DANA Inc quarterly report, Q2 FY2021

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Dana Incorporated (NYSE: DAN) — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Dana supplies driveline, motion, electrification, sealing and thermal-management products to light-vehicle, commercial-vehicle and off-highway markets. Results are compared with 2020, when COVID-19-related shutdowns and demand declines significantly affected activity.

Financial performance

  • Q2 revenue: $2.205 billion, up $1.127 billion (105%) year over year. Management attributed the increase mainly to recovering end markets and conversion of sales backlog; currency added $87 million and pricing actions added $30 million.
  • Q2 earnings and margins: Gross profit was $252 million, or 11.4% of sales, versus a $10 million gross loss and negative 0.9% margin a year earlier. Operating earnings were $113 million versus an operating loss of $112 million. Net income attributable to Dana was $53 million ($0.36 diluted EPS), compared with a $174 million loss ($1.20 diluted loss per share).
  • First-half revenue and earnings: Revenue was $4.468 billion, up 49%. Gross profit was $503 million (11.3% margin), compared with $196 million (6.5%). Dana-attributable net income was $124 million ($0.85 diluted EPS), versus a $116 million loss ($0.80 diluted loss per share).
  • Segment EBITDA: Q2 was $234 million versus a $3 million loss; first-half was $469 million versus $203 million. Q2 segment results included Light Vehicle $87 million, Commercial Vehicle $18 million, Off-Highway $97 million and Power Technologies $32 million. The filing reports adjusted EBITDA of $233 million for Q2 and $467 million for the first half; these are non-GAAP measures.
  • Cash flow: First-half operating cash flow was $94 million, compared with cash used of $126 million. Working capital used $239 million, including $204 million for receivables and $305 million for inventory, partly offset by $270 million from accounts payable and other net liabilities. Capital expenditures were $133 million; adjusted free cash flow was negative $39 million, versus negative $247 million.
  • Liquidity and debt: June 30 cash and equivalents were $384 million, down from $559 million at year-end 2020; marketable securities were $59 million. Reported total liquidity was $1.572 billion, including $1.129 billion available under the revolving facility. Long-term debt, net of issuance costs, was $2.400 billion; the balance sheet also showed $21 million short-term debt and $8 million current long-term debt. Dana reported compliance with financing covenants and no revolver borrowings.
  • Other balance-sheet items: Total assets were $7.679 billion and total equity was $1.939 billion. Inventories rose to $1.435 billion from $1.149 billion at December 31, 2020.

Material changes versus 2020

  • Revenue and segment earnings rebounded sharply from the pandemic-affected comparison period. The company cautions that the prior-year base was unusually weak; the filing does not present this rebound as a like-for-like indication of normalized growth.
  • Q2 sales increased organically across all regions, but the global semiconductor shortage caused customer downtime and constrained sales. Stronger international currencies added $87 million to Q2 revenue and $135 million to first-half revenue.
  • Higher commodity costs reduced year-over-year earnings by $70 million in Q2 and $105 million in the first half. Higher standard and premium freight costs reduced earnings by $20 million and $43 million, respectively. Customer recoveries and pricing lagged supplier material-cost increases by about 90 days.
  • In May and June, Dana issued €325 million of 3.0% 2029 notes and $400 million of 4.25% 2030 notes, and redeemed its $375 million 2026 notes and $425 million 2024 notes. Debt extinguishment losses were $24 million in Q2 and the first half. The revolving facility was increased to $1.15 billion and extended to March 2026.
  • First-half 2020 included a $51 million goodwill impairment and unusual tax items, including a $56 million Q2 tax expense for foreign valuation allowances. These affected the comparison with 2021.

Outlook, commentary and risks

  • 2021 outlook, unchanged from April: Sales of $8.5–$9.0 billion and adjusted EBITDA of $920–$1.0 billion. Management expected sales nearer the high end, citing demand, currency and material-cost recoveries. Adjusted EBITDA margin was projected at 10.7%, with electrification investment partly offsetting operating improvements.
  • Management expected adjusted free cash flow of approximately $280 million, or about 3.0% of sales, and capital expenditures of about 4.0% of sales. Higher capital spending for customer programs was expected to offset part of the earnings recovery.
  • Net new-business backlog for 2021–2022 was $700 million: $500 million expected to be realized in 2021 and $200 million in 2022. Management said the backlog was evenly balanced between electric-vehicle and internal-combustion-engine content.
  • Key operating risks discussed include semiconductor shortages and customer production interruptions, supply-chain and labor constraints, freight disruption and elevated commodity costs, delayed customer price recovery, foreign-currency movements and cyclical end-market demand. Dana also noted Argentine inflation and currency exposure.
  • Other items to monitor include the $14 million first-half loss on the Hyliion investment, a $9 million loss on de-designating currency swaps, and a $7 million first-quarter impairment related to a China joint-venture disposal completed in April. Dana said pending legal matters and other contingencies were not expected to have a material adverse effect; accrued environmental liabilities were $9 million.
  • Dana stated that liquidity and operating cash flow should be sufficient for anticipated needs over the next 12 months. Some non-U.S. cash is subject to local repatriation restrictions. The company reported effective disclosure controls and no material change in internal control during the quarter.

Important facts for investors to verify

  • Whether 2021 revenue, adjusted EBITDA and adjusted free-cash-flow guidance was achieved, and how the non-GAAP measures reconcile to GAAP results.
  • How semiconductor availability, customer downtime, labor constraints, freight costs and commodity inflation affected production, margins and working capital after June 30.
  • Whether customer pricing and material-cost recoveries caught up with supplier cost increases, including the disclosed approximate 90-day lag.
  • Debt, interest expense, refinancing effects and covenant headroom after the 2021 note issuance and redemptions.
  • The conversion and quality of the $700 million sales backlog, including timing, customer awards and expected profitability of EV-related programs.
  • Changes in Hyliion investment value, foreign-exchange exposures, cash repatriation constraints, and the status of legal, environmental and warranty obligations.