.
| Segment | Sales, Q1 2020 | Segment EBITDA, Q1 2020 | Q1 2019 EBITDA |
|---|---|---|---|
| Light Vehicle | $808 | $83 | $102 |
| Commercial Vehicle | $333 | $21 | $41 |
| Off-Highway | $532 | $72 | $82 |
| Power Technologies | $253 | $30 | $34 |
COVID-19-related demand deterioration and lower vehicle production affected all segments. Commercial Vehicle and Light Vehicle faced particularly substantial volume-related EBITDA declines; Off-Highway sales were also affected by weak construction, mining and agricultural markets. Segment EBITDA is a company-defined measure and may not be comparable with similarly titled measures at other companies.
Other comprehensive loss was $122, driven largely by $154 of currency translation adjustments; comprehensive loss attributable to the parent was $73. Goodwill declined to $441 from $493, including the $51 impairment and currency impacts, partly offset by acquisitions.
Outlook, management commentary and risks
Dana withdrew its previously issued full-year guidance because it did not reflect the pandemic, and said it would not provide financial guidance while disruption and uncertainty continued. Management identified employee safety, cash conservation and liquidity maintenance as priorities. Actions included facility closures or restrictions, cost and discretionary-spending reductions, reduced capital and research spending where appropriate, and use of government programs.
The company temporarily suspended common dividends and share repurchases. The Board had declared a $0.10-per-share dividend in Q1, but the filing says future declarations and payments were suspended in response to COVID-19. A $500 secured bridge facility was entered into on April 16, 2020, after quarter-end, maturing April 15, 2021; the filing describes it as available if needed. Dana also amended credit-agreement covenants. Management said liquidity and operating cash flow were expected to cover anticipated requirements over the next 12 months, while acknowledging economic uncertainty.
Key risks include the pandemic’s uncertain duration and severity; further declines in vehicle demand; prolonged facility or supply-chain disruptions; and possible additional goodwill impairment. Commercial Vehicle and Off-Highway goodwill remained at risk under adverse scenarios. Dana also said further tax valuation allowances could be recorded if subsidiary profits fall. Other exposures include currency, commodity prices, trade policy and customer or supplier financial distress.
Reported contingencies included $6 of accrued product-liability costs and $12 of environmental liabilities at March 31, 2020. Dana stated that pending legal matters were not expected to materially adversely affect liquidity, financial condition or results. It also guarantees certain divested-business lease obligations, including approximately $6 of annual payments through June 2025.
Most important facts for investors to verify
- How quickly production and customer demand recovered after the sharp March 2020 deterioration, and whether cost reductions kept pace.
- Whether operating cash flow, working-capital needs and capital spending improved, and how much of the $1,325 reported liquidity was practically accessible.
- Use and terms of the post-quarter $500 bridge facility, covenant compliance and the effect of amended leverage limits.
- Whether further goodwill impairment or tax valuation allowances were required as pandemic assumptions and forecasts changed.
- Whether and when Dana resumed dividends or share repurchases after their temporary suspension.