Dana Incorporated (NYSE: DAN) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in millions of dollars except per-share data. Dana supplies driveline, sealing, thermal-management and electrification technologies to vehicle and industrial markets.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1,078 | $2,306 | $3,004 | $4,469 |
| Gross margin | $(10); (0.9%) | $326; 14.1% | $196; 6.5% | $626; 14.0% |
| Operating loss (earnings before interest and taxes) | $(112) | $(95) | $(65) | $45 |
| Net income (loss) attributable to Dana | $(174) | $(68) | $(116) | $30 |
| Diluted EPS | $(1.20) | $(0.47) | $(0.80) | $0.21 |
| Adjusted EBITDA | $(5) | $286 | $200 | $543 |
| Operating cash flow | $(75) | $73 | $(126) | $57 |
| Capital expenditures | $58 | $92 | $121 | $190 |
Q2 sales fell 53% year over year, including a $1,204 (52%) organic decline; first-half sales fell 33%, with organic sales down 34%. Dana attributed the deterioration chiefly to COVID-19-related production declines across end markets. The company reported a Q2 segment EBITDA loss of $3, compared with $290 of segment EBITDA in Q2 2019. First-half segment EBITDA was $203, versus $549.
Q2 segment sales and EBITDA were: Light Vehicle $337 and $(32); Commercial Vehicle $200 and $(8); Off-Highway $401 and $38; Power Technologies $140 and $(1). Off-Highway was the only segment with positive Q2 EBITDA.
Balance sheet, liquidity and debt
- At June 30, 2020, cash and cash equivalents were $694; marketable securities were $19. Total assets were $6,908 and total current liabilities were $1,379.
- Long-term debt, net of issuance costs, was $2,827, with $36 current portion and $7 short-term debt. Dana issued $400 of 5.625% notes due 2028 and added $100 to its 5.375% notes due 2027 during June.
- Reported liquidity was $1,687, comprising $689 available cash, $19 marketable securities and $979 of revolving-credit availability. No revolving borrowings were outstanding at quarter-end; $21 was used for letters of credit.
- Dana reported compliance with financing covenants. It amended its credit agreement to temporarily ease the first-lien leverage limit, with a maximum of 4.0:1 for the quarter ending December 2020 and a scheduled return to 2.0:1 by the quarter ending September 2022.
- First-half cash used in operations was $126, and free cash flow was $(247). Working capital used $228 of cash, including a $482 reduction in accounts payable and other net liabilities. Cash increased by $209 during the period, primarily supported by $476 of financing cash flow.
Changes, outlook and risks
- COVID-19 impact and response: April was the most disrupted month, with production gradually ramping up in May and June. Dana described facility closures, reduced demand and disruption to customer, supplier and global supply chains. Cost actions included labor and spending reductions, deferred capital and R&D spending, and temporary cuts to executive, employee and board compensation.
- Shareholder distributions: Dana temporarily suspended common dividends and share repurchases in response to the pandemic. No shares were repurchased in Q2.
- Outlook: Dana withdrew its prior full-year guidance and said it would not provide financial guidance because of continuing disruption and economic uncertainty. Management said it believed liquidity and operating cash flow would meet anticipated requirements over the next 12 months, while acknowledging uncertainty.
- Impairment: Dana recorded a $51 first-quarter goodwill impairment tied to COVID-19-driven lower expected cash flows, including $48 for Commercial Vehicle and $3 for Light Vehicle. Management warned that remaining goodwill in Commercial Vehicle and Off-Highway remained at risk if the downturn persisted or demand weakened further.
- Taxes and unusual items: Q2 included a $56 tax expense for foreign valuation allowances due to reduced income projections. Dana also wrote off $5 of deferred financing fees after terminating its bridge facility. Q2 2019 included a $258 pension settlement charge, so headline year-over-year earnings comparisons reflect differing unusual items.
- Financial-statement correction: Dana revised first-quarter 2020 year-to-date attribution for redeemable noncontrolling interests after finding that $20 of goodwill impairment should have been attributed to those interests. It said the error was not material and did not require amending the prior Q1 filing; revised figures increased Q1 parent-attributable income and EPS by $20 and $0.14, respectively.
- Other exposures: Dana cited currency, commodity-price, trade-policy and economic risks. It reported $159 of redeemable noncontrolling interests; Hydro-Québec may put its interests in certain subsidiaries to Dana at fair value after June 22, 2021. Dana said pending legal matters were not expected to materially affect its financial condition or results.
Key facts for investors to verify
- Whether customer production and Dana’s sales recover, and whether cost reductions can keep pace with demand.
- Cash burn, working-capital movements, capital spending and actual availability under the revolving facility.
- Debt covenant headroom and the effects of the amended leverage limits and added note debt.
- Goodwill valuation assumptions and potential additional impairment, particularly in Commercial Vehicle and Off-Highway.
- Foreign tax valuation allowances, the corrected noncontrolling-interest attribution, and the potential cost of Hydro-Québec’s put rights.