Dana Incorporated (NYSE: DAN) — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Unless noted, amounts are in millions of U.S. dollars.
Business context
Dana supplies driveline, motion, electrodynamic, sealing, thermal-management and digital products to light-vehicle, commercial-vehicle, off-highway and industrial markets. It operated in 33 countries, with approximately 38,200 employees. Results were heavily affected by COVID-19-related shutdowns and demand declines, followed by a production and demand recovery from midyear.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $7,106 | $8,620 |
| Gross margin | $621; 8.7% of sales | $1,131; 13.1% of sales |
| Operating income (EBIT) | $124 | $292 |
| Net income (loss) attributable to Dana | $(31) | $226 |
| Diluted EPS | $(0.21) | $1.56 |
| Adjusted EBITDA (non-GAAP) | $593 | $1,019 |
| Cash from operations | $386 | $637 |
| Capital expenditures | $326 | $426 |
| Adjusted free cash flow (non-GAAP) | $60 | $272 |
Sales fell 17.6% year over year; organic sales declined 18%, partly offset by $125 from acquisitions. Lower volumes, pandemic-related operating inefficiencies and costs to restart plants weighed on margins. Lower commodity prices benefited earnings by about $37, while material recovery and other pricing actions reduced year-over-year earnings by $80.
Fourth quarter: Sales were $2,108 versus $1,987 in Q4 2019. Net income attributable to Dana was $40 versus $85; diluted EPS was $0.27 versus $0.58. Q4 sales benefited from stronger light-vehicle demand and backlog conversion.
Debt, liquidity and capital allocation
- At year-end, cash and cash equivalents were $559 and marketable securities were $21. Reported total liquidity was $1,556, including $979 of available revolving-credit capacity.
- Debt obligations were approximately $2,481 as disclosed in risk factors; the selected financial data reports total debt, less issuance costs, of $2,454. Dana paid down its Term A Facility in full during 2020 and reported no Revolving Facility borrowings at year-end.
- Interest expense increased to $138 from $122. Average effective interest rates were approximately 5.0% in both years. Dana said it was in compliance with financing covenants at December 31, 2020.
- The company issued $400 of notes due 2028 and an additional $100 of notes due 2027. It temporarily suspended common dividends and repurchases in response to the pandemic; 2020 dividends declared were $0.10 per share versus $0.40 in 2019.
Material changes and unusual items
- All four segments reported lower sales and EBITDA. Segment EBITDA was $603, down from $1,023; Light Vehicle EBITDA was $239, Commercial Vehicle $36, Off-Highway $234 and Power Technologies $94.
- A $51 goodwill impairment charge was recorded in Q1, including $48 for Commercial Vehicle and $3 for Light Vehicle. The filing identifies COVID-19 effects on expected cash flows as an impairment trigger.
- Other income included a $33 gain related to conversion and fair-value adjustment of Hyliion shares. This gain is nonrecurring and affected reported results.
- Income tax expense was $58, versus a $32 benefit in 2019, including additional valuation allowances in foreign jurisdictions. Dana reported $104 of gross unrecognized tax benefits.
- Dana corrected an immaterial prior-period error in the attribution of a goodwill impairment to redeemable noncontrolling interests; it revised comparative year-to-date financial information in this filing.
Outlook, commentary and risks
For 2021, Dana forecast sales of $8,050–$8,550, adjusted EBITDA of $860–$960, an adjusted EBITDA margin of approximately 11.0%, and adjusted free cash flow of approximately $250 (about 3.0% of sales). The outlook assumed improving markets, $500 of net new business backlog converting in 2021, and reduced pandemic-related inefficiencies; higher investment and capital spending were expected to partly offset the recovery. The outlook excluded a pending acquisition of part of Modine Manufacturing’s thermal-management business.
Management cited electrification as a strategic growth focus and said the $700 net-new-business backlog expected to launch in 2021–2022 was evenly balanced between electric-vehicle and internal-combustion content. Market recovery remained uncertain. Key risks include pandemic and cyclical demand, customer concentration (Ford represented 20% of sales; FCA 12%; the top ten customers 54%), supply-chain constraints, commodity and currency movements, pricing pressure, debt and pension obligations, and execution of new-program launches. Dana stated that pending legal matters were not expected to materially harm its financial condition, liquidity or results.
Most important facts for investors to verify
- Whether sales, margins, operating cash flow and free cash flow recover as forecast, and whether the $700 backlog converts on schedule.
- Whether the 2021 adjusted EBITDA and cash-flow outlook is achieved; these are non-GAAP measures and the filing does not provide a reconciliation of the EBITDA outlook to GAAP net income.
- Debt maturity, interest-rate and covenant exposure, including the effect of refinancing and the availability of revolving credit.
- Customer concentration and supplier resilience, particularly if vehicle production or end-market demand weakens again.
- Potential effects of tax valuation allowances, unrecognized tax benefits, pension funding and redeemable noncontrolling-interest put rights.