Dana Incorporated (NYSE: DAN) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts in millions except per-share data. Dana supplies driveline, sealing, thermal-management and electrification products to light-vehicle, commercial-vehicle and off-highway markets.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2,535 | $2,204 | $7,601 | $6,672 |
| Gross margin | $203; 8.0% | $206; 9.3% | $583; 7.7% | $709; 10.6% |
| Segment EBITDA | $190 | $212 | $524 | $681 |
| Adjusted EBITDA | $192 | $210 | $524 | $677 |
| Net income (loss) attributable to parent | $(88) | $48 | $(63) | $172 |
| Diluted EPS | $(0.61) | $0.33 | $(0.44) | $1.17 |
| Operating cash flow | $171 | $(75) | $307 | $19 |
| Capital expenditures | $94 | $95 | $300 | $228 |
| Free cash flow | $77 | $(170) | $7 | $(209) |
Q3 sales rose 15% year over year, but gross margin fell 130 basis points. Organic sales grew 21%; unfavorable currency movements reduced Q3 sales by $139. Higher commodity costs, non-material inflation and supply-chain-related inefficiencies outweighed incremental volume benefits. Pricing and recovery actions increased sales by $229 in the quarter, but recovery of non-material inflation remained uncertain and customer material-price recovery typically lags supplier cost changes by about 90 days.
For the first nine months, sales increased 14%, while gross margin declined 290 basis points. Foreign currency reduced sales by $292. Commodity costs increased earnings pressure by $396 and non-material inflation by $250; pricing and recovery actions increased sales by $569. Operating cash flow improved from $19 to $307, with working capital using $21 versus $501 a year earlier. Capital spending increased to support awarded programs and new business.
Q3 segment EBITDA was $60 for Light Vehicle (up from $54), $18 for Commercial Vehicle (down from $20), $91 for Off-Highway (down from $100) and $21 for Power Technologies (down from $38). Year-to-date segment EBITDA declined in Light Vehicle ($124 vs. $241), Commercial Vehicle ($38 vs. $53) and Power Technologies ($71 vs. $111), while Off-Highway rose ($291 vs. $276).
Financial position and liquidity
- At September 30, 2022, cash and cash equivalents were $371; cash, cash equivalents and restricted cash totaled $390. Marketable securities were $13.
- Total debt was approximately $2,551, including $230 short-term debt, $7 current long-term debt and $2,314 long-term debt net of issuance costs. Short-term debt was $23 at year-end 2021; long-term debt net of issuance costs was $2,386.
- Reported total liquidity was $1,317, including $370 available cash, $934 of revolver availability and $13 marketable securities. Revolver borrowings were $195 and letters of credit used $21 of the $1,150 facility. Dana reported compliance with debt covenants.
- Current assets were $3,954 and current liabilities $2,658. Total liabilities were $5,795; total equity was $1,671.
Material changes, unusual items and outlook
- Goodwill impairment: Dana recorded a $191 Q3 charge, fully impairing goodwill in the Commercial Vehicle reporting unit. Management cited higher risk-free rates, sustained commodity costs, other cost increases and supply-chain disruption; market capitalization was below book value of net assets. Off-Highway goodwill was not impaired.
- Taxes and attributable loss: Q3 income tax expense was $31, including a $31 state valuation-allowance expense, partly offset by $32 of U.S. tax-credit benefit and a $2 tax benefit associated with the impairment. A $79 net loss attributable to redeemable noncontrolling interests materially affected the allocation of the consolidated net loss; parent-attributable loss was $88.
- 2022 outlook, unchanged from July: Sales of $10.0–$10.2 billion; adjusted EBITDA of $700–$740; operating cash flow of approximately 6% of sales; capital spending of approximately 4% of sales; and adjusted free cash flow of approximately $200, or 2% of sales. Management cited continued commodity and non-material inflation, with higher labor, energy and transportation costs. These are non-GAAP outlook measures where applicable.
- Management commentary: Dana expects continued investment in electrification, awarded programs and growth markets. It said liquidity and operating cash flow should cover anticipated needs over the next 12 months, while noting uncertainty in the economic environment.
- Risks and contingencies: Risks include supply-chain disruptions, inflation and delayed customer recoveries, foreign-exchange movements, cyclical end-market demand and potential impacts from Russia’s invasion of Ukraine. 2021 revenue from Russia and Ukraine was approximately $75; Dana reported limited physical presence in Russia. The company said pending legal matters were not expected to materially affect results or liquidity. Environmental liabilities were $8; accrued product liabilities were $1, with $17 recoverable from third parties.
- Dana reported a possible recording of up to approximately $200 in valuation allowances related to U.S. federal credits and attributes in the next 12 months. The filing also disclosed a first-quarter 2022 $8 cost-of-sales adjustment for an intercompany inventory-transfer error, which management concluded was not material to the quarter or prior periods.
Important facts for investors to verify
- Whether the $191 goodwill impairment and weaker Commercial Vehicle outlook assumptions indicate further impairment risk.
- Whether pricing actions and customer recoveries can catch up with commodity, labor, energy and transportation cost inflation, and whether margins recover.
- Whether management’s full-year adjusted EBITDA and adjusted free-cash-flow outlooks were achieved, given higher capital spending and working-capital needs.
- Debt maturities, short-term borrowing needs, revolver availability and covenant headroom; also consider that most reported cash was held outside the U.S.
- The assumptions underlying the potential U.S. tax valuation allowances and the significant variability in Dana’s effective tax rate.
- Whether supply-chain, currency, geopolitical and vehicle-market developments materially alter demand or operating costs.