Dana Incorporated (NYSE: DAN) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed July 28, 2023. Dana supplies driveline, sealing, thermal-management and electrification products to light-vehicle, commercial-vehicle and off-highway markets through four segments. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2,748 | $2,586 | $5,392 | $5,066 |
| Gross margin | $271; 9.9% | $183; 7.1% | $500; 9.3% | $380; 7.5% |
| Operating earnings (EBIT) | $124 | $59 | $214 | $125 |
| Net income attributable to Dana | $30 | $8 | $58 | $25 |
| Diluted EPS | $0.21 | $0.06 | $0.40 | $0.17 |
| Operating cash flow | $256 | $257 | $86 | $136 |
| Capital expenditures | $122 | $90 | $242 | $206 |
| Free cash flow (company-defined) | $134 | $167 | $(156) | $(70) |
| Adjusted EBITDA (company-defined) | $243 | $162 | $447 | $332 |
Q2 sales rose 6% year over year; organic sales increased 7%, partly offset by $21 of adverse currency effects. Six-month sales increased 6%, with organic growth of 8% offset by $96 of adverse currency effects. Dana reported Q2 segment EBITDA of $244 versus $164 a year earlier.
At June 30, cash and cash equivalents were $484 (plus $19 restricted cash); total debt was approximately $2,654, including short-term and current maturities. Long-term debt, net of issuance costs, was $2,587. Total liquidity was $1,618, including $1,134 available under the revolver after letters of credit. Working capital consumed $172 of cash in the first half, contributing to lower operating cash flow and negative free cash flow. The current ratio was approximately 1.59.
Material changes and drivers
- Q2 gross margin improved 280 basis points year over year. Dana cited sales volume, material savings, lower commodity costs and lower premium freight; these benefits were partly offset by non-material inflation, operational inefficiencies, launch costs and warranty expense.
- Q2 net income improved, but higher interest expense ($39 versus $32) and income taxes ($55 versus $18) absorbed part of the operating improvement. A $19 reserve for prior-year foreign tax matters was recorded in Q2; excluding it, Dana said the Q2 effective tax rate would have been 40% rather than 62%.
- Segment EBITDA improved in Light Vehicle ($66 versus $33), Commercial Vehicle ($28 versus $10) and Off-Highway ($131 versus $100); Power Technologies declined ($19 versus $21). Power Technologies’ margin was pressured by inflation and operational inefficiencies despite higher sales.
- First-half capital spending increased to $242 from $206. Receivables used $246 of cash and inventory used $107, while increases in payables and other net liabilities provided $181.
- Dana issued €425 million ($458 at issuance) of 8.5% senior notes due 2031 and used proceeds to redeem $200 of 2025 notes and reduce revolver borrowings. The revolving facility was amended to mature March 14, 2028. Dana had no revolver borrowings at quarter-end and reported covenant compliance.
Outlook, commentary and risks
Dana maintained 2023 guidance of sales of $10.45–$10.95 billion, adjusted EBITDA of $800–$900, operating cash flow of $560–$610, capital spending of approximately 5% of sales, and free cash flow of $50–$100. Management indicated adjusted EBITDA margin of 7.9% at the guidance midpoint, about 100 basis points above 2022, and free cash flow of approximately $75 at midpoint. The outlook reflects modest market improvement, cost recoveries and $300 of net new-business backlog, partly offset by supply-chain disruption, customer order volatility and electrification investment. The filing does not provide a GAAP reconciliation for adjusted EBITDA guidance.
- Management described continued non-material inflation in labor, energy and transportation; customer recovery for these costs is not specifically provided for in current contracts and may involve prolonged negotiations. Material cost recovery typically lags supplier cost changes by about 90 days.
- Market conditions vary by region and end market. Dana noted weaker South American truck demand and forecast a 25% decline in South American medium/heavy truck production for 2023; it expected North American commercial-vehicle demand to remain strong and modest growth in construction equipment markets.
- Foreign exchange remains significant: 57% of first-half sales were outside the U.S.; currency movements reduced first-half sales by $96. Certain overseas cash is subject to repatriation restrictions or costs.
- Other exposures include commodity-price movements, supply-chain disruption, customer order changes, warranty estimates and uncertain tax positions. Environmental liabilities were $6; the company guarantees certain facility leases through June 2025, with approximately $6 of annual payments. Dana said pending legal matters were not expected to have a material adverse effect. No material risk-factor changes were reported.
- Dana paid a $0.10-per-share dividend in each of the first two quarters. No shares were repurchased in Q2; approximately $102 remained under the repurchase authorization, which expires December 31, 2023.
Key facts investors should verify
- Whether the 2023 sales and adjusted EBITDA outlook is achieved, and the extent to which performance depends on pricing recoveries, backlog conversion and market volumes.
- Whether working-capital use and elevated capital spending improve enough to deliver positive full-year free cash flow after first-half free cash flow of $(156).
- Debt cost and refinancing implications of the 8.5% 2031 notes, alongside total debt, interest expense and the company’s target of improving investment-grade metrics.
- The persistence of non-material inflation and operational inefficiencies, and the timing and amount of customer recoveries.
- The effect of the $19 foreign tax reserve and other jurisdictional tax items on future effective tax rates and earnings.