Dana Incorporated — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Dana supplies driveline, motion, electrification, sealing and thermal-management products to vehicle manufacturers and industrial markets. Amounts below are in millions of dollars except per-share data and percentages.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,204 | $1,994 | $6,672 | $4,998 |
| Gross margin | $206; 9.3% | $214; 10.7% | $709; 10.6% | $410; 8.2% |
| Net income (loss) attributable to Dana | $48 | $45 | $172 | $(71) |
| Diluted EPS | $0.33 | $0.31 | $1.17 | $(0.49) |
| Adjusted EBITDA (non-GAAP) | $210 | $201 | $677 | $401 |
| Cash from operating activities | $(75) | $321 | $19 | $195 |
| Capital expenditures | $95 | $60 | $228 | $181 |
| Adjusted free cash flow (non-GAAP) | $(170) | $261 | $(209) | $14 |
At September 30, cash and cash equivalents were $220, current assets were $3,603 and current liabilities were $2,173 (approximate current ratio: 1.66). Debt carrying value was approximately $2,465, including short-term debt, current maturities and long-term debt; this compares with approximately $2,454 at December 31, 2020. The revolving facility had $1,077 available. Dana reported total liquidity of $1,315 and compliance with financing covenants.
Changes versus prior periods
- Q3 sales rose $210, or about 11%, but gross margin declined $8 and fell 140 basis points as a share of sales. Adjusted EBITDA increased modestly to $210.
- Nine-month sales increased $1,674, or about 33%, and Dana swung to $172 of attributable net income from a $71 loss. Adjusted EBITDA rose to $677.
- Year-to-date operating cash flow fell to $19 from $195, primarily as working capital consumed $501 versus $50 in the prior year. Higher receivables and inventory drove the use; inventory was increased to buffer supply disruption.
- The 2020 comparison included a $51 goodwill impairment, $21 of restructuring charges, and unusually large tax valuation-allowance effects. These items affect the year-over-year earnings comparison.
Management outlook, risks and notable items
- 2021 outlook: Sales of $8.8–$9.0 billion, expected near the midpoint; adjusted EBITDA of $815–$875; adjusted EBITDA margin of about 9.5%; and adjusted free cash flow of approximately $90, or about 1% of sales. Management lowered its adjusted EBITDA outlook and cited supply-chain disruption, labor shortages, semiconductor-related customer production cuts and electrification investment. No reconciliation of adjusted EBITDA guidance to GAAP net income was provided.
- Management expects working-capital needs to remain elevated and capital spending to support customer programs. Higher commodity costs are expected to be largely offset by pricing and material-recovery actions, though customer recovery mechanisms lag supplier cost increases by about 90 days.
- Key operating pressures include the global semiconductor shortage, freight and port constraints, labor shortages, higher steel and aluminum costs, and customer downtime. Currency movements also affect results; stronger currencies added $157 to year-to-date sales.
- Q3 segment results were mixed: Light Vehicle EBITDA fell to $54 from $89; Commercial Vehicle rose to $20 from $17; Off-Highway rose to $100 from $64; Power Technologies rose to $38 from $34.
- During 2021 Dana issued new 2029 and 2030 notes and redeemed its 2024 and 2026 notes, recording a $24 loss on debt extinguishment. The company also repurchased $23 of shares in Q3 and paid $0.10 per share in dividends in each of the first three quarters.
- Dana sold all its Hyliion shares during Q3; the year-to-date loss on that investment was $20. In October 2021, it signed a sale-leaseback agreement for three U.S. facilities: expected proceeds of $78 and a gain of $70, with closing expected in December. The initial 20-year lease term entails $119 of committed payments.
- UAW and USW labor agreements at certain U.S. facilities expired in August 2021. A tentative multi-year agreement was reached, subject to union ratification. Dana said pending legal matters were not expected to have a material adverse effect; accrued environmental liabilities were $9.
- Management stated it believes liquidity and operating cash flow will cover anticipated needs over the next 12 months. It also noted that some non-U.S. cash may be difficult to repatriate.
Most important facts for investors to verify
- Whether supply constraints, customer production cuts and labor shortages ease, and whether the 2021 sales and adjusted EBITDA outlook is achieved.
- Whether pricing and customer recoveries catch up with inflation in commodities and freight, and the resulting effect on gross margins.
- Whether working capital normalizes and cash conversion improves after the $501 year-to-date working-capital cash outflow.
- Debt levels, refinancing costs, revolver availability and covenant compliance, alongside capital spending, dividends and buybacks.
- Union ratification and execution of the announced facility sale-leaseback, including the expected gain and long-term lease obligations.