Dana Incorporated (NYSE: DAN) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in millions except per-share data. Dana supplies driveline, sealing, thermal-management and electrification products to light-vehicle, commercial-vehicle and off-highway markets. Results reflect the COVID-19-related contraction in demand, with production recovering sequentially from May through September.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,994 | $2,164 | $4,998 | $6,633 |
| Gross margin | $214; 10.7% | $282; 13.0% | $410; 8.2% | $908; 13.7% |
| Net income (loss) attributable to parent | $45 | $111 | $(71) | $141 |
| Basic and diluted EPS | $0.31 | $0.77 | $(0.49) | $0.98 basic; $0.97 diluted |
| Adjusted EBITDA (non-GAAP) | $201 | $250 | $401 | $793 |
| Operating cash flow | $321 | $231 | $195 | $288 |
| Capital expenditure | $60 | $108 | $181 | $298 |
| Adjusted free cash flow (non-GAAP) | $261 | $125 | $14 | $54 |
- Revenue and margins: Q3 sales fell 8% year over year, primarily from lower customer volumes; nine-month sales fell 25%. Q3 gross margin declined 230 basis points and nine-month gross margin declined 550 basis points, as cost reductions lagged the sharp volume decline and fixed costs remained. Lower commodity costs and cost savings provided partial offsets.
- Cash and liquidity: Cash and cash equivalents were $956 at September 30, up from $508 at year-end 2019. Total reported liquidity was $1,955, including $954 available cash, $22 marketable securities and $979 of undrawn revolver availability. Nine-month operating cash flow was $195; capital spending was $181.
- Debt: Long-term debt, including its current portion, was $2,874; short-term debt was $12. Debt increased from year-end, primarily following issuance of $400 of 2028 notes and an additional $100 of 2027 notes. The company reported covenant compliance and no meaningful debt maturities before 2024.
Changes versus the prior period
- Q3 parent-attributable income fell to $45 from $111; nine-month results shifted to a parent-attributable loss of $71 from income of $141.
- Q3 segment EBITDA was $204 versus $253; nine-month segment EBITDA was $407 versus $802. Lower volumes weighed on every segment, while segment performance and margins varied.
- Q3 segment sales were $913 Light Vehicle, $314 Commercial Vehicle, $507 Off-Highway and $260 Power Technologies. Q3 sales declined most in Commercial Vehicle and Off-Highway; Power Technologies sales increased modestly.
- Nine-month results included a $51 goodwill impairment charge in the first quarter, driven by the pandemic’s effect on expected cash flows and lower market capitalization. In 2019, results included a $260 pension settlement charge. These unusual items complicate year-over-year earnings comparisons.
- Nine-month operating cash flow declined despite lower working-capital cash use ($50 versus $197), primarily because operating cash generation was lower. Investing cash use improved substantially from 2019, which included major acquisition spending.
Outlook, commentary and risks
- 2020 outlook: Sales of $6.65–$6.95 billion; adjusted EBITDA of $530–$590; operating cash flow of approximately 5.1% of sales; capital spending of approximately 4.4% of sales; and adjusted free cash flow of approximately 0.7% of sales. Management’s outlook assumes continued easing of pandemic impacts and no significant renewed disruption or major-customer shutdowns.
- Management described third-quarter market improvement as significant but uneven across regions and markets. It emphasized employee safety, cash conservation, cost flexibility and maintaining liquidity. Dividends and share repurchases were temporarily suspended in response to the pandemic.
- COVID-19 remains the principal risk: renewed shutdowns, supply-chain disruption or weaker customer demand could affect sales, cash flow and liquidity. Remaining Commercial Vehicle and Off-Highway goodwill was identified as exposed to further impairment if demand or expected cash flows weaken.
- Other risks include foreign-exchange movements, commodity costs and delayed customer price recovery, regional economic weakness, trade-policy uncertainty, and restrictions on repatriating some non-U.S. cash. Dana reported $457 of pension and postretirement obligations.
- Hydro-Québec may put all of its specified interests in TM4, SME, PEPS and Ashwoods to Dana at fair value after June 22, 2021; redeemable noncontrolling interests totaled $152 at quarter-end. Dana said pending legal matters were not expected to materially harm its financial condition, liquidity or results. It also guarantees certain divested-business facility leases through June 2025.
- After quarter-end, Dana sold its 20% interest in Bendix Spicer Foundation Brake for $51 in cash, a note and deferred proceeds; acquired a 49% interest in Pi Innovo for $17; and converted Hyliion notes into 2,988,229 shares following Hyliion’s October 1 merger.
- The filing reports a correction to the first-quarter 2020 allocation of goodwill impairment to redeemable noncontrolling interests. The error was deemed immaterial and no amended first-quarter filing was required; the revised nine-month figures include the correction, increasing first-quarter parent-attributable income by $20 and EPS by $0.14.
Key facts for investors to verify
- Whether demand recovery and production levels support the sales and adjusted EBITDA outlook, particularly under the stated assumption of no major renewed disruptions.
- Whether Dana can restore gross and segment margins as volumes recover, given the fixed-cost and cost-flexibility pressures described.
- Debt, refinancing and covenant headroom after the 2020 note issuances and credit-agreement amendments; also assess the potential cash cost of Hydro-Québec’s put right.
- Cash-flow conversion, capital spending and the sustainability of liquidity, including cash accessibility outside the United States.
- Potential additional goodwill impairment, tax valuation-allowance changes, and the financial effects of the post-quarter affiliate transactions and Hyliion shareholding.