Dana Incorporated (NYSE: DAN) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Dana supplies driveline, sealing, thermal-management and electrification products to light-vehicle, commercial-vehicle and off-highway markets. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $2,735 | $2,644 |
| Gross margin | $244; 8.9% of sales | $229; 8.7% of sales |
| Earnings before interest and taxes | $70 | $90 |
| Earnings before income taxes | $35 | $60 |
| Net income attributable to Dana | $3; $0.02 per diluted share | $28; $0.19 per diluted share |
| Adjusted EBITDA (non-GAAP) | $223 | $204 |
| Net cash used in operating activities | $(102) | $(170) |
| Capital expenditures | $70 | $120 |
| Free cash flow (non-GAAP) | $(172) | $(290) |
Reported consolidated net income was approximately zero in Q1 2024, while Dana-attributable net income was $3. Income tax expense was $37, including an $11 valuation allowance charge for foreign locations; the effective tax rate was 106%, versus 50% a year earlier. Interest expense rose to $39 from $34, primarily due to higher rates.
At March 31, cash and cash equivalents were $351, down from $529 at year-end 2023. Total liquidity was $1,477, including $1,126 of availability under the revolving facility. Debt was approximately $2.63 billion, including current maturities; the filing reports $2,580 of long-term debt net of issuance costs. Dana was in compliance with its financing covenants. Working capital used $251 of cash, chiefly to finance receivables.
Changes versus prior year and segment results
- Sales increased $91, or about 3%; organic sales increased $88, or 3%, and currency added $3. North America sales rose $144, while Europe declined $45 and Asia Pacific declined $24.
- Light Vehicle sales rose to $1,098 from $962 and segment EBITDA to $67 from $49. Commercial Vehicle sales were broadly flat at $524 and EBITDA remained $17. Off-Highway sales fell to $781 from $842 and EBITDA to $115 from $118. Power Technologies sales rose to $332 from $318 and EBITDA to $27 from $23.
- Gross margin improved 20 basis points. Lower premium freight, warranty and commodity costs and higher material savings helped; labor and other inflation, electrification spending, operational inefficiencies and unfavorable mix offset some of the gains.
- Operating cash use improved from $170 to $102, but remained negative. Working capital cash use narrowed from $304 to $251. Capital spending was lower year over year.
Outlook, management commentary and notable items
- 2024 outlook: Sales of $10.65–$11.15 billion; adjusted EBITDA of $875–$975 million; operating cash flow of $500–$550 million; capital expenditures of approximately 4% of sales; and free cash flow of $50–$100 million. Adjusted EBITDA margin is expected to be 8.5% at the midpoint, about 50 basis points above 2023. Dana does not provide a reconciliation of adjusted EBITDA guidance to GAAP net income.
- Management expects modest market-demand improvement and cites $350 million of net new-business backlog. Higher-margin new business and operational improvement are expected to be partly offset by fading commodity-cost recovery benefits, increased electrification investment, higher cash interest and taxes, and working-capital needs.
- Management describes 2024 commercial-vehicle demand as weakening moderately in North America, with modest improvement expected in South America and Asia Pacific. Off-highway demand is expected to soften in agriculture and decline moderately in European construction equipment. Dana identifies a modest currency headwind to 2024 sales.
- In February, Dana agreed to sell its European hydraulics business for approximately $40, subject to closing adjustments. The business was classified as held for sale and a $29 loss was recognized; closing was expected in Q2 2024.
- Q1 restructuring charges were $5. Accrued employee termination benefits include planned reductions of approximately 300 employees over the following year. The quarterly common dividend was $0.10 per share.
- Material cost recoveries from customers typically lag supplier cost changes by about 90 days; recovery of non-material inflation is uncertain and may require prolonged negotiations. Other exposures include end-market cyclicality, foreign exchange, commodity costs and restrictions on repatriating some overseas cash.
- Dana said pending legal matters were not expected to have a material adverse effect based on current information. Accrued environmental liabilities were $6. The company also guarantees certain divested-business facility leases through June 2025, with approximately $6 of annual payments.
Important facts for investors to verify
- Whether the European hydraulics divestiture closed as expected, and final proceeds after closing adjustments.
- Whether the 2024 sales, adjusted EBITDA and free-cash-flow outlook is achieved, including the assumptions for end-market demand, currency and new-business backlog.
- Progress in receivables, inventory and payables management, given continued negative Q1 operating cash flow and free cash flow.
- Whether foreign tax valuation allowances or other tax items continue to weigh on earnings and the effective tax rate.
- Execution of restructuring and operational improvements, and the effect of inflation, customer cost recoveries and electrification investment on margins.
- Debt repayment and refinancing plans, covenant compliance, and access to the revolving facility as debt maturities approach.