Dana Incorporated — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Dana supplies driveline, motion, electrification, sealing and thermal-management products to light-vehicle, commercial-vehicle and off-highway markets. Amounts below are in millions of U.S. dollars, except per-share data and percentages.
Financial and operating highlights
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $2,644 | $2,480; up $164 (about 7%) |
| Gross profit and margin | $229; 8.7% | $197; 7.9% |
| Operating earnings (EBIT) | $90 | $66 |
| Net income | $31 | $20 |
| Net income attributable to Dana | $28; diluted EPS $0.19 | $17; diluted EPS $0.12 |
| Adjusted EBITDA | $204 | $170 |
| Operating cash flow | $(170) | $(121) |
| Capital expenditures | $120 | $116 |
| Free cash flow | $(290) | $(237) |
Sales increased organically by $239, partly offset by $75 of adverse currency effects. Pricing and cost-recovery actions contributed $110 to sales. Segment EBITDA was $49 for Light Vehicle (up from $31), $17 for Commercial Vehicle (up from $10), $118 for Off-Highway (up from $100), and $23 for Power Technologies (down from $29).
At March 31, cash and cash equivalents were $401, versus $425 at year-end 2022. Total current assets were $4,233 and current liabilities $2,876. Debt on the balance sheet comprised $321 of short-term debt, $32 of current long-term debt and $2,328 of long-term debt, net of issuance costs. The company reported $839 of unused revolving-facility availability and total liquidity of $1,239. It had $295 drawn on the revolver, $16 of letters of credit, and was in compliance with debt covenants. The revolving facility maturity was extended to March 14, 2028.
Material changes and drivers
- Gross margin improved 80 basis points, supported by sales volume, material savings, lower commodity costs and premium freight, and net material cost recoveries. Offsetting pressures included $96 of non-material inflation, higher warranty costs, program launch costs and operating inefficiencies.
- Operating cash use worsened year over year, principally because working capital used $304, compared with $211 in Q1 2022. Receivables used $270 and higher inventory used $104, partly offset by cash from payables and other liabilities.
- Interest expense rose to $34 from $31; the filing attributes the increase to higher average debt and interest rates. The reported effective tax rate was 50%, versus 49%.
- Q1 included $8 of distressed-supplier costs in the adjusted EBITDA reconciliation. Warranty liability ended at $108, including $8 of adjustments to prior estimates.
Outlook, commentary and risks
Management maintained its February 2023 full-year outlook: sales of $10.35–$10.85 billion, adjusted EBITDA of $750–$850 million, operating cash flow of $510–$560 million, capital spending of approximately 5% of sales, and free cash flow of $0–$50 million. Management expects adjusted EBITDA margin of 7.5% at the guidance midpoint, about 60 basis points above 2022. It expects higher EBITDA to be largely offset by higher capital spending, with free cash flow around $25 million at the midpoint.
Management cited modestly improving global demand, $300 million of net new-business backlog, and material-cost recoveries as supports. Continued supply-chain disruption, volatile customer orders, operational inefficiencies, non-material inflation and investment in electrification may constrain performance. Customer recovery mechanisms for material costs lag supplier cost changes by about 90 days; non-material inflation recovery is less certain and may involve prolonged negotiations.
Other exposures include foreign-currency movements (which reduced Q1 sales by $75), commodity costs, cyclical end markets and limits on repatriating some non-U.S. cash. Management believes liquidity and operating cash flow will be sufficient for anticipated needs over the next 12 months. It reported no material change in risk factors or market-risk exposures and no material adverse impact expected from pending legal matters; environmental liabilities were $7. The company also guaranteed certain divested-business facility leases through June 2025. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether operating cash flow and free cash flow improve as seasonal receivables and inventory unwind, and whether full-year guidance remains achievable.
- How quickly customer pricing recovers ongoing labor, energy and transportation inflation, beyond material-cost recovery.
- Whether supply-chain disruption, customer order volatility, warranty costs and distressed-supplier exposure ease or persist.
- Debt levels, revolver usage, covenant headroom and access to cash held outside the United States.
- Execution and returns on electrification and other growth investments, including the segment-level profitability trends.