Dana Incorporated (NYSE: DAN) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in millions of dollars except per-share data. Dana supplies driveline, motion, electrification, sealing and thermal-management products to light-vehicle, commercial-vehicle and off-highway markets.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $2,669 | $2,535 | $8,061 | $7,601 |
| Gross margin | $236; 8.8% | $203; 8.0% | $736; 9.1% | $583; 7.7% |
| Operating earnings (EBIT) | $91 | $(101) | $305 | $24 |
| Net income (loss) | $25 | $(163) | $92 | $(133) |
| Net income (loss) attributable to Dana | $19 | $(88) | $77 | $(63) |
| Diluted EPS | $0.13 | $(0.61) | $0.53 | $(0.44) |
| Adjusted EBITDA | $242 | $192 | $689 | $524 |
| Cash provided by operations | $112 | $171 | $198 | $307 |
| Free cash flow | $(5) | $77 | $(161) | $7 |
Q3 sales rose 5% year over year, with organic growth of 4%; nine-month sales rose 6%, with organic growth of 7%. The filing attributes sales growth to stronger off-highway and commercial-vehicle demand, improved light-vehicle production, backlog conversion and customer pricing/cost-recovery actions. Foreign exchange increased Q3 sales by $42 but reduced nine-month sales by $54.
Gross margin improved year over year, but SG&A increased to $126 (4.7% of sales) in Q3 from $114 (4.5%) and to $410 (5.1%) year to date from $374 (4.9%). Q3 interest expense was $41 versus $32; nine-month interest expense was $114 versus $95. Effective tax rates were elevated: 60% for Q3 2023 and 58% for the first nine months, including $19 of tax expense in Q2 for prior-year foreign tax reserves.
Cash, debt and liquidity
- Cash and cash equivalents were $421 at September 30, 2023, versus $425 at December 31, 2022. Cash, cash equivalents and restricted cash totaled $440.
- Total current assets were $4,220 and current liabilities $2,670. Working capital used $169 of cash in the first nine months, including $243 used to finance receivables and $116 for higher inventory.
- Debt carrying amounts were approximately $2,631, including short-term debt and current maturities, versus approximately $2,408 at year-end 2022. Long-term debt, net of issuance costs, was $2,563. Cash less these debt carrying amounts implies approximate net debt of $2,210.
- Reported liquidity was $1,562: $421 of available cash and $1,141 of undrawn revolving-facility availability, after $9 of letters of credit. Dana reported no revolving-facility borrowings and compliance with its debt covenants.
- Capital expenditures were $359 in the first nine months, up from $300; operating cash flow less capital expenditures was negative $161. Cash from financing included €425 ($458 at issuance) of 8.5% senior notes due 2031; proceeds helped redeem $200 of 5.75% notes due 2025 and repay revolver borrowings.
Segments and notable changes
Q3 sales and segment EBITDA were: Light Vehicle $1,084 and $75; Commercial Vehicle $535 and $29; Off-Highway $739 and $110; Power Technologies $311 and $28. Year-to-date segment EBITDA was higher in Light Vehicle ($190 versus $124), Commercial Vehicle ($74 versus $38), and Off-Highway ($359 versus $291); Power Technologies was approximately flat at $70 versus $71.
- The 2022 comparison includes a $191 goodwill impairment charge in Commercial Vehicle, which contributed to the prior-year net loss and makes the earnings comparison unusually favorable in 2023.
- Q3 2023 included $17 of restructuring charges, primarily for administrative and functional-service rationalization. Accrued termination benefits cover approximately 500 employee reductions expected to be completed over the next year.
- Distressed supplier costs were $14 in Q3 and $26 year to date. Dana cited inflation, operational inefficiencies, warranty and launch costs, and higher electrification spending as offsets to cost savings and pricing recoveries.
- UAW strikes at certain Ford, Stellantis and GM U.S. operations reduced orders from Ford and Stellantis and led Dana to curtail some U.S. manufacturing and assembly operations.
Outlook, risks and contingencies
Dana’s 2023 outlook was sales of $10.2–$10.7 billion, adjusted EBITDA of $760–$850, operating cash flow of $375–$490, capital expenditures of approximately 5% of sales, and free cash flow of negative $135 to negative $20. The lower ends of the ranges assume UAW strike activity continues through December 31, 2023; the upper ends assume activity continues through October 31, 2023. Adjusted EBITDA and free cash flow are non-GAAP measures.
Management said current liquidity and operating cash flow should be sufficient for anticipated requirements over the next 12 months, while noting uncertainty in the economic environment. Key exposures include labor disruptions, cyclical vehicle and equipment demand, foreign currency, commodity prices, inflation and the lag or uncertainty in recovering cost increases from customers. The filing states that non-material inflation recovery is not specifically provided for in current contracts. Dana also notes that some non-U.S. cash is subject to repatriation restrictions or practical tax limitations.
Dana reported ordinary-course legal proceedings and accrued environmental liabilities of $6; management did not expect pending legal matters or contingencies to have a material adverse effect. The company guarantees certain divested-business facility leases through June 2025, including approximately $6 of annual payments. No material change in off-balance-sheet arrangements was reported.
Investor verification priorities
- Track the duration and production impact of UAW strikes, and whether actual results align with the outlook’s strike-duration assumptions.
- Reconcile reported adjusted EBITDA and segment EBITDA disclosures, and review the company’s non-GAAP definitions and reconciliations.
- Monitor working-capital use, capital spending, and the path from negative year-to-date free cash flow to the full-year outlook.
- Review debt costs and maturities, particularly the new 8.5% 2031 notes, alongside liquidity and covenant headroom.
- Assess whether pricing and material-cost recoveries continue to offset labor, energy, transportation and other inflationary costs; monitor warranty and distressed-supplier costs.
- Evaluate the assumptions behind the elevated effective tax rate, foreign tax reserves and redeemable noncontrolling-interest valuation.